Annual predictions are always risky, especially given the nature of advance publication deadlines. But a few, brave equipment finance consultants have accepted the challenge. Consider their insights as helpful resources for planning purposes, but still works in progress.
A favorite question of the year-end issue is, “What lies ahead?” In the U.S., Canada, Latin America, Europe and China, expect continued industry growth that, in some cases, lacks the gusto of 2018. Trends to watch include the impact of U.S. tariffs domestically and in Canada and China, the continued “uberization” of financial services and the equipment finance industry’s adoption of artificial intelligence, blockchain and other advanced technologies.
These are preliminary predictions that The Alta Group will continue to update as Q4/18 ends and we have greater visibility post-election.
Based on current economic forecasts, the economy should remain on solid footing in 2019 albeit somewhat dampened from this year’s robustness. Growth may see increased headwinds as the Federal Reserve looks to increase interest rates and the U.S. feels the macroeconomic consequences of its own and retaliatory tariffs. We can expect more lessors to be interested in expansion into adjacent markets or mergers and acquisitions as organic growth slows. With a Democratic-controlled House of Representatives now decided, prospects for renewed infrastructure spending are brighter, and that could translate into additional growth opportunities for construction equipment lessors.
Economic, regulatory or political factors that bear watching include rising interest rates and also the so-called fintech apocalypse, when the Office of the Comptroller of the Currency begins granting special purpose national bank charters (commonly referred to as fintech charters) to non-depository fintechs in mid-2019. The charters will enable fintechs to operate nationwide under one license instead of dealing with multiple state regulations. Will this be the end of the banking system as we know it or something subtler?
Within the equipment finance industry, we may experience more movement in the captive/vendor space. The Alta Group’s Strategy & Competitive Alignment practice has been very active working with original equipment manufacturers looking to optimize their financing programs. At the same time, we’re seeing some OEMs re-evaluating their current financing solutions. The sale or outsourcing of select captive financing programs is possible in 2019.
Longer term, we expect blockchain investment by the equipment leasing industry to increase over the next three to five years as lessors and other industry participants seek greater data security, enhanced speed of transaction processing and better credit availability to small and mid-size businesses. This prediction is based on a survey by the ELFA, Reuben Creative and Alta. Immediate challenges to this investment include legacy systems, the lack of proven blockchain skillsets available in the market overall, let alone in the equipment leasing industry, and the lack of market standards.
There will be a continued “uberization” of financial services in a shared economy, which requires an entirely new way of financing customers across a multitude of industries. My colleague Diane Croessmann points to examples including Michelin’s pay-per-mile solutions for fleet tires in transportation, Caterpillar’s per-metric-ton-moved options for big iron in construction, Siemens’ pay-per-outcome solutions for diagnostics in healthcare and Lenovo’s pay-per-seat options for PC devices in technology.
Beyond 2019, the internet of things, artificial intelligence, data analytics, robots and bots are among the developments that could potentially have profound implications on how equipment is financed, residual values, economic ownership and other aspects of our business.
Valerie L. Gerard is senior manager director and leader of Alta’s Strategy & Competitive Alignment practice.
Merger and acquisition activity in the equipment leasing and finance industry should remain robust during 2019 as companies continue to pursue growth objectives beyond those that can generally be obtained organically.
Many finance companies want to expand their current focus by entering new equipment segments and often prefer acquisitions to obtain the industry expertise, customers and vendor relationships required to be successful in those markets. Alta further believes equipment finance acquisition targets may extend beyond traditional finance companies to ancillary service providers. These include fleet servicing and maintenance, equipment tracking, technology refurbishing and remarketing, and other life-cycle service companies often used by the traditional customer base.
Due to a number of recent acquisitions, the number of sizeable, quality independent finance companies has been reduced, so valuation multiples should remain strong throughout 2019 for these entities. Many independents are eager to be acquired as they want a lower cost of capital, an improved technology platform and the shared resources a strong acquirer can provide to maintain a competitive offering.
However, several risks could affect these predictions, including an overly aggressive Fed, significant changes to the tax code and a reduction in stock market multiples, which could dampen enthusiasm for acquisition activity.
James R. Jackson, Jr. is managing director and leader of Alta’s Merger and Acquisition Advisory Practice
Economic growth in Canada has been strong but concern remains over U.S.-imposed tariffs on steel and aluminum, which continue despite a new free trade agreement between Canada, the U.S. and Mexico. The actions of the U.S. have caused volatility in Canadian financial markets and a decline in business confidence and investment. The signing of the free trade agreement had a positive impact, but concerns regarding lower commodity prices and limited transportation capacity.
The Bank of Canada has increased its benchmark interest rate three times in 2018 in an effort to manage economic growth. Commercial equipment finance companies are facing continued margin compression but originations are expected to continue to grow. Delinquency and defaults remain stable and at among the lowest levels in the past 10 years.
Overall, the outlook for Canada is stable growth offset by uncertainty due to the unpredictability of the U.S. policies toward Canada and the rest of the world.
Hugh Swandel is senior managing director of Alta in Canada.
Equipment finance activity in Latin America should outpace the region’s economic growth in 2019. In 2017, the industry grew five times the rate of the economy and we predict this trend will continue to some extent, though perhaps not as dramatically since it is a maturing industry.
Mexico and Colombia should maintain their leasing lead over other countries, but Chile, Peru and Brazil could gain ground. All three have made or are in the process of making the necessary shift from markets dominated by finance leases to emerging players in operating leases. Argentina, on the other hand, faces great macroeconomic headwinds, but its trend line is good and the industry has first class leadership.
Banks have been losing market share in recent years, dropping from 70-75% down to 65% in 2017, in part because of stricter regulations. Independents have been improving their position thanks to more favorable cash flows. Captives are mainly concentrated in countries with the largest leasing industries. We expect these trends to extend into in the year ahead.
In terms of foreign ownership of the largest leasing companies in Latin America, the U.S. share has dwindled to the point that it is no longer a relevant force. Countries including Japan, Spain, France, Germany and Canada have taken over the space once occupied by the U.S. This trend seems likely to continue in the year ahead, a reflection of the fading influence and involvement of the U.S. in Latin America.
Demand for and the definition of capital goods have been changing. In recent years, we have seen a decline of computer imports in all Latin American countries and skyrocketing demand for smartphones, which are not classified as capital goods. We are not aware of a single lessor currently financing them in Latin America. Enterprising lessors may move into this market in 2019 along with financing equipment more indicative of the Fourth Industrial Revolution, including drones and 3D printers. Electric vehicle financing may pick up as well. Interestingly, a large switch into real estate leasing has been a material component of leasing industry growth in Chile, Peru and Colombia, which could strengthen in 2019.
Rafael Castillo-Triana is CEO of Alta’s Latin American Region and author of the annual Alta LAR 100 report.
We expect to see artificial intelligence become more embedded in banking and finance applications, including leasing systems, over the next year. This is already occurring in fraud detection and compliance.
AI will be increasingly applied to credit decisions, sales and marketing, and customer service. This will increase credit decisioning automation, improve sales productivity through digital sales assistants and enable more upsell and cross-sell to occur. We are already seeing companies trialing AI-based applications in these areas while service providers like Equifax and Experian are embedding AI in some of their products. As leasing companies realize the benefits in terms of cost and staff productivity, AI-based applications will be going mainstream during 2020.
On the economic and political front, the outlook for the European leasing industry in 2019 is generally positive. The recent fairly robust growth is likely to continue, driven by (reasonably) healthy economic growth across most of the EU — particularly in the Eurozone and Central and Eastern Europe. While question marks hang over the market in Italy, given political and financial turbulence, core European markets such as France, Germany and Benelux are performing well while some CEE markets like Poland are growing strongly.
Despite the uncertainty in the UK over Brexit, the leasing market has shown considerable resilience, though recent evidence suggest growth has slowed in line with falling business confidence and shrinking investment by small and medium enterprises. In the event a viable Brexit deal is agreed to with the EU, then I would expect confidence to return to the industry. In the event the UK crashes out of the EU with no deal agreed, then all bets are off.
Richard Ryan is a partner with Invigors, The Alta Group in Europe
Overall, the Chinese leasing market is still growing. New leasing volume is being driven by large-ticket transactions, with aircraft and vessel leasing as two major contributors.
Financial leasing companies represented by ICBC Leasing, Bank of Communications Financial Leasing and Mingsheng Financial Leasing have emerged as new forces in the global shipping and aircraft capital markets. At present, Chinese-funded institutions have provided one-fourth of the financing for the global shipping industry and one-third for the global aircraft industry, becoming a major new investor.
Auto leasing is also a rising star. The China Auto Dealer Association predicts the overall auto financing market will reach 2 trillion yuan ($307.7 billion) by 2020, 2.5 times the 800 billion yuan scale reported at the end of 2016. It foresees about half of new car sales involving some form of financing.
While investment in the aircraft, shipping and auto industries has increased substantially over the past few years, funding for SMEs saw a significant decline due to bad debts and loan defaults. Banks are reluctant to provide funding to small and mid-size leasing companies in China.
Economic conditions and the effect of the trade war could slow growth in equipment financing in this region next year. Executives at the recent China International Equipment Leasing Forum in Beijing were notably concerned about their slowing economy, U.S. tariffs and the potential impact of a growing consolidation of power at top government levels. As reported by China Morning Post, the International Monetary Fund forecasts a slowdown in China’s GDP growth to 6.2% in 2019, with ongoing trade tensions with Washington hurting China more than the U.S.
The annual forum had fewer multinational and bank executives than in previous years, though several European and Chinese manufacturers attended. China Unicom, a state-owned telecom conglomerate, sent a representative who spoke about a pilot program to harness data from the Internet of Things into leasing software and use it for asset management, billing and pricing purposes.
Fintech was on the agenda, but this concept is primarily viewed as peer-to-peer consumer lending in China and not yet as a viable commercial leasing tool. Many P2P companies face tighter regulations and significant credit losses, which has dampened enthusiasm.
Adrian Pang is CEO of Alta’s Asia Pacific Region, and Jonathan Fales is an Alta director and annual speaker at the China International Equipment Leasing Forum.
Moritt Hock & Hamroff counsel Theresa Driscoll takes a look at the recent Second Circuit Momentive decision and uses it to examine the importance of clarity in drafting loan documents and understanding what loan documents say, especially when a lender needs to enforce its rights.
November 7, 2018
In the final installment of a two-part series, David Wiener reports on the ELFA Convention. Keynote speaker Dr. Larry J. Sabato, professor of politics at the University of Virginia, is a leader in the field of political predictions. Did he accurately predict the results of the mid-term elections?