Rough Waters Ahead: The ELFA Guides Industry in Wait-and-See Mode

by Phil Neuffer September/October 2016

The equipment finance industry has been growing, but a number of factors have slowed things down in 2016. ELFA President and CEO Ralph Petta and Bill Stephenson, chairman of the ELFA and CEO and chairman of the executive board of DLL, provide insights on the industry’s health, the coming elections and what the ELFA is focused on in a year of political and economic uncertainty.

The Equipment Leasing and Finance Association doesn’t just keep an eye on the equipment finance industry, it keeps every eye available on it. Recently, the industry has been in good standing. According to the ELFA’s 2016 Survey of Equipment Finance Activity (SEFA), new business volume was up 12.4% in 2015, marking the sixth-straight year of growth. According to Bill Stephenson, ELFA chairman of the board and CEO and chairman of the executive board of DLL, that growth came during an economic lull.

“Even though economic conditions may be stagnant, our industry is doing a great job with manufacturers and providing an alternative source of financing. We continue to outpace the overall market,” Stephenson says.

However, as the memory of 2015 fades, there are a number of trends and challenges facing an industry valued at nearly $1 trillion. Some of those trends may benefit lessees.

“Cost of funds ticked up, as interest rates slightly increased at the end of 2015,” says Ralph Petta, president and CEO of the ELFA. “It’s a good time to lease equipment. With so much competition in the marketplace, it may be challenging for some leasing and finance companies, but for a lessee looking to acquire assets, it’s a good time.”

Industry segments, including software, IT and healthcare equipment, have flourished. Petta projects the latter will grow. Some of these thriving industries have been helped by a shift toward managed solutions. According to a study from the Equipment Leasing & Finance Foundation and The Alta Group, managed solutions may generate 22% of total equipment leasing volumes during the next half decade.

“Finance companies are seeing an opportunity to not just finance the equipment but to provide a complete solution, a cost-per-use type of solution, to manufacturers where consumers only pay for what they use,” Stephenson says. “The manufacturers are bringing that solution and we, the finance company, provide the logistics, the billing, the collecting and the expertise to present that single solution.”

Despite a more attractive environment and expan-ded offerings, in the ELFA’s July Monthly Leasing and Finance Index, new business volume was down 17% year-over-year, 30% month-over-month and 8% year-to-date. Petta and Stephenson point to the agriculture and energy industries, which have been suffering. Despite its resiliency, the equipment finance industry has hit a bump in the road.

“Our data show that growth is starting to stagnate. It slowed down the first couple of quarters, and we don’t really expect it to pick up in any appreciable way,” Petta says. “The economy isn’t growing, and there’s not a lot of certainty about where it’s heading or what the political landscape is going to look like in the near term and the not-so-near term.”

Politics and Regulations

Political uncertainty has been pegged as a major concern by equipment finance executives in each of the last three Monthly Confidence Indexes from the Equipment Leasing & Finance Foundation. For Petta and Stephenson, one of the most important issues that November results will impact is regulation.

“The economy hasn’t fully stabilized to this new norm of heightened regulatory oversight. Everyone is now adapting and hiring a tremendous number of people to monitor, report and ensure compliance with the new regulations,” Stephenson says. “What we see is that balancing these activities and investments alongside your customers’ expectations for speed, flexibility and simplicity is quite challenging. The question is whether this will continue to be the new norm following the outcome of the elections in November.”

Those regulations could begin having even more impact, especially on bank-owned firms, due to new ratios and capital requirements.

“I think you’re going to see a lot of banks get creative with their balance sheets in order to be within the proper capital and risk ratios. This could create some upheaval, particularly with bank-owned lessors, who may step away from certain financial products or exit certain market sectors,” Stephenson says.

Along with regulation, the ELFA is alert to the possibility of legislation that would impact tax reform, the tax code and the push for more transparent credit information.

“The association is spending a lot of time and effort trying to understand to what extent there will be legislative proposals impacting tax reform going forward. The House of Representatives put out a blueprint for tax reform, and there are some things in there that are good for us and some things that are not so good for us,” Petta says. “It depends on who makes it to the White House and what the complexion of the House and the Senate is as to whether or to what extent there will be any meaningful efforts to address the tax code.”

As far as pending tax reform proposals go, Petta says a big issue is preserving the deductibility of interest expense, which is especially important for the smaller independents. Petta is also concerned that the Dodd-Frank legislation and forthcoming regulations will take a toll on leasing and finance companies.

“Making sure that certain credit information required by Dodd-Frank through section 1071 doesn’t add a lot of complexity and burdensome record keeping to leasing and finance companies is really top of mind for us at the moment,” Petta says.

As the election approaches, the ELFA will take on an active role in shaping the political landscape.

“The association will be at the table when these regulations are being drafted, whenever that is,” Petta says. “Since it’s a cornerstone of what we do — educating our elected officials and policy makers here in Washington — we are fortunate to have a lot of open lines of communication.”

This communication is done primarily through the ELFA’s Capitol Connections program as well as by conducting in-district meetings with members of congress. These programs give association members a chance to talk about their specific legislative and regulatory concerns and provide an avenue to educate lawmakers about the equipment finance industry.

Talent and Lease Accounting

While the election and its accompanying uncertainty have been a critical part of the ELFA’s work in 2016, many other initiatives have been on the table, starting with its efforts to attract young talent into the equipment finance ranks, specifically through its Emerging Talent Advisory Council and guest lecture program.

“We created ETAC, which is the Emerging Talent Advisory Council, to encourage young talent to get involved in the association early in their careers and to attract the best and brightest to the equipment finance industry. It’s proven to be tremendously successful, and I think we’ll continue to see that grow,” says Stephenson, who has been at the forefront of the guest lecture program as well, speaking at his alma mater Florida State twice already.

Petta also says the association is focused on shifting to a new lease accounting strategy, as members now must prepare to employ the new standard.

“The association is transitioning from an influencing posture to more of an educational positioning so that not only do our members know about the standard and how to comply, but they can educate their particular lessee customers about them as well,” Petta says. “Now that the standard’s been adopted, and it won’t be implemented for another couple of years, it will give us a little bit of time to provide educational resources through our website, through publications and through conferencing to explain exactly what’s in the standard and how to explain the changes to their lessees and customers. Bottom line is that lease financing continues to offer an attractive equipment acquisition value proposition and our members’ customers need to be aware of this.”

Wait and See

The uncertainty swirling around the industry may only get more intense in the coming months and years.

“Until there’s a little bit more certainty in the marketplace, we think the U.S. economy will kind of bump along, reacting to headwinds. For example, the strong dollar, whether Brexit is an issue or not, depressed energy markets and even terrorism and things that occur outside our borders, all this results in businesses taking a wait-and-see stance in deciding whether to expand or grow, and therefore, whether to invest in equipment. We see that indecision continuing for the rest of the year,” Petta says.

Even as that wait-and-see approach remains firmly in place during the last stages of 2016 and into 2017, Stephenson says there are plenty of reasons to be hopeful, especially when you look at the industry’s past.

“I’m an optimist. I’m excited. I think you can always create value in your organization. Focus on what you can control and influence,” Stephenson says. “We have a tremendously resilient and adaptable industry. We’ve continually had the rules changed on us over the last 40 or 50 years, and we continue to emerge as a tremendous value to our economy and to the businesses and customers we represent. I’m very confident that no matter the outcome in November, we will continue to create value for the U.S. economy through our industry and the association.”

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