Truck Leasing in a Down Economy: How to Prepare

Nassau Asset Management has been providing full-service asset management, including asset recovery, collections, remarketing, plant liquidations, and appraisals for more than 25 years to the equipment finance industry. The very nature of our business means we often know what's going to happen next, first. Based on the information compiled by our company and detailed in our NQI, along with other industry data and our own experience, I'd like to offer some insight and recommendations for lawyers serving the equipment leasing sector.

The Current Outlook

Nassau Asset Management recently issued the NQI for 2007, providing an analysis of year-to-year trends, comparing 2007 to 2006. We do this by tracking equipment collections, repossessions and remarketing trends among our customer base, throughout the country and around the world.

In general, we have seen what can best be described as a significant correction in the market. In particular, we reported a 110% increase in truck repossessions and liquidations. There are several reasons for this jump, starting with the clear decline in homebuilding.

This decline affects a wide range of peripheral business sectors, and most of them utilize trucks. Simply consider the progress of lumber from the forest to the sawmill to the lumber yard and then to the construction site. Then note the delivery of appliances, furniture and other items to be placed in the homes, along with the movement of the families from the old house to the new one.

Each one of these steps involves trucks, and the rings continue to expand out of the housing epicenter. In addition, government regulations (including restrictions on travel time), rising fuel costs and competition placed greater financial strain on businesses that utilize trucks.

Finally, the trucking industry saw new, more stringent emission standards applied to engines produced in 2007, raising questions about their performance capabilities. Many buyers instead purchased the remaining trucks with more proven '06 engines, taking advantage as well of low interest rates. This led to an increase in late model trucks on the market, driving down prices in the used truck market.

As a result, sales in new trucks declined in 2007. Recent truck registration data from market research firm R.L. Polk & Co. showed registrations of new Class 8 trucks dropped 37.8% from 2006. The Polk report also indicated a small rise in the total number of Class 8 vehicles in operation, up just 2.2% over the same period last year. For the year, truck manufacturers sold 150,965 Class 8 vehicles in 2007, the lowest number since 2003 and a 46.8% fall from 2006.

The news in other categories was not as bad in 2007. Nassau reported a drop of 32% in repossessions and liquidations of construction equipment in 2007, as compared with 2006. It appeared that this sector avoided the problems of the trucking category for much of the year because of the continued strength of the commercial construction industry. Market analysts reported that non-residential construction activity has actually grown in the past 12 months, going into the last half of 2007.

However, during the last half of the year, we did note a slight increase in the rate of repossessions of construction equipment; this sector may now be feeling pressure, which warrants further scrutiny.

Repossessions and liquidations of machine tools declined by 47% in 2007 over 2006, while the activity in printing equipment dropped by 23% during the same time period. Meanwhile, repossessions and liquidations rose in 2007 for medical devices by 121%. There are a number of factors for these varying results, including inventory levels, traditional irregular patterns of capital investment and insurance concerns driving some products out of the market.

Other trend reports seem to mirror the findings of our NQI. For example, the Equipment Leasing and Finance Association (ELFA), in its year-end Monthly Leasing and Finance Index (MLFI), reported that new business volume for 2007 was only 5% higher than 2006. In terms of fourth quarter commercial equipment lease and loan activity for 2007 compared to 2006, new business volume remained flat, at $24.5 billion in both periods.

The ELFA report also noted that year-over-year new business volume declined in both December and the entire fourth quarter. ELFA's president, Ken Bentsen, Jr., stated that this may indicate some pullback on investment, as a result of economic uncertainty.

All of these factors have produced a significant increase in activity for the asset management industry, and more than ever, it has required us to stay focused on our main goal in supporting our customers, producing recoveries instead of write-downs. With that in mind, it should be noted that Nassau is still selling equipment. We still see a number of vibrant businesses that need equipment, have good credit, and still look good on paper. Thanks to conservative financial decisions, a clear focus on their core business values, and sufficient equity, these companies are taking advantage of their position in the current economy.

We are also seeing a growing international presence in the U.S. market, via the Internet. Nassau's Web site receives an estimated 700,000 hits each month, and a significant portion of them come from international companies. These companies are reviewing the equipment online, bidding on it and then coming to the U.S. to inspect them and then purchase.

Strategic Options

In times such as these, it is best to apply a reality check when dealing with pursuing collections and asset recovery. This starts with an accurate and honest equipment valuation. Lawyers should consult with equipment and leasing managers before taking legal action based on the recovery and resale of assets. For example, before initiating a replevin order, it is important to ensure that the assets in question have enough value to justify the action.

Conversely, attorneys should expect similar cooperation from those managing the assets. Whenever possible, work with a company experienced in meeting the needs of attorneys; preferably this means working with an experienced asset management company.

These companies can serve as a one-stop solution source, increasing the speed of the process, to either salvage or resolve an existing transaction with a higher level of return. This 'one-stop shop' approach means your clients would have all of the asset management tools at their disposal, and can call on the appropriate tool at every step in the process.

In difficult economic conditions, it is also important to maintain a strong communication pipeline. This applies to both internal communication among the customer, legal counsel and asset manager, and external communication with the equipment lessor. Through effective communication, all parties can more readily agree on the actual value of the equipment in question, better gauge the nature of the lessor's financial options, determine the appropriate tone and rate of negotiation, and then select and execute appropriate final steps to achieve resolution.

In extreme cases, legal action may occur and, at that time, companies and their legal counsel will need to defend deficiency challenges by lessees. In those cases, an asset management firm may be asked to defend transactions in a court of law. Under those circumstances, the processes used to negotiate those transactions must always be deemed commercially reasonable.

In addition to these reasonable and proven processes, an experienced remarketer will be familiar with describing them in an affidavit and assist the companies and legal counsel in successfully resolving these issues through legal action.

The final step in the process is to consider all options for remarketing of equipment. As stated earlier, this now should include effective use of the Internet. A good Web site will better present this equipment to all potential buyers, both here and abroad, and provide streamline reporting mechanisms for completing the deal.

These steps will improve the success rate of these transactions and speed up their completion, alleviating the threat of a high rate of write-downs.

Conclusion

At this point, it isn't possible to fully answer the initial question, 'How bad is it?' It is clear that the economy is undergoing a significant correction; how severe and for how long remains to be seen. A continued oversupply of both new and slightly used trucks will keep prices down and combine with an ongoing decline in home construction to place pressure on owners and operators of trucking fleets. Other equipment sectors will also continue to operate in an atmosphere of market correction.

However, we continue to be able to find buyers for the equipment entering the remarketing sector. With some assistance coming from overseas buyers interested in equipment that can be reviewed, inspected and purchased via the Internet, we can foresee a market where companies can maintain a strong recovery rate of delinquent accounts.

We recommend that equipment leasing and finance companies with their legal counsel make sure they have accurate data on the equipment values, a full understanding of all their options for resolving delinquent accounts, and a strong relationship with asset management professionals to assist them along the way. Otherwise, the final answer to our question could be, 'Worse than I thought.'

Edward Castagna is president of Nassau Asset Management, based in Westbury, NY, a full-service firm that provides asset recovery, collections, remarketing and appraisal services to the equipment leasing and finance industry. Castagna has 15 years of experience in all areas of asset management, but is best known for his expertise in remarketing strategies and liquidations. He can be reached at 516-345-6301 or [email protected].

'How bad is it?' It may sound like the set-up line to an old joke, but in reality, this is probably the question most asked by any number of business leaders and experts when talking about the current economy. Without doubt, the economy appears headed for a downturn, based on the analyses and reports issued by dozens of major corporations, analysts, and government agencies.

This is currently most prevalent in the trucking sector, which saw a dramatic increase in repossessions and liquidations in the past year, according to Nassau Asset Management's NasTrac Quarterly Index (NQI). Some of the reasons for this spike involve issues beyond current economic conditions, as we will discuss in this article. However, it is clear that the changing fortunes of the housing market have had a negative 'ripple effect' on trucking.

Will we head into a recession? Will the trucking sector be further damaged? What other business categories will be affected? How should legal counsel prepare to assist their clients? What will be the most effective steps they can take to do so?

Nassau Asset Management has been providing full-service asset management, including asset recovery, collections, remarketing, plant liquidations, and appraisals for more than 25 years to the equipment finance industry. The very nature of our business means we often know what's going to happen next, first. Based on the information compiled by our company and detailed in our NQI, along with other industry data and our own experience, I'd like to offer some insight and recommendations for lawyers serving the equipment leasing sector.

The Current Outlook

Nassau Asset Management recently issued the NQI for 2007, providing an analysis of year-to-year trends, comparing 2007 to 2006. We do this by tracking equipment collections, repossessions and remarketing trends among our customer base, throughout the country and around the world.

In general, we have seen what can best be described as a significant correction in the market. In particular, we reported a 110% increase in truck repossessions and liquidations. There are several reasons for this jump, starting with the clear decline in homebuilding.

This decline affects a wide range of peripheral business sectors, and most of them utilize trucks. Simply consider the progress of lumber from the forest to the sawmill to the lumber yard and then to the construction site. Then note the delivery of appliances, furniture and other items to be placed in the homes, along with the movement of the families from the old house to the new one.

Each one of these steps involves trucks, and the rings continue to expand out of the housing epicenter. In addition, government regulations (including restrictions on travel time), rising fuel costs and competition placed greater financial strain on businesses that utilize trucks.

Finally, the trucking industry saw new, more stringent emission standards applied to engines produced in 2007, raising questions about their performance capabilities. Many buyers instead purchased the remaining trucks with more proven '06 engines, taking advantage as well of low interest rates. This led to an increase in late model trucks on the market, driving down prices in the used truck market.

As a result, sales in new trucks declined in 2007. Recent truck registration data from market research firm R.L. Polk & Co. showed registrations of new Class 8 trucks dropped 37.8% from 2006. The Polk report also indicated a small rise in the total number of Class 8 vehicles in operation, up just 2.2% over the same period last year. For the year, truck manufacturers sold 150,965 Class 8 vehicles in 2007, the lowest number since 2003 and a 46.8% fall from 2006.

The news in other categories was not as bad in 2007. Nassau reported a drop of 32% in repossessions and liquidations of construction equipment in 2007, as compared with 2006. It appeared that this sector avoided the problems of the trucking category for much of the year because of the continued strength of the commercial construction industry. Market analysts reported that non-residential construction activity has actually grown in the past 12 months, going into the last half of 2007.

However, during the last half of the year, we did note a slight increase in the rate of repossessions of construction equipment; this sector may now be feeling pressure, which warrants further scrutiny.

Repossessions and liquidations of machine tools declined by 47% in 2007 over 2006, while the activity in printing equipment dropped by 23% during the same time period. Meanwhile, repossessions and liquidations rose in 2007 for medical devices by 121%. There are a number of factors for these varying results, including inventory levels, traditional irregular patterns of capital investment and insurance concerns driving some products out of the market.

Other trend reports seem to mirror the findings of our NQI. For example, the Equipment Leasing and Finance Association (ELFA), in its year-end Monthly Leasing and Finance Index (MLFI), reported that new business volume for 2007 was only 5% higher than 2006. In terms of fourth quarter commercial equipment lease and loan activity for 2007 compared to 2006, new business volume remained flat, at $24.5 billion in both periods.

The ELFA report also noted that year-over-year new business volume declined in both December and the entire fourth quarter. ELFA's president, Ken Bentsen, Jr., stated that this may indicate some pullback on investment, as a result of economic uncertainty.

All of these factors have produced a significant increase in activity for the asset management industry, and more than ever, it has required us to stay focused on our main goal in supporting our customers, producing recoveries instead of write-downs. With that in mind, it should be noted that Nassau is still selling equipment. We still see a number of vibrant businesses that need equipment, have good credit, and still look good on paper. Thanks to conservative financial decisions, a clear focus on their core business values, and sufficient equity, these companies are taking advantage of their position in the current economy.

We are also seeing a growing international presence in the U.S. market, via the Internet. Nassau's Web site receives an estimated 700,000 hits each month, and a significant portion of them come from international companies. These companies are reviewing the equipment online, bidding on it and then coming to the U.S. to inspect them and then purchase.

Strategic Options

In times such as these, it is best to apply a reality check when dealing with pursuing collections and asset recovery. This starts with an accurate and honest equipment valuation. Lawyers should consult with equipment and leasing managers before taking legal action based on the recovery and resale of assets. For example, before initiating a replevin order, it is important to ensure that the assets in question have enough value to justify the action.

Conversely, attorneys should expect similar cooperation from those managing the assets. Whenever possible, work with a company experienced in meeting the needs of attorneys; preferably this means working with an experienced asset management company.

These companies can serve as a one-stop solution source, increasing the speed of the process, to either salvage or resolve an existing transaction with a higher level of return. This 'one-stop shop' approach means your clients would have all of the asset management tools at their disposal, and can call on the appropriate tool at every step in the process.

In difficult economic conditions, it is also important to maintain a strong communication pipeline. This applies to both internal communication among the customer, legal counsel and asset manager, and external communication with the equipment lessor. Through effective communication, all parties can more readily agree on the actual value of the equipment in question, better gauge the nature of the lessor's financial options, determine the appropriate tone and rate of negotiation, and then select and execute appropriate final steps to achieve resolution.

In extreme cases, legal action may occur and, at that time, companies and their legal counsel will need to defend deficiency challenges by lessees. In those cases, an asset management firm may be asked to defend transactions in a court of law. Under those circumstances, the processes used to negotiate those transactions must always be deemed commercially reasonable.

In addition to these reasonable and proven processes, an experienced remarketer will be familiar with describing them in an affidavit and assist the companies and legal counsel in successfully resolving these issues through legal action.

The final step in the process is to consider all options for remarketing of equipment. As stated earlier, this now should include effective use of the Internet. A good Web site will better present this equipment to all potential buyers, both here and abroad, and provide streamline reporting mechanisms for completing the deal.

These steps will improve the success rate of these transactions and speed up their completion, alleviating the threat of a high rate of write-downs.

Conclusion

At this point, it isn't possible to fully answer the initial question, 'How bad is it?' It is clear that the economy is undergoing a significant correction; how severe and for how long remains to be seen. A continued oversupply of both new and slightly used trucks will keep prices down and combine with an ongoing decline in home construction to place pressure on owners and operators of trucking fleets. Other equipment sectors will also continue to operate in an atmosphere of market correction.

However, we continue to be able to find buyers for the equipment entering the remarketing sector. With some assistance coming from overseas buyers interested in equipment that can be reviewed, inspected and purchased via the Internet, we can foresee a market where companies can maintain a strong recovery rate of delinquent accounts.

We recommend that equipment leasing and finance companies with their legal counsel make sure they have accurate data on the equipment values, a full understanding of all their options for resolving delinquent accounts, and a strong relationship with asset management professionals to assist them along the way. Otherwise, the final answer to our question could be, 'Worse than I thought.'

Edward Castagna is president of Nassau Asset Management, based in Westbury, NY, a full-service firm that provides asset recovery, collections, remarketing and appraisal services to the equipment leasing and finance industry. Castagna has 15 years of experience in all areas of asset management, but is best known for his expertise in remarketing strategies and liquidations. He can be reached at 516-345-6301 or [email protected].