The 2014 ELFA/IMN Investor Conference provided clear evidence that industry leaders are optimistic about this year’s forecast for investment growth. The consensus of those in attendance was the equipment finance sector will not only be a major contributor to the expansion, but will continue to evolve in ways that will keep investors interested.
The Equipment Leasing and Finance Association/Information Management Network (ELFA/IMN) Investor Conference was held on the first day of spring — March 20, 2014 — in New York City with 350 attendees, some at the conference for the first time. Popular opinion from attendees marked belief that a stable economic forecast and investor demand signaled another positive year ahead in equipment finance. The big picture showed that unless there is an unforeseen circumstance, real growth at 3% will be driven by private business, jobs, housing and consumer demand. Industry leaders said the equipment financing sector is not only a major contributor to this economic growth, but also an economic indicator; the industry is changing and evolving, but in ways that are keeping investors interested. Investment growth is projected to be
“Our economy was postponed, not canceled,” Joanne DeSimone, director of Standard & Poor’s Rating Services, said, citing last winter’s unusually bad weather as a factor in lower-than-expected growth. But despite sluggish conditions, she reported six issuer transactions were completed in the first quarter of 2014, representing a total value of $3.9 billion.
Rana Mitra, principal of Atalaya Capital Management, said despite regulatory compliance concerns, “Private equity firms, business development companies (BDCs) and larger financing companies are where the action is.” Both new and existing BDCs are attracted to the industry’s better spreads, she added, noting that according to investors, there is a lot of money chasing middle market opportunities.
“Investor demand is very robust,” agreed Miles Herman, president of LEAF Commercial Capital. A variety of banks acquired leasing companies recently, he noted, citing Umpqua Bank’s acquisition of Financial Pacific; MB Financial’s merger announcement to acquire Taylor Capital, the holding company of Cole Taylor Bank; and City National Bank’s acquisition of First American Equipment Finance. Most recently, CapitalSource Bank, a wholly owned subsidiary of CapitalSource, merged with PacWest’s banking subsidiary, Pacific Western Bank. “Buyers are looking for sustainable models that will help them expand their platform and add to their profitability,” Herman said.
At the conference, two small-ticket independent lessors, Todd Kaufman, president of Keystone Equipment Finance, and K. Bill Dost, president of D&D Leasing, said the one-day event was worthwhile. Dost was impressed to hear about the high levels of liquidity in the market, while Kaufman said he appreciated the industry overview.
The first panel of speakers providing the overview Kaufman referenced noted that credit quality is well above pre-crisis levels and liquidity is good. Speakers remarked that this is an ideal time to strengthen liquidity and, it was emphasized, “diversify funding.”
Bob Rinaldi, CEO of King Commercial Finance, introduced a snapshot of new economic research stemming from the Equipment Leasing & Finance Foundation — research that he said he is passionate about because it will not only provide more transparency for investors but will also be good for the industry as a whole.
The research, involving PayNet and Dr. Jim Schallheim, a finance professor with the University of Utah, will show the correlation between yields and risks for a better forecast of risk-adjusted returns in the leasing industry, compared to other publicly available debt insurers. Rinaldi said that the need arose during the downturn when liquidity was a problem. The research findings are founded on a database representing more than 1,000,000 transactions. See sidebar.
SEC regulation on financial services, also discussed at last year’s conference, continues to be the biggest issue, especially for banks. The only other note of economic caution from this panel was that there are minor delinquency increases in small-ticket investor pools.
Tom Howard, a partner with Chapman and Cutler, presented information about the Dodd-Frank §1071 provision that amends the Equal Credit Opportunity Act by requiring banks to collect and report on race, sex and ethnic background of loan applicants while also separating this collected data from the credit application itself.
He also cited Regulation ABII, which (if passed) will require very detailed disclosure of assets and service fees that the ELFA notes will create privacy concerns. It also slows the offering process and includes executive officer certification of the deals. In addition, risk retention regulation 941 will require that sponsors of securitization transactions, the issuers, must retain 5% of the credit risk. These are expected to be topics ELFA members will take to Capitol Hill in June. It was noted that most of these regulations are expected to have long transition periods after enactment.
In another panel on the transportation segment, a German bank representative, Todd Kendall, senior advisor to DVB Capital Markets, said asset details to be required by ABII will probably be provided on a password-protected website for investors only, and this shouldn’t affect decisions concerning ABS or corporate bonds. But it will be costly to create, he noted, compared to just providing a summary as is accepted today.
The mix of attendees has changed over time, shifting to analysts, investment bankers and more institutional types, according to David D’Antonio, managing director of EverBank.
American leasing companies have changed, as well, he said. “They are now really more like specialty finance companies — increasingly offering working capital funding, not just equipment-backed leases. These are professional money managers; 25 years ago when I entered the business you just sold a lease. These new companies are professional and I think it is a good thing, it’s just evolution. There are no pure play independent lessors, small ticket or middle market, there are only a handful in mind …. we have over a billion dollars in commitments to specialty finance companies. We’re providing committed, secured credit to support originations and to support their product on the balance sheet,” D’Antonio said. D&D Leasing is a good example of the evolving small ticket lessor. “We’ve offered what we call ‘professions loans,’ which is, specifically, working capital loans to the professional segment in the UK,” said Dost, adding, “We’ve seen it grow pretty steadily. We plan to open up to the general corporate public a working capital loan to meet their business needs.”
Kaufman, of Keystone, said his company is primarily focused on financing in the road transportation sector, but he was intrigued with growing involvement in working capital financing.
Herman remarked, “People acquiring equipment are still basically in a replacement cycle. We haven’t seen expansion consistently across the board, but certain sectors are better than others, such as trucking, agriculture, energy — particularly renewable — and healthcare and technology.” At LEAF, he said, the growth is predominately through vendor financing with existing partners, new clients and recently closing programs with Burger King and the furnishing solution company Herman Miller.
In a discussion led by D’Antonio, it was reported that the securitization markets are getting back to normal, and they are more seamless than in the past.
Crowd funding was mentioned as peer-to-peer funding is happening, but it is not ABS-ready, said Chris O’Connell, senior vice president of DBRS. Also discussed was the access to so much more data, including free data that can be pulled from places like Amazon, and this is helping to drive lower-end financing products. Andrea L. Petro, executive vice president of Wells Fargo Capital Finance, said that while there is heavy regulation by the Federal Reserve, “they can’t regulate the business cycle out of business.”
Mitra, on an investor panel moderated by Herman, said investors had expected a flood of banks to buy leasing companies last year, but regulatory restraints are causing some delays.
Therefore, companies will need to grow organically for another year or so, they said. It was recommended that finance companies use this time to diversify funding sources and seek long-term relationships to ride it out. Andrew Bender, CEO of GSG Financial and an investor panelist at the discussion, said his company is seeing growth in manufacturing logistics as more manufacturers seek bundled solutions. “They’re looking to have service and maintenance monetized, thus reducing reliance on the assets in establishing the deal terms and parameters,” he said.
Craig Weinewuth, president and CEO of ENGS Commercial Finance, said transport equipment is in a major replacement cycle, and his company is seeing some of the oldest assets ever because of long delays in equipment upgrades during the economic downturn. He said commercial trucks, trailers and related equipment are expensive so financing is critical, making this a reliable sector. But his company focuses on a slice of small-to-medium companies with five to 25 units, while 90% of the market has fleets of 40 units or more.
Craig Zimmerman, a senior account executive with PNC, said the blue water vessel space is of interest, but in partnership with another party that knows the market well. He said the transportation sector overall is very important to his corporate finance group focused on both the U.S. and Canada. In aviation the focus is on U.S. business aviation, rather than global commercial aviation.
Another panel was dedicated to renewable and alternative energy leasing, with representatives from United Wind and Altus Power Management moderated by Melanie J. Gnazzo, partner, Chapman and Cutler. Lars Norell, managing partner of Altus, said while there have been no securitizations, his niche segment is “analogous to any others. As long as the building doesn’t disappear, there are few ways to interrupt the cash-flow.”
He added there is a false market perception that alternative energy projects depend on government incentives, but he said that is not what is driving his business. Working with hospitals and large retailers such as IKEA, he said the transactions created as floating rate purchase power agreements (PPAs) need to be reset based on energy costs and that they have a “floor” built in for risk protection.
United Wind, a small wind developer based in Brooklyn, NY, has gained traction with the company’s WindLease platform, the first-ever, little-to-no-money-down leasing option for small wind customers throughout the United States. According to Russell Tencer, co-founder and CEO of United Wind, the company has signed up the first 50 U.S. customers to lease a small wind turbine on its property.
“With WindLease, United Wind has introduced a product to the small wind market that customers have been waiting for,” Tencer said, as the platform allows customers to reduce or eliminate the traditionally high upfront costs associated with purchasing a small wind system. Leasing with United Wind also allows customers to lock in energy prices over the entire lease term, and therefore avoid historically substantial utility energy price increases over 20-year periods. For example, according to Tencer, with WindLease, homeowners with appropriately sized properties with good wind resources, can save as much as $20,000 to $30,000 over the life of the lease, while medium-sized commercial operations, such as farms or small factories, can realize savings exceeding $150,000.
Founded in 2013, United Wind has raised the first-ever institutional tax equity investment in the small wind market, with GSG Energy Finance’s $25 million project fund for installations primarily in New York, Massachusetts and Oregon. According to Russell in an article in Forbes, “These states were selected not only because the electricity costs are relatively high there, but because they also offer incentives to residents and commercial organizations for using alternative energy.”
Andrew Mathews, on DLL’s Clean Tech Team, said the 30% ITC can be used by the owners of the structures or within a sale leaseback, but their secret to success is working with developers who have a stream of projects, many in the $2 million to $15 million range.
One key trend is the application of more technology to maintain customers and to provide more information, better service, customization and faster operations. The trends panel discussed emerging use of cloud computing, re-engineering and social media to analyze business from a credit and collections perspective.
Dave Gilbert, CEO, National Funding, said since 1999 his company has experienced a “major evolution,” going from doing no business online and having no Internet search capability to now gaining 45% of new business from the web. Joe Franco, in business development for Genpact, said they are seeing interest in CRMs, vendor portals and mobile applications, with most demand on the frontend because dealing with the backend presents more challenges. He noted that on global projects they explore off-shore resources and find ways to not have to build out architecture where not essential.
The trend panelists also discussed the growth they see in business to and from Canada after a cross-border withholding tax was adjusted favorably, according to Barbara Goodstein, a partner with Mayer Brown, who moderated the trends discussion.
For those companies that were resilient during the downturn, one speaker, Evan Wikoff, executive vice president of capital markets, Ascentium Capital, said, “This is another great year to be in the equipment leasing business.”
Herman of LEAF agreed, saying, “If you look at our market overall, we are a leading indicator of where the economy is going, and people see the numbers and confidence levels are positive.”
Aside from numbers, Kaufman said, there is “an energy you can just feel.”
D’Antonio agreed: “The feeling was positive and vibrant. There is a new or continued upward trend in originations and a lot of talk about the value of these firms providing an environment that is very positive for everyone.”
Susan Carol (Twitter: @scapr) has been a contributor to the Monitor since 1989. She also manages a communications firm that specializes in the equipment leasing and finance industry and she serves on the ELFA Board of Directors and the ELFA Communications Committee. For more information, visit www.scapr.com.