Summary
At the recent Truckload Carriers Association Refrigerated Carrier meeting, several fleet operators made comments regarding equipment financing - including availability, interest rate increases, problems with unprofitable fleets continuing to run without making payments and expectations for the future. It allows for comments regarding capacity reductions, trucking profits and future truck sales.
Analysis
As written in the past in these articles, keys to trucking profits are the F-words of Freight (rates), Flow (utilization), Focus (segment), Folks (drivers), Fuel (price / surcharge) and Financing (rates / availability). The latter has many implications for equipment manufacturers looking ahead - and paints a new (old) “financing” paradigm for new business. It also sheds light on truck capacity and bank problems.
As noted in the article, banks are not foreclosing on / repoing accounts where trucking companies are technically in default like they have in the past. From our work in the segment, there are many truckers in serious default (6-months) without making full payments. If they communicate, there is leniency.
Banks active in the national marketplace such as BB&T, US Bank (USB), etc. are being hit by slow pay (non-performing assets (up 20%+). They were not only liberal in issuing past loans, but they also don’t know the borrowers well. Additionally, truck / trailer assets are a smaller problem at banks than home loans, seconds, lines of credit, credit cards and other unsecured debt. Of course, one problem is that banks are not set up to handle a significant flow of trucks through the repo and auction process.
The most active players in the new truck financing marketplace are the OEM financiers such as Daimler Truck Finance, PACCAR (PCAR) Financial and Navistar (NAV) Financial, who have historically financed a quarter to a third of the new trucks in a 200,000 unit per year Class 8 market. This translates into somewhere in the range of from 50,000 to 75,000 trucks in that market. In today’s 100,000 unit market, this makes them big players if they want to be. Look to see them continue to strengthen their portfolios with better credits!
Major fleets have other options through their own relationships. Small & mid-size fleets leverage their own banking and major lenders such as GE Capital and Caterpillar Finance FCCEF Div. Local / regional banks who have long-term relationships with smaller fleets are the least affected since they were pretty conservative to begin with.
The refrigerated sector is unique that freight levels are relatively good as compared to other sectors - i.e. people eat regardless of economic activity. The fixed cost of a refrigerated trailer and the resale market are such that lenders definitely don’t want them back - and are more willing to take a wait and see attitude. Trucking profit-loss / balance sheets aren’t pretty and are impacting financing today. Mixing in lease contracts makes the equation different and are easier to re-write. Otherwise, not mentioned are negotiated returns of trucks to dealers and rewriting of finance contracts at pretty deep discounts (some lenders we are working are taking up to 50% haircut).
The issue is down to math. The approx. half-million trucks on lots or parked are a deterrent - and we know that continuing to have trucks running somewhere is better than “lot-rot.” Actual truck financing default rates haven’t increased much when you compare them to last year. Default rates are actually improving.
Today’s environment is one where truck values have held up relatively well (especially compared to the 2001+ timeframe), so a financier has the potential to make more money back because the market will be even more interest rate insensitive especially on used equipment moving ahead. We don’t necessarily agree with letting unprofitable trucking companies continue, but don’t expect to see lender leniency to diminish.
Even though we believe that we are in the trough on new truck sales, limited financing will continue to dampen future sales. We expect the financing market to hearken back to one more like that of the 80”s where we averaged 120,000 Class 8 units per year. If we adjust this for today’s marketplace, let’s hope for 200K from this perspective - in a year or so.
As noted in the article, banks are not foreclosing on / repoing accounts where trucking companies are technically in default like they have in the past. From our work in the segment, there are many truckers in serious default (6-months) without making full payments. If they communicate, there is leniency.
Banks active in the national marketplace such as BB&T, US Bank (USB), etc. are being hit by slow pay (non-performing assets (up 20%+). They were not only liberal in issuing past loans, but they also don’t know the borrowers well. Additionally, truck / trailer assets are a smaller problem at banks than home loans, seconds, lines of credit, credit cards and other unsecured debt. Of course, one problem is that banks are not set up to handle a significant flow of trucks through the repo and auction process.
The most active players in the new truck financing marketplace are the OEM financiers such as Daimler Truck Finance, PACCAR (PCAR) Financial and Navistar (NAV) Financial, who have historically financed a quarter to a third of the new trucks in a 200,000 unit per year Class 8 market. This translates into somewhere in the range of from 50,000 to 75,000 trucks in that market. In today’s 100,000 unit market, this makes them big players if they want to be. Look to see them continue to strengthen their portfolios with better credits!
Major fleets have other options through their own relationships. Small & mid-size fleets leverage their own banking and major lenders such as GE Capital and Caterpillar Finance FCCEF Div. Local / regional banks who have long-term relationships with smaller fleets are the least affected since they were pretty conservative to begin with.
The refrigerated sector is unique that freight levels are relatively good as compared to other sectors - i.e. people eat regardless of economic activity. The fixed cost of a refrigerated trailer and the resale market are such that lenders definitely don’t want them back - and are more willing to take a wait and see attitude. Trucking profit-loss / balance sheets aren’t pretty and are impacting financing today. Mixing in lease contracts makes the equation different and are easier to re-write. Otherwise, not mentioned are negotiated returns of trucks to dealers and rewriting of finance contracts at pretty deep discounts (some lenders we are working are taking up to 50% haircut).
The issue is down to math. The approx. half-million trucks on lots or parked are a deterrent - and we know that continuing to have trucks running somewhere is better than “lot-rot.” Actual truck financing default rates haven’t increased much when you compare them to last year. Default rates are actually improving.
Today’s environment is one where truck values have held up relatively well (especially compared to the 2001+ timeframe), so a financier has the potential to make more money back because the market will be even more interest rate insensitive especially on used equipment moving ahead. We don’t necessarily agree with letting unprofitable trucking companies continue, but don’t expect to see lender leniency to diminish.
Even though we believe that we are in the trough on new truck sales, limited financing will continue to dampen future sales. We expect the financing market to hearken back to one more like that of the 80”s where we averaged 120,000 Class 8 units per year. If we adjust this for today’s marketplace, let’s hope for 200K from this perspective - in a year or so.
Jay Thompson consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
