This year’s Funding Source roundtable participants offer their insights on deal flow, funding sources and credit quality, as well as provide some tips on how brokers can improve the odds of getting a deal done in today’s lending environment.
The equipment leasing and financing industry is on more solid footing since the U.S. recession ended in 2009. While business may not be as robust as it was prior to the economic downturn, it has certainly improved for the respective companies of the equipment leasing and financing executives who participated in Monitor’s annual roundtable discussion.
What can the equipment leasing and financing industry expect in terms of deal flow, funding sources, credit quality and potential challenges in 2015?
Looking ahead, the lending environment is expected to continue improving as the economy continues to progress. In February, the Equipment Leasing & Finance Foundation’s Monthly Confidence Index was 66.3, a slight increase from the three-year high reached by the January index of 66.1. Amid this positive outlook, the three executives assembled for this year’s roundtable discussion agree it is best to remain cautious as they seek to capture more market share.
Bob Fisher, senior vice president of Ascentium Capital; Jim Padden, CEO and president of Padco Financial Services; and Paul Menzel, CEO and president of Financial Pacific Leasing, an indirect provider of small-ticket commercial equipment leases, they offer their views on deal flow, funding sources and credit quality, and as provide some tips on how brokers can improve their odds of getting a deal done in today’s lending environment.
Existing Sources and New Market Entrants Help Increase Deal Flow Activity
On the deal flow side, all three roundtable participants credited their increased level of activity from a year ago to more deal flow from existing sources and an increase in the number of origination sources. Transaction flow continues to increase for Ascentium Capital from early 2015 compared to last year, primarily from expanding its business with existing lessors, third-party originators and their programs.
“Our whole mission is to create synergies with our finance partners and develop effective programs that enable them to capture more opportunities with their customers and vendors,” says Fisher.
The number of lessors isn’t a driving force; rather, Ascentium prefers to find and grow strategic business relationships with lessors that seek to bring value to their customers. As a result, Fisher says the company is actively looking for additional sources, but in the context of diversification and strategic opportunities where it can assist its lessors in expanding their market share.
Padco Financial Services also saw a slight increase in its annual volume, mostly due to deal flow from existing sources. “Our average deal size certainly creeped up a bit,” says Padden. “As a small ticket funder, we did more large deals last year than usual. In fact, the independent brokers we tended to do less business with became even less frequent.”
Menzel, credits his company’s 79% increase in deal flow activity to Umpqua Bank, which acquired Financial Pacific in July 2013. “There was a huge lift in activity once we became part of Umpqua Bank,” he says. “We have had a tremendous growth period over the last 18 months where we doubled the size of our company in terms of assets. In addition, we have seen a steady increase in deal flow activity from existing sources we have done business with for over 20 years, as well as new entrants in the market.”
Increased Levels of Activity Expected in 2015
Ascentium is anticipating higher levels of activity this year to continue its upward momentum and expects certain sectors to finally seek and implement equipment upgrades this year. “This includes new acquisitions of technology equipment and also transportation,” says Fisher. “The service sector will continue to drive the need for equipment replacement and additional opportunities. We look at 2015 as a year of moderate growth, but with a cautious eye.”
Padden also expects higher levels of activity for his company this year. “We were seeing higher levels of activity, and we’re hoping that trend will continue. We all need to grow. It seems as if the economy has been treading waters for years. Several sectors where we see new demand are in small and used machine tooling, technology equipment as well processing kinds of equipment.”
Financial Pacific Leasing’s higher level of activities this year will be fueled by economic growth, notes Menzel, with consumer confidence being the biggest driver. “Top line revenue growth is finally occurring in small businesses,” says Menzel. “What’s holding people back is confidence that the economy has rebounded. We also need them to shed those psychological fears and deep-seated scars on employment and housing dislocation during the recession. It’s taking a long time to heal those wounds. I think people have decided to hunker down and try to do without borrowing until they feel confident.”
That confidence will come from top line revenue growth, says Menzel. Once the average consumers become confident about their real estate and job situation, the economy will only get stronger. “I think we finally turned a corner and some people are starting to spend more—the gas prices have certainly helped. Once top line revenue growth for small businesses starts to grow, they are going to start investing in equipment again.”
Competing in Today’s Lending Environment
The roundtable participants have each seen the lending environment become even more competitive over the past year. “We have done more repeat business as a percentage of our total portfolio of new business over the last several years,” says Padden. “We have more customers returning and that is who we prefer to stick with — it’s better than taking shots in the dark.”
But Padden says customers are also shopping around for the best price. “They are not just coming back to the same business they know they can get it done with. They’re going to look at me and somebody else. Local banks, in particular, are very competitive with a small equipment funder like us.”
While it has been a highly competitive marketplace for Ascentium as well, the company is maintaining its current pricing and, most importantly, maintaining its credit quality. “Additional lenders will continue to enter and leave the industry with some loose structures, but that is typical in the normal ebb and flow of this industry,” explains Fisher. “Our environment is pretty steady, but this helps us stay competitive. Our strong financial condition and consistent portfolio performance has enabled us to earn the highest possible ratings from Moody’s Investors Service and DBRS on our senior class of notes.”
Excess liquidity plays a significant factor in Financial Pacific Leasing’s environment, so Menzel has been seeing large, non-regulated competitors enter the marketplace. “There are definitely more players in the field of finance today,” he says. “Even Google and hedge funds are now getting involved. We feel it’s the result of the liquidity in the marketplace. With the liquidity, obviously the spreads are a lot skinnier too.”
Improving Credit Quality
On the credit side, Menzel says Financial Pacific has been experiencing improved credit quality just like everyone else. “When we became part of Umpqua Bank, we started emphasizing higher quality credit at lower rates,” he says. “So the mix of our business is still a wide credit window from A to DD paper.”
However, Menzel cautions that lending companies need to be aware that strong portfolio performance is the primary result of people becoming more conservative and taking better care of their credit now, which will change in a highly liquid credit environment.
“Risk-averse psychology resulted in the downturn,” he says. “People are trying hard not to overextend themselves. Any credit that they do take out, they are making sure they can afford it. So there’s a much more conservative approach to the use of credit. That’s reflected in performance as well. I think the whole industry is experiencing record low delinquencies in losses. It just takes one more downturn to turn that around.”
According to Fisher, its lessors and brokers are receiving more requests from equipment vendors and distributors wanting to take advantage of this current positive credit trend. This has led Ascentium to take a more strategic approach to help its lessors win this business.
“The marketplace is allowing the equipment provider to get additional clients approved to finance their products,” he says. “Additionally, more equipment manufacturers are incorporating a more formal finance solution into their sales process to enhance client relationships and drive sales.”
Since it operates in a much smaller lending environment, Padco is still seeing the same kind of credit quality. “The credit quality is only improving incrementally, but that’s the nature of a smaller ticket market like ours,” he says. “If the general trend is better quality applicants, then there would be great pressure in our marketplace. Those companies demand better rates and if it’s attracting new players in the game, the rates will eventually be driven down.”
Getting a Deal Done in Today’s Environment
As a broker, if you want to improve your odds of getting a deal done in today’s environment, Padden stresses the importance of being flexible.
“We’re willing to step outside of the box for people who will perform for us — the broker or the lessee,” he says. “Not every deal gets done. If brokers are willing to be flexible, more deals can get done. Know what you can sell or what your funder will take, and be willing to bend a bit, even if it means offering a new, structured payment or a term change.”
Because this is a business relationship grounded in transparency, Fisher says the lessor needs to know the transaction, market, vendor, customer, and why the client is acquiring the equipment.
“Understanding these critical areas demonstrates that the broker understands what they are submitting,” he says. “This shared risk management ensures the portfolio remains healthy and helps build a long-term business relationship.”
Menzel’s advice is really fundamental — to know your customer. “Take the time to know your customer and make sure the financial information or application information submitted is complete and accurate,” he says. “When business is good and because of liquidity in the marketplace, the process is more streamlined so some companies are trying to cut corners to make it easier just to get a deal done. But speed to market as a way to compete sometimes has a tendency to cause businesses to not really know their customer.”
Key Challenges and Opportunities in 2015
Looking ahead to the remainder of 2015, competitive rates will pose a challenge for Financial Pacific Leasing. “Anytime you have a very liquid, growing market with a lot of competition, companies have to try to steal market share to achieve growth,” Menzel says. “The easiest way to do that is to offer the lowest rate and/or take more credit risk. We are in that environment at the moment.”
Padden believes it’s best to remain cautious until the economy starts roaring again. The year after the most recent economic crash, Padco had to rewrite most of what it had done the year before — and Padden doesn’t want to get into that trap again. “In our marketplace, there might be a slump in some sectors, notably oil and energy, and that will drag down supply. But we have a little exposure everywhere,” he says.
Fisher agrees about the volatility in various sectors of the industry. “You know what you know until you don’t. The key is to be nimble and to be able to make prudent decisions as challenges and opportunities arise,” he says. “We believe there is a tremendous amount of opportunity for lessors and brokers, and their funding sources. Partnering with a lender that is flexible is critical to shared successes. That’s how we see opportunities in the upcoming year.”
Daniel Casciato is a professional business writer and regular Monitor contributor.
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