The biggest takeaway from the 16th Annual Investors’ Conference was the feeling that the equipment finance market is poised for steady growth in 2017. With interest rate hikes on the horizon and conditions improving in the energy sector, new business volume is expected to rebound despite uncertainty surrounding public policy and trade.
The 16th Annual Equipment Leasing and Finance Association (ELFA) and Information Management Network (IMN) Investors’ Conference on Equipment Finance was held at the Union League Club in New York City on March 22.
After a brief introduction from Ralph Petta, president and CEO of the ELFA, Bill Verhelle of Harvard Partners, current chairman of the Equipment Leasing & Finance Foundation (ELFF), discussed the importance of the ELFF’s research and notified attendees that the foundation’s resources are now available on its website for free.
Anthony Cracchiolo, president and CEO of U.S. Bank Equipment Finance and current ELFA chairman, gave attendees an overview of the state of the industry. “If you leave this room with one idea,” he said. “Things are good.”
Although 2016 investment in equipment and software declined by about 1%, Cracchiolo said a change is in store. “In 2017, we expect equipment and software to rebound and expand by at least 3%,” he said. “We are operating from a solid base…business confidence is improving, labor markets are firming and the GDP is expected to grow at 2.7%.”
But even the best times are not without a few challenges. Cracchiolo outlined the top 10 equipment acquisition trends for 2017. Net equipment investment is expected to pick up, surpassing $1.5 trillion, and equipment financing is also expected to grow, with nearly eight in 10 businesses financing equipment. However, public policy continues to be an area of uncertainty. Cracchiolo said the possibility of infrastructure spending and reduced regulations would be great news for the industry, but changes in trade policy could risk headwinds for equipment exporters.“The energy sector, we believe, bottomed out in 2016,” Cracchiolo said, noting that the oil industry’s drag on the economy should end, leading to increased oil production and investment. He said the improved market conditions should benefit key verticals, including oilfield, mining, materials handling and industrial and construction equipment.
The Federal Reserve increased interest rates at its March meeting, and Cracchiolo said three additional increases are expected in 2017, which will lead businesses to assess and plan for financing options.
According to Cracchiolo, customer desire for convenience is expected to drive innovation in the industry, including fintech, managed solutions and e-chattel paper. “We’re still trying to assess the impact of fintech and alternative finance,” he said. “We’re not seeing it as a major obstacle or competitor in all the markets that we operate in.”
The final trends Cracchiolo discussed were the impending lease accounting rule changes, which will take effect in 2019 and the “wild cards” which include potential geopolitical risks that might affect capital investment, such as Brexit, populist political movements and restrictive immigration policies.
Stewart Hayes, senior vice president of Wells Fargo Capital Finance, moderated a panel that provided an overview of the capital markets.
Panelist John Deane, CEO of The Alta Group, discussed the effects of the slow growth environment, including increased M&A activity and a quest for improved efficiency. Deane said 2016 contained one of the most active M&A markets in decades.
The panelists also discussed rising delinquencies. “We are seeing delinquencies and losses starting to migrate upward,” said Chuck Weilamann, managing director of DBRS. “It’s not something that we would look at as alarming at this point. It is, ultimately, what we would expect as a reversion to the mean.”
Weilaman said he expects issuance to stay in line with last year. “We saw approximately $10 billion get done in the sector,” he said of 2016. “We expect to see about the same amount of activity this year — perhaps more deals but smaller.”
Competition has been fierce for a while, and now the industry must deal with new entrants as well. “Fintech is out there; it’s taking away a lower segment of the marketplace,” said Miles Herman, president of LEAF Commercial Capital, also noting that community banks entering the space are using pricing capacity to attract customers.
Deane ended the session with an overview of managed solutions, which Alta predicts will represent more than 20% of industry volumes over the next three to five years. Since there is a full continuum of these transaction types, the industry must learn how to fund and structure them appropriately.Green Investing
Belis Wolfe, counsel and director of finance programs at Energy Programs Consortium, led a panel on green investing. She got the idea after learning that equipment finance companies are not utilizing green bonds, even though they may already be investing in green equipment.
Melanie Gnazzo, partner at Chapman and Cutler, discussed the guidelines for green bonds, which are used to exclusively finance or refinance green assets. In order to qualify for a green bond transaction, a third party must certify that the equipment meets these guidelines.
Bruce Trahtenberg, vice president and general manager of Global Clean Technology at DLL, discussed the types of assets the equipment finance industry already invests in that will qualify for green bond status, including renewables like solar and wind as well as energy efficient equipment such as LED lighting. He said energy storage will be the next frontier; it is expected to see the most rapid growth in the next five to 10 years.
Political & Regulatory Landscape
Teresa Davidson, vice president, legal and general counsel from Volvo Financial Services the Americas, led a panel on the political and regulatory landscape. Given the changes that have occurred in Washington D.C., many impending regulations are up in the air.
Sairah Burki, senior director at SFIG discussed risk retention, which she said issuers have been able to comply with effectively since its implementation. However, she said the recently introduced Financial CHOICE Act suggests sweeping regulatory reforms, including doing away with risk retention for firms that can hold 10% capital. Barbara Goodstein, partner at Mayer Brown, said rolling back risk retention will be more problematic now because people have already signed on and incorporated it into the transaction process.
Andy Fishburn, vice president of Federal Government Regulations with the ELFA, said that the likelihood of the CHOICE Act passing is cloudy at this point because the populist wave has not gone away, the push for deregulation is not that strong and the Senate is not showing an interest in Dodd Frank reforms.
Todd Plotner, partner of Chapman and Cutler, opened the Transportation Finance Briefing session by asking the panelists why there has been a dearth of transportation issuances. Pete Rogers, managing director of Wells Fargo Securities, explained that the marketplace has driven the slowdown, as both the railcar and container industries have been under stress recently. Rodgers said issuers have been staying away from ABS because there has been less need since bank lines have been funding the transactions. Rodgers said banks can be more constructive in a down draft since they have been through these cycles before, while investors may shy away from ABS transaction during these times.
Jing Xie, director of S&P Global Ratings, said steel prices have also affected the container industry because it accounts for approximately 40% of the cost of building a new container. In 2016, China pulled back on steel production, which led to increased prices and a corresponding impact on container prices.
The panel also discussed the benefits of recent consolidation in the shipping industry to the container market as well as the ramifications of the Hanjin bankruptcy on portfolios.Aircraft Finance
Tony Nocera, managing director of Kroll Bond Rating Agency, led the Innovations in Aircraft Finance panel. He said that we are currently in the third round of aircraft ABS (the first was pre-9/11 and the second in the mid-2000s). Of the approximately 22 transactions since 2012, about 10 are in the midlife to end-of-life space, eight are new aircraft, three are concentrated pools into aircraft types and one was 100% turboprops.
Elena Serdyuk, director at New York Life Investors, explained that investors show interest in aircraft ABS not only because of its attractive spreads and yields, but because of the risk profile of the asset class. She said a steady pipeline of transactions have drawn more investors into the space.
Joseph Howard, treasurer of Willis Lease Finance, said institutional investors have been migrating away from containers while developing an interest in aircraft engines, which have a stable value historically.
Stephen Whelan, partner at Blank Rome, said the Aircraft Protocol to the Cape Town Convention, which provides greater legal certainty to creditors, especially in cross-border transactions, has been a “silver bullet” thanks to the number of countries that have adopted it. According to a study cited by Whelan, the protocol is expected to save $161 billion in financing costs between 2009 and 2030.
Commercial Equipment Marketplace Council Founder Charles Anderson led a panel that addressed the challenges and opportunities of marketplace lending. Anderson opened the session by asking attendees if they would buy or sell OnDeck and Lending club, noting approximately 60% of these fintech companies are owned by institutional investors.
Alex Ploch, vice president of DZ Bank, discussed the rapidly evolving terminology in this aspect of lending, which was originally called “peer-to-peer” before the switch to “marketplace lending” when more institutional investors joined the fray. Ploch said these companies have learned to diversify lending sources, so “alternative finance” or “fintech” are now better terms to use.
Charles Wendell, president of Financial Institutions Consulting, pointed out that fintechs come in many forms — some do referral loans with banks, some are direct, others have become business units of banks and others are IT companies that develop platforms for banks.
Rajesh Rao, chief financial officer of fintech company Rapid Advance, discussed the shift that has occurred with this technology wave. While the initial goal was to revolutionize lending and put the banks out of business, over time as growth occurred and investors began to require more earnings, these companies realized they must be more responsible with growth, credit and income.
KeynoteMichael Gregory, deputy chief economist and head of U.S. Economics at BMO Capital Markets, was the keynote speaker. He titled his talk, “Reflation Nation,” thanks to the surge in optimism witnessed after the Trump election. He said while some skepticism has begun to emerge since then, the stock market has continued to be elevated while consumer and small businesses confidence remains at its highest level in more than a decade.
Despite this confidence, Gregory said that the U.S. budget deficit does not provide the government with much wiggle room to enact new policies, which are needed to spark the infrastructure spending and tax cuts that could provide the stimulus the economy needs to support growth, which has been averaging a lackluster 2.1%.
Institutional Investor Roundtable
Jeff Merchant, director of BMO Capital Markets, led the final panel of the day, the annual institutional investor roundtable. David Lee, president and chief executive officer of Colford Capital Holdings; Allison Hock, associate director at Metlife; Stephen Ceurvorst, managing partner of Lord Capital and W. Bradford Armstrong, principal at Lovell Minnick Partners discussed the equipment-backed ABS market, including what attracts investors as well as challenges and growth opportunities in the sector.
Digital solutions have become and will continue to be important to manufacturing. Anthony Casciano and Gary Amos of Siemens Financial Services explain how financing can help ensure the digitalization of a manufacturer’s operation even beyond equipment.
It is important to have flexibility in the way you finance assets in order to implement an effective financial structure. Patrick Gaskins explains the different factors to consider and why it’s important to make plans based on what is occurring and not what might occur.