Financing Market Seen Returning to Normal, But Loans to Fleets Are Becoming More Costly
By Daniel P. Bearth, Senior Features Writer
This story appears in the Feb. 1 print edition of Transport Topics.
Although the overall credit market appears to be returning to some semblance of normalcy, trucking executives said they still face higher borrowing costs as many commercial banks remain cautious about lending and uncertainty persists about the U.S. economic recovery.
Many fleets have cut back on capital spending, reducing the demand for loans, but industry observers have said tighter credit could limit trucking companies’ ability to expand freight-hauling capacity when demand picks up.
“It’s tough to get new equipment financed at a reasonable rate,” said Steve Williams, chairman of Maverick USA, a leading flatbed carrier in North Little Rock, Ark.
Maverick has idled about 300 of the nearly 1,400 trucks in its fleet since the beginning of 2009 but has remained current on all payables, including equipment loans.
“I can only imagine what it’s like to go out and try to get financing when the company is nine or 10 or 12 months behind on payments,” Williams commented in a recent issue of Arkansas Trucking Report, which is published by the Arkansas Trucking Association.
Dave Capps, owner of Capps Van and Truck Rental in Dallas, said he was left scrambling to find a new lender after GMAC Financial Services pulled the plug on a $100 million line of credit last March.
On a billboard outside his office in Dallas, Capps posted an eye-catching message, “Lender Wanted. We need to buy 1,000 new GM vans now.”
The ploy drew national media attention, and Capps soon had offers from GE Capital Corp. and a number of other banks and equipment vendors.
“I’ve never seen in my entire career anything like what happened,” Capps said in an interview with Transport Topics. “It was extremely scary.”
Steven Dutro, a partner with Transport Capital Partners, a Nashville, Tenn., consulting firm that specializes in helping firms find sources of capital and provides advice on mergers and acquisitions, said the current credit environment “is more like lending was 10 to 15 years ago.”
“Standards are higher. Banks are looking for better credit quality, and they are requiring bigger down payments,” Dutro said. “Easy credit is definitely not coming back.”
Scott Davis, a partner with Grant Thornton LLP in Charlotte, N.C., said that although “the freeze in financial markets seems to be thawing,” lenders are being far more selective. Also, interest rate spreads — the difference between the cost of funds and the rate lenders charge — remain high.
The increased cost associated with borrowing is reflected in the terms of two recent trucking company refinancings, Davis said.
In the first case, a large truckload carrier refinanced its debt at the benchmark London Interbank Offered Rate, known as LIBOR, plus 4.5%. The new credit arrangement included a LIBOR floor of 2%.
The new deal effectively raised the interest rate to 6.5% from around 5%, Davis said.
In the second case, he said, another prominent truckload carrier offered to restructure its borrowings at LIBOR plus 6%, with a LIBOR floor of 2.25%.
“Their existing terms were LIBOR plus 3.25% with no floor. If the banks accept [the fleet’s offer], their interest rate would increase from under 4% to 8.25%,” he said.
Officials from each of the two carriers declined to comment on financing terms and therefore are not being identified by TT.
Despite the tighter credit conditions, many banks and bondholders have been willing to restructure loans or reset terms of equipment leases to help trucking companies survive the downturn.
YRC Worldwide Inc., Gainey Corp. and Greatwide Logistics Services all averted financial crises by exchanging debt for equity. The move saved the companies millions of dollars in interest payments and gave them time to adjust to the dramatic drop in shipping volume.
In addition, ADS Logistics LLC filed for Chapter 11 bankruptcy protection on Sept. 2 but emerged less than two months later after striking a deal to turn over the business to its senior secured lenders.
President William Ritter said ADS, which specializes in distributing steel and other metals used in making automobiles, was hard hit by a drop in auto sales in 2009 and had to downsize its operations to be profitable.
“We had management in place for a larger organization,” Ritter said. “The recession has had a much greater effect on steel and autos than other industries. It’s been really tough.”
Through bankruptcy, ADS was able to restructure its debt and eliminate “bad assets,” Ritter said. The company shut down several underused distribution centers and relocated its corporate staff from an office in Homewood, Ill., to a truck terminal in Chesterton, Ind.
ADS was able to retain a fleet of about 300 company-owned and independent contractor-owned trucks, but Ritter said that he is concerned about the ability of his company and others to provide additional capacity in the future because tighter credit will make it more difficult for people to purchase trucks.
“A truck shortage is coming,” Ritter said. “Owner-operators are not coming back as fast as they left.”
Part of the reason creditors are willing to extend credit and alter payment terms is that the value of used truck equipment is not high enough to make it worthwhile to repossess the assets and sell them on the open market.
“Banks don’t want assets back,” said Thomas Connolly, an executive with the financial consulting firm Eve Partners LLC in Atlanta. “It’s a timing issue.”
If used-truck prices go up, there could be a rash of repossessions and forced sales as lenders seek to recover funds from companies in arrears, said Mike Iannelli, managing director of Lincoln International, an investment banking firm in Chicago.
Iannelli said many companies have violated loan covenants or have fallen behind in payments and that lenders “are looking at options.”
Liquidation is an option, but not one that makes sense, especially if the company is a freight broker that has few hard assets, such as trucks and trailers, that could be sold, Iannelli said.
In many cases, lenders allow freight carriers to amend credit agreements or forgo payments on equipment, and in doing so, lenders can avoid having to mark down the value of collateral, which would increase losses for the bank.
“They are kicking the can down the street,” Iannelli said.
A positive sign for lenders is that stock prices for many publicly owned trucking companies are at or near 52-week highs, reflecting optimism among investors that the bottom of the recession has been reached and freight demand will pick up.
Two companies — Vitran Corp. Inc., Toronto, and Saia Inc., Johns Creek, Ga. — recently sold stock to pay down debt. Another firm, Roadrunner Transportation Services, Cudahy, Wis., has taken steps to launch an initial public offering, the first in nearly a decade by a trucking company.
By bolstering equity and restructuring debt, trucking companies are taking steps to shore up capital resources “so they will have the firepower to take advantage of a stronger freight market,” said Kenneth Evans Jr., transportation and logistics sector leader for accounting firm PricewaterhouseCoopers in Miami.
“The best companies have also reduced their cost structure to be prepared for the time freight moves again,” he said.
Evans said he figures that about one-third of trucking companies are financially strong, one-third are in reasonably good shape and the remaining companies are just “hanging on.”
At least one financial industry official thinks that many trucking companies have actually weathered the current downturn better than previous recessions.
Dan Clark, head of transportation finance at GE Capital Corp., Fairfield, Conn., said that when demand for freight hauling began to slacken in 2006, many firms cut back on equipment purchases and took other steps to reduce expenses.
“Because they started so early, when the financial crisis hit in late 2008, it didn’t hit nearly as bad,” he said.
Delinquencies in GE’s truck loan portfolio are in the “low- to mid-single digits,” which, Clark said, is similar to other downturns.
Officials at GE Capital said they expect overall demand for credit across all of their lending and leasing businesses to increase, starting in 2011.
