More of the New Normal?

It is becoming more apparent that the economy may have reached a new normal in which moderate economic growth translates to slower growth in revenues for governments, profits for businesses and incomes for households. Companies have become accustomed to more conservatively deploying their capital. Uncertainty, which in the past has applied to the beginning of an economic recovery, now seems pervasive and unrelenting.

During past recoveries, we saw significant levels of growth. According to Pew Research, the 1960s recovery saw the GDP bounce back 35.4%, and the Reagan recovery had a GDP growth of 27.7%, while the current recovery has seen a GDP growth of only 10.8%. In the new normal, the 2% to 3% economic growth forecasted still falls below an accelerated growth rate that businesses would like to see. If 2015 can rebound with a 4% or 5% growth rate, I think we'll see a pickup in investment within the equipment finance industry, as companies respond accordingly.

Late in 2014, we saw some pretty dramatic change in the positivity of the outlook among equipment finance professionals, according to the Equipment Leasing & Financing Foundation's (ELFA) monthly confidence index. In October, fewer executives reported a belief that business conditions would improve over the next four months, bringing us into the new year. Given that a lot of people wait through the summer months to see a pickup in activity, perhaps lower than expected September results led to this recent increased lack of confidence concerning prospects for the fourth quarter. This has also tempered expectations for the start of 2015. Again, we get the sense of lingering uncertainty that overwhelmingly defines the new normal.

Interest rates continue to confuse the market. One month they look like they are finally heading up as everyone has been predicting for two or three years, and the next month they head back down. This continued “fake-out” has led to significant swings in confidence levels. With the Federal Reserve announcing the official, and long-awaited, end to quantitative easing in October, confidence may even out for the equipment finance industry in 2015. When rates actually do rise significantly, maybe those investors holding large amounts of cash will finally start investing in new expansionary equipment. In turn, with an acceleration in capex rates, higher spreads may begin to creep back into the market. With that said, I am cautiously optimistic for 2015.

In response to the uncertainty and slow growth in the market, many banks are looking to grow assets at any cost for those borrowers that meet their tight underwriting criteria. In addition to offering historically low pricing, many lenders are offering more lessee-friendly structures such as extended lease terms and less restrictive documentation. It's a real buyers' market for financially strong borrowers.

Another contributor to last year's fluctuation in confidence is the unhealthy political scene, especially during an election year. Any time there is an election that could result in a considerable change in political power, you tend to develop a wait-and-see attitude as changing regulations can have a significant impact on the business environment. The recent November 2014 election results pose such a situation, so we are probably going to experience minimal growth over the next couple of months as the new Congress takes its seat in Washington.

Potential changes to the tax code that encourage investment could certainly have an impact on business activity. From a legal standpoint, a continued stricter regulatory environment under Dodd Frank has limited banks' ability to transact business. Basel III, an international regulatory framework for banks, will have a significant impact on these banks' ability to lend money to businesses ' as the guidelines require banks to spend a lot of time and money on compliance issues. Additionally, there is continued pressure on lessors being more transparent in their disclosures to lessees, especially pertaining to end-of-lease options and evergreen renewals. Changes to accounting for leases are expected to take effect in 2015/2016. While the impact has been softened, lessors and lessees need to be aware of how the changes will affect them.

What Sectors Will Drive Growth?

Looking at 2015 on a more granular level, it is likely that state and local government leasing will continue to be fairly robust as many states continue to experience revenue shortfalls. The construction industry has rebounded nicely since the Great Recession. Investment in construction machinery has been averaging annual growth of 30.8% in each of the last four years. Other growth areas include oil/gas/energy, transportation and healthcare.

State and local government lending was the strongest category in 2014, and we expect that growth to continue this year. Many municipalities are investing in energy-efficiency projects that tend to be for more money and for longer-term contracts. Municipalities vary in needs and use by state, with some preferring to utilize the public bond markets versus effective use of municipal leases for equipment. In our footprint, we saw significant use in the Mid Atlantic and Southeast.

The healthcare sector has traditionally been a frequent user of equipment leasing due to its capital intensive and new technology driven nature. Because of the Affordable Care Act (ACA) and its uncertain impact on the industry, healthcare leasing has slowed somewhat in the past two years. Harder collateral, like imaging equipment, has seen a decrease in equipment acquisitions while softer collateral, like Electronic Medical Records, has seen an increase. Investment in this type of technology is required to remain compliant with new regulations under the ACA. This is likely to continue this year and beyond.

Like the healthcare sector, transportation will see growth driven by external conditions. Much of the pick-up in this category in 2014 was for replacement equipment rather than expansion. Hopefully, with reduced unemployment and increasing consumer demand, there should be more opportunity for expansion in the year ahead. Also fueling the potential growth is the rising expectation of consumers to have rapid delivery of goods.

Human Capital

When it comes to matters of economic uncertainty and global turmoil, there is little that the equipment finance industry can do to help control those factors. However, as we heard at the ELFA Annual Conference, the industry does have the opportunity to be proactive in preparing itself for the future by attracting and hiring new talent.

Having been in the business for over 25 years, I see many of my peers around the same age who followed a similar career path. We've been able to take advantage of a unique industry that requires special skills. Most of us didn't come out of college wanting to start a career in the equipment finance sector. We all just happened to wind up in this industry somehow. For some reason, there does not appear to be as many young people in the industry as there were when I first started. And, over the next 10 years, I suspect that many of us will be retiring. I look around and there do not seem to be enough young people to fill our roles when retirement does come.

So how do we address this? The solution seems to be two-fold: Look for internal candidates, or more actively promote our industry to university students.

Banks have a wealth of talent already working within their organizations. With a current lack of qualified external applicants, banks need to look internally and find people with potential in other departments. Internal networking events that can help showcase our product will be crucial to recruiting from within the bank. The more the equipment finance team integrates itself into the bank versus operating as a stand-alone, the better. Additionally, internal candidates already understand the bank, its collective goals and its culture, which is advantageous to the organization.

That said, just hiring from within will not sustain the industry's need for talented, young professionals. And that's where university engagement can help. ELFA is already working to bring awareness of equipment finance as a career opportunity to college campuses with programs such as ELFA's Guest Lecture Program. Perhaps another way to promote our product to the younger generation is in the area of financing projects involving environmental sustainability. As noted above, significant growth in the past year has been in the government sector driven by increased financing of energy-efficiency projects. Additionally, many lessors are looking into or have been financing renewable energy projects, like solar and wind. This is a trend that looks to continue to drive growth in 2015 and beyond. Millennials are known for their concerns around environmental issues, so as an industry, we could be reaching this generation by highlighting the role equipment finance can play.

Conclusion

As we look at the future of our industry, both in terms of resources and business environment, we ask ourselves if 2015 will be a banner year for equipment finance. I am cautiously optimistic. The wild cards, I believe, are consumer and business confidence. If our politicians in Washington can figure out how to work together instead of against each other and focus on the economy, this could be a good year for the U.S. and the equipment finance industry. If not, I expect 2015 to be much like 2014 with moderate growth.

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Carl N. Boccuti is senior vice president ' Equipment Finance Business Development Head, Corporate & Specialty Bank. He has been with TD Equipment Finance since 2002 and in his current role, Boccuti actively manages sales teams in four business channels: Corporate Finance, Healthcare, Wholesale Vendor and Syndications. He can be reached at [email protected].

The U.S. economy has seen a modest and prolonged recovery following the 2008 Great Recession. According to a 2014 report from TD Economics, investment in equipment fell 31% during the Recession. Although difficult to estimate with certainty, as a result of the decrease in spending during that time, there is considerable cash sitting on the sidelines waiting to be invested in capital expenditures. Yet every year since the Recession, there has been uncertainty hovering over the markets, preventing prudent companies from opening the cash spigot. This uncertainty has taken the form of geo-political unrest, economic malaise and in the United States, the Affordable Care Act (ACA) has added another layer of complexity.

Searching for a Catalyst

The challenge facing the equipment finance industry is in pinpointing when businesses across sectors will reach a level of comfort where they are ready to deploy the cash that has been stockpiled. Will the catalyst be a turnaround in the housing market, increased consumer spending, rising interest rates, more favorable employment numbers or a growing calm within the global markets?

It is becoming more apparent that the economy may have reached a new normal in which moderate economic growth translates to slower growth in revenues for governments, profits for businesses and incomes for households. Companies have become accustomed to more conservatively deploying their capital. Uncertainty, which in the past has applied to the beginning of an economic recovery, now seems pervasive and unrelenting.

During past recoveries, we saw significant levels of growth. According to Pew Research, the 1960s recovery saw the GDP bounce back 35.4%, and the Reagan recovery had a GDP growth of 27.7%, while the current recovery has seen a GDP growth of only 10.8%. In the new normal, the 2% to 3% economic growth forecasted still falls below an accelerated growth rate that businesses would like to see. If 2015 can rebound with a 4% or 5% growth rate, I think we'll see a pickup in investment within the equipment finance industry, as companies respond accordingly.

Late in 2014, we saw some pretty dramatic change in the positivity of the outlook among equipment finance professionals, according to the Equipment Leasing & Financing Foundation's (ELFA) monthly confidence index. In October, fewer executives reported a belief that business conditions would improve over the next four months, bringing us into the new year. Given that a lot of people wait through the summer months to see a pickup in activity, perhaps lower than expected September results led to this recent increased lack of confidence concerning prospects for the fourth quarter. This has also tempered expectations for the start of 2015. Again, we get the sense of lingering uncertainty that overwhelmingly defines the new normal.

Interest rates continue to confuse the market. One month they look like they are finally heading up as everyone has been predicting for two or three years, and the next month they head back down. This continued “fake-out” has led to significant swings in confidence levels. With the Federal Reserve announcing the official, and long-awaited, end to quantitative easing in October, confidence may even out for the equipment finance industry in 2015. When rates actually do rise significantly, maybe those investors holding large amounts of cash will finally start investing in new expansionary equipment. In turn, with an acceleration in capex rates, higher spreads may begin to creep back into the market. With that said, I am cautiously optimistic for 2015.

In response to the uncertainty and slow growth in the market, many banks are looking to grow assets at any cost for those borrowers that meet their tight underwriting criteria. In addition to offering historically low pricing, many lenders are offering more lessee-friendly structures such as extended lease terms and less restrictive documentation. It's a real buyers' market for financially strong borrowers.

Another contributor to last year's fluctuation in confidence is the unhealthy political scene, especially during an election year. Any time there is an election that could result in a considerable change in political power, you tend to develop a wait-and-see attitude as changing regulations can have a significant impact on the business environment. The recent November 2014 election results pose such a situation, so we are probably going to experience minimal growth over the next couple of months as the new Congress takes its seat in Washington.

Potential changes to the tax code that encourage investment could certainly have an impact on business activity. From a legal standpoint, a continued stricter regulatory environment under Dodd Frank has limited banks' ability to transact business. Basel III, an international regulatory framework for banks, will have a significant impact on these banks' ability to lend money to businesses ' as the guidelines require banks to spend a lot of time and money on compliance issues. Additionally, there is continued pressure on lessors being more transparent in their disclosures to lessees, especially pertaining to end-of-lease options and evergreen renewals. Changes to accounting for leases are expected to take effect in 2015/2016. While the impact has been softened, lessors and lessees need to be aware of how the changes will affect them.

What Sectors Will Drive Growth?

Looking at 2015 on a more granular level, it is likely that state and local government leasing will continue to be fairly robust as many states continue to experience revenue shortfalls. The construction industry has rebounded nicely since the Great Recession. Investment in construction machinery has been averaging annual growth of 30.8% in each of the last four years. Other growth areas include oil/gas/energy, transportation and healthcare.

State and local government lending was the strongest category in 2014, and we expect that growth to continue this year. Many municipalities are investing in energy-efficiency projects that tend to be for more money and for longer-term contracts. Municipalities vary in needs and use by state, with some preferring to utilize the public bond markets versus effective use of municipal leases for equipment. In our footprint, we saw significant use in the Mid Atlantic and Southeast.

The healthcare sector has traditionally been a frequent user of equipment leasing due to its capital intensive and new technology driven nature. Because of the Affordable Care Act (ACA) and its uncertain impact on the industry, healthcare leasing has slowed somewhat in the past two years. Harder collateral, like imaging equipment, has seen a decrease in equipment acquisitions while softer collateral, like Electronic Medical Records, has seen an increase. Investment in this type of technology is required to remain compliant with new regulations under the ACA. This is likely to continue this year and beyond.

Like the healthcare sector, transportation will see growth driven by external conditions. Much of the pick-up in this category in 2014 was for replacement equipment rather than expansion. Hopefully, with reduced unemployment and increasing consumer demand, there should be more opportunity for expansion in the year ahead. Also fueling the potential growth is the rising expectation of consumers to have rapid delivery of goods.

Human Capital

When it comes to matters of economic uncertainty and global turmoil, there is little that the equipment finance industry can do to help control those factors. However, as we heard at the ELFA Annual Conference, the industry does have the opportunity to be proactive in preparing itself for the future by attracting and hiring new talent.

Having been in the business for over 25 years, I see many of my peers around the same age who followed a similar career path. We've been able to take advantage of a unique industry that requires special skills. Most of us didn't come out of college wanting to start a career in the equipment finance sector. We all just happened to wind up in this industry somehow. For some reason, there does not appear to be as many young people in the industry as there were when I first started. And, over the next 10 years, I suspect that many of us will be retiring. I look around and there do not seem to be enough young people to fill our roles when retirement does come.

So how do we address this? The solution seems to be two-fold: Look for internal candidates, or more actively promote our industry to university students.

Banks have a wealth of talent already working within their organizations. With a current lack of qualified external applicants, banks need to look internally and find people with potential in other departments. Internal networking events that can help showcase our product will be crucial to recruiting from within the bank. The more the equipment finance team integrates itself into the bank versus operating as a stand-alone, the better. Additionally, internal candidates already understand the bank, its collective goals and its culture, which is advantageous to the organization.

That said, just hiring from within will not sustain the industry's need for talented, young professionals. And that's where university engagement can help. ELFA is already working to bring awareness of equipment finance as a career opportunity to college campuses with programs such as ELFA's Guest Lecture Program. Perhaps another way to promote our product to the younger generation is in the area of financing projects involving environmental sustainability. As noted above, significant growth in the past year has been in the government sector driven by increased financing of energy-efficiency projects. Additionally, many lessors are looking into or have been financing renewable energy projects, like solar and wind. This is a trend that looks to continue to drive growth in 2015 and beyond. Millennials are known for their concerns around environmental issues, so as an industry, we could be reaching this generation by highlighting the role equipment finance can play.

Conclusion

As we look at the future of our industry, both in terms of resources and business environment, we ask ourselves if 2015 will be a banner year for equipment finance. I am cautiously optimistic. The wild cards, I believe, are consumer and business confidence. If our politicians in Washington can figure out how to work together instead of against each other and focus on the economy, this could be a good year for the U.S. and the equipment finance industry. If not, I expect 2015 to be much like 2014 with moderate growth.

'