Show Me the Money! Independent Lessors — COVID Influenced Funding Challenges

by Ray Ellingsen

Ray Ellingsen is Vice President of Syndication and Operations, Corcentric. He has more than 25 years of experience in the syndication, equipment lease finance and commercial banking industry. At Corcentric he is responsible for growing and maintaining national funding source relationships with complementary valued-added financial institutions and equipment finance organizations, as well as developing customized, customer-focused, life-cycle fleet management financing programs. Prior to joining Corcentric, Ellingsen served as Vice President of National Lease Financing for BankFinancial FSB, where he provided funding to leasing companies and managed syndication relationships.



As we face what appears to be another recession, Corcentric’s Ray Ellingsen explores liquidity life preservers for independent equipment finance companies.

Here we go again! A liquidity pinch, perhaps like no other. Depending on your definition of a recession, we are in, or quickly approaching another. But keep in mind that recessions are actually considered normal business cycles. Our economy has survived 11 between 1945 and the most recent one in 2009.

Get ready for No. 12, coming at us fast and furiously with unprecedented twists and turns, as a result of the COVID-19 pandemic.

The main difference between this recession and others revolves around its type, speed, and magnitude. Without hindsight, it was tough to see this one coming. The trigger was an unsuspected level 12 tsunami versus the typically protracted economic forewarning signals.

Given the provoked suddenness, technological recovery speed, and fiscal stimulus tricks learned from the 2009 recession, some economic pundits predict the economy may rebound relatively quickly once we move on from this self-induced economic coma.

And while the events leading into — and potentially out of — the pandemic crises may be different, the equipment finance industry and independent lessors alike are starting to see some very similar market liquidity constraints that we experienced in past recessions. So, as the economic fallout waters begin to recede, we need to look for liquidity life preservers.

Why the liquidity crunch? When the government shut down certain businesses and implemented in-shelter mandates, companies saw the future business interruption tea leaves (business closures, clients stopping payments, supply chains freezing, etc.). So, they quickly moved to secure future business liquidity sustainability by drawing down all possible revolving credit facilities and created cash reserves to ride out the storm.

Many of the largest U.S. banks reported near immediate maximum loan asset growth. Within a few weeks, banks booked loan growth equal to two-, three- and even four-year projected growth. In layman’s terms, banks loaned out all their money; they have no real incentive, or quite frankly, capacity, to lend more.

That combined with historic immediate loan payment deferral requests and potential defaults by companies and industries negatively affected by COVD — hospitality, travel, transportation, oil, healthcare, etc. — has severely constrained bank capital adequacy – their ability to maintain reserves to protect depositors and sustain bank solvency.

When a bank’s capital adequacy approaches the minimum regulatory ratios, credit/loan limits, credit availability and related market liquidity becomes severely restricted, if available at all. If available, credit pricing increases due to limited supply.

If this sounds daunting, it is, at least in the short term. But we have been through similar circumstances like this before, so we need to employ similar equipment finance funding and leasing fundamentals used in the last go-around.

For starters, independent lessors have seen credit price increases across the board.  And while pricing becomes a moving target as U.S. banks adjust to the cost of fund increases resulting from capital adequacy tightening, pockets of equipment finance credit availability remain.

As with any business, relying on any one channel for support is a limiting strategy. While U.S. bank-owned equipment finance companies represent a predominant source of equipment market finance funding, there are other funding liquidity options to consider.

  • Foreign-owned banks with U.S. presence equipment finance companies: These types of institutions are sizable and do not have the same U.S. regulatory criteria and may have additional liquidity.
  • Insurance companies with equipment finance groups: While these groups are regulated, regulations and asset investment policies differ from that of banks.
  • Finance companies with balance sheet capacity may have availability.
  • Independent lessors: This may be an opportune time to utilize short-term balance sheet investment hold strategies. As always, they just need to employ sound credit underwriting and residual investment policy decisioning.

From the lessee perspective, sound leasing due diligence in these times should entail asking your respective lessor about their funding capabilities. Do they have multiple channel funding access? If so, how do they plan to achieve and sustain your upcoming funding requirements?

We are definitely going to experience unprecedented economic strain, and at times have more questions than answers. But the equipment finance industry is known for its resilience and innovation.

We will come out on the other side, having learned some new tricks to combat and successfully contend with the current business environment and its liquidity pressures.

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Terry Mulreany
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