During the bubble that occurred in 2021, when asset values – especially for used trucks of any kind – hit record highs, buyers flooded the secondary market – keeping inventories low and values high. Aided by disrupted supply chains, pandemic-related liquidity and low interest rates, the market soared.
The environment in 2023 is decidedly different. Although experts’ opinions about the likelihood of a recession in 2023 appear to be moderating, supply chain issues have largely been resolved and a series of interest rate hikes to fight inflation have made money tighter and more expensive, while driving down activity in key sectors like transportation and home building.
The result? According to this December article from Freightwaves titled, "'Once-in-a-lifetime pricing boom' in used trucks reverses course,” used truck prices are “trending toward normalcy.” Quoted in the article, Chris Visser, J.D. Power Valuation Services Senior Analyst and Product Manager, said “It’s safe to say there will be many truck owners underwater on their loans in 2023. Many will face repossession.”
Though most acute in the trucking and transportation industries, the same dynamics that are depressing asset values are at play in other sectors exposed to the impacts of inflation, higher interest rates and slower growth. For many, year-over-year portfolio performance is already showing signs of poorer performance.
Reducing Default Risk in a Softening Market
There is nothing lenders and lease finance companies can do to defy these macroeconomic trends, but there are measures they can take to help manage the increased risks in their loan/lease portfolios. For many, however, these activities fall outside internal core competencies and may require the assistance of expert outsource partners.
- Know the status of collateralized equipment – Even in trucking, newer, lower-mileage vehicle valuations in good condition are holding up relatively well. This is true across sectors where asset quality helps ensure lifetime value and the probability of expected loan/lease performance. That’s why lenders should focus on the whereabouts and condition of assets by inspecting equipment more diligently.
- Understand customers’ total asset finance exposure – Lurking in many loan/lease portfolios are customers who are experiencing financial distress due to high balances across multiple institutions. Databases and on-the-ground intelligence gathering help make it possible to identify and deal with increasingly at-risk customers before the need for repossession becomes irreversible.
- Focus on customer account management – Lenders should pay closer-than-usual attention to borrowers and the tells that might indicate an increased risk of default. Here, seasoned collections talent can help by identifying warning signals and the experience to walk customers through what is often a very difficult and embarrassing set of circumstances. Especially now, it’s important to recognize that any customer can sometimes find themselves in unfortunate circumstances. The more a lender can do to demonstrate good will, the better loan performance will be.
As the pandemic-related euphoria that drove record loan portfolio performance gives way to a slower, more historically ordinary set of financial realities, many lenders and lease finance companies are finding that their collection capabilities have weakened. Driven in part by easy access to capital and high asset valuations, the need for collections expertise diminished. Unfortunately, however, those days are over. Today, the collections “muscle” they may have lost is now a key operating imperative.