Reason to Believe: Funding Sources Remain Optimistic in Uncertain Environment

by Monitor Staff Mar/Apr 2022
In an exclusive Q&A, Adrian Hebig of Channel Partners, Eric Renaud of NFS Leasing, Marci Slagle of BankFinancial Equipment Finance and James Truran of Amur Equipment Finance give the lay of the land for funding sources, discussing deal flow, marketplace challenges and the effect of factors like the COVID-19 pandemic and geopolitical tension on the cost of funds.

Adrian Hebig,
Chief Operating Officer,
Channel Partners

The current environment for funding sources is marred by many of the same challenges facing the greater equipment finance industry, with supply chain constraints, geopolitical tension and soon to be increasing interest rates among the many factors playing into the calculus of going to market. To get a handle on the funding source perspective on this uneven landscape, Monitor spoke with leaders from Channel Partners, NFS Leasing, BankFinancial and Amur Equipment Finance in an exclusive Q&A.

How is the level of deal flow activity today versus what it was a year ago? If activity is higher, is it the result of more deal flow from existing sources or an increase in the number of origination sources, or both?

Adrian Hebig: Application activity is markedly higher as we head into 2022 and we attribute this, in part, to a strong and growing equipment finance partner base. Our partners continue to see strong market segment activity in construction and transportation as well.

 Eric Renaud: Thanks to the support of our partners and the effort of our outstanding

Marci L. Slagle, CLFP, President, BankFinancial Equipment Finance

team, NFS Leasing grew originations 16% in 2021, and activity is up significantly at the start of 2022. We have experienced both an increase in volume from existing sources, as well as growth from new partnerships. Vendors are seeking to increase approvals beyond what a traditional lender can provide, and NFS has been a beneficiary of this effort.

Marci L. Slagle: We are experiencing increased activity. We are seeing more applications and bidding on more; however, the closing ratios are down due to delays, losing collateral, finding collateral and acceptance and delivery being pushed out.

James Truran: We’ve experienced strong growth in application activity year over year. We note improved activity across the sectors primarily driven by deepening relationships. We have been fortunate to expand our team with seasoned relationship managers who have also helped to add to our growth.

Do you expect your current performance level to continue? What are the key drivers behind your optimism or pessimism?

Eric Renaud, Chief Credit Officer, NFS Leasing

Hebig: We do anticipate robust activity and growth trends will continue into 2022. Our optimism is tied to the exceptional strength of our partners, well-founded relationships focused on growing and winning together and enthusiasm for our new SYNC product rollout to our partner base. We have much to be excited about but continue watching challenge areas like the supply chain issues and rapid pace of equipment sales.

RENAUD: We do expect our growth to not only continue, but likely accelerate. We expect that businesses will continue to make significant investments in capital equipment to address the impact of COVID and ongoing supply chain issues, including automation and technology solutions.

Slagle: I do see this going into second quarter as COVID winds down (hopefully!) and as the supply chain straightens and deliveries are completed. It appears there is a lot of pent-up demand. As rates are starting to inch up, this is also going to have some impact going forward.

James Truran, COO, Amur Equipment Finance

Truran: We are cautiously optimistic about prospects to the industry, supported by economic tailwinds and the benefits of the American Jobs Plan. Global supply chains, inflation and the continued global health challenge presented by COVID remain challenges.

What are some of the factors you’ve had to deal with when you go to the marketplace to compete as a funding source?

Hebig: If you look across the equipment finance industry, we are and have been seeing wider credit windows and low rates as primary levers companies pull to compete for business, including aggressive approvals and structure designed to grow their portfolios and deploy cash.

Slagle: The usual suspects: competitive rates, deeper credit windows, lesser underwriting requirements, the ability to provide a predictable cost of financing several months out due to lead times and, of course, the current rate market.

Truran: Customer service is critical yet one of the most overlooked aspects in our industry. Continuing COVID had generally impacted service levels, but we see better turnaround times, consistent decisioning and responsible rates as collectively effective in gaining market share. We have seen both bank and non-bank competitors aggressively lower prices, but given our forward expectations on the rate environment, we have been cautious in making short-term rate adjustments.

How are current geopolitical events, such as the ongoing pandemic or the situation in Ukraine, affecting your business?

Renaud: With the help of the vaccines and better management of severe COVID cases, we have seen customers getting back to work with renewed vigor and urgency. So far, the situation in Ukraine has not affected our business. That said, we will continue to support our customers regardless of the macro environment.

Slagle: As of now, I can’t say I have seen the situation in Ukraine directly affecting us yet. However, from the pandemic, we are still seeing supply chain issues affect our borrowers and the availability of equipment, both new and used. Even with new equipment unavailable in some industries, we’re seeing used equipment sell quickly and for more than historical comps, which can become an issue when valuing collateral. The pandemic has also decreased healthcare volume, as expansion opportunities were put on hold as costs were focused on operating expenses. Delays of elective surgeries appear to have delayed certain equipment replacement, which has become standard.

The Federal Reserve is poised to raise interest rates this year. How will that impact cost and availability of funds?

Hebig: Channel does not have any concerns about liquidity or availability to funds. A rate increase is imminent and if history is a future indicator, we may see those who operate with a higher cost of funds struggle to remain competitive.

Renaud: We anticipate the Federal Reserve making perhaps multiple rate increases this year as part of their plan to tame inflation. Our cost of funds will align in step with the interest rate increases like every other direct lender in the industry. However, this will have no impact on our availability of funds through our credit facility, which was recently increased and expanded.

Slagle: Funds will still be available, but we will see [costs of funds] increase, which will lead to buy rate increases or willingness to accept thinner margins. We have been in such a low interest bubble for so long, this is going to be an issue of the market correcting to what is acceptable to both borrowers and lenders. I see this [as] a pain point through the end of 2022.

Truran: Swap curves have now factored in several rate rises this year as central banks adapt monetary policy to tame inflation. We would anticipate this incrementally increasing the cost of funds for lenders, although with a long-term perspective, rates remain near historic lows. Generally speaking, there remains an abundance of capital supply in markets and we would not anticipate this to change dramatically in the coming months.

What is your outlook for the equipment finance industry in 2022?

Hebig: 2022 is starting off exceptionally strong and we expect the first quarter to be well above last year. We remain mindful of the potential impact of rising rates along with the economic and political environment to date. That considered, we sustain our optimism that 2022 will be another year of success for our partners and Channel.

Renaud: We are extremely bullish on the equipment finance industry in 2022. With companies returning to the office, the resolution of supply chain issues and a relatively healthy economy, customers are seeking capital to invest in their businesses. Unemployment remains low, and with a shortage of skilled labor, there is an ongoing need for automation. As always, equipment lessors who listen to their customers’ needs are in a position to grow and expand as they provide the capital needed.

Slagle: I think we will see a slower Q1, strong Q2 and Q3, provided overall rates don’t go up too quickly, causing recession pressures. We’ll see more stability given the decrease in social unrest, with 2022 not being a presidential election year and COVID variants lessening in severity. I think overall there is reason to be optimistic in 2022.

Truran: Positive. Equipment finance has the advantage of enabling the purchase of assets that companies put to work to further grow their business. Despite recent market volatility, the U.S. economy is anticipated to grow significantly as COVID subsides and day-to-day life resumes and, coupled with potential federal infrastructure investment, this should translate into a healthy and sustained demand for equipment finance.

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