The Monitor asked the heads of the leading vendor finance companies to reflect on what the environment was like to do business in 2013 and comment on what their expectations are – both positive and negative — as they look ahead. We thank Jeff Berg at De Lage Landen, Brian Madison at Key Equipment Finance, Paul Omohundro at Banc of America Leasing, Tim Reese at Wells Fargo Financial Leasing and Nicholas Small at CIT Vendor Finance.
Jeff Berg, U.S. Country Manager, De Lage Landen
Brian Madison, SVP, Manufacturer & Vendor Alliances, Key Equipment Finance
Paul Omohundro, Managing Director, Global Vendor Finance, Banc of America Leasing
Tim Reese, President, Wells Fargo Equipment Finance
Nicholas Small, Managing Director, CIT Equipment Finance
MONITOR: As you look back on 2013, what are some of the takeaways from this past year that you would like to share with our readers. And for the pure fun of it, please rate 2013 on a scale of 1 to 10, with 10 being the best year you could’ve ever imagined – and tell us why.
Berg: In 2013 we made a significant effort to incorporate operational excellence and process improvement into our business model, so that we can continue to offer our vendor partners optimal service and the solutions they need. This has been a global endeavor for DLL that builds upon our commercial growth in a way that fully prepares for external challenges ahead. We have found increasingly that our partners are not just looking for off-the-shelf, one size fits all products, but rather total asset solutions or full service solutions like Managed Equipment Services (MES). In 2013 we started more than 15 MES pilot projects, mostly in healthcare and office technology, around the world. Ultimately, the trust that we have developed with our partners over the long term is why they look to us to bring them into new markets or help them expand their existing presence with enhanced financial tools. In 2013, we supported export growth with some of our largest customers into targeted growth regions. DLL’s Construction, Transportation & Industrial group worked with a global industrial and agricultural equipment company, to further grow its business in Mexico, Australia, China and India. Four years ago, we only did business with this company in the U.S. Since the program started we have also helped it expand finance offerings into Canada, Europe and Brazil.
Based on the innovation, growth and optimization experienced in 2013, I have to give it an 8. Despite considerable external challenges, we worked alongside our partners to drive their businesses and exceed our financial goals at the same time.
Madison: Overall, 2013 was a good year for Key Equipment Finance vendor finance programs. We saw strong growth in vendor finance relationships across our technology, energy, healthcare and public sector markets despite stiff competition and prolonged pressure on spreads.
We were particularly pleased to see our existing vendor partners doubling down on equipment finance in 2013, especially in the technology segment and the public sector. This is encouraging from an economic perspective and presents opportunity for vendor finance oriented lenders. Our healthcare team secured several new vendor relationships over the past year, which was another highlight for our company in 2013. We also continue to see strong credit quality across our portfolio, and credit quality on new originations exceeded expectations in 2013.
Overall, I would rate 2013 an 8 on a scale of 1-10. Although we achieved significant vendor milestones including deepening our relationships with existing vendor clients and attracting new vendor partners, we’re hoping to see stronger economic vitality and better margins in 2014.
Omohundro: Global expansion is a continued theme: We had significant growth due to our product delivery model and some market dislocation. EMEA (Europe, Middle East, Africa) was a pleasant surprise in 2013 — we had better than expected overall growth compared to 2012. In APAC (Asia Pacific), we also saw significant growth.
Our new business volume remained strong in 2013 and continues to grow — we had a record year in 2013, and our overall portfolio performed well. Our general industries segment experienced its first substantial growth year since 2010, with a strong increase over 2012.
We also had good success in originating new programs in 2013. While there is strong competition for new programs, our global capabilities can be a differentiator. My rating would be an 8, based on our overall platform growth, expanded vendor coverage in EMEA and APAC, and new program growth.
Reese: The issues and opportunities in 2013 were, in many ways, a continuation of the trends we experienced in 2012. In spite of the anemic economy and the return of many old (and emergence of new) competitors to our various markets, we achieved record volume in all of our industry channels and record profitability. Although headwinds in the second half of the year in the form of declining margins from price competition and higher funding costs certainly put a bit of a damper on the year-end celebration.
The pleasant surprise for us, and I believe the industry in general, was the continued strong performance of our existing portfolios which will be important for us as we face potential economic and margin issues ahead. In 2013, we successfully expanded our vendor and dealer base as our relationships continued to mature and we became more fully integrated with our customers, focusing particularly on providing the ultimate customer experience. We are no longer viewed as simply a funding source to help our vendors sell more equipment. Instead, our relationships now require real-time solutions, 24/7 access to us and to their portfolio, and a financing partner that is driving efficiencies throughout the leasing cycle that help them retain their customer base. Our industry and our relationships continue to evolve and, while 2013 should rate very high on the scale, I would rate it similarly to the year prior, giving it a 7 or 8, but trending down based on some of what I would consider irrational pricing, residual setting and margin erosion we saw come back into the market during the latter part of the year.
Small: I saw 2013 as a pivotal year for CIT Equipment Finance in the U.S. In addition to continuing solid year-over-year growth in finance volume, we successfully launched FlexAbility, a new suite of products that address the financial, operational and go-to-market challenges facing small and middle-market companies that offer complex sales and pricing structures to their customers. This product was a two-year undertaking that greatly expands our ability to support practically any finance structure our clients can devise.
We saw credit metrics continue to trend lower throughout 2013. We had expected it to uptick more as the economy strengthened.
I would rate 2013 as a 9 because we grew assets at desired levels, had outstanding portfolio performance, saw an increase in the average deal size for both small and mid-ticket transactions, and launched FlexAbility, an innovative, industry first, suite of products that can transform the traditional relationship we have with our customers.
MONITOR: When you consider the environment within which our organization conducts business, what would you say are some of the key areas of concern and, on the flip side, how would you characterize the current climate for doing business that you find encouraging enough to believe there are better days ahead.
Berg: I remain continually cautious about what 2014 holds, but there are some key indicators that give me hope. An increase in U.S. real GDP in Q4/13, along with a forecast for upward projection for 2014-15 across all global regions is very encouraging.
Obviously, I am very mindful of economic conditions in the U.S. given my role at DLL. It will be interesting to see if we can sustain growth as the U.S. government continues to adjust policies to drive economic growth. Interest rates are staying low and that provides opportunity for all of us in the financial world. At the same time, the private sector has a large amount of demand to upgrade equipment and infrastructure investments that have been put off for the last few years. Businesses will need to invest to sustain their competitive advantage, and this is where we can be ready with the right tools to help them make the most of their capital.
Beyond the ever-present economic conditions that we have to contend with, we battled the biggest uncontrollable force in Q1/14 — the weather. At DLL, we had to make considerable adjustments for a fierce winter on the East Coast. It made for a challenging start to the year for our customers and our employees. The good news is that DLL’s portfolio is performing well and we continue to experience top line growth consistently. Increasing our portfolio while managing costs is how we will continue to achieve profit despite the considerable headwinds around us.
Madison: Although 2013 was a strong year, the vendor finance market — and equipment finance in general — continues to face challenges related to a slow-growth economy and public policy uncertainty. The healthcare market, in particular, is still very much in flux as a result of the Patient Protection and Affordable Care Act. Many hospital systems and providers are engaged in merger activity, while others are still taking a “wait and see” approach to capital expenditures. Early adopters have started to realize that they need to kick-start investment in areas that improve patient satisfaction and patient care, and I believe others will follow suit in 2014.
Low interest rates create unique challenges for the public sector market because until spreads start to rise, the difference between tax-exempt and taxable rates will remain marginal. We are also seeing lenders who walked away from the public sector during the downturn start to buy their way back into this market, which puts additional pressure on margins. Another challenge is created by the changing regulations associated with municipal advisors, which is a distraction to those in the public sector. A broad net has been cast in this area, making it hard to interpret the true intention of the changes and who needs to register, and these changes are having a significant impact on the public sector market.
Despite these challenges, there is much to look forward to in the coming year. New opportunities are presenting themselves as vendors continue to look for ways to grow profitably, and we are encouraged to see that utilizing financing as a means to sell more products and services continues to grow in acceptance both with existing vendor partners and with vendors that have not traditionally embraced financing.
Although we are operating in a slow-growth environment, I remain optimistic that we will see continued economic growth in the coming year. We also see a sizable market to penetrate, particularly in the areas of technology and healthcare, which presents significant opportunity for our sales and business development teams and the equipment finance industry at large.
All in all, the biggest challenges I see for 2014 are challenges we’ve grown accustomed to over the past couple of years. We are pleased with the growth we saw in vendor finance in 2013 and are optimistic about continued growth and new opportunity in 2014.
Omohundro: I can think of three areas of concern. One is that we are more than likely entering into a rising interest rate environment, which could cause some disruption. Another that impacts most of us in the industry is managing uncertainty around regulatory and capital requirements. And finally there’s the continuing concern regarding the ongoing discussions of lease accounting changes and tax reform.
It’s more fun to talk about what’s encouraging: We’ve been experiencing solid growth in new program development the last few years and expect to see that continue to payoff in 2014 and beyond as the programs develop and mature. In the general industries segment, capital expenditure forecasts look promising, which should help us to continue to grow in that segment. In the technology sector, we’ve spent a lot of time developing cloud and managed services offerings, which look like promising opportunities for growth. And I expect international growth to continue.
Reese: As with any business cycle, there are always issues and opportunities. On the positive side of the equation, I do believe there is pent up demand for the acquisition of equipment and the use of vendor financing by the full spectrum of customers, which should bode well for our industry. However, I see two potential storms on the horizon that could significantly impact our performance in 2014.
The first is whether the economy will continue to recover in the face of increasing interest rates and how our industry will respond to the challenges presented. From a customer or portfolio perspective, we see increased risk of default with customers who have taken advantage of historically low interest rates to increase their borrowings. These highly leveraged customers, when faced with a sluggish economy and higher interest rates, could represent the most immediate risk to our portfolio. Strong portfolio performance like we have experienced over the last few years could cause the industry to lose focus and cause us again to take on increasingly more risk for too little margin. We have already seen the return of competitors into our markets using rate and residuals as the cost of entry, and even though this is another repeat of past industry sins, we’ll return to competing at the lowest common denominator to retain our vendor base. We are potentially at another inflection point in the business cycle and our experience should again help guide us through.
The second area of concern, the regulatory environment, creates uncertainty in terms of service, productivity and profitability as new regulations are applied to our industry that begin to blur the lines between consumer and commercial financing. These regulations are creating difficulties, particularly in a vendor-origination model, which will force lessors to have more direct dealings with lessees or place even more reliance on our vendor partners. The fact is that our industry is under even greater scrutiny and we are now operating in a zero-tolerance compliance environment, which could cause radical changes in how we do business and the service we provide to our customers. There is no doubt that the lack of clarity around current regulations and the potential for new regulations will occupy our time and attention while we continue to strive for enhanced service levels for our customers.
Small: Whether it’s flow or mid-ticket deals, we are seeing fewer down-the-street box placements and more custom, structured solutions. The market is transitioning and whenever that happens, it brings potential risk and potential opportunity. With our FlexAbility product investments, we are betting on a continuation of this transition to larger solutions that include components charged based on usage and more managed services types of offerings.
We believe better days are ahead for several reasons. The U.S. economy is slowly rebounding and remains robust in contrast to other mature economies. Corporate America is leaner and is investing in its people, infrastructure, systems and processes.
The tougher market environment of recent years has forced many companies to acknowledge the changing competitive playing field. No matter the industry, new entrants seem to be abounding. These competitive threats have prompted many companies to better understand their customer requirements and build better product and service offerings. And that is always a good thing. On top of all this, we have the influence of technology advancements. From big data/analytics and social business to cloud and mobility as well as the consumerization of B2B interfaces, it feels more like revolutionary times and less like evolutionary. Despite the real threats of seemingly unsustainable national debts, unfunded social contract liabilities and loose monetary policies among the world’s largest countries, we are positive in our outlook.
Whether you are a third-party originator or a funding source/bank, the responsibility lies with all parties to build partnerships based on mutual trust, mutual commitment, shared ideas and common goals.
Kenneth P. Weinberg, Shareholder, Baker, Donelson, Bearman, Caldwell & Berkowitz
Usury laws vary from state to state, which can make a lease or loan more complicated when the lessor is in one state and the lessee in another. Kenneth Weinberg discusses how this has played out so far in the courts, with favorable rulings for a lessor often depending not only on who files first, but where they file from.