Uneven, But Positive Net Results for Leasing Industry at Midyear

Credit Approval Rebounds

After two very disappointing quarters, credit approval ratios as a percentage of total credit decisions managed to end the midyear point just slightly higher than the previous year. The second quarter of 2002 ended with a 74.2% credit approval ratio that dropped significantly to the 12-month low of 66.3% in the third quarter of 2002. For the fourth quarter of 2003, the credit approval ratio remained at a disappointing level, increasing ever so slightly to 66.7%. Thankfully, the first quarter of 2003 then saw approvals jump up to the 12-month high of 76.4% before taking a minor decline to close the midyear point at a reasonably healthy 74.3%.

On a note of some concern, the latest PIR found that average losses (charge-offs) as a percentage of receivables, were fairly high when compared with the same 12-month period of other years. Although charge-offs remained fairly consistent (fluctuating between 1.2% and 1.6%) for the 12-month period ending June 30, 2003, this positive news seems more than offset by the fact that the numbers are more than double the returns posted in previous years. For purposes of comparison, in last year's PIR, from the second quarter of 2001 to the second quarter of 2002, the highest level of charge-offs of 0.7% was reached in the second quarter of 2002 and the lowest level of 0.4% was reached in the second quarter of 2001. Of course the mix of responding companies was different in last year's survey, but as a reference point it is certainly worthy of note. Similarly, for the 12-month period from June 30, 2000 to June 30 2001, charge-offs registered between 0.5% and 0.7%.

Delinquencies Stable

More encouraging news is that the number of second quarter delinquencies as a percentage of gross receivables was fairly low. At midyear 2003, delinquencies of less than 30 days stood at a 12-month low of 97.5%, down slightly from the 12-month high in this category, 98.2%, which was seen in the fourth quarter of 2002.

Accounts 31- to 60-days overdue showed little change over the past year. At the close of the second quarter of 2002, accounts in this category stood at 0.9%. Delinquencies in this category then fell in the third quarter of 2002 to the 12-month low of 0.6%, before rising to 0.7% in the fourth quarter of 2002 and 0.8% in the first quarter of 2003. Delinquencies in this category ended this 12-month period at a high of 1.0% in the second quarter of 2003. The good news, however, is that in addition to being relatively stable over the course of the past 12 months, these numbers are also fairly low when compared with prior years.

Delinquencies of 61 to 90 days for the second quarter of 2003 were reported at 0.4%, which is where delinquencies in this category also stood third and fourth quarters of 2002. The 12-month high in this category of 0.5% was reported in the second quarter of 2002 and the 12-month low of 0.3% was seen first quarter of 2003. As with the previous category, delinquencies here are slightly lower than the PIR from midyear 2002 and considerably lower than the PIR from midyear 2000 when delinquencies in this category averaged 1.2%.

Delinquencies in accounts more than 90-days past due do not appear to be a source of great concern. Over the past 12 months, actual delinquencies have been relatively stable, but dropped below 1.0% only once, the 12-month low of 0.7% at the close of the fourth quarter of 2002. At the end of the second quarter of 2002, delinquencies stood at 1.0% before rising slightly to 1.1% in the third quarter of 2002. After the drop-off to end the year, actual delinquencies then jumped to the 12-month high of 1.3%. The second quarter of 2003 then brought some relief as delinquencies in this category dropped back to 1.1%. Once again, the numbers in this category are fairly healthy, especially considering that for the same period in 2002 and 2001 actual delinquencies averaged 1.4% and in 2000 they averaged over 2.0%.

Employment Fallings

The most recent PIR showed an 11.8% decline over the 12-month period ending June 30, 2003 in the total number of people employed by the responding leasing companies. In fact, the second quarter of 2002 was the 12-month high in this category at 6,094 employees and this number then proceeded to drop for four consecutive quarters to end the 12-month period at 5,377 employees for the second quarter of 2003. Overall, the decreases in employment were fairly insignificant between the second quarter of 2002 and the fourth quarter of 2002 as employment dropped by only 84 workers or 1.4%. At the end of the first quarter of 2003, however, employment then fell by 205 people or 3.4% from the prior period. Employment then ended the 12-month period by making its biggest decline, falling by an additional 428 people or 7.4% from the previous quarter. According to the responding companies, this decline is probably attributable to two employers that had a “significant reduction in force since the second quarter of 2002.”

While falling employment and “increased productivity” or “efficiency” seem to be the hallmarks of the current economy, it is certainly not the benchmark of an industry on the rise. While it is nice that some of the industry's indicators ended this past quarter up slightly from a year ago, it is also a likely source of concern that total net portfolios and new business volume have been so inconsistent, that charge-offs are double what they were last year and that employment has dropped steadily since June of 2002.

The argument on the other side is that while the economy may not be very strong, the business community is taking the appropriate steps to weather the storm. Evidence in support of this position may be seen in the most recent figures reported by the Administrative Office of the U.S. Courts, which just announced that the total number of business bankruptcies filed from midyear 2002 to 2003 has decreased by 5.2% from the prior 12-month period. For the 12-month period ending June 30, 2003 there was a total of 37,182 business cases filed, compared with 39,201 for the previous 12-month period. Breaking down this figure a little further, for the 12-month period ending June 30, 2003, Chapter 7 business bankruptcy liquidations are down by 6.7%, and Chapter 11 business bankruptcy reorganizations are down by 8.3% from the same period in 2002. Whether these figures will have any direct bearing on the leasing industry is unclear, but it has to be encouraging to the industry that the business community as a whole seems to be adjusting to the economy instead of failing because of it.

The PIR, reported on a quarterly basis, tracks the performance of leasing companies in six key areas. The same companies are tracked for each PIR quarterly report in order to provide a reliable trend analysis, although the mix of companies may vary from report to report.

The participants in this report were ADP Credit Corporation, Amsouth Leasing Corporation, Caterpillar Financial Services Corporation, Computer Sales International, Inc., Dana Credit Corporation, De Lage Landen Financial Services, Farm Credit Leasing Services Corporation, Fleet Capital Leasing, GreatAmerica Leasing, Hitachi Credit America Corporation, John Deere Credit Corporation, JP Morgan Leasing Inc., Key Equipment Finance, LaSalle National Leasing Corporation, U.S. Bancorp Leasing & Financial, Verizon Credit, Inc. and Wells Fargo Equipment Finance.

(see sidebar below)

Fitch Equipment Lease ABS Delinquency Index Reaches 5-Year Low

Fitch Ratings of New York has released the latest edition of “The ABS Equipment Expo,” which revealed that during second quarter 2003 its equipment lease asset-backed securities (ABS) delinquency index fell to its lowest level since October 1998. Fitch stated that as of June 30, 2003, total delinquencies greater than 30-days past due fell 25.6% from the first quarter to reach 2.97%.

According to Fitch, the current issuers within its equipment lease ABS index have survived 3 years of industry tiering and boast proven business models. Results of industry improvements are evident from healthier securitized portfolio performance. Fitch believes equipment lease ABS investors can still expect stable credit performance in most securitized leasing portfolios and low ratings volatility throughout the remainder of 2003. Furthermore, as macroeconomic signs point to a mild rebound in business spending, lessors could soon experience robust portfolio growth as more businesses lease equipment that could lead to an increase in securitization volume.

Despite improving delinquency and economic trends, however, Fitch has observed greater month-to-month index volatility in 2003 compared to the past 2 years. The company believes the volatility was driven in part by three transactions that paid out and traditionally exhibited high delinquencies as well as two large transactions added to the index in the second quarter.

All public and 144A Fitch-rated ABS equipment lease transactions since December 1997 are included in Fitch's index, which now tracks the performance of 94 transactions over a 5-year period. “The ABS Equipment Expo” is a publication that follows equipment lease ABS performance, industry trends and developments within the securitization market. Both current and historical editions of the newsletter are available on Fitch's Web site at www.fitchratings.com or by contacting the Ratings Desk at 800-893-4824.

Consistent with the turbulent and uneven economy as a whole, the up and down results contained in the Equipment Leasing Association's Quarterly Performance Indicators Report (PIR) for the second quarter of 2003 should not come as much of a surprise. In the final analysis, industry members should take solace in the fact that while it has been a fairly wild past 12 months, there has been a net gain in two of the most important indicators: Total Net Portfolio and Total New Business. Certain other indicators, however, produced more mixed results. Specifically, employment in the industry is down while charge-offs are up when compared with the figures from the second quarter of 2002.

Generally a category marked by consistency, the industry's total net portfolio was anything but consistent over the past 12 months. Although net portfolios grew by a modest 1.4% from June 30, 2002 to June 30, 2003, they have also dropped for two consecutive quarters. Total net portfolio for the second quarter 2002 was $58.3 billion, which then dropped slightly to $58 billion in the third quarter of 2002, before ballooning to the 12-month high of $60.2 billion at year's end. The present year showed a first-quarter decrease to $59.7 billion, and for the second quarter the total net portfolio then fell again to $59.1 billion, representing an overall increase of 1.4% from the second quarter of 2002.

Total new business volume was also quite inconsistent over the past year, but closed the midyear of 2003 up by a respectable 10.4% from the second quarter of 2002 after an up and down 12 months. At the close of the second quarter of 2002, new business volume was $9.6 billion, which then dropped to $9.2 billion at the end of the third quarter of 2002. The end of 2002 saw the usual annual gain, rising to the 12-month high of $11.2 billion in new business, but just as quickly, the bottom fell out and new business dropped 25.9% to $8.3 billion in the first quarter of 2003. Fortunately, there was a healthy rebound to $10.6 billion to close out the midyear. While this increase represents a much-needed boost after a disappointing first quarter in 2003, a little more consistency would certainly be a significant salve to the nerves of the industry.

Credit Approval Rebounds

After two very disappointing quarters, credit approval ratios as a percentage of total credit decisions managed to end the midyear point just slightly higher than the previous year. The second quarter of 2002 ended with a 74.2% credit approval ratio that dropped significantly to the 12-month low of 66.3% in the third quarter of 2002. For the fourth quarter of 2003, the credit approval ratio remained at a disappointing level, increasing ever so slightly to 66.7%. Thankfully, the first quarter of 2003 then saw approvals jump up to the 12-month high of 76.4% before taking a minor decline to close the midyear point at a reasonably healthy 74.3%.

On a note of some concern, the latest PIR found that average losses (charge-offs) as a percentage of receivables, were fairly high when compared with the same 12-month period of other years. Although charge-offs remained fairly consistent (fluctuating between 1.2% and 1.6%) for the 12-month period ending June 30, 2003, this positive news seems more than offset by the fact that the numbers are more than double the returns posted in previous years. For purposes of comparison, in last year's PIR, from the second quarter of 2001 to the second quarter of 2002, the highest level of charge-offs of 0.7% was reached in the second quarter of 2002 and the lowest level of 0.4% was reached in the second quarter of 2001. Of course the mix of responding companies was different in last year's survey, but as a reference point it is certainly worthy of note. Similarly, for the 12-month period from June 30, 2000 to June 30 2001, charge-offs registered between 0.5% and 0.7%.

Delinquencies Stable

More encouraging news is that the number of second quarter delinquencies as a percentage of gross receivables was fairly low. At midyear 2003, delinquencies of less than 30 days stood at a 12-month low of 97.5%, down slightly from the 12-month high in this category, 98.2%, which was seen in the fourth quarter of 2002.

Accounts 31- to 60-days overdue showed little change over the past year. At the close of the second quarter of 2002, accounts in this category stood at 0.9%. Delinquencies in this category then fell in the third quarter of 2002 to the 12-month low of 0.6%, before rising to 0.7% in the fourth quarter of 2002 and 0.8% in the first quarter of 2003. Delinquencies in this category ended this 12-month period at a high of 1.0% in the second quarter of 2003. The good news, however, is that in addition to being relatively stable over the course of the past 12 months, these numbers are also fairly low when compared with prior years.

Delinquencies of 61 to 90 days for the second quarter of 2003 were reported at 0.4%, which is where delinquencies in this category also stood third and fourth quarters of 2002. The 12-month high in this category of 0.5% was reported in the second quarter of 2002 and the 12-month low of 0.3% was seen first quarter of 2003. As with the previous category, delinquencies here are slightly lower than the PIR from midyear 2002 and considerably lower than the PIR from midyear 2000 when delinquencies in this category averaged 1.2%.

Delinquencies in accounts more than 90-days past due do not appear to be a source of great concern. Over the past 12 months, actual delinquencies have been relatively stable, but dropped below 1.0% only once, the 12-month low of 0.7% at the close of the fourth quarter of 2002. At the end of the second quarter of 2002, delinquencies stood at 1.0% before rising slightly to 1.1% in the third quarter of 2002. After the drop-off to end the year, actual delinquencies then jumped to the 12-month high of 1.3%. The second quarter of 2003 then brought some relief as delinquencies in this category dropped back to 1.1%. Once again, the numbers in this category are fairly healthy, especially considering that for the same period in 2002 and 2001 actual delinquencies averaged 1.4% and in 2000 they averaged over 2.0%.

Employment Fallings

The most recent PIR showed an 11.8% decline over the 12-month period ending June 30, 2003 in the total number of people employed by the responding leasing companies. In fact, the second quarter of 2002 was the 12-month high in this category at 6,094 employees and this number then proceeded to drop for four consecutive quarters to end the 12-month period at 5,377 employees for the second quarter of 2003. Overall, the decreases in employment were fairly insignificant between the second quarter of 2002 and the fourth quarter of 2002 as employment dropped by only 84 workers or 1.4%. At the end of the first quarter of 2003, however, employment then fell by 205 people or 3.4% from the prior period. Employment then ended the 12-month period by making its biggest decline, falling by an additional 428 people or 7.4% from the previous quarter. According to the responding companies, this decline is probably attributable to two employers that had a “significant reduction in force since the second quarter of 2002.”

While falling employment and “increased productivity” or “efficiency” seem to be the hallmarks of the current economy, it is certainly not the benchmark of an industry on the rise. While it is nice that some of the industry's indicators ended this past quarter up slightly from a year ago, it is also a likely source of concern that total net portfolios and new business volume have been so inconsistent, that charge-offs are double what they were last year and that employment has dropped steadily since June of 2002.

The argument on the other side is that while the economy may not be very strong, the business community is taking the appropriate steps to weather the storm. Evidence in support of this position may be seen in the most recent figures reported by the Administrative Office of the U.S. Courts, which just announced that the total number of business bankruptcies filed from midyear 2002 to 2003 has decreased by 5.2% from the prior 12-month period. For the 12-month period ending June 30, 2003 there was a total of 37,182 business cases filed, compared with 39,201 for the previous 12-month period. Breaking down this figure a little further, for the 12-month period ending June 30, 2003, Chapter 7 business bankruptcy liquidations are down by 6.7%, and Chapter 11 business bankruptcy reorganizations are down by 8.3% from the same period in 2002. Whether these figures will have any direct bearing on the leasing industry is unclear, but it has to be encouraging to the industry that the business community as a whole seems to be adjusting to the economy instead of failing because of it.

The PIR, reported on a quarterly basis, tracks the performance of leasing companies in six key areas. The same companies are tracked for each PIR quarterly report in order to provide a reliable trend analysis, although the mix of companies may vary from report to report.

The participants in this report were ADP Credit Corporation, Amsouth Leasing Corporation, Caterpillar Financial Services Corporation, Computer Sales International, Inc., Dana Credit Corporation, De Lage Landen Financial Services, Farm Credit Leasing Services Corporation, Fleet Capital Leasing, GreatAmerica Leasing, Hitachi Credit America Corporation, John Deere Credit Corporation, JP Morgan Leasing Inc., Key Equipment Finance, LaSalle National Leasing Corporation, U.S. Bancorp Leasing & Financial, Verizon Credit, Inc. and Wells Fargo Equipment Finance.

(see sidebar below)

Fitch Equipment Lease ABS Delinquency Index Reaches 5-Year Low

Fitch Ratings of New York has released the latest edition of “The ABS Equipment Expo,” which revealed that during second quarter 2003 its equipment lease asset-backed securities (ABS) delinquency index fell to its lowest level since October 1998. Fitch stated that as of June 30, 2003, total delinquencies greater than 30-days past due fell 25.6% from the first quarter to reach 2.97%.

According to Fitch, the current issuers within its equipment lease ABS index have survived 3 years of industry tiering and boast proven business models. Results of industry improvements are evident from healthier securitized portfolio performance. Fitch believes equipment lease ABS investors can still expect stable credit performance in most securitized leasing portfolios and low ratings volatility throughout the remainder of 2003. Furthermore, as macroeconomic signs point to a mild rebound in business spending, lessors could soon experience robust portfolio growth as more businesses lease equipment that could lead to an increase in securitization volume.

Despite improving delinquency and economic trends, however, Fitch has observed greater month-to-month index volatility in 2003 compared to the past 2 years. The company believes the volatility was driven in part by three transactions that paid out and traditionally exhibited high delinquencies as well as two large transactions added to the index in the second quarter.

All public and 144A Fitch-rated ABS equipment lease transactions since December 1997 are included in Fitch's index, which now tracks the performance of 94 transactions over a 5-year period. “The ABS Equipment Expo” is a publication that follows equipment lease ABS performance, industry trends and developments within the securitization market. Both current and historical editions of the newsletter are available on Fitch's Web site at www.fitchratings.com or by contacting the Ratings Desk at 800-893-4824.