In a Monitor webinar series Vince Belcastro, group head of syndications for Element Fleet Management, moderated a lively discussion with panelists John Deane, CEO of The Alta Group; Robert Boyer, president of BB&T Commercial Equipment Capital; Terey Jennings, president of Financial Pacific Leasing; and Tom Ware, president of Tom Ware Advisory Services.
In this May 26 event, they discussed the industry’s re-adjustments, re-analysis and realignments with a second wave of Covid-19 anticipated. April was not a bad month for the executives. The PPP stimulus was helpful, and customers were able to re-negotiate contracts with payment deferrals and modifications. The question is: what happens in July when most 90-day deferments end?
What’s different about this disruption from other sudden downturns is that there are no guideposts; the last pandemic of this nature was in 1918. But looking back to previous downturns, Deane pointed out that major events in recent history have been in 10- 20-year cycles with the stock-market crash hitting the industry sharply while many were attending the ELFA convention in Las Vegas in 1987, followed by what was called the “perfect storm” triggered by the Dotcom Bubble in the latest 90s and now this. The equipment leasing and finance industry recovered strongly from these as well as the more recent “great recession.”
The Perfect Storm was an in-depth study commissioned by the Equipment Leasing and Finance Foundation and completed by The Alta Group. The study analyzed 10 equipment leasing companies and the reasons why they exited the market. The concern at the time was that there were forces making the leasing industry less attractive. In fact, the forces were individual company-centric, and the industry was fine, said Deane in a recent interview.
In the current downturn, everyone has turned off auto-decisioning and a banker noted a 20 percent reduction in applications with a lot of relief requests, especially from businesses in hard-hit areas like New York.
On the West Coast, Jennings said a lot of his customers—mostly small businesses—were affected. Therefore, his company is delving into new and more varied kinds of analysis than is typical. Obviously, most impacted were those companies that had to close due to stay-home orders. Healthcare and dental were hurt too, he said, but auto repair companies are doing okay. There is some variability based on geography but not as much as you would expect, he said. They are looking at many other variables to determine who will have the ability to continue on. Basically, Deane said they are looking at whether the customer has the financial strength and market position to weather the impact from pandemic-driven economic conditions.
Boyer added that his bank is looking at the full business story when making credit decisions because many problems now are not due to operational or financial performance, and the bank wants to maintain those clients only temporarily “limping.”
There was considerable discussion about various vertical markets and the observation that new approvals may be based more on the sector than the credit story. Deane said larger clients are deciding to stop accepting business from certain verticals for strategic reasons and because they just don’t know how bad it’s going to get. “Every recession is different,” he said. For instance, Deane said, “wholesale (or buy-desk) business may not be strategic for some lessors.”
In some cases, lessors are seeking equity to support their balance sheets while other are starting to look at selling, he added
The panelists agreed with Deane, who said in answer to many questions that there is not a one-case-fits-all experience in the Covid-19 business environment. However, he said many of Alta’s clients are looking at remodeling business structures, for example, to provide financing for managed services. This is based on the fact that captives are seeing more than 25 percent of business coming from service related activities. (See Diane Croessmann’s article: Pandemic Planning: Muddy Waters or New Waves for Equipment Leasing.)
Ware, who said he has carefully studied Covid-19 stats, remarked if you remove NY and NJ numbers from the equation, US cases were up six percent in late May. It was still spreading at the time of this blog post. In another webinar, Ware said he attended with 1,000 executives in real estate, they predicted the recovery would be a V-, W-, or L- shaped phenomenon. The Monitor asked a similar question of the 397 attendees and they voted on the shape of the economy with most saying it would be U- or W- shaped.
On a positive note, Deane said many clients report there are better spreads; the margins are up because the base cost of funds is down. And, the panelists agreed that when a vaccine becomes available, business will be back strong. Meanwhile, they said that while they anticipate elevated charge-offs this year, they are re-balancing risk-reward equations and remembering that their job requires taking some managed risk.
Source: Monitor Webinar and additional commentary from John C. Deane, CEO of The Alta Group.