Financial Market Turmoil Stymies Carriers Seeking to Acquire Equipment, Businesses

By Daniel P. Bearth, Senior Features Writer

This story appears in the Nov. 3 print edition of Transport Topics.

Despite passage of a $700 billion aid package intended to shore up depleted capital of large and small institutions, the near-collapse of U.S. financial markets is making it tougher for carriers to buy or lease equipment, and will force a reduction in the use of debt to pay for mergers and acquisitions.

“We had such a long run on easy credit that it’s difficult to come to terms with the fact that the times have changed,” said Edward Testa, vice president of sales for Greystone Equipment Finance Corp. in Burlington, Mass. “A few years ago, lenders were standing in line to give money to almost any business for almost any reason and for almost any terms. Those days are gone.”

A number of banks have stopped financing truck equipment because a loss of capital has reduced their ability to make loans, said Scott Maluff, vice president of operations for CapitalPartners Leasing in Birmingham, Ala.

While the supply of money for loans is shrinking, so, too, is demand for equipment financing as truckers hold off on purchases in response to weak shipping trends and higher costs.

The Equipment Leasing and Finance Association, Washington, D.C., said in its most recent report that new business volume dropped 22.1% in August from July, the first appreciable decline this year. The report is based on a survey of 25 member companies, such as GE Commercial Finance, Key Equipment Finance and Wells Fargo Equipment Finance.

“Everyone has been watching for signs that the global credit crisis is spreading into the general economy,” said William Verhelle, chairman of ELFA and chief executive officer of First American Equipment Finance, Fairport, N.Y. “The August decline in equipment lease and loan originations may be the first objective data reflecting a broad capital equipment slowdown in the U.S.”

Verhelle, who spoke during a State of the Equipment Finance Industry teleconference in October, said he expects a “steady increase in the cost of funding” as lenders pull back from the market.

Acting on recommendations by U.S. Treasury Secretary Henry Paulson, Congress passed legislation authorizing massive federal intervention to stabilize financial markets, following a dramatic decline in value of mortgage-related assets and insurance contracts. President Bush signed the bill into law on Oct. 3.

Practically every trucking company needs to borrow money at some point to buy or lease equipment and, increasingly, to pay for fuel and operating expenses because shippers are taking longer to pay bills.

“Many companies are suffering financially due to the soft economy,” said Todd Solow, a partner with Norwest Equity Partners, a private equity firm. “Even with a fuel surcharge, working capital needs have gone up, especially for smaller carriers.”

Solow said NEP, which owns a stake in mobile communications service provider PeopleNet, Chaska, Minn., and trucking and warehousing service provider Jacobson Cos., Des Moines, Iowa, will take a cautious approach to investing in transportation assets.

“We could be in for a period of prolonged softness,” he said. “Acquiring assets is not a smart thing to do right now.”

NEP, Minneapolis, recently closed its ninth buyout fund after receiving a commitment of $1.2 billion from new investors.

Thomas Donohue Jr., a partner with Adelphi Capital Corp. in Washington, D.C., said private equity firms will remain an important source of financing for trucking companies, but future transactions will use less debt.

“Marginal deals are not getting done,” Donohue said.

John Isaacson, a principal of American Capital Strategies in Bethesda, Md., said his firm is still looking for deals, but “like everybody, we’re being more picky.”

“Trucking and transportation have a cyclical component,” he said, “so we look for companies that have proven they can endure through a recession. Decline is acceptable; cliffs are not.”

Meanwhile, the competitive landscape for equipment lenders is undergoing significant change, according to a report published by the Equipment Leasing and Finance Foundation.

“Previously aggressive players have become more selective; some large players have exited the industry, new types of competitors, particularly those backed by private equity, are beginning to enter the market,” the foundation said in the report.

One new entrant, Tygris Commercial Finance Group, Chicago, raised $1.75 billion in equity capital and acquired equipment leasing specialists U.S. Express Leasing, Parsippany, N.J., and MarCap, Chicago, earlier this year.

Finance companies that relied on commercial paper and debt markets for relatively inexpensive capital are now experiencing a significant increase in their cost of funds.

For example, General Electric Co., the parent of GE Commercial Finance, recently solicited $3 billion from financier Warren Buffett, chairman of Berkshire Hathaway, Omaha, Neb., and announced the sale of up to $12 billion in stock to bolter its equity position.

GE Commercial Finance ranks No. 1 on the 2008 Monitor 100 list of largest equipment finance/leasing companies, with $135.17 billion in net assets. A GE spokesman declined to comment.

The market turmoil could offer opportunities for some firms, however, such as commercial banks with large deposit bases and finance companies run by equipment manufacturers.

Richard Howard, vice president of Daimler Truck Financial North America, Farmington Hills, Mich., the captive financial services provider for Freightliner commercial vehicle group, said his company is experiencing “relative strong demand” for truck financing and leases.

“I haven’t seen any significant impact on our business,” related to the global financial crisis, Howard said.

Although Daimler has made “no fundamental change” in its lending criteria, Howard said the company is doing more due diligence and is structuring transactions to match borrowers’ ability to repay.

“Cash flow is vitally important right now,” he said.

Officials from a number of large commercial banks also insisted that they are not backing away from lending for transportation equipment.

“We are still very active in the market,” said Chris Davis, senior vice president of BancorpSouth Equipment Finance in Hattiesburg, Miss.

Davis said the company targeted $240 million in new financing this year, and “we’re ahead of that number right now.”

Frank Forrest, manager of global corporate debt products for Bank of America in Charlotte, N.C., said the company is “actively lending” and that asset quality trends remain well within historical limits.

“Our loan criteria have not changed,” he said.

Adam Warner, president of Key Equipment Finance, Superior, Colo., said Key remains “very active.”

“With the rise in fuel costs and the slowdown in new building, Key has focused on customers whose business models are sustainable,” he said.

Although finance executives expect the number of delinquencies and losses to increase, current loan portfolios “appear to be performing pretty well,” said Michael Leichtling, a lawyer and chairman of the Equipment Leasing and Finance Foundation.

Delinquency rates — more than 30 days late — in August were 3.1%, compared with 3.3% in the same month a year earlier. Write-offs, or losses, were 0.88%, up 0.52% from a year ago but far below the peak of 1.5% in 2004, he said.

More companies are going out of business rather than scaling back operations, according to an analysis of foundation data by research firm IHS Global Insight, Waltham, Mass. Some of the shutdowns, such as Jevic Transportation in May, occurred with little advance warning.

Jevic, Delanco, N.J., ceased operating less than two months after implementing a new computer system and nine months after spending $10 million on new trucks, IHS Global Insight said.

Any retrenchment by lenders could make it more difficult for trucking companies to renegotiate debt.

Brian Cook, an executive at Hoosier Tradewinds Inc., a truckload carrier in Arcadia, Ind., said he was unable to find a lender after his company filed for protection from creditors under Chapter 11 of the U.S. Bankruptcy Act in July and cut back its fleet of 165 trucks by about 50%.

“We couldn’t handle [the debt] at our current size,” Cook told Transport Topics. “Our first goal was to find a new senior lender, but that is tough to do in this market.”

The company ended up getting support from its existing senior lender, Fifth Third Bank, Cincinnati, Ohio, and expects to emerge from bankruptcy in 2009, Cook said.

Other trucking companies are proceeding with planned expansions of operations, regardless of the credit squeeze.

Ed DiSalvo, president of regional package carrier Lone Star Overnight, Austin, Texas, said the company is going ahead with plans to provide service to all points in Texas and to parts of surrounding states.

“Credit is available when your [business] results are growing,” DiSalvo said.

Lone Star Overnight was purchased by PNC Equity Partners in 2007, and the company has used funds provided by the investment firm to purchase and lease additional vehicles and facilities.

“Our investors are interested in growing the value of the enterprise,” DiSalvo said. “Like any owner, you have to be careful with capital, but they’ve been very encouraging.”

But with the economic uncertainty expected to continue, buyout firms have begun to look for distressed assets or companies that have too much debt, said Douglas Christensen, managing director of Chapman Associates, a Schaumburg, Ill., firm that advises buyers and sellers in sale transactions.

“There is no clear estimate of how much debt actually exists in the trucking industry — where the debt exceeds the value of the assets. This is something that certainly exists [and] a situation not likely to change unless economic activity increases,” he said.