There is normally a consensus whether the market conditions in a particular year were better for a buyer of deals or a syndicator. 2014 will go down as a year where the sheer volume of good product for sale was lower, making it a tough year for all of us.

Overview

A high tide raises all boats, but we are in a period of an extended low tide in terms of new deal flow. Why is this? The easy refinances have been flushed through the system. Interest rates continue to be at all-time lows, resulting in a significant drop in profitable tax lease origination volume because a CFO has little motivation to analyze lease economics when he or she has the option to do a low rate loan or finance lease. A prolonged low interest rate environment also leads to lower yielding, harder to syndicate assets being put on the books. Another factor negatively impacting deal flow in 2014 was that bank lessors were still reluctant to sell assets as this is contrary to growing assets. Last but certainly not least, companies in most industries (except for a few hot markets like oil and gas, rail, marine and trucking) were still reluctant to make big equipment purchase commitments to expand capacity.

Conditions Favored Syndication

The conditions in 2014 gave an advantage to the syndicators because if you had a well-priced, well-structured deal with solid credit there was a very liquid market of extremely hungry buyers that made you look like a hero in your shop. Also, syndicators selling higher yielding assets out of portfolio to meet fee targets or manage exposure were in the cat bird seat. Let me ask the syndicators reading this article who work at shops that don’t sell out of portfolio: How many newly originated deals with strong credits did you have to sell last year that had fat pricing and were well structured?

It is more likely that your internal customers, the relationship managers, made your job more difficult because they were behind budget and pushing to retain as much as possible. Your credit folks accommodated them by increasing the internal hold limits thereby reducing the product you had for sale. Customers have also become emboldened in this market to ask for the world, and talk to enough sources until they find a willing partner (e.g., your organization). This means you were asked to give high confidence that a deal could clear the market even though it was thinly priced and pushed the “structure” envelope — and you had 24 hours to respond. Yes, you probably still found some investors to play (again, easier for a solid credit), but you definitely worked harder to find a home. The fees generated on newly originated deals, as a percentage of OEC, were a lot lower than in years past, which meant you had to syndicate more volume to have a shot at meeting fee budgets.

Mismatch Conundrum

Now let’s talk about the deals for tougher credits expected of syndicators. Many were leveraged high growth companies in “hot” markets, and the relationship manager was telling you that in order to win the deal it needed to be priced at a very low spread of “X,” coupled with a request to stretch on the term, structure or residual. These demands created more mismatches last year than I have seen in any of the 15 years I’ve been in this seat.

What do I mean by a mismatch? Banks have responded to the Great Recession and heightened demands from regulators by developing more robust internal risk rating systems and by adopting more complex industry-specific credit policies. Since each bank has developed its own “mousetrap,” this oftentimes results in two banks assigning very different internal risk ratings to the same company. The two common ratings used by banks are the Probability of Default PD and Loss Given Default LGD Ratings. These ratings lead directly to pricing requirements and to the bank’s appetite and desired hold levels for a given credit. This mismatch makes it more difficult when a bank lessor is syndicating a deal for a company that is viewed (and priced) favorably internally, but may not be viewed in the same fashion by another bank. Finding the right partner on the deal took a more concerted effort. Over the last several years, what used to be an environment where banks risk rated and viewed credit risk in a very similar fashion has now been put in a state of flux, and each bank believes they’ve built the better “mousetrap” to assess credit risk and price appropriately.

Varying Outcomes for Buyers

Before you start feeling too sorry for syndicators, let’s examine the many challenges buyers faced in 2014. There was less product available for sale due to many of the factors discussed above. Some buy shops had a strong year (at least in terms of volume), and others really struggled. These varying outcomes are due to a combination of several factors.

First and foremost are pricing requirements. Pricing has tightened across the credit spectrum over the last several years, and if your organization has not responded with lower pricing requirements, then this “disciplined” approach is leading to lower buy volume. In addition, if your organization has very rigid pricing requirements tied to internal risk ratings or minimum (but possibly unrealistic) return requirements, then you are going to lose out to another organization that has more flexibility to adapt to market pricing. Like it or not, the market sets the pricing, and from a customer’s perspective the best deal offered becomes the market pricing. Trying to match or beat the best deal offered just doesn’t become achievable based on the risk adjusted pricing requirements of your organization. The year 2014 will be remembered as one where the challenge between growing assets and booking profitable deals that met profit targets was never greater.

Another big factor that determined success in 2014 was directly related to the industries and asset types organizations pursued. If an organization was increasing hold limits to credits in the “hot” markets like oil and gas, equipment rental, marine, truck and rail transportation, and you were willing to price to market both in terms of spread requirements and residuals, then it probably was a solid year. Another bright spot in 2014 was lender finance including those bank lessors willing to provide wholesale funding to independent leasing companies. However, if your main focus was in healthcare, tax exempt segments, corporate aircraft, mining and construction, or vendor and IT financing, it was probably a tougher year.

Another unique challenge buyers face is the reality that direct originations will always be the main focus at most organizations. There are many deals that all of us are shown in the marketplace that we can’t pursue because the company is an existing customer or high priority prospect of the leasing company or bank. However, if you look beyond that, you will see that you still have the ability to see deals from a large number of sources that increases your chance of success.

Strengthening the Value Proposition

In conclusion, 2014 was a very interesting year and one that saw very different results at the capital markets groups of bank lessors. We should all be focused now on strengthening our value proposition within our organizations. This means syndicators must work closely with the relationship managers to provide competitive capital market solutions that seamlessly meet the equipment financing needs of their customers. Buyers must continue to do what they do best: adding significant volume that is both profitable and efficient in terms of origination costs. Syndicators and buyers also serve a very important purpose, and that is to keep their eyes and ears on the market to provide timely market intelligence to senior management.

As I was writing this article, someone asked me what I expect to change in 2015, to which I answered, “It’s getting a lot harder to predict the future in our business, but one thing you can count on is change.”

Scott Kiley is a vice president at Fifth Third Equipment Finance Company.