A Look at the Credit Side

by Monitor Staff January/February 2010
This is the first of a special series devoted to conversations with key executives of Monitor 100 companies. In the series, we will address topics related to the overall editorial theme of the issue at hand. In terms of risk management, who better to launch this column than Andrew Mesches?
Andrew Mesches Chief Credit Officer, Key Equipment Finance

Monitor: Since the onset of the most recent recession, we understand that equipment leasing and finance companies are viewing deals — especially from the standpoint of credit — differently than they had before. What are the key differences in the way deals were considered prior to mid-2007 versus how deals are considered today?

Andrew Mesches: A lot of what now drives decisions is based on availability and cost of capital, and how much lenders want to put on their balance sheet versus syndicating to other funders. The market is no longer flush with available, cheap capital. Lenders are being more selective in terms of credit quality because they want to enhance portfolio quality on the assets they keep, and they want to make sure they can find homes for those assets they decide to syndicate.

M: Do you agree that leasing companies have reordered their criteria for running their businesses to credit quality first, followed by margin spread next and lastly, new business volume? If so, how long do you think this “new order” will be with us?

AM: I do agree that there has been a refocus of priorities on new business from quantity to quality. Again, I think a lot of this is due to the increased cost, and decreased availability, of capital. The limited capital has tightened credit approval parameters. These dynamics have also helped strengthen margins for lenders.

I think it would be foolish to say that this new order will be around forever, however I do think it will stick for a lot longer than it has in previous cycles. Some of this is due to the severity of the economic downturn and the turmoil in the financial markets. Some of it is also due to the heightened level of awareness and oversight from the regulatory agencies.

M: Key Equipment Finance, like many other shops, has chosen to focus on business opportunities within the parent company’s footprint. Can you explain the reasoning and the benefits of this approach as a strategic approach? What are the benefits to this approach from your perspective as chief credit officer?

AM: The overall approach is directed toward building relationships. I would say that Key Equipment Finance has chosen to focus more on the parent company’s footprint, but that is certainly not our exclusive center of attention. We have also made a concerted effort to continue to support our vendor partners, as well as to reach out to end-users directly in those markets in which we believe we can be distinctive and where we can develop a deeper relationship with our clients. Looking at this from the risk side, I think the benefits would come from playing in specific markets where we can add value and for which we can provide strong support.

M: While the general consensus is that things seem to be getting better economically, core sectors (equipment classes) such as transportation and construction have seen little in the way of relief. Do you agree with this? Also, which other sectors do you see will continue to struggle for the foreseeable future?

AM: I do agree that the core sectors mentioned are still struggling. I think that will continue along with other sectors that are tied directly or indirectly to the real estate industry. Until we see a major uptick in the home sale market and until we see improvement in the unemployment numbers, many sectors will suffer. Retail is a prime example and this cascades to manufacturing on the supply side and commercial real estate as well.

M: By contrast, which sectors or equipment classes have weathered recent economic troubles relatively well?

AM: With the economic downturn as broad as is has been, virtually every sector has been impacted. Cost and availability of capital is a widespread issue. Increased bankruptcies and resulting equipment repossessions have created poor secondary market conditions in numerous industries. That said, one area that I do think has done relatively well is Information Technology. Ironically, these assets may have little secondary market value, but companies consider this equipment “essential use” as they cannot operate without them.

M: When considering the small-ticket financing business, how well have credit scoring models and technologies held up during the past several quarters? Are they as attractive today as they were before the economic turmoil surfaced?

AM: With respect to small-ticket, which we make available for our vendor partners as well as directly for bank clients, I believe scoring models and technologies have held up well, but are only tools and need to be used appropriately. Both need to be updated on a periodic basis to be effective. The scoring models and technologies have been, and will continue to be, essential to an organization’s efficiency and effectiveness. They are a necessity to compete in the small-ticket market.

M: We hear a great deal of the “graying” of the leasing industry and if the recent past has taught us anything, well-trained credit people are as critical as they have ever been. What are your recommendations in dealing with replacing seasoned credit personnel with new talent? Said another way, how does KEF deal with this reality?

AM: I believe there is a need to anticipate the exit of seasoned credit personnel (retirements and the like), and to actively facilitate knowledge transfer and skill development to those with less experience in this area. At Key Equipment Finance, we have established an in-house learning “university” that provides a broad-based program covering equipment finance-specific, as well as, general management topics. We also employ numerous resources available through our parent company and outside resources. Key Equipment Finance recognizes that people are attracted to an organization based on its culture and opportunity to develop skills. We have focused on these to attract the best talent in the industry.

M: Is there anything else you’d like our readers to know?

AM: I think we all recognize that 2008 and 2009 were very tough years — many have said the toughest they have ever seen — but I think we also have to recognize some benefit coming in the form of giving us a better perspective as to what the future might bring. As a risk professional, I don’t think we can ever forget that we will continue to live in economic cycles. As good as the good times may be, 2008 and 2009 reminded us of what might be around the corner and we need to be prepared.

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