By David Hubbard
Motorcoach financers remind operators to take time to reflect the hard times they have just been through and understand the game has changed. They say money is available, but the path ahead demands sound basic business with accountability like they have never seen. Credit processes are much more stringent than before.
Eric Coolbaugh, a principal of Advantage Funding, Lake Success, NY, says in the past 20 years, he has never seen such de-leveraging of commercial and consumer credit because of previous lax credit standards.
“The U.S. economy has seemingly prospered due to Americans’ ability to buy a home and tap into what they loosely considered endless equity. As a result of this feeling of prosperity, Americans spent more than they could afford on everything from automobiles to travel to coaches,” says Coolbaugh. “Unfortunately for most coach operators, the home equity is gone and there are hard choices to make.”
Considering the present economic climate, he says he has not seen such de-leveraging because of lax credit standards since early 2000.
Leases and loans
Advantage Funding, a subsidiary of Marubeni America Corp., the multinational Japanese trading conglomerate, specializes in direct and indirect niche transportation finance and leasing. Their target transactions are leases and loans for new and used commercial coaches, minibuses, school buses, paratransit vans, ambulances and limousines. They also establish captive finance programs for commercial transportation equipment manufacturers. With the exception of schools buses, these businesses have reported steady decreases in units sold for several years, according to Coolbaugh.
“Operators without other areas of diversification have a tough time remaining profitable,” he says. “The retail limousine operator was practically annihilated as consumers cut any and all discretionary spending. All this has resulted in high delinquency lenders as well as increased repossessed inventory.”
With the public scaling back coach trips throughout the United States, Coolbaugh warns operators to be conservative in how they manage their operations.
Advantage Funding also reports OEM sales for new equipment are down, with many operators electing to maintain their current fleets rather than rather than replace or add equipment. According to Coolbaugh, they are running their vehicles longer they have historically because of the economic uncertainty.
Unable to pay on time
Coolbaugh says he sees customers with strong businesses who have never before paid late experiencing short-term cash flow disruptions and unable to pay on time. In certain circumstances a number of those operators without strong core operations have had to close their doors.
“In today’s finance market, banks are as skittish as they have ever been,” he says. “Some are only lending to the top 5 per cent of fleet operators and turning down most others. Advantage Funding continues to keep a practical lending standard, but we are seeing leverage and high debt loads on almost all applications that cross our desk. In the past many of these applications might have been structured for approval through increased down payment, but in today’s volatile market we almost always have to turn them down.”
Advantage Funding says customers applying for credit today need to pay keen attention to their submittal. Tax returns and financial statements (preferably audited) must be included as well as references from other banks they are paying in a timely manner. Most financial institutions will be asking more questions and scouring data for any signs of high debt load or inability to pay.
The highest standards
Lenders will review personal credit and hold it to the highest standards, so being up front about credit problems when submitting an application is essential. A brief summary detailing business history, future plans and personal experience is key, according to Coolbaugh.
Looking forward Advantage Funding is optimistic about coach financing but says it fully understands this is not the end of this de-leveraging process.
“We think there are still unforeseen bumps in the road and mountains to climb in 2010,” says Coolbaugh. “Eventually, the U.S. economy will be stronger and those coach operators who understand credit and cash flow will be well positioned for long term growth when the economy improves.”
The ABCs of credit financing
Shore Funding Ltd., Little Silver, NJ, provides equipment financing to motorcoach and school bus operators through conventional loans and TRAC leases for new and used equipment.
Company president Joe DiAngelis thinks much of today’s financial woes harken back to the recession of 2000 and the aftermath of 9/11. He says this was about the time the country began embarking on the path of easier credit in an effort jumpstart the economy. By 2009 the scene had shifted significantly due to liquidity problems in the banks.
“No question we have been through a tough couple of years,” says DiAngelis.
“Coach operators needing to replenish their fleets came up to a wall only a few could walk over. Many more had to really strain to climb over, while others did not make it over that wall whatsoever.”
DiAngelis says his company typically sees credit applicants in three tiers — A, B and C.
The As are top shelf operators who have been in business for at least five years and have maintained an excellent cash flow. They come to the table ready to supply strong financials and accurate balance sheets.
The Bs are similar to As but generally not quite as strong financially. Still they signal good business management and keep their finances under control.
DiAngelis says C-grade applicants can be good operators who have hit a rough patch along the way. He says while they will still pay a higher rate and take more time, they generally have what it takes to better their position in terms of financing. “They will have a story to how it happened,” he says. “Again, we just need an explanation. If they ran into trouble through the previous year or went through a single catastrophic event that set them back, we look for signs that show they are still headed in the right direction, such as positive cash flow and balance sheets that are intact.”
DiAngelis says as a general rule his company will likely not approve an operator who shows back-to-back yearly losses. In some situations where he sees red flags, DiAngelis says an approved C-grade applicant may still require additional collateral.
“We will look at the total fleet, how many vehicles are paid off, those still owing and the overall value,” he says. “That is how we determine hidden equity that may help with the deal.”
DiAngelis says the conditions of 2009 bring great scrutiny, and anyone financially derelict and unaccountable will have a tough row to hoe.
“Five years ago we never asked for a debt schedule, when a debt is coming off, the monthly payments, and how capable the client was in servicing new debt,” he says. “In today’s new world, these considerations are paramount.”
Insurers do what they can
According to Bill Love, president of Euclid Insurance Agencies, Melbourne, FL, the criteria and requirements for motorcoach insurance is pretty cut and dried.
“Operators know the limits to meet sand stay in business,” says Love. “There is no give and take with insurance compliance.”
But from where he sits, Love says he too has seen scathing ancillary effects of the economy over the past year. He reports approximately 9 percent of his client base closed the doors and went out of business, where in a normal economy that number is around 1 percent for a variety of reasons.
“As insurers, we have done our best to hold rates down,” he says. “The businesses that survived downsized significantly to insure fewer vehicles.”
According to Love the insurance market is still offering operators reasonable rates. They are not seeing drops, but neither are rates increasing. He says insurance rates are settling as the economy improves little by little, giving everyone an opportunity to shake out and move forward.
Love advises operators to plan wisely for 2010 and beyond. He sees it as learning to do more with less and making realistic projections in line with present levels.