Fleet Financing Trends: A Roundtable Discussion

Our panelists:

Gerald Doughty: Director of Financial Services – Prevost

Matt Hotchkiss: Senior Vice President, Bus Division Sales Manager – Wells Fargo Equipment Finance

Edward P. Kaye: Vice President of Sales & Co-Founder  – Access Commercial Capital

Kevin B. McDonald: Business Development Manager – TIAA Bank


Moderator Craig Lentzsch, former CEO of Greyhound Lines; former president / CEO of Coach America; and past executive director of All Aboard America! Holdings, along with a panel of industry experts, explores the latest trends in vehicle and fleet financing.

Craig Lentzsch: Please start with an overview of thoughts on the new bus financing market at this point in time.

Gerald Doughty: I think everybody’s been afraid that’s there’s going to be a downturn, but we’re not necessarily seeing that at this point in time. From the financing standpoint, we use all outside lenders — including someone like Volvo finance — and we’re not having difficulties finding folks that are trying to buy buses and get the financing needed.

Kevin McDonald: I would echo what [Doughty] said. I think for TIAA the current market has been pretty consistent over the last several years. We work through various manufacturers and distributors and we’ve seen a pretty steady increase of business from them.

Matt Hotchkiss: We are anticipating the market to be down slightly from prior years, which is also what we are hearing from the manufacturers. We look closely at new coach sales volume over time and new coach sales have been on an upward trajectory for 9 or 10 years, or really since the Great Recession with over 1800 coaches sold in 2018.  From a lender’s perspective we would like to see sales volumes level off since too much supply in the market can be a concern.  The last time there was a new coach sales trend like this was around 2000. Shortly thereafter the event of 9/11 coupled with the quantity of new coaches in the market led to a significant crash. The used coach values tumbled as did new coach sales. Lenders are or should be conscious of trends like this. Moderation after a decade of increasing sales is probably good.

Lentzsch: What about the used bus market?

Ed Kaye: We’ve seen a steady flow of business from our vendor partners, and we see a steady amount of business direct from our users. So the used cars business has been pretty good. But prices certainly have been impacted by a couple recent major defaults, so we’ve got to be very careful with the values we put on used coaches these days. The market value of used coaches in general have been impacted by a couple of large bankruptcies.

Hotchkiss: Just to piggyback off what [Kaye] just said: those bankruptcies were significant.  All Resort, Cavallo, and Silverado put around 400 used coaches into the market.  This is a lot of coaches for the market to absorb and certainly has an impact on coach values. Another thing that is impacting used coach values is the fleet rotation of the tech companies in the Northern California Bay area. It’s a massive market for coaches and these companies tend to rotate their fleet every three to five years which is happening in a significant way this year and next. These coaches are late model, low mileage, and high spec so very nice units. The combination of these two – bankruptcy liquidations and tech company rotations – will have an impact on new coach sales as well as erode used coach values.

McDonald: I would echo the exact same comments. I think we’ve the seen the lengthening of the sales cycle on the used coaches due to all the aforementioned situations in market. From our end, we remain committed to the industry. I think we’re committed to the fact that this sales cycle will take a little longer to remarket, but we do believe that values will ultimately stabilize once that inventory has filtered through.

Lentzsch: What effects, if any, are you seeing on the traditional leasing market or TRAC leasing market from the promulgated change in accounting rules? Do your customers care?

Doughty: As a manufacturer, we’re not seeing any customers come to us and request anything particularly different from the lenders because of that. While some are concerned, it’s not something that’s impacting whether they choose a lease or a loan.

McDonald: I would agree that the motivations to do a lease haven’t really changed with these new accounting rules. It’s not often that companies were doing a lease to be off balance sheet, there were other reasons. And those reasons still exist.

Lentzsch: In today’s market, do you believe traditional loan financing or lease financing is more attractive?

Kaye: It really depends on the company and its financial situation that drives the decision on a lease or a loan. And our shop, depending on the age of the collateral, the age of the coach will kind of drive a lot of that decision. So, the older coaches that we’ll finance, we’ll only do on a full payout loan basis. But with some of the new coaches we were just talking about, those more often have to be leased.

Lentzsch: Have any of the depreciation write-offs that you can take nowadays affected lease rates?

Hotchkiss: The difference between a lease and a loan, as far as rates go, really hasn’t changed due to accounting changes. There is the benefit of the 100 percent depreciation but now the depreciation is worth less because corporate tax rates are lower.  For the most part the net result is about a wash.  Lease rates had typically been about a point lower than loan rates which is consistent with what they are today. The 100 percent bonus depreciation may mean however that some of our customers have enough depreciation and that may make leasing more enticing to them.  By passing those deprecation benefits to the finance company they can take advantage of lower rates.  We are seeing a little more leasing this year because of that.

McDonald: From our end, we’re indifferent to lease versus loan. We leave that decision up to the customer. Rates on loans and leases are at pretty historic levels, so it’s a good time to choose either finance products at this point — whatever works best for the customer.

Doughty: And again, when our customers come to us, we allow them to make the decision. We’ll present it to them both ways if they want it. Give them the features and benefits of each and let them make the decision from there based on what their accountant advises them to do. About three months ago, or at the end of last year, more customers realized that rates jumped a little bit. They were used to them being even lower and when they did pick up a little bit, people hemmed and [hawed] a little bit. But they’re still historically low.

Lentzsch: Are any other external factors affecting the market for selling and financing coaches?

McDonald: No, I would probably defer that to the manufacturers more. Historically, there are fluctuations in the market and we find them pretty hard to predict. And we have a team that monitors credit folks and portfolio folks that monitor the industry and financial trends. And basically, we’ve found there’s constant change, so we don’t try to make any predictions on it.

Lentzsch: What is your impression of the overall profitability and financial help of your customers last year and going into this year?

Kaye: For almost as long as I’ve been involved in the coach finance business, there has been a top tier, the top segment of operators who are overly capitalized with good balance sheets and a strong wherewithal to handle any economic situation. But the majority of our customers and the majority of the industry are smaller mom and pop operators that are highly leveraged and thinly capitalized; they’re using the coaches to fuel their cash flow. They’re much smaller credit risk to us, but those are the ones that struggle and always have.

Hotchkiss: We are significant lenders in the coach industry and look at a broad cross section of coach operators across the country on a regular basis. We have been noticing negative profit trends in 2018 year-end results. With the tight labor market costs for drivers, mechanics and other staffing are going up faster than companies are able to keep up. On top of that there were fuel and insurance increases in 2018. As a result, we are consistently seeing a significant amount of margin compression in 2018 financial statements. It’s not everybody but it does seem to be the majority and enough to make the case that 2018 was a challenging year in our industry. The good news is that demand continues to remain strong. We’re viewing 2019 as a reset year. Operators are recognizing that their expenses outpaced their revenues or pricing and they are making adjustments to react to that. We are already seeing positive results for 2019 primarily as a result of long overdue price increases.

McDonald: Yeah, I agree that the expenses have gone up and I think it’s eating into profitability. We analyze our customers who have run into problems the last 12 to 18 months. We spend a lot of time trying to find a correlation from one troubled company to another and really haven’t been able to draw a straight line between them to find out if it’s not all just because of expense that somebody’s gotten in trouble. We’ve had health reasons, some people just shutting down, going out of the business, over-expansion, and various other reasons for people having potential issues out there. So as far as profitability, the health of the industry, and people that have potentially struggled recently, we haven’t been able to connect the dots to one particular reason why somebody might have an issue.

Lentzsch: Have these fluctuations in prevailing interest rates affected you guys at all?

McDonald: I can’t speak for our treasury end of things, but in a coach market in general, it’s a hyper competitive market. There’s a lot of lenders and margins are constantly getting pushed to the extreme. But as far as lending, we still find it a healthy segment in terms of the interest rate markets. We find that they go up and down and are hard to predict, so we kind of build our business so we can maintain our financing through various curves.

Lentzsch: Are you doing just fixed-rate financing or do you do some floating-rate financing?

Hotchkiss: We do both. There hasn’t been a lot of demand on floating rates recently. The yield curve is very flat, in fact slightly inverted, which would indicate that rising rates are not highly likely in the future. They had been rising form quite some time but have stabilized and actually dropped the last couple of months. Although rates appear to be stable, they are impacted by many things including Fed policy and the economy. There is very little gap between a fixed rate and floating rate loan currently which takes the advantage of a floating rate deal out.

Kaye: I agree with everything [Hotchkiss] just said. The direction of interest rate markets is a function of the Fed. And they’ve pretty much stated that they’re not going to increase rates for the remainder of the year, or at least towards the end of the year. So we only offer a fixed rate product and we’d only anticipate interest rates issues.

Lentzsch: Was there any single grouping or area that seemed to outpace the others in terms of expense increase in 2018 that you’re aware of?

Doughty: It’s definitely the drivers. Those wages keep on going up and in some cases, they can’t even find drivers. That makes it really expensive when you got buses that are sitting. Buses without drivers is not a good thing. If the bus keeps costing you money, your guys keep expecting to get paid. I mean it’s kind of rude, but oh well, that’s the nature of your business.

Kaye: What keeps me up at night sometimes is insurance. We have a lot of companies that mention insurance increases or premium increases in their insurance. And all it takes is a couple of insurance companies to exit the market and then we have a real problem. So I agree, drivers certainly are a big issue and I think insurance is a close second.

Lentzsch: How do you think the market is going to fair as we look into the more distant future?

Doughty: I am cautiously optimistic.

Hotchkiss: When we are talking about financing as it relates to that question there are two things that are impacting us. One is consolidation. This is a substantial headwind for our company because I would probably list 30 companies that we did business five years ago that we may not do business with today because they were acquired.  We will continue to face these pressures as consolidation continues which is a challenge for our volume goals. The second factor is what Kevin alluded to earlier. It’s a hyper competitive market and there are new lenders every day that haven’t been there in the past. As a company we just have to work harder and sell our value proposition to the industry.

Lentzsch: Anything else to add?

Kaye: I would just add one thing that we didn’t talk about that is going to impact the entire industry: a recession. So we know it’s looming out there somewhere, we don’t exactly know when. But we all probably would agree that at some point in the future it’s going to happen. And when that happens, I think there’ll be a lot of, for lack of a better phrase, “blood in the streets.” There’s a lot of companies that I don’t think will be able to withstand the recession, and it will cause an increase in repossessions and inventory and impact valuations. We are taking an aggressively defensive position on a lot of credits we might have approved in the past.

Hotchkiss: The coach market is however fairly resistant to recessions, and in many cases counter cyclical to a recession.

Doughty: I couldn’t agree more, and I want to kind of reiterate what [Hotchkiss] was saying, being from a manufacturer’s stand point. We get a lot of phone calls from lenders that want to be in this business. And there’s nothing worse than a lender who doesn’t know what they’re doing in this business. You’ve got a great group of lenders here that know exactly what they’re doing, but there are a lot of places that just try to throw their names in the hat. They think, “Hey I want to get into that segment,” but it’s not as easy a segment to get into as you’d think. They make poor decisions on the credits they’re making decisions on, and it hurts the industry as a whole.

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