To understand the current dynamics of municipal leasing activity, Equipment Finance Advisor spoke with Dan Wong, SVP at PNC Equipment Finance. In this Q&A session, Wong dispels some common misconceptions about the municipal leasing sector and notes that activity in this sector has arguably benefitted from the economic downturn.

Equipment Finance Advisor:  Given your 25-years plus experience, what is your general assessment of the municipal leasing marketplace these days? Municipalities that either declared bankruptcy, most notably Detroit and Stockton, CA, or those on the verge of declaring bankruptcy, seemed to have had a chilling effect on municipal leasing activity.

Daniel Wong:  I believe the current municipal leasing marketplace is very healthy. There are a number of firms that have entered the business over the past few years, and the appetite for this paper is very robust. Certainly the defaults on the Harrisburg, Jefferson County, Stockton, and Detroit issues made everyone stop and reassess things. I believe if you go back and analyze why some of these entities declared bankruptcy, you would come to realize that reasons for such were unique and isolated. It’s not something I would say was systemic across the industry. The recession of 2008-2009 certainly put pressure on most municipalities and states, and most definitely factored into the default equation; but the reasons for default were different in each case. We saw a decline in the level of activity for a short period of time, but we’ve seen activity levels come back nicely in the past 18 months.

You might think this is an odd statement, but municipal leasing activity has arguably benefited from the economic downturn. If you look at the number of entities that have come to market with new bond issues, those numbers are flat to down over the last few years. Much of the activity in the muni bond markets has been to refinance existing issues and less so for new needs. Over the past few years, we’ve seen clients come to market to access funding for their capital expenditures via municipal leases and conventional bank financing in lieu of the traditional bond route. The extremely low rate environment, easy access to funding, limited disclosure requirements, and quick turnaround times have contributed to municipalities using conventional bank loans and leases to fund projects that have historically been funded via bonds.

Equipment Finance Advisor:  Is municipal leasing “out of the woods” so to speak?

Wong:  If you go back and review what were some of the root causes of the recent bankruptcies and defaults, you ‘d find things like fraud, fixed costs that were too high for the revenue base in question, inability to raise rates (or decisions not to) for certain revenue bond issues, and poor control over large capital projects. These were all unique situations, and the problem wasn’t what I’d call systemic. In that regard, I don’t believe these defaults were as much of a deterrent or concern to the overall municipal leasing business as one might envision. The overall market slowed and lenders/investors became more selective, but over the past couple of years, we’ve seen activity and market acceptance rival the best of times. 

I don’t know if municipal leasing was ever “in the woods” or if we’re “out of the woods”, but I do believe on a going forward basis, we need to continue to keep an eye on unfunded pension liabilities, as these look to be the predominant factors in the recent downgrades within the municipal sector.  Additionally, state budget pressures and it’s impact down market for public higher education, school districts, social service and cultural type entities within the general not for profit sector should be closely watched.

Equipment Finance Advisor:  What are your expectations for municipal leasing for the rest of the year and early 2016?

Wong:  I believe the market activity will remain relatively strong for the rest of 2015 and early 2016. The appetite for tax exempt paper will remain strong and lenders/investors will accept unusually low spreads and returns for the higher quality issues. There remains an abundance of capital that many institutions want to deploy, and this is one area where we’ve seen extremely aggressive pricing and appetite.

Equipment Finance Advisor:  Again, given your experience in this specialized field, what has changed in the way deals are structured, funds are appropriated or in any other processes for municipal leasing deals in the last eight to ten years? Did the recession play any part in these changes?

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