Capital Markets

Securitizations Seen Spurring Loans

Renewed investor interest in securities backed by equipment leases might free up banks' ability to lend to corporations.
David KatzSeptember 1, 2010

With new business volume picking up among equipment-leasing companies, these lenders envision a new source of economic hope: the return of asset-backed securitization of leases. If that business returns to any significant extent, bank balance sheets could be freed of sluggish assets. And with that freedom will come a yen to lend to corporations, the reasoning goes.

Last week The Equipment Leasing and Finance Association’s Monthly Leasing and Finance Index, which reports economic activity for the $518 billion equipment-finance sector, showed that overall new business volume for July jumped 17% compared with the same month in 2009. That marked the strongest year-over-year increase in the equipment-leasing business in two years. After 20 straight months of declines, the business has shown positive year-over-year growth in each of the past four months, hitting $5.6 billion in July.

That uptick may be luring yield-starved investors back to equipment-lease securitizations, leasing executives think. In talking with investors, Crit DeMent, chairman and chief executive officer of Leaf Financial Corp., says he’s found that “they like the equipment space because, compared to some other asset classes like credit cards and real estate, we have seemed to come through the recession a bit better.” Leaf has put together three such securitizations this year, he notes.

The current mood of corporate caution in capital spending may also benefit the lease-securitization business. In today’s environment, leasing equipment can seem more appealing to corporate finance executives than buying it. “As we come out of a recession, the percentage of equipment that is financed tends to be higher on a year-over-year average than it is in normal times,” says DeMent. “People tend to hold on to their capital a little bit more than they might have in the past.”

Companies that lease equipment have most to benefit from a rise in such securitizations, which can provide them with a cheaper source of capital than borrowing from banks. “Strong lessors with portfolios that are proven through historical performance in solid, basic, core business will be able to get structured finance or securitizations done,” says Steve Grosso, president and chief operating officer of CoActiv Capital Partners.

That would mark a distinct comeback from the days of the recession, when asset-backed securitization in general got partial blame for the paucity of liquidity on bank balance sheets and the consequent credit crunch. After the ABS market fell to near inactivity in 2009, the federal government’s Term Asset-Backed Securities Loan Facility (TALF) provided backing and a boost to the issuance of asset-backed securitizations.

But TALF stopped lending in March. “Right now, with all the TALF money gone…you’re back to a traditional securitization model,” says Grosso, adding these securities are currently priced to lure back investors. “But it will be a much more focused, limited market than pre-economic turndown.”

Still, even a partial revival of the securitization market could spur bank lending by freeing up banks’ balance sheets, according to DeMent. A non-bank finance company such as Leaf, he explains, generally takes out a warehouse line of credit to temporarily finance a portfolio of leases. “For the market to work properly, you need to every once in a while take finance off the leases that are on the warehouse line and put them into a term securitization,” he says.

Moving leases from bank balance sheets in that manner can free up lending capacity. “The banks feel better about [securitizations] because they don’t feel that these portfolios are going to get stranded on their balance sheets and that there is a secondary market to keep these things moving,” adds DeMent. And that good feeling could translate into more loans for corporations.