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How Discipline and Customer Focus Yield Success: A Q&A with Merrimak Capital

Date: Apr 10, 2012 @ 07:00 AM

For twenty-one years, Merrimak Capital has been a leading independent leasing company, focusing on evolving its suite of financing solutions to meet the needs of growing public and private companies worldwide. Clearly, with a Fortune 1000 customer base, Merrimak must be doing something right.

How has it grown over more than two decades? How has it weathered the consolidation and shakeouts that saw many independent leasing companies disappear, especially over the past decade? And, finally, what does it see as the next step to keep Merrimak vital and growing as new opportunities begin to emerge with the first signs of a rebounding economy?

Equipment Finance Advisor (EFA) sat with Merrimak’s President and CEO Mary Kariotis and Tim Schmuker, Merrimak’s senior vice president of capital markets and syndication, to learn more about what has made their company so successful to date—and their strategy to remain in the forefront in today’s increasingly challenging equipment financing environment.

EFA: Can you give me the 30-second elevator speech about Merrimak—who you are and what you do?

Kariotis:  We’ve been in business for nearly twenty-two years. We were originally founded as an IT equipment broker in 1991. We began originating our first lease transactions of scale in 1996. Today, we have about twenty-five employees and contractor affiliates.

EFA: Twenty-two years is a lifetime in the leasing business. Maybe you could tell us a bit about how you’ve seen the leasing business evolve.

Kariotis: Thank you. As I mentioned, Merrimak grew from being an IT equipment lessor to expanding its markets to encompass machine tools and materials handling equipment—really, all different types of capital assets around the world. For instance, we have cranes on lease in Africa. But we’ve always been very fortunate that we’ve positioned ourselves to hold 99% of what we originate for our own account. Doing that allows us to offer our lessees more flexibility and to continue to expand our business.

EFA: That, and your focus on financing for investment-grade companies, right?

Kariotis:  Well, we’ve always catered to the enterprise market. It’s not necessarily investment grade; it’s really that we’re a balance-sheet lender, so we really focus just on financeable credits. We maintain a pristine portfolio.

EFA:  I’m sure that’s got to be a big relief, given today’s market.

Kariotis:  It certainly is. In light of what’s happened with the economy, we need that stability. We have enough risk in managing our residual positions in the equipment. Credit is really not a risk with what we do. But there are other advantages, like being able to take residuals and work within the secondary market. If you are a true broker, you understand how to create a secondary market, basically, for any type of used asset.
EFA: So, what are you hearing from your customers? What are their top priorities today?

Kariotis:  Regardless of the industry, the consistent message we’re hearing from customers across the board is their expectation for competitive rates, innovative structures, premium customer service and, most important, transparency.

EFA:  That sounds like a pretty standard wish list. Has it changed lately, given that we may be emerging from such a difficult economic period over the past few years?

Kariotis:  No, I don’t think it’s changed significantly. I think, first, you have to be so competitive and, secondly, as customers lease, they inevitably have a lot of bad experiences with lessors because the industry is not regulated. Quite frankly, this creates opportunity for a company like ours. The more up front and more forthcoming you are with your customers in helping them manage their back end—and that’s what I mean by being transparent, disclosing your costs and true rates and terms and not having automatic renewals and other unfavorable terms the lessee is not aware of when the lease is originated—the more attractive you are to potential customers. That’s what enables a lessor like us to have the high customer retention rate we have and get the repeat business.

EFA: What about you, Tim; what do you think? What are some of the ongoing struggles that still exist for the leasing industry today?

Schmuker:  I like to take a historical perspective on where the industry is at. When I first got involved in equipment leasing, there were a lot of alternatives to bank funding.  There were a lot of finance companies that were bought out or went by the wayside and left the landscape with primarily banks for funding. Of course, banks are conservative by nature; you have to fit your credits to meet what they want to fund.

Some of this was brought about by the consolidation that occurred from the late 1980s to the mid-1990s, when GE Capital was buying up a lot of these companies. Funding became very homogeneous. I can remember when the ELFA funding exhibition once had seventy or more funding sources at one time; by 2008 it had shrunk to about twenty-five. Some are ‘super brokers’—larger independent lessors that have bank lines of credit. They’ll buy deals and aggregate them, so they’re not a true funding source. At Merrimak, we want to take an investment in the equipment and lay off the rental stream; banks are not looking to do that.

EFA:  So, given all that’s occurred as the industry has evolved, what are Merrimak’s biggest challenges going forward?
Schmuker:  I think generally, with interest rates being so low, banks really have a lot of liquidity and haven’t been lending all that much. Especially now, with the real estate market being flat, banks are flush with cash. This means there’s lots of funds chasing fewer deals, and that has compressed the margins on transactions significantly. It’s very competitive. You think your aggressive lease rate is competitive, only to learn that out of ten bidders, you’re maybe second or third.

Kariotis: I agree. I think we’re in a bit of a holding pattern for the moment. So we are continuing to focus on only doing business with strong, profitable companies. This has always been our strategy, and, in our twenty-one year history, we have experienced negligible losses within our portfolio due to credit or our residual assumptions.

As Tim said, margins are tighter across the board; there really is an abundance of lessors chasing fewer viable deals. We have to originate more transactions at lower margins to be competitive and to succeed and flourish in the current marketplace.

EFA:  So how are you able to stand out from the pack in such a slim-margin marketplace?

Kariotis: Improving our strategy to increase our business is always the biggest challenge. We always have to differentiate ourselves. There must also be a focus to only win business that will be profitable. It is as important to our lessees as it is to us that we maintain and live by a sustainable strategy. This also involves maintaining a balance in our portfolio risk—not having too much saturation in one specific equipment type—so any potential losses will be compensated by gains from other assets. Of course, you’re not going to win on every investment, but if one of them does go bad, it’s not going to be catastrophic for the company.

EFA: I’d like to shift gears slightly and ask you about Tier One Diversity Spend Credits. How does Merrimak being a woman-owned business fit into your strategy and offer your customers a specific value-add?  

Kariotis:  Well, first, it’s important to understand that while we feel our ability to offer Tier One Diversity Spend Credit is an important byproduct of being a valued financing partner, it certainly will not be the compelling reason for being awarded a lease transaction. We like to think of it as a differentiator for us in the leasing marketplace. Most major corporations have significant diversity spend goals tied to government compliance. Finding a competitive lease offering from a diverse supplier is a true challenge for lessees because brokers do not bring value-add to the enterprise marketplace; there is really no reason for an enterprise customer to utilize a broker, and if they do, it typically is just a “pass through.” Although I do not know for sure, I assume we are the largest WBENC-certified lessor that is a true lessor. We feel we meet that challenge of supplying Tier One Diversity Spend Credit very effectively.

EFA: So how does it work? Can you give a typical example of how you see your customers utilizing it?

Kariotis: What happens is that a customer like, say, an AT&T, which has a substantial percentage of government business, will be told by the government, ‘We’re giving you X billions of dollars of business. Therefore, a certain percentage of all your goods and services have to be engaged through either a woman-owned, veteran-owned, or a minority-owned business.’ It is made clear that if they don’t engage with one of these diversity-spend entities, they’ll not be in compliance with government regulations and stand to lose their government contract or get fined.

With that said, customers are still very challenged because, as Tim was saying, margins are very thin, and they don’t want to just give a deal to a minority-owned or a woman-owned business just to get the spend credit. The diversity initiative for enterprise accounts is taken very seriously by a group of elite professionals; the last thing they want to do is award a transaction to obtain Diversity Spend Credit just to have the transaction assigned to the financial giant that was already bidding on the deal. They still want the greatest value.

As I mentioned earlier, our ability to offer Tier One Diversity Spend credits is not by any means the compelling reason why we’re going to win business, but in today’s tight market, it is a substantial differentiator and provides the platform for us to present our service offerings. We became WBENC-certified to support the needs of our existing customers. But since receiving our certification, we have added seventeen enterprise accounts that are actively buying our leasing services. We are extremely grateful for the opportunities that our WBENC status has provided.

For more information on Merrimak Capital, click here.

Equipment Finance Advisor Staff Writer
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