While the still-sluggish economy continually weighs on the minds of equipment finance executives, this year’s funding source roundtable participants express mixed sentiments towards deal flow, supply/demand factors and credit availability, as well as closing deals in today’s environment. Overall, they each remain optimistic for higher levels of activity in 2014.
Paul J. Menzel, CLP, President & CEO, Financial Pacific Leasing, Umpqua Bank
Steve Gray, SVP, BB&T Equipment Finance
Tom Davies, SVP Capital Markets Manager, People’s Capital & Leasing
Over the last few years, the economy has remained a concern for the equipment leasing and financing executives who participated in Monitor’s annual roundtable discussion. This year was no exception. The executives assembled for this year’s roundtable discussion all agreed that the equipment leasing and financing industry is in a good place and their respective institutions are poised to capture more business — but only if the economy can run at a faster pace.
The participants offered their views on deal flow, funding sources, credit quality, as well as provided some tips on how brokers can improve the odds of getting a deal done in today’s environment. They also assessed the state of the industry in 2013 and provided some insights as to what the industry can expect to see in 2014.
Level of Activity from the Deal Flow Side
On the deal flow side, call it a great year for Financial Pacific Leasing. In December, its year-over-year origination activity was up 230%. Paul Menzel, president and CEO, points out that much of the credit goes to Umpqua Bank, which acquired his company in July 2013.
“Our activity has increased substantially and it is a result of the strategic changes and capabilities that we have now, as a sub of a bank, versus being owned by private equity,” says Menzel. “That capability is the cost of funds and the leverage we have to be able to generate an acceptable return on equity at much lower pricing.”
This allows Financial Pacific Leasing to capture a portion of the A credit market that it was unable to access before as an independent owned by a private equity company. Its growth, across the board, has been from an existing array of sources but it is now capturing a larger share of the market because its pricing is more competitive. Menzel calls Umpqua Bank’s acquisition a game changer in Financial Pacific Leasing’s ability to access funding as compared to a year ago. “We have no funding or pricing issues anymore.”
People’s Capital and Leasing has seen a similar level of activity this year compared to 2013 with the same number of sources. Although it tends to work with a limited number of sources in its third-party origination group, Tom Davies, senior vice president of People’s Capital and Leasing, says that it is always open to establishing new relationships.
“At year’s end, it was extremely busy with companies taking advantage of the bonus depreciation before it expired,” he explains.
Like Financial Pacific Leasing, People’s Capital is part of a bank — People’s United Bank, a healthy $33 billion financial institution.
“Because we are part of the bank, we have never been limited in our 16-plus years in existence as an equipment financing source in terms of our ability to access funding,” says Davies.
Steve Gray, senior vice president of BB&T Equipment Finance, says the indirect deal flow side has been relatively slow for his company thus far in 2014.
“It was rather robust at the end of the fourth quarter, but for us, it has slowed a bit recently,” says Gray. “Hopefully that is not too unusual because the first quarter is always a bit slow. On the direct side, we are seeing a decent amount of activity; not a lot of awards to speak of yet, but I am sure that will follow.”
As far as the ability to access funding, Gray believes the market is very hungry for syndication opportunities. “I think there is a lot of pent up demand to buy transactions from other funding sources.”
Key Drivers for Activity in 2014
The roundtable participants agreed that the economy continued to be sluggish in 2013, but each of them remain optimistic for higher levels of activity in 2014. As long as interest rates do not accelerate too quickly, Davies expects activity for People’s Capital to increase in 2014. According to Davies, the energy sector has been good and he believes it will continue to be strong. He also expects increased activity in marine, mining, healthcare and manufacturing.
“We are expecting to see some increased demand in aviation as well,” says Davies. “There have been some areas of aviation that have been a bit soft but we expect that business to gradually improve throughout 2014. In general, throughout most of the industries we work with, I think we will see some growth.”
What does concern Davies in 2014 is the possibility of interest rates increasing too quickly.
“There has been a lot of mixed news lately in regards to how well the economy is doing,” he says. “Assuming things are going along the way they are now, I would suspect that we are going to have a little bit of an increase in our business across the board.”
Menzel is hopeful of higher levels of activity purely from a market expansion perspective.
“I am hoping the market is finally going to be larger and growing because there is certainly more competition buying for the total market,” he says. “People have been stealing market share from each other in order to grow and that is a driver of higher credit risk being taken, at lower rates and lower spread. That is a result of a static marketplace in terms of demand but a growing market in terms of supply.”
On the demand side, Menzel hopes the market starts showing more expansion. While there seems to be some evidence of that, he acknowledges that it is still not certain. Financial Pacific Leasing expects to be more active since it is part of a bank now. As a result, it plans to enter into different segments of the marketplace.
“We will be looking at, not only, small-ticket, but middle-market transactions, vendor and direct retail origination channels,” Menzel says. “For those reasons, our opportunities are much broader than they were before the bank acquisition. So our activity is going to be higher in 2014 regardless of the growth in the marketplace.”
Gray is also hopeful that his company sees higher levels in 2014 than it did in 2013.
“Whether the economy picks up will have a big impact on whether or not there is enough demand to satisfy everyone,” he says. “We are observing more activity in the corporate aircraft space, which is a new platform for us. We are also seeing more activity in the marine area and some rail activity as well.”
Credit Availability in Today’s Market
In regards to the credits from funding sources, Gray says that BB&T Equipment Finance’s funding sources are not necessarily loosening their credit criteria. They may be loosening their pricing for those credits, but the credit criteria remains the same.
“There has been some improvement in the quality of some of the credits,” he says. “Our portfolio is performing extremely well.”
Without a doubt, Menzel says there are definitely more sources entering the equipment financing space as compared to one year ago. This is mainly due to three reasons: its low cost of funding, the re-opening of the securitization market and the amount of liquidity in the marketplace. That will always push risk and pricing in negative ways, notes Menzel.
“The advantage we have always had is a scoring model and underwriting strategy that has been developed to be effective in the higher risk end of the credit spectrum,” he says. “Credit risk does not really bother us that much. We also know how to price risk. So we are not really challenged on the credit side.”
Overall, Menzel says the quality of credit has certainly improved in the last year. As a result, it underwrites a broad spectrum of credit, from A to DD Paper.
“I see our competitors losing credit discipline, but it is that supply-demand equation,” he says. “When demand is flat and supply is cheap and plentiful, guess what? People lower their credit standards.”
Davies too has seen the quality of credit improve. “In general, it seems that a higher percentage of companies are doing better at this time compared to last year. Furthermore, the majority of the most recent financial statements we are receiving show improved liquidity and leverage through all of the sectors we finance.”
On its syndication side, Davies says he does not yet see a noticeable loosening of its sources’ underwriting criteria. On the other hand, he does see a continued increase in the amount of liquidity in the market.
“This is reflected in the increase in the number of competitors in our industry, which we believe will put pressure on some sources to look closely at their own credit criteria,” he adds. “When you have an increase in the amount of liquidity that comes in, the next step is for people to soften up their credit criteria. We have not seen that yet with the sources that we work with but I think that it is inevitable that this will happen.”
Getting a Deal Done in Today’s Environment
For brokers who would like to improve their odds of getting a deal done in today’s environment, Menzel says the one thing that has always been a fundamental tenet of getting deals done as a broker is knowing your customer.
“That involves taking the time to vet your customer, making sure that they are a real company with a real need and that there are no hidden mines in their profiles,” he says. “Knowing your customer to me has always been a key of being successful as a broker.”
The other thing that Menzel says you can bring to the table as a broker is to give fast and easy service — that, he says, differentiates you from the classical bank model.
“If you can deliver a fast and easy product and be smart enough to get to know your customer to a degree that you can serve the funding source well, that’s the way you find success in this environment,” he says. “So align yourself with funding sources that have a fast, easy and consistent model.”
Additionally, Davies recommends that brokers have up-to-date company and financial information. “This is very important in ensuring a seamless transaction. Having the most recent facts allows us to ask fewer questions and get decisions made quickly.”
As far as Davies is concerned, when there is a deal to be done, regardless of having money down, guarantees or covenants, “the level of information that is provided to us helps us get it done.”
Looking Ahead to Challenges and Opportunities
Looking ahead to the remainder of 2014, Gray says the primary challenge is whether there will be enough demand for new business. In addition, he expresses some concern over the number of portfolio sales that may be available in 2014.
“I am not sure that business that has been done recently is as liquid because of bonus depreciation and compressed interest rates,” Gray says. “So from a third party standpoint, if there is an increase in interest rates, there may not be as much product in that area as well.”
Since Financial Pacific Leasing is in a high-growth environment, Menzel says that one of the opportunities it will be focused on in 2014 is staffing and trying to find good people to continue to add to its payroll.
“We do not have any funding, process or credit underwriting challenges,” he says. “We have the capacity and the ability to do a lot of business. It is just a matter of getting staffing up and using technology to capture as much as we possibly can.”
As a result, it will be hiring and looking for people who will help them build out its total bank model platform as well as its small-ticket, and lower- and middle-market commercial credits.
“Finding good, qualified people who are willing to join a growing, dynamic organization is a challenge in this market,” Menzel adds. “Good people are being held onto by their existing employers.”
Daniel Casciato is a professional business writer and regular Monitor contributor.
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