Succeeding in an Uncertain Funding Environment: New Thinking Needed in 2010
By Bruce Kropschot and Tom Wajnert
It would be a gross understatement to say 2009 was a challenge for most equipment leasing and finance companies. We all know the pain felt by many in the business last year was unprecedented. Fueled by the poor economy, delinquencies increased and equipment demand significantly dropped. Many traditional funding sources were simply not available.
Most leasing companies that rely on the securitization market for funding found it closed, while many banks discontinued lending to leasing companies. Those that have remained in the market are much stingier with their credit approvals and advance rates. Only a few of the largest originators of equipment leases and loans were able to take advantage of the government’s TALF program.
Furthermore, equipment leasing and finance businesses have been mostly unsuccessful in accessing public and private debt, as well as equity markets, during the past year. While independent leasing companies have been hit the hardest by these funding constraints, all sectors of the leasing industry have found the availability of funding to be a challenge.
How can an equipment leasing company improve its odds for funding success in the uncertain financing environment we face in 2010? First, a leasing company must continually assess market conditions and look for new financing opportunities. It is certainly not wise to be overly dependent on any one or two financing sources. We do expect new financing options to become available in 2010, and it would be wise to explore such new funding sources when they are introduced.
Second, a leasing company should look at the concerns of its funding sources and then try to structure its financing arrangements to quell any issues. If non-recourse financing is no longer an option with a financing source, perhaps an ultimate net loss arrangement that provides limited recourse will enable a leasing company to continue to do business with the funding source.
If a funding source is concerned about a leasing company’s high leverage ratio, maybe a sale of part of the portfolio will enable the funding source to conduct additional business. It also may be prudent for a leasing company to consider raising additional equity or subordinated debt in order to reduce its leverage ratio.
While capital market conditions may not be ideal, those companies that are prepared will be in the best position to access the capital markets at the appropriate time.
And finally, now more than ever it is critically important for a leasing company to carefully evaluate its business opportunities. The goal is to determine which types of business it should concentrate in, given the limited availability of funding.
It certainly makes sense to decline marginal or “story” credits if funding sources do not have an appetite for these types of transactions. Also, funding sources are heavily influenced by receivable agings and static pool analyses, so it is very important for leasing companies to concentrate on those credits that pose the least collection risk.
The disruptions in the financial markets over the past year are likely to have a long-term impact on the types and terms of financing available to equipment leasing and finance companies. It is essential then for management to realize there is no such thing today as business as usual and a new norm is emerging.
The bottom line? Management must address the new financing realities in order to assure the continued viability of their companies.
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