Eric Hanson,
Senior Managing Director and Co-Head – Financial Institutions Group,
Macquarie Capital
1. The equipment leasing industry is undergoing a profound structural change.
The large financial institutions holding specialized leasing businesses in specific asset classes, such as rail, vendor, IT and medical, are assessing how those businesses fit within overall strategy, core customer segments and geographies.
Finance companies and banks are narrowing their apertures and focusing on franchise strengths. Those owning national/global monoline leasing businesses, be it in rail, vendor finance or IT, that are not providing synergies to the core business are increasingly weighing leasing businesses as divestiture candidates. Examples of this trend include GE Capital, Wells Fargo, CAI International and PNC.
In bank boardrooms there is more focus on merging with competitors than diversifying lines of business. In the transformative time we are experiencing, CEOs are emboldened to consider significant actions coming with risk and the cost write-downs in order [to] reposition.
2. Equipment finance is an ascending asset class for institutional investors.
In the broader financial markets, equipment lease and finance assets are an ascending asset class with institutional investors. The alternative asset management complexes — under the umbrellas of insurance companies, private equity/credit funds, pensions and sovereign wealth funds — are targeting commercial equipment leasing and lending assets as well as consumer secured equipment receivables. Their motivation is to capture premium spreads relative to rated public debt and to benefit from inflation through residual gains. Trading the illiquidity premium in leasing assets relative to public debt is increasingly attractive.
Over the last two years, the largest alternative asset managers, including Apollo/Athene, Blackstone, KKR/Global Atlantic, Pimco, CPPIB and BlackRock, have expanded their investment in commercial and consumer equipment finance through whole company and portfolio acquisitions, lift-outs and joint ventures to acquire whole loans/leases.
The most attractive equipment financing sectors are those with the prospects of long-dated growth — either due to structural changes in asset ownership (aircraft or rail), inherent organic growth (solar or consumer point of sale) or consistent anticipated growth through corporate partnerships arrangements (vendor finance). The end game for these asset managers is assuring consistent growth in assets under management.
3. Sophisticated leveraging has led to excess spreads.
The premium returns — excess spread — available today in the equipment finance asset class is largely the result of increasingly attractive and sophisticated approaches to leveraging the asset investment.
ABS rates and bank cost of funds have bottomed to historic lows, and structured solutions, from senior tranches down to equity, are funded in multiple capital markets. At the same time, absolute lease rates in many equipment types have not declined proportionately. Structured financing for asset pools over the last six months have provided financing with absolute rates in the 2% range on intermediate terms for heavy equipment like rail and container as well as smaller ticket assets in small business and consumer.
4. New doors are moving the middlemen out of the way.
This unprecedented phenomenon is resulting from the disintermediation of financing alternatives for equipment financing across a wide range of fixed income investors, ranging from private to public and across direct investment and highly syndicated securities. Rather than just lending, institutions are becoming lessors and rather than buying ABS from investments bankers, they are going direct as single source ABS providers.
The abundance of capital is opening the door to creating de novo asset-lite lease origination businesses capable of growing insulated and scaled leasing franchises.
