Concerns about rising interest rates now, and a possible recession later, have made ELFA members gloomy about the business climate in 2023. My last Equipment Market Forecast reflected this pessimism in the preference of survey respondents for a limited number of product types, depressed residuals assumptions for almost all equipment categories, and lackluster expectations for future bookings.

Unfortunately, consensus predictions about a recession seem credible. And the pandemic will have lingering supply chain effects until mid-2024 for some manufacturers. Yet recent federal initiatives, on balance, are good news for our industry, and several leasing and financing options could make it easier for ELFA members to do business.

The consensus of opinion is that the second half of 2023 will produce negative GDP (gross domestic product) - and so will the first quarter of 2024, depressing annual GDP to an almost-negligible 0 to 0.5 percent, despite expectations of a brisk second-quarter rebound; that’s a recession.

The double whammy of supply-chain slowdowns and, consequently, depleted inventories is hoisting prices for markets such as automobiles. While recently inspecting ladle carriers in a steel mill, I learned that delivery times for parts from the OEM are about six to 18 months, whereas most parts had been usually in stock. Many of our other equipment customers face a similar situation; they’re postponing financing on new orders because they can’t get their equipment.

The disappointing Net Rising Index (NRI) totals mark the end of a dozen years of positive survey results. This may seem ominous; the residual value falloff is presenting asset managers with equipment re-marketing challenges. Also, in survey volume expectations, the extent to which volume changes from year to year is the deciding factor. While survey participants mostly think volume will fall, this doesn’t distinguish between 5 percent, 10 percent, 20 percent or some other figure. It’s the percentage drop, year to year, that’s significant.

Despite the cautionary assessment of survey participants, the nature of certain markets, new and anticipated developments, and an array of risk-reduction strategies can help our industry prosper going forward.

For starters, consider the strong portfolio preferences for the same equipment types during the past two years, where leasing and credit officials have embraced tried-and-true performers. What those all-stars – e.g., construction, machine tools, and truck/trailers – have in common are very broad secondary markets and plentiful trade data that can support residual value assumptions. For instance, used truck/trailer values may be dropping now, but knowing the size of the decrease and what projected sales should happen gives you a business opportunity. The same is true even with the low-ranking automobile market: Since you know where the sales are going, you also know where to do business.

Then there’s federal legislation, enacted in 2021, that mostly will benefit our members.

Congress finally passed an infrastructure bill, one that pumps $1.75 trillion into road, bridge, utility, freight, rail and other infrastructure projects; it will be a boon to construction that can only strengthen this industry further.

The $52.7-billion CHIPS Act, which funds semi-conductor research, development and production, will impact all equipment markets to some degree, with the greatest implications for hi-tech computers, telecom, automobiles, rail, oil/gas/energy and aircraft. That will help build a lot of wafer fab plants, but there is a caveat. Chip production is expanding so fast that chip prices are falling and an oversupply is accumulating. We already see that semiconductor equipment sales are expected to drop by 15+ percent in 2023.

Climate change is either central to or a big byproduct of every major bill that’s been passed, especially the Inflation Reduction Act. And it’s going to weigh on heavy trucks. A new rule taking effect for model year 2027 heavy trucks will slash nitrogen oxide and particulates emissions by 80 percent and 50 percent, respectively. This will cause new prices to increase by $20,000 to $40,000 each. That will trigger a huge pre-buy of 2025 and 2026 models, thus ballooning inventories of used trucks at that time; used values will fall.

However, Congress may provide some relief. About 40 senators are mulling a bill that would let smaller trucking companies bypass the extra costs for the 2027 models. Another proposal would either eliminate or temporarily waive the 12 percent excise tax on these trucks – again, to help the small truckers.

For the equipment types that posted poor survey scores, it may be safer to do a loan, with additional security, instead of a lease. But several types of leasing arrangements may reduce risk, too.

• Over-the-road equipment lessors could extend a TRAC lease, where if the equipment sells for less than a certain percentage (say, 20 percent of cost) when the lease ends, the lessee pays the difference between the sales price and the cap. If it sells for more than the cap, the lessee gets the upside.
• A First Amendment lease would let someone structure a four-year lease (for example), leasing the item for four years and renewing for 12 months at a fixed amount, so there is no remaining residual when the 60 months are up.
• Creating strong maintenance and return provisions, particularly with semi-desirable assets, makes it more likely that lessors will get their equipment back in good condition. They could even prompt the lessee to buy the item. And, if the lessee neglects the equipment, where costly repairs are necessary, they might buy it anyway to avoid paying for those repairs.
• Offering an upfront security deposit that’s refundable when the lease ends might also entice a lessee to buy the equipment at lease end, because they’ve already, effectively, put a down payment on it.

Apart from leases, consolidations – to assemble more investors to share the load – are happening more frequently. Accordingly, in recent months, we worked on three due-diligence deals for buyers and sellers of banks and leasing companies.