New Strategies & Tools Needed in Improving Business Climate

by Edward Castagna June 2010
As the old saying goes, be careful what you wish for. Asset managers may be gaining a new appreciation for the meaning of the phrase as they try to determine how best to handle an improving business climate — a climate that presents a new set of challenges that must be effectively handled with new strategies or tools.

Just how do you handle an improving business climate? As usual, the answer may be simple: be smart, do your homework, work with trusted partners and employ the right tools to do each job. How you achieve these goals is where the real work begins.

As the recession came to an end, the economy only managed to skid along the bottom, with several months of flat performance and few signs of significant improvement. Now we may finally be seeing an upswing. In many key categories, there has been some positive news. Manufacturing expanded at the fastest pace in nearly six years in April, according to the Institute for Supply Management, a private trade group of purchasing executives. New housing starts in April were up by almost 6% as compared to March figures. Net orders for Class 8 commercial vehicles rose by 91% in April 2010 compared to the same month last year, according to ACT Research.

All of this is good news, indeed. But it seems clear that the recovery from the recent downturn will be a gradual one, and it will occur in a different-looking marketplace.

Some banks are leaving the leasing market and surviving companies are abandoning certain business sectors. Other companies are struggling with the decision on how best to “clean up” the mess remaining on their books, especially when it comes to troubled or delinquent assets.

At Nassau Asset Management, we are hearing from a number of asset managers even before writing a lease. One of their biggest challenges is that they don’t have accurate values for their assets as they try to project what the future holds, three years down the road.

Simply put, they want to know, “What is this stuff really worth?” They clearly want to proceed with caution, as you would expect after a severe downturn. When people get back into the “leasing pool,” they’re doing so with care. They want to verify the true value of the assets and they want this information about newly leased assets and those already in their existing portfolio.

We have found that our clients are gaining great benefit from our ability to provide them with an accurate appraisal of the fair market value of these assets, at the beginning, not the end, of the lease. This comes from having experience in selling assets on the current market. We know what value these assets were able to hold through a recession and we can apply that knowledge to our clients. Obviously, if you can sell equipment at certain rates during the recession, you know they should do better in an improving market.

It is also important to extend the knowledge of the value of assets as they move through the collections and resale processes. As an example, look at trucks. In our recent experience, day cabs, delivery trucks and other trucks that “stay close to home and come home every night” held more value as compared to trucks that travel for more than a day. For one thing, it is easier to track and collect these “close to home” trucks, should they become delinquent assets, than trucks that go cross country and can end up anywhere.

Having a clear understanding of the current and anticipated future market value, along with knowledge of the collections and resale markets, will keep companies from dumping troubled assets in their portfolio, without getting a proper return.

Some companies have taken the shortsighted view that, in the clean up stage, it’s better to pile up “the bad stuff” and package and sell it for pennies on the dollar.

We believe (and our current experience validates this belief) that by effectively employing collections and remarketing, it’s possible to get a better return on delinquent assets. Frankly, it often depends on the financial condition of the financial institution. The determinant is often the amount of patience the institution has in reserve to seek increased value, or are they forced by financial pressures to just want to get these items off the balance sheet.

As a sign of a more positive economic climate, we’re seeing more “clean up” collections as asset managers finally decide to deal with many of their delinquent accounts that had been piling up. It is true that a number of companies did not survive the downturn, (for example, Avondale Partners reported that trucking company failures leaped to 730 during the first quarter of 2010, the largest number since the third quarter of 2008), but there are new companies coming forward and showing interest in these available assets.

As another sign of the changing environment, asset managers are likely to be spending less time putting temporary bandages on problem areas and now have more time to collect and remarket troubled assets. The fire’s out and they’re cleaning up the mess. In fact, some have already cleaned up and now they’re starting to rebuild.

Finally, we have found that we can add value to our clients’ credit teams, which are hoping that new leases offer a safe and healthy opportunity for growth. Because of our extensive network, experience and research tools, we can provide the relevant intelligence needed to lend money in this environment.

Value is the key element for asset managers and this extends beyond just determining the fair value of assets. They also need to find value in the processes used to manage these assets. For example, they can limit their costs by working with an asset management company that operates on a contingency basis on remarketing and collections. When you have to recover money, there’s no cheaper option than contingency arrangements.

Additionally, it is usually more effective to work with a full-service external resource that can assist in all phases of the management process in a coordinated process, instead of having to deploy different resources for each phase and then try to get them to work together.

So, if better days are here, who is most likely to take advantage of them? Well, the smart always prevail. When it comes to asset management, that means you need to know the real value of the equipment in question, that your price matches that value, the residuals are set correctly and you’re lending into the right market after struggling through these times.

At Nassau Asset Management, we are optimistic, but not naïve, about the coming year. We see signs of growth and new avenues of opportunity. We think 2010 will end up being what many of us wanted, but only if our deeds match our wishes.

Edward Castagna is president of Nassau Asset Management, based in Westbury, NY, a full-service firm that provides asset recovery, collections, remarketing and appraisal services to the equipment leasing and finance industry. He has 15 years of experience in all areas of asset management, but is best known for his expertise in remarketing strategies and liquidations. Castagna is particularly knowledgeable about using an alternative to auctions, known as orderly liquidations, to maximize return on liquidated assets. He is a board member of the ELFA, an industry speaker and a quoted source on asset remarketing strategies.

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