Waiting for the Thaw: A Look at Repossession and Liquidation Statistics

Bob Dylan wrote many years ago, “You don't need a weatherman to know which way the wind blows.” The same rule applies to the current economic crisis. Everyone has felt its impact in some fashion.

But careful review of cogent data can provide greater insight into the specific problems and challenges, and even opportunities surfacing in the midst of the news of shutdowns and layoffs, and the discussions on how to turn things around that are taking place on Capitol Hill and every home in America.

At Nassau Asset Management, we have created the NasTrac Quarterly Index (“NQI”), using our internal repossession and orderly liquidation activity in a given quarter to track changes as compared with the same quarter the previous year or with previous quarters in the same year. By reviewing NQI data over a number of quarters, it is possible to note trends that are occurring in specific sectors of the equipment leasing industry.

While it is not possible to use the NQI to predict the future, it does provide an excellent snapshot of current conditions and, when combined with information from other sources, enables us to have a good sense of what the coming year will have to offer. In our NQI report covering the final quarter of 2008, we saw the slumping economy continue to have widespread effects on the manufacturing, construction, and transportation industries.

Manufacturing and Construction

Repossessions and liquidations of machine tools rose by more than 150% in 2008, while construction equipment repossessions also increased as compared with 2007. Machine tool repossessions have undergone a steady and continuous increase since the third quarter of 2007, according to our records. We believe a spike in the machine tool sector reflects the true economic condition; therefore, it is clear that manufacturing demand is low, thus bringing more repossessed and off-lease machine tools to the market.

The latest unemployment figures confirm this finding. Of the 598,000 jobs lost in January, according to government statistics, manufacturing companies shed 207,000 jobs. That represents a more than 1.5% decline from December 2008. As a point of comparison, 111,000 jobs were lost in the construction industry, and the service sector, often regarded as a source of job growth in the past, saw 279,000 jobs lost.

The last such increase in machine tool repos came during the previous recession, after 9/11. In this case, there are several factors that bear watching as we attempt to forecast the duration and significance of this recession.

For example, it will be important to mark the level of repossession activity before and after any major event within the automotive sector. While both GM and Chrysler are moving ahead with plans to reduce their debt levels, the specter of bankruptcy still looms. That likelihood may increase if the federal government goes ahead with reported plans to “push to the head of the line” of creditors, in order to assure repayment of the billions given to the companies in the bailout package.

If GM or Chrysler should file for Chapter 11 bankruptcy protection, repossession activity will likely undergo a dramatic increase. There would be a ripple effect, as the shock wave hits the outside contractors who are fed by GM or Chrysler.

Meanwhile, scrap steel prices, which only a few months ago were at record highs, have recently dropped to the lowest levels in nearly five years. Numerous reports from across the country indicate a significant drop in activity. According to a story from the Phoenix Business Journal in early February, recyclers in the state claimed material bought in October was still sitting there.

This spike in machine tool repos at the same time the price of steel goes down indicates manufacturing demand is low, which is bringing more repossessed and off-lease machine tools to the market. This was a trend we saw in the beginning of the last recession.

If there is one small positive sign in the manufacturing sector, it might come from a recent report by the National Association of Manufacturers (“NAM”), the Manufacturing Institute, and the Manufacturers Alliance/MAPI. That report indicated that the United States is making progress toward controlling structural costs, such as labor, regulation and taxes. Admittedly, foreign manufacturers continue to enjoy an advantage in recent years over their domestic counterparts, but if the positive trend continues, it could provide relief in the long term to these industries.

The latest NQI displays the ongoing problems in the construction industry, reflected by the loss of 111,000 jobs in January. Construction equipment repossessions in 2008 rose by 11% from the totals for 2007. This sector has been struggling for some time now, and a recent report by the federal government showed new home construction has now dropped to the lowest rate since 1959, the first year the government tracked this activity.

The housing decline is now seemingly affecting the nonresidential-building and public-works markets, which had been relatively healthy. McGraw-Hill Construction is forecasting a 7.4% decline in construction starts in 2009, following declines of 12.4% in 2008 and 8.0% in 2007.

Other experts don't believe that the problems will peak in 2009. In a recent Webinar, Jim Haughey, chief economist for Reed Construction Data in Georgia, said he expects the U.S. economy will hit bottom in late summer or early fall and won't recover until the end of 2010. Once the recovery begins, Haughey predicts the country would see limited growth for several years. Because of that, he predicts nonresidential construction spending to hit bottom in the winter of 2010.

In the same Webinar, Ken Simonson, chief economist for the Associated General Contractors of America, predicted that nonresidential construction spending would fall 3% to 9% this year, with retail taking the biggest hit.

Meanwhile, the Architecture Billings Index, a forward-looking index of U.S. nonresidential construction activity, increased by a modest 1.7% in December, but remained 19 points lower than it was a year earlier. The American Institute of Architects survey began in 1995 and had reached historically low numbers in October and November, because of the economic market.

Transportation

Truck repossessions processed by Nassau declined by 25% in 2008 from a high point in 2007, but it is important to note that there were still a significant number of repossessions last year. By comparison, the 2008 totals represented a 50% increase from 2006 figures.

The initial glut of trucks in the marketplace following the change in diesel engines in 2006-2007 has now been absorbed. However the slow economy means there is still a high level of inventory, which may yet increase due to difficult credit slowing down the entire food chain.

In its most recent data, from November 2008, the U.S. Department of Transportation's Transportation Services Index (“TSI”) totaled 108.8, a decline of 1.1% from October's level and 2.3% from November 2007's total. This is a measure of month-to-month changes in the output of services provided by for-hire transportation industries. In a year-over-year comparison, the TSI declined 1.2% during the first 11 months of 2008.

The numbers for the month-to-month changes in the output of services provided by for-hire rail, trucking, inland waterway, pipeline, and airfreight firms, the Freight TSI totaled 107.6 in November ' the lowest level since January 2004, according to the Department of Transportation's Bureau of Transportation Statistics.

The decline in freight transportation is not connected to fuel prices. There continues to be more supply than demand, keeping prices relatively low.

Other Sectors

Data in the NQI showed repossessions of medical equipment in 2008 increased by approximately 50% over 2007. In Nassau's experience, the health care industry is typically not affected by economic downturns; the current rise in recoveries can be attributed to equipment with applications for treatments not reimbursed by insurance. This would include equipment coming back from cosmetic or aesthetics practices.

In most cases, these treatments are out-of-pocket expenses for the patient, and with most consumers now trying to cut back on non-essential expenses, many medical practices specializing in these treatments have been feeling the pinch.

Looking Ahead

Based on our current volume and activity and the other trends in the marketplace, we predict current trends will continue for at least the next six to 12 months. Much will depend on the extent and timeliness of the initiation of the infrastructure projects proposed by the Obama administration as part of its stimulus package. That package is being finalized in Congressional debate as this article is written, so it is not possible to gauge what will be done, whenit will commence, and how much
activity will be authorized.

What is clear is that, in the interim, some weaker companies will not be able to survive until the infrastructure work commences. This is especially true if American automakers continue their struggles or decline further, despite government assistance. It will also be important to see if U.S. exports decrease because of a rising dollar.

Clearly, one of the most crucial factors to watch is the credit market. It remains, at best, sluggish, and lenders are receiving mixed signals. The Federal Reserve weekly reports show an increase in commercial and industrial loans, but those loans are being used by large companies to meet their financing needs or to have cash on hand for the future. They are not being used to generate new business activity in the leasing sector and elsewhere.

Therefore, it's not clear that the credit market has yet to begin supplying the relief needed by potential borrowers in the industrial markets. As a result, Nassau has seen a slight drop in a still strong buying climate among our customers who are struggling to maintain normal credit lines.

To return to Bob Dylan, he actually provides some other words to consider when looking at the future: “May you have a strong foundation, when the winds of changes shift.” It is safe to say that at some point in the next 12 to 18 months, a combination of government action, an increased flow of credit, the normal ebb and flow of the marketplace, and factors not yet visible will provide a shift in the positive direction.

In the meantime, businesses will have to apply sound operating practices, increase their flexibility and responsiveness in terms of obtaining and using assets, and have a firm understanding of all options available to them as they work their way through the coming year.

[IMGCAP(1)]

Edward Castagna is President of Nassau Asset Management, based in Westbury, NY, which provides asset recovery, collections, remarketing and appraisal services to the equipment leasing and finance industry. A board member of the ELFA representing the service providers business council, 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 may be reached at 516-345-6301 or [email protected].

Bob Dylan wrote many years ago, “You don't need a weatherman to know which way the wind blows.” The same rule applies to the current economic crisis. Everyone has felt its impact in some fashion.

But careful review of cogent data can provide greater insight into the specific problems and challenges, and even opportunities surfacing in the midst of the news of shutdowns and layoffs, and the discussions on how to turn things around that are taking place on Capitol Hill and every home in America.

At Nassau Asset Management, we have created the NasTrac Quarterly Index (“NQI”), using our internal repossession and orderly liquidation activity in a given quarter to track changes as compared with the same quarter the previous year or with previous quarters in the same year. By reviewing NQI data over a number of quarters, it is possible to note trends that are occurring in specific sectors of the equipment leasing industry.

While it is not possible to use the NQI to predict the future, it does provide an excellent snapshot of current conditions and, when combined with information from other sources, enables us to have a good sense of what the coming year will have to offer. In our NQI report covering the final quarter of 2008, we saw the slumping economy continue to have widespread effects on the manufacturing, construction, and transportation industries.

Manufacturing and Construction

Repossessions and liquidations of machine tools rose by more than 150% in 2008, while construction equipment repossessions also increased as compared with 2007. Machine tool repossessions have undergone a steady and continuous increase since the third quarter of 2007, according to our records. We believe a spike in the machine tool sector reflects the true economic condition; therefore, it is clear that manufacturing demand is low, thus bringing more repossessed and off-lease machine tools to the market.

The latest unemployment figures confirm this finding. Of the 598,000 jobs lost in January, according to government statistics, manufacturing companies shed 207,000 jobs. That represents a more than 1.5% decline from December 2008. As a point of comparison, 111,000 jobs were lost in the construction industry, and the service sector, often regarded as a source of job growth in the past, saw 279,000 jobs lost.

The last such increase in machine tool repos came during the previous recession, after 9/11. In this case, there are several factors that bear watching as we attempt to forecast the duration and significance of this recession.

For example, it will be important to mark the level of repossession activity before and after any major event within the automotive sector. While both GM and Chrysler are moving ahead with plans to reduce their debt levels, the specter of bankruptcy still looms. That likelihood may increase if the federal government goes ahead with reported plans to “push to the head of the line” of creditors, in order to assure repayment of the billions given to the companies in the bailout package.

If GM or Chrysler should file for Chapter 11 bankruptcy protection, repossession activity will likely undergo a dramatic increase. There would be a ripple effect, as the shock wave hits the outside contractors who are fed by GM or Chrysler.

Meanwhile, scrap steel prices, which only a few months ago were at record highs, have recently dropped to the lowest levels in nearly five years. Numerous reports from across the country indicate a significant drop in activity. According to a story from the Phoenix Business Journal in early February, recyclers in the state claimed material bought in October was still sitting there.

This spike in machine tool repos at the same time the price of steel goes down indicates manufacturing demand is low, which is bringing more repossessed and off-lease machine tools to the market. This was a trend we saw in the beginning of the last recession.

If there is one small positive sign in the manufacturing sector, it might come from a recent report by the National Association of Manufacturers (“NAM”), the Manufacturing Institute, and the Manufacturers Alliance/MAPI. That report indicated that the United States is making progress toward controlling structural costs, such as labor, regulation and taxes. Admittedly, foreign manufacturers continue to enjoy an advantage in recent years over their domestic counterparts, but if the positive trend continues, it could provide relief in the long term to these industries.

The latest NQI displays the ongoing problems in the construction industry, reflected by the loss of 111,000 jobs in January. Construction equipment repossessions in 2008 rose by 11% from the totals for 2007. This sector has been struggling for some time now, and a recent report by the federal government showed new home construction has now dropped to the lowest rate since 1959, the first year the government tracked this activity.

The housing decline is now seemingly affecting the nonresidential-building and public-works markets, which had been relatively healthy. McGraw-Hill Construction is forecasting a 7.4% decline in construction starts in 2009, following declines of 12.4% in 2008 and 8.0% in 2007.

Other experts don't believe that the problems will peak in 2009. In a recent Webinar, Jim Haughey, chief economist for Reed Construction Data in Georgia, said he expects the U.S. economy will hit bottom in late summer or early fall and won't recover until the end of 2010. Once the recovery begins, Haughey predicts the country would see limited growth for several years. Because of that, he predicts nonresidential construction spending to hit bottom in the winter of 2010.

In the same Webinar, Ken Simonson, chief economist for the Associated General Contractors of America, predicted that nonresidential construction spending would fall 3% to 9% this year, with retail taking the biggest hit.

Meanwhile, the Architecture Billings Index, a forward-looking index of U.S. nonresidential construction activity, increased by a modest 1.7% in December, but remained 19 points lower than it was a year earlier. The American Institute of Architects survey began in 1995 and had reached historically low numbers in October and November, because of the economic market.

Transportation

Truck repossessions processed by Nassau declined by 25% in 2008 from a high point in 2007, but it is important to note that there were still a significant number of repossessions last year. By comparison, the 2008 totals represented a 50% increase from 2006 figures.

The initial glut of trucks in the marketplace following the change in diesel engines in 2006-2007 has now been absorbed. However the slow economy means there is still a high level of inventory, which may yet increase due to difficult credit slowing down the entire food chain.

In its most recent data, from November 2008, the U.S. Department of Transportation's Transportation Services Index (“TSI”) totaled 108.8, a decline of 1.1% from October's level and 2.3% from November 2007's total. This is a measure of month-to-month changes in the output of services provided by for-hire transportation industries. In a year-over-year comparison, the TSI declined 1.2% during the first 11 months of 2008.

The numbers for the month-to-month changes in the output of services provided by for-hire rail, trucking, inland waterway, pipeline, and airfreight firms, the Freight TSI totaled 107.6 in November ' the lowest level since January 2004, according to the Department of Transportation's Bureau of Transportation Statistics.

The decline in freight transportation is not connected to fuel prices. There continues to be more supply than demand, keeping prices relatively low.

Other Sectors

Data in the NQI showed repossessions of medical equipment in 2008 increased by approximately 50% over 2007. In Nassau's experience, the health care industry is typically not affected by economic downturns; the current rise in recoveries can be attributed to equipment with applications for treatments not reimbursed by insurance. This would include equipment coming back from cosmetic or aesthetics practices.

In most cases, these treatments are out-of-pocket expenses for the patient, and with most consumers now trying to cut back on non-essential expenses, many medical practices specializing in these treatments have been feeling the pinch.

Looking Ahead

Based on our current volume and activity and the other trends in the marketplace, we predict current trends will continue for at least the next six to 12 months. Much will depend on the extent and timeliness of the initiation of the infrastructure projects proposed by the Obama administration as part of its stimulus package. That package is being finalized in Congressional debate as this article is written, so it is not possible to gauge what will be done, whenit will commence, and how much
activity will be authorized.

What is clear is that, in the interim, some weaker companies will not be able to survive until the infrastructure work commences. This is especially true if American automakers continue their struggles or decline further, despite government assistance. It will also be important to see if U.S. exports decrease because of a rising dollar.

Clearly, one of the most crucial factors to watch is the credit market. It remains, at best, sluggish, and lenders are receiving mixed signals. The Federal Reserve weekly reports show an increase in commercial and industrial loans, but those loans are being used by large companies to meet their financing needs or to have cash on hand for the future. They are not being used to generate new business activity in the leasing sector and elsewhere.

Therefore, it's not clear that the credit market has yet to begin supplying the relief needed by potential borrowers in the industrial markets. As a result, Nassau has seen a slight drop in a still strong buying climate among our customers who are struggling to maintain normal credit lines.

To return to Bob Dylan, he actually provides some other words to consider when looking at the future: “May you have a strong foundation, when the winds of changes shift.” It is safe to say that at some point in the next 12 to 18 months, a combination of government action, an increased flow of credit, the normal ebb and flow of the marketplace, and factors not yet visible will provide a shift in the positive direction.

In the meantime, businesses will have to apply sound operating practices, increase their flexibility and responsiveness in terms of obtaining and using assets, and have a firm understanding of all options available to them as they work their way through the coming year.

[IMGCAP(1)]

Edward Castagna is President of Nassau Asset Management, based in Westbury, NY, which provides asset recovery, collections, remarketing and appraisal services to the equipment leasing and finance industry. A board member of the ELFA representing the service providers business council, 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 may be reached at 516-345-6301 or [email protected].