Participants in the commercial equipment leasing and finance industry are in the risk and reward business. Over the past few years, a question has often been asked:
Is the industry being rewarded for the risk it is assuming?
Portfolios have performed exceptionally well over the last five to seven years. Even high-risk portfolios have posted exceptionally strong results. But what happens when the results are normalized? When portfolios return to historical performance levels? When will the normalization occur?
There are signs that portfolio performances are starting to normalize. "A" credits are performing better than "C" credits.
Sub-prime transactions are paying slowly and are being charged-off at a higher frequency than 12 or 18 months ago. Newer participants, newer investors, and new money are somewhat surprised at the even modest increases in delinquencies and/or charge-offs, while industry veterans are perplexed that much of this normalization didn't occur three to five years earlier.
Strong management teams and organizations:
- Are well prepared to react to negative impacts in the portfolio. They have the systems and expertise to properly and quickly address delinquencies, repossessions, and remarketing of equipment; and are minimizing any charge-offs.
- Have sales teams and credit departments that are working diligently to minimize risk and maximize profits on the front end of every transaction.
- Are focused on structuring transactions to protect their investments. They are not necessarily following new trends, but are using proven historical knowledge to make prudent decisions.
- Remember the #1 lesson learned from the 2008 downturn - the equipment (collateral) matters.
- Are using predictive analytics to avoid future challenges and capitalize on future opportunities.
- Are going deep, rather than wide. They are focused on what they know best. They are cautious when entering uncharted waters.
- Are long-term players and value quality over quantity.
I have witnessed strong sales and credit professionals working together to structure and price transactions with an emphasis on value, security, and profitability. Professionals in the commercial equipment leasing and finance industry understand that every funding is an long-term (three to five year) investment which assumes risk based upon future economic conditions and outcomes. They understand that even minor variations in returns (a 15 or 50 basis points increase or decrease in averaged weighted yields) can determine future profits or future losses.
Wheeler Business Consulting works with management teams to develop their human capital, to identify and strengthen weak links within the organization, and to improve overall efficiencies.
Wheeler Business Consulting works with banks, independents, captives, origination companies, and investors in the equipment leasing and finance arena. We provide training, strategic planning, and acquisition services. Scott Wheeler is available to discuss your long-term strategies, to assist your staff to maximize outcomes, and better position your organization in the market.
Scott A. Wheeler CLFP