Funding Source Insight: Post-Pandemic Access to Capital

by Rita Garwood May 2021

Monitor checks in with leaders from two banks that provide capital to equipment finance companies. They talk about the biggest challenges their clients faced in 2020 and what it takes to get a deal done in today’s environment.

Kyle Shenton,
Managing Director, Asset Securitization,
Regions Bank

In the early days of the COVID-19 lockdown, many feared the worst for businesses that were ordered to shut down. Kyle Shenton, managing director of Asset Securitization at Regions Bank, and Matt Tallo, managing director of the Financial Institutions Group at Capital One, agree that dealing with a flood of deferment requests in the early days of the COVID-19 pandemic was the top challenge for their equipment finance industry clients in 2020.

“Our clients did a great job of shifting resources to work with their customers to provide relief and we worked with our clients to make the necessary modifications to our lending facilities to accommodate how our clients were handling their customer bases,” Shenton says.

 

Matt Tallo, Managing Director, Financial Institutions Group, Capital One

“Each company addressed the issue differently based on their client base,” Tallo says. “Some gave a one-month grace period to any client that asked for it; others allowed their customers to skip one, two or three months of payments; some allowed for reduced monthly payments over a period of time; and others used a combination of all of the above.

“Deferrals were tacked onto the end of the contract so the financial commitment would be made whole. These modification processes seemed to have worked well, as the equipment finance companies experienced limited losses attributed to their modification policies.”

“Anecdotally, many equipment finance companies have expressed how pleased they were to see their customers quickly adapt to the new environment in order to stay in business and remain current on contract obligations, whether modified or not,” Tallo says. “Unfortunately, some businesses were not as lucky, given the toll the pandemic has taken on certain industries.”

Slamming on the Brakes

The impact of the COVID-19 pandemic on the equipment finance industry was swift, as its customers rapidly shifted from acquiring new equipment to struggling to make payments on existing loans and leases.

“When COVID-19 hit in March 2020, new business volume across the sector slowed, hitting a monthly low in May, as reflected in the MLFI-25 Index,” Tallo says. “There was a lack of demand for equipment financing as customers assessed the landscape and adapted to the impacts of regionally imposed lockdowns. As states began to reopen, new business volume picked back up and demand for financing from banks is increasing.”

“2020 was clearly an interesting year, as the market volatility in late Q1/20 and Q2/20 brought on by the COVID pandemic negatively impacted deal flow,” Shenton says. “As issuers worked through deferments, the government stimulus made its way into the markets and portfolios started to stabilize, we saw issuers gain access to the capital markets and lenders deploying capital again.”

“Later in 2020, new business volume did slow again; however, it bounced back up in December with renewed optimism over the FDA’s approval of several vaccines,” Tallo says. “Year over year — in the middle of a pandemic — the MLFI-25 new business volume was down only 5.8%, which demonstrates the industry’s resiliency.”

Shenton adds that volumes, cost and terms slowly improved throughout 2020. “We have seen that momentum continue into 2021,” he says.

When it came to cost of funds, Shenton says it was no surprise that issuers with exposure to industries impacted by COVID-19, such as hospitality, restaurant and retail, experienced the greatest impact to availability and increased costs in 2020.

“But the current strength of the markets and stabilization in asset performance has improved that trend for many issuers,” Shenton says. “A benefit issuers are experiencing is the low rate environment, which has helped their overall cost of capital, offsetting the impacts of spread increases in certain cases.”

One Year Later 

As spring flowers begin to bloom, many are returning to offices or classrooms, while others are hopping on commercial aircraft for the first time in a year. As we enter the late stages of the pandemic environment, it seems like a sense of normalcy is beginning to set in. But is that truly the case for deal flow? How has everything that the industry has experienced over the last year affected the process?

“Overall, I would say not too much has changed to getting a deal done in the current market,” Shenton says. “Lenders continue to be focused on strength of management, [a] company’s financial condition and quality of assets. We are working with both early stage and established companies to provide new and incremental financing.”

“There is still a lot of liquidity in the market, as evidenced by the ability for equipment finance companies to access the capital markets at very attractive pricing,” Tallo says. “While the enhancement levels and pricing may have inched up a little for those issuers that went to market in the second half of the year, the demand for the industry’s paper remains strong.”

Although the process remains the same, parties on both sides of the deal table have learned valuable lessons from the last year.

“It is important for borrowers to illustrate and articulate their ability to manage through ongoing volatility shocks like we saw in 2020,” Shenton says. “This can be done through diversified liquidity sources, credit/underwriting culture, historic asset performance and strength of the management team.”

“As businesses are adjusting quickly to address the current conditions we’re in, so are the equipment finance companies. Many of them have enhanced their underwriting policies by asking for more financial information than they previously required and are more cautious of concentrations to sectors that were heavily impacted by the pandemic,” Tallo says. “As a lender, we want to understand how our clients adjusted to the changing market dynamics and what they may be doing differently to ensure a sound portfolio.”

Shenton and Tallo agree that a sense of cautious optimism is shared by many companies in the industry about the remainder of 2021.

“2020 illustrated how unpredictable the world we live in can be, but we continue to be cautiously optimistic about 2021 and remain active in lending to the equipment leasing space as well as multiple other asset classes,” Shenton says.

Tallo says companies know that there are still many challenges ahead, but they also are adapting to current circumstances.

“There were a lot of learnings throughout 2020 about managing disruption and keeping an eye on current and future risks,” he says. “Additionally, many trends emerged across the business landscape that will likely become more permanent and part of our day-to-day moving forward. As we continue to adapt — and as infection rates decline — it’s likely that we will see an increase in new business volume from existing pent-up demand.”

The opinions expressed in the article are statements of the commentator’s opinion, are intended only for informational purposes, and are not formal opinions of, nor binding on Regions Bank, its parent company, Regions Financial Corporation and their subsidiaries, and any representation to the contrary is expressly disclaimed.

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