The Replacement Economy

Investment in new equipment is practically nil, a leasing-company executive says.

The economy will truly be in a state of recovery when companies start ordering new equipment rather than just replacement parts, representatives of the equipment leasing industry say.

Speaking last week at the Equipment Leasing and Finance Assn.’s briefing on the fourth quarter of 2009, Anthony Cracchiolo, president and CEO of U.S. Bank Equipment Finance Co., characterized U.S. corporate capital expenditures for equipment as “weak” because the demand for replacement parts overwhelmingly dominates the desire for new equipment. “We are seeing very little…expansion equipment,” the lender said. “New plant and equipment is not being invested in.”

While companies have a great deal of “pent-up demand” for loans or leases to finance equipment, much of it has to do with patching up existing assets, according to Ralph Petta, the ELFA’s interim president. He said the association, like other small businesses, is “deciding to sit on our IT equipment for another six months or so, even though we could probably use an upgrade in hardware and software.”

Even increased purchasing of new equipment wouldn’t necessarily be a signal of a vigorous recovery, in Petta’s view. “We’ve just got to wait for the economy to come around before companies will go from expanding plant and equipment to actually producing more inventory,” he said.

Indeed, cumulative results of the association’s monthly index of 25 equipment leasing and financing companies reinforced the picture of a sputtering marketplace for equipment finance. In the fourth quarter of 2009, overall new business volume for lenders and leasers showed a 22% decline compared with the fourth quarter of 2008. (The monthly leasing and finance index is a compilation of data from the ELFA’s members. The respondents include major captive finance organizations, such as Caterpillar Financial Services Corp.; banks with leasing operations, such as Bank of America; and independent finance outfits, such as CIT.)

The Slump in Equipment Leasing and Lending

However, Petta pointed out, the decrease in new business volume in the fourth quarter was not as dramatic as the year-over-year declines in the first three quarters of 2009 — 30.6% in the first quarter, 40.0% in the second, and 33.7% in the third.

In another sign of moderation, after climbing steadily throughout 2008, the percentage of finance companies’ receivables of more than 30 days seemed to have leveled off in the 4.3% to 4.8% range in the last three quarters of 2009. In Q4 2009, in fact, such receivables rose by 13.2% year over year, the lowest such increase in 2009.

The effects of the downturn on equipment buying have been unevenly dispersed among industries, the ELFA’s survey shows. Perhaps reflecting the federal government’s stimulus program, Petta noted, the two best-performing sectors in the lenders’ portfolios in the fourth quarter of 2009 were health care and state and local government services.

The worst-performing industries were construction and trucking, according to the respondents. Yet there’s a clear difference between the prospects for the two sectors in 2010, according to Thomas Ware, senior vice president for analytics and product development at PayNet, a research firm specializing in the commercial credit industry. “The trucking sector has a brighter future” because tractor-trailer trucks are forever wearing out and in need of replacement parts, he says. “They only go 100,000 miles [before needing complete refurbishment], whereas our housing stock doesn’t need to be expanding.”

 

 

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