Amid industry disruption and turbulence due to the COVID-19 pandemic, the reputation of independent equipment finance companies for being creative and resilient is being reinforced. A majority of participants polled during a session presented at ELFA 2020 Business LIVE! said that independents will gain market share over banks and captives in 2021. Where they are finding opportunities and how they pursue deals were among the topics of the event session “Pockets of Opportunity for Independents – Where to Shoot the 8-Ball.”
The session was presented by the Equipment Leasing and Finance Association’s independent middle market business council steering committee on Oct. 28 and featured committee chair Ricardo “Ricky” Rios of CEFI and Jonathan Albin of Nexseer Capital as co-moderators along with panelists Abhay Bhootra of Truist Securities; Barry Ripes of PayNet, an Equifax company; and Tom Davidson of Encina Equipment Finance. Throughout the session, panelists discussed market conditions, credit availability and best practices in examining how independents are coming through 2020 successfully.
The following are five key takeaways about where independents are focusing their attention as they pursue market share.
Key Industry Data
Originations in the equipment finance industry were down 30% year over year and 9% month to month at the end of August, according to PayNet data. The highest delinquencies year over year are in healthcare and brick-and-mortar retail (including arts and entertainment), and they are the most challenged sectors going forward. Primed for success are construction (with delinquencies as of August down 12% year over year), agriculture (with delinquencies up a bit but fairly steady and expected to improve) and transportation, which has become an integral part of online sales delivery. States with the highest COVID-19 rates unsurprisingly have the highest default rates. Florida, California, New York, Texas and Louisiana have shown average default rates (4%) much higher than before COVID-19 (under 1%). States with the lowest default rates (around 1.5%) — North Dakota, South Dakota, Minnesota and Nebraska — will likely see an increase in defaults after recent COVID-19 spikes. PayNet reports the year-over-year spikes are the biggest since they started tracking the data in 2005.
Industries for Opportunity
Independents tend to dig into business models and get into industries that have a history of restructuring, all of which point to continued opportunity. Panelists did not let up in seeking new business through the pandemic, critiquing plans and evaluating their likely degree of success while continuing to structure transactions accordingly. In some ways the virus has accelerated some trends that were already happening. There are attractive opportunities in technology, infrastructure, software and anything with an online component in the business model as well as select manufacturing, packaging and some consumer products. On the downside, there are obvious challenges in travel and hospitality as well as oil and gas, which has had tremendous volatility.
Availability of Capital
Despite the pandemic, the sources of capital that were available pre-COVID-19 are still intact, and capital continues to be readily available in many forms. By comparison, during the Great Recession in 2008, asset-backed securities market disruption was unprecedented, while during the pandemic the disruption lasted for only five to six weeks. Capital is available from many sources, including securitization, institutional investors, banks and one-off players. As an indicator, data show that small-ticket and mid-ticket independents in 2019 issued about $7.7 billion in term asset-backed securities, and year to date in 2020, there is already about $7.3 billion. It is a strong number for the middle of a pandemic and indicates how constructive the capital markets have been in responding to large appetite and demand.
Importance of Relationships
For independents looking to secure capital, strong relationships with providers are critical from both a strategic and transactional perspective. On a transactional level it is critical to have many relationships with potential providers and potential syndication buyers, have an understanding of what their appetite is for a given opportunity, and be able to tap into it quickly. On the strategic side, it requires finding the right provider with whom to collaborate effectively, having good communication and designing a strategic set of opportunities together to pursue. This requires a common understanding of how the independent operates and mutually agreeing on where the strike zone is. Either way, it is about relationships and tapping into the providers who best know your business.
Underwriting is Key
Underwriting practices are still in place without any real adjustments. What is different is that everyone has a new risk factor that they think about in a number of different ways: particular industries and the trends in the industry, a particular company and the usage of equipment, and what has happened in the supply chain. The COVID-19 risk factor is a thread that goes through every transaction. It is key to understand how lasting and flexible companies are, what equipment they are looking to finance and how critical it is to their operations given the current environment.
As a panelist noted, when you’re not holding back during a pandemic, it really proves that you’re an independent equipment finance company. Independents are more nimble, can move and adjust more quickly than a large bank and can adjust their business model. The ones who understand their business plan and verticals will be poised to take opportunities sooner rather than later.
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