After years of holding a tight-fisted grip on corporate purse strings, mid-sized companies are starting to increase spending on new equipment and expansion plans. Investment in plants, equipment and software--which fell to $1 trillion in the depths of the financial crisis--is expected to reach $1.35 trillion this year and $1.55 trillion in 2015, according to the Equipment Leasing and Finance Association (ELFA). As investment grows, so does financing activity--from $454 billion in 2009 to about $742 billion this year and a projected $816 billion in 2015.
Chief financial officers (CFOs) of middle-market companies financing equipment, or contemplating doing so, should understand how recent changes in the equipment finance marketplace could benefit them. More and more lenders today are choosing to share part of their loans with networks of finance providers in what's known as a syndication. [America has around 197,000 medium-sized firms, defined as those with annual revenues between $10 million and $1 billion, according to data from the National Center for the Middle Market at the Ohio State University.]
A New Mix of Lenders
The growing use of syndication in equipment finance is being driven by market demands as well as regulatory guidance. To make financial institutions more resilient to market and liquidity shocks, for example, regulators are toughening rules governing how much capital lenders must hold against various investments.
What does that mean for CFOs of middle-market companies? In the past, as a long as a lender was comfortable with a borrower, it was free to finance any asset it liked--such as trucks, barges or planes--without tying up significant amounts of additional capital. That may change going forward.
Let's say a large regulated financial institution finances an airplane for a company with a credit quality equivalent to a "B" rating instead of a "BB" rating. The financial institution will be required to set aside more regulatory capital and, in light of this, some lenders might scale back the types or size of assets they're willing or able to finance.
But the effects of the new regulatory environment aren't all negative for borrowers. CFOs seeking equipment loans and leases may be pleasantly surprised to find lender demand for their business has never been stronger. One reason is that bank regulators have suggested to regional and community banks that they have invested too heavily in real estate and need to diversify. These...