Nancy Pistorio,
President,
Madison Capital

Mitch Rice,
CEO,
Commercial Capital Company

Saurin Shah,
President,
MidCap Equipment Finance

Peggy Tomcheck,
President,
Aspen Capital Company

How would you characterize new business volume in 2024? Have you seen any noticeable shifts during the first half of the year?

NANCY PISTORIO: We have noticed a decline in originations in the first six months of 2024 as compared to the same period in 2023. We primarily lend to small- and medium- sized businesses. Our clients comment they are delaying purchases where possible. They cite reasons including: thinking rates will eventually come down, equipment prices have risen too sharply and they want to “see what happens after the election.” Deferring replacement or addition of equipment can only be done for a limited time. Our expectation is that demand will be back, possibly over the second half of this year, as companies adjust to the new normal of rates and pricing.

MITCH RICE: We saw a bit of a slowdown in Q1/24 compared to the prior year, but Q2/24 came on strong, and we are tracking towards 10% to 12% annual growth [from] 2023.

SAURIN SHAH: Activity in the large-ticket space in Q1/24 was similar to 2023. However, recently, new business volume is slowing. This could be a seasonal effect with summer months usually being slower in Q1 and Q4. Being an election year, there is a level of uncertainty that could be affecting new CAPEX purchases.

PEGGY TOMCHECK: Aspen Capital specializes in tailored technology lifecycle management, supported by adaptable lease financing programs. Most of our clients continue to follow the strategies we’ve established. However, a small segment of new business has moved to longer-term leases to lower annual expenses.

In today’s higher interest rate environment, have you noticed any changes in customer preference when it comes to leasing versus buying an asset?

PISTORIO: In greater numbers, we are seeing businesses that have the ability to do so choosing to pay cash rather than finance. These businesses feel the current cost of financing new equipment is too high.

RICE: We have noticed customers have been more interested in flexible options. Customers have been focused primarily on keeping their monthly payments low. At times, a guaranteed residual has worked to help customers lower their monthly payment.

SHAH: Liquidity remains a premium, so I suspect customers will lease versus buy. However, customers have definitely realized that, if they intend to finance CAPEX purchases, the cost of financing for leases or loans is significantly higher than years past. Furthermore, since the timeline of rate cuts by the Federal Reserve have been pushed out, these higher rates are here to stay for a while.

TOMCHECK: Since Aspen’s lease programs cater to technology lifecycle strategies, interest rates have less of an impact on the operational benefits and overall costs.

Have you seen any noticeable changes in credit quality over the last 18 months?

PISTORIO: With new applications, we are seeing a trend of the owner/guarantor carrying higher amounts of revolving debt than they had a couple of years ago. Coupled with an uncertain economy, this gives us concern about additional financial stress on small businesses.

RICE: Outside of over-the-road trucking, there has not been a huge noticeable change in credit quality. In most industries, we did see a modest financial performance decline across the board from 2022 to 2023, but overall quality has remained stable.

SHAH: Surprising to me, the financial performance of companies in our portfolio is very healthy. Overall, the general economy remains strong. Near-term debt maturities and the associated refinance risk are really the only concerns that we have for credit quality. Equipment values seem to be holding up as well, so collateral coverage is strong.

TOMCHECK: Aspen targets well-established customers, primarily with ‘A’ and ‘B’ credit ratings, who provide audited financial statements or are government/state agencies. As a result, credit quality has remained stable.

How is the higher interest rate environment impacting your customers? Are you seeing more cash or covenant restraints?

PISTORIO: In our market segment, we are not seeing more covenant restraints. However, capital equipment-intensive businesses that finance their income-producing assets are experiencing margin compression due to increased acquisition and financing costs. This is particularly impactful if they are in an industry where it is more difficult pass on the higher costs to their clients.

RICE: We are generally requiring higher down payments than we would have in 2022 or 2023.

SHAH: Debt service coverage ratio is definitely tighter given the higher cost of debt, but our portfolio companies are still meeting covenants. Leverage was trending higher in 2023, but with stronger financial performance and EBITDA generation, leverage ratio remains in an acceptable range.

TOMCHECK: We are observing some customers opting for longer lease terms.

Have you experienced an increase in delinquencies and charge-offs?

PISTORIO: Commercial bankruptcy filings are significantly up in the first half of this year relative to the first half of 2023. Like many lenders in the current economic environment, we are seeing an uptick in delinquencies and charge-offs. Freight transportation is a significant contributor to this trend. For Madison, it has been manageable, as we have limited assets in this industry.

RICE: We did see a spike up at the end of 2023 into Q1/24, but that was more than likely attributed to our typical winter seasonal increase. Past dues have worked down this summer and are in line with a typical year.

SHAH: No, our portfolio is performing well.

TOMCHECK: Since Aspen engages in minimal small credit and app-only business, we haven’t seen an increase in delinquencies and charge-offs.

Any additional thoughts?

PISTORIO: Many in our industry are facing challenges with rising delinquencies, higher cost of capital and access to capital. We see increasing reports of firms pausing or stopping funding while they deal with these issues. We all need access to capital to operate. As banks grapple with liquidity issues, the health of our funding channels and partners has never been more important. Equipment finance leaders are navigating in a challenging and uncertain economic environment. However, we know from experience our industry is resilient, collaborative and innovative — all important attributes for managing through current issues and any potentially difficult times ahead.

SHAH: Based on the types of transactions that have been flowing through our pipeline recently, it does appear that the quality of large-ticket transactions is trending lower versus prior years. Higher advance rates and lower risk-adjusted yields seems to be rearing its ugly head, which is usually a late-cycle phenomenon, in my experience. Additionally, less mature businesses are seeking equipment financing as potentially other financing alternatives are not available. This could just be my personal opinion, but we are tightening up our credit standards and being more “choose-y” in the types of deals and companies that we want to partner up with. If the economy slows down or heads for a recession, we want to make sure we are positioned with strong cash flowing companies that can weather the next cycle.

TOMCHECK: Aspen’s short- and long-term strategy is to expand our technology lifecycle programs to address the operational needs of our customers by leveraging technology among organizations. •