Sunny Skies and Thunder Claps: Dexter Dissects the Revolutionary Events of 2015
by Dexter Van Dango September/October 2015
Mystery writer Dexter Van Dango examines the events that shaped the industry in 2015 — perhaps a bit earlier in the year than he would’ve liked. He says this year’s business environment, economic conditions, state of the industry and competitive rivalry converged to create a memorable storm.
To call the year 2015 unusual would be an understatement. Activity in the first quarter was somewhat light, but then things started to pick up. While there were no summer doldrums, we saw some pretty interesting politics with a neurosurgeon challenging a TV star/real estate mogul as the frontrunner for the Republican presidential nominee role. The year 2015 has been anything but boring. In fact, this year has been marked by revolutionary change.
Evolution is defined as a process of gradual, peaceful, progressive change or development, as in social or economic structure or institutions. During the past five or six decades the equipment finance and leasing industry has experienced evolutionary change. Revolution is defined as a sudden, complete or marked change in something. What has happened so far in 2015 is no less than revolutionary — and there is still more to come.
When Monitor editor Rita Garwood sent me a reminder of my pending deadline for this article, she noted that publisher Jerry Parrotto was requesting I write about the year in review. That request is a bit like asking me to write about a car accident that hasn’t yet happened. In my humble opinion, we are going to experience a flurry of activity in the few remaining months of 2015. There’s a lot more to come!
A Year to Remember
In my April 2015 opinion piece on monitordaily, I wrote about Harvard Business School professor and author Michael Porter and his Five Forces of Competition. My article showed that the threats of new market entrants and substitute products were present and very real. It demonstrated that the bargaining power of suppliers was low due to the prolonged low interest rate environment, while the bargaining power of customers was on the rise due to the increased rivalry among competitors.
Call it the “perfect storm” if you wish. The business environment, the economic conditions, the state of the industry and the rivalry among competitors made 2015 a year to be remembered.
The year started with high expectations. The money anxiety index had returned to pre-recession levels and general business confidence was high. There was a noteworthy increase in M&A activity. Royal Bank of Canada announced its plan to acquire City National Bank at a $5.4 billion price tag that represented a significant premium. CIT Group pressed for closure of its acquisition of OneWest Bank. Then in late February, Huntington Bancshares agreed to buy Macquarie Equipment Finance at a price that astonished most observers. In early March, longtime industry stalwart Ed Dahlka retired for about the fifth time — don’t count him out just yet! All of this was newsworthy, but really, nothing startling.
Then it happened. When something happens once it is an anomaly, twice a coincidence, three times a trend. For the third time, a buyer paid a significant premium for a stake in a U.S. leasing company. Century Tokyo Leasing, one of the top lessors in Japan, purchased 35% of the common shares of CSI Leasing. The sale reportedly placed a valuation on the company that took CSI founder Ken Steinback from rich to uber rich.
The commotion continued as Dave Fate, formerly of AIG Commercial Finance, teamed up with former GE Capital veterans Paul Bossidy and Steve White to create Stonebriar Commercial Finance. Once again, I refer to Porter’s teachings: When entry barriers are low and supplier bargaining powers are decreased, opportunity is created for new market entrants.
Cue the thunder roar.
GE Capital Divestiture
In a blockbuster announcement on April 10, 2015, General Electric CEO Jeffrey Immelt made a bold move to return GE to a pure play industrial company by exiting the financial services business. GE planned to accomplish this by selling the bulk of assets contained in its GE Capital unit and returning most of the proceeds from that disposition to shareholders in the form of a $50 billion share buyback. The same day, GE announced a sale of GE Capital’s real estate holdings to Wells Fargo and Blackstone for $26 billion. GE was the talk of the town at this year’s annual ELFA funding expo, which I wrote about in another monitordaily piece in May. Many attendees were dismayed at the thought of the future of our industry without its largest participant, the famed 800-pound gorilla.
Every week throughout the summer, headlines streamed speculative news about which companies were bidding for which pieces of GE Capital. Nearly as frequently, GE issued press releases announcing new or renewed relationships with clients, stressing that all things were business as usual.
In early June, GE announced the next appendage to be severed — the U.S. Sponsor Finance business and a $3 billion bank loan portfolio to the Canada Pension Plan Investment Board in a transaction valued at approximately $12 billion, as well as the European Sponsor Finance business to Sumitomo Mitsui Banking Corporation Europe Limit for $2.2 billion.
Around the same time, GE announced an agreement to sell its U.S., Mexican, Australian and New Zealand fleet businesses to Element Financial for $6.9 billion, as well as a handshake deal for the potential sale of its European fleet businesses to Arval, a fully-owned subsidiary of BNP Paribas.
Like a phoenix reborn from the ashes of Newcourt and growing at the pace of Jack’s beanstalk, Element Financial emerged as a serious contender for the industry’s frontrunner position. With its purchase of the GE fleet leasing business, Element instantly became the global market leader in automotive fleets. What Bud Grossman began in 1956 as General Leasing Company in Minneapolis, later known as Gelco — a company purchased by GE in 1987 — has now become a part of Element Financial, which appears to be transitioning into the role of 800-pound gorilla successor. Through the acquisition, Element gained not only the assets and operations of the GE Capital Fleet Services but also a who’s who list of Fortune 500 fleet customers.
In a brief two and a half months, GE Capital divested more assets than Bank of America, Monitor 100’s #2-ranked company, holds in its entire equipment finance unit.
In early August, Capital One announced its intent to acquire GE Capital’s U.S. Healthcare Finance Unit for $8.5 billion — a 6% premium over the June 30, 2015 stated asset values. The deal, which is expected to close in the fourth quarter, will result in the hiring of a number of key executives, including long time GE officer Darren Alcus, who will serve as president of the new business under the Capital One banner.
GE and its investment bankers pushed a book of business representing roughly $40 billion in assets from a handful of separate business units in late May. By mid-September, GE announced the sale of an estimated $9 billion in transportation assets to BMO Financial. The company that was originally known as Associates Commercial Leasing was purchased by CitiCapital in 2001 then later sold to GE Capital in 2008. Now, in its transition to the Canadian bank lessor, BMO will become the country’s largest truck finance and leasing company, under the leadership of Dan Clark, former president and general manager of GE Capital Transportation Finance.
Merely a day later, Bloomberg reported that KKR & Company and Apollo Global Management were pursuing the $11 billion in assets of GE Commercial Distribution Finance, the inventory finance business, with its legacy going back to ITT, Deutsche Financial Services, Transamerica and others.
The Wall Street Journal separately reported that Sumitomo Mitsui, Orix and Mitsubishi UFJ Financial Group were the final bidders for the estimated $5 billion in GE’s local Japanese commercial finance assets. Meanwhile, Reuters reported that GE intends to sell its asset management business, representing the divestiture of another $115 billion in retirement and pension-related assets.
Presently, I’m feeling a bit anxious over the immediate future. As the Fed held its annual retreat in Jackson Hole this August, the stock market rode more ups and downs than the Grand Tetons. China’s attempt to stabilize its economy resulted in volatile swings in global markets. Immediately, the talking heads on Fox and CNBC began pushing the anticipated Fed rate hike out to December, and even January 2016 in the opinion of some. Following its September 17 meeting, Federal Reserve Chair Janet Yellen announced there would be no rate hike at this time, citing global economic weakness and financial market turmoil.
Banks desperately need a rate hike to help improve net interest margins (NIM). Since the beginning of the recovery, NIM for all U.S. banks has fallen from 3.83% in the first quarter of 2010 to 2.97% in the second quarter of 2015.1 While interest rates remain stable, the competitive landscape has forced banks to lower margins in order to compete. This is an unsustainable strategy, which has led to layoffs and strenuous cost cutting. At the same time, banks are adding audit and compliance heads to meet the requirements of increased regulatory oversight caused by Dodd-Frank. It’s not a pretty picture.
What surprises will the remainder of the year bring? It’s hard to say. I would speculate that, despite the fact that a press conference has not been scheduled to follow the Fed’s October meeting, my bet is rates will rise by 25 basis points at that meeting and will rise again at the December meeting. Before year end, I would expect GE to announce the sale of their equipment finance business units, quite likely in two pieces. The vendor and direct businesses will be sold to two banks, or one very large bank. Only time will tell. In my January 2016 Top Picks article I will assess just how wrong — or lucky — I was in these predictions.
As always, if you have a different opinion please share it with me at email@example.com.