Though analysts are still pointing to the equipment sector as a place to find relative value, the industry itself, particularly on the small ticket side, continues struggling with the same growing pains seen in other sectors once dominated by specialty finance companies.

Most notable, there have, and will continue to be, industry consolidation, according to sector specialists, causing the pool of issuers to shrink (see also Fitch Observation, p.8).

Including Rule 144A, true private and the U.S. public market, the equipment lease-backed league table contained approximately 30 issuers in 1999, compared to the 14 that have claimed issuance so far this year.

"I think [the consolidation] picked up steam this year, but what's happening in equipment leasing is probably no different than what's been happening in other areas," said Kent Becker of Moody's Investors Service. Becker compared the industry consolidation to what's been happening in subprime home-equity and subprime auto.

Late last year, The CIT Group acquired Newcourt around the same time that Case Credit Corp. and New Holland teamed up to form CNH. In May of this year, Citigroup bought Copelco Capital from Itochu International.

Also this year, Wells Fargo announced it will buy Charter Financial, a deal expected to be completed before the end of the year. Further PNC Financial Services Group acquired the origination and servicing business of U.B. Vehicle Leasing, just after European American Bank acquired with Fidelity Leasing, according to the Equipment Leasing Association (ELA), the industry's official trade group.

"The consolidation has been severe," said Warren Kornfield, director of asset-backed securities at William Blair & Co. "But I can give you a list of 36 equipment leasing companies [exposed to consolidation], 25 of them were in the mid market, nine of them were smaller guys. All of these guys were guys originating $200 [million], $300 [million] a year to a $1 billion, $1.5 billion. In that middle market, it's a brutal consolidation."

Kornfield, who has been working with the small ticket equipment finance industry for 15 years, argues that, along with the titans swallowing up the general midsized companies, the niche, specialty, small ticket financers are able to survive, because of economies of scale. There's not enough money in those niches to turn the heads of the larger corporations dominating hot product groups like office equipment and computers.

"It's also just a realization that's there's too many equipment leasing companies out there," Becker added. "There's just a limited amount of profits and you've got too many players trying to get those profits. From an economic standpoint, somebody has to leave the industry."

Advanta Corp., along with its mortgage businesses, announced that it would seek strategic alternatives for its equipment leasing operations. Further, the future of the Conseco Finance's equipment arm is uncertain, as well as that of Finova Capital, according to market sources.

"There seem to be a lot entities shopping themselves," one source noted. "In terms of how successful they'll be, who knows? It's probably not the best time to be in the market."

Still, some market watchers remain more optimistic about the state of the industry. Laurie Kusek of ELA said, "Even with all the consolidation, the trend is definitely up. Business is doing really well. We've estimated that for the year 2000, the equipment leasing industry will conduct about $233 billion worth of volume, and that's compared to $226 billion in 1999."

Liquidity Issues

Apart from industry consolidation, liquidity seems to be the biggest concern in the equipment sector, particularly among the smaller companies, which tend to be more reliant on the capital markets and warehouse financing for viability.

"We are aware of a growing concern within the equipment sector regarding liquidity and it may be that the pendulum has swung such that funding sources are now overly critical of this sector," said Tony Golobic, chairman and chief executive officer of GreatAmerica Leasing Corp.

"Liquidity, however, still exists, as evidenced by our ability to complete our first public term securitization deal in June of this year," he added. "We were very pleased with the execution on that transaction and believe that this was result of First Union's excellent work and the strength of our underlying portfolio and our company's performance."

"For a lot of issuers it's important to be able to sell down the triple-B, because securitizing is their primary funding tool," said First Union's Manoj Kumar. Kumar added that First Union's market share for selling triple-B-rated equipment backed assets is more than 80%.

The liquidity issues that have plagued some of the small ticket issuers have not impacted the agricultural and construction (A&C) lenders in quite the same way, because those lenders are generally larger and more credit worthy, and often with investment grade ratings, such as Orix Credit Alliance.

Because of their size and credit, companies like Orix are not as reliant on the capital markets for funding likewise, before Orix's return to market last fall, the company had been operating without securitization since 1994.

"A lot of these smaller equipment entities are not [investment grade]," Moody's Becker said. "So they really live and die by liquidity issues."

Though for the most part, the sector's liquidity issues have been independent of the actual performance of the collateral, there have been some isolated instances of credit loss.

For example, Fitch downgraded three classes of a deal from small ticket lender T&W Funding in May, due to a dramatic deterioration in asset quality, Fitch said.

"I've heard rumors in the marketplace about other small companies in trouble," said one market source.

"Our experience has been that the large ticket portfolios and medium ticket portfolios tend to perform better than the small ticket portfolios," said Denise Person, also an analyst at Moody's.

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