19 March 2008
Half way through 2007, it appears the market for cranes and transport equipment is still strong and that capital for construction equipment and transport vehicles is readily available. While this is good news for the industry, purchasing new equipment should be approached with knowledge and expert advice. A strong financial team can be a critical resource in deciding what equipment to purchase and how it should be financed.
Commercial construction activity remains strong throughout the US, which bodes well for the construction equipment industry, specifically cranes. In such a positive marketplace, there still are issues to deal with in terms of securing financing.
Jay Buechler, customer finance manager for Manitowoc CraneCredit, says the primary issues are a company's cash flow and their backlog of work. “If a company can show that they have secured work to keep a machine that is being financed profitably busy, it goes a long way toward giving a financing source some comfort,”he explains. “While secondary market values are continuing to trend upward due to a scarcity of equipment, a financing source really never wants to rely on resale value of the equipment as their primary source of repayment for the financing.”
Credit quality still remains a major issue, according to Harry Fry, of Harry Fry & Associates. “If the company has a strong credit history, financing is not an issue for them,”he says “Cranes remain quality collateral for lenders. In our experience, we need to have relationships with many lenders in order to meet the financing challenges of all types of credits, not just those companies with ‘A’ credit standards. Because of our association with a variety of lender types, we have been able to finance small companies, large companies, companies that might have had some credit issues in the past, but who still need to purchase equipment to serve their customers.”
“While manufacturers are doing all they can to increase production levels, machines are still scarce, and values have risen dramatically in the open market as a result,”says Buechler. “Lenders do need to take extra caution in this market on used equipment deals to ensure that the structure of a used equipment deal matches the cash flow capabilities of the company to service the debt. The key beyond that is remembering that a five year financing on a five-year-old piece of equipment results in a ten-year-old piece of equipment at the end of the financing, irrespective of what value is associated with that piece of equipment in today's market. Lenders can only make educated guesses as to what the market will be like during and at the end of the term of that financing. Again, the collateral/residual value of the machine should not be considered the primary source of a lender getting repaid.”
Fry says that the market for used equipment is active, even though availability for new equipment has improved, especially in the rough-terrain crane and truck crane markets. “The market for used ATs and crawlers remains active,”he says. “Financing for used cranes is available. The issue with used cranes, especially in an end-user to end-user sale, is confirming that the equipment is free and clear of any liens.”
The other issue is determining value. Fry explains: “In this heavy demand market, pricing on the used equipment may be higher than the lender is willing to advance. In many cases, a down payment is being required to keep the loan to value in line.”
First and foremost, finance companies must assure the companies they are doing business with are strong and solvent. The concerns for a finance company are varied. “For me, the major concerns are still making sure that the company is a solid provider of construction services and that it has a good history of successfully completing work profitably,”says Buechler. “What tends to happen towards the latter parts of a cycle is that there are new entrants to the industry that feel they have the experience to make the same kinds of profits that the established players have during the early and middle parts of the cycle. They want to get in to the business, but invariably they are getting in at the wrong time. These types of situations require a financing company to really underwrite the deal more strictly, placing a careful eye on work that the borrower has, and getting bigger down payments and shorter amortizations when possible.”
Interest rates have been creeping up over the past year. What does this mean for the market for construction equipment?
The rising rate environment by itself has not seemingly been a factor for us, as the price tag for cranes still requires people to get financing for the machine, irrespective of where rate levels are at,”says Buechler. “While crane activity is still very strong, it seems that other types of construction equipment are slowing somewhat. The combination of that along with rising rates seems to have led to the commercial banks getting a little more choosey in their underwriting. While the commercial banks can still be very aggressive on a deal that they really want, we are running into the commercial finance companies in more situations now than at this time last year.”
Fry says that while the finance market has remained fairly constant over the last 12 months, interest rates have been rising and yet borrowers have been slow to realize this. “The rise in rates has not seemed to impact the purchasing as the jobs are continuing and the equipment is needed,”he explains.
The upcycle for cranes and other construction equipment has been steady for more than a year. How does a finance company gauge when the next down cycle might be on the horizon?
“That is the $64,000 question,”says Buechler. “If we knew that, all our jobs would be easy. As I mentioned, one thing you tend to see is more new entrants to the industry after the peak of the cycle, so when you start seeing more entrants, it can provide a clue. One interesting thing about this cycle for us is that this time around, we have a much more global footprint. Given the rapidly expanding markets elsewhere in the world, we're hoping that this global diversification will help mute the impact of any down cycle here in the North American market.”
Fry says many lenders have experience in this industry and can look back to history and gauge the cycles. “The difference may be that today's crane market is much more global than ever before and that historical data is not available,”Fry says. “However, because of the global marketplace for cranes, there are many more avenues to liquidate assets if needed, without losses.”
While the finance company must look at all the attributes of the company purchasing equipment, the company purchasing the equipment should also be strategic in choosing a finance partner. Companies should look for a financing source that understands the construction business, understands the cycles that the industry typically goes through, understands the equipment well, and focuses on customer service.
“Funding sources that can perform well on those parameters are funding sources that are going to be there and have funds available in both good times and bad times, rather than heading for the hills during tough markets,”says Buechler.
Fry maintains that companies today should look at many options and look at the whole picture. “The local banker is no longer the only avenue for borrowing,”he says. “When assessing what's best for their purchase, the company should look at structure of the financing – do they need a loan or a lease for this purchase? Will they need to address any tax issues? How long do they feel the crane will remain in their fleet? What are the costs of financing – rate should not be the only factor reviewed - documentation fees, lien search fees, security deposits, down payments, etc, should all be factored in when assessing a structure.”