The U.S. equipment finance industry is navigating uncharted waters with the coronavirus COVID-19 pandemic. After speaking with clients and providing advice for dealing with this disruptive issue, we realize executives are looking for reliable insights at this time, so our consultants have weighed in with some initial observations and their perspectives on the industry impacts.
Initial Impacts
COVID-19 creates a widespread credit event for the industry where significant portfolio restructurings will now be the norm. The depth and breadth of this remains to be seen and will depend largely on each portfolio’s composition of asset types, but for many companies it is realistic to anticipate that 25 percent to 30 percent of portfolios will require restructuring. Sectors that are being hit hard include transportation, healthcare, energy and hospitality/entertainment. The regulatory agencies have already issued guidelines to enable the banks to work with impacted, but otherwise current, borrowers on short-term modifications in response to COVID-19.
Some people are trying to compare what is happening today to the “Great Recession.” Some of the best practices learned will be helpful for pivoting operations and moving forward but comparisons between the two events fall short. There are human health concerns and social distancing as differentiators. Equipment finance companies are dealing with COVID-19 not only from a business standpoint but also a personal one, which is why many are still in “battle station” mode. On a positive note, there remains good availability of funds right now compared with the onset of the Great Recession, and some equipment finance companies are proving to be innovators as they step in to provide funding in the healthcare sector, including support to labs creating testing kits.
In fact, healthcare manufacturers are in overdrive. Medical manufacturers whose products are in high demand are focused on deploying excess inventory where needed. In some cases, short-term financing is being requested in anticipation of the shorter-term nature of the demand. In many other cases, where speed is of the essence and where available, they are paying cash for equipment. Healthcare providers, however, are at risk as they still have to a pay for equipment that may be under-utilized in the short-term due to forced business closures and stay-at-home orders. Hospitals and special purpose providers (for example, imaging centers with MRI) remain busy but providers whose services are considered more discretionary, such as routine dental and eye care, will be disrupted at least in the short term.
We are recommending that all captives, not just those in the healthcare sector, speak with their manufacturer parents to understand if there will be equipment shortages or pricing changes resulting from COVID-19. Managers of vendor programs will also need to have these conversations and re-evaluate.
COVID-19 will be the first market test for fintechs as most have not yet weathered a credit cycle. Fintechs focused on SMB lending will certainly experience increased delinquency although many of the largest had already tightened credit in anticipation of a recession. Those fintechs with bank partnerships may fare better depending on how the two work together to get through the pandemic. Funding line restrictions may play a significant part in determining ability to weather the pandemic and will likely create consolidation opportunities.
Fintechs are proactively looking towards how their technology can assist in the crisis, and as a matter of fact more than 50 have offered their technology or services on a free or discounted basis to financial institutions. There are some fintech models experiencing increased demand during the crisis; predictably, early wage access firms are seeing the largest surge, but they are not alone. We know of at least two fintechs – one with an equipment sharing platform and the other an “as-a-service” subscription model – that are poised for growth due to COVID-19 impacts.
Mergers and acquisitions (M&As) are being delayed. Interested parties have too many distractions to aggressively pursue opportunities at this time, and both sellers and buyers are facing diminished multiples. M&A opportunities will exist in a post-COVID-19 environment for portfolios with high-quality assets and a proven management team.
From an asset management perspective, values for all major equipment are down, from machine tools to railcars to trucks and trailers, and more; many are down 15 percent to 30 percent. More specifically, great pain is being felt in plunging values for the marine, oil-patch, mining, airline, and railcar & locomotive sectors. There is not one sector that has been unaffected.
Short Term
In the short term, companies that are nimbler and can adjust more quickly to new challenges will succeed. Equipment finance businesses that made shifts to operate in the cloud or operate with some automation will have a distinct advantage, as will organizations that are already established to work remotely.
The challenges of remote work are far more intricate than simply providing a laptop. Security and access rights need to be developed for users outside the corporate infrastructure. The decision on whether to allow non-branded equipment by users not traditionally expected to operate remotely can have serious security consequences. Cloud-delivered applications make this somewhat easier.
Electronic approval processes supported by Business Rules Engines (BRE) need to replace paper signoffs. Many CRM and ERP platforms have this type of functionality built in, but it is often not deployed because of resistance to the electronic model.
Speaking to several technologists who are dealing with this now, a “one-size-fits-all” approach is not working. The job requirements of a credit analyst versus an asset manager, versus an accountant will drive a wide range of functional and data access requirements. A simple laptop and data line that are used by an executive or sales professional (the typical remote user) are insufficient to support the activities of users who traditionally partner with other groups in person.
Platforms to support video conferencing and document collaboration are a minimum starting point. This is a great opportunity to embrace such technologies.
A lot of equipment is renewed at end of term in a panic environment, whereas the normal propensity is to exchange existing assets for new equipment. In some ways, these auto renewals will be one silver lining. This was the trend in 2008 and it is expected again. Equipment finance companies should factor this into their asset management planning.
One lesson learned in the Great Recession is that it’s important to reach out to customers now about their current and anticipated COVID-19 impacts. Before you call, though, have an objective action plan in place for assisting customers based on your own financial situation, such as whether you are able to postpone certain payments or rewrite deals. Otherwise you will be overwhelmed handling requests for rewrites and extensions on a case-by-case basis.
Goodwill may be gained as equipment finance companies do their part to help business customers recover. Get out in front and try to understand their situation. Don’t wait for them to go to 60- or 90- day delinquency, We saw that with Hurricane Sandy, where some smart small-ticket lessors gave their clients a break if they needed an extension of a month or two. People have long memories when the rug is pulled out from them.
It’s also wise, particularly now, to step up due diligence and cybersecurity efforts, as bad actors tend to exploit situations like the present one. Be especially vigilant about verifying identities, being alert to bogus emails and social media posts, and proceeding with caution once we come through this pandemic. It will be tempting to let down our guards, but we expect more fraudulent solicitations and offers for funding in the aftermath of COVID-19 as well.
Longer Term
With this pandemic in mind you should be planning for the next one and considering emerging equipment types such as robots, cobots and drones that minimize human-to-human contact in manufacturing, healthcare and other sectors. These will be in greater demand. They are valuable technologies in their own right but even more attractive from the perspective of dealing with a pandemic. In fact, deploying easily reprogrammable robotics right now may help automakers to retool their factories to manufacture ventilators for COVID-19 patients.
Offering usage-based flexible payment models – already a trend in the industry – is another way to help businesses through a pandemic. Additionally, many companies will seriously consider what routine processes can be automated to improve efficiency, far more than they have to date.
Beyond the COVID-19, outbreak we anticipate a sizeable increase in originations due to pent up demand. As M&As resume there will also be a greater appreciation for high quality secured portfolios and management teams that come through this.
Equipment finance businesses with strong management and stable portfolios should survive the impacts from COVID-19, but there are questions about the viability of some newer, smaller companies. No matter the size or nature of your business, this is the time to be a leader preparing dynamically for the next step with an eye on the future. Rely upon industry resources you trust and safeguard the health of your teams.
