Playing the Ant to the Grasshopper: Asset Managers Look Ahead to the Future
by Monitor Staff January/February 2019
With optimism remaining sky-high nine years into an economic recovery, it’s part of an asset manager’s job to make sure companies don’t suddenly plummet back to earth. Monitor sat down with Carl Chrappa of The Alta Group and Kevin Sensenbrenner of Stonebriar Commercial Finance to discuss their outlook on the year ahead and the ways asset managers can help lessors protect themselves for the inevitable downturn.
Looking ahead to this year, what are your expectations regarding residual setting, return conditions, residual realization, collections and recovery?
CARL CHRAPPA: As we enter 2019, expectations are high for another prosperous year. That said, the economy is widely expected to slow somewhat due to rising interest rates, global trade tensions, a divided Congress and return to a more regulatory environment.
This will affect asset management in several areas. For example, residual setting will require a more exhaustive study as economic and business conditions related to some equipment types that are predicted to soften 3 to 5 years hence; in some cases, considerably. Thus, many equipment types may see residuals lowered this year. This could also result in tightening return and maintenance provisions.
Residual realization will be good in the short term but soften over time especially if customer behavior and risk of future weaknesses are not taken into account today. Meanwhile, credit conditions will soften somewhat in the near term, and the Delinquency Roll Rate will rise. Thus, defaults and bankruptcies will slowly increase over time. In addition, the approaching implementation of CECL [Current Expected Credit Losses] will demand attention and planning. Early adoption is permitted after December 15, 2018. CECL will require a much deeper level of modeling, analysis, and loss reserve reporting than has been previously required.
KEVIN SENSENBRENNER: I anticipate 2019 to be similar to what we saw in 2018. Many markets are healthy relative to historical trends. So far we have found very few industries showing signs of stress. For example, the domestic energy markets are again very active and growing. In general, transportation trends are a good indicator for the direction of broader markets. Rail, inland marine and other transportation-related asset segments are stable or trending upwards.
When market conditions do soften, solutions-focused private finance companies are well positioned to catch fallen angels and execute on those opportunities. Banks will pull back on new originations and refinancing in a recessionary environment, which gives private independents like Stonebriar the opportunity to structure transactions under conservative residual terms and conditions advantageous to our business’ profitability. We consider ourselves a counter-cyclical business and very good at growing and strengthening our portfolio using disciplined approaches no matter the state of the economy.
In year nine of an expansion cycle, will you be doing anything differently?
CHRAPPA: Since the current expansion is in its 9th year, it is prudent to expect sooner or later it will end. Some economists are predicting a recession in the next 24 to 36 months. In light of this, asset managers must be even more diligent in their duties in order to protect their companies’ bottom lines.
SENSENBRENNER: We will continue to stick to our core principles and remain disciplined. Time tested valuation processes and well-planned exit strategies are critical to protecting and enhancing a business’ profitability.
Globalization and rapid technological advances across most sectors are creating shorter industry cycles and faster shifts in asset values. To keep pace with these tighter trends, it is important to have an open line of communication with our customers, to utilize our strategic partners and to stay informed on the latest developments. This strategy has allowed us to stay disciplined in markets regardless of cycles.
These macro influences emphasize the importance of developing robust systems and strategies to better collect, evaluate, communicate and execute on current information. With that in mind, Stonebriar is undergoing a technological transformation to maximize the utility and efficiency of our people, processes and analysis of data. These tools are very effective, but secondary to having the in-house expertise to understand the big picture.
What do asset managers need to know going into 2019?
CHRAPPA: Going into 2019, asset managers must be aware that business and economic conditions don’t last forever and plan accordingly. This could mean using an RV matrix or grid in order to identify potential variances in residual values as a percent of original cost. Deals with large discrepancies could require additional study.
Also, asset managers should be more proactive when leases are nearing maturity and try to learn if the lessee intends to return the equipment. Once known, either an equipment appraisal (with trade data shown) can be undertaken to aid in negotiations with the lessee or a detailed remarketing plan can be constructed to sell the asset on the open market for the highest price.
As a final thought, leasing companies with diligent and proactive asset management units should continue to prosper even in the face of an economic slowdown.
SENSENBRENNER: Many markets remain healthy. If you look at the dozen or so primary industries within the commodities, manufacturing, transportation, high-tech and medical equipment segments, all have seen equipment values rise over the last year.
Agriculture-related equipment demand and values remain depressed, but have improved from their lows. Technological changes will impact the future of this market as tractors and agricultural machinery become more fuel-efficient and offer increased production with auto-steering technology, connectivity and autonomous controls. Inland marine assets have recovered from an overbuild. Shipyard consolidation and reduction of older capacity is strengthening values. Corporate aircraft for-sale inventory is continuing to decline and is now at very manageable levels. As a result, value curves in this segment appear to have stabilized.
Business leaders have largely embraced the rapid introduction of home working and digital processes as an inevitable necessity. Though the global lockdown has rapidly accelerated trends in digitalisation, seeing many asset finance businesses moving their operations entirely online in a contracted timescale, the direction of these developments is not a new concept for the industry.
Scott Nelson, Chief Digital Officer, Tamarack Consulting
While it is too early to define the new normal, one thing we can say for sure is that the rule “past performance does not guarantee future returns” has never been more true. Scott Nelson explores how real-time data can reflect a customer’s current financial health and reduce uncertainty about the future.