Resiliency, declining asset values and deferrals were among multiple discussion points in a lively, Monitor-hosted virtual event in early July featuring Alta’s Carl Chrappa. Other participants were Ken Schneider of Great American Insurance, Tony Cracchiolo, of US Bank, Vendor Finance, and Bob Rinaldi of Rinaldi Advisory Services, who moderated the session. Among the take-aways:
- Half of expected deferrals didn’t happen. Many customers had simply requested them as insurance against worst-case scenarios;
- Propensity to lease may strengthen now as lessees seek to preserve cash;
- Assets that can be used for more than one purpose and those classified as essential use are in greater demand than others;
- Stick rates are increasing, but asset values are generally decreasing—as much as 40 percent;
- Standard credit analysis is not valid in today’s environment.
Asked if the current economic downturn is different from others, Chrappa said yes, because the virus is new, which makes responses to it and predictions about it difficult. Chrappa said two to three years could pass before the equipment finance industry again sees new business volume at 2019 levels. Even so, Chrappa observed that a number of used asset classes are still performing well, including autos and trucks, construction equipment, machine tools, and computers. Among negative performers are aviation, marine, rail, oil and gas, steel foundries, furniture, and printing. Schneider voiced optimism about the second half of 2020, saying he expects gradual improvement in new business growth “as long as we don’t have another business shutdown.” Cracchiolo reported seeing new transactions to lease or to maintain contracts already in place while these assets are needed, but he also said he’s seeing fewer upgrade requests.
When asked about the shape of the recession, Chrappa said it is an open “V,” starting at the top on one side and ending at the top on the other side–but not necessarily occurring quickly. The V-shape is illustrated in the following two slides representing data for specific sectors:
Cracchiolo said that one big difference in this recession compared to the Great Recession of 2007-2008 is that asset overcapacity is not now an issue. Just as businesses paused during mandated Covid-19 shutdowns across the country, so, too, did manufacturing. “We don’t have a capital problem, a liquidity shortage or a credit problem,” he said, adding, “The question is: Will our clients have a revenue source?” Looking at rail and barge asset catagories, Chrappa said it may take both several years to recover. He suggested aircraft could take slightly less time; about two years. When asked about used machine tools, Chrappa said the category is faring well because it supports so many types of users, such as auto manufacturers, job shops, repair shops and finishing work. He noted that in 2019 there were some $4.5 billion in new machine-tool sales , but said that 2020 projections have been lowered by about 50 percent.
Panelists also discussed the industry’s big picture as deferrals end in the coming months. Schneider said he believes many lessors will look to do some workouts, but that his company developed repossession insurance during the Great Recession and is already getting calls for it. In closing, panelists advised caution, suggesting that equipment finance companies resist looking backward for answers and instead study individual sectors and businesses to assess their resiliency and risk in the current new environment. Carl Chrappa heads Alta’s Asset Management Practice.
Screen capture from Monitor Live event in July 2020 Post COVID-19: Risk Management & Business Resiliency. Moderator Bob Rinaldi CEO, Rinaldi Advisory Services (bottom left) Featured Guests: Ken Schneider Divisional SVP, Great American Insurance (top left) Carl Chrappa Senior Managing Director – Asset Management Practice Leader, (top right) The Alta Group, LLC Tony Cracchiolo CEO, US Bank Equipment Finance (bottom right)