The past few years were good times for businesses involved with construction equipment. Customers, manufacturers, dealers
and finance companies enjoyed strong business results and growth.
New product deliveries were strong due to firm demand for utility, infrastructure and commercial construction. A strong supply
of loan and lease dollars created an environment of pricing and approval structures favorable to the customer. Construction
equipment loan portfolios were performing well, with industry delinquencies at low levels and a robust demand for used equipment.
These were very good times indeed. The question now is, what changes will we see?
Weathering the cycles
The Housing Factor
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As in all segments of financial services, industry expertise and planning is required to weather the cycles. Lenders and lessors
to the construction equipment industry should be students of various cycles, not all of which show the same pattern historically.
The primary cycles include:
- Economic cycle: A common construction related metric is housing starts, and much of the past industry expansion can be linked to this measure.
This much is certain: the decrease in housing starts negatively affects construction equipment companies, new equipment sales,
used equipment values, portfolio delinquencies, dealer parts and service revenue ... and the list goes on. It is well publicized
that housing starts and home prices have softened. Many parts of the U.S. are experiencing residential real estate recessions.
Infrastructure projects (shopping centers, schools, etc.) are also showing signs of softening.
- Replacement-cycle and equipment values: The base level of replacement cycle for equipment is a function of utilization, repairs and cost of capital. Between 2005
and 2006, record demand and high utilization led to shorter replacement cycles for both contractors and rental fleets. This,
too, has contributed to the high level of equipment deliveries over the past few years.
A consensus view on 2008 construction-equipment sales is that the peak of the delivery cycle is well behind us. This should
translate into increased availability of equipment. However, a weak U.S. dollar makes our used equipment a good bargain for
buyers outside North America. This has resulted in a situation where, even though the market is slowing, used equipment values
have been partially supported by some supply being absorbed in international markets.
As a captive finance company, Volvo Financial Services works closely with Volvo Construction Equipment to track equipment
supply and demand to allow for better forecasting of changes in fleet age, growth versus replacement dynamics, and the resultant
effect on used equipment values over the next few years. This type of analysis assists in our efforts to gauge future collateral-loss
assumptions and structure current credit approvals accordingly. This process is often more art than science, but every piece
of information helps. Knowledge of regional and equipment segment differences is essential.
- Liquidity cycle: Liquidity (the supply of funds available to finance equipment) remains robust, but some lenders have tightened credit requirements.
This is in contrast to the previous two years when the supply of funds greatly exceeded demand as many lenders gained share
through taking more risk and less margin. The supply of loan and lease money available to the equipment industry should not
change significantly – although it will come with higher risk premiums and more standard approval structures. If unit sales
in 2008 are lower than in prior years, as anticipated, the same amount of money will be competing for fewer transactions.
It seems that 2008 will still be an advantageous time for customers with good credit to secure competitive pricing.
Other factors influence the equipment industry and the risk/reward parameters for finance and leasing participants. Lenders
and lessors who serve the construction equipment industry throughout each cycle should be mindful of all factors as part of
the daily duty of making smart credit decisions. Forecasting the cycles correctly is meaningless unless primary attention
is given to the basics: thorough credit analysis, collateral expertise, strong collection skills, a reliable remarketing network
and strong relationships with dealers and end-users.
