Credit where credit’s due

To some extent the ingenuity of owners and their ability to spot the changing winds across the economic landscape has allowed some to emerge from the crisis stronger than before while many others have perished.

Over the last decade many world economies have changed dramatically with rampant growth in some quarters now reduced to a crawl with the performance of former bit-part players now buoying the industry as a whole.

Europe, the Middle East and the US are gradually returning to growth while Australia, Asia and South America show levels of activity impossible to ignore.

However one of the symptoms of such a great recession is always the tightening of lending restrictions by financial institution, and without good credit availability the construction industry can be a perilous marketplace to be involved in.

A well-mixed fleet is of paramount importance to take advantage of construction opportunities as and wherever they present themselves. Many who had failed to recognize the world geographical shifts in crane demand and took chances with the cranes they bought or held onto during the good times have already paid the price.

Recently appointed Terex vice president and managing director for the Americas region, Frank Bardonaro, has observed this many times.

He says: “One thing we know from crane rental sector over the past few years is that there are a lot of companies who have financial difficulties, who are struggling. They often bought too many of the wrong cranes at the wrong time and the wrong price. We have all seen some large and small companies fall off over the last few years.

“I think of it as the 'dot crane' days. People were paying list price plus. It wasn't responsible of lenders. Through 2006, 2007, 2008, people were borrowing money for many cranes they can't now use or sell.

“Many of the cranes were to satisfy the ‘dot.crane’ bubble and the projects cancelled or cannot be considered long term work. This put several business in trouble and those who invested in tower cranes were hit especially hard during this time.”

With the million dollar crane deals needed by some during the financial crisis to ensure their fleet could weather the changing tides, and financing options limited by now extremely cautious lenders, fleet owners need options.

That is precisely why businesses such as Terex Financial Services and Manitowoc Finance exist.

Terex and Manitowoc believe that having finance companies under their group umbrellas, gives them ultimate freedom in how they structure finance deals for crane fleet owners.

Bardonaro says: “It is our goal to work with those who have made it through these times to ensure they get the right crane at the right price for jobs of today and tomorrow.

“We're not selling just to sell. We're working with end users and distributors who have a strategic plan for the cranes they will need tomorrow, not just the order they make today.”

With Terex Financial Services, Bardonaro believes they have one up on traditional financial service providers in that their knowledge of the cranes and the industry as a whole means a level of support for customers that can help prevent bad decisions.

“Terex Financial Services is right down the hall from me,” explains Bardonaro, “so when a customer wants a cash flow projection, or needs financial support and guidance to ensure success for the future, we can say, 'Here's the average utilisation on that machine, based on that machine with finance structured like this, here's what you can expect'. That really helps ensure their success.”

Being able to understand the customer’s underlying strategy in the crane market and understand the nature of the support needed is something that has helped Manitowoc Finance provide $3bn in financing for crane owners since its inception in 2003.

Manitowoc Finance also has its own captive finance company in Shanghai, as well as what it describes as a virtual joint venture with De Lage Landen, the equipment finance arm of Dutch bank Rabobank.

Explaining how the company’s method of operation helps Manitowoc Finance provide for its customers, David Pengelly, vice president of global trade finance at Manitowoc says: “We have three structures that we utilize. One is a virtual joint venture that we utilize with our partners. We own our own captive finance company in Shanghai that services China, and we also have what we refer to as referral programs that are not joint ventures.”

Many manufacturers offer formalized or informal referral programmes, where they will agree financing terms with the customer before selling the finance deal package to a bank that will underwrite it, effectively acting like brokers.

However this is far from Manitowoc’s focus, with only one referral programme in operation at the moment, the virtual joint venture partnership has been far more fruitful for the company, and they assert, better for the customers.

Manitowoc customer finance manager, Jay Buechler, says this partnership has allowed Manitowoc to carry out an almost ‘busines as usual’ approach to customer finance throughout the downturn.

“As it pertains to North America, prior to the 2008 financial crisis, it was pretty easy to get financing,” says Buechler. “It didn’t take a heck of a lot, money was fast and free and the financing sources were being very aggressive in putting cash out in the market. Obviously with the crash a certain segment of the funding source population actually went away, folks disappeared.

“Other folks pulled in the reins quite significantly, GE Capital being a perfect example of that. There were folks that were lending to dealers that had x million dollar lines with GE to do wholesale financing and GE said ‘sorry you can’t use it’. Very, very tight credit conditions, lots of declines.

“And during that time—it’s nice to be able to look back with 20:20 hindsight—but during that time it was easy to see that we had made a very good decision on our partner way back in 2002, because DLL, because of their vendor model focus, and because of the fact that their parent Rabobank didn’t have a lot of exposure to real estate, we had money available for folks and in fact had a record year in 2009 when nobody else was around.

“That doesn’t mean that structures didn’t change and get tighter. Credit conditions were viewed a little more closely, structures were changed to include somewhat shorter terms than were being done earlier, and typically down payments were required on many deals, whereas when everybody was lending money fast and furious it was 100+% financing. I mean anybody who asked for a down payment wasn’t getting a deal because lenders a,b,c and d weren’t asking for down payments.

“Back when it was running fast and furious you could do a crawler or a big all terrain crane on ten-year financing. Those days are gone, I haven’t heard of anybody looking at or offering a ten-year term since then. Seven years is about the maximum people will go in the funding side now.

“So there was a period in all of 2009 and probably into the first half of 2010 where the available funding source pool was very narrow, and De Lage Landen was, with us through Manitowoc Finance, a huge part of that narrow pool.”

At this point, with many of the traditional core markets for cranes returning to growth optimism, and bankers are starting to re-enter the equipment finance market they shunned during the downturn.

“I think since the 2010 midway point, so about a year ago now. In the last year you’re seeing people coming back to the table.

“Seeing folks come back into the market, and to me it probably started with the smaller regional bank players, I get the sense that they feel like they’ve weathered the storm, they’ve tightened up their reins and cleaned up their portfolio, got back to profitability and they have cash to lend again.

“But again they’re doing it on a little bit different basis. The terms aren’t as aggressive and crazy as they were in ’07-’08. The terms are shorter, but down payments are still required. Rates are decent because rates are low in the economic environment with the fed (federal reserve bank) holding rates down.

Bardonaro recognizes that many customers also feel they have weathered the storm, and are looking to position their fleet for growing opportunity.

“A lot of local firms are building their fleets and rolling out the older equipment. The most recent Ritchie Brothers auction in Orlando saw prices climbing again for used cranes, including many of our brands that brought as much at the auction as they sold for new 5-6 years ago.

“This is a great sign for all of us in the industry on both the manufacturing and end user side.

“We are able to take trade-ins if that is what the customer needs, so this has put is in a very good position. We are so confident in our product quality today that we are offering standard 2-year warranty, and sometimes even three-year warranties. That's where we're focused on building our business and providing customers with confidence that the machines will last and will be reliable throughout their lifetimes.