ELFA Equipment Leasing & Finance - Jan/Feb 2013 : Page 16

a quarter Century of residual Value ELFA’s 25th Equipment Management Conference has much to celebrate By Susan L. Hodges C 16 debut of the association’s Equipment Management Conference, and Chrappa was one of its pioneers. “Our goal for that fi rst conference was 75 attendees, and we had about 150,” recalls the President of Independent Equipment Company in Clearwater, Fla. “I was the fi rst speaker and was all ready to go into the room when I realized that we couldn’t fi t everybody in there, so we had to quickly change rooms.” arL Chrappa reMeMbers parts of 1988 LiKe they Were yesterDay. Th at year marked the A Place at the Table “The equipment management role was becoming more proactive,” remembers Terese Kramer, Equipment Group JANUARY/FEBRUARY 2013 EquiPmEnt LEasing & FinanCE magazinE thinkstock, shutterstock No wonder: In 1988, the equipment leasing industry was discovering the true potential of equipment management. Not only could knowledgeable equipment managers deter-mine the worth of anything from a new utility truck to a cattle-kicked rail car; they could forecast its value years down the road at lease-end—and suggest alternate lease terms or maintenance return provisions their fi nance company could use. Th e implications were huge. Manager and Vice President at BMO Harris Equipment Fi-nance Co. in Milwaukee, and a planner of the 25th confer-ence, which will be held in Tampa in February. “Equipment managers were becoming more involved in [deal] structure while continuing to manage origination valuations, portfolio management and the remarketing aspects of the traditional equipment management role.” But in 1988, equipment management was still part of the credit department. Writing equipment maintenance and return provisions, setting residuals, performing appraisals and remarketing and disposing of equipment at lease-end oft en fell to credit professionals who had little knowledge of

A Quarter Century of Residual Value

Susan L. Hodges

ELFA’s 25th Equipment Management Conference has much to celebrate<br /> <br /> CARL CHRAPPA REMEMBERS PARTS OF 1988 LIKE THEY WERE YESTERDAY. That year marked the debut of the association’s Equipment Management Conference, and Chrappa was one of its pioneers. “Our goal for that first conference was 75 attendees, and we had about 150,” recalls the President of Independent Equipment Company in Clearwater, Fla. “I was the first speaker and was all ready to go into the room when I realized that we couldn’t fit everybody in there, so we had to quickly change rooms.”<br /> <br /> No wonder: In 1988, the equipment leasing industry was discovering the true potential of equipment management. Not only could knowledgeable equipment managers determine the worth of anything from a new utility truck to a cattle-kicked rail car; they could forecast its value years down the road at lease-end—and suggest alternate lease terms or maintenance return provisions their finance company could use. The implications were huge.<br /> <br /> A Place at the Table<br /> <br /> “The equipment management role was becoming more proactive,” remembers Terese Kramer, Equipment Group Manager and Vice President at BMO Harris Equipment Finance Co. in Milwaukee, and a planner of the 25th conference, which will be held in Tampa in February. “Equipment managers were becoming more involved in [deal] structure while continuing to manage origination valuations, portfolio management and the remarketing aspects of the traditional equipment management role.”<br /> <br /> But in 1988, equipment management was still part of the credit department. Writing equipment maintenance and return provisions, setting residuals, performing appraisals and remarketing and disposing of equipment at lease-end often fell to credit professionals who had little knowledge of equipment. “It wasn’t good,” says Chrappa, “because they might get 20% residual on a used locomotive and think that was acceptable, not knowing that the real value was 60%.”<br /> <br /> Discussions like these formed the impetus for the first panel discussion on equipment management at an ELFA meeting in 1987, and creation of the Equipment Management Committee followed later that same year. By the time the first Equipment Management Conference convened in Phoenix the following year, the view that equipment management and credit underwriting were separate disciplines was becoming widespread. “Companies were ready to make equipment management into its own department,” says Chrappa, who was one of the first conference planners. “We talked about that, about putting more money into equipment management so that it would be better funded, and giving it separate goals and objectives. The idea was to raise equipment management to a higher level.”<br /> <br /> Not insignificant was credit managers’ support. “They were with us from the very beginning and they still are,” says Chrappa. “Credit people have always been great promoters of equipment management.” <br /> <br /> Switching Seats?<br /> <br /> There were growing pains along the way. By the early 1990s, equipment management had earned its own department—and was funding a number of leasing companies. “Residual values for equipment had skyrocketed,” explains Chrappa, “and equipment management departments were getting 60% to 70% value for off-lease equipment when residuals had been set at 10%.” <br /> <br /> Before long, though, finance company sales departments and independent brokers began bidding up residual values, hoping to win more transactions. As equipment values rose, leasing and finance companies began assuming more residual value. “Today equipment managers work hard just to break even with residual assumptions that are sometimes aggressive and can lead to losses,” says Chrappa. “But even if equipment managers no longer make huge profits for their companies today, they can still mitigate much bigger losses.” <br /> <br /> “What we’ve seen is the maturation of a previously non-existent discipline into one that is well defined, with its own value proposition,” summarizes Will Tefft, Senior Vice President of Asset Management at CapitalSource, Inc., in Chicago, and Immediate Past Chair of ELFA’s Equipment Management Committee. “Finance companies now underwrite the anticipated future value of equipment as well as the credit of the customer. This specialized skill sets our industry apart from all other types of lending except perhaps real estate.” <br /> <br /> Adding Value<br /> <br /> If equipment management has come of age, so has its conference. Supporters of ELFA’s Equipment Management Conference say the annual event that does a deep drill into the subject just gets better and better. “It’s easy to summarize why the conference has endured: value,” says Tefft. “It’s an education event that offers subject-matter experts with narrow bands of expertise, but extreme depth within those bands. In a concentrated period of time, they provide a lot of information that can’t be easily obtained elsewhere.” <br /> <br /> There’s also peer networking, which some say is the meeting’s best aspect. “Whether you’re a junior employee or a senior executive, the conference provides an unparalleled opportunity to have dialogue with your peers and counterparts at other companies,” Tefft says. <br /> <br /> Just as important: networking between equipment managers and appraisers, equipment brokers and dealers in the secondary markets. “It’s a two-way street,” says Tefft. “Whether meeting for the first time or renewing acquaintances to explore what each can offer, the conference provides a forum for exhibitors and potential clients to interact.” <br /> <br /> Terese Kramer thinks of it as one-stop shop. “You can get an update on best practices and trends in equipment and equipment types,” she says. “You can participate in hands-on inspections, tour facilities and meet with peers and with exhibitors who are service providers. The value of being able to do all those things in one place cannot be overestimated.”<br /> <br /> The Current Landscape<br /> <br /> Kramer’s assertion is particularly relevant, given the growing complexity of both equipment management and equipment finance. “In 10 years, I think we’ll agree that equipment management has become much more focused on regulatory compliance and regulatory risk,” says Tefft. Compliance, because banks now play a dominant role in the industry but must adhere to a growing body of bank-focused regulation. Risk, because federal, state and local governments now take a more active role regulating certain industries, producing major changes within them. <br /> <br /> “Banks are more sensitive now,” says Chrappa. “Audit teams are there 24/7/365, so banks must be extremely careful how they do things. Many now have risk departments that do nothing but study risk, so there is less bidding on equipment deals and much more caution. Banks are being squeezed really hard, but they’re trying to work through it. Things have been very difficult since the financial crisis.”<br /> <br /> Industries built around fossil fuels could say the same. “Think of regulation’s effects on the coal industry, on diesel engine emissions or natural gas extraction,” says Tefft. “Regulations weren’t at the forefront during the first 20 years of our conference, but are much more prevalent now and will be even more of a challenge going forward. Seemingly minor legislation can ripple through an industry and shift the dynamics of a market in a short time. Just as coal-fired utility plants that can’t attain compliance with emission standards are being phased out, hydraulic fracturing could experience increased scrutiny from regulators. With the stroke of a pen, the value of an entire equipment segment could change.” <br /> <br /> Such possibilities add to the concerns of equipment managers. “Part of our core responsibility as equipment managers is managing the portfolio,” says Kramer. “We have to reassess the value of residual-based transactions each year, and that includes considering legislation that could impact equipment values. We’re also responsible for ensuring that our companies’ equipment concentrations are appropriate. We also manage remarketing at the end of lease and are responsible for getting fair market value. Smart organizations realize you can’t just finance assets; you have to manage them.”<br /> <br /> Managing Tomorrow <br /> <br /> Since equipment management seems characterized by change, it seemed pertinent to inquire about the role of technology. Are certain tasks in equipment management now being done by technology that five years ago were being performed by humans, or not being done at all? Kramer considers. <br /> <br /> “Assets will continue to have a global market to sell into, so companies must have an ability to connect globally,” she says. “We already see auctions where 30 to 40% of the buyers are utilizing the Internet; if you have a piece of yellow iron for sale and someone in Abu Dhabi needs it, they’ll be bidding on it right alongside people in Minnesota. The market is now global, and opportunities to remarket globally are tied to this technology.”<br /> <br /> Another area gaining global efficiency through technology is equipment tracking. “Large generators are used all over the world, and one way to know where they are is to put tracking devices on them,” says Kramer. Not only do the devices disclose their location, they can also reveal how many hours are on the generator and time remaining before the next overhaul. Increasingly, GPS technology is being used to track equipment ranging from beer kegs to bus parts. Says Kramer, “Such systems are now critical to business inventory management, which dovetails with the way equipment managers manage assets.”<br /> A third efficiency spawned by technology is development of customized equipment-management databases. “We’re building our intelligence bank so that each time someone on the team does an equipment evaluation, we monitor and track a whole series of criteria,” Kramer explains. “We have all the information from evaluations we’ve done in the past, and as we accumulate more data, we’ll use it to make even more accurate and timely projections about future equipment values.”<br /> <br /> Such leaps in efficiency could be vital if Chrappa’s forecast is accurate. The author of the annual “What’s Hot, What’s Not” study on equipment markets doesn’t expect significant improvement in the U.S. economy for another one to two years. “When it happens, it will produce good things,” he says. “But we’ll have to keep an eye on investments in software and equipment, which are currently running negative. American corporations have almost $2 trillion on their balance sheets, so they can stay alive for a long time.”<br /> <br /> Even so, there are points of light. Last year, Chrappa’s study (www.elfaonline.org/Research/PDFs/HotNot_forWeb2012.pdf) revealed high expectations for 2012 results in medical equipment; oil, gas and other energy equipment; machine tools; high technology/computers; and trucks and trailers. Lease volumes were expected to increase overall, and residual value assumptions were seen creeping up for oil/gas/energy, rail, truck/trailer and machine tools, as well as for containers/chassis, construction and medical equipment. All told, study results were positive for the second year in a row, giving equipment managers reason for optimism—and room to grow. The 2013 edition of the study will be released at the upcoming Equipment Management conference.<br /> <br /> Five Reasons Not to Miss the 25th Annual Equipment Management Conference and Exhibition, Feb. 24–26 in Tampa<br /> <br /> 1. EDUCATIONAL SESSIONS: Following general sessions on the state of the industry, the association and “What’s Hot, What’s Not” in equipment, choose from four subject tracks that drill deeply into trends and developments in industry, technology, transportation and education.<br /> <br /> 2. OFF-SITE TOURS: For the first time at the Equipment Management Conference, attendees will be able to tour important manufacturing and maintenance facilities nearby. Choose between trips to Tampa Shipyard, Kenworth of Central Florida, Atlas Medical Technologies and Hawker Beechcraft FBO/Best Jets.<br /> <br /> 3. ON-SITE EQUIPMENT INSPECTIONS: Identify key specs, uncover critical areas of maintenance and discuss potential risk and reward aspects of equipment showcased by Independent Equipment Contractors, Iron Planet, IronTrax, Nationwide Equipment Co., Ritchie Bros. and Terex.<br /> <br /> 4. NETWORKING: Meet and greet peers and industry colleagues and find out what’s new in equipment improvements, ancillary services and ancillary products. Demonstrate your golf skills at the Conference Tourney at West Chase Golf Club and cruise Tampa Bay while trying your luck at blackjack, craps, roulette and poker for chances to win great prizes. <br /> <br /> 5. EXHIBITS: Learn more about primary and ancillary products and services that can boost your firm’s efficiency and/or broaden its offerings. At least 17 companies will staff booths and be prepared to demonstrate products or discuss services ranging from asset recovery to appraisals to collection services. <br /> Learn more at www.elfaonline.org/events/2013/EMC/.<br /> <br /> <br /> ----------<br /> Susan Hodges writes about equipment finance and other business topics from her office in Evanston, Ill.<br /> <br /> <br />  <br />

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