Funding Confidence: New Landscape Presents Opportunities for Deal Flow
by Phil Neuffer March/April 2017
As confidence in the equipment finance industry reaches new heights to start 2017, funding sources face a number of challenges as well as opportunities. Paul Menzel of Financial Pacific Leasing, Bob Fisher of Ascentium Capital and Brian Griffin of MB Financial Bank discuss ways to remain competitive, how the new presidential administration will impact business and how liquidity and credit quality have fared.
Confidence in the equipment finance industry has been elevated to start 2017. In January, the Equipment Leasing and Finance Foundation’s Monthly Confidence Index reached an all-time high of 73.4. Although that number retreated to 72.2 in February, it is still at an extremely high level, especially in comparison to a year ago when the index only reached 48.3. This confidence speaks well for the industry as a whole and has gone hand-in-hand with increases in new business volume on a year-over-year basis.
The optimism has been felt from the funding source perspective as well, where liquidity has improved, credit quality is still paramount and a new presidential administration has given the impression that pro-business measures are on the horizon.
An Optimistic Start
Brian Griffin, president of Lease Banking for MB Financial Bank, is seeing a typical seasonal dip. January and February are typically slower months for MB. “We’re not really attributing that to be anything more than a timing issue with regard to the availability of transactions that we would normally see. As is customary, we expect it to increase later this quarter and the rest of the year.”
Griffin is not worried because MB had a strong year in 2016, with business up 20% in comparison to 2015. “We’re driven to continue that success and expect transaction volume will pick up later on in the quarter and into the year,” he says.
Meanwhile, Bob Fisher, SVP of business development for Ascentium Capital, shares the optimism felt by his peers and is expecting continued business growth largely powered by existing third-party originators.
“It appears that activity has increased along with the industry optimism, whether it’s the election or other triggers pushing that,” Fisher says. “I think it’s going to continue. Across the board there’s still a good level of replacement financing going on but we’re also seeing upticks in equipment additions and business growth needs.”
Financial Pacific Leasing, an Umpqua Bank company, has also experienced an increase in business, which should continue if you ask President and CEO Paul Menzel.
“We are expecting continued growth in activity in our classic business,” says Menzel, who indicates there has been a substantial increase in application activity in the first few months of 2017. “We have established several ongoing relationships for discounting bulk portfolios on a regular and periodic basis. This is an important funding strategy for our larger clients who want to ensure consistent access to capital in the future.”
Last year, Monitor spoke with Menzel about the possibility of an impending liquidity crunch. That prediction did not necessarily become reality, whether you were an independent or a bank-owned leasing company.
“There remains to be more than adequate liquidity in our markets. While the Federal Reserve embarks on gradual tightening, there aren’t any obvious risks on the horizon that would affect liquidity,” says Menzel, who still advises companies to remain vigilant. “There isn’t always fair warning for such events, so planning and diversification on the capital side is always wise.”
Ascentium Capital is in very strong position in terms of liquidity, as it received a real shot in the arm when it was bought by private equity firm Warburg Pincus in October of last year.
“We’re very well capitalized,” Fisher says. “Our capital markets continue to embrace us because of our history and the team here and the focus on consistent underwriting and pricing strategies.”
You can also count Griffin as a funding source participant who has not seen and does not anticipate a liquidity problem.
“As a bank we’re literally funding from our own deposit base, and we feel very comfortable with our strong liquidity,” Griffin says.
The Credit Side of the Coin
On the credit side, delinquencies rose slightly in 2016, which is something the panelists of this roundtable don’t have drastically different viewpoints on, even if there is certainly some differentiation in their perspectives.
“While credit costs were slightly above our credit costs in 2015, we expect that to come down a bit in 2017,” Griffin says. “We don’t see anything dramatic on either side of the coin. As the market continues to improve, we are expecting a decrease in our delinquencies and charge-offs in 2017 as compared to 2016.”
Menzel anticipates an alternate progression on the credit side.
“We continue to see delinquencies slowly rise to pre-recession levels. Whether this is a bounce off of historical lows or an early indicator of more serious credit deterioration is still to be discovered,” Menzel says, while offering a warning. “I believe that the creditor marketplace is losing its memory of the Great Recession and the averseness to debt that kept some of the ‘credit pretenders’ out of the market. Borrowers are more apt to take on debt risk.”
Like Menzel, Fisher anticipates a slight increase in delinquencies in 2017, but he does not expect that increase to last all year.
“I anticipate a slight increase will continue in the beginning part of 2017. With the higher business confidence I believe the increase will level off at some point in mid to late 2017, but it’s a small impact at this point,” Fisher says.
With the environment for funding sources in a different spot than it was a year ago, the strategies that can turn prospects into deals have not changed all that much. Even so, maintaining an ability to be flexible to unforeseen challenges coupled with a need to adopt new tactics is critical.
For Menzel, the keys to remaining competitive in the marketplace are simple to understand if not so easy to consistently implement.
“Know your customer, add real value, deepen your funding relationships for more turbulent times,” he says while also noting that fintech and the so-called “uberization” of the credit process will both remain factors.
Remaining on top of the competition and providing more than just the lowest price are some of the most favored schemes in Griffin’s playbook, as he maintains that standing out in comparison to your competition is not only vitally important, but a more complex issue than simply winning the race to the bottom.
“In our business we try to work with our lessors on any transaction and try to help them win deals that they’re proposing on,” Griffin says. “To do that we always need to monitor what the competitive environment is both from the other lessor point of view as well as the funding source’s point of view. We’re always still at risk that someone could undercut us on a transaction. However, we believe the reliability and responsiveness we provide to our customers is an important component. It’s more than just offering the best price.”
Flexibility is another key component that needs to be implemented when going out to chase deals, according to Fisher. It takes going the extra mile and surpassing what customers expect that can really separate one funding source from another.
“For us it continues to be the speed and flexibility to stay ahead of the competition. As a lender we try 2017to be extremely flexible to win and maintain our third-party source business. I see that with a positive activity level recently in response to our service levels,” Fisher says. “I also think because there is a positive spin right now to business growth and the market is requesting unique finance structures and services, we will continue to focus on beating the expectations of the market, which is critical, and which we seem to be doing well at this point.”
But even when you are combining all of these strategies and running at full strength, Fisher says there still isn’t any magic formula for getting deals done. It takes an understanding of the third-party sources and an agreed upon levels of acceptable credit.
“Shotgun is long gone. With our third-party partnerships at Ascentium, we strive to know all our originators and continue to focus on helping them grow. If they come up with opportunities that make sense, we want to work with them in partnership.” Fisher says. “Our credit appetite is clearly defined. The partners know how to succeed and combine our flexible products and structures. We continue to see today’s environment as a win-win situation between the funder and third-party originator.”
Griffin is in agreement when it comes to credit quality remaining a very important factor when it comes to getting a deal done. In fact, he believes that a strong credit profile is more important than the actual asset being financed.
“It starts with credit quality, and that’s what we drive all of our decision making on. We’re actually more interested in the credit than the assets being financed,” he says, explaining that good assets still make transactions easier as well. “The better assets will typically still get a little bit better opportunity for approvals than softer assets.”
In addition to better credit and assets, Griffin appreciates lessors who are willing to put some skin in the game.
“We really like lessors that are putting equity into a transaction as opposed to a more of a dollar out type of transaction,” he says. “We like well packaged deals. The more thorough a package is, the more likely that it will be viewed positively and quickly, thus increasing the opportunity for a partnership. Our ultimate goal is to support lessors with the funding they need to be successful and deliver it with reliability.”
New Look in Washington
The environment in which funding sources are competing is going to be changing in 2017 and in the years beyond as the U.S. deals with the impact of a changing of the guard in the federal government.
Now that Donald Trump and a Republican-led legislative branch are in charge, many believe there will be a growing pro-small business sentiment. Even if that might be difficult to believe as the sitting president tweets out erroneous statements and the legislature continues to remained focused on international affairs, the equipment finance industry will likely be a beneficiary of the new look in Washington.
That begins with regulations, which increased significantly after the Great Recession in response to practices in the U.S. financial system that can be described as unethical at best and criminal at worst. However, Trump’s administration has vowed to roll many of these regulations back, which is being seen as a positive in the business world since regulatory compliance has become a heavy burden for companies.
“Certainly the appearances are, as I look at it, that the outlook will be pro small business, which will put pressure on regulation,” says Fisher, who does not face as much regulatory pressure working for independent Ascentium. “It certainly appears that in the industry for the banks [regulations have] been something of an albatross around their neck continuously as far as bringing in business.”
At Financial Pacific, Menzel and his team have had to deal with regulation without letting it seep out and impact clients, which is something he does not believe can be stopped forever as things currently stand.
“As a subsidiary of a bank we are required to shoulder our government’s regulatory compliance burden and do our best to insulate our clients from that process. Regulatory compliance will increasingly sift down to our clients with more expectations for their participation and support,” says Menzel, who anticipates some roll back, but maintains that regulations are for the most part here to stay. “It seems the pendulum will swing back a little to a more reasonable mean. However, regulations and consumer protections will not go away, so we will have to conduct business in a fair and equitable manner that minimizes misunderstandings and complaints.”
Increasing efficiency for MB Financial Bank is something that Griffin expects to result from a lessening of regulations from the federal government, but he also does not forecast major changes for the leasing division he leads.
“I agree with you that we will likely see decreased regulations for our industry. From our overall organization’s point of view, that’s a good thing and helps make our bank more efficient and therefore better able to serve our customer,” Griffin says. “From our own division’s point of view as a lease funding source, it’s probably not going to make a large difference to us. We don’t see any significant changes that [are] going to impact us in our primary business.”
Outside of the White House and legislature, anticipated increases in interest rates will be a new element to add to the pot and will force equipment finance companies to adapt.
“Increasing rates will demand a sharper focus on pricing,” Menzel says. “We have been spoiled by low and static rates for a very long time. That is changing this year, which is both a challenge and an opportunity. We will have to get used to passing on higher rates but we will benefit from that sense of urgency as an incentive to get equipment financing on a fixed rate and term structure.”
A more knowledgeable consumer base that will demand more from its financial partners presents new challenges as well.
“I think customers are getting more and more sophisticated in their analysis of a lease transaction and therefore the lessors need to be very attuned to the differing needs and desires of the ultimate lessees,” Griffin says.
Finally, there is a concern that third parties will fall away to an extent, but there are ways funders can avoid taking major hits from such a trend.
“I see the third-party origination channel continuing to demonstrate some shrinkage unfortunately as the fittest grow stronger,” Fisher says. “If you are a small- or medium-sized business, it is very important to identify a funding partner and build that business around them, or, if you prefer, to actually merge with them. But I think the partnership is critical and to realize that that third-party side is still shrinking up.”
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