Looking Back …

by Lisa A. Miller Sept/Oct 2013

Longtime Monitor contributor Lisa Miller meets with six industry veterans to discuss significant events that have impacted equipment leasing and finance over the past four decades. These industry stalwarts openly share experiences and special recollections they’ve garnered over the years, as well as offer some words of wisdom to newer members in the field and thoughts on what lies ahead.

As the Monitor celebrates its 40th birthday, it’s a good time to look back on how our industry has grown and changed. We sat down with six leasing professionals who have successfully ridden the same current over the past four decades: William H. Besgen, president and COO, Hitachi Capital America; Tony Golobic, chairman and chief executive officer, GreatAmerica Financial Services; Irv Rothman, president and CEO, HP Financial Services; Ken Steinback, chairman, CSI Leasing; Adam Warner, president, Key Equipment Finance; and Martin Weissburg, president, Volvo Financial Services.

When asked about the events that stood out as having had a significant impact on career and company, Rothman, who also celebrates 40 years in the industry, says the Tax Reform Act of 1986 changed the shape of the leveraged leasing segment of the industry. “When you did a tax-leveraged lease, the equipment had to be available for in-service prior to midnight at the end of the year for which you were claiming the tax credit. I remember making it to very few New Year’s Eve parties and working steadily through the month of December to close that business.”

“CSI couldn’t use the tax benefits prior to 1986, so we sold off all the tax benefits and retained the remarketing rights,” recalls Steinback, who founded the company in 1972. “This allowed us to put that money back into the company and start investing in our own deals. Now I believe we are the largest independent leasing company in the world, and we are also larger than most of the bank leasing companies.”

For Besgen the standout event was the recession in the late 80s and early 90s, when Hitachi Capital of America was started. “The marketplace was looking for capital, and the struggling banks were selling off assets. Because HCA had good financing behind it, we were able to take advantage of the turmoil in the marketplace and establish ourselves. We provided capital to the banks by buying leasing assets they had accumulated over time. We grew our assets from zero to $500 million in our first five years of business.”

“Without a question, the advent of the securitization market has had the most significant impact on GreatAmerica and my career,” notes Golobic, who founded the company in 1992. “It not only created additional credit capacity for lending institutions to offer mortgages, credit cards, auto loans and other products, but also enabled GreatAmerica and other smaller independent finance and leasing companies the ability to develop an efficient and expanded funding mechanism. This contributed to our ability to effectively compete with much larger, stronger firms.”

Both Weissburg and Warner commented that working through the downturns taught them a lot. “I’ve watched how those experiences either drive companies or individuals out of the industry or make you smarter and stronger,” relates Weissburg. “What we learned in prior downturns as an organization was beneficial when we faced the Great Recession.”

“I’m still not sure we are totally out of the Great Recession,” cautions Warner. “It seems as though we’ve been clawing our way out for the last couple of years. Hopefully the lessons learned will continue to influence our industry in terms of what to do and what not to do.”
“Another big change was the implementation of FASB 13,” states Rothman. “It was supposed to be the death knell of the leasing industry in the U.S. Instead it spurred the entrepreneurial spirit and intellect of people in the industry as they figured out how to work within the guidelines of this new accounting rule — and we did a good job of it.”

The Dark Days

The group notes that there have been five recessions since the first issue of the Monitor. We asked our panelists about the challenges, the lessons learned and if they would have done anything differently.

“Prior to this last recession, less focus was put on overall concentration risk such as how many similar transactions you might have, what they look like and what might happen if something were to dramatically shift within an entire sector, industry, asset group or client base,” confesses Warner. “At Key Equipment Finance, we were impacted in areas that we hadn’t considered related to each other. When the housing market collapsed, we expected that construction business would be significantly impacted. But we didn’t expect the impact on the aviation business from end-user clients who were real estate developers or companies. It also impacted municipalities whose tax base was radically altered because of home foreclosures and business failings.”

“If I had it to do over again, I would have had a stronger collections department and probably would have tightened our credit policies sooner,” claims Besgen “We have since brought in a seasoned collections manager who has worked to develop a staff with more aggressive collections skills and better procedures for follow-up.”

“We learned to make sure we are always building a flexible organization with employees who are cross-functional in their skill set,” counsels Weissburg. “If there is a slowdown in credit origination but collections are up, we can move people back and forth. This allows us to manage effectively through downturns as well as upturns. We were pleased that we began work on this concept before the Great Recession, because it gave us flexible operational capacity without the need to overreact or drop into crisis mode. For us the recession also confirmed the benefits of geographic diversification, because all 40 of our markets around the world were not impacted in the same way at the same time.”

“Sometimes during an upswing, it can be easy to lose sight of the need to focus on the fundamentals as you get caught up in the excitement,” declares Rothman. “It’s as if you learn to eat ice cream but forget how to eat spinach. You have to be disciplined and stick to what you are good at. During an up cycle, people can lose sight of what got them there in the first place. They may start to take more risks than they should and when the down cycle hits, you can collapse like a house of cards. This happened to me at AT&T Capital in 1990-1991. We were really doing well and when the recession came, we found ourselves on the wrong end of a downturn, and we paid for it.”

“The greatest lesson that I have learned was not to time the ABS markets too closely,” instructs Golobic. “During October 2007, as the interest rate spreads widened, we made the decision to postpone our planned securitization offering for a few months, expecting the spreads to narrow again. Well, they never did. Not only that, but the credit markets shut down completely. Fortunately, our reputation helped us access alternative, cost-effective funding vehicles which enabled us to continue to grow our business while some others had to pause.”

“We didn’t experience that many challenges,” admits Steinback. “In the most recent downturn in 2008, when our business mix was more international, we had some issues with funding in a couple of countries, but we were able to fund them through our U.S. sources. Because competitors were having cash and earnings issues, we were able to buy some companies with first-rate staffs and good assets.”

Rising Above the Challenges

“The biggest challenge for leasing companies was a lack of liquidity,” says Warner. “As part of a well-capitalized bank, we hadn’t anticipated that there could be issues with how much capital we would be able to access. Prior to the recession, it was common for banks to borrow money that they would then loan out; that is not the model today. Most banks want to be core-funded, or deposit-funded, because it can be very expensive to go to the secondary market to borrow money.”

“We had a commercial paper program guaranteed by our parent company, but commercial paper was not being bought or sold, and the inability to lend and raise money was significant,” shares Besgen. “Fortunately our parent, Hitachi Capital Corporation in Japan, is very strong with financial reserves and was able to write us a check for $177 million to tide us over that lack of liquidity. Not being able to raise money regardless of the credit quality of your company was frightening and having a strong parent certainly helped.”

Rothman also felt fortunate to have a parent company with a strong balance sheet and ready access to capital. “We were well-prepared for the downturn, because we never lost sight of our fundamentals. We never went outside our range of competency or tried to achieve growth that was dramatically better than the range of our best and worst year’s growth. A defining moment was when HP acquired EDS and Lehman Brothers collapsed. I was a little nervous about our ability to produce a return when our spreads jumped, but things calmed down after a few months. EDS was a sizeable acquisition. It didn’t affect our debt rating at the time, but it did cause people to look at us more closely.”

“We hit a downturn in our equipment acquisitions, though not necessarily in earnings,” reports Steinback. “The downturn allowed us to keep equipment on lease longer by extending, rewriting, lowering payments and doing all the things a leasing company can do to help clients. The downturn was good for profitability but bad for increasing the size of our portfolio, which limited our ability to remarket in future years.”

“I will never forget the panic intensity of some of the most seasoned executives in the financial profession during 2008,” remembers Golobic. “Until that point I assumed the dark days of widespread financial panic were over with the passing of the Great Depression. How wrong was I? The depth of bank and financial institution impairment, caused by the subprime mortgage section of the securitization market, brought on almost a complete shutdown of financial markets. At GreatAmerica this experience impressed on us the need to diversify our funding vehicles, regardless of the cost.”

“We knew the cost of funds was going to be volatile in the short term, but we didn’t know what it would be in the mid-to-long term,” recollects Weissburg. “Availability and cost of funds was one of the most interesting, fascinating aspects of the downturn. We were very glad to be diversified in how we raise money and to be a part of a parent with a strong balance sheet.”

“During the downturn, international expansion was a defining move for us,” says Steinback. “We had the money to expand, and there were acquisitions out there where companies were in trouble. Because of regulation and capitalization issues that were occurring in other countries and at home, we could buy bank portfolios in New Zealand, Australia, Malaysia, Singapore, Eastern Europe, Portugal, Spain and even in the U.S.”

Historic Industry Growth

The Monitor 100 made its debut in 1992 showing a combined U.S. industry portfolio size of $134.8 billion. That portfolio is now $548.4 billion. When asked what drove that expansion, Warner cites a growing understanding of leasing products as more banks and finance companies offered them. “It’s important to note that some of that growth was due to conversion of business that would normally have been done as loans but instead moved over to equipment financing obligations.”

“Globalization of the business is very important for us,” emphasizes Rothman. “Today HP Financial Services does approximately 65% of its business outside the U.S. The rapid evolution of technologies has also added to our business growth. Customers don’t want to get saddled with outdated equipment, and they can preserve their operational flexibility by leasing equipment from a lessor who knows how to manage those assets in a sensible and fiscally attractive manner.”

Steinback attributes growth in the IT leasing industry to users who wanted to find financing alternatives to the programs offered by manufacturers. “Users could lease their equipment directly from the big manufacturers, but when the actual lease rate was quoted and they realized there was an alternative such as CSI, they got another quote. Eventually users realized they could do business with a firm that was more flexible and allowed them to take equipment out early if there were technological changes or if they wanted to refresh or upgrade.”

Golobic suggests there were two main drivers for this growth: “The globalization of leasing and equipment finance in addition to a deeper appreciation among equipment manufacturers and distributors that financing offered an effective sales tool. A third, but lesser factor was the substantial expansion of bank-affiliated leasing subsidiaries into credit products previously not offered by our industry.”

“Banks often come in and out as the market expands and contracts,” says Weissburg. “The recent consolidation helped those of us still around to get bigger and stronger. We can raise our funds in a more sophisticated manner and use technology as a comparative advantage. We source talent globally and utilize best practices from around the world. The U.S. is a mature, developed market, but in emerging markets where equipment finance and leasing is in its infancy, there is greater opportunity. We’ve seen our fastest rates of growth outside the U.S.”

“Ours is a resilient industry that can find openings where they may not seem to exist,” affirms Besgen. “When there is change, the industry responds quickly and makes opportunities work. The resiliency comes from the entrepreneurial spirit within the people who are part of this industry, especially those at the independent finance companies that can respond to opportunities quickly and with less bureaucracy.”

What’s Ahead

“The equipment finance industry will continue to grow, but perhaps at a lesser pace,” remarks Golobic. “Possible hindrances include greater governmental regulations on banking as well as non-banking financial firms and the pending changes in accounting for leases, which could make leasing artificially less attractive to some.”

“I listen to credit industry analysts and economists, and several believe that we could already be at the top of a growth period and might be looking at a downturn fairly soon,” stresses Warner. “Coming out of this recession has been so prolonged that it wouldn’t surprise me to see a contraction. The challenge will be to know what you have done with your portfolio to prepare for a contraction. I don’t have a lot of optimism over the next couple of years about GDP driving a lot of incremental growth in the economy — at least not for the next 12 months.”

“There is a big correlation between the growth rate and the economy,” explains Besgen. “I expect both to continue to grow, but there are also segments of the market that grow faster than others. So depending on your industry focus, you may be able to take advantage of that. The banks will have more restrictions and that will be an opportunity for the non-bank segment.”

“It’s impossible to predict a growth rate, but you can see a slowdown,” adds Rothman. “As people absorb how to accommodate doing business under the new accounting rules, it is likely they will pause and take a deep breath as they try to figure things out. As for the banks, they move in cycles. They come into a market and then leave it. If there’s an advantage of non-banks over the banks, it won’t be for long; and if the banks have the advantage, that won’t be for long either.”

Weissburg expects moderate growth over the next few years. “Regulation will have some impact but not huge. Increasingly, non-banks and banks have to spend more on compliance and regulatory issues, but I don’t think that will impact the rate of growth nearly as much as customer demand will.”

Steinback agrees that it is going to be tougher for the banks. “Those banks that are well-capitalized and have quality management and high credit standards will continue to do well, but those who do not will not fare well.”

Enter the Internet

The advent of the Internet and the evolution of technology have changed life on the job dramatically. Besgen confirms that speed and efficiency in credit processing has clearly changed the business environment, and the customer benefits from the technological advances. “You need a strong IT leader, department and infrastructure to stay on top of the changes in the marketplace. We are using iPhone and iPads as standard issue now, and they provide the ability to communicate quickly and close deals faster. The iPad has replaced the laptop — it’s not only easier to carry around but it also gets through airport security quickly.”

“Data is so much more readily accessible today than it was prior to the Internet,” declares Warner. “You used to do research by making phone calls and going to the library to read archived newspaper articles on microfiche. Today, you Google a topic and have relevant information at your finger tips in seconds.”

“When I first came into the business, everyone sent paper memos and you got copied,” recalls Rothman. “You dictated your correspondence during the day, your secretary brought it to you for signing late in the afternoon. Now my people can reach me anywhere with instant messaging. Everything moves faster, it’s a global economy and a lot of our customers are global multinational companies. I am open for business 24/7/365.”

“As a company, we are so much faster and more efficient while always increasing quality and customer service,” exclaims Weissburg. “Our U.S. operation is very much technologically driven, from origination to credit underwriting to how transactions are documented, funded and tracked. The architecture allows customers and dealers to access real-time information on their accounts, allowing us to gain significant operational flexibility.”

“Credit modeling in small ticket is becoming increasingly reliable,” asserts Golobic. “Now, a well-managed small ticket company with sufficient mass and discipline can effectively use actuarial processes to achieve predictable results. Internally, technology has helped us measure just about everything we do, including portfolio monitoring, trending, efficiencies and financial projections.”

“If you told me ten to 15 years ago that I would have an IT department that is bigger than the IT departments I used to sell to, I would have said you didn’t know what you were talking about!” laughs Steinback. “When we started in this business, we would lease only a few serial numbers to a company. Now we lease thousands of machines, each with a different serial number. Each has to be tracked, and sales and property taxes have to be calculated for the various locations. A big multinational company may have equipment in 20 countries, and its people need online systems to tell them what they have and where it is.”

Shared Wisdom

With decades of experience in the industry, we would be remiss if we didn’t ask our seasoned professionals to advise the younger members of the equipment finance community.

Golobic begins, “Always stick with your basic instincts and don’t be persuaded by others. Don’t run in herds, because herds often run off the cliff. Do not copy your competition whose main objective may be volume growth at all costs. Manage for the long term and understand that in an increasingly commoditized industry, your employees can be a powerful differentiating factor.”

“Understanding and knowing your customer is critical, and that hasn’t changed in 40 years,” says Besgen. “To provide great value of service, you have to know who they are, what they are all about and what they want. Valuing relationships is vital. Always maintain your integrity; your word is your bond.”

Steinback believes in the power of networking. “Our company built its reputation in a broker-dealer market, and I was very active in the Computer Dealers and Lessors Association. In the mid-’70s to early ’90s, it was a major organization for 360 companies. All the industry leaders served on the board at some point, and they helped me a lot. My advice is to meet the right people and befriend them. There are no benefits to making enemies.”

“Don’t get into a deal or new market or segment or customer relationship unless you also know how you are going to get out in the event of a default,” warns Weissburg. “In our industry, it can come down to how skilled and quick one is at remarketing repossessed equipment. If you do that well, and within your planning horizon, you can do very well in this business. But if you don’t understand the equipment, the specs and how it is used, odds are that you are not going to be very good at underwriting the credit, collecting the account or remarketing those unfortunate deals that default. Those basics haven’t changed since I entered the industry; it’s the common sense approach.”

“Personally and professionally, I say to prepare for downturns,” proclaims Warner. “Americans like to think that everything is going to keep growing, but this last recession has had a more profound impact on consumers and families.”

“Always remember that people are important in our business,” insists Besgen. “Our customers often tell us what we should be doing and what we are not doing well, and it’s our employees who hear them. We as leaders must be good at listening to our employees who interface with our clients, because they are the people who bring us new ideas and fresh suggestions. Relationship building with employees is as important as building relationships with customers.”

“This is the same advice I gave my kids when they started out in business,” relates Rothman. “Never say no, even if you don’t know how to do something. Say, ‘I don’t know how to do it, but I’ll figure it out and deliver a result that will work for you.’ Take on assignments that no one else wants — it shows you are dedicated to the progress of the company. Be open to opportunity as opposed to being committed to a career path. Be a good team member — no one can do business alone these days. It is important to be reliable, to be someone who is in it for the work and the good of the organization. Remember that, at the end of the day, it is always about the customer.”

Moments to Treasure

Every career produces magical moments, those cherished memories that stand out over time. We asked our panelists to share their special times. Golobic started attending industry events in the late 1970s. “I was a relative newcomer, yet I was greeted by some of the most senior leaders of our industry with genuine warmth, graciousness and helpfulness. I will never forget this.”

“I took my first job in equipment leasing as an associate accountant,” remembers Warner. “I had been in charge of areas of production for a manufacturing company, and their finance subsidiary had a job for an accountant. I had gone to school for accounting so I took a step back in pay and hierarchy, but it was a career-defining decision. I knew finance was what I really wanted to do, and it has worked out very well for me.”

Besgen recalls a conversation over dinner with the late Ken Pontikes, the founder of Comdisco. “Ken told me, ‘For a transaction to be good, it has to be good for both parties — the buyer and the seller — so just keep that in mind.’ I always remember that, because it is really what makes business work. He was a great guy, with a warm personality, and you could see why his company was so successful because of how he treated his people. You have to be good to your employees as well as your customers, and they’ll be good to you. That’s the way it works.”

“The first deal we did at Compaq Financial Services as a brand new organization stands out for me,” reminisces Rothman. “As a captive, we were a square peg in a round hole — a finance company inside an IT company. We put the company and systems in place, wrote the documents and then sat around a phone that did not ring. When we did get our first piece of business, it was with the Metropolitan Opera. My secretary had a cake made in the shape of their building. This is an indication of how small we were then: We all gathered in a conference room and had cake and ice cream to celebrate that we finally had done a deal.”

“Back in 1970 my only job had been selling computers for Honeywell, and a friend at IBM offered me an opportunity to finance two machines for an insurance company,” Steinback tells us. “I needed $30,000, and I didn’t have it but said I could get it. I used an old Comdisco lease form, changed the lessor’s name to CSI and had to manually calculate the lease rate factor — I didn’t have an HP12C back then. I didn’t know to research the company and its credit. I came up with a rate and offered it, and then called a young banker friend to finance the deal. He told me the president of the insurance company had been indicted for fraud! We did the deal, and it all worked out fine, but I truly learned a lot in that transaction.”

Kudos to the Monitor

All of our participants have read the Monitor since the beginning of their careers. “I remember waiting for it to arrive, so I could find out what was going on in our industry and with our competitors and who was doing what,” mentions Warner. “The publication quickly established itself as having its finger on the pulse of the industry, because its editors were in constant touch with all the people in the industry. One of the things I have always liked about the Monitor is that it is fact-based. That has made a big difference in the quality of the publication.”

“The Monitor keeps me up to speed on what’s going on in the industry,” says Besgen. “I enjoy the Monitor 100 as well, as all the sub-segment lists that the publication comes up with. They let me know who is doing what.” Since Hitachi’s acquisition of Hennessy Capital, the company is now in the business of asset-based lending and factoring, so Besgen says he’s reading the Monitor’s sister publication, ABF Journal, too.

“I have a terrific amount of respect for the Monitor and its role in this industry,” says Weissburg. “It plays an important role in allowing my U.S. executive team to stay involved.”

Rothman adds, “I’ve been reading it since the beginning. I’ve been interviewed often, and I’ve written some articles for the Monitor. We share a long history of a cooperative relationship.”

“I read the Monitor and enjoy it,” says Steinback. “It’s a well-done publication, but I wish there were more coverage from my vantage point. The publication’s focus is on the capital equipment industry, not the IT leasing market.”

“The Monitor has been a publication that many of us in the leasing industry have come to rely on,” concludes Golobic. “They have always covered the topics that are top of mind and offered solid insights into some of the issues facing our industry.”

Lisa A. Miller is a regular Monitor contributor who has worked in the equipment financing industry for more than 15 years.

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