Phelan: First, we are not seeing spikes in past due loans. As a matter of fact, loans past due are improving. When past due loan statistics are improving, this means businesses are maintaining strong financials and have capacity to borrow in the future. But, as I said, they are being cautious with their resources. If we saw decreases in investment combined with increases in days past due of 15 to 20 BPs per month, we’d be a lot more concerned about a business cycle change. 

The hunker down mentality we are seeing now is similar to what we saw in 2012, but actually much worse because of the greater political uncertainty we face today than in 2012. Following a strong year in 2011, 2012 plodded along until we had some clarity surrounding the election. Then years 2013 through 2015 were strong. So we could be following this same pattern of being on hold and cautious until we see how everything shakes out, and then we may see some clarity when the elections are over and policies on healthcare, taxes and trade are clearer.

It’s important to note that a 2% to 5% investment rate means businesses are not willing to go very far out in risk taking, and this is despite the fact that they demonstrate stronger financial profiles than in past years.

Equipment Finance Advisor: FinTech companies are targeting small businesses at an increasingly rapid rate and many have expanded their offerings to include equipment finance (beyond working capital financing). Can you comment on the impact this form of financing will have on the equipment finance industry long term?

Phelan: The FinTech lenders are learning how thier secured and unsecured loans will perform through a credit cycle and over time. Equipment finance lenders have been through credit cycles and have tested these models through several cycles. So, it seems to me that leasing companies are in many ways ahead of the game in the usage of software to facilitate quick loan and lease approvals.

Fintechs are doing a good job of filling holes in the market. Banks have had to pull back on certain types of lending due to the regulatory environment and someone has to fill those lending gaps. There’s a reshuffling of this market going on and Fintechs can complement the offerings of equipment lessors particularly when there’s a working capital component needed to go along with essential use equipment. When more essential use equipment is added into a business, operating expenses also increase – creating a need for working capital. FinTechs are filling the roles the banks filled by providing working capital. We don’t see Fintech’s as a direct threat today because they are a complement to the equipment finance lenders as a source of operating capital.

Equipment Finance Advisor: Please provide our readers your insights into the CAPEX outlook for the major equipment sectors.

Phelan: Our data clearly indicates CAPEX is down in all sectors – particularly in transportation. Wholesale trade is negative, and agriculture is experiencing a big negative trend and getting worse. Agriculture (-19%) has not stabilized, it hasn’t found its bottom yet, so Ag lenders will likely see more credit losses and higher loan provisions.  The Mining and Quarry (-19%) sectors have stabilized for now but we are hearing about some big losses coming from the oil development companies, and Manufacturing (+3%) is weak at this time. The top performing sectors are Construction (+10%), Retail (+6%), Transportation (+6%) and Waste Services (+6%).  You can see that consumer driven sectors are showing some positive momentum including food/accommodations at (+3.8%).

Equipment Finance Advisor: What is your outlook for default rates for 2016?

Phelan: The outlook is a slight rise in default rates in 2016. We saw them hit the bottom in 2014 at 1.5%, and then picked up a bit in 2015 to 1.6%. We are currently projecting a 1.8% to 1.9% default rate for businesses in 2016. So this is slowly getting back to a more normal risk taking environment. I know higher default rates are not exciting, but they are an indication of a return to a more normal risk/return market. The outlook for credit quality is still above average for the equipment finance industry as a whole, but some sectors will see big jumps in default rates such as Mining (+.9%) and Agriculture (+.6%).