The Monitor 100 rebounded from the initial impact of the COVID-19 pandemic, posting a modest gain in net assets and the largest uptick in originations since 2012. The group managed this feat amid a tight labor market and backlogged supply chain. And although soaring inflation, rapidly rising rates and recession fears have joined the maelstrom in 2022, the group remains optimistic for future growth.
The Monitor 100 companies reported net assets of $531.2 billion, $209.1 billion in new business volume and 27,897 employees.
Portfolios remained stable in 2021, with an overall growth rate of 0.9% for the group, a slight improvement from the -0.8% decrease posted in 2020. Sixty-nine Monitor 100 companies reported a combined $20.2 billion increase in net assets while 31 posted declines equal to $15.4 billion, which resulted in a collective year-over-year increase of $4.8 billion.
After recording a net decrease of 9.3% in 2020, new business volume rebounded from the COVID-19 pandemic’s initial impact. The Monitor 100 companies reported $209.1 billion in 2021 new business volume, an increase of $17.2 billion (9%) from 2020, marking the highest rate of originations growth recorded in the Monitor 100 since 2012. The top five experienced a shake up, with DLL, Caterpillar and Wells Fargo achieving higher volume rankings this year, moving to No. 3, No. 4 and No. 5, respectively.
Adapting to Uncertainty
Although the initial days of COVID-19 are long behind us, the pandemic itself and the resulting ramifications to the economy continue to unfold. The uncertainty of the last few years has demanded innovation while the return of inflation and volatile interest rates have resulted in a return to fundamentals.
“From an equipment finance perspective, the last couple of years have really highlighted old school corporate finance 101 about matching longer-term financing with longer-term assets, like equipment,” Linda Redding, head of Equipment Finance at J.P. Morgan Commercial Banking, says, underlining the importance of preserving liquidity for equipment acquisitive companies in today’s market.
“There’s been a great resilience,” Steve Grosso, president and CEO of Auxilior Capital, says. “Companies that have been innovative, thoughtful, disciplined and courageous have done really well. On the other hand, some companies weren’t prepared to do what they needed to do or had just the misfortune of being in the wrong place with the pandemic’s onslaught.”
Tim Moriarity, executive vice president and manager of TriState Capital Equipment Finance points to the V-shaped recovery coming out of the pandemic, combined with steep increases in interest rates and asset values and dramatic declines in equipment availability. “These factors, most of which are a result of the pandemic, have exacerbated the problem of predictability within our industry,” Moriarity says.
Unpredictability has taken root in the U.S. economy and appears to be planning an extended stay. Whispers of a possible recession have been popping up as the U.S. economy shows signs of a slowdown and business investment begins to decline. U.S. GDP is forecast to come to a veritable crawl in Q2/22, advancing at an annualized rate of 0.2%, according to the July
Monthly Outlook by Wells Fargo’s Economics Group, which was appropriately named The Descent.1 According to the report, a mild recession is anticipated in Q1/23 given the “tight stance” of monetary policy coupled with the “blistering pace” of core inflation.
The July 2021 Beige Book, published by the Federal Reserve, echoed these sentiments, indicating that although economic expansion has continued at a “modest pace,” several districts have reported signs of a slowdown and expressed concern for increased recession risks.2
Inflation hasn’t been a top concern for most equipment finance companies in decades. According to the Bureau of Labor Statistics, inflation rose 9.1% in June, with the energy index contributing nearly half of the total increase.3 Since the U.S. economy has not experienced a 12-month increase of this magnitude since November 1981, this is the first taste of inflation for many of today’s leaders.
Rising Rates and Capital Access
Another factor rearing its head for the first time in more than a decade is the rising interest rate environment. While many lenders have expressed a desire to see rates increase after hovering at historic lows since the Great Recession, the pace of recent change has been swift, and the Fed has more increases planned for the remainder of 2022.
“There’s going to be some sticker shock all the way from the end-users to the lessors, to the banks,” Marci Slagle, president, BankFinancial Equipment Finance, says. “It’s a retraining. It’s going to take a little while for us all to adjust. I’m shocked on a daily basis when I look at the spreads and swaps and see where we’re going to be and realize how much these rates have gone up in just three months.”
“Easy access to capital is a thing of the past, at least in the short run,” Kyin Lok, CEO of Dext Capital, says. “The best capitalized companies who’ve made the proper investments in technology and people, will benefit from a flight to quality as less prepared competitors will struggle with the changes.”
“No matter how good of a scuba diver you are, if you don’t have oxygen and are in deep water, you’re going to drown,” David Lee, CEO of North Mill Equipment Finance, says. “The oxygen for this industry is access to capital. If you are over levered, not diversified, and don’t have operating scale, you are in very deep water. You will have your access to liquidity curtailed quickly in a downturn, causing the business to die regardless of how solid of a business you thought you might have had. Therefore, the most important thing for us is always making sure we have access to liquidity, and the best way to do that is to maintain our leverage at manageable levels during good times so when stressful economic scenarios commence, we can get to the surface for oxygen.”
Randy Hicks, executive vice president, SLR Equipment Finance, points out a silver lining when it comes to rising rates: “Leasing is a fixed rate product for the most part. Where a lot of other debt components of a company’s balance sheet are floating rate debt instruments, leasing has the opportunity to be very attractive in a rising rate environment. Higher rates tend to make leasing a little bit more attractive on the margin.”
“We are in this very unique time where there’s been a meaningful delay in equipment purchases for many companies, and they might currently be in the middle of a fleet refresh or some other acquisition program that they they’re going to need to move forward with, regardless of the interest rate cycle,” Redding says. “The current rate environment could prompt some borrowers to move toward leasing as a way to manage their monthly financing costs, interest deductions and their overall tax position.”
Supply Chain Setbacks
Decisions to delay equipment acquisition over the last few years can be traced back to a variety of factors, but one of the biggest contributors to this trend in 2021 for Monitor 100 companies was supply chain breakdowns. In addition to delays at ports, the ongoing semiconductor shortage sparked by the pandemic has persisted, impacting myriad asset classes. According to McKinsey, the chip shortage will continue “far into 2023.”4
More than half (52%) of the companies that provided a 2021 retrospective statement on this year’s Monitor survey mentioned the impact of supply chain challenges on their business:
“The most significant challenge we faced was supply chain disruption. Our clients simply couldn’t get consistent delivery of the assets that would help grow their business,” a U.S. Bank Affiliate reported.
“Supply chain disruptions have caused us heartache on equipment deliveries and deterioration of credit quality of customers during those wait times,” another U.S. Bank Affiliate noted.
“Our most significant challenge in 2021 was keeping up with demand despite historic disruptions in both the supply chain and labor markets,” an Independent reported.
The Great Resignation
In 2021, more than 47 million U.S. employees left their jobs on a voluntary basis, according to data from the U.S. Bureau of Labor Statistics.5 Maintaining adequate staffing levels was another challenge many Monitor 100 companies faced in 2021; 32% of companies that outlined their 2022 focus indicated that hiring and retaining employees would continue to be a primary objective.
“We need to overcome the growth challenges presented by labor shortages. We have tremendous objectives to continue to grow our business and expand our talented team of professionals. We have found difficulties with doing this based on the labor shortages in the marketplace,” an Independent reported.
According to the Wells Fargo economic outlook report, while the labor market continues to be one of the strongest in decades, with job openings and jobless claims indicating continued strength, various indicators demonstrate that the market will cool off soon.
In its July Beige Book, the Fed noted that employment continued to rise at modest or moderate pace and the job market remained tight. Labor availability improved modestly in nearly all districts and demand for workers declined, according to the report. In response to rising inflation, the report noted that one third of Federal Reserve districts indicated that employers were considering or had given bonuses and two districts reported that workers had requested wage increases.
Despite the ongoing challenges in the labor market, the Monitor 100 companies managed to add 585 employees, in 2021, increasing the total number of Monitor 100 employees to 27,897, a 2.1% year-over-year increase. Independents increased their teams by 7.6%, Foreign Affiliates by 5.8%, Captives by 1% and U.S. Bank Affiliates by 0.9%.
The Monitor 100 companies also plan to focus on improving employee productivity, efficiencies, technologies and data access and utilization this year.
“Lack of consistent and quality access to data across all channels and markets limits our ability to make fact-based decisions quickly. Improving our data backbone and ability to access reliable and consistent data would ensure decisions are taken with full visibility to all available factors,” a Captive reported.
“Increasing the use of, and better leveraging, technology in mundane and repeat business activities is our focus. As we are forced to be more flexible with our clients and partners and generate more productivity with fewer headcount, technology assistance becomes more critical to business success,” a U.S. Bank Affiliate reported.
“Continued ‘futurizing’ of business process and technology,” an Independent reported of its primary focus in 2022. “Clearly, the future state requires a more automated internal and external experience for team members and for customers.”
“Technology will continue to play an ever-increasing role in how we finance our equipment acquisitions and capital, how we work, how we communicate with each other and how we stay connected,” Lok says. “But in terms of financing tools, I think there’s going to be a really big push toward ease of use. Real time access will really just be the price of admission in terms of providing financing in all sorts of industries.”
Forecasting the Future
Of the 94 companies that provided a forecast for estimated year-end 2022 net assets, 71 (76%) predicted an increase, four (4%) forecast a decrease and 19 (20%) anticipated no change to the size of their portfolios. The forecast for the group, calculated on an average weighted basis, is 5.9%, which would increase total Monitor 100 assets to $562.6 billion by year-end 2022, an increase of $31.4 billion. Last year, the group predicted an increase of 5.3%, which was considerably higher than the 0.9% increase achieved by this year’s group.
Of the 95 companies that provided a new business volume forecast for year-end 2022, 75 (79%) expect an increase, two (2%) anticipated a net decline and 18 (19%) predict originations to remain stable on a year-over-year basis. Calculating the forecast on an average weighted basis, the group predicted a 7.7% year-over-year increase in new business volume, which would bring year-end 2022 originations to $225.1 billion, a $16 billion increase. Looking back to last year’s prediction of 10.8% volume growth in 2021, the companies came close to achieving this outlook, posting a 9.0% year-over-year increase.
Of the 81 companies that completed a staffing forecast, 81 (93%) anticipate hiring in 2022, while two (2%) plan to decrease staffing levels and four anticipate no change. As a group, the Monitor 100 companies plan to hire 1,168 new employees in 2022, a 6.4% year-over-year increase, with U.S. Bank Affiliates providing 31.7% of the total, Captives 25.9%, Independents 24% and Foreign Affiliates 18.2%.
As the Monitor 100 companies continue to rise to the ongoing myriad challenges facing the industry today, time will tell if they will meet — or exceed — their forecasts. Despite the climate of uncertainty, one thing is for sure, the Monitor 100 companies have learned to be quick on their feet and how to remain resilient in the midst of an incessant storm.
Monitor would like to recognize AP Equipment Financing. With $495 million in net assets and $239 million in originations at year-end 2021, AP would have ranked No. 78 in the asset ranking and No. 80 in the volume ranking if not for a reporting error that was discovered too late.
As always, we appreciate the time and effort of the equipment finance companies that participate in our annual survey. The Monitor 100 would not be possible without the ongoing cooperation of the equipment finance community.
1U.S. Economic Outlook: July 2022,” Wells Fargo Economics Group, Jul. 14, 2022. 2“Beige Book – July 13, 2022,” Federal Reserve. Jul. 13, 2022. 3“Consumer Price Index Summary,” Bureau of Labor Statistics, Jul. 13, 2022. 4“Semiconductor shortage: How the automotive industry can succeed,” McKinsey, June 10, 2022. 5“Job Openings and Labor Turnover Summary,” U.S. Bureau of Labor Statistics, Feb. 1. 2022.
Rita E. Garwood is editor in chief of Monitor. Phil Neuffer, senior editor; Ian Koplin, editor, and Markiesha Thompson, associate editor, conducted interviews for this article.
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