Capital Markets

Equipment Leasing: No News Is Good News

While the Greek debt crisis may have spooked potential machinery buyers, forecasts of cheap capital may have made them picky.
David KatzJuly 1, 2010

Has the European debt crisis really taken the steam out of the U.S. economy, or is the trouble abroad a blip on the path to recovery? One key indicator of growth, commercial-equipment leasing, is equivocal on the matter, to say the least.

While the most recent figures released by the Equipment Leasing and Finance Association reveal that new business volume rose in May by 5% compared with May 2009, they also show that such volume dropped by 6% — from $4.7 billion to $4.4 billion — in comparison with April 2010. May, of course, was when the debt crisis blossomed in Greece and began to surface in other European nations.

For their part, equipment financiers are content to attribute the May swoon to transitory noise in the markets. While corporate and individual consumers have “a lot more confidence that the economy’s recovering” than they did a year ago, says Ed Foley, executive vice president of Caterpillar Financial Services Corp., “you’re going to see month-to-month spottiness in terms of new business [because] customers’ confidence is still fragile.”

These days even good news can have a dampening effect on corporate investment in capital equipment. On April 28, when the Federal Reserve announced it would keep the target interest-rate range for borrowing federal funds at 0% to 0.25%, it forecast “exceptionally low levels of the federal funds rate for an extended period.” That suggests that companies in the market to borrow money or sign a lease to buy new equipment will enjoy a lengthy period of low-cost financing. But it also means that companies will have a diminished sense of urgency to replace or add equipment, according to Russell Nelson, president of Farm Credit Leasing Services Corp.

In May “people just took a pause to weigh all the factors; all the forces in the economy,” says Nelson. Potential purchasers can take a month or two to decide whether or not to buy. If deep economic uncertainty persists, they’re likely to decide to “hold on to their cash and keep themselves as liquid as they can,” he adds.

To be fair, tightening of lending standards by banks and independent equipment-leasing companies might have something to do with the recent dip in new business. Nelson notes that the farm-equipment finance company’s approval process for loans and leases for longstanding customers hasn’t changed in the past 18 months. The company has, however, been spending a lot more time evaluating new credits and paying close attention to their collateral and liquidity, he says.

At Caterpillar Financial, it’s the customers that have changed, not the standards, according to Foley. While the company’s lending strictures have been fairly constant for 20 years, the damage done to corporate balance sheets by the recession has made “it more difficult to get a customer over the approval line,” he adds.

The best indicator of future demand for equipment financing is the current state of borrowers’ businesses, Foley says. Potential lessees or borrowers must “be comfortable that they’ve got enough work on hand to pay for their existing equipment before they take the step to buy new equipment,” he says, noting that customers will first exhaust the alternatives of using (and repairing) their existing equipment, renting equipment short term, or buying some of it used.

One good sign is that prices are going up for some kinds of used equipment, the Caterpillar lending executive says. Another, Foley adds, is that the company’s customers are putting more hours on their machines and more repair into them, “which means they’re working, and thus [clients are becoming] able to pay more promptly.”

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