Emerging from The Shadows: Independents Embrace Optimism for 2021
by Dave Fate, Brent M. Hall, & Justin Nielsen May 2021
Leaders of three top private independents share the biggest challenges their companies faced in 2020 and discuss how their cost and access to capital fared over the last year. As the economy emerges from the COVID-19 pandemic with pent-up demand and new infrastructure spending projects on the horizon, they agree 2021 looks bullish for the industry.
Dave Fate, President & CEO, Stonebriar Commercial Finance
What was the biggest challenge your company faced in 2020 and how did you overcome it?
Dave Fate: The biggest challenge we faced was the sudden stop in travel and loss of opportunity to meet face to face with customers, business partners and prospects. When the global pandemic became evident in March, we immediately assessed how best to assist our then current customers and prospects. We are happy to report that our disciplined, uncompromising credit culture, coupled with our focus on assets that are integral and essential to the ongoing operations of the customer, once again proved vital to Stonebriar Commercial Finance’s outstanding performance.
In 2020, SCF achieved record volume of $1.4 billion, its highest level of new business volume in its six-year history.
Operating income grew over 36% from 2019, highlighted by zero credit losses for the sixth straight year. We were able to meet and exceed the challenges brought on by the pandemic due to the skill, dedication and tireless effort of our staff.
Brent Hall: The biggest challenge that we faced in 2020, like many companies probably, was the very rapid transition to a remote work environment. Our IT group had to rapidly deploy additional hardware for home offices and set up a new system for remote meetings which, in our case, was Microsoft Teams. We also implemented electronic documentation.
Justin Nielsen: The pandemic and economic shutdown last year put significant stress on our customer experience approach, as we were forced to make emergency adaptations to
our systems. One crucial example was in mid-March of 2020; we identified the urgent need to institute a payment-relief program for our lessees.
It was obvious with the complete economic shutdown that many of our lessees would certainly see an abrupt decrease in revenues and a likely potential for payment impairment.
We “rolled up our sleeves” to create a pre-packaged payment relief plan for our lessees who requested assistance. This took considerable work (often requiring department leaders to work around the clock) and collaboration with each of our wonderful funding partners to complete. It was incredible to watch the Onset team institute such a monumental task in a very short period of time.
By April 1 of last year, we were proud to offer each and every lessee who requested help a temporary payment-relief program. Not one of our customers was declined. We knew we were one of the fastest to bring this fully documented, pre-packaged payment relief to market, as several of our funding partners asked if they could have and use our “CRP” (COVID Relief Program). We were flattered at the request and of course gave it to them freely.
Additionally, many of our customers were frustrated that none of their other lenders or lessors offered them any payment help during the crisis. Our lessees were extremely grateful that we had this in place to help remedy their unexpected cash-flow constraints. Ultimately, we were able to offer our CRP to a large number of our lessees. Not only did this protect the overall performance of Onset’s portfolio, but more importantly, it helped us provide the best customer experience we could during extraordinarily difficult global economic circumstances.
How has the cost and availability of capital changed over the last year?
Fate: As we have noted in our recent press releases, SCF continued to access the capital markets in 2020 with high demand for our securitized products at the very attractive rates. Our 20-1 and 21-1 ABS issuances were met with record demand from over 70 investors made up of the world’s largest asset managers, insurance companies and other institutional investors.
The markets are very liquid right now with significant amounts of cash looking for quality investments. The past performances of our existing issuances, illustrated by continuing rating agency upgrades, have shown that SCF is a sound and trustworthy investment. SCF’s $1 billion revolving credit facility provides liquidity to operate the business.
Hall: The cost of capital has remained quite low, with no movement in interest rates and strong demand for small ticket equipment lease and finance business. We’ve actually seen a decrease in pricing, and availability has been excellent, with more capital providers chasing fewer quality assets. In our capital raise, which took place in Q1/21, we were oversubscribed, having come to market with a $20 million offering and ending up with $25 million in under two weeks.
Nielsen: Funding availability was a dramatic roller coaster last year. While Q2/20 was Onset’s worst funding quarter in recent history, we significantly recovered by exceeding our quarterly funding record in Q4 and actually wrapped up 2020 by achieving our highest annual fundings in company history — what a year! That said, there was definitely a capital supply and demand issue in Q2, which was certainly understandable and most definitely self-explanatory.
Looking back, it was impossible not to feel the unsettling uncertainty regarding how long the financial markets would take to return to even a resemblance of normalcy. Thankfully, Onset Financial experienced a swift and healthy return of capital availability while debt rates remained competitive compared to previous years of strong global financial markets. It was so refreshing, and frankly, quite relieving to see the capital debt markets snap-back into normalcy at the beginning of Q3, which was a much faster return than the overall national economic recovery. Obviously, this lightning-fast recovery was dramatically impacted by a combination of federal relief programs and stabilizing equity markets after a very bumpy Q2. In summary, considering the Herculean challenges of the pandemic and economic shutdown, capital availability and low debt rates remained constant throughout 2020 with the exception of Q2.
What is your outlook for equipment finance in the year ahead given the macro forces at play (political, pandemic, etc.)?
Fate: We remain very optimistic for equipment finance in 2021. The economy is growing, demand is trending up in most industries and many consumers are in the best shape they have been overall, with higher personal savings, stronger net worth and less debt. Over $5 trillion of high yield debt will need to be refinanced over the next several years, and significant government spending during that same time would likely drive additional CAPEX needs.
It is important to note, however, that higher taxes and increased regulation, as proposed by the current administration, could temper the growth of CAPEX spending. The equity markets are at record highs, interest rates are still low and companies are flush with cash. The outlook for the equipment finance industry is strong for the near-term.
Hall: We are very bullish on 2021 and expect to grow our business 38%. It is expected that GDP growth will be 4% to 6% this year and there is a lot of pent-up demand for CAPEX. Even though employment is higher, the other economic indicators are quite good, with many companies faring very well during COVID-19 and poised for strong growth this year.
Nielsen: Looking at our current macro-economic environment with total positivity, I’m thrilled at the potential opportunities that lie ahead. There are so many wonderful things happening that I believe will be monumental for the equipment leasing industry. The federal government has flooded trillions of dollars into the market. Hopefully, this will have the desired effect and jumpstart consumer spending, which directly impacts the economic food chain. Companies across the country will need to grow to meet increased demand. Equipment leasing should thrive as the national economic engine begins to hum again.
Additionally, the current administration is moving forward with trillions in infrastructure spending. Again, how can this not be an absolutely huge and potentially industry-changing positivity? Sure, economists may argue the long-term adverse effects this surge in the national debt will have on taxes, the value of the dollar, inflation and artificially low interest rates; however, as it relates to equipment leasing, I believe a major spending flurry is coming and equipment lessors need to be in the best position possible to capture the new funding opportunities.
Don’t forget the stock market! The Dow continues to perform at a record-breaking pace which also drives confidence in capital markets. This should keep capital availability in a state of high liquidity, so there will be plenty of dollars to fund the increased equipment demand. By way of disclaimer, we were hit so hard and fast by the pandemic and it seems the news outlets are constantly reminding us of the very real potential for new virus surges and variants that could quickly send us back into lockdown. So, we still need to always act with prudence. However, it should be obvious I’m extremely bullish on the equipment leasing industry in 2021 and beyond.
While 2020 has proven that nothing is ever set in stone, there are some emerging trends that suggest things may be looking up for a handful of industries. What will 2021 look like for businesses that lease fleets for regular operations? The Bancorp has rounded up fleet-related predictions that business leaders should be aware of next year.