Did you hear the one about the Great Recession putting the nail in the lease syndication coffin? The lack of liquidity in 2009 drove most equipment finance organizations toward an exclusive franchise focus, abandoning all activities considered non-core. Precious capital was preserved for “customers” as defined by each lessor: vendor partners, bank trade area and/or direct originations. The purchase of syndicated finance transactions was considered non-strategic and therefore red-lined. From 2008 to 2009, reported bought deals dropped by about half.  Leasing staff involved in buy and sell activities were redeployed, or victims of lay-off. The 2009 Chicago ELFA funding exhibition hall echoed with just two dozen booth exhibitors – a dramatic drop from the hundred or so in its heyday. Was lease syndication dying? Was it dead?

Fast forward five years. Guess what? The lease placement funeral didn’t happen. It seems that someone took the nails out of the capital markets coffin and syndication activity within equipment finance is alive and well. Syndication buy activities have recovered remarkably – exceeding that of pre-2008 levels. The early registration list of the 2014 ELFA Chicago funding forum has pushed past 500 registered attendees. What in the world prompted the funding phoenix to arise from the ashes of the capital markets crash?

• Lessors’ need to generate volume: after such devastating reversals in 2008, the surviving lessors needed to generate positive performance as rapidly as possible. Syndicating transactions is an efficient generator of both significant volume and fee income.
• Credit exposure management prevails: disciplined to manage overall risk, equipment finance organizations are more diligent than ever in managing individual outstandings to each company. To maintain capacity for future immediate needs for existing clients, syndication of select current booked schedules empowers lessors to rapidly accommodate new financing requests before a customer is tempted to entertain other competitors.
• Syndication fee income augments earnings: with competitive transaction pricing, gain on sale from syndication income can help improve current period income performance.
• Large transactions necessitate participation: larger equipment finance facilities can often exceed the preferred on book retention appetite of originators – even those who tend to book and hold most transactions. Intentional participations, both those underwritten and placed or anchored and placed, become a lessor’s solution to manage customer needs.
• Single investor lease participation is a logical successor to the sunset of the leverage lease: for many years, leveraged leasing was the equipment financing product of choice for the largest transactions. It provided the ability to monetize tax benefits and trade them between inefficient and efficient users, resulting in attractive yields within a generally understood standard structure. In turn, that meant a fluid marketplace, generating economies of scale that created an ideal product powerhouse.  As important, it also allowed a lessor to manage ultimate credit exposure. Exposure is now managed through a lease syndicate or master trust to enable lease schedule placement or participation of a portion of a particular asset.
• Securitization is now on book – driving syndication popularity for balance sheet hygiene: securitization, while a popular method to monetize earning streams, is now essentially an on-book financing vehicle and thus does not meet the criteria to allow sale treatment of the assets securitized. Syndications, however, does provide off-book financing, allowing sales recognition for manufacturers and OEMs. Given the pressure to produce revenue, lease syndication is attractive because it results in more current-period income. It is also the placement tool of choice for banks and independent leasing firms – as well as captives - who are sensitive to their overall balance sheet appearance and on book leverage.

Syndication success is a matter of supply and demand. The above offers a compelling case for the sell-side of transactions. But now what about the buy-side?

• Liquidity came roaring back: Most financial institutions are now faced with an abundant supply of capital that needs to be deployed.
• Core originations may not fully satisfy funding objectives:   New equipment finance volume generated from within the equipment finance franchise (be that through direct, bank referral or vendor channels) are generally inadequate to satisfy newly set growth targets.
• Stretch goals have driven many lessors to re-boot indirect third party origination platforms: the drive to satisfy volume requirements have caused many equipment finance organizations to embrace intermediary funding platforms and (re-)declare them as strategic.
• Quid pro quo creates a two-way street: The symbiotic relationship between otherwise competing lessors has been renewed; buying from and selling to other leasing companies is a true win-win situation. The cross sell of transactions often offers the comfort that the customer relationship of each seller will be honored by the buyer. And when credit limits are approached, there are go-to sources to place transactions to manage exposure.

While all of these factors have contributed to the resurgence of syndications, some important market characteristics are different. Specifically, credit parameters are more stringent than pre-2008. This is true for many market segments compared to the requirements prior to the Great Recession, not just equipment finance, since older credit and risk models did not do an effective job of preventing credit losses. In particular, the higher credit quality demanded post-recession by bank owned equipment finance organizations has dictated a narrower band of what is considered an acceptable on book transaction. Customers outside that band become candidates for syndication to accommodate their needs. Although reciprocity has always been a factor in syndication buy/sell relationships, as noted earlier, the pressure to have acceptable levels of buying and selling on each side is higher than ever. Many syndications sources are reaching capacity and, given the focus on risk management and mitigation, must closely manage their portfolio exposures. Without reciprocity, their ability to maintain long-term volume and profitability targets would be severely impacted. Since virtually all of the major buy/sell entities are in the same situation, enforcement of this requirement plays a much larger role than previously in selecting a suitable partner.

Despite its bleak outlook during the great recession, equipment finance syndications has come roaring back to remain an important part of the equipment financing industry for the foreseeable future. As the available syndicators approach capacity, there is additional opportunity for new (or return) market entrants, and we should expect to see an increase in the number of lessors taking advantage of this product.