Alternative Funding Strategies in Light of Vanishing Credit Markets
by Monitor Staff May/June 2008
After he spoke at the ELFA-IMN investor conference, the Monitor sat down with Rick Wolfert of Aquiline Capital Partners in New York, a private equity firm with $1.1 billion in capital commitments. Although he emphasizes the dislocation of the credit markets, Wolfert remains positive, saying that opportunities are just as attractive as they always were for companies with capital and liquidity.
Monitor:You said the old business model doesn’t work in today’s environment. Please describe generally what you meant by a “back to the future” model?
Rick Wolfert: Given the major dislocation we are experiencing in the credit markets, commercial finance and leasing companies must find alternatives to funding strategies that are dependent on structured finance vehicles. They will need to adopt funding strategies that were used before the modern era of structured finance took hold. This would include traditional bank loans, private placements and depository strategies such as ILCs.
M:You talked about winners and losers. Could you briefly note the characteristics of winners in the marketplace today?
RW: Winners are those that have strong balance sheets and access to capital and liquidity. Those not in this group will win if they can adapt to the new environment. Keys to success will be access to larger levels of equity, and the ability to access funding outside of the structured finance market. I suspect the losers will be those who do not have sufficient equity or scale to compete, or are over dependent on structured finance funding strategies. As we have seen, that whole market is shut down, or at best, very expensive and difficult to access.
Wolfert elaborated on the characteristics of the winners:
Access to large amounts of equity
The ability to absorb higher funding costs temporarily
Access to “new” pools of capital
Diversified and scaled business models
Capability to directly originate assets
Demonstrated track record of underwriting & managing risk
Strong management teams with deep knowledge in specific asset classes
M:You said that industrial loan companies may have a significant advantage, and we just learned that Marlin’s application was approved. Do you think we will see more companies seek this option?
RW: There are already many companies in our industry that have had these depository institutions as a part of their strategies. Examples include CIT, GMAC, Merrill Lynch Capital and CapitalSource. This funding strategy will be increasingly attractive as an alternative to the structured finance market.
M:What other ways will Wall Street be bypassed? What about foreign sources of capital?
RW: There are large pools of capital that can be accessed via private placements. Institutional investors like the transparency that comes with funding large pools of diversified, well-underwritten loans and leases. There are investors from Europe, the Middle East and Asia who will have an interest in the assets our industry originates, but reputation is paramount. And companies will need to be able to originate sufficient asset pools. Scale and reputation is important if you are going to be relevant to these investors.
M:Could you elaborate on your statement that we shouldn’t be confused between liquidity and availability?
RW: There are two forces in play … the Fed is injecting liquidity almost daily, and at the same time as I mentioned at the Investor Conference, for the first time in decades bank charge-offs exceeded reserves in Q4. Accordingly, there is increasing pressure from regulators to increase capital ratios and to tighten lending requirements. Non-investment grade companies are still having tremendous difficulty getting financing and those who do find that the amount of equity or collateral required has increased significantly.
M:What kind of government action might be needed to result in a broad recovery in the credit markets?
RW: Liquidity over time will help stabilize the markets. Market-to-market adjustments are creating a lot of margin calls and fear in the markets. We just saw a good example of this with the Bear Stearns transaction that just happened.
M:How much contraction are you expecting to see in the equipment leasing and finance industry? What does the end game look like?
RW: There is going to be industry consolidation among the smaller companies that have difficulty raising equity and finding competitive funding in today’s markets.
M:There was quite a bit of pessimism expressed at the conference, where is the hope?
RW: For those companies with capital and liquidity, the opportunities in today’s market are as attractive as we have seen in decades.
Managing Director, Head of Leasing National Sales,
The Bancorp Commercial Fleet Leasing
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