PNC EF — Good, Bad & Ugly

by Richard Doherty Nov/Dec 2013
In analyzing the equipment finance market as we close out the year, Richard Doherty, president of PNC Equipment Finance, notes that the irregular 2013 market brought a mixed bag, including organic growth despite a sluggish economy, government instability and increased competition. Resilient industry professionals who continue to make educated decisions are vital to taking what momentum we enjoyed this year into 2014.

As the year progressed, PNC Equipment Finance witnessed some good — specifically in organic growth, doing more business with existing customers. The bad was the sluggish pace in which this new business developed. When it comes to the “ugly” of equipment finance this year, three major areas of concern stood out including uncertainty in the healthcare industry, economic and government instability and the influx of more competitors chasing limited deals.

The reasons behind these industry occurrences are far from our control. It is important, however, to understand the underlying causes.

This year, our healthcare customers faced multiple challenges. At the forefront is the Affordable Care Act (ACA). Hospital executives are troubled, not knowing what their systems will need to accommodate demand. The uncertainty, fear and lack of knowledge regarding the implementation of the ACA have trickled down to those of us in equipment financing.

The ACA will provide nearly 48 million additional people with access to health systems nationwide. Hospital executives’ primary concerns revolve around staffing needs and quality of care — with equipment purchases and upgrades no longer a priority. It is difficult for our customers to know how to appropriately allocate capital expenditures following the ACA’s rollout. As a result, new equipment finance originations are not as robust as expected.

Another variable for hospital executives is the increase in health system consolidations, which have been on the rise since 2001. When hospitals merge creating mega-sized health systems, it usually creates a “passing down” of equipment. As such, hospital executives see less of a need to finance new equipment and begin repurposing or repositioning equipment throughout their hospital systems.

Good things do come to those who wait, including those of us in equipment finance. As the process of health system consolidations continues and the ACA’s full implementation becomes complete, the expectation is that the healthcare market will improve as uncertainty subsides and equipment financing demand returns.

Economic and Government Instability

The economy has been stuck in neutral for the past couple of years. This neither helped nor hurt the equipment finance industry. At PNC Equipment Finance, we kept busy re-evaluating customer relationships to serve their financing needs. This approach offers us growth opportunities despite the economy.
In addition, government officials have contributed to our struggles this year. While Congress squabbles over the debt ceiling, fiscal cliffs and other issues, various equipment financing segments have experienced difficult times.

Partisan rancor within the government has created a number of roadblocks. For example, PNC Aviation Finance faced an unexpected impact by the most recent government shutdown. As our employees worked diligently to secure strong relationships within the segment, new aviation finance deals stalled when the Federal Aviation Administration (FAA) office closed for business. Required by law to register aviation equipment with the FAA, the shutdown closed the FAA, delaying completion of these deals.

There is no escaping that the current state of the economy and government actions play a significant role in the decision-making process for our customers. While it is difficult for us to predict what the future holds for the economy or government, it provides a learning opportunity to prepare for the unexpected and learn how to take the good with the bad.

Increased Competition

The equipment finance industry witnessed an unanticipated rise in competition this year. Some old players sitting on the sideline jumped back in the game and new players quickly rose to prominence. More competitors, mixed with a decrease in customer demand and fewer business opportunities, resulted in a tighter market.
With more market participants vying for business and a surge of lower-than-normal pricing through the markets, our overall assumption is that some companies either are struggling to meet their business plan or are so new to the industry that they are willing to provide these record low rates. Unfortunately, a growing number of these participants demonstrate a willingness to sacrifice quality for price.

In the face of this competition, leaders within the industry must continue to practice responsible lending and leasing. Secured deals should provide organizations with a portfolio that establishes credit quality, which strengthens its company and is beneficial to the industry as a whole.
What We Have Learned

Gaining additional business from current customers is an important aspect of our industry given the competitive landscape. As market share continues to feel pressure due to increased activity from new competitors, our relationship-building skills will improve our business insight heading into 2014.
There is much promise within the equipment finance industry. It consists of a resilient group of professionals and organizations. It is important to remember what brought many of us to this financial sector, along with the time and dedication many shared to make the industry what it is today. Take this year’s momentum into 2014 and continue to make educated decisions, as those decisions can affect us all.

Disclaimer: This content has been prepared for general information purposes and is not intended as legal, tax or accounting advice or as recommendations to engage in any specific transaction, including with respect to any securities of The PNC Financial Services Group, or any of its affiliates, and do not purport to be comprehensive. Any reliance upon any such information is solely and exclusively at your own risk. Please consult your own counsel, accountant, or tax or other advisor regarding your specific situation.

Rich Doherty has been working in the equipment finance and leasing industry for more than 30 years. In 2011 he was named president of PNC Equipment Finance, a member of PNC Financial Services Group. PNC Equipment Finance is the fourth largest bank-owned leasing company in the U.S. Prior to joining PNC Equipment Finance, he held executive positions with Merrill Lynch Capital, Bank of America Leasing, FleetBoston and CIT. Doherty received a bachelor’s degree in economics from Bethany College in West Virginia and his master’s from the University of Pittsburgh. He is member of the Board of Trustees of the Equipment Leasing & Finance Foundation.

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