ELFA/IMN Investors’ Conference: Adjusting to a Post-Covid-19 World
by Ian Koplin May 2021
Although it was held virtually, the ELFA/IMN Investors’ Conference focused on a theme of the slow but steady emergence from the COVID-19 pandemic. Equipment-backed ABS has experienced a “bright start” in early 2021 and volume is expected to return to near-normal levels.
Ian Koplin, Editor, Monitor
The 20th Annual ELFA/IMN Investors’ Conference, like so many other events this past year, was held virtually for the benefit and safety of all who would regularly attend in-person. Agile as ever, moderators and presenters adjusted to the new digital format through a series of conference-call styled presentations and roundtable discussions featuring key points and changes within the equipment finance and leasing industry and relevant sectors.
2020 Trends to Watch in 2021
Kristine Snow, president and CEO of Cisco Systems Capital and chair of the Equipment Leasing and Finance Association, presented the Top 10 Equipment Acquisition Trends of 2021, pulling from a conglomeration of insights and market data extracted from the 2021 US Economic Outlook Report published by the Equipment Leasing & Financing Foundation in partnership with Keybridge Research.
To see where the market is going, it is important to look back at just how transformative, tumultuous and downright different 2020 was for equipment finance, the financial industry and the planet. In early 2020, trade wars, tariffs and the effects of macro-economic pressures and geopolitical challenges were the industry’s primary concerns. Last year’s ELFA/IMN Investors’ Conference was one of the first conferences to be cancelled as the world began to understand that life as we knew it was about to change forever. Today, we are finally starting to see the light at the end of a harrowing tunnel.
“The pandemic has changed how we work, how we live, the role of business and the needs and expectations of consumers around the globe,” Snow said. “One of the most immediate impacts was the massive migration to remote work. Eighty-eight percent of global enterprises encouraged their office workers to work from home because of the pandemic, and of course, as many of you have experienced it firsthand, it wasn’t just work. It was school that moved to the home as well. It’s been estimated that 1.2 billion children around the globe moved into a virtual or hybrid education.”
In addition, governments moved to virtual legislation and healthcare delivery had to be redefined. Snow said telehealth adoption increased by 50% in the first six months of 2020. According to Snow, since the COVID-19 pandemic began, 73% of companies have decided to accelerate digital transformation plans. Saying ‘things have changed’ would be an understatement, but these driving factors and their effects on the equipment financing industry will have a lasting legacy.
Economic growth will be the top trend of 2021. Snow said 2020 featured unprecedented damage to the U.S. economy, causing it to contract by 3.5% during the year, equating to the worst yearly performance since the end of World War II. Twenty-two million jobs were lost, and many businesses are still recovering from the impacts of the pandemic and subsequent economic contraction.
Despite the gravity of 2020, Snow said research predicts 2021 to be a “tale of two halves.” The first half is projected to remain sluggish, but the second half holds great potential as the distribution of vaccines continues to gain momentum and Congress provides economic stimulus packages for consumers and businesses. Snow noted that GDP is estimated to expand by 4.7% in 2021. (The ELFF increased its 2021 estimate for U.S. GDP to 5.7% in a Q2 update to its outlook).
The “tale of two halves” is also relevant to another trend for 2021: capital spending growth. As with economic growth in 2020 into 2021, investment in equipment and software was below average early in the pandemic only to regain strength later in the year. Snow said capital spending declined by 9% in Q1/20 and 28% in Q2/20, followed by a record increase of 47% in Q3/20. Thanks to this rebound, equipment and software investment is expected to grow by 7.8% in 2021 as the economy regains its strength. (The ELFF upped its projection for equipment and software investment in 2021 to 11.2% in a Q2 update to its outlook).
Snow said 80% of all businesses currently lease or finance equipment, partially driven by low interest rates, which will be continued over the short and medium term. The Paycheck Protection Program has offered a lifeline to struggling businesses through multiple rounds of stimulus and legislature aimed at helping the U.S. economy and its consumers recover. Many lenders and equipment finance companies also offered payment relief plans to their customers in 2020, allowing breathing room for those struggling to cope with sudden changes brought on by the pandemic.
Low interest rates, government stimulus packages and payment relief or restructuring of transactions present a trifecta of hope. The Q2/20 ELFA MLFI-25 demonstrated a spike in delinquencies, while new business volume declined 6% in 2020 on a year-over-year basis. However, new business volume and U.S. GDP growth is projected to increase in 2021, translating to strong demand for equipment investment and originations. Confidence in the equipment finance industry has reached an all-time high, according to the ELFA MCI-EFI.
A Post-COVID-19 World
Snow indicated that outlooks for the workplace in a post-COVID-19 world generally point to optimism in the small business market as businesses adapt to and evolve with work-from-home hybrid environments. Strong municipal markets are projected to emerge in 2021 as schools and governments adapt hybrid models. This paradigm shift will continue to require additional financed IT assets for customer access and data security enablement, compelling lenders and equipment finance companies to offer enhanced digital tools to connect with customers and businesses. Snow said the industry must evolve to meet these demands.
Digitalization and the transformation of technology to meet the demands of an evolving economic landscape will be needed in a post-pandemic world. The adoption of modern, smart technology and the business model it builds is expected to surge as demand rises exponentially in 2021. Everything that was born from necessity in 2020, from e-leasing to e-signatures and beyond, will continue to gain traction and deployment as e-commerce solutions rise to meet customer demand. The industry stands to benefit from a continued increase in remote and contactless back-office operations, with the speed of processes involving compliance and data security being a top priority.
Snow said data security is a top concern for companies in 2021. The heightened use of digital and contactless transactions and data as well as the transformation of information exchanges in the workplace will bring a renewed focus to the need for effective cyber security strategies. Based on a research study performed by Cisco, 66% of CEOs interviewed indicated that numerous lessons have been learned from the pandemic, resulting in increased cyber security investments over the past year, a trend that will continue forward.
Capital Investment Trends
On a year-over-year basis, 2020 ABS volume declined by roughly 20% and equipment-backed ABS was down 34%. Despite that dramatic drop, Joanne DeSimone from Kroll Bond Rating Agency noted that most issuers adopted a controlled approach and implemented tighter focus around certain industries. Although issuance paused for approximately six weeks in March 2020, a complete shutdown of lending did not happen. Quentin Cote from Orion First said many small-ticket equipment originators matched 2019 volume in 2020 despite an initial flurry of payment deferrals.
Stephanie Mah of DBRS Morningstar said 2021 is off to a “bright start,” with nearly $4 billion in equipment ABS issuance at the time of the conference on March 11. Investors are beginning the year with pent-up demand for equipment ABS as they look to diversity away from auto, according to Lauren Lannefeld of BMO Capital Markets. BMO is projecting ABS volume to return to historic norms of approximately $15 billion in issuance by the end of 2021. Lannefeld said spreads have compressed significantly from the volatility of the last year.
A Changed Political Landscape Changes Expectations
In a panel focused on the regulatory outlook for the industry, panelists noted that federal and state legislative activity presents a mixed bag of favorable and unfavorable news. Positives include a return to ‘business as usual in Washington’ as the uncertainty of the previous administration has been removed from business and decision-making stimulus initiatives designed to steady the economy and labor markets. Accelerated spending on vaccine development and distribution includes many facets involved in major spending bills, such as a massive, bipartisan infrastructure revitalization investment, from which the industry stands to gain substantially.
The continued polarization of Democrats and Republicans in Congress regarding a potential increase in corporate tax rates and the implications of climate policy and regulation will be an area to watch. Another trend to watch in 2021 is an increased blurring of the line between consumer and commercial activism and the aggressive legislative and regulatory proposals regarding financial services licensing and disclosures.
The panel noted that according to the International Monetary Fund, China is the world’s only major economy that expanded last year after falling to a nearly decade-low in early 2020. U.S. exports to China surged in the second half of 2020, and China will continue to play an outsized role in determining global demand for exports from several key end-use markets, including agricultural equipment and medical devices. A strong recovery for China’s economy means a strong demand for U.S. exports and a solid recovery for the U.S. economy. This opportunity will depend on the fate of U.S./China relations, which have yet to be solidified by the Biden administration.
Key Takeaways and Conclusive Notes
2021 began with soft economic momentum due to the winter surge in COVID-19 cases in late 2020. The manufacturing sector has been leading the recovery so far, while consumer spending has been tepid. Stimulus packages should boost spending by late winter. Labor markets are weak now but should strengthen as the year progresses.
The pace of growth in 2021 will depend heavily upon the speed at which vaccines are distributed. Consumers would like to return to pre-pandemic spending levels as soon as conditions return to a safe level. Assuming there is 70% immunity to COVID-19 by late summer and a healthy return to domestic leisure travel and business meetings this fall, new business growth is expected to increase between 4% and 5% in 2021.
Meanwhile, the $1.9 trillion American Rescue Plan and strong ‘pent-up demand’ could lead to rising inflation. Panelists advised attendees to keep an eye on whether rising commodity prices will translate into higher consumer prices. An increase to the range of 2% to 2.5% would be innocuous, but an increase closer to 3% to 4% would likely bring strongly negative reactions in both the bond and equity markets.
Although manufacturing activity is nearing a full recovery, the outlook for other sectors is more mixed. Residential construction continues to surge, while demand for automotive, electrical equipment and most types of machinery is growing. Traditional brick-and-mortar retail and commercial real estate will remain under pressure throughout the rest of 2021. Travel and tourism as well as spending for entertainment will slowly improve as vaccines are rolled out.
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