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GE Capital Nears Finish Line -- Who Wins, Who Loses?

Date: Jan 04, 2016 @ 07:00 AM
Filed Under: Industry Trends

Editor’s Note:  The following article was prepared for Equipment Finance Advisor by an equipment finance executive with nearly 30 years of experience in financial services with first-hand experience at GE Capital. The author requested anonymity and since GE’s exit from commercial lending and leasing remains in process, Equipment Finance Advisor agreed to the writer’s request. We dispense with the convention of using a pseudonym and simply present these thoughts offered by an industry executive who we deemed more than qualified to discuss the topic.

GE Capital, formerly known as GE Consumer Finance, got its start in 1930 during the Great Depression to help customers purchase GE appliances and pay for them over time. Fast forward eighty-five years to April 10, 2015 when Jeff Immelt announced GE would sell most of GE Capital. In many respects, Immelt is trying to return GE to its roots, as the remaining GE Capital businesses will focus on financing GE products to GE customers. As a result of this bold move, what is lost from these intervening years is a legendary culture, known for its sales and risk disciplines; notable for its successes and near financial meltdown; regarded as a market leading provider of commercial loans and leases to middle-market companies; and a financial engine that propelled the GE enterprise over several decades. Perhaps the most impacted -- aside from some 35,000 employees -- will be those non-investment grade, middle-market companies seeking an alternative to traditional bank financing. In fact, many middle-market companies have already been impacted as GE Capital came under Fed regulatory oversite following the 2008 credit crisis.

A Legendary Corporate Culture

GE Capital’s culture demanded growth, innovation and determination. GE Capital was an equal opportunity employer and cared little about pedigree with Ivy Leaguers few and far between. Sales budgets routinely increased 10% per annum and income 15%. If a boutique leasing company developed a new financing idea such as “non-admitted asset” financing for insurance companies, GE Capital would hone the concept and propose it 100 times to every insurance company in America. If a deal was originated that did not fit the division’s charter, you funded it and hoped you didn’t get caught by another division. Competition across the GE Capital businesses was well-known and two separate GE Capital businesses would often compete for the same deal. Some clients were well aware of this phenomenon and used it to their advantage.

An example of GE Capital’s innovation was the way it leveraged its industrial parent company. GE and GE Capital pioneered a process whereby GE Capital would bring the full resources of a worldwide manufacturing and engineering company to its customers -- initially called “At the Customer For the Customer” or “ACFC." Imagine possessing the ability of bringing top engineers from GE Plastics to your prospective borrower that was a $25 million injection molding company based in Elgin, IL experiencing a production issue and at the same time, needing to finance $8 million in new injection molding equipment. Would that borrower select any other lender or lessor regardless of the rate offered if GE could reengineer the production floor and save the company $500,000 a year? These ACFC resources were a "game changer" for GE Capital and its customers.

GE Capital’s culture was demanding, and clearly was not for everyone. Budgets went up each year regardless of market conditions and when deals went bad, you were expected to get your hands dirty and get the money back. A classic example of this was Del Taco, a California-based Mexican American quick service restaurant chain. The Del Taco/GE Capital relationship began as an initial leveraged buyout in the late 1980s that later became a defaulted loan for which GE exchanged some of its debt for equity. This later became a 1993 bankruptcy and ultimate sale by GE Capital to the company’s executives in exchange for a note and cash. GE Capital agented the senior credit facility for Del Taco for many years thereafter.

As GE Capital Exits, Where Do We Go From Here?

The question now remains who will middle-market, non-investment grade companies look toward for financing? Bank leasing companies will grow larger, but continue to be limited by regulation. Business development companies will continue to be intrigued by equipment finance and the annual volume of earning assets available, but will also be constrained by leverage and a higher cost of capital. Large corporates like Chrysler Capital, Philip Morris, AT&T Capital and ITT Capital exited the commercial finance space decades ago leaving a landscape mostly comprised of vendor/captive finance providers such as CAT, Deere, Daimler, Komatsu, and Volvo, to name a few. Of course, we can now add GE Capital to this category.

Independents have seen solid growth over the past half dozen years and with the exception of a few larger players (i.e. MidCap, Element, Golub, NXT), most are under $1 billion in assets and focused on a particular segment such as mid-ticket collateral, small-ticket credit score, ABL/factoring, hard money/liquidators and so forth. I expect there will be consolidation as asset prices soften which is likely to happen during the next recession. Size and scale creates leverage across all facets of a commercial finance platform -- sales, risk and funding cost. GE Capital used organic growth and acquisitions to propel earnings. We’ll see if any of the current larger independents take on the GE model without the benefit of AAA parent support.

Looking toward the future, capital intensive middle-market companies may suffer the most from the absence of GE Capital in the next recession. Most GE Capital alumni can recall how annual volume targets and yield expectations were easier to attain during a recession compared to ordinary markets. As credit markets turn cloudy, banks tend to pull in credit rather than extend it, and that always created opportunities for GE Capital as well as other large unregulated commercial finance companies. The dearth of large independent commercial finance providers today sets up a potential credit crunch in the C&I market in the next recession. By way of example, GE Capital’s real estate business really established itself when they acquired Bank of New England’s (BNE) real estate portfolio previously established in 1991. GE Capital Commercial Equipment Finance accelerated its growth and income when it purchased BNE’s commercial equipment finance portfolio. Without an outlet for stressed credits, banks may be forced to hold stressed assets longer or sell them at deeper discounts. If banks tighten their credit box leading into a recession, middle-market borrowers will have fewer options at their disposal to refinance or replace equipment.

And finally, there will be divergent paths for the roughly 35,000 employees of GE Capital. Some will find a home with their buyer, some will stay with GE Capital, many will be displaced and undoubtedly others will help start new commercial finance platforms. Here’s to the latter.

Editor’s Postscript:  In terms of the equipment finance industry, we ask the following: In what ways can middle-market equipment lenders and lessors innovate to fill the void that GE Capital leaves behind as it exits the scene? Let us know your thoughts by posting a response in the comments section provided below. If you are interested in providing more commentary on the topic, please reach out to us at 484-380-2964.

Equipment Finance Industry Executive
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