Wong: The biggest change we’ve seen, and continue to see, is the demand for terms to be lengthened. As an example, police cars and ambulances have historically used three to five year financing terms; over the past year we’ve seen an abundance of requests for seven years. Energy Savings Projects have historically been 10-15 years. Now it seems like every other deal we see is a request for 20 year financing. I do believe the recession plays a part in this as lengthening the terms lowers the annual outlay for the municipalities. Likewise, the municipality may be able to get more of a project completed or add additional items to the financing by lengthening the term, while keeping the payments the same.
In addition to tenor, the biggest change in this segment over the past ten years has been price compression. Historically, a lender or investor in this segment got a premium over the comparable term and rated general obligation (G.O.) bond. This was because of the perceived risk for non-appropriation that is inherent in most municipal leases. In the past ten years, we’ve seen lease deals go off well below the comparable term G.O.’s. It’s counterintuitive, but that’s what demand for this type of paper has created.
Equipment Finance Advisor: Overall, which equipment sectors have you seen to be most active and which do you anticipate to be most active in the coming quarters?
Wong: The largest equipment sector by dollar amount financed would be the Performance Contracting segment. I would say that would be true for the past ten years, and it continues to be very active today. I believe the sheer number of projects being financed declined significantly over the past 18 months. Even with what is being requested, the dollar amount dwarfs every other sector.
Another sector with very active demand, both in dollars and number of deals, would be the technology segment. Networking infrastructure, PC’s and laptops, data storage, etc. have been very active for quite some time now.
We anticipate both of these sectors to be very active for the remainder of the year and into 2016.
Equipment Finance Advisor: Are municipalities still looking to retro-fit their municipal lighting systems to LED systems and their specialty vehicle fleets to green energy vehicles?
Wong: Lighting systems are very much part of the Performance Contracting projects I mentioned previously. Lighting is usually the quickest payback item on most projects and are a key component of most projects we are asked to finance. Street lighting project conversions to LED seem to be picking up traction, but from a financing perspective, aren’t quite as commonplace as the building lighting projects we’ve done for decades.
We saw a big uptick in requests for compressed natural gas conversions a couple of years ago, but that sector seems to have cooled down in recent years.
About Dan Wong: Dan Wong is senior vice president for PNC Equipment Finance with responsibility for leasing activity within all of PNC’s footprint territories which includes the commercial, middle-market and corporate finance segments. Additionally, he is responsible for leasing activity with PNC’s national businesses, including Healthcare, Business Credit, Municipal Finance and Indirect Originations.
PNC Equipment Finance is consistently ranked as one of the top 5 bank owned leasing companies in the equipment leasing segment with over $12 billion under management.