Equipment Lease Index Gains in March

Strong leasing could point to economic growth or just reflect replacement of old equipment.

An index of equipment leasing posted a solid gain in March, but it’s not clear whether that shows that companies are starting to grow or that they’re replacing old equipment.

The leasing and finance index compiled by the Equipment Leasing and Finance Association (ELFA), which shows the volume of commercial equipment financed in the U.S. by 25 lease financing companies, jumped 36% in March from February, and was up 10% vs. March 2011. For the first quarter, new business volume was up 17% from the first quarter of 2010.

Ralph Petta, ELFA’s COO, notes that the index cratered in 2008 and 2009, posting year-over-year declines of about 20% during that period. Starting in 2010, however, “there was a lot of frenzy in the business community to replaced aged assets,” Petta says, and the index started showing gains of 20% year over year.

That pace could not be sustained, Petta says, so a drop in the index was anticipated. Whether the relatively strong first-quarter growth can be maintained as companies shift from replacing aged equipment to growing their businesses remains an open question.

The Commerce Department reported Wednesday that durable goods orders fell 4.2% in March, the biggest decline in three years, although that was mostly driven by a drop in demand for aircraft. Meanwhile, large manufacturers including 3M, United Technologies and Caterpillar reported last week that sales are increasing, especially in the U.S.

John McQueen, head of Wells Fargo’s equipment finance division, said in a statement that banks started to see increased demand and reduced portfolio delinquency in the equipment finance market in the fourth quarter of 2010, and that demand stemmed from replacing aging equipment and companies seeking operational efficiency.

McQueen notes those trends have continued into 2012, with Wells experiencing “11.5% year-over-year volume growth, a 17% backlog increase, strong transactional spreads, and continued portfolio quality improvement.”

Petta says that the index covers equipment lease financing across a wide range of industries, and that so far evidence of business growth and expansion is limited to specific pockets, such as construction companies and companies engaged in transporting commodities.

“The rail market is doing very well because the economy is improving,” he says. “A lot more coal and grain is being shipped, so we’re finding investment in assets in those types of sectors.”

Another positive trend in the survey, Petta says, is that credit approvals have remained relatively high, dipping slightly to 78% in March from 79% the month before. More than 66% of respondents reported submitting more transactions for approval in March, up from 62% in February.

Companies often lease equipment rather than tie up capital by buying equipment. ELFA’s members include the lease financing subsidiaries of banks as well as nonbank financial companies and the captive financing arms of major nonfinancial corporations.

 

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