The Economy

Lenders Have Ample Liquidity to Fund Capex: ELFA

Financiers are chomping at the bit to fund capital equipment purchases, but borrowers and lessees are not cooperating.
Vincent RyanMarch 22, 2013

On a pure capital-availability basis, it might be the right time to finance a big capital-equipment expenditure.

New loans and leases to finance equipment buys fell 6% in February to $4.7 billion, the slowest monthly total in two years, according to an index from the Equipment Leasing and Finance Assn. (ELFA). The Monthly Leasing and Finance Index (MLFI-25), scheduled for official release on Monday, also shows that February’s dollar volume fell 20% from January, usually one of the slowest months for originations.

“Creditworthy borrowers have ample access to funding, and there is a ton of liquidity in this sector,” says Rick Remiker, executive vice president and group head of specialty banking at Huntington National Bank.

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ELFA executives say the cause is not the lack of loan or lease availability but hesitation on the part of CFOs to pull the trigger on capital expenditures. “I think that we are in an environment where [volume] is going to be a little bit up and a little bit down,” says Remiker, who is also chairman of the ELFA. That will continue “until we see clarity in the economy and from Washington,” he adds. A CFO gets to the decision point on buying equipment, Remiker explains, and “then there is something in Washington, Europe, or — this week ­— Cyprus, and the CFO says he is going to wait.”

Dampened activity was expected last month, says William Sutton, the ELFA’s president and CEO. “Our economic outlook said we would have a sluggish first half of the year and then a better second half,” he says. “Hopefully, we will pick up steam.”

Equipment-finance firms reported high credit-approval rates, 77.4%, in February, according to the ELFA. In addition, 53% of surveyed lenders and lessors said they put more transactions through the credit-approval process last month.

Independents, captives, and financial institutions have plenty of reasons for a renewed appetite for these loans, says Remiker.

For banks, which make up 28% of the ELFA’s membership, the attraction is that an equipment finance loan is a “fully funded asset,” he says. “All the money goes out the door.” That’s in contrast to commercial lines of credit. LOCs are committed money on banks’ balance sheets but largely remain untapped by corporations — and thus the banks earn interest only on the money being used by the borrower.

As a class, equipment loans can also perform better than commercial and industrial loans because of the assets they finance. “The last thing the company is going to do is stop paying on equipment that is producing revenue or saving them money,” Remiker says.

Equipment-loan portfolios are also performing exceedingly well, with delinquent loans (past due 30 days or more) at only 2%, according to the MLFI-25 index, and charge-offs reaching historic lows at 0.4%.

The problem loans of 2008 to 2010 have been “flushed through the system,” Remiker points out.

The 25 companies that make up the MLFI index represent a cross-section of equipment lenders and lessors, a market that funds about $725 billion in capital purchases yearly, says the ELFA. Independent finance companies constitute half of the ELFA’s membership, followed by banks (28%) and captive financing arms (18%).