Ownership Vs Usership

Unlike other equipment finance markets, the one for cranes does not have many captive finance companies. This does not mean that it is not highly competitive, as a number of bank asset finance divisions and independent funders are present and keen to provide finance to crane buyers.

Cranes have strong residual values and this is a parameter finance companies pay particular attention to. “A crane is typically a very well-maintained piece of equipment that has to meet stringent H&S testing on a regular basis, which helps protect its residual value,” Andrew Sagar, MD of UK-based Close Brothers Asset Finance’s Construction & Recycling. “In addition, the supply chain tends to be longer than with other standard yellow metal assets, helping residual values remain strong because the assets are in demand.”

Wells Fargo Equipment Finance, describes cranes as attractive equipment collateral to finance, because they have a long life and hold their value. The fact that most contractors are well established and have a long experience in the industry, was cited by the company as another reason behind the finance sector’s interest in crane finance.

For 20 years, DLL has been serving the global crane market and has a total crane portfolio of around €1bn. Neal Garnett, president ,Global Business Unit Construction, Transportation and Industrial at DLL, says there are various business drivers that impact crane financing. “Overall, there is low solvency in this market. Balance sheets rarely reflect the true status. In addition to that, cranes are expensive assets, which are all financed.” He adds that there is a high concentration of large customers, forcing the company to manage its credit appetite in the right way.

“A large-ticket crane could represent a too much of a small-lender’s portfolio, making them more risk averse with a much smaller appetite,” Garnett says. He highlights that understanding the business of the customers is key for financial companies. Our long-standing partnership with Manitowoc enabled us to increase our lending appetite and find suitable solutions tailored to the customer needs.”

Societe Generale Equipment Finance (SGEF) says the crane market has been a strong source of business for the company for over 20 years. The company finances a full range of cranes from several vendor partners. “The cranes range in size from smaller mobile cranes to large crawler cranes, and occasionally tower cranes,” says Kevin Bovington, vendor relationship director, Industrial Sector at SGEF. 

He says there can be challenges associated with providing crane finance. “A challenge with financing cranes can sometimes be the value of the asset versus the historical financial strength of the customer. Given their price, even single assets can represent a huge financial commitment for most customers. We overcome this by working with the customer, vendor partners and risk teams to ensure solutions can be provided. It is important to be forward-looking and understand what difference an additional crane asset will make to a client in future revenue streams.”

Ups and downs

Before the pandemic, DLL anticipated the global crane market to grow by 5.1% Compound Annual Growth Rate (CAGR) from 2020-2024. “Pre-Covid, the crane market was fairly stable, and slightly growing in recent years,” says Garnett. “However, post-Covid this is expected to drop to 1.77% growth. Covid-19 disrupted the supply chain and delayed investment decisions, which will impact the crane finance market as well.”

Bovington says that Covid-19 had less impact on the crane market than other sectors. “Most cranes are ordered for specific large-scale infrastructure projects that have remained more or less on course despite the global crisis.” However, acknowledging the difficulties some of its crane customers face, SGEF provides payment relief during this period and helped customers acquire additional cranes supported by deferring initial payments.

Talking about the UK construction sector, Sagar says the impact of Covid-19 has been lower than other sectors because it was able to trade through the pandemic. “The sector has also been well supported by the Coronavirus Business Interruption Loan Scheme, which has helped keep investment plans on track for many,” he added.

US-based Harry Fry & Associates, established in 1995, provides finance and leasing solutions to the crane, lifting and special transport industries. The company says it has placed over $1bn in equipment with domestic and international funding sources.

According to Harry Fry, the company’ president, the finance market in the US has been very competitive for several years. “Interest rates are low and businesses have enjoyed good, steady growth in many markets.”

In regards to the crane market, Fry says it has been relatively strong in recent years, despite the oil price drop and Covid-19. Talking about the part of the market serving the oil and gas industry, he says it was seriously disrupted when oil prices plummeted. “It has rebounded marginally with oil prices rising, but daily rates in the oil fields are still significantly lower than pre-pandemic.”

As for the effects of Covid-19 he comments: “Fortunately, the crane, and heavy transportation industries were deemed essential and so there was very little effect to the overall market performance. Of course there were trepidations early in the pandemic but shortly thereafter the market stayed steady and some areas grew.”

At Wells Fargo Equipment Finance, they identified hesitancy in the market at the beginning of last year because of Covid-19. They saw that changing over the course of the year, with the market performing well. The company found that the construction activity remained high especially for infrastructure projects, and this kept their crane customers busy throughout the year.

As for 2021, the 45^th edition of the annual Wells Fargo Construction Industry Forecast reveals more cautiousness or measured optimism among construction industry experts. The company conducts a survey and calculates the National Optimism Quotient (OQ), which measures the degree of optimism in the non-residential construction business for the coming year. At 78, the 2021 OQ figure indicates optimism tempered with restraint, said the company. The figure is 21-point lower than the one for 2020.

Wells Fargo Equipment Finance says there is increased investment in renewable sources which could increase demand for large crawler cranes in the coming years. It adds that if the infrastructure bill passes, it will have a significantly positive effect on the industry.

Talking about his expectations for the next few years in terms of demand for crane finance solutions, Fry says: “Based on early indicators it appears we could see a better than average market for new and used equipment. If an infrastructure bill succeeds, solid strong growth could be inevitable. The biggest issue for crane companies, even before the pandemic, has been operators. That is the greatest concern going forward which may inhibit significant growth.”

Popular finance products

DLL’s Garnett says traditional ownership driven products (loans, hire purchase, credit bail) remain the most important finance products for crane companies. “Crane companies know the economic life cycle and value of the asset, and like to build up equity and hidden reserves in the balance sheets which enables them to generate liquidity and remarketing profit when they sell them.”

Wells Fargo Equipment Finance offers conventional loan financing as well as equipment leasing. It says that in the US ownership is preferred to usership, with the company’s financial portfolio consisting predominantly of conventional loans. “Customers choose conventional loan financing because when they buy a piece of equipment, they currently get bonus depreciation that they can offset their tax liabilities.”

Harry Fry & Associates also finds that the conventional loan is the most popular finance product. “Cranes tend to hold their value extremely well so most companies want to own the asset. If they find the asset is not working up to its potential utilisation in their fleet, they can sell it,” says Fry. “The only changes over time has been more with rates than structure and term. We have been offering 10+ year terms since we started and during the early years when rates were in the 9% and higher many went with longer terms to help cash-flow. Recent years with lower rates many have chosen shorter terms of 84 months or less.”

Leasing

“In the last five years, we have seen certain segments acquire crane assets through leasing,” says Garnett.

The increased popularity of leasing was also identified by SGEF. Bovington says this is due to cranes being focused on specific projects for a limited term, rather than for general use. “Given the high cost price of cranes, leasing the asset at a monthly cost can be more financially viable than outright purchase. SGEF is able to support leasing transactions by taking future asset value positions which reduce customer commitments and lower costs by reduced rental repayments.”

Particularly for the US market, SGEF has seen in recent years a shift towards a rent to own product, where customers have the option to purchase the asset (without obligation) at the end of the initial lease period.

Fry says that cranes being good value assets, makes leasing suitable only for very specific applications. “We find that some larger construction companies may request a lease because they have a specific project that needs a specific crane that they do not have in their fleet. Once the project is completed, they can return the crane as it may not be one that fits their general crane fleet. If a crane is set up as a true tax/operating lease and the customer elects to buyout the residual at lease term they will find they will almost have to pay for the crane twice.”

He highlights that with interest rates still at historic lows and the terms offered in the market, especially on newer cranes, a lease payment and finance payment are not that far apart.

Fry says the TRAC lease product has gained some popularity for boomtrucks. TRAC is a tax-oriented lease available for over-the-road equipment, structured with a residual which is guaranteed by the lessee.

Size differences

Are there differences in the type of finance products chosen for different crane types and sizes?

Bovington puts it simply: “Generally speaking, the more expensive the crane, the more the customer will want to use the asset rather than own it. We often provide niche structures for high value assets.”

 “The smaller cranes go mostly hand in hand with shorter terms and financial leases,” says Garnett. “Bigger cranes are more project driven and sometimes require more flexible payment structures or arrangements. A general trend is that bigger cranes require longer finance tenors, which is why understanding the asset life cycle is key.”

Close Brothers Asset Finance is funding all types of mobile cranes, pick and carry cranes, spider cranes as well as tower cranes. Sagar says the company is looking at funding gantry cranes too. They find that hire purchase is the most popular finance product for small to medium-sized machines. “Large cranes tend to be financed through manufacturer-supported schemes, and in the case of large tower cranes, CapEX (funds used by a company to acquire, upgrade, and maintain physical assets) or bank funded. These pieces of equipment have a long service life and attract longer finance agreements.”