
In order to create a context for our discussion on Fleet Financing, please share your thoughts on the state of the overall private motorcoach market as we enter 2025.
Matt Hotchkiss: The motorcoach market is definitely in a strong position today. Demand is robust and operators are showing strong financial results.
COVID had a transformative and positive impact on companies’ balance sheets as they came out of the pandemic. That was a result of the various government funding programs for vehicles that became available like ERTC, CERTS, PPP and others. It really put companies in a position of strength as they emerged from COVID.
Coupled with that, the reduction in both the quantity of coaches and of coach companies in the market created a unique opportunity for operators to make margin, which most of them have capitalized on.
Our portfolio is performing well. I like to say that we are in a renaissance period in the motorcoach industry right now.
Dave Mendenhall: The pre-owned bus market has experienced an unprecedented inventory shortage over the past 24 months, reaching levels I have never observed in my career. This scarcity of equipment is due in part to the large number of units that were, prior to COVID-19, slated to be retired over the following five years but were instead retained in service.
Contributing factors also include significant rising manufacturing costs of new buses and longer-than-normal delays in delivery schedules. These challenges prompted many operators to refurbish their existing fleets rather than invest in new equipment early in the recovery period.
Recently, we have begun to see an increase in competing pre-owned inventory, marking the first significant shift in supply in several months. This trend suggests a gradual easing of market pressures and I anticipate that pre-owned bus prices will stop appreciating over the next 6 to 18 months and will begin to normalize to depreciating. In short, as new equipment begins to become more available and numbers of competing inventories and which have been appreciating, will stabilize and potentially decline over the next six months.
Sam Smith: The industry continues to do very well and agree that everyone is in a strong position. We have seen healthy revenue growth and good profit margins from most operators throughout the country. Some of this is associated with price increases that have been successfully passed on to customer to maintain or when possible, increase margins. In addition, operators continue to be successful adding new business. Our portfolio also continues to perform very well.
Dave Mendenhall: When we talk to our clients, I always inquire about their rate structures, “are you getting push back on pricing?” For months and months and months, the response has been no.
However, in the past couple of months we are beginning to hear the opposite. I think what we are seeing is the small bus operator that got us into the sins of the past, leasing or branding coaches for below market, way below operating costs in some cases, just trying to keep busy.
What we are hearing is more and more pushback on pricing. So, it does seem to be a little bit more competitive again and that could be a problem coming down the road.
Sam Smith: Overall, demand in the industry remains very strong, though I agree there are signs that it may be starting to plateau in certain regions. I’ve heard of some operators lowering their pricing to what I would assume would be unacceptable margins to win business. This approach can compromise the quality and service that customers expect. Maintaining healthy pricing practices is essential for the long-term health and stability of the industry.
How are interest rates compared to last year and what is the outlook for rates?
Sam Smith: This is a great question. Unfortunately, neither Matt nor I have the crystal ball to answer this and thoughts on the outlook would involve some guesswork in a white coat.
We have recently seen two rate cuts that have affected short-term rates, specifically the Federal Funds Rate and Prime Rate. But these rate cuts have not lowered longer term, fixed rates, they have increased them. There are several factors that come into play with the longer term and indexes like Treasuries including economic growth and expectations, inflation, the bond market, and investor sentiment. I think rates may continue to stay at these levels unless there are major economic changes.
Matt Hotchkiss: At this time last year, we would have guessed that rates would have been considerably lower this year by maybe 100 basis points or more.
And that is not what happened. As Sam Smith said, the Fed has dropped the rate twice a total of 75 basis points over the last 90 days, but market rates have gone up 50 basis points during that timeframe as a result of all the factors that Sam Smith alluded to.
Dave Mendenhall: While I do interface with our appraisal clients on many, many things, it is not our primary basis, what their rates are. We do want to be able to understand exactly what they want and be able to deliver that in a timely basis.
I have seen a couple of really good strong deals with a strong operator, where lenders come in and just made them a sweetheart deal on a blanket revolver. I don’t think that is the case on most operators at this point. They’re suffering some of that extra Fed rate. And who knows what that is going to look like in the coming months.
What is your view of the availability of secured credit for bus purchases this year compared to last year?
Matt Hotchkiss: For the coach market, there is plenty of credit available today. In fact, I would guess that today there are probably even more lenders in the coach market than there were pre-COVID. So, most companies are not having a problem finding financing.
Sam Smith: There seems to be plenty of credit available today, as Matt mentioned. New bank’s and funding source have entered the space since COVID and in general Bank’s are looking to put on assets again. I think making sure your lender understands your business is an important step in obtaining financing. We are in good times right now and a lender’s industry experience and commitment are important to consider.
In today’s market, do you believe traditional loan financing or lease financing is more attractive?
Sam Smith: For the most part it depends on the operators’ book and tax objectives. Towards the end of the year, TRAC leases tend to be more competitive, primarily because of the timing of the depreciation and the way we can monetize it. Looking into next year, bonus depreciations does step down from 60 percent to 40 percent, however, it’s possible that could change with the incoming administration.
Matt Hotchkiss: I think it is a good idea for companies to look at both options particularly at the end of the year, and compare loans to TRAC leases. The cash flow savings can be significant on a TRAC lease because of the lower monthly payment.
What are your thoughts on TRAC leasing a the moment?
Sam Smith: It would be helpful for operators to look at all the options they have including the overall monthly payment and tax appetite. As we continue to see more electric, operators should be aware of the tax credits that are available and how they can impact financing whether it is a loan or TRAC lease. These will become more common discussions with CARB and other states adopting CARB next year and beyond.
Matt Hotchkiss: The 45W tax credit is $7,500 on a light-duty vehicle, but $40,000 on a heavy-duty vehicle. A light duty vehicle would be a GVW of 14,000 pounds or less and a heavy-duty vehicle anything over 14,000 GVW.
Zero emission vehicle requirements are going to depend on CARB and the Advanced Clean Trucks rules, which may extend to other states that adopt the CARB regulations. CARB will likely prevail in states like California and potentially other states.
How do you think the merger and acquisition market is changing currently?
Dave Mendenhall: Have been involved heavily in a number of transactions this year and they are going strong. There is an appetite for solid companies. I have four or five clients who are actively buying. They are actively looking for opportunities and so we have been involved in several of them this year. It is cool to see, but it makes you wonder when the roll-ups are done, then what happens?
Sam Smith: I tend to ask the same question as the barriers to entry in this industry are incredibly high. While financing for a bus can often be found, the real challenges can lie in securing insurance, obtaining and maintaining DOT status, and meeting liability insurance requirements. These factors make can make it difficult for new players to enter the market. The most likely candidates are those with an established track record such as limo operators who may already have a relationship with an insurance provider willing to take a chance on them expanding into bus operations.
The M&A market is contributing to consolidation. Over the past couple of years, there’s been increasing interest from private equity but there are also existing operators. Another significant driver of consolidation is limited succession planning within many companies. In some cases, the next generation isn’t interested in taking over the business, leading owners to seek an exit strategy.
Matt Hotchkiss: Last year M&A activity was busy, but it has accelerated this year. We are seeing it across the country. It is a combination of the regional operators making tuck-in acquisitions to expand their geographic footprint and private or public equity making acquisitions in the industry with a likely strategy of consolidation.
Victor Parra: From my perspective it has been extremely active. Going forward, I would guess even more so. A lot of operators who made it through COVID are doing well. As I tell people, the best time to sell is when you do not have to. Clearly things are clicking on all six cylinders. EBITDA is very strong right now, which obviously enhances multiples.
So all of these factors, the exhaustion from getting through COVID, and the fact that they are doing well and things are great has companies considering if it might be time to make a move.
The succession process is different. For the most part, especially if it is a strategic acquisition, meaning another operator buying them, it is a pretty straightforward process. It is one operator taking over another, consolidating some. But for the most part, in all these transactions, whether it be a PE involvement or a strategic buy, the key piece here is the management team. Keeping the management team, that is critical.
In some cases, some of these deals won’t happen without the management team staying intact. So, we are finding companies that are interested in acquisition and want to really meet the management team to see how well they would A integrate with their own operation. And B, if they needed that management team to shore up their position in a given market, that is very important to them.
Dave Mendenhall: We are seeing some pretty strong clients right now with good multiples, and we do get a chance to hear that from some folks. Again, we know a lot about several things long before they are ever public, just by the nature of what we do. We have to be very careful about not disclosing any of that, but we are seeing some very solid responses.
Multipliers have been strong. Maybe not the strongest I have ever seen them, but very, very strong. And it is a good time for people to take the exit strategy if that is what they decide to do. There seems to be no shortage of buyers at this time.
Every transaction it seems there are two or three people looking. It seems like in 38 years of bus solutions, I have not seen a better environment than we are experiencing right now.
Matt Hotchkiss: I will go back to the balance sheets that are much stronger today coming out of COVID. Companies have more liquidity and less leverage. It is giving these larger regional players the ability to make these acquisitions because they are able to leverage their balance sheets.
Between these regionals expanding and the funding that is available in the private equity market, we will likely continue to see significant M&A activity.
When it comes to financing these M&A transactions, we participate in some of them and others we choose not to. It really comes down to what the asset value is compared to what we are financing, and what the resulting leverage profile look like after the acquisition.
If the leverage is reasonable and the asset value is good, we generally like to look at those deals. But if it is the opposite of that, we struggle with them.
Do contracts have penalties for pre or early payments if they’re financed and leases?
Sam Smith: In general, anytime there is a change of ownership or a potential sale of a company, the operator should notify their lender of the changes to prevent any issues. From time to time, we do have customers communicate the pending sale of the business and in some cases, they may be requesting a simple payoff letter as the buyer may have financing lined up. Depending on the original structure of the deal there could be prepayment penalties.
We may also receive a request to process a transfer and assumption, where the customer may be requesting to reassign the existing contract with the new entity or ownership. This can be a more complicated process depending upon the organizational changes that are being proposed. Typically, the more information available including details on the ownership change and impact to the financials the easier it is to understand navigate. We also can look at restructuring the overall debt where we may become the senior lender. We are interested in supporting our customers and that includes evaluating these options when appropriate.
Matt Hotchkiss: We probably get paid off 70 percent of the time, and then 30 percent of the time we allow them to assume the debt. But if they are paying us off and there are penalties in the contract, they have to pay those.
When supply eventually catches up to demand, what is your advice for operators? How can they prepare now?
Sam Smith: The most important advice for any business is to understand and manage your costs. Focus on work that acceptable profit margins, as top-line revenue is not the only measure of success. This is what pays the bills and ensures healthy cash flow, which are critical for the long-term. Additionally, having equity in your equipment and a healthy balance sheet provides a nice safety net.
Matt Hotchkiss: Take advantage of the good times, continue to manage your debt levels, and maintain a strong balance sheet. Lower debt and a strong balance sheet is going to give you a competitive advantage when conditions change. And they ultimately will. So, take advantage of these times right now.
Dave Mendenhall: It is good to get them thinking ahead. Coming out of COVID, we saw a big increase in price, 17 percent to maybe 24 percent pre-COVID from where it was then, on new equipment.
There were several units they normally would have cycled out to retirement during the following three, four years. A lot of companies did the smart thing, they knew they would have long lead times on new buses and they re-manufactured. They did a little engine transmission work, maybe dressed it up and gave it a paint job and seat covers, and put the money in.
Even if they know they are going to trade this equipment, at some point they need to continue to maintain it and service it, and not let it go. A lot of times, when people know they are going to let the equipment go, they stop doing the expensive stuff to it.
The used market is still there and there is still a big demand for it. If you are going to buy new in the coming months, it is just good stewardship to keep maintaining equipment and get it ready for trade. Be thinking ahead and take care of your assets.
Victor Parra: I have found that when we deal with companies that are involved in Spader 20, it is so much easier. They are very much in tune with the value of their business. The metrics Spader uses in 20 groups serve as critical guide to ensuring you’re building equity in your business.
Matt Hotchkiss: I believe all operators should be part of a 20 group or performance group. Comparing your performance to your peers in different geographic territories is invaluable.
Opinions and information included in this article are general and not intended to provide specific advice or recommendations for any individual or entity. Contact your banker, attorney, accountant, and/or tax advisor with regard to your individual situation.