The year 2011 has been characterized by some in the equipment finance industry as the beginning of the recovery. While not all agree with this description, recently released industry data indicate a positive shift is in the works.
According to the October MLFI-25 report released by the Equipment Leasing and Finance Association, year-to-date new business volume is up 25 percent compared to the same period of 2010. Additionally, the Equipment Leasing & Finance Foundation’s Monthly Confidence Index (MCI-EF) for November 2011 was 57.4, up from the October index reading of 50.7. These data points indicate the industry is finally demonstrating signs of strength in the face of a difficult domestic and global economic environment. Some positive news is also coming from U.S. economists. Today, unlike in 2010, many economists believe the U.S. economy will not experience a double-dip recession.
Yet, most leaders of finance companies and economists agree that the economic environment is anything but stable. Daily stock market swings of 1 – 5 percent have become the norm, and it’s anyone’s guess whether we should feel good about where the economy is heading or be fearful of a global meltdown - especially when considering the events unfolding in Europe. And to make the environment even more difficult to gauge, Washington remains in gridlock as it relates to the many economic issues facing the U.S. economy.
The equipment finance industry, like most commercial finance segments, has experienced difficult times since the beginning of the economic crisis. And while the industry is still in recovery mode and trends are moving toward the positive, the pace and consistently of the recovery is far from what most industry leaders would prefer to see.
Perhaps one positive outcome from this crisis is that the industry not only survived, but in many ways morphed into a more efficient machine. Industry strategists and leaders have learned from their mistakes, identified areas of opportunity, adjusted to new market conditions and regulatory reforms, and have emerged stronger and ready to do battle in a rapidly evolving economic environment.
So, where is the industry heading? Have lessors and lenders learned from their mistakes and made the necessary changes to successfully navigate these tumultuous times in preparation for the unknown?
To gain some perspective on these questions, Equipment Finance Advisor turned to Adam Warner, President of Key Equipment Finance, one of the largest bank leasing companies in the U.S. As president of Key Equipment Finance, Warner has instituted significant changes to the strategic direction of the bank leasing company in response to the changing economic environment.
Focusing on the Client
One major change Warner instituted was the requirement that all members of the Key Equipment Finance leadership team meet with a minimum of one client per quarter. This requirement applies not only to the business development staff, but also to leadership staffers in various departments including operations, legal, underwriting, human resources, strategy and more.
“This is a departure from what had traditionally been a more internally focused organization where liquidity, balance sheet performance and the regulatory environment were the focus,” says Warner. Warner also made a personal commitment in 2009 to spend a substantial portion of his time visiting clients to learn what they are experiencing in their particular markets and how Key Equipment Finance can assist them in achieving their business goals. “In our business and the industry in general, there’s a lot of capital available today, unlike two years ago. But demand is limited. The winners in this industry are going to be the companies focused on their clients, not only on internal issues. Our clients seem to find our approach refreshing,” says Warner.
However, Key Equipment Finance’s focus on its clients does not diminish its requirement to be vigilant in the underwriting of credit risk. And underwriting risk has changed within Warner’s group as well as within numerous lessors/lenders over the past three years. It seems safe to say that five years ago most lessors/lenders were focused on rapid growth within new markets, and the speed at which capital could be deployed because of the incredible amount of liquidity in the market. Warner described the past environment as “a time of extremes” and added “in the early 2000s getting credit was not difficult but in 2008 and 2009, it became very difficult.” But Warner believes the lending environment has moderated now that the impact of the recession on the financial services industry is a few years old and today there is more liquidity and pressure to grow again.
Despite this increase in liquidity and pressure to grow, Warner says, “We have not taken our eye off the ball as it relates to understanding both credit underwriting and enterprise risk when we enter a new market or find a new client. We are exceptional at understanding enterprise risk as it is a core foundation of our bank.” Warner offered an example saying, “when we look at our exposure to the healthcare sector, we not only look at Key Equipment Finance’s portfolio, but also exposure to the healthcare industry within the entire bank in all lending areas. Managing enterprise risk is a fabric of our company. This is not going to go away, nor do I want it to ever go away.”
Strategy Shifts With a Focus on the Future
In 2009, Key Equipment Finance exited less strategic and more challenged markets and reallocated the bank leasing company’s deployment of capital into three distinct markets where Warner felt confident there would be no disruption to liquidity. As a result of this strategic shift, Key Equipment Finance’s clients have never experienced a disruption in liquidity or capital for funding transactions and no disruption in customer service levels. Several market segments were exited in 2009, some of which were the financing of copiers as well as tractors/trailers through independent truck dealers. However, the group does provide financing in these segments on an end-user basis for existing bank customers and prospects.
Warner has no regrets about exiting these markets because it became clear that Key Equipment Finance could not remain a relevant player within them as the environment changed. “One of the key components for us entering and remaining in any market is determining if we can be a material player,” says Warner.
However, exiting any business segment that has traditionally been a significant contributor to portfolio growth can be challenging for any lending institution, and this strategy shift created a big challenge for Warner and his group. He described this challenge saying, “Exiting these businesses certainly makes us more focused, but it also created a portfolio runoff situation. Creating significant new business volume to outpace that runoff has been a challenge. Today we are focused on asset growth as well as growth in returns, and we are achieving our targets in all markets.” He also offered, “Key Bank is also core funded, providing significant liquidity to pursue new markets because access to capital is not an issue for us.”
Today, Key Equipment Finance’s U.S. business comes from three channels:
• Manufacturer/Vendor Alliances Channel – of which, roughly 80 percent of the origination in this group is generated from three industry segments: technology, healthcare and energy with each segment receiving equal focus. This channel is also seeking new opportunities, but will only pursue markets where the company can establish a long-term strategy to become a relevant player with leaders in manufacturing and national or international resellers.
• Bank Channel – providing financing for bank clients and bank prospects. This channel, comprised of a sales organization working for Key Equipment Finance, is embedded in the field with the bank’s lenders.
• Specialty Finance Channel – comprised of boutique operations such as lender finance, capital markets and asset-based lending.
The focus is paying off for Key Equipment Finance as the company is experiencing strong growth in all sectors. Warner credits this success to the industry expertise the company brings around the markets it serves. He adds, “Rather than being the jack of all trades and master of none, we elected to specialize in a few distinct markets. And this expertise is company-wide. When clients do business with us, they experience best-in-class service as well as a high level of subject matter expertise from our originations, credit underwriting, documentation and legal departments.”
Fact or Fiction: Banks Are Not Lending
We asked Warner for his thoughts on the perception that banks are not lending. Warner offered the following view: “I believe banks are lending and most banks have a strong desire to deploy their capital because it’s very expensive for banks not to do so. Banks as a whole are highly liquid today and they do not make money sitting on capital. But they are very mindful of not making the same mistakes made in the past, lending to businesses that could not make their payments in a downturn. But there certainly are businesses that cannot gain access to credit today, and perhaps for the right reasons.”
We wrapped up our session with Warner asking for his thoughts on the level of confidence senior leaders in the equipment finance industry are expressing, especially when you consider the inconsistent behavior demonstrated in both the MLFI-25 and MCI-EF reports throughout 2011. Warner offered the following observations: “The reports have been erratic as there’s a sense of nervousness in the market. Overall, I believe the tone in the industry is optimistic and we are heading in the right direction. But it’s hard to feel fully confident when we read about doomsday scenarios daily. Today, businesses need to replace equipment and invest in technology, and that is happening now.”
Adam Warner is the President of Key Equipment Finance. Key Equipment Finance is one of the largest bank-based equipment finance providers in the U.S. The company provides tailored equipment lease and finance solutions for small-to-large commercial clients and government entities. Through its vendor services unit, equipment finance programs are developed for manufacturers, distributors and resellers in the U.S., Canada and Europe. Additional information regarding Key Equipment Finance, its products and services can be obtained online at www.KEFonline.com.
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