Leasing Company Leaders Discuss What Lies at the End of the Economic Downturn
by Stephen J. McCabe October 2008
In the darkness of today’s increasingly complex and intractable economic downturn, leasing and finance industry leaders share their insight on why it’s easy to be pessimistic — but so critically important to be optimistic.
In June 2006, almost a year before the current market correction began to unfold with the July 2007 collapse of the subprime mortgage market, we reported that credit was still plentiful and markets were liquid as well as resilient and forgiving. Clearly, a year after the subprime mortgage meltdown, the consequent collapse of the residential housing market and the launch of soaring energy prices, we are mired in a downturn unprecedented for the complexity of factors contributing to it.
The question for many is, how deep is this current correction? What are its implications for the equipment leasing and finance industry? And where are lenders finding opportunities in this market?
We asked some leading executives in the equipment leasing industry to share their thoughts on how the marketplace has been evolving this summer — and where it might be headed over the next year and beyond.
Is That Light at the End of the Tunnel … or an Oncoming Train?
While there’s little consensus on where today’s unique confluence of events could take us, leasing company leaders seem to agree on one point: the current downturn is with us to stay — at least for the short term. The critical distinction between the pessimists and the optimists is how long they feel we might have to wait. Like many, Martin Cox is reluctant to hazard a guess.
Martin CoxGroup Executive, Chase Equipment Leasing
“Well, of course there’s light at the end of the tunnel — but it depends on how good your eyesight is and whether you can really see that far,” he says. A 27-year banking industry veteran, Cox is the group executive for Chase Equipment Leasing, in Dallas. He oversees that company’s $5 billion portfolio and 125 employees, that handle transactions focused in the $2 million to $40 million range, all of which are directly originated through the Chase sales force. Cox sees things getting worse before they can get better.
“We’ve all battened down the hatches, but I’m afraid it’s going to continue to deteriorate for some period of time. I think the macro trends related to housing, and the impact that has had on the financial industry itself and the availability of credit for businesses — all those things that can slow the economy down — are still working their way through the system,” Cox says.
Anthony Cracchiolo agrees with Cox on both points. “No, I don’t think we’ve seen the turning point yet; this downturn is a series of events unlike anything people have seen in my generation — and I’m no kid,” Cracchiolo admits.
A 30-year veteran of the equipment leasing and finance business, Cracchiolo serves as president and CEO of U.S. Bank Equipment Finance, in Portland, OR. His arm of the business focuses on transactions of more than $100,000 and up to approximately $50 million. From his vantage point, there’s little cause for optimism over the short term. “There’s probably more bad news that will creep through over the next six months than any good news. These are uncharted waters,” Cracchiolo warns.
Vince RinaldiCEO, National City Commercial Capital Corporation
For Vince Rinaldi, today’s uncertainty is attributable to “a unique confluence of events,” including high energy costs, a failing housing industry, the overall economy slowing down and liquidity issues.
As CEO of National City Commercial Capital Corporation in Cincinnati, Rinaldi guides a leasing and commercial lending company with more than $7 billion under management and $2.7 billion per year in originations. He founded the company in 1984 and has kept his executive team intact through two acquisitions, in 1996 and 2004.
Rinaldi remains confident his experienced team will help him see National City through the current uncertainty — and that uncertainty won’t be ending anytime soon. “I think we’re into 12 to 18 months of continued industry challenges,” he admits. “We’re going to be a bit more cautious, continue to manage our costs, and make sure we have the right people in the right place to move forward and capitalize on the opportunities available,” he says.
Other leaders of the largest bank-owned leasing companies in the country are taking a longer view, too. Mark Trollinger and Spence Hamrick serve as managing directors and co-heads of Wachovia Equipment Finance, the second-largest U. S. bank-owned leasing company, in Charlotte, NC. Together, they concentrate on supporting the equipment leasing needs of their bank’s customers by providing leases and financing for general ticket, essential-use equipment, with most of their transactions in the $5 million to $10 million range.
Mark TrollingerManaging Director & Co-Head, Wachovia Equipment Finance
Spence HamickManaging Director & Co-Head, Wachovia Equipment Finance
“I do think there is a fair amount of pain yet to come,” says Hamrick. “Maybe we’re a third of the way through it now, in July 2008.” Trollinger concurs: “I think we’ve still got a ways to go before we see that bright spot at the end of the tunnel.” But, better still, that light at the end of the tunnel is not an oncoming train. Hamrick explains that Wachovia has been finding plenty of opportunity in the current challenging climate.
“As a lender or provider of capital, there’s good news in the current downturn for us. It means we are going to get a more reasonable structure on our transactions and a price that we feel is a fair return for the risk we are taking,” Hamrick says. “That’s exactly what you look for in a downturn.”
David Merrill agrees. “In looking at the monthly leasing and finance index, the equipment finance sector is still very strong and companies are seeing growth. That’s encouraging data,” Merrill says. He serves as president of Fifth Third Leasing, in Cincinnati, a subsidiary of Fifth Third Bank that focuses on leases and financing packages of between $500,000 and $50 million, primarily for the rail, corporate air, surface transportation and manufacturing sectors.
“Yes, there’s still weakness in certain areas — housing, surface transportation, and auto-related industries — but it’s offset by [strength in] healthcare, IT and corporate aircraft,” Merrill says. “I think wherever there are challenges, there are opportunities.”
So where, exactly, are those opportunities?
Avoiding Catastrophe While Seeking Opportunity
According to many leasing industry executives, opportunities in today’s economy lie in steering clear of the most problematic sectors while building relationships and resources to help their most valued customers. Almost everyone agrees on the sectors that are currently most troubled — anything associated with residential housing or construction, surface transportation, printing and commercial airlines.
Adam WarnerPresident, Key Equipment Finance
“The most troubled industries are those around construction and fuel,” says Adam Warner, president of Key Equipment Finance, an affiliate of KeyCorp that focuses on a complete spectrum of capital equipment. For Warner, spiraling oil prices have forced everyone to make pragmatic decisions, and the rippling effects of those decisions are just starting to be felt.
“At some point, fuel impacts everything. We just heard about Starbucks closing 600 stores. How does that have anything to do with the price of diesel fuel or gasoline? Well, at some point, people have to make a choice about whether to fill up their gas tank or fill up their latte cup,” Warner says.
And there’s no sense in whining about the loss of financing opportunities in once-productive sectors, says Doug Bowers. As president of Banc of America Leasing, in Charlotte, Bowers guides the largest bank-owned leasing company in the United States, with approximately $1 billion in annual revenues. He’ll be the first to admit that some of the leasing industry’s more productive sectors are currently struggling.
“Is the trucking business tougher than it was 12 months ago? Absolutely. Are airplane buyers slightly more cautious about upgrading? Of course they are. Are manufacturers tighter on their capital expenditures? Certainly,” Bowers admits. “But saying all that, we’re more than finding our way.”
And Bowers is confident opportunities exist for others who are similarly committed to seeking them out. “There remains good news in the corporate air arena. That area’s still exciting for us,” he says.
For Cox, it’s clear why the corporate aircraft finance business is doing well. “The demand for private air travel is really strong because the commercial airlines are having such problems with customer satisfaction,” he explains. He sees a “huge international demand for corporate private jets.”
Dan McKewPresident & CEO, SunTrust Equipment Finance & Leasing Corporation
Other areas of transportation are providing similar “good news/bad news” opportunities for investors, according to Dan McKew, president and CEO of SunTrust Equipment Finance and Leasing Corporation. McKew, who has been in the business for 25 years, leads a company with a portfolio of approximately $6.5 billion and transactions spanning the complete spectrum from $20,000 to approximately $50 million. He sees parallels between the challenges faced by the ground transportation industry and those faced by the aircraft industry.
“Trucking is struggling, but that has created an opportunity for rail,” says McKew. “The moment you start to have difficulty with one delivery method or mode of transportation, another one opens up,” he says.
Cracchiolo has even found some wholly unexpected pockets of opportunity. “The machine tool sector has stabilized very nicely,” he reports. “The continued strength of the manufacturing sector is counterintuitive. I don’t know whether it’s a delay or whether the last down cycle made the sector stronger,” he says.
In addition to the aforementioned strength in corporate aircraft, healthcare (with the notable exception of diagnostic imaging), IT and commodities, others report strong opportunities in government and municipalities, marine transport, commodities, oil and gas, steel, exports and rail. “Municipalities still want to lease,” says Cox. “The demand’s steady for fire trucks, police cars, and the like.”
And rising energy costs, predictably enough, are pushing considerable new opportunities, according to Bowers. “We have been increasingly active in solar, wind and, to some extent, biomass,” he says. “In terms of the opportunity in front of us in alternative energy, what we see coming is very exciting.” Bowers attributes many of these opportunities to the growing pressure from government to ensure at least a minimal percentage of energy is produced from renewable resources.
“Green is real. It’s inescapable when you see states issuing mandates for the percentage of alternative energy [being sold],” he says.
Tightening the Purse Strings?
Is the current downturn causing a slowdown in capital investments? Are companies putting off leasing or purchasing new equipment?
For Warner, two “offsetting trends” are at work today, and either may surface at any time. “First, there’s a lower demand for equipment in general because economic conditions are causing companies to try and make the equipment they already have last longer. Second, when companies do decide to acquire equipment, they’re avoiding using their own capital,” says Warner. Depending upon which trend is revealing itself, the results will vary tremendously, he adds.
Doug BowersPresident, Banc of America Leasing
“We’re going to see fewer equipment acquisitions but an increase in the percentage of those acquisitions that get financed,” Warner predicts. “We haven’t really seen a slowdown in the demand for equipment financing because we have these two trends offsetting each other.”
Bowers is seeing a bit more thought going into the capital investment process on the part of many companies. “I think there’s definitely a pause and a deep look inside in terms of what’s required,” he notes, “and if they can hold out longer and not spend, we’re seeing that behavior, too.”
“Yes, customers are slowing down their decision-making process,” says National City’s Rinaldi. “Orders are up, but buyers are taking a longer time from order to actual delivery. They’re being more cautious,” he says.
Wachovia’s Trollinger concurs that a capital investment decision these days is more carefully thought through than perhaps ever before. “Customers are being more mindful and strategic on some of their capital expenditures,” he explains. “They’re focusing on their essential, core equipment and perhaps pulling back from some of the ancillary purchases.”
“Where they can pull back or forestall new investments, they are,” adds Cox.
David MerrillPresident, Fifth Third Leasing
But others are finding today’s economic climate having little effect on capital purchases — and perhaps even proving conducive to the lease product, according to Cracchiolo. “We are bucking the trend and seeing more business opportunities in front of us right now than we have in our recorded history of the company,” he says. Part of that may be attributable to attrition within the competition in a climate where, increasingly, only the strongest survive. We’re seeing a lot of growth in our equipment finance business — in fact, solid double-digits in the past two years — and we expect this to continue through the downturn,” he says.
Merrill is seeing similar strength at Fifth Third. “We have not really experienced any meaningful slowdown. Our backlog remains very stable and strong,” he says. “Overall, I feel good about our pipeline.”
McKew is also upbeat about SunTrust’s performance through the past year’s challenges: “We’re having a good year — our eleventh-straight record year, in fact,” he admits. “Knock on wood: I hope that continues.”
A Return to Rationality
While it’s obvious that fewer players mean greater opportunities for those remaining, there’s a prevalent sentiment that something akin to Alan Greenspan’s “irrational exuberance” had taken hold in the leasing and finance space through last year — and that it’s finally being exorcized. The fact that those who ignored the risks of lenient pricing and soft deal structures are gone, or soon will be, has many leasing industry leaders breathing a sigh of relief.
“This is what we needed,” says McKew. “We’re seeing that people who took undue risk and were not paid for it are feeling the pain of that,” he says.
Warner is seeing a similar shaking out of deals for deals’ sake. “There will always be the company that decides it wants a particular deal regardless of price, but, in general, that practice has stopped,” he says. For him, the change has really taken hold over the past six months, and he welcomes it.
“Pricing was still irrational in the third and fourth quarters of last year,” Warner explains. “But I think we hit an inflection point in pricing at the beginning of the first quarter of this year. If you have capital, you can now start charging for it.”
Cox, too, is welcoming what he sees as a return to sanity in pricing and structure — and perhaps a longer memory for the hard lessons that are being taught today. “We are seeing more discipline, definitely. The industry, collectively, has embraced a lot more rationality on pricing and structure,” he says. “The shakeout we’re seeing is maybe not about whether people are ‘rational’ or ‘irrational’ but about their ability to fund themselves, the strength of their own balance sheets, and their ability to raise capital at reasonable rates.”
Anthony CracchioloPresident & CEO, U.S. Bank Equipment Finance
For some, like Cracchiolo, there’s still further progress to be made. He feels “the general industry markets in capital equipment have not yet fully felt the liquidity strain that exists in the broader U. S. economy. Pricing is still low in comparison to the risks associated with the markets today. It’s got a ways to go,” he says. “Is it headed in the right direction? Yes. I think pricing has started to increase, and it’s going to continue to move upward in response to the credit environment.”
Merrill agrees that the swing in liquidity has still not been fully reflected in current pricing. But tightening liquidity is now starting to gain lenders’ attention. “There was so much excess liquidity for so long, but we’ve now gone from feast to famine in that area,” he explains. “Now that liquidity is at a much lower level in the marketplace, it has allowed us to improve our structures and provided some relief from the margin compression we had been experiencing.”
While industry leaders are looking for pricing to continue to better reflect risk, at least margin compression is no longer a worry. “Margin compression appears to have eased in the most recent months,” says Rinaldi, and he has seen the results of its disappearance firsthand: “In more recent conversations with some of our bigger customers, when we told them what our rate is, they didn’t flinch. Clearly, we were still priced competitively with the market.”
Yet, even if margin compression is gone today, its effects remain from the deals that were inked in the past. And it might take a while longer for those effects to work their way through the system, according to Rinaldi. “I don’t think we’ll be seeing any daylight for another nine to 12 months,” he predicts. “The margin compression we experienced in the past couple of years is now starting to impact our income statement as transactions from when we had better spread roll off our books. The new transactions we put on in the past 18 to 24 months had less spread, so it’s a double-whammy: we have less spread going forward.”
So, where do industry leaders see the equipment leasing and finance industry heading when the darkness finally lifts? Will their industry emerge stronger for having endured pain and regained discipline?
For some, like Chase’s Cox, such speculation is a distraction that may jeopardize the more important priority of continuing to move forward. “In times like this, you can’t focus on the tunnel. It’s a long way and it’s dark,” he says. “The key is to remain focused on what you can do to improve your business to position it for when that light does appear. If it’s six months or three years, you’ve got to be ready.”
And being ready means being positioned to move quickly as conditions change. “The equipment finance companies that survive are going to be the most agile ones,” says Warner.
McKew agrees that flexibility offers tremendous advantages in today’s market. “Nimble is good,” he states. “It’s better to be a PT boat than an aircraft carrier.” The ability to tap new opportunities as they appear and move away from unproductive ones quickly is critical, McKew feels.
“You can’t hang your hat on one thing,” he says. “I attribute [SunTrust’s] success to the fact that we have several vineyards and several orchards that we can harvest from. If one of them has an off year, we can always harvest more from the other.”
For Bowers and Merrill, today’s hard times for the overall economy might just be the best times for their banks. “I heard a quote recently, which our team has latched onto: ‘Don’t let a good downturn pass you by,’” says Bowers. “We are in a pretty enviable position. We have capital, we are out there playing ball, and we are seeing some of our competitors more fragile and constrained,” he says.
“It’s not all doom and gloom out there,” adds Merrill. “Our industry has always done pretty well when liquidity is tight and interest rates are high,” he says. Merrill predicts that much of Fifth Third’s success in the next year is going to hinge upon where interest rates go on a macro level and what the liquidity level pans out to be. “As an industry, we’ve tended to do pretty well during economic down cycles.”
For Key Equipment Finance’s Warner, success will be tied to meeting his bank’s call for responsible use of its capital. “Key has ample capital, and we intend to use it wisely. We are investing in relationships that provide good overall returns,” Warner says. “We’re not interested in volume for volume’s sake. We want to profitably grow revenue.”
McKew has similar marching orders at SunTrust: “The liquidity in the marketplace has now become the commodity,” he explains. “Where it’s lent and what the expected return will be are now going to be scrutinized.”
For Cox, “the days of bidding on every RFP that comes in are behind us now. Most institutions today are making sure that when you commit your balance sheet to something sizable, you’re doing it for a client or a prospect that you can develop a full relationship with — classic relationship banking.”
Rinaldi agrees that selecting the best opportunities with the most valued customers is more important now than ever before. There’s no room for undue risk or underperformance in today’s portfolio, he feels.
“You’ve got to always be looking at what value-add you’re offering because you have to be mindful of the fact you’re competing for the capital,” Rinaldi explains. “You have to be pretty clear on what you plan to do and come pretty close to what you said you were going to do.”
For some, like Wachovia’s Hamrick, the best solace might lie in the fact that all downturns are cyclical. “This will be the longest economic downturn I will have seen in my 28 years in the business,” he says. “The good news is that we’re in an economic cycle, and, like any other cycle, it will end. And when it does, there’s going to be a need for capital for equipment finance.”
Stephen J. McCabe is a senior writer for Susan Carol Associates, communications specialists in equipment leasing and e-commerce (www.scapr.com). In addition to compiling this annual roundtable for the Monitor for the past three years, McCabe has written on credit management strategies, financing training for sales professionals, and management techniques for today’s leasing industry in recent issues of the Monitor, ABF Journal and ELT.
Founder & CEO,
Wingspire Equipment Finance
When Liberty Commercial Finance launched in early 2017, it was founded with a vision of putting the needs of customers, employees and investors first. The idea was to create the type of organization that customers would repeatedly trust with their finance needs, employees would want to stay and grow with, and investors would want to continue to reinvest as the business grew.