The equipment leasing sector has had a rough go of it for more than a year now, as a few high-profile lenders have struggled publicly and headlines have cast gloomy shadows on the sector.
The domino effect has hit nearly every lender in one form or another. For example, responding to industry concerns, some banks have lowered their advance rates, causing an equipment company to take on additional cash collateral quite suddenly. The lower discount has caused several companies to become cash strapped and no longer able to originate business. Other issues include the pressure to have "warm" back-up servicers in place, as well as the subtle but ever-present push to break issuers into the mainstream of asset-backed securitization. In short, it's been a long, strange trip for equipment leasing this year.
Yet deal flow continued in 2002 and the leasing business has certainly not dried up. In fact, even small equipment leasers have issued vehicles in this dour climate, namely Frontier Leasing Corp., an Urbandale, Iowa-based originator formed in 1999. To date Frontier has recorded $155 million in issuance, most recently closing a $50 million equipment leasing securitization in September. Steven Frederick, principal, at Frontier Leasing sat down with ASR to speak about the nuances of the business and what equipment lenders, both large and small, can expect to face in the coming months of a new year.
ASR: Can you describe your business and, specifically, how Frontier derives value from leasing specialized types of equipment?
SF: We do small-ticket middle market leasing, anywhere from $5,000 to $10,000 dollar deals all the way up to half a million plus deals. We don't do residuals, we do buck-outs, we do a few "puts" here and there, but we do pretty vanilla leasing.
We'll do stuff as small as general office equipment, furniture fixtures and some ATM business, but then you move up the line and we do commercial laundry and car wash equipment. Our average deal size is right around the $50,000 mark. Our average car wash deals are in the $150, 000 dollar mark, the commercial laundry deals - some of them are getting pretty big these days - can get up to the $300,000 plus mark.
We do a lot of different kinds of equipment but we only do it through long-term relationships. What helps us derive value in what we do, essentially, is the knowledge of the business because we've been with these people, these vendors, for quite awhile. And because you've got good vendor relationships they are going to give you more business on the positive side, which helps because they don't want to be searching all over town, especially given the current funding environment.
ASR: Are there any other means of financing that you employ?
SF: Besides the obvious securitization, we do portfolio sales, we've got a repo facility with some insurance companies and we've got some general bank lines that we use. We like the portfolio sales to cover concentration issues when you go into a securitization, but you also want to have a lot of options for "in the event" of cases. During our first securitization, for example, we were in the pipeline to get the deal rated with Duff & Phelps when the Fitch/Duff merger went through. All of a sudden we were stuck - investors were already talking to us about the deal but we couldn't get a rating. However, our banks were comfortable with us enough that they increased our line. It worked out really well actually as one of our banks was new to the leasing field and said "what are your other options if this securitization thing drags on?" So we turned around and sold a $5 million chunk off to a relationship we had, and the bank not only opened up $5 million more for us but gave us an additional five. It worked out really well with our funding sources: We tell them we're going to do something and then follow through.
ASR: Frontier completed its third securitization this year. Was it a tougher market this year than in times past to get this through?
SF: I don't really think so. What we try to do with each securitization is...to keep some [initial investors] but we've always tried to bring in a new lead investor to get them in the deal.
ASR: What's the potential for another deal in the coming 12 months?
SF: I'd say it's very probable.
ASR: There's been a lot of pressure on the equipment leasing sector over the last several quarters. What are you seeing out there?
SF: The past two years there have been a lot of headlines with leasing companies where there have been some big bumps in the road; With all these bumps over the past two years, funding sources do everything they can to make sure they're protected, which is fine. But at some point you can squeeze so much from somebody that it actually becomes a bad thing...which leads you into the next thing people have done, additional servicing or back-up servicing.
ASR: What is Frontier's opinion on back-up servicers and how are you handling the role on future transactions?
SF: Overall, it's caused a squeeze for warehousing availability for people unless they've got a good story or good historical information to pass along. I think the servicer concerns are out there. Liquidity becomes an issue when you do find funding sources that protect themselves so much to the point that for the short term it looks good. But long term it hurts the company when...you start to pull all the cash away from them. I came from a background from the rating agencies. When some of these big fraud issues (with the T&Ws and things like that), all of sudden servicing became a big issue. Now I would say it's probably overdue. I don't like it as an issuer because it does add cost. However, where you have the biggest problems [in a default] is just getting all the information together and just getting it out. So, while I don't like it because it adds expense, overall it's probably warranted. I can complain about it, but I choose to say it actually makes sense, it's a cost of business and it's probably overdue. And if you want to be in this business anymore that's pretty much what you've got to do.
ASR: What is the potential for equipment leasing deals achieving mainstream success with ABS investors?
SF: Equipment leasing, more than any of the other assets - cars, mortgages - is what I always call a "story bond." You're never going to have uniformity. You put a group of five leasing companies together and everyone's going to do things a little bit different. So you can't compare and say things are going to be the same, whereas you could in home equities because a lot of things are pretty streamlined. We're trying to follow through on our business plan and what we want to achieve. And when we do that, it's a good story to tell to those ABS investors that are in the equipment leasing market. Everybody understands leasing but I think there's enough of a difference in the people and the way the people do business that it's going to be tough to bring that in as a standard, one size fits all type of option. I don't see that anytime soon.