Study Forecasts Equipment Finance Better Positioned for Another Recession
OCT 23, 2017 - 7:44 am
A new study conducted by the Equipment Leasing & Finance Foundation and PayNet shows industry credit quality and performance remain strong and better than pre-recession levels. The study points toward continued better-than-historic average performance due to the economic outlook, improved underwriting and portfolio management, and better credit quality originations booked since 2010.
“Though intense competition and the length of time since the Great Recession are beginning to affect credit standards, this study shows very clearly that even if a recession were to occur, the equipment finance industry would experience significant lower default and loss rates than those seen in the Great Recession,” said Thomas Ware, PayNet’s senior vice president, an incoming trustee of the Equipment Leasing & Finance Foundation and the new chairman of its research committee. “The weaker borrowers were wiped away by the recession, and both borrowers and lenders have since been more cautious, resulting in much higher portfolio quality today.”
The overall 24-month default rate by year of contract origination shows dramatic improvement from 2007 to 2010 and that improvement continued through 2013 when the default rate bottomed out at 2.2%.
The study reveals there was an increase to 2.5% in 2014, the last year for which there is a full 24 months of performance. Bank-owned lenders exhibited the lowest default rates in all years except 2008 and 2009. Independents showed the lowest default rates in 2008 and 2009. Captives showed significant improvement to the point where they experienced similar default levels as independents for 2011 through 2013, after suffering the highest default rates for the 2005 through 2009 origination vintages. However, captives did show a meaningful increase in default rates to 3.1% in 2014. All three lender types showed increasing default rates in 2014.
“There is a remarkable improvement in the quality of originations from 2005 to 2016,” said William Phelan, president of PayNet. “The results indicate that the equipment finance industry has fully recovered from the impact of the Great Recession, with expanding origination and portfolio volumes.”
The percentage of originations in the low and below average score tiers, based on volume, increased from 12.8% in 2005 to 20.1% in 2008 and then back to 12.4% in 2016, while the percentage in the high and above average score tiers improved dramatically from 25.7% to 43.9% from 2005 to 2016.
PayNet will provide additional insight at the Equipment Leasing and Finance Association’s 56th Annual Convention.
Generally speaking, cross-collateralization is a fairly straightforward concept to people active in commercial finance. The idea is that any collateral pledged to a lender by its customer (referred to in this article as a debtor) secures every single obligation of... read more
As we continue to navigate the COVID-19 pandemic, many smaller equipment finance companies may not have access to the same level of information upon which larger industry players rely. Our guest editors suggested we ask several Monitor 100 companies to... read more