When trucks are crisscrossing the country with full loads of cargo, economic analysts begin to think about clear roads ahead. Raw materials moving toward factories and finished products moving to market offer early signs of a growing economy.

The trucking industry appears to be emerging from its slump of recent years. We sought out Jon Eide, national sales manager for the Commercial Vehicle Group at Wells Fargo Equipment Finance to share his perspective. Eide has worked in transportation equipment finance for 28 years, with the last eight years spent at Wells Fargo.

Recently Transport Topics, the weekly newspaper of trucking and freight transportation, reported that Class 8 truck retail sales through June were up 65% year-to-date with backlog rising for the ninth consecutive month. “The reported year-to-date growth rate is somewhat sensationalized, given the low production and retail sales numbers in 2008-2010,” responds Eide. “We were below the historic norms for the last three years, so while significant growth is occurring, the percentage of growth may be somewhat overstated.”

The slow down in the industry began in 2007 when multiple factors came into play. “That year brought the third stage of a four-stage federal engine mandate that shippers were trying to comply with,” relates Eide. “To get ahead of this emission-reduction mandate, a large pre-buy occurred, and shippers acquired excess equipment. Economic growth came to an abrupt halt and affected freight availability, and this resulted in excess capacity and a lot of idle equipment. Shippers consequently delayed equipment replacement through 2008-2009, but we have seen strong improvement in 2010 and that has continued in 2011.”

Because of the delayed 2008-2009 replacement cycle, Eide says we are now experiencing a multi-year growth phase for the Class 8 truck and trailer business. Typical usage for a Class 8 truck is generally 110,000-120,000 miles per year with an average truck life of four to five and a half years. Reports indicate that the current average age of Class 8 trucks is approximately 6.7 years, making it the oldest average age the industry has experienced in the last 25 to 30 years.

Over the past five years, drastic changes in technology and regulation have occurred, too. The four-stage emission-reduction mandate that ended in 2010 greatly changed engine technology. Regulations have also changed, addressing driver hours of service and driver safety issues. Onboard electronic recorders now eliminate paper logbooks and provide the shipper with enormous amounts of data to better manage business and operational efficiencies.

“There is an awful lot happening in this business,” remarks Eide. “Wells Fargo Equipment Finance is one of very few financial institutions that has weathered multiple recessions in the transportation business. We try to be consistent and be a partner that the transportation industry can depend on. The years 2001 and 2008 were very difficult times for the transportation industry, but we remain committed to this business in good times and in tough times.”

Lessons of the Recession
Obviously a lot of lessons were learned from the Great Recession. For Wells Fargo Equipment Finance, a focus on cash flow and liquidity were probably the biggest takeaways. “Cash flow is king in our end-user’s business,” says Eide, “because it represents the ability to service debt in both good and bad times. We monitor our customers closely to ensure they have sufficient top line revenue to generate the necessary cash flow to service debt. Their access to liquidity is crucial to their survival, especially during these recent down years. The ability to manage existing credit lines, control expenses and maintain a cash cushion is often the difference between survival and failure. We also learned that you must not rely too heavily on the collateral value of the truck during recessions. That is not a new lesson, but it seems the finance industry has to learn this over and over again with each recession.”

During the tough times, financial providers fought to keep delinquencies and charge-offs at acceptable levels. Wells Fargo Equipment Finance dealt with performance portfolio challenges as a team. “We saw a great internal collaboration between our credit and collections teams as they sought to develop solutions to meet our customers’ challenges,” recalls Eide. “Countless hours were spent with customers in search of amicable solutions to help with the changing market conditions. Communications between the customer and lender was and is critical.”

In this industry, credit underwriters typically consider the first source of repayment as the revenue generated by the asset (the truck and trailer). The second source, which financial institutions often find themselves very dependent on, is the value of the asset itself. “We all hope we never get to the point where repossession is necessary, making the secondary payment source now our only repayment solution,” emphasizes Eide. “Our approach on underwriting credit is to avoid relying solely on the asset, because equipment values typically drop in down markets. As the need and demand decrease, it drives the value of the equipment down, providing no easy solution for a financial remedy. Our many years of experience lending in this industry have taught us to be cautious and not overvalue collateral as the primary source of repayment.”

The one place where Wells Fargo Equipment Finance does put additional emphasis on collateral value is over-the-road trailers. During the downturn, it was able to remarket and realize stronger remarketing values on trailers than for other assets. “Going forward we will continue to focus on this niche market where our internal expertise, originating and remarketing/releasing is very strong. This allows us to meet more of our customers’ needs and go to market as more than just a single-product lessor,” Eide says.

Liquidity and Competition
Excess liquidity in the marketplace tends to be a part of economic recovery and is not new for the transportation industry. This is partly due to the hard-asset nature of the transportation business that is appealing to many lenders. “Unfortunately it is a cyclical business, and many financial institutions modify their underwriting approach and/or yield requirements to acquire assets in a recovery without really understanding the potential effects of a future industry downturn. Competition is healthy for the transportation finance business, because it provides needed lender diversification for shippers in this recovering market.”

The captives play a significant role in providing financing solutions to the transportation industry, too. “A captive’s financing motivation can be different from a non-captive lender, because it has an OEM product to consider,” informs Eide. “We have seen the return of more normalized underwriting from the captives post-recession as well as from the non-captive lenders. Similar to other lenders in this business, the captives are also searching for additional sources to share exposure with.”

Wells Fargo Equipment Finance strives to provide a consistent, dependable solution for its customers’ financing needs. “Changing our approach during the market swings sends the wrong message to customers,” declares Eide. “They need to know you’ll be there to support the industry through the ups and downs of the market. We do not change our underwriting philosophies or approaches with the changing market, because we don’t feel that is a proper model for being a long-term finance provider in this market. We have practiced this philosophy since 1972.”

What Lies Ahead
Eide predicts that four very basic concepts will likely drive the strengthening market through 2013: the improving economy, pent-up demand for equipment replacement, reduced capacity and improving technology. “An improving economy creates stronger freight availability, thus many shippers’ financial results will continue to improve. As financial institutions strive to provide more capital to shippers for replacement of equipment, this improved financial performance will allow for more lenders to provide needed capital. The industry is behind on its replacement cycle, and we are going to play catch-up over the next 18 to 24 months,” he notes.

Eide added, “We anticipate an increased number of financing opportunities in the next three years compared to 2008-2009 but from a smaller number of shippers. This is based on total active shippers being greatly reduced during the downturn, leaving the remaining shippers in a position of growing their fleets. So the financing opportunities will grow but within a smaller number of shippers. Lastly, technological changes are helping our shippers become more efficient. Efficiency leads to greater operational performance, which leads to better bottom lines, and better bottom lines are always good for the financing market.”

Eide insists that the recovery in the market is providing a lot of new opportunities. “We are very bullish on the transportation industry for the remainder of 2011 and well into 2013. Wells Fargo Equipment Finance is participating along with the recovery in this market. Our volumes are growing along with our market share. Our approach is to be a long-term, consistent finance partner in the transportation market, and our loyal customer base continues to depend on us for financing solutions while acquiring new equipment throughout this recovery. We support our customers’ businesses with the multiple competitive finance products Wells Fargo Equipment Finance has to offer. Based on optimistic equipment replacement forecasts, we anticipate increasing finance volumes.”

Lisa A. Miller is a freelance writer who has worked in the equipment financing industry for 15 years.