After the turmoil caused by the Silicon Valley Bank and Signature Bank crisis in March last year, many traditional Key Equipment Finance Capital Markets partners reduced or completely halted indirect originations. The funding market had already downshifted at the beginning of 2023 due to rising interest rates. In times of liquidity constraints, the typical response is to retract from secondary markets, prioritizing capital for customers and vendor programs.

As 2024 began, the financial landscape showed improvement compared to the second half of 2023. While a few investors have decided to sit out again this year, most traditional players are open for business and actively seeking funding opportunities.

Bank-owned leasing institutions in the secondary market are focusing heavily on returns, credit quality and credit spread. Many increased their cost of funds or contend with pricing floors, particularly for longer-term deals. Key Equipment Finance’s cost of funds have returned to competitive levels, allowing us to focus on anchoring a portion of large strategic deals for our clients. This strengthens Key's balance sheet while enabling our clients to acquire the assets they need to grow their businesses.

Finding capital for smaller middle-market transactions, particularly for B+ and lower credits, continues to be a challenge. Most investors are still hungry for investment grade business. There is a growing need for investors in the higher yielding transactions in the B+ to CCC+ market. The higher-risk, higher-rate market has always been underserved, especially in the rate environment bank clients expect but it’s starting to open up and we are starting to see new entrants, specifically amongst the non-bank independents. But, while the rise of independent shops is significant, these entities often have intensive underwriting and documentation processes and prefer larger specific types of equipment finance transactions.

Markets to Watch

• Transportation and Trucking: This sector is poised for a big shake-up with freight rates remaining severely depressed since the latter half of 2023 and into 2024. Many lenders are cautious about sourcing directly and indirectly in this space.

• Renewable Energy: This sector holds promise, primarily due to governmental backing. Companies in the equipment finance space are developing strategies to capitalize on the green energy push.

Trends and Challenges

Spreads have tightened in certain asset classes year-over-year. Buyers and investors are looking for returns, and the credit window on many of the deals is narrow. They have a defined credit box and there is not a lot of room for stretching. Investment grade deals are the most sought-after, with buyers and investors adhering strictly to defined credit criteria.

Level Playing Field

Having spent over 33 years in this industry and witnessing countess cycles, I recently observed something new: a playing field that, at times, seems almost level between bank-owned and independent finance companies. The majority of my career was spent in the vendor space, specifically, wholesale vendor, which closely resembles and operates as a traditional capital markets business. Now that I lead Key Equipment Finance Capital Markets, I see banks – that typically had an edge in pricing, deal structuring and responsiveness – becoming more equal with some independents. In my opinion, this may be due to more independent organizations utilizing diverse securitization facilities and the rate environment being less volatile in some credit segments.

In conclusion, while the funding environment is more favorable than in the recent past, challenges remain, particularly for smaller middle-market transactions. However, sectors like renewable energy and the high-yield market offer promising opportunities for investors willing to navigate the complexities, and it will be interesting to see how competition between banks and independents nets out in the future.