Although 2021 brought some hope, the equipment finance industry continued to grapple with the effects of the COVID-19 pandemic, including labor shortages, supply chain disruption and more. To dig into how these developments have affected the bank-owned sector of the industry, Monitor asked Ellen Comeaux of TIAA Bank, Chris Craft of 1st Source Bank, David A. Normandin of Wintrust Specialty Finance and John Wolfe of M&T Bank to provide their perspective on the developments of 2021 and the outlook for 2022.

How would you characterize 2021 for bank-affiliate equipment finance companies?

Ellen Comeaux: If 2020 was the year for unpredictability, 2021 exemplified resiliency and recovery. In comparison to 2020, 2021 showed growth across a multitude of equipment finance sectors, particularly in the transportation, construction and healthcare segments. Supply chain disruption, however, does continue to present challenges to growth with delays in equipment deliveries.

Chris Craft: 2021 was a much better year than many in the equipment finance industry would have expected. While supply chain related challenges continue to constrain the supply of many equipment types, overall demand was strong for most major equipment types.

David A. Normandin: 2021 has been a strong year for many bank-owned equipment finance and leasing companies. While the global COVID-19 pandemic continues, portfolios have generally performed better than many expectations. This experience continues to reinforce the strong performance of the asset class through economic cycles and increases confidence in the investment community as well as bank organizations.

John Wolfe: As expected, as vaccination rates increased and businesses reopened, capex spending rebounded. However, supply chain issues like ongoing chip shortages and workforce challenges resulted in mixed syndication results. It’s worth noting that loan and lease demand was better than expected based on the amount of cash on borrowers’ balance sheets. Lower (fixed) interest rates also contributed to this demand.

How did the delta variant impact your business?

Comeaux: While the delta variant contributed to expected labor force shortages and continued supply chain delays, it also stalled or altered many of our industry’s plans to

gather in person at trade shows and other yearly trade meetings where a lot of new business activity occurs. Even with these challenges, our overall volume levels are up this year.

Craft: The delta variant caused a major initial pause. Then, as people began to adapt to new realities, demand for trucks, cars, private aircraft and other equipment types increased significantly.

Normandin: The delta variant delayed teams re-engaging in person. We are now getting back together in small groups and look forward to the time when we can engage as a large group. From the recent ELFA Annual Convention, where approximately 900 industry leaders gathered, it is clear we are not alone in this desire to see and be seen.

Wolfe: The delta variant prolonged the recovery period by clearly impacting customer confidence and reducing mobility and spending. It amplified supply chain and labor market issues, causing delays in asset deployment and deliveries.

Has there been a shift in transaction/credit quality over the last year?

Comeaux: Fortunately, we have not experienced a noticeable shift in transaction quality over the last year. Today, other than monitoring the supply chain and related inflation, we are back to business as usual.

We haven’t seen industry-wide deterioration in credit quality over the last year. The market is very competitive, and thus, companies can find a plethora of financing options to meet their needs. We expect this to continue heading into 2022, as most lenders are looking to grow their balance sheets with quality assets.

Craft: During the early stages of delta variant, we saw a downward shift in credit quality. Today, delinquency levels are very low, while credit grades and client liquidity levels are improved. Credit quality has improved over the course of the year as management teams continue to adjust their operations to the dynamics of this market.

Normandin: We have not experienced a material shift in transaction quality in 2021 and have experienced the average term lengthening. In the small-ticket segment, we have experienced an average term that is longer than I have seen in my career. I think this is driven by very low borrowing rates and excess liquidity in the market that has bolstered the acceptance of longer terms. Additionally, we have seen early payoffs at elevated levels. We believe this is a result of stimulus funds being leveraged to pay off debt and strong cash positions of our customers.

Wintrust has experienced strong credit quality amongst new originations and solid credit quality in the overall historical portfolio.

Wolfe: I don’t believe we have witnessed a major shift in equipment finance credit quality at M&T, though there appears to be an upward trend in overall risk ratings. While not back to pre-COVID-19 levels, credit quality continues to improve. Overall, it’s considered “stable” and default rates have fallen.

However, there are several possible headwinds that could challenge the stable nature of the economy and put downward pressure on credit quality. For example: inflation, possible rising interest rates, continued supply chain issues and potential Q4/21 global upticks in COVID-19 cases in Europe and Asia.

What is your outlook for the equipment finance space for 2022?

Comeaux: We’re anticipating the demand from our vendor partners and the end consumer will continue to increase as pent-up demand rolls into the new year. At the same time, anticipated increases in both equipment and borrowing costs could impact temporary demand.

Our partners across the healthcare industry are currently focused on delivering product as quickly as possible amid supply chain challenges. As they work to roll out current product, we anticipate that the demand to upgrade to newer technologies that haven’t yet been released will also increase.

We’re also closely watching the progress the Infrastructure Investment and Jobs Act is making through Congress, as the bill will likely spur investment activity for several industry sectors.

Craft: Demand for equipment is very strong and OEMs are doing all they can to overcome persistent supply chain issues. That said, it is likely that 2022 will continue to be inventory constrained.

Normandin: 2022 will be a year of opportunities to solve for changes in our economy and business. Rates will increase, inflation will rise, additional regulation and disclosures will become reality, the need to monetize service-based solutions will continue and competition will be fierce. Customer-experience-focused companies who can adapt with nimble yet complex technology-based administrative capabilities will take share of wallet from their competition.

Wolfe: It looks to be a robust year for many equipment markets, with values holding up well in 2022, but supply chain challenges could continue to be a barrier to sustained recovery and growth for these markets. If there is any silver lining to this scenario, it is that the resulting volatile upward pressure on new and used equipment prices due to the supply chain challenges would be a boon for current remarketing and selling off lease used equipment.

Looking more long term, the passage of the infrastructure bill could add to existing momentum for truck, trailer and other transportation markets as the annual spending of $120 billion is spread across various sectors.

How has competition changed over the last year?

Comeaux: There exists a multitude of finance options for every borrower/lessee in the market today, and in 2021, I would say the competition continued to be very robust.

Normandin: During the last year, competition has continued to drive margins to razor thin levels with little room for error. This has increased the need for scale, efficiency, technology and human talent. The competition for the best people is very high, resulting in companies taking measures they would have never considered just a couple years ago. Fortunately, M&A activity has created opportunity for talent and business.

Wolfe: Two examples worth mentioning are increased competition for good quality credit and private equity-backed finance companies continuing to enter the market to compete for structured and higher rate transactions.

Is there anything we haven’t covered that you believe would be of value to our readers?

Comeaux: Even before the pandemic, we’ve prioritized providing our vendor partners with digital product solutions that deliver a consistent and reliable experience. We are investing in digitization as a way we do business, and as we head into 2022, we will continue to focus our efforts on this incredibly critical aspect of our business model.

Normandin: Supply chain challenges have and remain a material disruption to our obligors, suppliers and industry. This has resulted in significant shortages of products and parts in most equipment types we fund. The used equipment markets have experienced a surge in demand which has resulted in strong pricing in the secondary markets. This will continue.

Wolfe: Pending budget reconciliation could provide substantially increased and extended tax incentives for renewable generating resources as well as battery energy storage and transmission projects. Should it pass in its current form, renewable energy project sponsors should benefit from increased long-term certainty for investment from long-term federal incentives. •

This article was produced prior to the passage of the Infrastructure Investment and Jobs Act.