Garnet Capital Advisors Blog

The coronavirus pandemic is having a devastating impact on the financial sector, and the equipment finance industry is no exception.

It's unprecedented territory for the industry, as the COVID-19 crisis continues to wreak havoc on the US economy. The current health crisis is creating a credit situation where major changes in loan portfolios will not only be required but will become normal activity.

The severity of the impact will largely be based on individual portfolio asset allocations. Still, it's safe to assume that a significant proportion of portfolios will need some form of restructuring.

Unsurprisingly, the sectors hardest hit by the pandemic include hospitality, transportation, and energy, among others.

The Equipment Financing Industry Will Likely Undergo Stress From COVID-19

Fortunately, there is still widespread availability of funds, with some equipment finance firms stepping up as innovators to financially assist the healthcare sector, such as helping to create labs that develop COVID-19 test kits. In certain situations, short-term financing is being requested to support short-term demand.

However, many healthcare providers remain at risk. While many hospitals are scrambling to keep up with care, others are suffering as elective procedures remain canceled. Yet despite idle operations in many facilities, the bills for existing equipment still need to be paid. Dental offices, cosmetic surgery centers, and other healthcare facilities with operations that have been halted are in financial distress and are left with equipment that they're still financing.

Businesses in the hospitality industry are shuttered, yet they're still left with equipment they may no longer be able to pay for, leaving lenders with potentially delinquent assets.

This will be an interesting time for fintechs, who have not yet experienced a full credit cycle. The current coronavirus pandemic will be their first test. Fintech firms with substantial small business lending assets on the books will likely realize high delinquency rates. That said, fintechs that have partnered with bigger banks may be in a better position to deal with the current situation.

The value of major equipment has decreased, be it trucks, machinery, electric tools, or others. Many are down in value by as much as 30 percent. In particular, equipment in the mining, airline, marine, oil-patch, and locomotive sectors are reeling from the effects of the pandemic. Having said that, all industries are hurting to some degree.

Many equipment finance companies are doing what they can to help their customers recover rather than waiting for their loans to go delinquent. This has been done in the past, such as after Hurricane Sandy, when some lenders offered extensions where needed.

Funding line restrictions could be a key component in determining a company's ability to handle the crisis and will likely lead to opportunities to consolidate.

Lenders Encouraged to Consider Selling Off Problematic Assets

With sound management practices and robust loan portfolios, equipment finance companies should be able to survive the effect of the COVID-19 pandemic. Regardless of the size of the business, it is of paramount importance to safeguard loan portfolios to better weather this current economic storm.  Garnet has developed COVAM, a model to asses values taking into account COVID-19 effects.

There's little doubt that the equipment finance industry is going to experience stress stemming from businesses falling short of being able to pay for their financed equipment. One way to mitigate this risk is to sell off potentially risky loan assets. Selling off loans that were previously problematic and focusing on new issues that have a greater chance to recover is a good use of limited resources.

Partnering with Garnet Capital to sell these risky loan assets is prudent practice and something that all lenders should consider. Sign up for our newsletter to stay abreast of issues that are pertinent to your business.