ELFA/IMN Investors’ Conference: Equipment ABS Market ‘Strong at All Levels’
by Rita E. Garwood May/June 2018
Presenters at the 17th Annual Investors’ Conference shared an optimistic outlook for the equipment finance industry, with ABS “strong at all levels,” M&A “very frothy” and 2018 business investment expected to be “very bullish.”
Although the 17th Annual Equipment Leasing and Finance Association (ELFA) and Information Management Network (IMN) Investors’ Conference on Equipment Finance was scheduled for the first day of spring, it certainly felt like winter in New York City on March 22. With the threat of a Nor’easter looming, the Union League was buzzing as attendees kept an eye on hourly forecasts and, in some cases, adjusted their travel plans.
Ralph Petta, president and CEO of the ELFA, kicked things off by outlining the association’s three strategic initiatives for 2018: people, technology and policy. The ELFA continues its mission to attract emerging talent to the industry and hosted its first Women’s Leadership Forum this year. The association also improved its online tools, including discussion forums, for greater functionality.
Jeffry Elliott, senior managing director of Huntington Equipment Finance and current chairman of the Equipment Leasing and Finance Foundation (ELFF), discussed two new initiatives aimed at connecting mentors with the next generation workforce: the guest lecture program and the internship center.
Top 10 Equipment Acquisition Trends
Petta discussed the top 10 equipment acquisition trends for 2018. Investment in equipment and software is expected to grow by 9.1% in 2018, thanks to solid labor markets, moderate GDP growth, stable credit conditions and continued optimism. “As the U.S. economy goes, so goes the equipment leasing and finance business,” Petta said, noting the outlook for overall investment in 2018 is “very bullish.”
Equipment financing is expected to increase, with eight in 10 businesses planning to finance equipment. Corporate tax cuts also are predicted to drive demand for new equipment. “Confidence as measured by the monthly confidence index that the foundation puts together is at near-historic highs,” Petta said. “Particularly with the tax cuts, there’s just a lot of euphoria about what that means in terms of optimism, confidence in the economy and businesses’ ability to grow and expand, which is all good for financing assets.”
Other notable trends include the rising interest rate environment, which is not anticipated to deter CAPEX expansion, and technological equipment advances, which may attract businesses seeking improved efficiency.
Investment in the agricultural, aircraft, construction, industrial, trucking and computer sectors is forecast to remain steady or strengthen. While companies scramble to implement lease accounting changes, Petta said this should not change behaviors in lease-versus-buy analysis.
A greater focus on the customer is expected this year, with fintech and managed solutions providing greater effectiveness and flexibility. Trade issues are expected to pose headwinds, which may affect global demand for U.S. exports. Finally, several wild cards — geopolitical risks, fintech disruptions and the mid-term elections — may affect the industry.
Wells Fargo Capital Finance Senior Vice President Stewart Hayes moderated the capital markets panel and described the market as strong “at all levels.” James Jackson, managing director of The Alta Group, described the M&A market as “very frothy” during a recap of notable transactions. His primary concerns for M&A in 2018 included rising interest rates, margin compression, a lack of supply to meet demand and the effect of tax reform and trade tariffs.
Providing an overview of the active ABS market, Wells Fargo Securities Managing Director Pete Rogers said, “2017 was a strong year, with over $230 billion in issuance volume, the strongest post crisis to date — up 23% over 2016 — so the market is really healthy.” Although Rogers noted overall projections for 2018 are a bit lower, he added, “We expect to see solid activity in equipment and definitely see the transportation sector holding firm and probably increasing.”
Rogers said the market has continued to see growth from larger issuers and steady activity from independents, noting “it’s a very efficient tool for them.” Tom Beckmann, assistant treasurer of CNH Industrial Capital, said there are now a greater number of independent issuers than captives.
MetLife Director Loritta Cheng said spreads have made the market attractive to new issuers, including smaller independents and investors. However, she worried that a rise in complacency could result in underwriting deterioration.
Rogers echoed this concern: “The longer you go without pockets of weakness, what does a correction look like when it happens?” While he remained unsure if the rising rate environment would be “the canary in the coal mine,” he believed it would add “frictional transition costs” to many in the industry.
In a discussion about potential opportunities, Beckmann said, “If you’ve never done ABS, don’t look at it as a one and done thing … look at it as an ongoing program.” He stressed the importance of getting everyone in an organization involved in the process: “If the entire company takes its eye off the ball, then you have the potential for a real train wreck.”
To close the session Hayes asked panelists if the market would be better, worse or the same in two years. Cheng, Rogers and Beckmann expected similar conditions while Jackson predicted the environment to be worse.
Legislative & Regulatory Update
Teresa Davidson, special counsel for Volvo Financial Services, led a panel on the regulatory environment and gave an overview of issues in cybersecurity and data privacy, including updates on the regulation of the Internet of Things (IoT) and fintech licensing. Davidson also provided a run-down of potential Dodd-Frank revisions — noting the dramatic differences between house and senate bills — and the adoption of the Secured Overnight Financing Rate (SOFR) as a benchmark to replace LIBOR, which will no longer exist after 2021.
ELFA Vice President of State Government Relations Scott Riehl discussed the importance of “keeping the lanes free” in the states, pointing to the California lender’s license “disaster” and noting the faster pace and greater volume of legislation introduced at the state level.
Joe Sebik, director of Tax Reporting for Siemens Financial Services and chair of the ELFA Federal Tax Committee, and Anne Levin-Nussbaum, counsel for Mayer Brown, examined how tax reform will affect the industry, including corporate rate reduction, net operating loss carry forwards, limit on interest deductibility and 100% bonus depreciation.
Sebik said “the whole nature of the industry is now changing” and users will need to be educated about the tax ramifications of leasing versus borrowing to understand the best options for their situation. Since the tax code was changed before companies had a chance to argue their case, he would like to hear from organizations that have experienced unintended consequences from the reform. Overall, Sebik said 2018 should be a great year for equipment finance, thanks, in part, to the confusion surrounding tax reform as users may simply opt to lease equipment rather than try to grasp the changes.
Technology & the Equipment Finance Sector
In a technology-focused panel, moderator Stephen Whelan, partner at Blank Rome, discussed three key points concerning blockchain technology in equipment finance: 1) it will not remove the applicability of trustees and collateral agents, 2) it is ideal for parties that know each other, like the close-knit equipment finance industry and 3) it can make electronic chattel paper more user-friendly.
Sohini Roy, CFO of CG Commercial Finance, anticipated seeing higher blockchain adoption rates at larger companies due to the higher costs required to implement the technology, which is in its “hype and hope phase.”
Charles Anderson, CEO of Currency Capital, said blockchain has the potential to streamline the underwriting process — removing some of the effort and cost of verification.
CapX Partners’ Eric Starr stressed the importance of staying ahead of the rapidly-changing technology curve since companies that fall behind will find themselves on a “treadmill to oblivion.”
The panel discussed enhancing customer experience via technology. Anderson suggested examining the value being offered to the customer, paying close attention to two words: simple and easy. “I think technology is going to revolutionize how our customers interact with us because technology will make it easy for them to choose what they want and how they’re going to pay for it.”
Jim Griffin, chief technology officer of Fleet Advantage, discussed leveraging IoT to glean analytics measuring asset performance, enabling effective lifecycle management.
On the topic of managed solutions, Whelan noted today’s customers are likely to say, “I want to pay only for what I use when I use it, and take this hell-or-high water clause and throw it in the Hudson River.”
Roy said she expects the industry to evolve from pure asset financing to an AI-driven model that is more predictive in nature, with managed services solutions as the piece in between. The real question for Roy was not the fate of the hell-or-high water clause, but the professionals who work for equipment finance firms. “Lessors are historically structured finance professionals,” she said, noting the skills of technology professionals will become more vital, “so the makeup of equipment leasing firms is going to experience change.”
Transportation Finance Briefing
Todd Plotner, partner at Chapman and Cutler, moderated a transportation finance panel.
Michael Pearl, treasurer of Triton International, said the outlook for the container market remains positive and supply and demand for containers is tight, as most leasing companies are at 98-99% utilization. Pearl said trade growth, around 5% in 2017, was stronger than initial expectations and is expected to be fairly decent in 2018.
Jing Xie, director of S&P Global Ratings, noted the effect of steel prices on the container industry as the Chinese government has continued to limit production capacity for steel manufacturing.
The panel also discussed changes to structuring container deals as investors increasingly want to include effective triggers and more protection.
Since the container market has recovered, Xie noted many investors are chasing container ABS deals. Pearl said that while spreads are tighter and benchmarks are up, Triton’s set of investors has remained consistent.
Looking at the railcar industry, Xie said the overall market is experiencing an overcapacity. Xie also noted the tank car retrofitting process has been slow, and with five years left until mandatory adoption, there is no rush to retrofit.
Can the Economic Expansion Set a Record?
Keynote speaker Gus Faucher, chief economist at PNC Financial Services, analyzed the current economic expansion, which began in 2009 and is currently tied for the second longest expansion in U.S. history.
After explaining how imbalances in the economy cause recessions, Faucher said, “When I look at the economy right now, I do not see imbalances. I think the economy continues to steadily improve, and I think the expansion will continue through the rest of 2018.”
While this expansion has been weaker than most, Faucher said this has lowered the chance for the imbalances to develop. “We’ve had consistent, steady growth, and that means the economy can continue to expand at this pace without the imbalances that would cause a recession in the future,” he said.
Looking ahead, Faucher identified several “big risks to the upside and downside.” The first was President Trump, who has the potential to positively and negatively affect the economy. Other likely upsides include fiscal policy, the global economy, employment confidence, regulatory reform and increased commercial construction. Possible downsides include monetary policy and interest rates, trade wars, the stock market, immigration, budget deficits and terrorism.
Moderator of the Innovations in Aircraft Finance panel, Mark Hirshorn, senior vice president of U.S. ABS at DBRS, said 2017 was a record year for aircraft ABS and 2018 is off to a great start.
Joseph Howard, treasurer of Willis Lease Finance, said the demand for aircraft issuance is growing and many issuers are tapping the market yearly for stable cash flows.
Tony Nocera, senior managing director of ABS Commercial at Kroll Bond Rating Agency, said the asset class is attractive to investors because aircraft are long-term, sustainable, well-established assets that bring strong yields relative to risks. Nocera said the investor base is growing and as the market grows, liquidity has increased.
Vivek Kaushal, chief risk officer of Global Jet Capital, said the owners of aircraft, usually large companies or high net worth individuals, also make the asset class attractive thanks to lower default and loss rates.
Private Equity in Equipment Leasing
Cyndi Giles, head of Lender Finance for Wells Fargo Capital Finance, led a panel on the role of private equity in equipment leasing.
David Lee, president and CEO of Colford Capital Holdings, shared the qualities private equity investors look for, such as an experienced management team, definable market opportunities and a high return on assets.
John Cochran, managing director of Lovell Minnick Partners, said there is more PE capital today than ever before and many PE firms are “cross pollinating” between companies.
Tom Howard, partner at Chapman and Cutler, said time horizons can be the No. 1 risk an equipment finance company may face in a PE relationship. Howard stressed the importance of outlining a timeline in advance, as PE firms expect a liquidity event and can push a company into liquidity if it fails to stay on schedule.
Charles Stackhouse, vice president of Wafra Capital Partners, said PE investors must show self-discipline by partnering with management teams whose interests coincide with the investor’s. Unfortunately, he said this goal will become increasingly difficult in a dwindling supply market.
Bank Lender’s Roundtable
Christian Haesslein, director of DZ Bank AG, opened the Bank Lender’s Roundtable with an overview of an indicative term sheet for banks, which included shorter terms and an average commitment size of $50 million.
Lauren Lannefeld, vice president of BMO Capital Markets, discussed the types of bank products available to equipment finance companies.
Hayes said the trend over the last year has been too much money in the market. He said more banks are lending in specialty asset classes than ever before, which has resulted in the need for greater flexibility and creativity.
David D’Antonio, managing director of EverBank, said the world has changed a lot in the last decade and traditional facilities no longer work the same way. He said leasing companies often do not have a lot of skin in the game, even though it may appear that way, so banks must structure around that.
When investing in an equipment finance company, Capital One Managing Director of Asset-Backed Finance Matt Tallo said banks want to see strong management with industry expertise and a succession plan.
Institutional Investors’ Roundtable
Ed Wu, director of Loan originations at Revere Capital, moderated the final panel of the day. Rana Mitra of Atalaya Capital Management, Andrew Carman of SQN Capital, Elena Serdyuk of New York Life Investors, Bob Peaert of Magnetar Capital and Manush Kapoor of West Wheelock Capital discussed the qualities attracting institutional investors to the space, how the asset class compares to others, challenges and growth in the sector and looming wild cards that could influence business investment. m
President and Chief Digital Officer,
“Technology is a tool” and this technology is a perfect fit for HR, as explained by Scott Nelson, president and chief digital officer at Tamarack Technology in this Monitor Web Exclusive. Learn how AI is not only good, but critical to human resource management in equipment finance.
Director of Data Analytics and Corporate Development,
Director of data analytics and corporate development for Fleet Advantage, Jackie Jacobs, CLFP, shares ways you can promote diversity within your organization. Covering everything from championing underserved groups to effective ideas on bringing people together, Jacobs provides a fresh perspective on something every business leader should know.