Money talks

Apart from identifying the crane with the right characteristics, during the buying process a fleet owner has to make an important financial decision.

“Fleet owners take a lot of time making sure they get the right crane to meet their needs, but it is equally important to find a partner from a finance standpoint that is going to be with them throughout the cycles,” says Jeffrey Gocken, vice president and global programme manager at global finance company DLL.

A number of bank asset finance divisions, independent funders and captive finance companies are operating in the crane finance market, as cranes’ strong residual values make them a more ‘secure’ asset.

John Crum, senior vice president and national sales manager of the Construction Group at Wells Fargo Equipment Finance, says: “Cranes tend to hold their value on the top end of the charts for all equipment types. Even in volatile periods where there might have been swings to the low side, they were not as dramatic as other asset classes.”

This makes finance companies interested in including cranes in their portfolio. Eric Freeman, vice president of Summit Funding Group, says the crane industry is the best place for a finance company to put its money if it is starting to go down market in credit profiles.

He adds that cranes are a great collateral because there are not a lot of technological advances and they do not a great amount of moving parts.

The high residual values mean that in the case of default in payments by the borrower, the lender can repossess and resell it at a relatively high price.

There is high availability of capital to finance cranes, and fleet owners have the ability to choose from a wide range of financial products including leases, loans and hire purchase.

Each company’s business strategy is different, therefore there isn’t a single finance product that meets the needs of all companies. However it is interesting to see the existence of geographical differences in finance product choices.

Manitowoc Finance and Wells Fargo Equipment Finance find that in the US market demand is highest for loans.

Crum says: “The fixed-rate term loan has been the most popular finance product in the US for many years. This is because the rates are very attractive, five to seven year rates are very low at the moment.

“For the general end users or crane rental companies, a five to seven year term tends to match their cash flows, utilisations and expected returns.

They are able to pay for the crane at a reasonable time and continue to build-up some equity while not overstressing their cash flows for it.”

Gocken says loans and finance leases are popular in the US because the idea of ownership is more prevalent than operating leases. “Cranes are intrinsically very valuable and have a long useful life, which makes ownership desirable.”

When a finance lease agreement is reached, the lessor buys the crane and rents it to the user for an agreed period. The lessor retains ownership but the crane user has the exclusive use of the asset.

Depending on the agreement, the crane user may be able buy or continue leasing the asset.

Summit Funding Group finds companies with low debt, particularly those adding a couple of cranes to their fleet every year, are seeking the cheapest loan available. On the other hand its clients who have to accomplish certain financial targets to keep stakeholders happy go for an operating lease with a fixed purchase option.

An operating lease contract allows for the use of an asset, but does not convey rights of ownership. The contract will generally run for less than an asset’s full economic life and it is off-balance sheet financing. The lessor assumes the residual value risk of the asset.

“What they get to do in that scenario, they bring the crane in without adding debt to the company and at the end of the lease term they can either hand it back, buy it for a fair market value or keep leasing it,” Freeman explains.

Vice president of Global Trade Finance at Manitowoc David Pengelly says while the company provides loans in Western and Eastern Europe, leasing is more prevalent in these regions, as it is “more of a rental market”.

“In Europe and China the focus on usership rather than ownership. Customers are looking for the ability to update their rental fleets rather easily by just handing the cranes back and releasing new cranes. It is more similar to the forklift industry,” says Pengelly.

As the UK construction market bounced back in the last couple of years, the demand for crane finance increased. Lombard, NatWest’s UK asset finance division, saw a 42% year-on-year increase in the value of crane finance in 2015 and a 56% increase in the number of cranes financed in the same period. Mark Treacy, sales director at Lombard, says the majority of its customers are funding cranes via hire purchase.

Hire purchase gives companies the certainty of fixed costs for the duration of the agreement and the option to buy the vehicle at the end.

“I think it has always been a dominant product in the asset finance industry. 95% of the cranes we have financed in the last two years have been on hire purchase and that is across the spectrum of our wide customer base, from the small sole trader through to large corporates,” says Treacy.

Treacy says there are various benefits from using hire purchase and asset finance in general, in terms of releasing cash and having an additional credit line to your normal bank funding lines.

“It can be completed very quickly, the security is actually the asset itself so you don’t need any other security. It is a fixed cost so you know right at the outset how much you have to pay on a monthly basis which takes away the uncertainty,” he adds. Hire purchase is also the most popular crane finance product at Hitachi Capital UK, which focuses on SME lending.

“A lot of the SME crane owners like to own the asset at the end of the term. Especially since the crane has such a long life span, it can last for 20-25 years,” says Andy Taylor, head of sales at Hitachi Capital.

The risks associated with ownership can be minimised through an operating lease facility, but only a small minority of UK crane fleet owners chooses this product. NMT Crane Hire, a Lombard customer, expanded its fleet from six cranes in 1990 to 45 cranes in 2016.

“We have expanded at the beginning because we were using our own cash to buy the cranes and then we have been using finance to expand quicker,” says Mark Ambridge, managing director at NMT Crane Hire.

The company initially did a couple of lease purchases but then selected hire purchase, which it has been using since.

“I like fixed rates and the crane is ours at the end of the day. I like to know the exact amount going out each month, it is much better than going variable. I wouldn’t lease anymore,” says Ambridge.

This year NMT Crane Hire added to its fleet a Terex Challenger 3180, Terex AC40/2L, Terex AC100/4/(L) and a Liebherr LTC 1050 telescopic compact crane, using hire purchase.

The Dutch crane market has shown signs of growth, but the economic crisis has changed the owners’ business strategy.

Nick Hendrix, equipment specialist at ABN Amro Lease Netherlands, says that when some smaller fleets demand a specific crane, they tend to hire a crane rather than purchase one. “They are operating with more flexibility than ten years ago, when the market was expanding and every company wanted to put their asset on their balance, now you see more rental,” he explains.

At ABN Amro Lease Netherlands the most demanded crane finance product is finance lease, with or without balloon payments.

“We do finance lease most of the time for crawler cranes, because they are robust assets which can be financed for a longer term, 7–10 years, or in some cases more than ten years. Operational lease is mostly used for all and rough terrain cranes,” says Hendrix.

Hendrix says many corporate customers who obtain finance for crawler cranes most rent them to companies in other countries.

Hire purchase accounts for 90% of all financing contracts of Terex Financial Systems in Germany, according to sales director at Terex Financial Systems EMEA Stuart McDowall. McDowall says demand for crane financing is high in Europe and that there are differences in the way each country defines their calculation methods and requirements.

He says: “For example, in France, the full amount is financed, and customers would usually buy the crane at the end of the leasing period for a very small percentage of the residual value. In Benelux and Spain, down payment can be requested and some customers may ask for balloon payment in order to reduce the monthly payments.

“But, funders in many other countries within Europe will look for a minimum of 10% down payment, and will often consider a VAT deferral to coincide with the customers VAT returns.”

A balloon payment is a repayment of the outstanding principal sum made at the end of a loan/lease period.

Finance lease is also the dominant product in China. “The most popular finance product is finance lease, accounting for about 95% of the total lease portfolio. Such a lease-to-own structure coincides with the asset ownership culture,” says Fong-Kiat Phua, general manager at Manitowoc Credit (China) Leasing.

Phua says the usual lease term ranges from three to five years built-in with a balloon payment of 30% for certain bigger ticket items.

This is lower than the one in the US and Europe which stands between five and seven years. Phua adds that there has been an increase in crane finance in China since 2010, but the demand for new crane finance is not strong in the last few years due to much lower volume of new sales.

“However the awareness of crane finance has never been so wide and so deep making it a reliable alternative source of finance,” Phua concludes.

What are funders looking for?

As we have seen finance companies are offering a wide range of finance options to potential crane owners, but they have a number of requirements.

All the interviewees quoted in the article, mention that their companies look beyond the ‘numbers’ when it comes to assessing a customer. “Whilst a customer’s financial position is important, we also take other factors into consideration when preparing a tailored package,” says McDowell.

Describing the standard underwriting process at Lombard, Treacy says they look into sets of accounts, projections, budget, length of trading, knowledge of the individual running the business and other general underwriting information.

Hendrix says that at ABN Amro Lease they are also looking at the asset itself. “We look very closely at the asset itself, the brand, type, version, additional equipment, how the company wants to use this asset and which industry the company operates in. We would like and need to know all types of aspects to have the best financial solutions for both parties.”

Gocken says the financier’s knowledge of the qualitative side of a business helps build the foundation of a beneficial long-term relationship with a customer.

“You can look at all of the quantitative aspects and make an assessment, but I think when you go a bit beyond that, you can get a better understanding of who it is that you’re working with. If you know the people in charge and know their commitment, you are likely to provide more flexibility, particularly when that company needs it most.”

Falling rates, shrinking margins

Competition in the crane finance market is high as a number of players have returned to the market after the economic recovery.

Gocken says: “Globally there is almost a cyclical flow of entrants into the marketplace. In the US, it is more that banks are constantly in and out of the market. At times, they are very aggressive in the crane market, while at other times they completely back away.”

The rates in the market have dropped over the last few years, which is beneficial for those seeking finance.

Lombard’s Treacy says the difference in the rates is due to lower cost of funds. “Cost of funds being where they are with the base rate being so low, has meant that the rate for the customers has been competitive all around,” says Treacy. Gocken says because the crane market is relatively small, finance companies are fighting over the same customers, and this puts pressure on margins.

“Let’s say a very small crane operator or rental company, with $10m dollar revenue, barely profitable, is looking for finance. If it is a nice steady little credit we will be competing against local as well as large international banks for this customer. Bidding against each other to give them money at 3%. It is a crazy market now as to how low the rates have gotten,” says Freeman.

Wells Fargo’s Crum identified competition as a challenge. “There is a lot of capital available in the market, so our challenge is competition and in making sure that we are there with the right product at the right time.

Our number one challenge is the abundance of capital and the rate environment we are in,” he says Taylor shares the same opinion: “We deal with brokers and our brokers have many choices of where they can place that business. Some of our competitors offer cheaper rates than us, some of them will have more adventurous credit policies than us. However we’re at the forefront for our turnaround times and the service we provide.”

Challenges

Manitowoc Finance’s Pengelly speaks about the challenges experienced by finance providers because of the downturn in the US market.

“We have to manage customer delinquencies better, and we entertain restructuring to help customers in rough times as a result of the current market place,” he says.

Across the pond, the Brexit result has created an uncertain economic environment, affecting investment.

Taylor says: “I think a lot of the SMEs leading up to the Brexit vote put the purchase plans on hold as they weren’t sure what was going to happen. The result was unexpected for many SMEs owners, so again they are waiting to see how things will go before they make a purchase. For an SME an asset of this value is a big commitment, so they have to be sure that the economic conditions and climate are right for that purchase.”

Another issue faced by UK finance providers is the low awareness of asset finance, this was highlighted by both Lombard and Hitachi Capital.

Certain characteristics of some types of cranes can pose challenges to finance providers. Fraud can occur in tower crane finance, because they are comprised of multiple parts that can be replaced.

Terex’s McDowall says: “Business banks like to finance mobile cranes, but tower cranes are somehow perceived differently by banks. Consequently our customers still face some reluctance from funders to secure financing for these products.

Fortunately we can help them.” At ABN Amro Lease Netherlands they have seen an increase in demand for tower crane finance, which they are predominantly financing through finance lease.

However in order to prevent loss, the bank insists there will be an identity to each part of the tower crane and a track and trace administration.

Hendrix says: “Each part should be identifiable by number and also by track and trace system. This is an obligation of the client, one of the terms and conditions we set up before financing a tower crane.

“It is also a challenge because in the crane business our customer is not used to it, but there were some incidents of non-traceable assets in the past so we had to act.”

Another issue for finance companies arises from cranes being an expensive asset to remarket.

Taylor adds that remarketing could be also be difficult due to some cranes being more specialised for particular applications.

Summit Funding Group’s Freeman says in the US many cranes have been pushed into the secondary market from the oil field areas like Texas, Oklahoma and Lousiana, as an effect of the falling oil price.

“We have seen a lot of big crane companies either going under or trying to sell some of their fleet and values going down in those areas, but it has been quite regional. Some of them need to be reconfigured to work outside the oil field, because they have certain specialised features.”

However, Freeman says because the ‘recession’ related to the oil price decline in the US is regional, these cranes do get sold in other regions.

“It is not like in 2008-9 where the whole world was in recession, so there was nowhere to go with them. We have seen a small dip in crane values in the last 6 - 12 months but it seems to be recovering,” says Freeman.

Despite the challenges, finance companies have illustrated that they are particularly interested in the crane market. The availability of finance products gives crane owners the opportunity to find one that matches their long-term strategy and contributes to their expansion.