When we last spoke to Andrew Mesches in early 2010, he had noted that the period from 2008 and 2009 had taught credit managers valuable lessons causing them to refocus their priorities. Now, two years later, although the recovery has been slow, liquidity has returned to the market only to be met by thin demand and loosened standards in some cases. From his perspective as an industry consultant, Mesches shares his sense of realities today for equipment finance credit managers.

“There is a lot of money out there and a lot of budgets have been ratcheted up in 2012, but there’s not as much demand for that capital. Spreads have tightened and because of budget demands for volume, there has been a push again to drive spreads down for competitive reasons. Although I’ve been out of the day-to-day corporate environment for a couple of years now, I can speak to the regulatory environment, primarily at the banks, which are being held to higher standards and certainly more intense monitoring than what was there in the past. While there might be desire from some organizations to loosen standards, it is very difficult in this environment because of the oversight from corporate risk and external regulatory agencies. There is an abundance of controls, measures and reports in place in today’s environment. In the minds of many people on the risk side, the situation that was created by the recession in 2008 and forward is too recent a memory and caused too much of a financial impact for the regulatory agencies and central risk management groups of institutions to relax their standards,” Mesches says.

In fact, Mesches notes that one of the biggest changes to the overall credit process in the past couple of years is the increase in regulatory compliance demands. In terms of lease documentation, Mesches observes that while there is not much new in terms of mitigants such as cross default, cross collateralzation and personal guarantees, there are tighter controls on the exceptions to policies dictating their use.” Rather than reinventing the wheel, the wheel is pretty much the same, but the ability to make exceptions and/or modifications as to how the wheel might look are not as varied as before,” he adds.

As the recession took hold and credit portfolios began to deteriorate, credit managers and their organizations kicked into action their plans to mitigate and ameliorate risk. According to Mesches, in general these risk strategies proved sufficient — over time.

“The actions and strategies taken to ameliorate risk were a staged affair. I don’t think when the recession started everybody said, ‘We have to do all of these things, we have to do them right now and that’s going to solve everything.’ They did it in steps and, as the recession worsened, people recognized that there were additional things to do. However, if some organizations had employed all of their risk mitigation strategies at once, they would have not done any business,” he explains.

With regard to changes in internal credit management operations, Mesches notes a move from front office to back office duties. “There has been shifting with respect to responsibilities of credit people. When volumes have dropped or problem accounts have increased within an organization, credit managers have refocused from underwriting or origination to portfolio management or helping with delinquent accounts — going from the front end to the back end. Some of that has shifted back, based on the ratcheting up of volume and need for credit underwriters and, as a result, increased FTEs on the portfolio management side have been necessary for additional reporting and follow-up. That’s a difficult decision for organizations to make because, while the risk management aspect is critical, we also know that it is a cost center. (It is also a loss avoidance center but difficult to translate that to bottom-line dollars.) Although risk management doesn’t generate new revenue dollars, through strong risk management policy, it curtails losses, which helps the bottom line,” Mesches says.

Moving forward, albeit at a measured pace, certain industries are showing signs of promise in leading the way to recovery. Mesches sees information technology and healthcare as two that have survived the recession and are poised to grow. He adds, “Healthcare was doing well before the recession, although there were some bumps during the recession, but as a whole weathered the downturn well. It is somewhat recession resistant because of the need for people to have adequate healthcare. Based on the accelerating number of Baby Boomers that are retiring, I don’t see that sector diminishing at all. There will be sectors within healthcare that are more stable than others. Hospitals are probably more stable than surgical centers or clinics. Healthcare overall is going to remain a strong segment of the economy.”

Mesches also notes that the energy market not only survived the recession, but perhaps even gained some speed. “Some of it is the alternative energy, such as wind power and to a greater extent the solar market. But there is also revival of the more traditional energy segments such as gas and oil. The energy area will continue to do well, and some of that has to do with technology. Although there are some negative comments with regard to fracking, there is no argument with the amount of reserves the U.S. has that can be much more fully developed with new technology. Equipment on the energy side of the market will continue to do well. As the demand continues to pick up for energy production, the equipment needs will be there,” he says.

Areas that will continue to struggle, according to Mesches, are those tied to the real estate and housing market, such as the building trades, construction and, to a certain extent, manufacturing. He feels that as long there is an anemic housing industry, coupled with the high unemployment rate, industries associated with real estate and housing will continue to drag and won’t see recovery for some time.

Pinpointing recovery geographically isn’t clean cut, Mesches says, noting both growth and struggle within the same regions. “There are some pockets of real growth, but it is much more micro-regional than it was previously. Growth attaches to the type of industry involved in that particular region. For example, there are parts of Texas and California that are really struggling in terms of high unemployment rates, foreclosures and industries that have left the area. But there are parts of those same states that are doing extremely well. Parts of California because of technology are doing very well; parts of Texas because of the energy boom are doing well. There are other surprises. If you looked at these pockets 12 months ago, the picture would have been different.”

He adds, “Areas within Oklahoma, the Dakotas, Montana, Louisiana and Wyoming, because of energy, are doing extremely well. Doing surprisingly well are parts of the Great Lakes region because of the current boom in the automobile industry. Some areas of the Southeast are doing well and others are struggling. A lot of the foreign auto manufacturers have built plants in the Southeast, such as Mississippi and Alabama, and they have created boom economies in these areas. In the Pacific Northwest, Boeing is doing extremely well with its 787, as is technology, with, of course, Microsoft. But there are parts not doing well because the building trades and lumber production are not as necessary due to the poor housing industry,” Mesches explains.

If sticking to the Five Cs of Credit played a role in surviving the Great Recession, their relevance is even more so during this recovery cycle, according to Mesches. “Having gone through the 2008 recession, the Five Cs of Credit remain the fundamentals for making sound credit decisions. We now have all of the tools and technology, but you still need to look at the Five Cs. I may have prioritized these differently pre-2008, but not completely. Number one has always been the same: Character. You can’t go any further with a client with a transaction if you can’t answer the character question. If character is questionable then you really don’t know if you are getting accurate or honest answers to any of the others. On the other end, where I may have said in the recent past that collateral was two, three or four, I now think collateral is fifth. While collateral is important, it can’t change a bad deal to a good deal. Based on what we saw in 2008 and forward and the devaluation of some collateral, hard value didn’t prove to be very hard at all. If there was hard value on a certain type of collateral because you could get a certain number of dollars if it was repossessed — that went out the window in 2008, based on the gluts in some markets, such as construction, transportation and the best/worst example, corporate aircraft where values plummeted by more than 50%. Capacity, capital and conditions are in a three-way tie, depending on the environment. It’s a blend. Those are all intertwined depending on the situation,” he notes.

And, finally, Mesches notes that if there is a new lesson coming out of this recession compared to those learned from down cycles it is, “remember the past.” He says, “As opposed to credit managers operating in the pre-2008 environment, we all now have experienced the dramatic impact of a major recession. Before 2008, many of us had never lived through a down cycle as remarkable as the Great Recession. But now we can say that if you were there in 2008, you experienced something that most of us hadn’t ever experienced, regardless of how long your career has been,” Mesches concludes.

Lisa M. Goetz is an associate editor of Monitor.

Andrew G. Mesches is a consultant for The Alta Group. Prior to joining Alta, Mesches was executive vice president and chief risk officer at Key Equipment Finance in Superior, CO from 1995-2010. There, he was responsible for the management of Key’s $10 billion loan and lease portfolio. Preceding Key Equipment Finance, Mesches worked for BancOne Leasing in Columbus, OH as senior vice president for credit and operations. His BancOne responsibilities included management of a $5 billion loan and lease portfolio, various equipment management activities and human resources. Previously, Mesches also held vice president and assistant vice president positions at San Francisco-based United States Leasing Corp. and Bank of the West, respectively. He began his career at the State Bank of Albany in Albany, NY (now part of Bank of America), holding various management roles. Mesches also is a longtime member of the Equipment Leasing and Finance Association and currently serves on its credit and collections committee.