Equipment Leasing Industry Confidence Eases in October, Default Expectations Improve

According to the October release of the Monthly Confidence Index for the Equipment Finance Industry from the Equipment Leasing & Finance Foundation, confidence in the equipment finance market is 55, easing from the September index of 56.5 and steady with pre-COVID-19 index levels.

When asked about the outlook for the future, MCI-EFI survey respondent Bruce J. Winter, president of FSG Capital, said, “It’s now obvious that the economic fallout from this pandemic will continue for the foreseeable future and there will be no quick return to pre-COVID 19 economic metrics. While many of our clients have adapted to a new normal, others have spent their government stimulus and are at risk of closure without additional support. The resiliency of the equipment finance industry is without doubt, but as with other cycles, there will be winners and losers. In this cycle, those lucky enough to have little or no exposure to threatened industries will be the winners, while those with too much exposure to these same segments have no choice but to deal with significant stress.”

October 2020 MCI-EFI Survey Results

The overall MCI-EFI is 55, a decrease from the September index of 56.5.

When asked to assess their business conditions over the next four months, 29.6% of executives said they believe business conditions will improve over the next four months, down from 35.7% in September, while 51.9% believe business conditions will remain the same over the next four months, an increase from 46.4% the previous month. In addition, 18.5% believe business conditions will worsen, an increase from 17.9% in September.

In October, 22.2% of survey respondents said they believe demand for leases and loans to fund capital expenditures (capex) will increase over the next four months, down from 28.6% in September. Most (66.7%) believe demand will “remain the same” during the same four-month time period, an increase from 64.3% the previous month, while 11.1% believe demand will decline, an increase from 7.1% in September.

“Wintrust Specialty Finance has experienced strong originations, yields and portfolio performance in the third quarter. Our application volume has been continuing to grow, and the overall credit quality has been good. While I think the election will affect volume in the fourth quarter of 2020, the market will adapt and continue forward.” David Normandin, CLFP, president and CEO of Wintrust Specialty Finance, said.

A third (33.3%) of the respondents expected more access to capital to fund equipment acquisitions over the next four months, up from 17.9% in September. The remaining executives (66.7%) said they expect the “same” access to capital to fund business, a decrease from 78.6% last month. None said they expect “less” access to capital, a decrease from 3.6% the previous month.

“Within each industry we serve, there are pockets of companies that are doing quite well and continue to invest in the future. Many organizations have accelerated investment in digital transformation, upgrading software and workforce mobility,” Alan Sikora, CLFP, CEO of First American Equipment Finance, said.

When asked, 25.9% of the executives reported they expect to hire more employees over the next four months, up from 17.9% in September. The majority (63%) said they expect no change in headcount over the next four months, a decrease from 71.4% last month, while 11.1% expect to hire fewer employees, up slightly from 10.7% the previous month.

None of the leadership evaluated the current U.S. economy as “excellent,” which was unchanged from the previous month. More than half (55.6%) of the leadership evaluated the current U.S. economy as “fair,” which was up from 46.4% in September, while 44.4% evaluated it as “poor,” which was down from 53.6% last month.

A little more than a quarter (25.9%) of the survey respondents believe that U.S. economic conditions will get “better” over the next six months, a decrease from 50% in September. A majority (59.3%) believe the U.S. economy will “stay the same” over the next six months, an increase from 39.3% last month, while 14.8% believe economic conditions in the U.S. will worsen over the next six months, up from 10.7% the previous month.

In October, 22.2% of respondents said they believe their company will increase spending on business development activities during the next six months, a decrease from 28.6% last month. Most of the respondents (70.4%) believe there will be “no change” in business development spending, a decrease from 71.4% in September, while 7.4% believe there will be a decrease in spending, up from none last month.

“We continue to see opportunities, especially with customers who traditionally use cash for expansion but are presently looking to lock in long-term, low rates.” Michael Romanowski, president of Farm Credit Leasing, said.

COVID-19 Impact Survey of the Equipment Finance Industry

The ELFF also released highlights of the COVID-19 Impact Survey of the Equipment Finance Industry, a monthly survey of industry leaders designed to track the impact of the coronavirus pandemic on the equipment finance industry. The foundation collected 76 survey responses from Oct. 1 through Oct. 12 on a range of topics, including payments deferrals, defaults and staff analysis.

A majority (56%) of companies expect that the default rate will be greater in 2020 than in 2019, down from 73% last month, while 35% expect it to be the same compared with 20% in September, and 9% expect it to be lower compared with 7% last month. Only 7% of lenders reported having more than 10% of their portfolio now under deferral, down from 15% of lenders last month.

“I remain optimistic about the equipment finance industry’s ability to support the economy and fuel the recovery. I am most concerned about turmoil in the country and worry that the upcoming election and social unrest may have negative impact in the short run.” Valerie Hayes Jester, president of Brandywine Capital Associates, said.

When asked to what extent regulatory and/or funding source pressures are limiting companies’ willingness or ability to provide deferrals now, 66% responded “not at all,” 29% answered “somewhat” and 4% indicated “substantially.”

“Opportunities for new asset acquisition and sale leaseback will grow for independent lessors over the short to medium term. The length of the pandemic and other fiscal policies will determine when the competitive landscape will normalize for the supply of equipment finance capital.” Jeffry Pfeffer, president of Accord Equipment Finance, said.

The largest percentage of respondents (58%) have 0.01-4.99% of dollars outstanding currently under payment deferral in their owned portfolio.

“The next three to six months look promising from a transportation perspective. The future will be driven more by legislation pertaining to the reduction of greenhouse gases and electric vehicles. There will always be a need for equipment finance solutions. What that will look like three-plus years from now is anyone’s guess.” Jim DeFrank, EVP and chief operating officer of Isuzu Finance of America, said.

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