Execs See Consolidation in Finance Sector Following Recent Sell-Off by Biggest Player
This story appears in the May 16 print edition of Transport Topics.
A slowdown in demand for truck equipment is fueling competition among finance companies and commercial banks, which could lead to more consolidation in a sector that has seen a sell-off by the industry’s biggest player, company executives said.
“We will have to work harder to get a bigger piece of a smaller pie,” said James Freund, chief marketing officer for Engs Commercial Finance, a privately owned financial services company based in Lisle, Illinois.
The competitive landscape is undergoing changes of historic proportions as GE Capital Corp., the nation’s largest equipment finance company, carries out a plan to sell off $200 billion in financial assets as a part of a move by its corporate parent, General Electric Co., to refocus its business on manufacturing, health care and industrial automation technology.
In December, Toronto-based BMO Financial Group acquired GE Capital’s transportation finance business and its portfolio of loans and leases valued at $8.9 billion. BMO now operates the business as part of Chicago-based BMO Harris Bank, retaining a staff of more than 600 employees, 15 locations in the United States and Canada, and leaving in place longtime CEO Dan Clark as the new head of BMO Transportation Finance.
A few months later, in March, Wells Fargo & Co., based in San Francisco, took over an even bigger slice of GE’s financial empire with the purchase of the North American portions of GE Capital’s commercial distribution finance business, which funds inventory of finished durable goods. In addition, Wells Fargo acquired GE’s vendor finance business, which provides loans and leases to manufacturers and dealers, as well as GE’s corporate finance businesses, which make secured asset-based loans and lease equipment to middle- market customers.
Both deals are certain to shake up the top ranks of equipment finance and leasing companies in North America, said Jerry Parrotto, publisher of Monitor Daily, a Rosemont, Pennsylvania, media company. It publishes the Monitor 100, an annual ranking of the largest equipment finance and leasing companies in the United States and Canada.
“GE Capital has consistently occupied the No. 1 spot in the equipment finance and leasing space over the past 25 years,” Parrotto told Transport Topics.
In 2015, GE Capital reported total net assets of $105.7 billion, more than twice as much as No. 2-ranked Banc of America Leasing. Wells Fargo Equipment Finance ranked No. 5, and BMO Harris Equipment Finance ranked No. 38 on the list. Both will certainly move higher when the 2016 Monitor 100 list is released later this year.
More mergers and acquisitions could be in the offing as competition intensifies and demand for equipment weakens, industry executives said.
“There is more volatility in the market now than any time in the last five or six years, which tends to lead to M&A opportunities,” said Freund of Engs Commercial Finance. “We’re currently assessing a few situations.”
In addition to continuing to expand the truck business, Freund said, he is looking at opportunities in other hard asset categories, such as construction and machinery. Freund and CEO Craig Weinewuth were part of a group that bought Engs Commercial Finance in 2012. The company ranked No. 78 on the Monitor 100 list in 2015.
The market for credit generally mirrors sales of equipment, and experts are forecasting a significant decline in truck and trailer sales in 2016 after several years of near-record volume.
Transportation represented 28.5% of all equipment financed in 2014, with trucks and trailers making up about half of the total transportation volume, according to data collected from 89 companies by the Equipment Leasing and Finance Association, a trade group in Washington, D.C. ELFA’s member companies include independent and captive leasing and finance companies, banks, financial services corporations, brokers, investment banks and manufacturers engaged in financing capital goods.
Although financing totals for 2015 have not yet been released, transportation is expected to remain one of the top categories for investment. ELFA said anecdotal information from the first quarter of 2016 shows transportation and truck equipment trending positive while lending in railroad, mining and oil field equipment, agriculture and construction have turned negative.
With truck sales expected to slow this year, the industry will be watching carefully to see if there is any deterioration in credit quality, said Ralph Petta, CEO of ELFA. “Delinquencies and losses have been at historic lows since the Great Recession,” Petta noted. “The trend is changing somewhat. We’re seeing an uptick in delinquencies and losses. We’re watching it.”
But finance executives generally remain upbeat about prospects for business in 2016.
“Last year was a great year for the industry,” said Steven Goodale, vice president of Daimler Truck Financial, a unit of Daimler Trucks North America. “We expect that 2016 will look similar to 2014 in terms of growth. Our portfolio is currently near $13 billion and continues to grow. Delinquencies and bankruptcies remain stable, and we have not seen an uptick in bankruptcies overall.”
Goodale said he sees no problem yet with the quality of credit in its portfolio. “Many fleets have enjoyed tremendous success over the last few years,” Goodale said. “Their balance sheets are healthy, fuel prices are low and they continue to perform well. The owner- operator segment is typically a strong indicator of economic challenges, and we have not seen any major deterioration in that aspect of our portfolio.”
Although financing volume is expected to be down compared with last year, BMO’s Dan Clark said he views the business as a “return to normalcy” after a period of extraordinarily high equipment sales. Used trucks are more plentiful, and that has led to some softening in prices as dealers sell off excess inventory, he noted.
Patrick Gaskins, senior vice president of financial services for AmeriQuest Transportation Services, said current estimates of new-truck sales this year of around 230,000 units in North America, compared with more than 300,000 in 2015, reflect “a pause” after many fleets accelerated truck replacement when the recession ended.
“It’s not a major correction,” Gaskins said. “It should pick back up at the end of this year and into next year.”
Gaskins said his company is targeting medium-duty trucks and trailers for additional growth this year. Many private fleets have added trucks over the past year to offset capacity shortages among for-hire fleets, he said.
Independent truck owner-operators also represent a potential growth market for financing, said Brett Petersen, chief operating officer of Cure Leasing & Maintenance, a unit of AmeriQuest that provides vehicles and maintenance services to about 500 truck operators. “Anecdotally, owner-operators are struggling more this year than last year,” Petersen said. “But what we’ve also seen is carriers offloading their own equipment and turning to an asset-light business model.
Freund, of Engs Commercial Finance, said he also sees strength in certain vocational sectors and expects to gain business that historically went to commercial banks.
“Given the regulatory environment today, bank-owned finance companies have had to change their model and are not as active in the truck finance space,” Freund said. “This creates opportunities for an independent like Engs.”
BMO’s Clark said the new association with the BMO Financial Group, the parent of the Bank of Montreal, has enabled his organization to provide additional banking products and services to customers in the United States and Canada. “We have seamless coverage now,” he said.
Clark also said he sees little loss of business. “We’re busy,” he noted. “We’re not seeing any attrition. We have the same sales force, just different business cards.”
