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NXT Capital – Opportunities to Collaborate in a Competitive Market

Date: Mar 17, 2015 @ 07:00 AM

Equipment Finance Advisor recently spoke with Michael Gay, Senior Managing Director and Group Head of NXT Capital Equipment Finance, about market trends and opportunities in 2015.

In the last 20 years, Michael Gay has held positions across a broad array of equipment financing companies, banks and commercial finance companies. Prior to taking the helm of NXT Capital’s Equipment Finance Group, he was a managing director of Capital Markets at Banc of America Leasing. Michael also led large equipment financing originations and syndications in the western U.S. for Key Bank Equipment Finance and held significant positions at GE Capital.

NXT Capital Equipment Finance specializes in providing large-ticket equipment financing to below-investment-grade companies. Established in 2013, the group consists of 14 professionals in offices across the United States who originate transactions on a national basis.

Headquartered in Chicago, NXT Capital is privately held, non-bank lender with more than $7 billion in funding capacity.

Equipment Finance Advisor: With first quarter nearly over, what do you see as the market outlook for the rest of 2015? What economic trends are affecting the industry?

Photo of Michael Gay - Senior Managing Director & Group Head - NXT Capital Equipment Finance

Michael Gay: I believe the increased liquidity we’ve seen in recent years will continue, as will heightened competition due to more players entering the market. But most of the liquidity and market entrants are playing in the same “sandbox” – that is, serving higher quality credits. In contrast, NXT Capital focuses on the sub-investment-grade portion of the market.

I also expect to see intense competition for relatively stable middle-market company deals in strong collateral classes such as trucks, high quality construction equipment, material handling equipment and corporate aviation.

The combination of liquidity and competition for deals with these characteristics will likely keep margins tight throughout the year. Further, the falling price of oil will dramatically reduce oil and gas deals, which have been large drivers of deal volume and asset growth over the last few years. This could put even more pressure on pricing as industry participants look to replace that volume. 

However, the landscape also offers some positives. The improving economy is encouraging companies to invest in growth by acquiring new assets. So I expect that the equipment finance industry will grow this year, especially in industrial segments outside of oil and gas.

It will be interesting to see whether the improved economy and resulting CAPEX growth will be enough to offset volume losses from the oil and gas industries.

Equipment Finance Advisor: How is capital markets activity impacting the equipment finance industry?

Gay: Generally speaking, the capital markets are putting additional pressure on equipment finance. Not only is there a tremendous amount of liquidity available in the equipment finance industry, there is also a vast amount of liquidity available through the capital markets.

Borrowers today have numerous choices for funding CAPEX, be it a lease or debt through a high-yield offering, a term loan or their ABL facilities. Understandably, they will use the cheapest capital they can get to acquire or finance an asset. When there’s as much liquidity as we’re seeing today, borrowers may use other forms of low cost debt to finance CAPEX or raise capital.

On the other hand, so much liquidity also supports increased syndication opportunities for banks and leasing companies. When an equipment lender is looking at a transaction that outstrips its funding capacity, there should be plenty of opportunities to syndicate the deal.

The same is true if a bank’s hold position for a client is approaching the credit limit. Expanded market liquidity should allow the bank to move forward, confident that it will find syndication partners.

Equipment Finance Advisor: Where do you see the most appealing market opportunities?

Gay: Many companies have held back on capital investments over the last five years. In the last few years, the industry has been anticipating growth in spending and investment that didn’t materialize the way most of us had hoped or expected.

But now we’re seeing an improved economic environment, low oil prices and increasing consumer confidence. I’m optimistic that this will embolden companies to make more aggressive capital investments and finally spend with an eye towards growth rather than just replacement.

This should create opportunities for the entire equipment financing industry, including banks and large commercial finance companies that serve high-rated credits, small leasing companies that serve small to mid-size companies and independent commercial finance companies like NXT that primarily serve sub-investment-grade credits.

I think we’ll also see more collaboration throughout the industry, especially for larger ticket deals in the single B area of the market. Regulation is limiting banks’ and large commercial finance companies’ ability to serve these clients. But as companies in this risk spectrum increase spending, there will be demand for the industry to meet their needs.

I view this as a great opportunity for some of the larger banks that touch a number of single B companies. When a bank finds a deal with a credit profile that it may find difficult to underwrite, it can leverage the funding capacity and expertise of firms such as NXT and capture fee income that wasn’t previously available in the market. Additional fee opportunities should be especially attractive as finance margins will likely be under pressure throughout the year.  

Also, banks want to maintain relationships and this type of collaboration is a great way for them to provide solutions to their single B clients while they manage through cyclical pressures or higher leverage.

Equipment Finance Advisor: What are NXT Capital’s goals for 2015? What sectors are you targeting?

Michael Gay: Our 2015 goals are to continue to accelerate our growth rate, build our portfolio, increase our geographic reach and further establish ourselves as the leader in large-ticket financings for sub-investment-grade companies.

NXT Capital Equipment Finance was launched in 2013. In 2014, we doubled the size of our portfolio while refining our focus and understanding of where and how we bring value to the market. This year, we’ll build on that foundation and broaden our reach.

Our growing portfolio brings numerous advantages such as cost and funding efficiencies and higher hold capacities, which let us touch a broader range of clients and step up to a wider array of deal types and sizes. So I’m excited to take what we do very well and apply it to a bigger population. 

NXT Capital is open to equipment leasing and lending opportunities across the market. But I believe we’re particularly well-equipped to pursue opportunities with companies or sectors the rest of the market sees as weak. It’s essential for an equipment finance company to understand business and credit cycles. We’re very good at this, as well as identifying and understanding the survivors in weak sectors.  It makes what we do interesting and frankly, it’s what I think makes equipment finance such a compelling form of financing.

Equipment Finance Advisor: What accomplishments are you most proud of since starting NXT Capital Equipment Finance?

Gay: It’s been exciting to put together a team of equipment finance professionals who have outstanding expertise underwriting and structuring complex deals. Truly, there is never a dull moment.

For example, we financed a large scoreboard and digital display project for an NBA franchise, which meant underwriting very soft assets for a company that isn’t your typical equipment finance client. Digging in to understand the organization, taking a different underwriting approach and getting the deal done was exciting and gratifying.

We've also done more traditional types of deals, such as financing tank barges on the Mississippi, a big IT infrastructure project for a large retailer and a specialized manufacturing facility. No two deals or borrowers are alike, which keeps it fun, interesting and challenging.

I’m very pleased NXT’s ability to be flexible in looking at a transaction, assessing it and providing capital for specialized situations. There’s always a need for that flexibility and financing, but it’s increasingly difficult for banks and large commercial finance companies to provide. I’m proud that NXT can offer this expertise and funding capacity to the industry and our clients.

Equipment Finance Advisor Staff Writer
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