Is there a liquidity crisis in the coach industry?
By Matt Hotchkiss
As I work with motorcoach operators and manufacturers around the country, I’m often asked about the “liquidity crisis” that many associate with the recent recession. So what is a “liquidity crisis” and how it is affecting the coach industry and lenders like Wells Fargo Equipment Finance?
Depending on which industry you are in, U.S. economic activity peaked at the end of 2006 or early in 2007. Companies were growing, banks were lending and the economy seemed on an endless upward trajectory. However, when the housing bubble burst
and the economy started to deteriorate, companies struggled to sell their products and repay loans. The U.S. economy officially entered recession in December 2007. Over the course of the next year, and especially in the latter part of 2008, the financial services industry faced unprecedented pressures.
It became evident that the growth rate from much of the decade was no longer sustainable. With fewer lenders able or willing to lend, the amount of capital flowing in the system decreased, prompting a fear we wouldn’t have enough “liquidity” or cash to keep the economy moving forward. It was a true financial crisis. The Federal Reserve went to great lengths to inject capital into the markets so that banks could continue to lend and companies could continue to meet their short- and long-term obligations.
Now, three years later, many banks have returned to profitability, and in general, have greater cash reserves. This is due in part to the fact that corporations and many American households are guarding their cash. Government regulators are also monitoring banks and recently raised capital requirements to ensure banks can compensate for potential loan losses. In addition, lower demand for goods and services and a high degree of uncertainty about economic conditions can contribute to a slower rate of growth which often decreases loan demand. The lean economic years also produced a great number of companies that were not able to remain profitable, decreasing the number of qualified borrowers. Even if a bank does not change its credit standards for a particular industry, there may be fewer companies who meet those loan qualifications.
So is there a liquidity crisis today? No. The truth is that many banks have cash to lend and are looking for industries and companies that can demonstrate an ability to remain profitable. All companies must make careful choices about how they operate and banks must make smart decisions about who to lend to. Banks make strategic choices about the industries they will specialize in so they can make informed decisions about when and where to lend.
The fact is that banks need to make loans to turn a reasonable profit so it’s in a bank’s interest to make prudent loans that fit its risk/return tolerance. However, facing uncertainty in the economy and a smaller pool of qualified borrowers, banks may be lending less and it could feel to some that less money is available or that it’s harder to qualify.
Wells Fargo Equipment Finance has not seen a major impact on its business with the motorcoach industry due to this liquidity crisis. While other lenders may have changed their policies or may have been constrained in the amount of capital they could provide, we’ve always had plenty of capital to lend. Through the recession and what has been a very modest recovery, we have continued to offer loans and leases at competitive rates. Our credit review policies remained essentially unchanged and we have continued to actively pursue qualified equipment buyers in a variety of segments within the transportation industry.
The economic outlook for the next year remains tenuous. The Federal Reserve has signaled that it will keep rates low “at least through late 2014.” This is good because it provides some certainty about where interest rates will be, but it also signals that the overall economic growth rate is not likely to be exceptional. The Wells Fargo Economics team’s forecast for GDP growth is painfully slow at about 2.3 percent in 2012 and 2.1 percent for 2013. At this point, the forecast suggests there will be enough momentum to keep the economy from slipping into a double dip recession barring some kind of new shock to the system.
In spite of the unquestionably difficult times we’ve seen in the broader economy, there are incentives that may make a new motorcoach purchase attractive today. For example, rates remain near historic lows. If you are in the market to upgrade your bus or coach fleet, you may be able to translate these low rates into a low monthly interest expense that could last for the useful life of your equipment. In addition, you may be able to claim a 50 percent “bonus” depreciation expense if you place new equipment into service before the end of 2012 when this tax credit expires. Talk with your tax advisor to see if this incentive can apply to your company.
Matt Hotchkiss is the motorcoach equipment finance specialist at Wells Fargo Equipment Finance. Based in Minneapolis, Matt has been working with motorcoach operators for 15 years. He can be reached at (612) 667-4129 or by email at [email protected]