Looking Forward to 2010: The Entrepreneurial Spirit of Leasing Prevails
We have complete faith in the entrepreneurial spirit that is the underpinning of the leasing business; never underestimate the strength and ingenuity of American business. We will overcome these challenges and be even stronger after the storm. All of us see the world through our own eyeshades, here’s the view from Cedar Rapids, Iowa. My objective is to give you our perspective of the finance business as it is today and how we see it evolving over the next twelve months. Change has driven down two tracks; reduced consumer demand and a credit crisis unlike any we have seen in our professional careers. So where do we go from here? Credit Standards Credit guidelines will not loosen up significantly. Why? Funding sources that bought using a FICO based credit model have experienced higher than expected losses, many have exited the market. B credit sources have vanished, leaving only A and C sources. C sources have been able to buy B deals at C pricing. A sources that remain have adjusted credit guidelines to reflect an economy in recession. We have seen our approval percentage improving as brokers adjust to revise credit standards and better quality lessees consider new equipment. Quality credit applications will continue to be at a premium. Vendors tell us that new purchases are being made on a “need” basis as opposed to “want” or “nice-to-have”. If it’s not broken, they’re making do. Pricing We believe borrowing costs and lease pricing will experience upward pressure. This will be the result of three factors: • Increased loss reserves • Less competition • A push toward more acceptable returns In 2007/8, there was a surplus of funding sources competing for the same deals, the result was substandard returns at higher risk. We believe funding sources will be returning to the market provided returns match risk. We are seeing a thaw in the asset-based securitization (ABS) market. TALF is effectively bringing investors back to the bond market but they are not the traditional investors. The investors are being drawn to the enhanced yields of TALF transactions but there are some concerns that liquidity may evaporate without continued government support. However, as more traditional commercial paper investors come back to the market we believe the ABS market will return. Bank lines and conduit facilities are also beginning to open up. Conduit facilities were never intended to be a long term funding mechanism, so when the ABS market imploded this created pressure on bank lines. As a result, we saw more scrutiny and tighter procedures as banks dealt with the unplanned risk of holding this portfolio longer than expected. With the ABS market returning, we have seen some easing of conduit restrictions. We expect to see a gradual return of both markets albeit at higher rates. Portfolio Performance Delinquency and losses have stabilized over the last four months. We think our portfolio delinquency will hover plus or minus 25 basis points of where it is now for the next twelve months. Losses in this economy have been tougher to predict with business closings seemingly coming from nowhere—going from never late to out-of-business in a single phone call. We do not see delinquency returning to ’07 rates for some time. Based on these observations, we see some interesting opportunities in the market for those positioned to take advantage. Grow Market Share The vendor market holds significant opportunity because so many well known national lessors have experienced funding problems or portfolio concerns that have caused them to rethink their markets. Large companies tend to make sweeping decisions about market direction. When they exit a business many viable vendors are left behind. Successful broker lessors are exploiting niche expertise to find new vendor opportunities. Vendors tell us: • Equipment purchases will be needs based, that is, customers are buying when it’s broken • Customer are extremely cost sensitive • Customers are rate sensitive • When they do buy, customers need the equipment quickly As a result, we believe vendors will be attracted to financial partners that can provide: • Swift credit decisions • Attractive rates • Minimum “red tape” • Ability to finance a broader range of credits At GreatAmerica we are focusing on our core strengths and partnering with broker lessors that are doing the same by reducing our number of broker relationships. This allows us to concentrate our resources on fewer partners that share our vision. Broker lessors that focus on vendor value-add, in place of low rate, will tend to build long-term relationships. Stability The good news is that we see the playing field leveling this year for brokers and funding sources. There is a long list of funding sources that have adjusted credit and pricing or decided to exit the broker market. There may be further loss of funding sources to the broker channel as these companies work to secure their bank lines. Funding has been a very competitive part of the market in recent years and brokers have been adept at taking advantage of them. Examples include: • Regional Banks. Both in and out of their foot print, these regional banks were interested in acquiring leases. Real estate losses have forced several to refocus lending. • National Banks. Bank failures and mergers have impacted a long list of leasing subsidiaries. • Lessors. The most notable failures have been in the B credit space. Human Resources Recent leasing company closings have resulted in an abundant talent on the street but income expectations may have to be reset. Sales people have been paid at levels that weren’t sustainable under cost structures and profitability suffered as a result. We have seen several new entrants into the broker market as displaced sales people, unable to find a position with a lessor, decide to go out on their own. We expect to see more new brokers enter the market. Successful companies are also spending time fine tuning their talent selection process. Examples include multi-stage interviews and personality profile testing as a way to make better hires in terms of functional job performance and cultural matches. It can be a real problem to hire a high performing sales person that creates undue stress on the operations staff. Corporate Culture The culture of the company sets the tone for dealing with success and overcoming challenging times. We believe companies that spend their time focused on the outside world will be at the mercy of reacting to changes that may be out of their control. Companies that develop a culture focused on excellence will be positioned to take advantage of dramatic changes in the market. We see corporate goals being adjusted to the new realities but excellent companies are not settling for mediocre performance. In closing, we anticipate 2010 being a year of opportunity as the recession moderates, demand for product improves and the need for creative financing returns. We have complete faith in the entrepreneurial spirit that is the underpinning of the leasing business; never underestimate the strength and ingenuity of American business. We will overcome these challenges and be even stronger after the storm. Republished with permission from the September/October Issue of Newsline, (Vol 1, No. 5, pp. 35-37) a publication of the National Equipment Finance Association
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