The large financial institutions that were heavily involved in equipment financing have reduced the size of their portfolios from pre-crisis days. Does that mean there is an opportunity for smaller banks, even with soft growth in the U.S. economy? BancAlliance thinks so. The Washington, D.C.-based network of member banks pool their resources to access national commercial and industrial loans, gaining access to larger loans than they might otherwise be able to finance. It recently added a new equipment finance team lead by Jay Squiers, who talks about trends in the sector.
Why did BancAlliance get into equipment financing?
Our members have told us that they would like to see a variety of C&I loan opportunities, including equipment finance. We are focusing on larger equipment loans to larger companies—these loans just would not fit on the balance sheet of a community bank. We have a lot of experience with the underwriting and collateral associated with these loans, and many community banks don’t have the resources to access this asset class on their own. It is a solid asset class that community banks will appreciate—with tangible collateral—but still very different from commercial real estate loans.
Why is it a good asset class?
It is a market in which many of the larger players have exited. A few years ago, a number of large financial companies were active in this space, building significant portfolios. As a result of the financial crisis, the capacity of these financial players has diminished, and capital costs have increased. We believe that we will be able to go into the market and access good loans that are well structured and acquire them on behalf of our member banks, and we can be a significant player in this market.
Are you essentially buying loans from these big lenders?
As we get this asset class up and running, we are working with agents who already have loans in the pipeline. As we continue to grow, we will have the capacity to originate our own loans. We will base our strategy on member preferences.
What does the market look like, economically speaking?
We’re in a replacement cycle—not a growth cycle. Companies have tightened their belts for the last few years. The equipment that needs financing right now is absolutely an essential part of a company’s ongoing business. As a lender, you want to finance essential equipment for a business because you know they’ll take care of their equipment and stay current on the loan. When you’re talking about real estate, that’s all about location and the local economy. When you’re talking about equipment, it runs on a different economic cycle than local real estate.
What are the special challenges for doing these loans?
You have to be comfortable with collateral valuations, including a sense for projected valuations. If depreciation dramatically exceeds amortization, you’re going to end up with an underwater loan that is not covered by your collateral. The valuation is affected by a lot of factors: Can this equipment be redeployed? Is it going to maintain its value? How comfortable am I that the market is going to be there in three to five years? To answer these questions, we use an independent evaluator, with strong credentials, who performs detailed analysis. It is analogous to the appraisal process on real estate loans. The appraisers are independent, experienced and knowledgeable about the type of equipment we’re asking them to value.
You underwrite both the collateral and the borrower?
Yes. You want someone who is a good operator and is generating sufficient cash flow to repay you. We look at the downside scenario as part of the underwriting. We need to be comfortable that we are lending to an experienced operator who is not prone to mistakes. Equipment loans are typically structured on a full recourse basis. In addition, a secured claim with priority in bankruptcy exists against particular pieces of equipment if that scenario ever occurs.
What types of equipment are we talking about?
We will cover a broad range of sectors, including manufacturing, oil and gas, trucks and railcars, cargo carriers, tankers or barges, and equipment used to process and haul commodities. Medical equipment is a really competitive space right now, but we will do it if we find the right opportunities. I think we’ll very much focus initially on the U.S. middle market and larger loans, $5 million to $100 million.