For the amount everyone talks about the credit crunch, it has proven suprisingly difficult to find statistical evidence of it. There is no evidence for a decrease in lending supply in Europe, says Laurent Quygnon, head of banking economics in economic research at French bank BNP Paribas.
“I can see that banks are saying that there is some restriction in the supply of credit or loans; they say that the criteria for taking out a loan is more difficult. But at the same time, we do not see the expression of these results in figures. This is not necessarily strange. It means that for a part of our clients, the criteria are more strict, but at the same time they continue to lend to the others, and a lot of companies have a positive net cash situation.”
Quygnon speaks from a point of view of France and Europe, but to some degree the picture is similar on the other side of the Atlantic Ocean, says Ron Riecks, general manager of Wells Fargo Construction, a division of Wells Fargo Equipment Finance.
“In the US market, the general slowing in the construction market has reduced borrowing, and people are buying less equipment now than several years ago. There is less activity in the construction space. Overall activity in the crane area, because it supports petrochemical work, is fairly robust, and crane companies with good credit are not having trouble finding finance. We are happy to lend to crane companies, and are looking for customers.”
In other words, it may be the slowdown in the economy, not so much the availability of credit, that has reduced bankers’ appetite for lending. “Because the current economic times have caused some markets to slow down, ie, housing, lenders are very hesitant to finance 100% of new equipment cost,” says finance advisor Harry Fry, of Harry Fry Associates.
Riecks agrees, saying that lenders are now demanding a 25% equity stake in a new crane. Some say the amount is even higher – as much as 40% down, says Doron Livnat, CEO and owner of crane rental company Hovago, who is also an advisor for Netherlands’ Rabobank.
“There are still good rates in the market place, but the lowest rates seem to be available only to the strongest credits – which is how it should be,” says Fry. “A company that has strong financials and has shown the ability to pay over the course of time should be rewarded with lower rates, as they are a lower risk to that lender. In the not-too-recent past, we saw very low rates going to borrowers that may not have deserved them. Now, the banks are seeing their portfolios defaulting, which is going to further reduce their margins on these deals.”
But at least one company is trying to hold on to its existing deals. Boom Logistics, one of Australia’s largest crane rental companies, signed a new financing deal in August with nabCapital, BankWest and GE Capital. “The financing facilities have been specifically structured to allow Boom to retain many of its existing equipment lease finance and hire purchase facilities, and therefore continue to realise the benefits of the low fixed interest rates associated with these facilities,” the company said in a statement. Its three-year revolving debt deal holds AUS$56m of these leases, and the company has another AUS$98m outside them. The company said that the deal has contributed to its relatively low cost of borrowing, averaging 9% for its 2009 fiscal year.
Paperwork
Harry Fry advises borrowers with poor credit to consider putting down additional collateral. “Due to economic times, buyers may not have the extra cash to put towards the new crane purchase, but they have equity in their crane fleet. By putting up a crane that is free and clear, the lender has decreased their LTV [loan to value ratio]-and it gives them a warm and cozy feeling!”
Riecks at Wells Fargo says that putting up a crane you own as collateral on one you are buying is particularly common in small crane companies, which gradually switch to cash purchases as they grow because there is less paperwork. Riecks spells out the hassle factor: “Typically the lender wants to see copies of the original invoice that you got when you bought it, typically they want to do a filing search to make sure that the crane is free and clear. A lot of times one subsidiary of a company buys a crane, and then another subsidiary uses it, and the internal paperwork has not caught up with the current situation.”
Harry Fry says that the biggest change he has seen over the past year is delays in processing applications. “The time to get a credit decision has greatly increased. No longer can you submit a finance package to a lender and expect an answer within 3-5 days. Today, even with a complete credit package for review, a credit decision will take upwards of 10 days to 2 weeks. The due diligence is much more in-depth.” This requirement could also make it particularly difficult to buy used cranes with credit, since the crane will be snapped up by a cash buyer.
Most people seem to agree that the cost of borrowing has risen over the past year; this also seems to be due more to the failing economy than lack of credit. In Europe, interest rates are up. In the United States, interest rates have fallen, but banks are asking for larger increments over US Treasury base rates, in bonds. Even equipment finance providers are feeling the pinch, Riecks says. “Big companies that may have been, two years ago, borrowing at 20-40 basis points over Treasuries (0.20%-0.40%) are now borrowing at 150-200 points over them. This has to do with lenders’ general concern about the economy,” he says.
In France, borrowers are turning to their bank at the expense of equipment finance, says Quygnon. In the April-June period, cash lending increased 19.3% compared to the same period last year. This rise was almost double the increase of equipment finance in the same period (11.2%). Quygnon explains why this might be. “The risk premium on the market is very high now. Bankers enjoy better information about their clients” than third parties, such as equipment finance houses, he says. “This phenomenon is less obvious outside of France.”
Captive financing
The best rates in the business may come from manufacturers’ captive finance companies, says Riecks at Wells Fargo, because of manufacturers’ subsidies.
Although Riecks admits he is not familiar with any particular crane deal, he says: “I’m captive for plenty of other manufacturers, and I can tell you, there is a subsidy provided by the manufacturer to offer lower interest rates.” In fact, Riecks says that the widespread practice of captive financing has muted the effect of the economic downturn on the crane business.
Captive financing is offered by all of the major manufacturers. Manitowoc Crane Finance is backed up by De Lage Landen, Liebherr by Sued Leasing, Terex Financial Services in Europe by De Lage Landen. Not all manufacturers go down this route; for example, Kobelco in the USA uses Harry Fry as a broker, and Tadano-Faun in Europe goes to several different providers.
Why not simply use captive financing? Harry Fry says that borrowers should look at multiple providers to match their exact needs, instead of going with a single captive finance company. “One bank cannot possibly be the answer to a multitude of different credit scenarios,” he says.
Riecks at Wells Fargo says that lenders should look at the term of the loan. If the captive financing company’s low rate only lasts for a short period, it might affect the company’s cash flow as it finishes paying off the crane. On the other hand, if a company negotiates a long-term finance deal but plans to get rid of the crane in short term, it may find itself in a situation of negative equity, Riecks says. When it comes to sell a crawler financed over 12 years after only three years of ownership, it may owe more than the crane is worth on the open market.
Livnat at Hovago also says that he sees long-term lending becoming more scarce. “If [finance providers] are putting up a million Euros to finance a crane for 10 years, they are more hesitant, and have more difficulties to do it. Then they push customers to do leasing, which has a different structure, but even there, it will be difficult.”
But he suggests that crane companies’ greed is partly responsible for this problem. “Banks have seen that we have all been selling cranes. New prices of cranes in the last 3-4 years went up about 35%-45%, and we have been selling used cranes, because of the shortage, for very high prices. And they know that this cannot last forever. They know that they have on their books cranes which are too expensive, whether new or used, that when the downturn comes there will be a mismatch.”
His advice for crane rental companies now? “To show bankers that they can make money on operating the business, which means for example to raise rental rates. It is impossible to say by how much, because it is not a homogeneous market, and to operate an 80 tonner takes two people in some places, and in others only one.
“All my colleagues understand what I am saying, but they just don’t do it. They ignore it; they were able to ignore it, they made tons of profit from selling used cranes. A lot of people made very good money.”
Livnat calls the situation a wake-up call. “In the last three years we had a party, and now it is over. What I regret is during the last three years, while prices have risen in anything that you and I buy, the crane rental company did not raise prices. We pay more for fuel, tyres, spare parts, salaries, insurance, more for hamburgers, and we could not, we were not mature enough, not professional enough, to raise rental rates. Manufacturers, however, were able to raise their prices, which none of us liked, but we accepted it.
“My idea is that in the European and North American market, any crane you want to operate below 60t you are losing money on, unless you charge it as if it were a 70-tonner. All those small cranes, nobody can make money on. But it happens in big cranes too. If you take a 400t or a 500t hydraulic AT, you are talking about an investment, with trucks and trailers, bolts, nuts, of more than 3.5m Euro, and you rent it out very cheap. I don’t want to give out numbers because I am scared to do that.”
Despite Livnat’s gloominess, his company stands to benefit from the current market situation, as he himself admits. Hovago only re-rents its fleet of 250 mobile cranes; that is to say, he rents only to crane rental companies. “We give our customer the possibility to expand on off-balance finance. Which means that they know what they need to pay per month, and after the contract, they return crane to me, or have an option to purchase at an agreed price. In a way, we are sharing the risk.”
