United States AUTO & ASSET FINANCE COUNTRY SURVEY 2016 - ASSET FINANCE INTERNATIONAL IN ASSOCIATION WITH WHITE CLARKE GROUP - Blank Rome LLP
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ASSET FINANCE
INTERNATIONAL
IN ASSOCIATION WITH
WHITE CLARKE GROUP
United
States
AUTO & ASSET FINANCE
COUNTRY SURVEY 2016
United States
Auto and
andAsset
AssetFinance
Finance
Country Survey 2016
White Clarke Group
White Clarke Group is the market leader in software
solutions and business consultancy to the automotive
and asset finance sector for retail, fleet and wholesale.
White Clarke Group solutions enable end-to-end
credit processing and administration to streamline
business practice, cut operational cost and deliver
outstanding customer service. White Clarke Group has
a 24-year track record of leadership and innovation
in finance technology, consultancy and new market
entry. Clients value White Clarke Group's industry
knowledge, market intelligence and innovation. The
company employs some 600 finance and technology
professionals, with offices in the UK, USA, Canada,
China, Australia, Austria and Germany.
whiteclarkegroup.com
http://www.assetfinanceinternational.com
Publisher: Edward Peck
Editor: Brian Rogerson
Author: Nigel Carn
Asset Finance International Ltd.
39 Manor Way
London SE3 9XG
UNITED KINGDOM
Telephone: +44 (0) 207 617 7830
© Asset Finance International, 2016, All rights reserved.
No part of this publication may be reproduced or used
in any form or by any means–graphic; electronic; or
mechanical, including photocopying, recording, taping
or information storage and retrieval systems–without
the written permission from the publishers. 2
United States
Auto and
andAsset
AssetFinance
Finance
Country Survey 2016
Acknowledgements
Gary Amos, CEO of Commercial Finance Americas, Siemens Financial
Services
Bill Bosco, Principal, Leasing 101
Jonathan Dodds, Chief Executive Officer – Americas, White Clarke Group
Chris Enbom, CEO, Allegiant Partners
Brendan Gleeson, Group CEO, White Clarke Group
Dave Mirsky, Chief Executive Officer, Pacific Rim Capital
Tom Partridge, President, Fifth Third Equipment Finance
Bob Rinaldi, CEO, Commercial Industrial Finance
Alan Sikora, CEO, First American Equipment Finance, a City National Bank
company
Bill Stephenson, CEO and Chairman of the Executive Board at DLL
Adam Warner, President, Key Equipment Finance
Marguerite Watanabe, President, Connections Insights
Stephen Whelan, Partner, Blank Rome LLP
3
United States
Auto and
andAsset
AssetFinance
Finance
Country Survey 2016
Contents
Acknowledgements 3
The US at a glance 6
The US equipment and auto finance market 8
Equipment finance trends 8
Performance in 2015 and 2016 9
What the experts say – Market performance 11
Economic factors 13
What the experts say – Industry confidence 14
Lending trends 16
Market prospects 18
What the experts say – Industry initiatives 19
Business confidence 21
Small business hesitancy 22
What the experts say – Small business awareness 24
of equipment finance
4
United States
Auto and
andAsset
AssetFinance
Finance
Country Survey 2016
Auto sector finance trends 26
Leasing bucks the downward trend 26
What the experts say – Investment in technology 29
Technology – The top priorities for auto financing 31
sources
The justification for technology improvements 31
Technology improvements most often evaluated and 31
implemented today
The key to getting ahead with technology 33
What the experts say – Lease accounting changes 34
Lease accounting rules issued in 2016 36
Overview of the impact 36
Preparing for the new standard 36
Lessor issues 37
Lessee issues 37
A look ahead 38
The legal and regulatory environment 39
True sale 39
Hell or high water 39
Bankruptcy remote? 39
Tarnished ‘golden share’ 40
An unenforceable covenant? 40
5
United States
Auto and Asset Finance
Country Survey 2016
The US at a glance
This new Asset Finance International country survey aims to
provide a balanced assessment of the latest developments in the
equipment and auto finance markets in the US.
Key areas covered and principal findings include:
ƴƴ Figures from the industry body, the Equipment Leasing and Finance
Association (ELFA), show that new business volumes (NBV) in the US
equipment leasing market grew by 12.4% to $123 billion in 2015
ƴƴ However, NBV in H1 2016 fell 6.6% compared with the same period a year
earlier, the first drop into negative growth for six years.
ƴƴ Against expectations, the US economy has been growing only slowly, at a rate
that has actually been trending downward. However, data on the US labour
market has been much more positive.
ƴƴ Business investment has fallen for three consecutive quarters to mid-2016,
possibly because businesses are not anticipating stronger economic growth
and are therefore holding back on investing.
ƴƴ Data for equipment finance lending show independent lessors experienced
the strongest rate of growth in 2015, although this segment still trails banks
and captives for market share.
ƴƴ By far the largest year-on-year growth in 2015 was in the large-ticket
market segment, although the middle- and small-ticket segments still have
considerably higher total volumes.
6
United States
Auto and Asset Finance
Country Survey 2016
ƴƴ In 2015 the equipment finance market was dominated by the transportation, IT,
construction, and agriculture segments, although of all market segments only
transportation, IT and construction saw any growth over the previous year, and
the only significant growth was in transportation.
ƴƴ Forecasts for equipment investment in 2016 have been trimmed. Projections
are for sluggish conditions for most segments, with the best prospects for IT
and medical equipment, whilst agriculture is predicted to fall further.
ƴƴ Business confidence has slumped, following a general downward trend since
early 2015.
ƴƴ Confidence among small businesses is also falling, leading to a cautious
attitude to borrowing and investing in their businesses.
ƴƴ In the auto sector, new vehicle sales are down after 66 straight months of
growth. However, fleet sales are growing, as is the volume of new vehicles
financed by leasing which now accounts for around one-third of the market.
ƴƴ Although there has been a slight rise in delinquencies in auto financing,
leasing remains very prime.
The opinions and comments of a select group of equipment finance industry
leaders are provided throughout this survey. Topics under analysis are:
ƴƴ Market performance;
ƴƴ Industry confidence;
ƴƴ Industry initiatives;
ƴƴ Small business awareness of equipment finance;
ƴƴ Investment in technology; and
ƴƴ Lease accounting.
There are also special articles covering:
ƴƴ Technology – The top priorities for auto financing sources;
ƴƴ The latest developments in the Lease Accounting Project; and
ƴƴ Recent legal and regulatory developments in the US equipment and auto
finance market.
7
United States
Auto and Asset Finance
Country Survey 2016
The US equipment and auto finance
market
Since the last Asset Finance International report on the US
equipment and auto leasing industry a year ago, the sector
continued to grow in 2015 but recently the rate of growth of new
business volume (NBV) has gone into reverse.
The prospect of a deceleration in the market was well flagged up; however, the
decline in sector growth rate and the extent of the underlying factors behind the
collapse in momentum have been greater than expected.
There are, of course, many diverse elements that affect an industry as large as this
in any year, but 2016 has already seen some exceptional events on the global front
and domestically there is the matter of the presidential election to come.
Globally, the economy continues to grow only slowly; oil and commodities prices
remain low. Central banks are tending to support national economies by keeping
interest rates low or even reducing them, while in the US it is still expected that
they will be raised, although the timing of the next increase is uncertain due to
weaker than expected economic data.
And the US equipment and auto finance sectors, which over recent years
have continually grown faster than the economy, have also been affected by a
downbeat attitude.
The decline in sector growth rate and the extent of the
underlying factors behind the collapse in momentum
have been greater than expected
Martin Nixon
Equipment finance trends
By the beginning of 2016 the US equipment finance sector had grown in value to
an estimated US$1 trillion and it remains the largest national market in the world.
Its interests are represented by the Equipment Leasing and finance Association
(ELFA).
Gathering statistical information on an industry of this size is a major undertaking,
but the ELFA produces an annual Survey of Equipment Finance Activity (SEFA)
that covers key statistical, financial and operations information on the domestic
equipment finance industry in the previous calendar year, based on responses
from 100+ ELFA member companies.
8
United States
Auto and Asset Finance
Country Survey 2016
The ELFA also publishes the Monthly Leasing and Finance Index (MLFI-25) which
gives information on the current market, covering key indicators with data from a
sample of 25 major member companies.
Given the size and diversity of the overall market, such data, from which selected
details appear below, should only be taken as a guideline to industry-wide activity
rather than an accurate representation. Figures do not include data on auto leasing
(including floorplan finance), real estate and ‘non-equipment finance operations’.
Details of the 2016 survey, which is based on responses from 116 ELFA member
companies, can be found at www.elfaonline.org/data/sefa-survey-of-equipment-
finance-activity.
Performance in 2015 and 2016
The 2016 SEFA shows equipment finance NBV increased significantly in 2015 over
the year before – by 12.4% to $123 billion – reversing a decline in year-on-year
growth for the previous three years.
However, the MLFI-25 figures for the first half of 2016 show that, despite a
welcome uptick in June, NBV in the period totalled $44.2 billion – a drop of 6.6%
compared with the same period a year earlier.
NBV growth rate
25.0%
16.5% 16.4%
12.4%
15.0% 9.3%
6.7%
3.9%
5.0% -2.2%
-5.0%
-6.6%
-15.0%
-25.0%
-30.3%
-35.0%
2008 2009 2010 2011 2012 2013 2014 2015 H1 2016
Year-on-year growth
Source: ELFA (SEFA 2016, MLFI-25)
9
United States
Auto and Asset Finance
Country Survey 2016
The year-on-year increase in June was in fact the first positive figure since
July 2015, and the latest figure for July 2016 has slumped back into negative
territory with a near 17% decline on July 2015. The July total of $7 billion NBV also
represents a rather alarming 30% decline from the previous month’s spike of $10
billion.
MLFI-25 NBV and monthly comparison
$bn 14.0 35.0 %
30.0
12.0
25.0
10.0 20.0
15.0
8.0 10.0
6.0 5.0
0.0
4.0 -5.0
-10.0
20
-15.0
00 -20.0
14
-14
14
15
5
15
15
-15
15
16
6
16
–
r-1
r-1
g-
c-
b-
n-
g-
c-
b-
n-
ct
ct
Ap
Ap
De
De
Au
Ju
Ja
Au
Fe
Fe
O
O
NBV (£ billion) Monthly y-o-y change (%)
Source: ELFA, Asset Finance International
On the first-half figures, ELFA president and CEO Ralph Petta remarked that the
performance “appears to reflect the trend toward continued slow economic growth
and volatile equity markets in the US, as well as troubling international events
that are causing business owners to approach capital investment decisions with a
wary eye. A decline in portfolio quality contributes to a narrative of an equipment
finance market trying to gain its footing in the face of a volatile economy amidst a
recent period of uncertain political and social unrest.”
10United States
Auto and Asset Finance
Country Survey 2016
What the experts say – Market performance
Asset Finance International asked industry leaders in US equipment and auto finance
for their views on a number of current issues
The first topic for discussion concerned the fact On the other hand, if there is a Republican
that the rate of growth of the US leasing industry victory, he said, “then 2017 will continue the same
is proving to be slow in 2016. Is the downward course until the business community starts to see
momentum set to continue, or will it pick up in the real evidence that there is a paring back of the
coming 12 months? regulation factory and hostile attitude towards
anything not related to government.”
A year ago, the industry outlook was reasonably
optimistic, at least that growth in leasing would Other participants in the debate were cautious
outstrip that of the overall economy. Now, there are about the outlook. Tom Partridge of Fifth Third
questions over the direction of the economy after Equipment Finance commented: “There has been
the forthcoming elections, and whether business an overall lack of growth year over year, which is
regulation will change. somewhat surprising given that bonus depreciation
remains in effect,” adding: “In my opinion there
Bill Stephenson of DLL, and current chairman of continues to be a lack of new business investment.
the ELFA, provided an overview: “The downward I think this trend could continue until there is
momentum we have seen can be attributed to a more clarity on the direction of overall business
number of factors, including slow growth in the regulation. Many clients remain wary of the
global economy, a contraction in trade, heightened direction of the US economy as well as regulatory
political uncertainty and continued low energy trends.”
and commodity prices. I expect this trend will
continue into 2017 until we have further clarity on And in the view of Adam Warner of Key Equipment
the outcome and effects of the US presidential Finance, “In the US, it is starting to feel like the end
and congressional elections and a better of a positive growth cycle. The forecast for industry
understanding of how aggressive the Federal activity is down and I don’t believe there will be
Reserve will be in pursuing rate hikes.” a major turnaround in buying and financing in the
coming year. We are also starting to see a small
For Bob Rinaldi of Commercial Industrial deterioration in portfolio quality largely driven by a
Finance, it all depends on the election, with a correlation to energy industries.”
Democrat victory meaning “the hostile attitude
towards business and finance via regulations
and nationalizing of some corporate profits (via
fines and levies) will continue. The result will
be more of the same slow growth caused by a
In the US, it is
real unwillingness of businesses to expand their starting to feel
employee base or invest in plant and equipment
other than for replacement.” He concluded: “In like the end of a
essence, the business community in the US has
been informally boycotting this administration from
positive growth Adam Warner,
the start.” cycle Key Equipment Finance
11United States
Auto and Asset Finance
Country Survey 2016
Sector involvement can affect a company’s A final positive spin came from Gary Amos of
outlook. As Alan Sikora of First American Siemens Financial Services (SFS), who noted that
Equipment Finance (FAEF) said, “Declines in a leasing and finance companies remain strong,
handful of sectors like agriculture, oil and gas have despite continuing political and fiscal uncertainty.
been driving negative trends while other industries “There remains an opportunity for organizations
like healthcare and alternative energy are robust. to play an important role in helping with economic
In the industry segments that First American recovery and supporting necessary equipment
serves, we are experiencing growth and expect it investments,” he said.
to continue over the next 12 months.”
There remains optimism that things will pick
up, especially once the uncertainty around the Overall we still
elections is resolved. Chris Enbom of Allegiant
Partners stated: “I am optimistic that once the see businesses
election is finished business investment will
pick up a bit next year compared with this year.
being pretty
Class 8 truck purchases were so strong in 2014 conservative Chris Enbom,
and 2015 that when the oil boom faded and
transportation overall dipped a bit it caused a but we also see Allegiant Partners
slump in 2016, but I think we are starting to pull
out of the slump. Overall we still see businesses
them needing to continue
being pretty conservative but we also see them to replace equipment
doing pretty well and needing to continue to
replace equipment.”
Dave Mirsky of Pacific Rim Capital concurred, He concluded: “Although the rate of growth
saying: “It is my opinion that the business is slower than 2015, equipment replacement
environment in the US will improve in the coming demand will continue to drive investments. As
months. We are already seeing an increase in businesses further recognize their capacity to meet
demand. The economists that we follow are operational demands, their equipment investing
projecting mild growth in the year ahead and I activities will be increasingly focused on replacing
agree with them.” ageing or outdated assets.”
12United States
Auto and Asset Finance
Country Survey 2016
Economic factors
It is certainly true that the world’s largest economy has suffered from a bout
of volatility, with conflicting data regularly coming out regarding growth and
employment, all of which has an unsettling influence on businesses’ investment
decisions.
Against expectations, the economy has been growing only slowly, at a rate
that has actually been trending downward. Meanwhile, data on the US labour
market has been much more positive with unemployment stable at a perfectly
manageable level of around 5% and employment levels generally strengthening.
US GDP growth rates
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
-1.0%
-2.0%
Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2013 2013 2014 2014 2014 2014 2015 2015 2015 2015 2016 2016
Y-o-Y change Change over previous quarter
Source: U.S. Bureau of Economic Analysis
These contradictory signals have led to some confusion, particularly regarding
when the US Federal Reserve will raise interest rates again, as has been widely
anticipated to happen before the end of the year. It has been expected through
2016 that the economy will pick up in line with employment trends; however, there
is an alternate view. Data from the U.S. Bureau of Labor Statistics showing sluggish
growth in earnings and hours worked may in fact indicate that momentum in the
labour market could fall away and that the GDP trend is the more realistic.
Perhaps there is no need for an increase in interest rates so soon. Inflation has
been circling the 1% level throughout 2016 but remains far from the nominal
2% target. The real driver of economic growth in the first half of 2016 has been
consumer spending, and this may not be sustainable.
And while overall job numbers have increased, productivity growth is down if not
actually falling. A big problem is weak investment: business investment has fallen
for three consecutive quarters to mid-2016, and this may be because businesses
are not anticipating stronger economic growth and are therefore holding back on
investing.
13United States
Auto and Asset Finance
Country Survey 2016
What the experts say – Industry confidence
The next topic for consideration by the panel of industry experts concerned the
seeming crisis of confidence in the US concerning the political and economic
outlook, which is reflected in leasing industry confidence levels. Asset Finance
International asked their views on this lack of confidence, its origins, the main
constraints of leasing growth, and what might be the drivers going forward.
As in their earlier comments, the panel’s concerns most thoughtful organizations are being cautious
pivoted round the presidential election, regulation until they can see the lay of the land and can get
and a low-growth economic scenario, both a better understanding of what policies a new
domestic and global. administration will actually cause to happen.”
First off, Adam Warner of Key Equipment Finance
commented: “The level of political and legislative
uncertainty is always higher during an election The lack of
season. This presidential election, however, has
caused an even greater divide between and confidence
within the political parties. This political fraction
causes concern about effective governance
stems from our
and economic stimulus initiatives at the Federal very divided Dave Mirsky,
level. Those sentiments effectively translate into Pacific Rim Capital
decreasing confidence from both businesses government
and consumers. A healthier global economy that
drives manufacturing, along with a more stable
and the differences in
geopolitical climate, would bolster the sale and opinion running through
financing of US goods.”
our population
Slower than expected economic growth is a
primary contributor to lack of confidence, in the
opinion of Fifth Third Equipment Finance’s Tom
Partridge. “A lot of change has been placed on Gary Amos of SFS concurred, saying: “Economic
the business community over the past several uncertainty and today’s regulatory environment are
years, whether it is increased regulation, universal causing customers to pull back and delay capital
health care, or unknowns around a changing expenditures from already modest equipment
marketplace,” he said, adding: “Many clients want acquisition budgets.”
to maintain strong balance sheets in case we
experience another downturn.” A small uptick in the August MCI-EFI index is
an encouraging sign for DLL’s Bill Stephenson,
Dave Mirsky of Pacific Rim Capital provided although he noted there remain various factors
a forthright opinion: “The lack of confidence weighing on business investment and asset
stems from our very divided government and acquisitions.
the differences in opinion running through our
population.” He continued: “The party that is most One such factor is jobs. “Although we continue to
likely to win the election is using hostile rhetoric in see employment growth, the pace slowed again
reference to business and free trade. Therefore, in August and continues to paint an inconsistent
14United States
Auto and Asset Finance
Country Survey 2016
recovery picture,” Stephenson said, adding: “Oil and increasing challenges to maintain profitability
prices continue to hover at or below $50, which levels. The industry also faces a challenge to
has a pervasive effect on many industries, not just recruit talent, so there are certainly opportunities
the energy sector. Commodity prices are not yet for companies, such as SFS, which can offer a
rebounding with price levels on wheat, corn and global reach and have demonstrated financial
dairy heavily impacting the US agricultural sector strength throughout the recession.”
and pushing farm debt to income ratios to levels
not seen since the mid-1980s.” Finally, in his view, “The drivers going forward will
be the financial providers that can apply industry
This was taken up by FAEF’s Alan Sikora, expertise with market understanding to offer
who observed: “Underperforming sectors like tangible solutions for customers. Instilling trust in
agriculture, oil and gas may be impacting the our service offering and the return it can have for
confidence levels of some industry executives.” end users will be critical for all lending institutions
However, he has hopes for the future: “As these moving forward.”
sectors improve and overall economic conditions
strengthen, the leasing industry will benefit.”
Bill Stephenson agreed, adding: “I think once we The drivers
get the elections behind us, and start to see some
rebound in oil and commodity prices, business going forward
investment will follow.”
will be the
And Chris Enbom of Allegiant Partners sees signs
of a turnaround, stating: “I think some confidence
financial Gary Amos, SFS
indicators have increased again. After the political providers that
uncertainty is over, the biggest uncertainty will be
with regards to rates, but I think rate uncertainty can apply industry expertise
will affect the equity markets more than the with market understanding
equipment finance markets.”
to offer tangible solutions
Further factors affecting leasing industry
confidence were suggested by Gary Amos: “An for customers
oversupply of lenders is creating rate compression
15United States
Auto and Asset Finance
Country Survey 2016
Lending trends
According to the SEFA report, banks remained by far the largest type of lender
of equipment finance in 2015, increasing volume by 12% to $73 billion – a jump
that was aided by Wells Fargo’s acquisition of GE Capital portfolios which had
previously been categorized in the ‘independent’ segment. However, despite this
the banks’ share of total NBV slipped marginally compared to the year before.
Furthermore, independents increased lending by 60% year-on-year to nearly $13
billion, thereby increasing market share regardless of the Wells Fargo/GE Capital
deal. NBV provided by captives, however, only increased by 3% year-on-year to
$37 billion, leading to a slide in market share to under 30%.
Market share of NBV by type of lender (%)
%
100 7.2 10.4
90
80 32.5 29.9
70
60 Independents
50
Captives
40
60.2
30 59.8 Banks
20
10
0
2014 2015
Source: ELFA (SEFA 2016), Asset Finance International
In terms of NBV by deal size, by far the largest year-on-year growth was in the
large-ticket market segment which leapt by 34%, although the middle- and small-
ticket segments still have considerably higher total volumes, at $58 billion and $41
billion respectively in 2015.
16United States
Auto and Asset Finance
Country Survey 2016
NBV by market segment
80 4.0%
33.9%
60 30.0%
57.8
51.4
$ bn 40 20.0%
12.4% 41.0
39.9
20 10.0%
23.8 2.8%
17.8
0 0.0%
Large ticket Middle ticket Small ticket
2014 ($bn) 2015 ($bn) Change (%)
Source: ELFA (SEFA 2016), Asset Finance International
It is noticeable that there has been a downward trend in recent years in the
percentage of finance providers whose NBV has grown, from nearly 80% in 2013
to 65% in 2015, although it’s still a positive factor that nearly two-thirds of finance
providers have experienced growth.
Businesses with growing vs declining NBV (%)
%
100
21.4
24.3
31.0 35.0
80
71.7
60
75.7
78.6 69.0
40 65.0
20
28.3
0
2011 2012 2013 2014 2015
Growing Declining
Source: ELFA (SEFA 2016)
17United States
Auto and Asset Finance
Country Survey 2016
Market prospects
The Equipment Leasing & Finance Foundation (ELFF) publishes a
quarterly projection of likely equipment and software investment,
the Equipment Leasing & Finance U.S. Economic Outlook. It is
sobering to see how the outlook has changed since the end of
2015, at which point the outlook was for “around 4.4% growth in
2016”, similar to if not a little higher than the level in 2015.
However, by April 2016, in its Q2 Outlook, the ELFF had revised down its
projection: “We expect equipment and software investment to expand 2.7% this
year, somewhat slower than the 3.8% growth rate in 2015.”
And in the Q3 Outlook of July, the forecast was much bleaker: “Given recent
data and current momentum, we expect equipment and software investment to
increase by just 0.9% this year, significant slowdown from last year’s 3.8% growth.”
Regarding specific market segments, ELFA figures for 2015 show that the
equipment finance market was dominated by the transportation, IT, construction,
and agriculture segments – no change from previous years, although of all market
segments only transportation, IT and construction saw any growth over the
previous year, and the only significant growth was in transportation.
Agriculture witnessed a particularly steep fall, from over 12% of the total to just 9%,
and industrial & manufacturing equipment continued to slide and now has well
under 4% of the market.
Equipment finance by sector, 2015
2.8%2.5%
3.7%
Transportation
4.2%
IT & related services
4.7% 29.7%
Construction
Agriculture
9.1% Medical equipment
Office machines
Industrial/Manufacturing equipment
11.5% Materials handling
Energy
21.3%
Source: ELFA
18United States
Auto and Asset Finance
Country Survey 2016
Industry projections for 2016 are for sluggish conditions for most segments, with
the best prospects for IT and medical equipment, whilst agriculture is predicted
to fall further. Growth in transportation and construction is expected to remain
subdued until the economy shows signs of real expansion, and energy will
continue to suffer from global pressures on oil prices.
Financial institutions have been tending to tighten credit standards, with the
MLFI-25 showing credit approval ratios to have eased from over 80% of decisions
submitted in December 2015 to below 76% in July 2016.
What the experts say – Industry initiatives
Asset Finance International sought the equipment leasing industry leaders’ views
on what initiatives or changes the new administration might introduce following the
election that would benefit their business and that of their clients.
Once again, the consensus was that over- The new administration could start with tax reform,
regulation has been a brake on progress and as proposed by Adam Warner of Key Equipment
relaxation of this would be seen as a positive signal Finance: “In addition to working to heal the wounds
and definitely beneficial for business. from this election process, the US Congress needs
to unify on comprehensive tax reform that would
Such a change can’t come too soon for Bob encourage capital formation.”
Rinaldi of Commercial Industrial Finance, who
said: “If there was evidence that government’s To this he added: “The continuation of tax
grip on everything starts to loosen and the new incentives for clean energy sources is paramount to
regulations implemented over the past eight years bolstering the sale and usage of solar panels, wind
start to be repealed then real economic progress energy, fuel cells and other clean energy products.”
will take hold due to a more positive confidence.”
On this topic, Allegiant Partners’ Chris Enbom
It was widely agreed that the outcome of the commented: “At the end of 2015 Congress passed
elections will influence the future tone of a new Section 179 legislation and alternative energy
regulatory environment that has, in the words of legislation that is good for five years, so we don’t
DLL’s Bill Stephenson, “clearly been a challenge for expect any major changes to these tax laws unless
our industry in recent years.” there is sweeping tax reform – which is unlikely
next year.”
Naturally, anything that encourages investment in
capital equipment would be welcomed, and a lift in However, in his opinion, the biggest issue the
confidence to make such investment commitments industry is facing is that of free trade. “Many
would be helped by greater unity in government equipment manufacturers in the US rely on free
following a divisive campaign. trade agreements for their supply chains and to
19United States
Auto and Asset Finance
Country Survey 2016
sell their products around the world,” he said, any conditions, and as a result, we strive to remain
“and Trump talks about wanting to start trade flexible and responsive.”
wars, which would be pretty disastrous for many
companies in the short term.” And for Fifth Third Equipment Finance’s Tom
Partridge, a period of stability after several years
Paul Gogolinski
Enbom continued: “In the longer run there isCEO,
a lotTotal Fleet Solutions, Poland
of increasing regulatory burden would benefit
of talk in Congress about overhauling the tax code, businesses. “We need a period of time where the
which I think would be harmful to the economy business community will not experience great
in the short term due to the uncertainty created change so they can focus on the growth of their
around the new tax rules. The government cannot business as well as focusing on productively
lose tax dollars, but would change the system – so improvements through increased capital
new winners and losers would be created with the spending,” he remarked.
new tax system.”
Trading conditions and tax policy were also at
the forefront for Dave Mirsky, who commented: We need
“Pacific Rim Capital operates internationally, so we
prefer anything that will make it easier to transact a period of
business across borders. On the other hand, if
US manufacturers build more factories within the
time where
country, we will probably benefit from the increased the business Tom Partridge, Fifth Third
purchases of material handling equipment. Tax Equipment Finance
policy also has a large impact on leasing and lease community
pricing, both to the good and the bad.” will not experience great
He concluded: “As lessors, we will always prefer change so they can focus on
those policies that promote business investment.
Entrepreneurial companies have to thrive under the growth of their business
Bill Stephenson
CEO and chairman of the
executive board, DLL
20United States
Auto and Asset Finance
Country Survey 2016
Business confidence
A long-standing indicator of the equipment finance industry’s view of business
conditions and expectations for the future is the ELFF’s Monthly Confidence Index
for the Equipment Finance Industry (MCI-EFI).
The latest index for September 2016 stands at 53.8, a long way down from where it
stood 18 months earlier on 72.1, and marking a continuation of a general downward
trend that began back in March 2015.
MCI-EFI, Jan 2015-Aug 2016, with trendline
75
72.4 70.7
70 67.4
66.1 67.5
66.3
65
61.1 60.2 60.2 59.1
63.0 62.6
60
58.7 55.1 53.8
54.8
55
54.0
50 52.3 52.5
51.6
48.3
45
Jan-15
Feb-15
Mar-15
Apr-15
May-15
Jun-15
Aug-15
Sep-15
Oct-15
Nov-15
Dec-15
Jan-16
Feb-16
Mar-16
Apr-16
May-16
Jun-16
Aug-16
Sep-16
Jul-15
Jul-16
Source: ELFF MCI-EFI, http://www.leasefoundation.org/research/mci/; Asset Finance International
Executives responding to the MCI-EFI question about how they see conditions for
their business over the coming four months were split evenly, with 19% believing
conditions will improve and 19% believing they will deteriorate, whilst the bulk of
62% are not expecting any change.
None of the executives expect more access to capital to fund equipment
acquisitions over the next four months, a decrease from 13.3% the month before.
Taking a six-month viewpoint into the start of 2017, just 6% of the respondents
at this stage believe that economic conditions in the US will improve, with 19%
believing conditions will worsen and the remaining three-quarters expecting no
change from the present.
21United States
Auto and Asset Finance
Country Survey 2016
Small business hesitancy
A leading indicator of economic performance and business confidence among
small businesses is the Thomson Reuters/PayNet Small Business Lending Index
(SBLI). The July 2016 index figure of 121.5 represents a sharp drop from 139.2 in
June, and is 16% down on the same month a year earlier, the largest decrease
since October 2009. The general direction of the SBLI over recent months shows
small businesses taking a more bearish view of the economy.
The companion Thomson Reuters/PayNet Small Business Delinquency Index
(SBDI) for July 2016 shows the percentage of loans that are 31-90 days past due
was at its highest level since December 2012. Compared to one year earlier,
delinquency increased by 13 basis points, the largest year-on-year increase since
December 2009.
The collective wisdom of millions of small business
owners is to hold off on borrowing and investing in their
businesses
As William Phelan, president of PayNet, Inc. commented on the release of these
figures: “It’s too early to call a change in the business cycle, but the collective
wisdom of millions of small business owners is to hold off on borrowing and investing
in their businesses,” adding: “This all means greater risk for the underlying credits
and most likely rising defaults of private companies over the next 12 months.”
Caution certainly seems to be the watchword amongst small businesses. Results
from California-based direct lender Balboa Capital’s Q2 2016 small business owner
survey reveal a decline in revenues after a strong first quarter but optimism for
the future. “The slight downturn is somewhat consistent with what we are seeing
among the small business owners we work with. They are continuing to invest in
their companies, but are taking a more strategic and cautious approach,” says Jake
Dacillo, marketing director at Balboa Capital.
Elsewhere, a snapshot of Midwestern businesses’ attitude to equipment finance
comes from a September 2016 article in the Milwaukee BizTimes, which notes
that slow economic growth has tended to make firms rein in spending, and where
capital outlay has been necessary – primarily to replace equipment rather than
for expansion – companies have been using cash that has been accumulating.
Businesses have also been using excess cash to reduce their debt loads.
22United States
Auto and Asset Finance
Country Survey 2016
However, while lending levels have been fairly static it may be the need to increase
efficiency that encourages investment, a view expounded by Tom Rude, first vice
president of Equipment Finance at First Business Bank-Milwaukee. “There’s a
cautiousness, there’s still uncertainty, but there comes a point when companies
need to make the investments in their business to stay current with technologies,
to stay current with productivity,” he says.
There’s a cautiousness, there’s still uncertainty, but
there comes a point when companies need to make
the investments in their business to stay current with
technologies, to stay current with productivity
A considerable influence on this cautious outlook is the deadening effect of the
build-up to the presidential election, with businesses putting investment decisions
on hold as the result is too close to call. And in truth the result when known may
not ease the hesitancy.
The ELFA’s Ralph Petta summed up the sentiment that has been building in
the industry back in May when he said: “Erosion in business confidence due to
misgivings about the November presidential and congressional elections and
what they portend for the future direction of the nation, an unexpectedly negative
May unemployment report, an economy barely growing, and a series of violent
events both here and abroad provide a negative backdrop for business owners
considering making capital investment decisions.”
23United States
Auto and Asset Finance
Country Survey 2016
What the experts say – Small business awareness
of equipment finance
It seems that many smaller businesses still lack awareness of the benefits of
equipment finance and are reluctant to invest in relevant new technology. Asset
Finance International asked the panel of industry experts for their views on how the
industry can improve this situation.
Reactions to this were varied, with current ELFA Others on the panel were strong advocates of the
chairman Bill Stephenson and past chairman importance of technology adoption. Adam Warner
Bob Rinaldi defending the association’s work, stated: “The most effective way to educate small
particularly through the Guest Lecture Program. businesses on how lease financing can enable
them to acquire needed technology is to ensure
Stephenson commented: “One of ELFA’s core that technology salespeople are discussing finance
efforts this year was to continue to increase options at the beginning of their sales process.
awareness of the industry amongst both This means that lessors active in the technology
prospective customers and employees. The Guest vendor finance arena need to continually provide
Lecture Program, for example, not only serves to training on how to introduce financing as the
educate young professionals about the career primary way for customers to acquire technology
opportunities that exist for them, but also informs solutions. With the movement to SaaS, cloud and
the future business leaders of America about the services financing, this training becomes even
enabling role the equipment finance industry plays more critical.”
in the economy and business community.”
Chris Enbom cited his own company as an example
And Rinaldi observed: “Due to the weak economic that many small businesses are well aware of
conditions, demand for borrowing is down technology, saying: “We are a small company and
while the supply of funds is high. This may be we invest very heavily in technology.”
contributing to a lack of growth in the industry for
the small business sector. But having said that, He elaborated on this: “I think there are many more
the industry can and is increasing its outreach to managed/cloud services that businesses use, and
the business community, more specifically the companies are becoming more comfortable in
emerging business people of tomorrow. The ELFA some situations with a bigger ‘managed services’
is doing that by expanding the Guest Lecture component to their businesses. I think it is creeping
Program and having more of our members deliver into many small businesses (think of reservations
the GLP to finance, accounting and masters systems for restaurants like Open Table) that tech
and undergraduate students at universities and companies take a big share of the new business.
colleges across the US.” Equipment finance companies need to be thinking
about this new model as well (we certainly are!).”
However, Tom Partridge thought that more could
be done: “The industry needs to do a better job of Gary Amos took this up, stating: “With the internet
educating the client on technology improvements of things changing the landscape of how we
and how these improvements can lead to do business, smaller organizations now find
increased productivity. The industry also needs themselves managing marketing automation and
to do a better job of explaining the true cost of customer relationship management tools by a
leasing to the client.” more virtual approach. Equipment financing can
24United States
Auto and Asset Finance
Country Survey 2016
enable organizations to adopt the technology and demonstrate to the customer how efficient and
platforms required to more successfully conduct flexible their offerings are, and that financing can
business across a variety of industries.” accelerate business growth.”
He continued: “Organizations need to be more As Alan Sikora said, “Equipment finance can be a
transparent about the benefits they can provide powerful strategy for small businesses to acquire
to end users, and how they can help them the technology they need,” adding that “Leasing
through the most cost-effective means. Through companies must engage with small businesses
transparency and properly educating our target to understand their needs and provide the tools
audiences we will find more willingness for smaller and resources necessary to ensure entrepreneurs
businesses to adopt our offerings in the future.” make informed decisions.”
Technology specialists Brendan Gleeson and
Jonathan Dodds of White Clarke Group stressed
the importance for small businesses not only to Business owners
adopt innovation but to adopt the right innovation.
“Business owners know the world is shifting
know the world
increasingly online, and companies are scrambling is shifting
to keep up with the sudden dash for digital,” said
Gleeson. “What matters most is getting the best increasingly Brendan Gleeson,
fit for their requirements, and for small businesses White Clarke Group
this means technology that adapts as conditions
online, and
change and the business grows.” companies are scrambling
“In a situation where there is uncertainty regarding to keep up with the sudden
economic growth, smaller businesses are
going to be extra cautious about capital outlay,” dash for digital
added Dodds. “Lessors and vendors need to
25United States
Auto and Asset Finance
Country Survey 2016
Auto sector finance trends
The US auto sector has been in robust health in terms of sales and
growth in finance in recent years, but even here the current year
has seen a plateau and a deceleration.
In fact, according to a monthly sales forecast by J.D. Power and LMC Automotive,
the seasonally adjusted annualized rate (SAAR) for new-vehicle retail sales for
August 2016 is expected to be down by 6.5% at 13.2 million units compared to 14.2
million units in August 2015.
Likewise, the SAAR for total sales of passenger cars and light commercial vehicles
is expected to fall by 5.2% to a projected 16.8 million units in August 2016, down
from 17.7 million units a year earlier.
This will be the fourth decline in sales in six months, which comes as a shock
following 66 straight months of growth.
However, fleet sales are expected to exceed 223,000 in August 2016, a 3%
increase year-on-year, thus accounting for 15.0% of total light-vehicle sales.
The above SAAR projections are broadly in line with predictions from the National
Automobile Dealers Association (NADA). According to NADA’s chief economist,
Steven Szakaly, trends that could slow down vehicle sales growth in the coming
years include: “The ageing vehicle fleet discourages long-term vehicle sales;
average loans terms for new vehicles have risen to 68 months; and new-vehicle
transaction prices are continuing to rise, up about 3% this year, while wages remain
stagnant.”
On the other hand, he highlights the main factors that will continue to grow and
drive sales as rising employment, low gasoline and diesel prices, and leasing,
adding: “Leases are increasing, which now accounts for more than 34% of the
market.”
Leasing bucks the downward trend
This assessment of the value of leasing equates with that provided by Experian’s
State of the Automotive Finance Market report for Q2 2016, which shows a year-
on-year increase in the percentage of new vehicles acquired with financing, from
85.8% in Q2 2015 to 86.5% in Q2 2016. The proportion of new vehicles financed
by leasing has grown more impressively, up from 26.9% in Q2 2015 to 31.4% in Q2
2016.
26United States
Auto and Asset Finance
Country Survey 2016
Leasing – auto market share, with trendline
%
35.0
30.0
25.0
20.0
15.0
10.0
5.0
0.0
Q2 2011 Q2 2012 Q2 2013 Q2 2014 Q2 2015 Q2 2016
Source: Experian Automotive, Asset Finance International
Looking at the share of the market by lender type, the ‘finance’ segment, which
includes leasing, has fallen back from 13.4% in Q2 2015 to 11.6% in Q2 2016 of all
vehicle sales, and has slipped to below 5% of the market in new vehicle sales.
Meanwhile, the captive segment has increased share of all vehicle sales from
26.8% in Q2 2015 to 27.7% in Q2 2016, marking a gradual upward trend over recent
years. This segment has also increased share of new vehicle sales to well over half
the market total.
Auto finance market share by lender type, Q2 2016
New & used vehicles New vehicles
0.2%
7.1% 4.6%
11.6% 11.4%
18.7%
31.7%
34.8%
52.2%
27.7%
Finance Bank Captive Credit Union BHPH (Buy Here, Pay Here)
Source: Experian Automotive
27United States
Auto and Asset Finance
Country Survey 2016
In addition, Experian data reveal that 30-day delinquencies have increased across
all lenders apart from credit unions, with the total market rate for loans and leases
standing at 2.22% in Q2 2016 (2.19% in Q2 2015).
The Experian report notes that “leasing remains very prime as more consumers
across all risk tiers choose to lease”. The Q2 2016 figures show prime and super-
prime accounting for close to 75% of new leases, but there continues to be a
gradual increase in risk in auto leasing, with sub-prime lending rising to a recent
high of 7.4%.
Further industry information from online resource Edmunds.com shows that the
number of vehicles leased in the first half of 2016 totalled 2.2 million, double the
total for the first half of 2011 – an impressive rate of growth over five years.
The Edmunds.com research indicates non-traditional categories such as pick-up
trucks and compact cars are leading lease volume growth. The attractions that
leasing offers of low monthly payments and ease of ownership have been taken
up particularly by older buyers, with leasing penetration increasing by 74% over the
last five years among buyers aged 75 and above, although proportionately the age
group with the highest leasing level is the millennials.
The research also reveals that while new vehicle purchasers are much more likely
to be male than female (58% to 42% respectively), the pattern changes for vehicles
acquired through leasing with a higher percentage of lessees being female.
Leasing penetration by age group, Jan–Apr 2016
%
36.0
34.2%
34.0
32.4% 32.3%
31.7%
32.0
30.0% 29.9%
30.0
28.0
26.0
Millenials 35-44 45-54 55-64 65-74 75+
Ages
Source: Edmunds.com
28United States
Auto and Asset Finance
Country Survey 2016
Finally, there should be mention of the alternatively fuelled vehicle sector, which
includes electric vehicles and hybrids. As in many countries the concept is slow
to gain a footing in the US, particularly with fuel prices continuing to be low if not
actually falling in recent months.
It is initially encouraging then, to note that in the first half of 2016 sales of
alternatively fuelled passenger vehicles grew 18% on the same period the year
before – a striking rate of growth until the actual numbers reveal total H1 2016
sales to be fewer than 64,000 (Source: EV-Volumes).
So despite plug-in hybrid electric vehicle (PHEV) sales achieving a record market
share in June 2016, this was still just shy of 1%. Estimates are for 150,000 sales in
2016, a sector high and surely one that will continue to grow, if slowly.
What the experts say – Investment in technology
Asset Finance International asked the panel of equipment finance industry leaders
whether it is valid to assert that US lessors are themselves guilty of underinvesting in
technology. Should the industry be investing more in technology to deliver smarter
solutions for customers?
The panel did not see underinvestment as an
issue – certainly not in relation to their own
operations – but was appreciative of the risks of
In short,
not investing. expense up,
According to Bob Rinaldi, for some lenders lower margins down,
investment in technology may have been a
case of prioritizing other demands following the
and a weak Bob Rinaldi, Commercial
financial crisis. “Many lessors have invested more economic Industrial Finance
in compliance which has gobbled up most of their
budgets,” he said, adding: “Moreover, the very growth climate leading to
low interest rate environment has compressed
net interest margins severely on equipment
less demand or willingness
loans while also making equipment leasing less to spend on technology
attractive due to these low borrowing costs. So,
in short, expense up, margins down, and a weak
economic growth climate leading to less demand Rim Capital has invested heavily into technology
or willingness to spend on technology.” in recent years and has focused on analyzing and
improving our systems with the goal of becoming
Dave Mirsky stated: “Leasing is a low margin, more efficient while maintaining and improving our
competitive business that should be driving all already excellent customer service. Every lessor
lessors to become as efficient as possible. In should be doing the same.”
addition, the business customer is demanding
ever more rapid and mobile solutions to leasing For Adam Warner there are several trends that
concerns which should provide an impetus for the warrant deeper investment in technology solutions
industry to invest more into technology. Pacific by US lessors. “First,” he said, “there has been
29United States
Auto and Asset Finance
Country Survey 2016
a drive over the past few years to provide self- has registered its biggest upswing since before the
service options for business clients. Second, financial crisis in 2015 and 2016 from a 20-year low
there is a clear movement to get data through in 2014. There are entrepreneurs who are looking
mobile devices, even for businesses. Finally, as for equipment finance and they’re often going to
businesses look for more options to pay for usage look to new, tech-savvy funding methods.”
and access rather than equipment, lessors need
more robust variable financing options.” For Alan Sikora the outlook is straightforward.
“Clients demand and deserve both personalized
In addition, he noted, “The need for a lessor to service and convenient digital experiences. To
increase its technology spend will depend largely thrive in the years ahead, equipment lessors must
on the industries and clients the company serves. make technology investment a priority,” he said.
For example, lessors that largely serve smaller
businesses will see a greater demand for mobile Bill Stephenson’s view is that, while overall
solutions, as their clients’ behaviour is closer to investment in technology has been high, the
that of a consumer.” industry has been slow to innovate when it
comes to creating new, more efficient ways of
There is also a small but growing challenge to doing business, but he sees that starting to turn
established lessors from alternative sources of around. He said: “Our business models are being
funding, provided by new, agile companies that challenged by alternative forms of financing,
use cutting-edge technology. “This dynamic group and while it’s yet to be decided whether these
of finance providers,” said White Clarke Group’s microfunders and fintechs have a viable business
Jonathan Dodds, “such as peer-to-peer funders model, the uncertainty is enough to cause concern.
and crowdfunders, are taking a lead in technology This pressure is forcing lessors to pay attention to
use and development – partly because they are where the industry is headed.”
already solely online platforms. They are making
it easier for start-ups and small companies to He continued: “We also need to look at the
raise capital through their flexibility. They are fast, equipment supplier side of the equation because
responsive and smart.” technology will disrupt many of the traditional
distribution channels used today to sell equipment to
customers, and in turn, will disrupt how leasing and
finance solutions are introduced to these customers
This dynamic at the point of sale. Our partners and customers
want to conduct business with us in new ways, and
group of finance we need to meet their requirements or risk losing
providers are the relationships we’ve built. We no longer have an
option when it comes to investing in technology.”
making it easier Jonathan Dodds,
Finally, Gary Amos observed that “acquiring new
for start-ups White Clarke Group
technology is the right solution for business if
the return is greater than the initial investment.”
and small companies to He continued: “The right investment opportunity,
raise capital through their coupled with the proper financial solution,
truly showcases the value that new technology
flexibility acquisitions can provide.”
He also pointed out that “equipment financing and
And his White Clarke Group colleague Brendan leasing companies will find greater success if they
Gleeson added: “Company formations are on the more clearly educate their respective industry
increase again – the Kauffman Index of Startup stakeholders on the returns that investing in new
Activity, which measures new business creation, technology can have for their business.”
30United States
Auto and Asset Finance
Country Survey 2016
Technology – The top priorities for
auto financing sources
Auto finance specialist Marguerite Watanabe looks at
technology improvements in this sector
Ask any auto finance executive about their strategic By and large, the expansion of functionality is the
goals and technology improvements will be one of most common reason for captives, banks and auto
them. In fact, for the American Financial Services financing companies to introduce new technology.
Association (AFSA) Vehicle Finance Advisory Board, This could be to improve operational processes and
Technology Improvements (e.g. new systems and efficiencies or reduce costs, but it could also be to
software, eContracting, reporting tools) has been maintain a competitive advantage, fulfil compliance
selected as the number one opportunity for five requirements or improve dealer or customer
straight years. Technology improvements can be satisfaction.
further classified as replacing legacy hardware,
adding or replacing software, applying new tools With all these solid arguments for investment, it
and analytics or introducing new plug-ins or, would seem a straightforward justification for new
more frequently, developing apps, all having a and improved technologies. There are just as many
consequential impact on the business. explanations, however, as to why technology projects
don’t get off the ground. The most common of these
is that getting proper prioritization on an IT project
The justification for technology improvements list, especially in large companies, can seem like it
would take an Act of Congress or Parliament. There
The rationale as to why technology improvement is are simply too many other things that always seem
identified as a top priority is very easy to understand. to have priority for one reason or another. Another
Generally speaking, technology not only enhances is that the new technology may have too great of an
operational capabilities, but often workflow and cost impact on legacy systems or it could interfere with a
efficiencies can be gained. The reasons apply across larger ongoing technology project. And sometimes
the industry regardless of corporate ownership it is merely too hard to justify the project because
(public, private equity, privately owned), size (large it is a challenge to adequately show the return on
to small), geography (national, regional, local), credit investment or to clearly demonstrate the need versus
spectrum (prime, near prime, non-prime) or dealer the want.
focus (franchised, independent).
All auto financing sources must replace their ageing Technology improvements most often evaluated
legacy systems at some point, though many try to put and implemented today
off doing so for as long possible. This could involve a
replacement with a completely new platform from a The functional view
new service provider, an upgrade to a new platform In the area of risk management and account
with the same provider or a move from in-house acquisition or originations, there is a great amount of
to hosted platforms with a new or current provider. activity. For all the reasons named above, there have
Another case could be that the old platform can no been multiple auto financing sources that have had
longer be supported by the provider or internally with loan origination and servicing system updates and
outdated programming or need for greater security. Or replacements over recent years, many featuring more
it could be that change is necessitated as a result of a flexibility and configurability.
merger and acquisition situation.
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