Last year marked the fourth straight year of recovery for the U.S. equipment leasing industry. A robust U.S. economy led many manufacturers and service companies to continue investing in new equipment, benefiting equipment lease providers. Although economic activity demonstrated relative strength, the U.S. economy shows signs of slowing and equipment leasing companies are reacting. What do these developments portend for companies looking for equipment leases?
A survey conducted by the Independent Equipment Company and the Equipment Leasing and Finance Association (ELFA) revealed that leasing companies are becoming more selective and cautious in making their equipment leasing investments. These companies are pursuing certain types of equipment and industries and shying away from others. Driving these preferences are some of the following concerns: 1) the prospect that our economy is drifting into recession; 2) if the economy slows significantly, residual values for certain types of equipment will erode; 3) continued malaise in the credit markets caused by the sub-prime mortgage meltdown; 4) stagflation; 5) high energy prices; and 6) pressure on certain equipment values caused by a declining dollar and foreign competition.
The survey also revealed the leasing industry's strong preference for seven equipment types:
• Oil/gas/energy
• Aircraft
• Marine/intercoastal equipment
• Medical
• Computers/high-tech
• Rail
• Machine tools
However, the industry seems to be shying away from these equipment types:
• Plastics manufacturing
• Truck/trailer
• Printing
• Automobiles
Shedding even more light on industry leaders' views about future market prospects, ELFA revealed the prognosis of its annual Industry Future Council (IFC) meeting. The IFC is a panel of two-dozen senior executives representing a cross section of the equipment leasing and finance industry. Here are some of their conclusions:
• The industry is in the midst of a correction that began last year. A liquidity crunch set off by the sub-prime mortgage debacle and fears about the state of the economy triggered the correction.
• Going forward, the ability to access funding will critically differentiate lease providers. This development may impact lessees, particularly at the lower end of the credit scale, as they look for new leases at favorable rates and terms.
• The panel noted the continued trend away from pure leasing, toward loan-type equipment financing products. The lack of desire and ability of leasing companies to stomach residual equipment risk may explain this trend.
• Some banks and large independent finance companies must now face the Basel II capital adequacy requirements mandated by federal regulators. These stricter capital requirements may cause certain of these companies to exit the equipment financing market and create new opportunities for smaller unregulated competitors.
Most industry leaders remain optimistic regarding long-term prospects for equipment financing. The industry remains sound, leasing portfolios continue to perform well, and the demand for equipment financing remains strong even in the face of a slowing economy. Yet, like other industries that rely on robust economic activity to thrive, the outlook for equipment leasing depends on U.S. economic performance --- which seems to be sagging.
What impact will the slowing economy, the credit crunch, and the flight of leasing providers away from certain equipment types have on companies shopping for new leases? So far, system liquidity appears sufficient to satisfy the overall demand for equipment leases. Tighter credit and equipment preferences might lead some leasing providers to raise their credit standards and/or rates for certain lease transactions --- particularly those involving trucks, trailers, automobiles, plastic manufacturing and printing. However, lining up new leases in certain segments, like home construction, could prove more difficult.
In other parts of the market, the flight away from certain equipment types presents an opportunity for smaller leasing competitors. While it is possible that less credit-worthy companies may get closed out of some transactions, it is more likely that these firms will still be able to secure leases, but be subject to higher rates and tighter terms. In this regard, like other segments of the commercial finance market, equipment leasing will probably pull back from the frenzy of recent years to a more measured, sustainable pace.
