Capital Markets

Lenders: Low Demand Killing Equipment Financing

Tightfistedness isn't the cause of the downturn in leasing activity, according to equipment-financing executives. It's the economy, stupid.
David KatzNovember 2, 2009

The steep falloff in new equipment-lease deals stems from a lack of customer demand and not from tight underwriting, according to most respondents to a survey of leasing companies.

Almost 80% of the participants in a survey of a cross-section of 25 equipment leasing and financing companies that saw declines in business volume in September “said that declining customer demand and not [tightened] credit underwriting standards or spreads were the number-one reason” for the drop-off, Ralph Petta, interim president of the Equipment Leasing and Finance Assn., said in a conference call late last week.

The volume of new business for the companies surveyed declined by 31% in September 2009 from the same period in 2008. At the same time, the companies reported that month-to-month new business volume jumped 27% from $3.7 billion to $4.7 billion from August 2009 to September 2009. (The monthly leasing and finance index is a compilation of data from the ELFA members that includes major “captive” finance organizations such as Caterpillar Financial Services Corp., banks with leasing operations like Bank of America, and independent finance outfits like CIT.)

In response to a question from a participant in the call, however, Petta acknowledged that the boost in business volume between August and September 2009 stems from a normal seasonal upturn, rather than a boost in the economy.

Other findings revealed that conditions in the leasing business were continuing to deteriorate. Portfolio quality — meaning how long lessees take to pay their bills — is “not improving,” said Petta. In September, in fact, the companies reported that 5.6% of their receivables weren’t paid in more than 30 days; that figure was 5% in August of this year. Yet although the September receivables figure was the highest since at least January 2008, there were two outlier companies with extraordinarily high receivables percentages that may have skewed the numbers, Petta noted.

Similarly, the lessors turned in a less-than-terrific performance in terms of losses, according to Petta. As a percent of net receivables, losses rose from 2.05% to 3.01% between August and September 2009. Addressing the September percentage in comparison to the percentage reported for the same month in 2008, 1.1%, he said it’s “a huge spike in average losses reported by the 25 companies on a year-over-year basis.”

Layoffs are another sign of the times at equipment-leasing outfits. The total number of employees at the companies stood at a little over 10,000 as of September 2009, down from 10,400 in the prior month and down from 11,000 in September 2008. The companies are “still shedding employees, looking to cut costs,” according to Petta.

Two leasing-industry executives were at pains to show that the downturn was having a different impact on different sectors of their businesses. One was Tony Golobic, chairman and chief executive officer of GreatAmerica Leasing Corp., which he called “a small-ticket company that services office equipment and telecom segments.” Although those industries as a whole have been hit hard by the downturn, the actual experience of dealers breaks down equally among those whose business has increased, decreased, or remained flat, he said.

GreatAmerica is up about 12% in new business for the current fiscal year, according to Golobic. The finance company’s fiscal year ends in May. At the same time, its income is down 20% “due to increased credit losses, which have doubled in the last two years,” he said. Delinquencies have been showing a steady decline since a February high of 2.3%, to 1.4% in September.

Nevertheless, said Golobic, “the credit markets have substantially improved over the last three months. Where[as] three months ago I would say things are very, very guarded, I would say that today the credit markets are starting to open up.”

Robert Stowers, a vice president and managing director of Altec Capital Services, a “captive” finance company associated with manufacturer Altec Inc., noted that some of the industries his company provides equipment-leasing services for are doing better than others. In the electric-utility market it serves, demand is currently stable, and Stowers foresees considerable growth in 2010 and beyond.

That’s because $3.4 billion in federal government stimulus money is going to about 100 utilities as part of the revamping the nation’s electrical grid, called the “smart grid” effort. Stowers hopes that at least a small part of the money will go for the kind of equipment his company provides leasing for. He also thinks the telecom side of Altec Capital’s business will get the usual fourth-quarter boost it tends to get when companies start ordering trucks and other equipment.

On the other hand, Stowers said, “it has been a trying 18 months in other segments that we participate in,” such as construction and transportation. “The supply is so big that no one is paying market prices for [those] types of equipment,” he added.

The 26 companies who participate in the ELFA index (one company acts as an alternate, while 25 are surveyed) include ADP Credit Corp.; Bank of America; Bank of the West; Canon Financial Services; Caterpillar Financial Services Corp.; CIT; De Lage Landen Financial Services; and Dell Financial Services.

The index also includes Fifth Third Bank; First American Equipment Finance; GreatAmerica; Hitachi Credit America; HP Financial Services; John Deere Credit Corp.; Key Equipment Finance; and Marlin Leasing Corp.

The others are National City Commercial Corp.; RBS Asset Finance; Regions Equipment Finance; Siemens Financial Services; Susquehanna Commercial Finance; US Bancorp; Tygris Vendor Finance; Verizon Capital Corp.; Volvo Financial Services; and Wells Fargo Equipment Finance.