EQUIPMENT LEASING ASSOCIATION
Construction and Agricultural Equipment Leasing, 2004
U.S. Market Dynamics and Outlook
Prepared By:
R.S. Carmichael & Co., Inc.
White Plains, NY
(914) 761-8200
rsc@rscarmichael.com
June 30, 2004
Copyright 2004. Reproduction in whole or part,
without prior written consent, is strictly prohibited.
TABLE OF CONTENTS
Page
INTRODUCTION
Objectives
Methodology
1
1
EXECUTIVE SUMMARY
2
CONSTRUCTION EQUIPMENT
Market Overview
Lease Financing Practices
Rentals
Manufacturer Practices
Dealer Practices
End-Customer Practices
Competitive Environment
Road Building Equipment
Cranes
Mining Equipment
18
20
26
29
32
35
36
41
44
47
AGRICULTURAL EQUIPMENT
Market Overview
Lease Financing Practices
Competitive Environment
Commercial Lawn/Grounds Equipment
Forestry Equipment
Equipment Leasing Association & R.S. Carmichael & Co., Inc.
51
54
58
61
63
INTRODUCTION
Objectives
•
The principal objectives guiding this research study have included the following:
1. Measure and characterize the U.S. construction and agricultural equipment
lease financing markets.
2. Identify trends affecting lease financing penetration in each market.
3. Evaluate the leasing practices and needs of customers and equipment vendors
(manufacturers and dealers).
4. Assess the lease financing competitive environment.
5. Project the U.S. construction and agricultural equipment leasing markets
through 2005 and identify the requirements for leasing company success.
Methodology
•
The following work steps represented the basis for this market research:
1. In-depth telephone interviews with construction and agricultural equipment
lessees, equipment vendors and other industry participants.
2. Analysis of secondary data from the Equipment Leasing Association, other
trade associations, publications, government agencies and other sources.
3. Analysis of recent R.S. Carmichael & Co. research in relevant markets.
Equipment Leasing Association & R.S. Carmichael & Co., Inc.
This study of construction and
agricultural equipment leasing
has been conducted by R.S.
Carmichael & Co., White Plains,
New York, in cooperation with
the Equipment Leasing
Association.
EXECUTIVE SUMMARY
Overview
•
The U.S. construction and agricultural equipment leasing markets, including the
forestry and mining equipment segments, have languished in recent years. However,
there are signs that all of these industries have experienced improvement in 2004, and
the near-term outlook for lease financing in each market is positive. Moreover, key
equipment manufacturers such as Caterpillar and Deere have reported gains in
construction and agricultural equipment sales, as well as strong increases in their
lease financing volumes.
The construction and
agricultural equipment
industries represent two of the
largest markets for lease
financing.
Construction Equipment
Overview
•
The construction equipment categories where lease financing is most prevalent include
earthmoving, road building and forestry equipment. Mining is also a noteworthy
market segment.
-
Earthmoving equipment includes cranes, excavators, graders, back hoes
and bulldozers. Road building equipment includes rock crushers, pavers,
asphalt handlers and concrete mixers.
-
Forestry equipment includes strippers, skidders, loaders, de-limbers
and slashers. Customers include independent loggers/contractors, as
well as major forest products companies. Caterpillar and Deere are
significant players, and there are also a number of specialty
manufacturers.
-
Mining is a traditional sub-segment of the construction industry. Aboveground equipment (e.g., crushers, pulverizers) represents most of the lease
financing activity.
Equipment Leasing Association & R.S. Carmichael & Co., Inc.
2
EXECUTIVE SUMMARY (Cont.)
Ticket sizes for lease financing of construction equipment range widely from $25,000
to $5 million, but mainly fall in the small-ticket category (i.e., $25,000 to $250,000).
At least 50% of construction
•
The principal manufacturers of construction equipment include Caterpillar, CNH,
Deere, Komatsu, Terex, Volvo, Ingersoll-Rand and JLG. In the crane segment,
Manitowoc is a significant player. Astec Industries is an example of a leading
specialist in the road building equipment field.
financed in some fashion.
•
Construction equipment distribution is largely through independent dealers. Direct
sales are limited to major accounts, such as the U.S. government.
•
End-customers for construction equipment include road building and home building
contractors, major forest products companies, mining companies, and government
agencies.
•
equipment sales are
Lease Financing
•
Much of the equipment financing in the construction industry is “money-over-money”
in the form of conditional sales agreements and finance leases. This reflects the long
useful lives and high residual values of construction equipment.
•
Residuals-based lease financing products (e.g., fair market value purchase options,
operating leases) have become more attractive in the industry because of their lower
monthly payments and some customer preference for off-balance sheet financing.
•
Equipment rentals are widely utilized in the construction industry and compete with
conventional lease financing products. Rental companies and dealers with rental pools
have become prominent in the industry.
Equipment Leasing Association & R.S. Carmichael & Co., Inc.
3
EXECUTIVE SUMMARY (Cont.)
Tax-exempt/municipal leasing is an important financing product since construction
equipment purchases are often made by state, county and local governments.
The construction
•
Lease financing terms average 3 to 5 years.
returning to lease
•
The seasonality of the construction industry in many parts of the country has led to flexible
lease structures such as skip-payment options.
financing levels found
•
•
equipment market is
in the late 1990s.
Construction equipment vendors (i.e., manufacturers, distributors/dealers) capture a large share
of the lease financing market through captive finance companies or third-party leasing
company relationships.
Market Size and Growth
•
The U.S. construction equipment leasing market resumed its growth in 2003, as the industry
experienced strong replacement demand. Additional replacement demand is projected to
sustain market growth through 2004 and into 2005.
•
Annual market growth is forecast to be in the 8% to 10% range for 2004 and 2005.
Construction Equipment Leasing Volume, 1999-2005
$ Billions
15
$12.0
$11.5
$11.0
$10.5
$11.4
$12.5
$13.5
2004(E)
2005(E)
10
5
0
1999
2000
2001
2002
2003
Source: Equipment Leasing Association and R.S. Carmichael & Co., estimates
Equipment Leasing Association & R.S. Carmichael & Co., Inc.
4
EXECUTIVE SUMMARY (Cont.)
•
•
Earthmoving and road building equipment will continue to represent key segments of the
construction equipment leasing market.
Construction equipment
Most other equipment categories will also experience renewed leasing growth.
$12 billion in 2004.
lease financing will exceed
Leasing Market Drivers
•
A number of factors influence the construction equipment industry and hence the
utilization of lease financing.
Factors Affecting Construction Equipment Sales, 2004
30%
35%
21%
16%
20%
15%
12%
7%
10%
0%
General
Economy
Highway
Funding
Rental
Company
Demand
Inventory
Levels
Housing
Starts
Interest
Rates
5%
Credit
Availability
Source: Association of Equipment Manufacturers
Base:
Construction Equipment Manufacturers
•
General Economy. The general economic situation in the U.S. is the most influential
driver of the construction equipment leasing market. With the improving business
climate, equipment manufacturers and lessors have become more optimistic about a
resumption in equipment leasing growth.
Equipment Leasing Association & R.S. Carmichael & Co., Inc.
5
EXECUTIVE SUMMARY (Cont.)
Highway Funding. Construction equipment leasing is heavily impacted by federal,
state and municipal government funding for highways and other construction projects.
Legislation for funds to improve and repair highways should help boost the
construction equipment leasing market in 2004 and 2005.
The general economy and
•
Rental Companies. Contractors and other construction equipment customers have
continued to demonstrate a strong preference for rentals. As a result, equipment rental
companies will need to modernize their aging fleets to keep pace with increased
demand.
market drivers.
•
Housing Starts/Construction Spending. Residential home building continues to be a
major driver of the construction equipment leasing market. By contrast, commercial
building construction will be a weaker influence because of the uneven economic
recovery.
•
Interest Rates. The low interest rate environment has encouraged contractors and
others to finance their equipment.
•
Credit Availability. Ample credit capacity in the construction equipment marketplace
has further stimulated the use of lease financing.
•
Equipment Aftermarkets. An active aftermarket exists for construction equipment as a
result of its long economic life and limited technological obsolescence. The aftermarket is
efficient because used construction equipment is often remarketed through manufacturers’
networks, as well as through dealers’ used equipment channels.
•
Equipment Leasing Association & R.S. Carmichael & Co., Inc.
highway funding are
particularly significant
6
EXECUTIVE SUMMARY (Cont.)
Leasing Acceptance. The use of lease financing is entrenched in the construction
equipment industry, especially since vendors have increasingly viewed lease financing
as an essential sales-aid. The widespread acceptance of leasing is evidenced by high
lease penetration rates.
Replacement demand from
•
Lease Subsidies. Equipment manufacturers through their captive finance companies
or third-party leasing providers subsidize or “buy down” financing rates. This helps
stimulate sales of their equipment.
financing.
•
E-Commerce. According to some surveys, vendors might originate more than 10% of
their equipment lease financings via the Internet in 2004. Also, the Internet will become
a more important tool for lease application processing, credit scoring and documentation.
•
Equipment Leasing Association & R.S. Carmichael & Co., Inc.
customers with aging
equipment will spur lease
7
EXECUTIVE SUMMARY (Cont.)
Leasing Competitors
•
According to the Equipment Leasing Association, banks and bank-affiliated leasing
companies originate more construction equipment financings than captive finance
companies or independent third-parties.
Independents
20%
Captive finance companies
are less prominent in the
construction equipment field
than in the agricultural
Banks
60%
industry.
Captives
20%
Base:
$7.4 billion, reported new business volume, 2003
Source: ELA Survey of Industry Activity, 2004, and RSC&Co. estimates
•
Most of the major construction equipment manufacturers have captive finance
companies.
Captive
John Deere Credit
Caterpillar Financial Services
CNH Capital
Komatsu Financial
Volvo Commercial Finance
Hitachi Capital America
Ingersoll-Rand Financial Services
Access Financial Solutions
Parent
Deere & Company
Caterpillar, Inc.
CNH Global
Komatsu America
Volvo Construction Equipment
Hitachi Construction Machinery
Ingersoll-Rand Company
JGL Industries
Equipment Leasing Association & R.S. Carmichael & Co., Inc.
8
EXECUTIVE SUMMARY (Cont.)
•
One leading manufacturer, Astec Industries actually exited the captive finance business
(Astec Financial Services) in favor of establishing customer lease financing programs
with unaffiliated third-parties.
•
Other construction equipment manufacturers have joint ventures or formal customer
leasing programs in place with third-party providers. Terex Corporation’s creation of
Terex Financial Services in 2003 in partnership with GE Vendor Financial Services is a
notable example.
•
The major third-parties in the construction equipment lease financing field continue to
be CIT, CitiCapital and GE.
CIT
CitiCapital
GE Commercial Finance
CIT, CitiCapital and GE are
the principal non-captive
competitors.
Longstanding player with strong dealer referral
relationships in-place at the local level.
Claims to be construction equipment financing
leader.
Both vendor and end-customer origination of
construction equipment leases through its Vendor
Financial Services and Commercial Equipment
Financing units.
•
The competitive environment also includes several sizable independent finance
companies such as Financial Federal and ORIX Financial Services.
•
Some of the major bank-affiliated leasing companies are also significant competitors,
including Fleet Capital Leasing/Banc of America Leasing & Capital, US Bancorp
Equipment Finance, and Wells Fargo Equipment Finance.
Equipment Leasing Association & R.S. Carmichael & Co., Inc.
9
EXECUTIVE SUMMARY (Cont.)
Agricultural Equipment
The agricultural equipment
Overview
•
Agricultural equipment that is most typically lease financed includes tractors,
harvesters, irrigation equipment and treatment/application equipment.
•
Lease financing ticket sizes can range from $25,000 for tractors to >$250,000 for
center-pivot irrigation and treatment/application systems.
•
Major manufacturers of agriculture equipment include Deere, CNH and AGCO.
Other significant manufacturers include Gehl and Lindsay.
•
Agricultural equipment is distributed largely through independent dealers. These
dealers often represent multiple manufacturers.
•
End-customers range from family and “hobby” farms to major corporate farms and
government agencies.
industry is closely linked to
the construction equipment
market at the manufacturer
and dealer levels.
Lease Financing
•
Conditional sales agreements and finance leases are prevalent in this industry because
of the long-life characteristics of agricultural equipment and farmers’ historical
preference for equipment ownership.
•
Residuals-based leasing (e.g., fair market value purchase options, operating leases) is
attractive to customers with an interest in minimizing lease payments or off-balance
sheet treatment.
Equipment Leasing Association & R.S. Carmichael & Co., Inc.
10
EXECUTIVE SUMMARY (Cont.)
Tax-exempt municipal leasing and TRAC leasing are also significant lease financing
products in the agriculture industry.
Agricultural equipment
•
Lease terms are generally 3 to 5 years; however, extended-term financing is offered.
U.S. lease financing markets.
•
A variety of lease financing payment schedules are utilized based on seasonal and
harvesting variables. Monthly, quarterly and annual payment structures are all found.
•
Equipment vendors are very influential in the sourcing of lease financing for
customers, either through captive finance companies or relationships with third-party
leasing providers.
•
Equipment manufacturers will subsidize lease financing rates to help retain customers
in a largely replacement market.
•
Floorplanning is a related financial service that is widely used by agricultural
equipment dealers.
•
represents one of the major
Market Size and Growth
•
Overall investment in agricultural equipment has been stable in recent years.
•
The agricultural equipment market has been largely a replacement market.
•
Lease financing volume for agricultural equipment was estimated to have exceeded
$9 billion for the first time in 2003.
Equipment Leasing Association & R.S. Carmichael & Co., Inc.
11
EXECUTIVE SUMMARY (Cont.)
•
The agricultural equipment leasing market is projected to grow 5% annually.
The outlook for
agricultural equipment
Agricultural Equipment Leasing Volume, 1999-2005
lease financing is
$ Billions
15
10
$8.5
$8.0
$8.1
1999
2000
2001
$9.5
$8.9
$10.0
$10.5
2004(E)
2005(E)
positive.
5
0
2002
2003
Source: Equipment Leasing Association and R.S. Carmichael & Co. estimates
Leasing Market Drivers
•
Credit availability and interest rates are the most positive factors influencing
agricultural equipment sales, as well as the utilization of lease financing.
Positive Factors Affecting Agriculture Equipment, 2004
100%
95%
93%
92%
85%
80%
79%
78%
78%
60%
40%
20%
0%
Credit
Availability
Interest
Rates
Acreage
Planted
Grain
Exports
Crop
Prices
Replacement
Demand
Farmer
Attitudes
Source: Association of Equipment Manufacturers
Base: 49 farm equipment member companies
Equipment Leasing Association & R.S. Carmichael & Co., Inc.
12
EXECUTIVE SUMMARY (Cont.)
Demand for agricultural equipment and lease financing depends on crop prices and
yields.
Lease financing subsidies
•
Farmer attitudes toward equipment ownership are very much in evidence in their
selection of lease financing options.
retaining customers in the
•
In terms of equipment replacement, used equipment sales can dampen the growth of
new equipment sales.
industry.
•
In selecting a lease financing provider, the attributes most valued by agricultural
customers are fast turnaround, strong customer service, competitive rates, and
structuring flexibility.
•
Agricultural equipment manufacturers with captive finance companies view lease
financing as a tool to generate incremental sales and increase market share.
•
Manufacturers may offer incentives through their captives in the form of lease
financing rate subsidies to stimulate equipment sales.
•
-
reflect the importance of
consolidating agriculture
In addition to subsidized lease financing rates, captives may offer other
incentives such as skip-payment options and initial waivers of finance
charges.
Equipment Leasing Association & R.S. Carmichael & Co., Inc.
13
EXECUTIVE SUMMARY (Cont.)
Leasing Competitors
•
The leading equipment manufacturers have captive finance companies that are
important sources of lease financing in the agriculture industry.
Captive
AGCO Finance
CNH Capital
John Deere Credit
Gehl Finance
Kubota Credit
•
Parent
AGCO Corporation
CNH Global
Deere & Co.
Gehl Company
Kubota Corporation
financing competitors (CIT,
CitiCapital, GE) are also
found in some segments of
the agricultural equipment
leasing market.
Third-party lease financing sources are also significant competitors in the agricultural
equipment industry. They include several notable specialists:
Specialist
Agricredit Acceptance
Agstar Financial Services
Farm Credit Leasing
First National Equipment Financing
•
The largest third-party lease
Parent
De Lage Landen/Rabobank
Agstar member
CoBank
First National of Omaha
Another specialist, Telmark, was acquired by Wells Fargo Financial Leasing in 2003
and now comprises its Rural Markets division.
Equipment Leasing Association & R.S. Carmichael & Co., Inc.
14
EXECUTIVE SUMMARY (Cont.)
Opportunity Considerations
•
•
Successfully addressing lease financing opportunities in the construction and
agricultural equipment lease financing markets hinges on a number of requirements,
including a full product line, high-quality execution, and strong vendor relationships.
There are distinctive
Full Product Line. Equipment manufacturers and dealers often have a strong
preference for lease financing providers that can meet a wide range of customer
needs. A product line that includes finance and residuals-based leases, as well as
specialized capabilities such as municipal leasing, is attractive. In addition, lease
financing providers that can meet dealer needs for floorplanning and rental pool
financing are valued.
agricultural equipment
•
High-Quality Execution. The construction equipment marketplace seeks lease
financing providers that can deliver fast turnaround on credit approvals, vendor
payments, and other leasing-related activities.
•
Vendor Relationships. Lease financing opportunities are often found at the
equipment dealer level since many of them utilize providers other than their
manufacturers’ captive finance companies. In addition, equipment vendors value
leasing companies that can provide sales support at the local level. This includes the
training of dealer sales personnel on how to better integrate leasing in the equipment
sales process.
•
Industry Expertise. Lease financing companies with construction and agriculture
industry expertise and specialization often are perceived as more responsive and
flexible than generalist lessors.
•
Credit Appetite. Construction equipment dealers and manufacturers also value leasing
partners that do not cherry-pick their customer base and will accept a wide range of credits.
They may expect leasing companies to approve upwards of 80% to 85% of customers.
Equipment Leasing Association & R.S. Carmichael & Co., Inc.
requirements for success
in the construction and
lease financing fields.
15
EXECUTIVE SUMMARY (Cont.)
•
Market Niches. Cranes, mining equipment, forestry equipment and commercial
grounds care equipment are among the niches that have unique financing practices and
needs.
•
E-Commerce Capabilities. Leasing company web-based capabilities will steadily grow
in importance as a requirement for success. This includes lease application processing,
credit decisioning and documentation via the Internet. These capabilities will represent
important competitive advantages in the construction and agricultural equipment lease
financing markets.
Equipment Leasing Association & R.S. Carmichael & Co., Inc.
16
DETAILED FINDINGS
According to the U.S. Department of Commerce, agricultural, construction, and mining equipment
manufacturing is classified as a broad industry covering businesses engaged in producing construction
equipment, mining equipment, farm machinery, forestry equipment and commercial lawn care equipment.
Each of these categories is analyzed on the following pages in terms of market dynamics, lease financing
practices, and the competitive environment.
Equipment Leasing Association & R.S. Carmichael & Co., Inc.
17
CONSTRUCTION EQUIPMENT
Market Overview
•
Principal categories of construction equipment include earthmoving, lifting (e.g.,
cranes), and road building equipment.
Independent contractors
-
Earthmoving equipment includes excavators, graders, backhoes and
bulldozers.
construction equipment.
-
Lifting equipment includes cranes and aerial lifts.
-
Road building equipment includes asphalt pavers and rollers.
Equipment Type
Earthmoving
Excavators
Backhoes
Bulldozers
Lifting
Cranes
Aerial lifts
Road Building
Asphalt handlers
Concrete mixers
Pavers
•
Ticket Size
$75,000 to $2 million
Significant Vendors
Caterpillar
John Deere
Komatsu
$25,000 to $250,000+
Manitowoc
Genie
$50,000 to $2 million
Astec
Caterpillar
Terex (Cedarapids)
are an important market for
Mining equipment is closely associated with the construction equipment field. This
market is analyzed separately.
Equipment Leasing Association & R.S. Carmichael & Co., Inc.
18
CONSTRUCTION EQUIPMENT (Cont.)
•
•
•
Customers for construction equipment include independent contractors, major
corporations, and government agencies.
Construction equipment is
Sales to government agencies can be as high as 25% for some construction
equipment manufacturers.
networks of independent
largely distributed through
dealers.
Dealers are often exclusive to particular manufacturers for the principal equipment
lines; however, they will also carry many different categories of equipment from a
number of different manufacturers.
-
Annual equipment sales for dealers vary considerably. The largest
dealers with branches in multiple states can have annual revenues
exceeding $100 million.
-
While some dealer bankruptcies occurred during the recent economic
downturn, manufacturers indicate that their dealers have endured by
reducing headcount and inventory levels.
•
Direct equipment sales are generally confined to the largest corporations and the
federal government.
•
Caterpillar, Komatsu and Deere produce full lines of construction equipment. Other
competitors, such as Hitachi and Case (CNH), tend to be niche players.
_
Caterpillar also produces a small line of agricultural equipment.
_
Case and Deere have a primary focus on agricultural equipment.
Equipment Leasing Association & R.S. Carmichael & Co., Inc.
19
CONSTRUCTION EQUIPMENT (Cont.)
Lease Financing Practices
•
Capital expenditures for construction equipment in the U.S. increased to $22.1 billion in
2003 after dropping during 2001 and 2002.
building equipment sales
have rebounded more
Construction Equipment Capex, 1999-2005(E)
$ Billions
30
$22.9
Earthmoving and road
quickly than lifting
$23.2
$20.3
$21.0
$22.1
2001
2002
2003
$23.5
$25.0
equipment.
20
10
0
1999
2000
2004(E) 2005 (E)
Source: U.S. Department of Congress
•
Improvements in industry sales have been uneven in the major equipment categories.
% Increase/Decrease
+2.0%
5%
0%
-5%
-1.3%
-10%
-15%
+7.2%
+7.1%
+2.4%
+4.9%
10%
-11.6%
-5.7%
-1.5%
-7.0%
-11.5%
Earthmoving
Lifting
-22.0%
-20%
-25%
2000/2001
Road Building
2001/2202
2002/2003
2003/2004
Source: Association of Equipment Manufacturers
Outlook for Construction Equipment Business
Equipment Leasing Association & R.S. Carmichael & Co., Inc.
20
CONSTRUCTION EQUIPMENT (Cont.)
•
Lease financing of construction equipment amounted to an estimated $11.4 billion in
2003 and should reach $13.5 billion by 2005.
Construction Equipment Leasing Volume, 1999-2005(E)
$ Billions
$12.0
15
$11.5
$11.0
$10.5
$11.4
2000
2001
2002
2003
$12.5
Lease financing volume has
returned to levels seen five
years ago.
$13.5
10
5
0
1999
2004(E) 2005 (E)
Source: Equipment Leasing Association and R.S. Carmichael & Co. estimates
•
The majority of construction equipment leasing transactions are small-ticket (i.e.,
$25,000 to $250,000).
Large-Ticket +
Micro-Ticket
1%
Small-Ticket
72%
Middle-Market
27%
Base:
$7.4 billion, reported new business volume, 2003
Source: ELA Survey of Industry Activity, 2004
•
Finance leases/money-over-money financing products are widely used in the
construction equipment industry.
•
Residuals-based leases have grown in popularity.
-
Fair market value (FMV) leases are sought by customers interested in
lowering their monthly payments.
Equipment Leasing Association & R.S. Carmichael & Co., Inc.
21
CONSTRUCTION EQUIPMENT (Cont.)
-
The off-balance sheet financing characteristics of operating leases are
appealing to some larger corporate customers.
•
Because of the seasonal nature of the construction industry in many parts of the U.S.,
lease financing products are required to have flexible repayment structures, such as
skip payments and step payments.
•
A major portion of construction equipment financing is in the form of conditional sales
agreements and money-over-money financings.
•
Leases written can be split from 50%/50% to 15%/85% between residuals-based
(FMV) and finance leases. The particular situation of each vendor and customer
dictates the type of lease written.
_
•
Lease financing
penetration exceeds
50% for some vendors.
Of the 50% of parent sales captured by one of the leading captives, roughly
60% to 65% is straight debt financing, while the remaining portion is
broken down between finance leases, residuals-based leases (e.g., FMV),
and tax-exempt municipal leases.
Since municipal leases are tax-exempt, rates are lower than on conventional lease
financings. Financing can be in the form of a conditional sale with an appropriations
cancellation clause.
-
When municipalities make cash purchases, equipment with lower
specifications and lower ticket sizes may be acquired. When equipment is
leased, they may be more inclined to acquire higher quality and consequently
higher-priced equipment. Accordingly, the ability to offer municipalities a taxexempt lease is a critical sales tool.
Equipment Leasing Association & R.S. Carmichael & Co., Inc.
22
CONSTRUCTION EQUIPMENT (Cont.)
•
Operating leases may be preferred by some contractors, not only because of their
limited working capital, but also because of their need for performance bonding.
_
Construction contractors are often required to obtain a performance bond
which states that an insurance company will fund the completion of a
project should the contractor default or fail to properly complete the work.
Therefore, if a contractor has a heavy debt burden as the result of financing
equipment, this may reduce the contractor’s eligibility for bonding, hence
forcing it to lose out on potential projects.
•
For construction equipment, as much as 45% to 55% is lease financed. This compares
to the agricultural equipment field where lease financing penetration is closer to 25% to
40%.
•
In instances where FMV leases are provided by a manufacturer’s captive finance
company, it may have every intention of taking the equipment back from the customer
at the end of the lease term.
-
•
Lease financing can be
advantageous from a
bonding standpoint
because equipment is not
on the books. As a result,
contractors can seek larger
projects.
Some manufacturers/captives like to have their on-lease equipment
returned because of their remarketing capabilities and the equipment’s high
residual values.
A challenge of lease financing in the construction industry is determining the
equipment’s residual value.
_
The conditions under which construction equipment is utilized are not
constant. This is in contrast to other types of equipment (e.g., materials
handling) where it is easier to estimate what the equipment will look like
when it comes off lease.
Equipment Leasing Association & R.S. Carmichael & Co., Inc.
23
CONSTRUCTION EQUIPMENT (Cont.)
•
The major construction equipment manufacturers believe that strong remarketing
capabilities are essential for success in lease financing. Some have used-equipment
units that will remarket equipment returned at the end of the lease term or if the
equipment is repossessed as the result of customer default.
_
In the case of smaller equipment manufacturers, the aftermarket may be
dealer-driven, with the manufacturer becoming involved only if there is a
large fleet coming to the used equipment market (i.e., a portion of the fleet
will roll back to the manufacturer). This is done to avoid cannibalizing
new equipment sales in specific geographical areas.
_
Third-party lease financing providers often have to sit on used equipment
for longer periods of time and remarket through auction channels. This
can mean accepting less on resale value.
•
Lease financing rates are frequently based on comparable-term treasuries as the index.
•
Equipment manufacturers and their captives can offer competitive rates through
subsidy programs, often in the form of rebates to customers.
•
Lease financing is generally over a 3 to 7 year term.
-
Lease financing has
become essential to small
contractors without ample
working capital.
A typical finance lease can have a 4-year term with a fixed-price purchase
option (e.g., 10%).
•
Lease financing providers may offer below-market rates, zero-percent interest for the
first year, or skip payments in an attempt to increase market share.
•
Some captives will finance transactions for other equipment manufacturers, but usually
only if a component of the transaction is their parents’ equipment.
Equipment Leasing Association & R.S. Carmichael & Co., Inc.
24
CONSTRUCTION EQUIPMENT (Cont.)
•
•
Captive finance companies have a distinct advantage in the redistribution of used
equipment.
Lease financing rates may
Lease financing sources, especially banks, may fade in and out of the construction
equipment market depending on the strength of the economy.
equipment manufacturer.
-
•
be subsidized by the
Some banks do not have a strong presence in the construction equipment
financing field because of the perceived risk level. They are very sensitive
to the cyclicality of the construction market.
Industry-specific knowledge is vital in establishing successful lease financing relationships
between construction equipment vendors and customers and their financing partners.
-
Quick turnaround and acceptable credit approval ratios are highly
dependent on industry knowledge. Where approval decisions are based
solely on credit, underwriters unfamiliar with the construction industry
may not approve acceptable ratios (e.g., 80% to 85%) of customers.
•
The vendor-oriented lease financing business is a relationship one where success
depends on service levels that are delivered. Once a lease financing provider is
competitive on rate, it boils down to turnaround times and credit acceptance ratios.
•
Floorplanning is a related financial service that is widely used in the construction
equipment industry.
-
Floorplanning for construction equipment remains the traditional pay-assold model.
-
The manufacturer typically offers the equipment to dealers for an interestfree period (e.g., 6 months), then the floorplan financing becomes interestbearing until the equipment is sold.
Equipment Leasing Association & R.S. Carmichael & Co., Inc.
25
CONSTRUCTION EQUIPMENT (Cont.)
•
Both equipment vendors and customers express optimism about the prospects for
construction and agricultural equipment lease financing in 2004.
45%
40%
utilization has become
more project-by-project,
62%
60%
As construction equipment
rental financing has grown.
46%
30%
20%
8%
Distributors
Contractors
10%
0%
Worse
Equal
Better
Source: CIT Construction Industry Forecast, 2004
Base: 1300 distributor and contractor interviews
Rentals
•
Rentals of construction equipment have grown in importance and can account for
upwards of 50% of dealers’ annual equipment movement.
_
Dealers will provide rental/purchase products that allow customers to
rent the equipment for one year. If the customer wants to buy the
equipment, a percentage of the rental payments is applied toward the
purchase of the equipment.
Equipment Leasing Association & R.S. Carmichael & Co., Inc.
26
CONSTRUCTION EQUIPMENT (Cont.)
•
In 2004, construction acquisition dealers expect their rental business to grow.
Percentage of Dealer Sales Expected from Rent-to-Sell Business in 2004
Rental pool financing is an
important need for many
construction equipment
1999
dealers.
2000
2001
2002
2003
2004
0%
10%
20%
30%
40%
50%
60%
70%
Source: CIT Construction Industry Forecast, 2004
Base: 189 distributors with rent-to-sell business
•
The increased demand for rentals has had an effect on the utilization of traditional lease
financing.
_
From the customers’ perspective, they seem to have less and less desire to
own the construction equipment. In the past, many of them were
purchasing the equipment after a 6-month rental because they did not want
to lose the equity already invested. During the recent economic downturn,
many of them were returning the equipment because of the uncertainty of
future business.
_
Rentals have become very popular and pose a major challenge for the
dealer because the equipment remains on the books as a rental. Since
rentals may represent a large part of a dealer’s credit line, they may not
be able to obtain more equipment for cash or leased sales.
Equipment Leasing Association & R.S. Carmichael & Co., Inc.
27
CONSTRUCTION EQUIPMENT (Cont.)
_
•
Rentals can represent a risky business for dealers because of the large
capital investment required and the cyclical nature of the construction
industry. However, since their customers are expressing a desire to rent
rather than purchase or lease, the dealers must be willing to provide
rental programs – with the support of their manufacturer’s captive or
third-party commercial finance organizations.
Independent rental
companies are recovering
from their financial
distress.
The major independent equipment rental companies active in the construction
equipment field include National Equipment Services, NationsRent, Rental Service
and United Rentals. Some of them have been struggling in recent years.
_
United Rentals appears to be the largest commercial and industrial
equipment rental company in the U.S. Construction equipment (e.g., aerial
lifts, bulldozers) represents a significant segment of its business. Revenues
in 2003 approached $3 billion and represented a slight increase over 2003.
_
Rental Service Corporation rents construction and other types of
commercial/industrial equipment. It is reportedly the second largest
rental company and also sells used and new equipment. Its revenues in
2003 exceeded $1.4 billion, but have not grown in recent years.
_
National Equipment Services rents cranes and other construction
equipment to contractors. NES is also active in the sale of new and used
equipment. Revenues in 2003 amounted to $567 million which was a
decrease of nearly 9% compared to 2002. The company also reported a
loss exceeding $200 million. It exited from Chapter 11 bankruptcy this
year.
_
NationsRent also has exited from Chapter 11. It rents backhoes, bulldozers
and other construction equipment, and also sells new and used equipment.
Its total revenues were in the $500 million range.
Equipment Leasing Association & R.S. Carmichael & Co., Inc.
28
CONSTRUCTION EQUIPMENT (Cont.)
Manufacturer Practices
•
Lease financing is used as a marketing tool by many construction equipment
manufacturers. Profiles of specific manufacturer practices follow:
-
A leading manufacturer of road construction equipment (e.g., pavers), with
ticket sizes ranging from $25,000 to $2+ million, indicated that lease
financing captured an estimated 15%-20% of its sales. Until recently, a
captive finance company provided customer financing for the parent’s
equipment and also financed construction equipment manufactured by
others. However, this vendor decided to eliminate its captive in favor of a
private-label program with a third-party lessor.
-
A major manufacturer of mining equipment (e.g., shovels, drills), with ticket sizes
in the millions of dollars, has found that most of its customers arrange lease
financing through their own sources. As a result, the vendor has found no
compelling need to establish a captive finance company. Where leasing support
is requested, this vendor will informally refer customers to several independent
lease financing companies. The referrals are based on the lessors’ industry
expertise and proven appetite for transactions in the mining industry.
-
One of the largest earthmoving equipment manufacturers that distributes through
a network of independent dealers has a well-established captive that provides a
range of lease financing products. This captive has successfully integrated lease
financing with equipment sales by placing financial sales representatives in the
parent’s regional equipment sales offices throughout the U.S. It also has
strengthened the parent’s relationships with dealers by providing floorplanning
and other wholesale financial services (e.g., capital loans).
Equipment Leasing Association & R.S. Carmichael & Co., Inc.
The sales-aid value of
lease financing is widely
recognized by equipment
manufacturers.
29
CONSTRUCTION EQUIPMENT (Cont.)
-
Another manufacturer of construction equipment has found that most of its
equipment is financed in some fashion. While its contractor customers will
often turn to their local banks for equipment financing, others expect the
manufacturer and its dealers to provide lease financing in conjunction with
the equipment purchase. This vendor has formal agreements with third-party
lessors to provide this financing. It also reports that these programs, which
are private-label in nature, can capture more than 20% of eligible equipment
sales. Another facet of its relationship with third-parties is that it will
sometimes remarket used equipment on their behalf.
-
A major manufacturer of construction equipment (e.g., backhoes) with ticket
sizes ranging upwards from $75,000 has a captive finance company that
captures a high percentage of parent equipment sales. It also provides
floorplanning to dealers to facilitate their stocking of inventory. The captive
appears to hold most lease paper in its portfolio, though some is discounted
to third-parties or periodically securitized. This captive has found that a
major requirement for success is offering a broad financial product line that
addresses a range of customer needs (e.g., tax-exempt financing).
-
A manufacturer of both construction and agricultural equipment has a
captive finance company originating lease financing transactions averaging
under $100,000. The finance rates in many cases are subsidized by the
parent. The captive was established to provide end-customers with a
financing option and to generate incremental equipment sales for the parent.
Lease penetration is an estimated 25% of parent sales. The captive also
provides floorplanning for dealers in addition to financing their rental fleets.
Equipment Leasing Association & R.S. Carmichael & Co., Inc.
Some equipment
manufacturers have found
no compelling need to create
captives.
30
CONSTRUCTION EQUIPMENT (Cont.)
-
A producer of construction-related cranes and aerial work platforms utilizes
a handful of third-parties for its customer lease financing. Lease penetration
for these programs is an estimated 25% of the manufacturer’s eligible
equipment sales. Floorplanning is also offered to the independent dealer
network, and this typically includes an interest-free period of 90 days or
more. Rental houses are an important customer base for this manufacturer’s
equipment, and rental fleet financing support from the manufacturer is often
sought.
-
A large manufacturer of construction and mining equipment (with ticket sizes
ranging up to $500,000) recently established a captive finance company to
replace a private-label program with a third-party. Much of this captive’s
focus may be aimed at rent-to-own programs since rentals have become an
important construction equipment financing tool. In the case of mining
equipment, customers often line up their own financing sources, so that the
captive’s role here could be less significant than in supporting parent sales
to the construction industry.
-
A leading construction equipment manufacturer created a captive finance
company to provide sales-aid financing for its independent dealer network.
In some customer segments, this captive reports lease penetration
approaching 50%. Products offered include finance leases, residuals-based
leases and tax-exempt financing. Floorplanning is also offered to the dealer
base, as well as rental pool financing. While this captive holds some finance
paper in its portfolio, much of it is discounted to third-parties.
-
A producer of cranes and other construction equipment has subsidized its
lease financing programs in order to remain competitive with other
manufacturers that have their own captive finance companies. These
programs were formed with third-party finance companies that assume all of
the credit risk. This manufacturer has also relied on its dealers to offer their
own financing programs to the end-customers.
Equipment Leasing Association & R.S. Carmichael & Co., Inc.
At the manufacturer level,
the provision of dealer
floorplanning is an important
adjunct to customer lease
financing.
31
CONSTRUCTION EQUIPMENT (Cont.)
-
-
A manufacturer of mining equipment has established leasing program
relationships with several third-parties. They were selected on the basis of
their industry knowledge, ease of execution, and competitive rates. These
third-parties are also involved in the financing of used equipment that is
refurbished by the manufacturer.
Manufacturers report
subsidizing lease financing
rates to stimulate equipment
sales.
A leading manufacturer of cranes for the construction industry reports that
at least 50% of its equipment sales are financed in some fashion. While
customers often source their own financing, they sometimes seek
manufacturer-provided financing. Accordingly, formalized lease financing
relationships have been forged with third-party providers since this
manufacturer does not have sufficient capital to establish a captive finance
company or hold lease paper in its own portfolio.
Dealer Practices
•
Dealerships for the full-line construction equipment manufacturers have a great deal
of flexibility in financing a customer’s transaction. This may include financing a sale
through their own lines of credit, either holding the paper themselves or selling it off
individually or bundled to a third-party finance source.
•
Depending on the size of the transaction or previous arrangements, the dealer will
refer the customer to the manufacturers’ captives or third-party financing sources.
•
Profiles of specific dealer practices follows:
-
A Caterpillar dealer with annual sales exceeding $40 million indicates that the
average lease financing transaction size is $125,000. Equipment sales to
municipalities are important, and tax-exempt leases are offered for this purpose.
Rentals are also significant because of contractor customers’ uncertainty of
projects. This dealer uses both the captive finance company of Caterpillar and
third-party finance companies such as CIT, CitiCapital and GE. The captive is
utilized when rates are competitive, the customer has outstanding leases with the
captive, or the customer expresses a preference for using the captive.
Equipment Leasing Association & R.S. Carmichael & Co., Inc.
32
CONSTRUCTION EQUIPMENT (Cont.)
-
Another heavy construction equipment dealer with more than 500 employees and
five branches distributes asphalt equipment, backhoes/loaders, excavators and
forestry equipment. Lease financing transaction sizes can range from $50,000 to
$3.5 million. The dealer’s customers include contractors, major construction
companies and mining companies. A significant trend reported by this dealer is
the increased usage of rental programs. Contractors will do short-term rentals
with no intention of purchasing the equipment at the end of term, while mining
companies are more interested in rent-to-own programs that provide for a
portion of the rental payments to be applied toward the purchase of equipment.
Overall, an estimated 50% of equipment is moved via rentals, 40% are outright
sales, and 10% of the equipment is leased.
-
A dealer specializing in the sales of road and asphalt equipment offers
products from more than 100 different manufacturers. Lease financing ticket
sizes for this equipment can range from $25,000 to $250,000. Most
customers are independent road contractors and municipalities (40% of
sales). Lease penetration is an estimated 30% to 35% of annual equipment
sales. Tax-exempt leasing is an important product for municipality sales.
Manufacturers may subsidize the lease rate to some extent. Current lease
financing providers include CitiCapital and GE.
-
A privately owned earthmoving equipment dealer for Case (CNH) reports
lease financing ticket sizes ranging from $25,000 to $500,000. Customers
include independent contractors, major construction companies and
municipalities. Most sales are to contractors. Lease penetration may be
25% to 35%, while another 25% of sales are outright purchases. An
estimated 40% to 50% of equipment is rented. Rental products include a
purchase option in which 80% of paid-in rents are applied toward the
purchase price if the customer elects to purchase. In addition to captive
finance from CNH Capital for Case equipment, CIT is referred for lease
financing for other equipment manufacturers represented by this dealer.
CNH Capital also provides floorplanning for Case equipment.
Equipment Leasing Association & R.S. Carmichael & Co., Inc.
The use of lease financing
is ingrained among
construction equipment
dealers.
33
CONSTRUCTION EQUIPMENT (Cont.)
-
A dealership for heavy and light construction equipment in Texas sells to
landscape companies, highway construction companies, and agricultural
customers. This dealer reports that lease penetration has declined in favor
of rental programs. For every piece of equipment sold outright, 10 pieces
seem to be rented. Also, strong competition for rentals has emerged from
specializing rental companies. In addition to manufacturers’ captive finance
sources, this dealer uses CitiCapital and GE for customer lease financing.
In some cases, the manufacturer will subsidize lease financing rates via its
captive and will be more lenient than third-parties in its credit approval.
This dealer also reports a strong aftermarket for used equipment and a
separate department for this purpose. If the used equipment is not sold or
rented by this department, it will be sold at auction.
-
A heavy construction equipment dealership in the Pacific Northwest handles
excavators, graders, pavers, rollers and other equipment. The average ticket
size for the equipment exceeds $100,000. This dealer has found that customers
would rather lease than purchase equipment, and lease penetration is 25% to
30% of equipment sales. Leasing seems equally popular among independent
contractor and municipal customers. Lease terms are typically 3 to 5 years.
The providers of lease financing include John Deere Credit, CIT and
CitiCapital. The dealer’s relationship with the latter two financing sources are
characterized as informal and referral-based.
-
A full-service dealer handling construction equipment from 25 different
manufacturers has annual revenue exceeding $100 million. Most lease
financing ticket sizes fall in the range of $30,000 to $300,000. Customers
are mainly independent contractors, followed by major construction
companies and crane rental companies. They often seek full-service leases
incorporating field service, parts and training. This dealer also offers rental
programs with purchase options and estimates that rentals account for 50%
of annual equipment movement. Third-party leasing companies used include
CIT and CitiCapital. For dealer floorplanning/inventory financing, a local
banking relationship is utilized.
Equipment Leasing Association & R.S. Carmichael & Co., Inc.
At the dealer level, both
captives and third-party
finance companies are
utilized.
34
CONSTRUCTION EQUIPMENT (Cont.)
•
•
Construction equipment dealers financing transactions through their own lines of credit
may readily accept higher-risk customers than the manufacturer’s captive if the
equipment has a high resale value and the dealer has strong remarketing capabilities.
Some dealerships will use their manufacturers’ captives exclusively, while others have
relationships with multiple third-party sources.
_
can represent 25% to 35% of
dealer sales.
Captives will provide field sales support as well as floorplanning solutions
to the dealers. Some captives will have financing specialists in every
regional office of the parent.
•
In some instances, the concept of lease financing is still not well understood by dealers
and their equipment sales personnel. They do not seem to be promoting lease financing
as an option for equipment acquisition because of the perception that leasing is too
complicated and delays the sale, resulting in the loss of business to competition.
•
In addition to providing lease financing to end-customers, construction equipment
dealers are active users of “wholesale” financial services, especially inventory
financing/floorplanning.
_
Lease financing penetration
Manufacturers will offer their equipment to dealers with no interest
during the initial inventory period (e.g., 3 to 6 months).
End-Customer Practices
•
For construction equipment lease financing transactions greater than $1 million, endcustomers often will line up their own financing sources because of the perception that
a better deal cannot be obtained through the vendor. For example:
Equipment Leasing Association & R.S. Carmichael & Co., Inc.
35
CONSTRUCTION EQUIPMENT (Cont.)
-
-
A construction firm and independent contractor in the Carolinas tends to
source its own equipment financing, independent of manufacturer- and
dealer-sponsored lease financing. Cranes represent the largest category of
equipment financed. This firm has found non-bank financing providers such
as GE to be more responsive and flexible than banks. Lease financing rates
are perceived to fall in a competitive range, so that provider selection is
based more heavily on non-pricing attributes such as fast turnaround.
Relationships with leasing company sales representatives are also important,
and monthly or quarterly meetings are desired.
Customers often express a
preference for non-captive
financing.
A Florida-based company active in building construction and concrete
production periodically acquires equipment ranging from bulldozers to mixer
trucks. The primary method of equipment acquisition is through installment
finance. Its finance sources include CIT and GE. In general, what this
company values in an equipment lender is ease of execution, especially rapid
credit approvals and quick documentation turnaround. It also prefers a
frequent level of personal contact by its lenders so that they are familiar with
the company’s financing needs on an ongoing basis. One benefit of using nonbank financing sources such as CIT is less stringent covenant treatment.
Competitive Environment
•
Captive finance companies are less of a competitive factor than in the agricultural
equipment leasing field.
Captives
25%
Independents
25%
Banks
50%
Base:
$4.8 billion, reported new business volume, 2003
Source: ELA Survey of Industry Activity, 2004, and RSC&Co. estimates
Equipment Leasing Association & R.S. Carmichael & Co., Inc.
36
CONSTRUCTION EQUIPMENT (Cont.)
-
Caterpillar Financial Services is the captive finance unit of the largest
manufacturer of earthmoving equipment. The parent also manufactures a
range of equipment for the mining and forestry industries. Caterpillar
equipment is mainly distributed through a network of independent dealers,
and end-customers range from small independent contractors to the U.S.
Government. Lease financing volume for Caterpillar Financial Services
exceeded $8 billion globally in 2003, and total assets amounted to nearly $20
billion. In addition to lease financing services, CFS also provides
floorplanning and other wholesale financing services to its dealer base.
-
CNH Capital is a wholly owned subsidiary of CNH Global N.V. that
provides financing to dealers and customers of its construction and
agricultural equipment. CNH is the third largest manufacturer of
construction equipment (e.g., backhoes, excavators) globally after
Caterpillar and Komatsu. Through Case Credit and other brands, CNH
provides lease financing, dealer floorplanning, insurance and other
financial products. Volume for CNH Capital amounted to $5.1 billion in
2003, and its portfolio exceeded $9.1 billion.
-
John Deere Credit is the captive finance arm of Deere & Co. which was
established almost 50 years ago. The parent manufactures construction
equipment, such as backhoes and excavators, as well as forestry and
lawn care equipment. Its construction equipment customers range from
small independent contractors to major corporations and government
agencies. Most equipment is sold through a network of independent
dealers. Floorplanning services are also offered to these dealers. Lease
financing volume for John Deere Credit totaled $10 billion in 2003, and
assets amounted to $12.4 billion.
Equipment Leasing Association & R.S. Carmichael & Co., Inc.
Vendors are mainly concerned
with the turnaround cycle and
credit acceptance ratios of
their lease financing partners.
37
CONSTRUCTION EQUIPMENT (Cont.)
-
-
Hitachi Capital America provides lease financing to customers of Hitachi
Construction Machinery America and Euclid Hitachi Heavy Equipment, as
well as to others requiring commercial financing. Its 2003 lease volume was
$585 million, and its portfolio amounted to $950 million.
Some captive finance
Ingersoll-Rand Financial Services has been evolving as a captive
financing unit within the parent company. The parent is a leading
manufacturer of construction, forestry and mining equipment. Financial
Services provides lease financing for a number of its product lines
including Blaw-Know, Bobcat and Club Car. Historically, IngersollRand Financial Services has operated as a unit of CitiCapital, one of the
major third-party commercial finance organizations in the U.S.
According to the Equipment Leasing Association, Ingersoll-Rand
Financial Services captive annual volume may be in the $700 to $800
million range.
also provide financing to
-
Komatsu Financial is the captive finance arm of Komatsu America
Corporation. The parent is a major manufacturer of construction
equipment, such as backhoes, graders, excavators, and bulldozers, sold
through a network of independent dealers to general construction
companies and contractors. It also produces mining equipment that is
sold quarries and mining companies. Komatsu Financial was founded
over 20 years ago and offers a range of lease financing products, as well
as dealer floorplanning and rental fleet financing.
-
Volvo Commercial Finance is a relatively new provider of captive lease
financing for construction equipment. It was originally established to
provide floorplanning services to Volvo Construction Equipment dealers;
however, a lease financing product line was introduced several years ago.
Lease financing volume for Volvo Commercial Finance exceeded $1
million in 2003, and the portfolio approached $3 billion.
Equipment Leasing Association & R.S. Carmichael & Co., Inc.
companies, such as
Hitachi Capital America,
business at-large.
38
CONSTRUCTION EQUIPMENT (Cont.)
-
Terex Financial Services was established by Terex Corporation in 2003
to provide customers with a range of lease financing products. The
parent manufactures construction equipment, cranes, aerial platforms and
mining equipment. TFS was formed in coordination with GE Vendor
Financial Services, the largest vendor leasing organization in the U.S.
Terex Financial Services allows the parent to offer customer financing
with minimal expense and without adding additional debt to the Terex
balance sheet by leveraging the resources and operational capabilities of
GE VFS.
•
Very few new captive finance companies are coming on-stream because of the capital
requirements and rating agency scrutiny.
•
Most of the existing captives should remain in place because they are generally healthy
and are helping their parents to grow.
•
Some captives engage in rediscounting their lease financing paper, while others hold
most of it in their portfolio. Some have relied more on securitization models.
•
Captives will finance other manufacturers’ equipment (both competing and noncompeting), but only if this equipment is sold through the parents’ dealers.
•
Captive finance companies are considered to be very flexible with their credit approval
ratios and try to work with every potential customer. This is attributable to the
captives’ first-hand knowledge of the equipment and the end-customer.
Equipment Leasing Association & R.S. Carmichael & Co., Inc.
Some captives report
a credit approval ratio
exceeding 90%.
39
CONSTRUCTION EQUIPMENT (Cont.)
•
The third-parties with recognized industry knowledge and a consistent industry focus
are CIT, CitiCapital and GE.
-
These competitors have nationwide organizations of financing sales
representatives which provides them with a distinct advantage because
much of the construction equipment lease financing business is locally
oriented.
-
Another strength of these third-party lease financing organizations is their
ability to train dealer sales reps on the benefits of leasing and how best to
introduce the lease financing option during the equipment sales cycle.
-
CitiCapital is one of the largest non-captive providers of construction,
mining and forestry equipment lease financing in the U.S. It also
provides floorplanning and rental pool financing for dealers. Total lease
financing volume in 2003 was nearly $16 billion, and net assets
approached $22 billion.
-
CIT is also a widely recognized non-captive player. It enjoys a
longstanding positive reputation among construction equipment
manufacturers and dealers.
-
GE Commercial Finance is another leading non-captive provider of lease
financing services through its Commercial Equipment Financing and
Vendor Financial Services units. For example, VFS established a joint
venture with Terex, while CEF acquired a portfolio from JLG (aerial
platforms). GE has a reputation for larger deals and stronger credits.
Equipment Leasing Association & R.S. Carmichael & Co., Inc.
CIT, CitiCapital and GE are
the entrenched third-party
competitors.
40
CONSTRUCTION EQUIPMENT (Cont.)
•
In addition to these top-tier independent (i.e., non-captive, non-bank) lease financing
competitors, there are several other third-parties that provide construction equipment
financing on a national basis.
Competitor
Financial Federal
ORIX Financial Services
Alter Moneta
Total Lease Volume, 2003
$696
504
257
A number of local, regional
and national commercial
banks have a strong interest
in the lease financing of
construction equipment.
Source: Monitor 100
•
Bank equipment leasing subsidiaries active in the construction equipment leasing
field include the following:
Competitor
BB&T Leasing
Center Capital (Webster Bank)
Citizens Leasing
Irwin Commercial Finance
SouthTrust
TCF Leasing
US Bancorp Equipment. Finance
Wells Fargo Equipment. Finance
Total Lease Volume, 2003
$142 million
268
769
273
288
570
2152
2509
Source: Monitor 100
Road Building Equipment
•
Road building (or bituminous) equipment includes rock crushers, pavers, conveyors
and asphalt plants.
•
Leading manufacturers include Astec Industries, Blaw-Knox (Ingersoll-Rand) and
Cedarapids (Terex).
Equipment Leasing Association & R.S. Carmichael & Co., Inc.
41
CONSTRUCTION EQUIPMENT (Cont.)
•
Equipment sales are direct to the end-customer through specializing sales forces, as
well as through independent dealers.
-
Crushing equipment and paving equipment are sold through dealer
channels. By contrast, asphalt production equipment is sold direct.
•
Customers for road building equipment are primarily contractors and corporations in
the road construction industry.
•
Installment loans, finance leases and residuals-based leases are all used to acquire
road building equipment.
•
-
The prevailing lease financing for crushing (and trenching) equipment is
residuals-based, usually in the form of fair market value (FMV) leases. The
end-customers typically want to have ownership of the equipment at the end
of term, thus necessitating the use of early buyout options (EBOs).
-
The lease financing of asphalt plants is usually straight money-overmoney financing.
-
Financing of asphalt laydown equipment is also money-over in nature.
Some road construction
companies prefer the offbalance sheet nature of
operating leases.
End-customers for road building equipment have had a growing preference for
residuals-based lease financing because of the lower monthly payments. Moreover,
customers prefer to assume the equipment upon lease termination because of high
residual values since the economic life of the equipment often exceeds the lease term.
_
A recent example demonstrates how well the equipment holds its value:
a $200,000 paver which was approximately 6 years-old was sold at
auction for $100,000, indicating a 50% retention of value.
Equipment Leasing Association & R.S. Carmichael & Co., Inc.
42
CONSTRUCTION EQUIPMENT (Cont.)
•
The average lease term is 5 years, but will range up to 7 years for some of the more
expensive crushing equipment and asphalt plants.
_
Shorter-term leases are usually written for paving equipment.
•
Lease financing pricing is often based on a spread over comparable-term treasuries.
•
Lease financing penetration at the manufacturer level appears to be in the vicinity of
20% to 25%. This has been the pattern in the road building equipment industry for a
number of years.
•
Equipment purchased for more than $1 million often tends to be lease financed
through the customers’ own sources.
•
Ticket sizes for lease financing transactions range from $25,000 to $2.5 million
(asphalt plants).
_
•
as much as 50% of sales
since customers often
arrange their own financing.
Asphalt plants are considered construction equipment, but are a fixture of
the property.
Rental programs are also found in this industry. Sometimes this is a trial period (e.g.,
4 to 6 months) for customers to check out equipment rather than a true rental
agreement.
_
•
Overall, leasing may capture
Dealers of road building equipment have seen increased demand for shortterm rentals. They will offer rental credits toward the purchase amount and
have found that 80% or more of renters will eventually purchase the
equipment.
The average life of road building equipment may be 5 to 7 years.
Equipment Leasing Association & R.S. Carmichael & Co., Inc.
43
CONSTRUCTION EQUIPMENT (Cont.)
•
Some manufacturers have used-equipment departments. They will take trade-ins and
recondition the equipment in order to facilitate a sale, but the secondary market is not
of major interest to them.
_
On occasion, manufacturers will remarket equipment for their lease
financing partners.
•
Floorplanning of dealer inventories is also sought in this market, and the major lease
financing providers will offer this product.
•
Competing lease financing providers include GE Commercial Finance and CIT. These
organizations have large networks of local leasing representatives, and they are valued
because of their industry-specific knowledge that results in fast credit approvals and
high acceptance rates. Their pricing is also considered to be in a competitive range.
_
Road building equipment
manufacturers view salesassistance financing as
essential since their
contractor customers often
want one-stop shopping.
CitiCapital is also a visible lease financing player in this market.
•
Captive finance companies appear to be less visible than in other market segments,
especially with the decision by Astec Industries to discontinue its captive (Astec
Financial Services) in favor of third-party vendor leasing programs.
•
Local and regional banks are also important providers of road building equipment
financing since contractors often first turn to their banking sources to pre-arrange their
own financing.
Cranes
•
Cranes represent a distinctive segment of the construction equipment industry.
•
Major equipment categories include lattice-boom crawler cranes, boom-truck cranes
and tower cranes.
•
Ticket sizes for cranes can range from $50,000 for a truck-mounted boom crane to
$5+ million for tower cranes (depending on lifting tonnage).
Equipment Leasing Association & R.S. Carmichael & Co., Inc.
44
CONSTRUCTION EQUIPMENT (Cont.)
•
Upwards of 90% of cranes sales are through independent dealers and rental companies.
-
-
Rental companies have become increasingly prevalent for large crawler
and tower cranes. In the past, they generally handled only smaller model
cranes, such as boom-truck and all-terrain cranes; however, they have
recently experienced more demand for higher-capacity cranes through
rental programs.
Crane manufacturers have
experienced an increase in
sales to rental companies.
Rental companies buy equipment to rent as a fleet for customers that do
not have an interest in purchasing or leasing cranes.
•
End-customers for cranes are often general contractors.
•
The Manitowoc Crane Group (including Grove and Potain cranes) appears to be the
largest crane manufacturer. Competitors include Terex and Link-Belt.
•
Crane companies usually do not have captive finance arms and do not seek to hold
lease paper in their portfolios. Instead, they will rely on third-parties to provide lease
financing for end-customers.
-
Manitowac Credit is an example of a third-party private-label lease
financing program.
-
Link-Belt evidently has had vendor leasing relationships with CIT and
CitiCapital. Last year, it started a vendor program with Wells Fargo
Equipment Finance.
Equipment Leasing Association & R.S. Carmichael & Co., Inc.
45
CONSTRUCTION EQUIPMENT (Cont.)
•
Since the average life of a crane can be 20 years, s strong aftermarket exists for used
cranes.
-
Some manufacturers are heavily involved in the remarketing of cranes.
•
An estimated 25% of crane sales are leased through manufacturer-sponsored
programs or through informal referral relationships with third-parties.
•
The average lease financing term appears to be 4 years, but will range from 3 to 7
years.
•
Much of crane financing is in the form of finance leases. Residuals-based leases are
less significant, although fair market value (FMV) leases are utilized.
-
•
subsidize lease financing
programs to remain
competitive.
One crane manufacturer with average ticket sizes ranging from $1 to
$1.5 million indicates that the lease financing it provides to customers is
split 50/50 between finance leases and residuals-based leases.
Manufacturers are also actively involved in the provision of floorplanning to their
dealer base.
-
•
Crane manufacturers will
Interest-free periods (e.g., 3 to 6 months) may be offered in connection
with floorplanning.
CIT, CitiCapital and GE are third-party commercial finance companies that have
been active for some time in crane financing.
Equipment Leasing Association & R.S. Carmichael & Co., Inc.
46
CONSTRUCTION EQUIPMENT (Cont.)
Mining Equipment
•
Surface mining equipment includes electric mine shovels, drills and drag lines.
•
Ticket sizes for this equipment can range from $500,000 to $25 million.
-
Mining equipment such as water-well drills and quarry blast-hole drills
can have ticket sizes in the $500,000 range.
-
Continuous miners can cost $1 million, while ticket sizes for continuous
haulage systems can exceed $2 million.
•
Sales of mining equipment are usually direct to the end-customer. This appears to be
the predominant channel of distribution in this industry.
•
Major manufacturers of shovels and drag lines include Joy Global and Bucyrus
International. Leading producers of drills include Bucyrus and Ingersoll-Rand.
-
In the case of Joy Global, two different divisions manufacture equipment
for the surface and underground mining markets.
-
Overseas manufacturers compete in some segments of the mining
equipment industry.
•
End-customers for mining equipment range from small, independent mine owners
and quarries to large natural-resource corporations.
•
End-customers often obtain their own financing for mining equipment acquisitions
from commercial banks and other sources.
Equipment Leasing Association & R.S. Carmichael & Co., Inc.
The mining equipment
industry has had a
traditional linkage to the
construction equipment
field.
47
CONSTRUCTION EQUIPMENT (Cont.)
They principal lease financing product used in this market is a finance lease with a
3- to 5-year term.
Most lease transactions
•
Lease financing penetration appears to be relatively low in the mining equipment
field, perhaps in the vicinity of 15% to 20%.
since mining equipment is
•
Lease financing terms typically range from 3 to 5 years.
period.
•
Recent developments in the mining industry have stimulated the utilization of lease
financing for equipment acquisition.
•
-
The U.S. mining industry had a strong year in 2003. Improvement in the
economy led to higher demand for metals (e.g., copper, aluminum).
-
According to the U.S. Department of Commerce, capital expenditures for
mining (and oilfield) machinery increased almost 35% from $4.8 billion
in 2002 to $6.4 billion in 2003. This is in dramatic contrast to the pattern
of stable capex over the 2000 to 2002 period.
seem to have 3-year terms
often worn out after this
Mining Equipment* Capex, 1999-2005(E)
$ Billions
8
$5.4
6
$5.3
$6.2
$6.4
$6.7
$6.9
$4.8
4
2
0
1999
2000
2001
2002
2003
2004(E) 2005 (E)
*Includes oil field machinery
Source: U.S. Department of Commerce
-
Industry analysts forecast continued improvement in the mining industry
through 2005.
Equipment Leasing Association & R.S. Carmichael & Co., Inc.
48
CONSTRUCTION EQUIPMENT (Cont.)
-
-
While the number of coal mines in the U.S. has steadily decreased, the
opening up of new mines has resulted in increased demand for coal
mining equipment.
Mines are smaller than in the past, and the lifespan of mines is shorter
(e.g., 3 to 5 years). As a result, mine operators seek smaller equipment,
and this equipment is more apt to be financed for a shorter period of
time.
•
Above-ground equipment may represent at least two-thirds of the total mining
equipment market.
•
Lease financing volume in the mining industry rose to $1.5 billion in 2003.
The use of lease financing
is accepted in the mining
equipment market.
Mining Equipment* Leasing Volume 1999-2005(E)
$ Billions
2
$1.2
$1.1
$1.2
$1.2
1999
2000
2001
2002
$1.5
$1.6
$1.7
1
0
2003
2004(E) 2005 (E)
*Includes oil and gas extraction equipment leasing
Source: Equipment Leasing Association and R.S. Carmichael & Co. estimates
•
While most financing is in the form of finance leases, residuals-based leasing
structures have grown in popularity.
-
The off-balance sheet benefits of operating leases are attractive to some
mining companies.
Equipment Leasing Association & R.S. Carmichael & Co., Inc.
49
CONSTRUCTION EQUIPMENT (Cont.)
•
With the exception of Ingersoll-Rand, manufacturers of mining equipment do not
have captive finance companies. They tend to have either formal or informal
relationships with third-party lease financing providers.
-
Ingersoll-Rand Financial Services is a relatively new captive.
Lease financing sources
are referred based on their
industry expertise and
their appetite for miningrelated transactions.
Equipment Leasing Association & R.S. Carmichael & Co., Inc.
50
AGRICULTURAL EQUIPMENT
Market Overview
•
The agricultural business in the U.S. has been undergoing consolidation at all levels,
from the number of farm operations to the number of equipment vendors.
_
_
•
There has been a continuing decrease in the number of U.S. farm
operations in recent years. However, the number and acreage of
corporate farms have grown.
Acreage under cultivation and agricultural output have increased despite
industry consolidation.
The principal agricultural equipment categories include tractors, harvesting
equipment, irrigation systems and treatment/application equipment.
_
The crossover between the
agricultural equipment and
construction equipment
industries has become more
pronounced as manufacturers
and their dealers consolidate
and diversify their equipment
offerings.
Ticket sizes for this equipment can range from $25,000 to more than
$250,000.
Equipment Type
Tractors
Ticket Size
$25,000 to $150,000
Harvesting
$25,000 to $250,000+
Irrigation/Sprayers
Treatment/Application
$75,000 to $250,000+
$75,000 to $250,000+
Illustrative Manufacturers
Deere
Case/CNH
AGCO
Deere
Case
Gehl
Lindsay
AgChem/AGCO
Equipment Leasing Association & R.S. Carmichael & Co., Inc.
51
AGRICULTURAL EQUIPMENT (Cont.)
•
Tractors, harvesting and irrigation/treatment represent the major equipment categories.
Other Equipment
25%
Tractors
25%
The U.S. market for
agricultural equipment has
been largely a replacement
market.
Commercial
Grounds Care
10%
Treatment/
Application/
Irrigation 20%
Harvesting
20%
Source: U.S. Department of Commerce and RSC&Co. estimates
•
End-customers for this equipment include corporate farms, family farms and hobby
farms, as well as government entities active in agriculture.
•
Smaller pieces of equipment tend to be acquired by “hobby” farmers.
_
•
Farmers that do not rely on farming as their principal source of income are
referred to as “hobby” farmers.
Demand for agricultural equipment depends on crop prices, yields and other variables.
_
When farmers have good yields and obtain good crop prices, they seem
more inclined to acquire larger pieces of equipment.
Equipment Leasing Association & R.S. Carmichael & Co., Inc.
52
AGRICULTURAL EQUIPMENT (Cont.)
•
Expenditures for agricultural equipment had been relatively stable during the 1999 to
2001 period; however, a rebound occurred in 2002 and 2003 as annual capital
expenditures exceeded $17 billion for the first time.
equipment sales has not
been uniform across
Agricultural Equipment Capex, 1999-2005(E)
equipment segments.
$ Billions
20
15
10
5
0
Growth of agricultural
$13.7
$14.6
$16.6
$17.5
$12.4
1999
2000
2001
2002
2003
$18.5
$19.5
2004(E) 2005 (E)
Source: U.S. Department of Commerce
•
Sales increases in combines led other agricultural equipment categories.
Predicted Farm Field Equipment Retail Sales Growth, 2003 to 2004
+5.9%
10%
+9.3%
+3.0%
5%
0%
-5%
-2.8%
Forage
Harvesters
Tractors (All)
Planters (All)
Combines
Source: Association of Equipment Manufacturers
State of the Ag Industry Outlook
•
Technology enhancements have resulted in agricultural equipment that lasts longer,
works faster, and performs multiple tasks.
•
Most agricultural equipment sales are through independent dealers that have formal contracts
with the equipment manufacturers.
Equipment Leasing Association & R.S. Carmichael & Co., Inc.
53
AGRICULTURAL EQUIPMENT (Cont.)
•
Three manufacturers dominate the agricultural equipment market: Deere, AGCO and
CNH. Other important manufacturers include Gehl, Lindsay, Valmont and Kubota.
Lease Financing Practices
•
•
has grown over the past two
years in step with increased
Lease financing is a very important tool in the agricultural equipment industry. This
is evidenced by the fact that the major manufacturers either have captive finance
companies (e.g., John Deere Credit) or formal leasing relationships with third-party
commercial finance companies.
_
The use of lease financing
investment in agricultural
equipment.
Smaller equipment manufacturers may sponsor third-party “vendor
leasing” programs.
The agricultural equipment lease financing market in the U.S. is approaching $10
billion in terms of annual volume. This represents a 55% lease penetration rate at all
levels of the equipment distribution channel (i.e., manufacturer-sourced, dealersourced, and customer-sourced financing).
Agricultural Equipment Leasing Volume, 1999-2005(E)
$ Billions
15
$8.5
10
$8.0
$8.1
$8.9
$9.5
2000
2001
2002
2003
$10.0
$10.5
5
0
1999
2004(E) 2005 (E)
Source: Equipment Leasing Association and R.S. Carmichael & Co. estimates
Equipment Leasing Association & R.S. Carmichael & Co., Inc.
54
AGRICULTURAL EQUIPMENT (Cont.)
•
The majority of agricultural equipment financing is in the form of finance leases,
conditional sales agreements and other money-over-money financing.
_
_
Agricultural equipment can have long useful lives, and residual values
can be significant.
is very much in evidence in
their selection of financing
options.
Finance leases with a dollar buyout purchase-option seem prevalent.
•
Residuals-based leases (i.e., fair market value, operating) provide greater
affordability through lower monthly payments. This is important to some farmers
and other agricultural industry customers.
•
Where residuals-based leases are written for agricultural equipment, the fair market
value at lease-end is determined in part by the number of hours on the piece of
equipment (e.g., tractors, combines).
•
Farmers’ pride of ownership
_
With tillage equipment, there is no easy way to determine the number of
hours put on this equipment.
_
With other types of equipment (e.g., irrigation systems), virtually no
aftermarket may exist if the equipment is attached to the real estate.
However, this equipment can increase the resale value of the property.
The expected life of agricultural equipment depends on a number of factors, such as
the specific application of the equipment and the number of harvesting seasons.
-
The economic life of some equipment is becoming longer because of
technological improvements.
-
Used equipment sales have dampened the growth of new equipment sales
to some extent because they represent a less costly alternative for farmers.
Equipment Leasing Association & R.S. Carmichael & Co., Inc.
55
AGRICULTURAL EQUIPMENT (Cont.)
•
•
The average lease term appears to be at least 3 years. However, leases have been
written for as long as 7 years to accommodate some customers, especially those
acquiring higher-ticket equipment.
Agricultural customers will occasionally use operating leases to keep the equipment
assets off of their balance sheets. Corporate farms also have a preference for
operating leases in order to more accurately project their expenses.
-
•
Agricultural equipment
lease financing is mostly
a small-ticket business.
Equipment ownership may not be a major driver for corporate farms
since they tend to trade-in equipment more frequently than family farms.
The vast majority of agricultural equipment lease financing transactions are smallticket (i.e., $25,000 to $250,000).
MiddleMarket
7%
SmallTicket
93%
Base: $4.8 billion, reported new business volume, 2003
Source: ELA Survey of Industry Activity, 2004
•
Lease payments are not always on a monthly basis. Depending on their harvest
schedules, farmers may make payments on a quarterly, semi-annual or annual basis.
-
For dairy farmers, the payment terms may be monthly because they
receive a monthly milk check.
-
For crop farmers, the payments may be annual since they may only get
money for crops once a year.
Equipment Leasing Association & R.S. Carmichael & Co., Inc.
56
AGRICULTURAL EQUIPMENT (Cont.)
•
•
Agricultural equipment manufacturers with captive finance companies view lease
financing as a tool to generate incremental sales and increase market share.
In selecting a lease
Manufacturers may offer incentives through their captives in the form of lease
financing rate subsidies to stimulate equipment sales.
attributes most valued by
-
Lease financing subsidies reflect the importance of retaining customers
in the consolidating agriculture industry.
-
In addition to subsidized lease financing rates, captives may offer other
incentives such as skip-payment options and initial waivers of finance
charges.
•
Some captives have electronic auctions to more effectively sell used equipment.
•
Captives will finance the sales of non-competing agricultural equipment sold through
their dealer networks.
•
Some captives will bundle lease financing paper that they originate and discount it to
third-parties.
•
In contrast to the construction equipment industry, rental programs do not have a
significant impact on the use of lease financing in the agricultural equipment industry.
•
Lease financing rates are often tied to comparable-term treasuries.
•
The ability to provide tax-exempt leases allows manufacturers to market their
agricultural equipment competitively to local, county and state governments.
Equipment Leasing Association & R.S. Carmichael & Co., Inc.
financing provider, the
agricultural customers are
fast turnaround, strong
customer service,
competitive rates, and
structuring flexibility.
57
AGRICULTURAL EQUIPMENT (Cont.)
•
Floorplanning is a related financial service that is widely used by agricultural
equipment dealers.
-
Manufacturers will provide floorplanning to their dealers through captive
finance companies or third-party relationships.
Captives are a dominant
competitive factor in
agricultural equipment
financing.
Dealers widely use captives for the initial floorplanning period (e.g., 6
months) because they provide the facility on an interest-free basis. At
the end of the initial term, dealers may purchase the equipment or utilize
third-party financing.
Competitive Environment
•
Captive finance companies enjoy a major share of the agricultural equipment lease
financing market.
Independents
15%
Banks
25%
Captives
60%
Base:
$4.8 billion, reported new business volume, 2003
Source: ELA Survey of Industry Activity, 2004, and RSC&Co. estimates
Equipment Leasing Association & R.S. Carmichael & Co., Inc.
58
AGRICULTURAL EQUIPMENT (Cont.)
•
The captives are led by John Deere Credit, CNH Capital and AGCO Finance.
-
Deere & Co. is one of the two largest manufacturers of farm equipment
(CNH Global is the other). Deere also is a manufacturer of construction,
forestry, and lawn-care equipment. Its farm equipment includes tractors,
harvesters and soil-preparation machinery. Construction equipment
includes backhoes and excavators. Farm equipment accounts for more
than 40% of sales. John Deere Credit is the entrenched captive finance
source.
-
CNH Capital is a wholly owned subsidiary of CNH Global N.V. that
provides financing to dealers and customers of its agricultural and
construction equipment. Along with Deere & Co., CNH is one of the
two largest manufacturers of agricultural equipment (e.g., tractors,
harvesters). Through New Holland Credit and other brands, CNH
provides lease financing, dealer floorplanning, insurance and other
financial products. Volume for CNH Capital amounted to $5.1 billion in
2003, and its portfolio exceeded $9.1 billion.
-
AGCO is the third-largest farm equipment maker in the U.S. behind
Deere and CNH. AGCO sells its tractors (under the AGCO and Massey
Ferguson names) and combines through a network of dealers. AGCO
Finance is the captive finance company that provides end-customer
financing and dealer floorplanning. The ability to provide tax-exempt
leases allows AGCO Finance to market its equipment competitively to
local, county and state governments.
-
Gehl makes agricultural and light construction equipment used by dairy
and livestock farms. The ticket sizes for agricultural equipment range
from $5,000 to $25,000+. All equipment sales are handled through an
independent dealership network. Gehl Finance was established to offer
customers a financing option and to assist in increasing sales. Gehl
Company may subsidize the lease financing rate.
Equipment Leasing Association & R.S. Carmichael & Co., Inc.
Captive finance companies
in the agricultural equipment
market are entrenched.
59
AGRICULTURAL EQUIPMENT (Cont.)
-
•
Kubota is Japan’s largest manufacturer of farm equipment, including
tractors and harvesters. Kubota Credit is the captive finance company.
Kubota has a growing position in the U.S. agricultural equipment market.
There are also several significant specialists in agricultural equipment leasing.
-
Agricredit Acceptance is a unit of De Lage Landen Financial Services
and Rabobank that specializes in lease financing for agriculture
equipment manufacturers, dealers and end-users. It has relationships
with some of the leading manufacturers in the industry (e.g., AGCO).
Agricredit lease financing volume represents a significant share of the
$4.3 billion in volume reported by De Lage Landen in 2003.
-
AgStar Financial Services is affiliated with one of the largest Farm
Credit associations (i.e., consolidated Production Credit Associations/
Federal Land Bank Associations) in the U.S. Equipment financing is one
of its principal activities, and its volume amounted to nearly $40 million
in 2003. Leasing assets were almost $150 million.
-
Farm Credit Leasing is a specializing agricultural equipment lender that
is majority-owned by CoBank, a $30+ billion organization that is part of
the Farm Credit System, a lending institution network. FCL leases
agricultural and other commercial equipment to more than 10,000
customers. In addition, it has formal vendor leasing relationships with
leading agricultural equipment manufacturers. In 2003, its lease
financing volume exceeded $325 million, and its portfolio size was
nearly $1.5 billion.
Equipment Leasing Association & R.S. Carmichael & Co., Inc.
In addition to a handful of
specializing lessors, the
broad-line commercial finance
companies (e.g., CIT) are
found in this market.
60
AGRICULTURAL EQUIPMENT (Cont.)
-
-
First National Equipment Financing was established by its parent, First
National of Omaha, over 30 years ago. The parent is one of the top 10
agricultural lenders in the U.S. FNEF finances agricultural equipment,
as well as many other types of commercial and industrial equipment. It
provides lease financing both direct to end-users and through
manufacturer and dealer programs. One of its prominent manufacturer
partners is Lindsay Manufacturing, a leading provider of center-pivot
irrigation systems.
Commercial lawn and
grounds work equipment
is closely tied to the
agricultural equipment
industry.
Wells Fargo Financial Leasing acquired Telmark Inc., an agricultural
equipment financing specialist, in 2003. Telmark has become the Rural
Markets division of WFFL, with a focus on vendor leasing programs for
manufacturers and dealers of agricultural equipment. Telmark was
formed by its previous parent, Agway, in 1964 and evolved into a
national lease financing source for agricultural, forestry, construction and
other commercial businesses. Telmark had over 17,000 customers, and
its lease portfolio exceeded $700 million.
Commercial Lawn/Grounds Equipment
•
Commercial lawn movers can have ticket sizes ranging upwards from $5,000.
•
Trail utility vehicles, used for grounds work at business complexes, resorts, ranches
and farms, represent a fast-growing offshoot of golf carts.
-
Ticket sizes often exceed $5,000.
-
This equipment is made by E-Z-Go (Textron subsidiary), Club Car
(Ingersoll-Rand subsidiary) and Deere & Co.
Equipment Leasing Association & R.S. Carmichael & Co., Inc.
61
AGRICULTURAL EQUIPMENT (Cont.)
•
Sales of commercial lawn/grounds work equipment is through independent dealers.
A demand for tax-exempt
•
End-customers include commercial landscapers, municipalities, large corporations,
and private and public golf courses.
leases, especially in the
Equipment manufacturers include Deere, Kubota and Gravely.
segment, is evident.
•
-
Gravely is a subsidiary of the Ariens Company.
•
The useful life of this equipment ranges from 4 to 10 years depending on the
frequency of usage.
•
Sheffield Financial, a subsidiary of BB&T, is an example of a specialist lease
financing organization in this market.
-
municipal grounds care
Sheffield finances Ransome, Bobcat and other manufacturers’
equipment. It provides financing for both commercial and consumer
accounts and evidently can provide floorplanning services if requested
by dealers.
•
Agricredit Acceptance (a unit of De Lage Landen Financial Services and Rabobank)
also provides lease financing for commercial lawn equipment.
•
Finance leases with fixed-price purchase options (dollar and 10% buyouts) are
common in this market. Residuals-based leases (e.g., FMV) appear to be less
prevalent.
•
Lease terms tend to be 3 to 4 years.
Equipment Leasing Association & R.S. Carmichael & Co., Inc.
62
AGRICULTURAL EQUIPMENT (Cont.)
Manufacturer-sponsored lease financing programs reportedly capture 20% to 25% of
eligible equipment sales.
Forestry equipment
•
Because of the seasonal nature of the commercial lawn care business, lease financing
providers are sometimes required to provide flexible repayment structures.
aligned to agricultural
•
Floorplanning is a related financial service that manufacturers often seek to support
their dealer network.
•
-
financing is also closely
equipment financing.
Providers of floorplanning include captive finance companies and thirdparty commercial finance organizations.
•
Manufacturers provide customers with lease financing through formal relationships
with third-party finance organizations.
•
Captive finance companies (e.g., John Deere Credit) are also in evidence.
Forestry Equipment
•
This equipment includes skidders, loaders, de-limbers, slashers, feller bunchers, and
forwarders.
•
Ticket sizes can range from $50,000 to $500,000. Self-propelled equipment (e.g.,
forwarders) tends to be the most costly.
•
Major manufacturers include Barko Hydraulics, Franklin Equipment (Tree Farmer),
Timberjack (John Deere) and Caterpillar.
•
The majority of equipment sales are through independent dealer networks.
Equipment Leasing Association & R.S. Carmichael & Co., Inc.
63
AGRICULTURAL EQUIPMENT (Cont.)
•
Manufacturers generally do not have formal customer leasing programs in-place;
instead, they tend to have a number of informal sources that they contact if customers
request lease financing.
-
Referrals are based on the perceived credit appetite of particular lease
financing sources.
•
Most forestry equipment financing is comprised of finance leases or conventional
installment sales financing. Residuals-based leasing is less commonly utilized.
•
Lease terms are typically 3 to 4 years.
•
Third-party financing sources include CIT and Agricredit.
•
Captive finance companies include John Deere Credit (Timberjack) and Caterpillar
Financial Services.
Equipment Leasing Association & R.S. Carmichael & Co., Inc.
Dealers frequently have
their own sources of
customer financing.
64