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Y ou have deals in the pipeline. Your industry trade association reports new highs in capital expendi-tures. You get to the brink of a good opportunity,

then something happens and there is a delay again. This is the way one attendee at the recent ELFA/IMN Investor Conference described the current environment.

While new business volumes have returned to heights not seen for some four or five years and many lessors are reporting net recoveries, there’s still a cloud of uncertainty. Rick Remiker, president of Huntington Equipment Finance and the chairman of the Equipment Leasing and Finance Association, said visibility is not as clear as it should be, but when you look at the current industry data, “it doesn’t get much better.” Receivables are at “all-time” lows, charge-offs are back to “normal” levels and liquidity is good. Industry banks have outper-formed compared to commercial peers, and asset-backed securities are doing well.

Remiker added: “Something has to give; we’re at peak levels. Why don’t we feel better?”

This was the opening perspective expressed by leaders at the ELFA/IMN Investor Conference in New York City last month.

The Big WorriesIs there reason for concern? The biggest worry noted in many sessions during the full-day conference is about anticipated regulatory burdens. The tremendous cost of compliance was cited, as well as regulations’ effect on competitiveness.

Last year it was reported that much of the new financing demand was fueled by replacement needs, and that continues to be a driver of volume, but there also are some pockets of growth stemming from new activity such as “fracking” for natural gas, which is leading to railcar demand. While talking about capital markets, John Detweiler, CFA, director, Standard & Poor’s Ratings Services, noted there seems to be strong

ELFA/IMN Investor Conference:With Deals in the Pipeline, Why Don’t We Feel Better?BY SUSAN CAROL

The general perspective expressed by industry leaders at this year’s ELFA/IMN Investor Conference was that although new business volumes have returned to levels not seen for several years, there’s still a cloud of uncertainty. Susan Carol interviewed several key participants to uncover the essence of this prevailing sentiment.

“While new business volumes have returned to heights not seen for some four or five years and many lessors are reporting net recoveries, there’s still a cloud of uncertainty. Current industry data suggests ‘it doesn’t get much better’ and we’re at peak levels, so why don’t we feel better?”

— Rick Remiker, President, Huntington Equipment Finance

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debt. There are seven hearings on this subject planned this year.Also on the subject of regulatory burden, it was reported that the new

accounting rules are still imminent with the May-June timeframe. This is now the projected arrival time for new rules from the SEC that will move most operating leases on balance sheets and burden lessees with leases requiring front-loaded interest and expenses. After a comment period a ruling could be made by 2014 with implementation in 2017.

Capital MarketsIn a session on capital markets, one of the questions addressed was how the landscape had changed for leasing companies. Andrea L. Petro, executive vice president, Wells Fargo Capital Finance, said the industry was strengthened through the downturn because it flushed out poor performers, and Chuck Weilamann, senior vice president of DBRS, Inc., said there has been an uptick in term ABS issuers and credit approvals are up to 70%.

Back on the subject of regulation, Thomas Howard, a partner with Chapman and Cutler LLP, said the SEC’s Reg. ABII requires new disclosures on asset-based securitizations, and chief executives must provide the certi-fication. The regulation includes a five-day review period, but that will slow down the offering process. Also mentioned was how Basel III will increase commercial equity (tier 1) ratios from 2% to 4.5% commitments to provide more regulatory capital against bank assets. This will phase in with global standards beginning this year and continuing through 2019.

Matthew Perkins, senior managing director at Guggenheim Securities (a subsidiary of Guggenheim Partners, a company with more than $170 billion in assets under management), reported that the issuance volume of asset-backed notes secured by small- and medium-ticket equipment leases and loans has fully recovered to pre-2008 issuance levels. He also said a number of first-time, specialty finance equipment lease originators have come to market over the past few years (including LEAF, Direct Capital, CCG and Ascentium). Some of the reasons that they have decided to issue asset-backed securities, include:

• Diversifying funding sources

• Increasing funding capability without increasing warehouse capacity

• Demonstrating the liquidity of the equipment leases and loans to their warehouse lenders

• Potentially lowering their all-in cost of funds (versus traditional warehouse lines)

• Potentially increasing the advance rate on their securitized portfolio (versus traditional warehouse lines).

capital investment in Texas and not just from fracking. “What we are seeing is multifaceted. We are seeing a number of commercial finance and fleet lease pools with larger concentra-tions in Texas likely due to a faster growing state economy; this includes fleet leasing and other small ticket categories.”

In looking at securitized pools of leases and loans, he said he observes a real ebb and flow in small business equipment volumes with various segments behaving differently from one another. Prospects for securitization are mixed as well with small-ticket, large-ticket and construction at lower levels, and middle-ticket, agriculture and trucking at moderate levels of activity. The capital markets are also exploring how to assess bundled solutions being created in the technology sector, as well as cloud solutions. Bundled lease payment and service arrangements can introduce performance risk of the service provider.

Detweiler said credit quality is better than they anticipated and even better than some issuers expected. He said ABS remains strong with fleet leases now a big segment of the $14 billion to $15 billion projected for ABS commercial finance this year. S&P is also seeing new entrants (smaller companies with equity capital in the $50 million to $100 million range) and mostly without the presence of monoline insurance companies, as was common prior to the financial crisis. There is a wide range of business models and management track records that are emerging in the current growth phase of the equipment finance sector, Detweiler explained.

“How long can credit quality remain so strong?” Detweiler and other speakers consid-ered this question in reference to the historically low loss rates on recent vintages of equip-ment loans and leases combined with the relative ease of raising capital for growth. They are warning against complacency that could result from weaker underwriting standards, increased competition and rapid growth, all of which ultimately led to significant industry consolidation in the 2008-2009 and 2000-2001 periods.

Acquisition InterestsJoe Nachbin, a director with The Alta Group, a global consulting firm and regular attendee of the conference, said, “There is beginning to be an interest in acquisitions on the private equity side as well as by some banks. The only negative is that there is a lot more money around than there are deals to do. It’s a combination of a replacement economy and there are a lot more people with funding available, so there are more people looking for the deals that are out there … compared to a couple of years ago when there was little funding.”

Regulatory BurdensTamping industry excitement are regulatory burdens anticipated on the near horizon. Stephen Whelan, partner of the law firm Blank Rome, suggested that attendees should take a close look at sections of the Dodd-Frank Wall Street Reform and Consumer Protection Act and consider where they want their association to take a stand. He cited §939, which empowers the SEC to establish a Credit Rating Agency Board (CRAB). CRAB would have the power to select one or more qualified rating agencies to provide an initial credit rating for each category of structured finance products. If the SEC so requires, the selected agency “shall charge an issuer a fee, as determined by the SEC.” This was illuminated in an SEC report issued last December and will be further explained in the regulatory agency’s online public webcast scheduled for May 14 on www.sec.gov.

In §942 the SEC suggests that pool-wide asset data will not be enough for future consid-erations; it says investors should have data that is culled by contract, rather than pools.

The Dodd-Frank regulatory concerns were followed by news that the American Bankruptcy Institute has a commission examining the Bankruptcy Chapter 11 Code, and a study is underway that could affect the rights of lessors, secured lenders and purchasers of distressed

“The issuance volume of asset-backed notes secured by small- and medium-ticket equipment leases and loans has fully recovered to pre-2008 issuance levels. A number of first-time, specialty finance equipment lease originators have come to market over the past few years (including LEAF, Direct Capital, CCG and Ascentium).”

— Matthew Perkins, Senior Managing Director, Guggenheim Securities

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It was observed during this conference by a number of people that the banks did not retreat during the downturn from leasing. In fact, Christopher Donohoe, managing director of Sandler O’Neill & Partners, said there were 20 transactions last year and eight banks are currently buying into the leasing sector.

Larry Marsiello, managing director of Pine Brook Road Partners, said his company likes to work with management teams: “It’s our favorite thing to do.” Pine Brook Road seeks out management teams with strategic thinkers who also have someone on the team who executes well. He said the team should also have a skeptic and a customer advocate and work well together. On his panel others said they look at a company’s geographic and product expertise, as well as vendor relation-ships and broker models. Viewing banks as an exit strategy, they said is not always the way to go.

This panel agreed that the industry is viewed as cyclical and, therefore, the companies that have structures in place to easily re-price and match assets to liabilities as interest rates fluctuate are most attractive.

Other topics discussed during the conference, the 12th consecutive event of its kind, included risk management and growing asset segments.

New RisksOne of the new risks mentioned more than once is that of complacency. If the industry gets too comfortable with all of the growth and the return to “normal” business routines, will it lose disci-pline? Kent Williams, chief operating officer of LeaseDimensions, noted that equipment was the key to the leasing industry’s strength during the downturn. On the other hand, if there are decreases in valuations, Karun Aggarwal, vice president of GenPact, noted risk factors will then increase. He advised reducing this risk by adopting more refined monitoring of metrics.

John Enyart, president of Portfolio Financial Servicing, said that quality servicers are important to investors. He also emphasized the need for investors to develop relationships with the trustees and any back-up servicers to make sure all are “at the table” from the start. Others on his panel agreed, saying information silos can be an issue, especially now with compliance concerns.

The transportation sector remains interesting to investors. Jesse Crews, chief investment officer with Trinity Rail, said the nation is in an “energy renaissance,” and there could be a multi-year upswing in tank cars, the rail carriers of oil and natural gas. The upswing does not include freight cars that carry coal. It was noted that at least half of rail transactions are investment grade, and credit losses are currently near zero. He said while the auto and real estate sectors have not “kicked in,” they are expected to get better. Ratings agencies and investors are also favoring deals involving domestic containers and offshore vessels, smaller in size.

With liquidity strong, markets returning to normal and the equipment leasing industry viewed as sound, is it also a good time for start-ups to gain seed money or sell their companies? Members of the last panel said it could be a good time but that they should “have a reason to exist.” David D’Antonio, managing director of Everbank Commercial, said he sees more opportunity for specialty niche companies than for general leasing companies. The panelists also said they prefer companies with multiple funding facilities, management integrity and strong growth in the “right way.”

Evan Wilkoff, executive vice president-capital markets, Ascentium Capital, said, “They have to understand that the world has changed. Today’s deal involves a company employing half of the staff used in the past and a new technology platform.” m

SUSAN CAROL has been a contributing reporter to the Monitor since 1989. She also manages a full-service public relations firm specializing in equipment leasing and finance, healthcare and technology. For more information, visit www.scapr.com and www.healthindustrywriters.com.

Miles Herman, president and COO, of Leaf Commercial Capital, said the new issuers also include several unnamed medium-sized companies. During the recession only larger companies had this access, he said.

Herman moderated a panel that discussed how investors distin-guish leasing companies and who they consider for investment oppor-tunities. The key is profitability, of course, at least an 11% ROE. James Murray, managing director of Freeman & Co., said market conditions are good right now. He said what they are seeing is that independents are having consultants help lessors present with bank-like qualities. But, it was pointed out that not all leasing companies can fit well in bank environments. Leasing and banking are very different worlds with one highly regulated and the other not nearly as much.

Nachbin said Alta consultants do indeed help lessors in this way to prepare for seeking funding, M&As or securitizations. It makes it easier for the bank representative to make the case with other bankers in the decision chain if the lessor has bank-like qualities, he said.

“The transportation sector remains interesting for investors. The nation is in an ‘energy renaissance’ and there could be a multi-year upswing in tank cars, the rail carriers of oil and natural gas. At least half of rail transactions are investment grade, and credit losses are currently near zero. Rating agencies and investors are also favoring deals involving domestic containers and smaller offshore vessels.”

—Jesse Crews, Chief Investment Officer, Trinity Rail

“Credit quality is better than anticipated and even better than some issuers expected. ABS remains strong with fleet leases now a big segment of the $14 billion to $15 billion projected for ABS commercial finance this year. S&P is also seeing new entrants (smaller companies with equity capital in the $50 million to $100 million range) and mostly without the presence of monoline insurance companies, as was common prior to the financial crisis.”

— John Detweiler, CFA, Director, Standard & Poor’s Ratings Services

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