MONTREAL, Que. - We've been hearing a lot about the financial crisis that struck the US before the entire world's markets sunk as well. At the root of the problem were hazardous housing loans, but the...
MONTREAL, Que. –We’ve been hearing a lot about the financial crisis that struck the US before the entire world’s markets sunk as well. At the root of the problem were hazardous housing loans, but the transportation industry would not be immune as the financial crisis evolved into a global credit crisis. Is there any credit out there available for trucking companies?
According to Eric Starks, president of FTR Associates, an American consulting firm specializing in transportation forecasting, the answer is yes.
He made the following comment during a teleconference call held recently, when Truck News asked him if the financial branches of the North American truck makers would continue to have access to credit: “In general, I think that they’ll have access to credit. I don’t think that they’re gonna have as much issues as some other people. What it really comes to is what’s the cost for them to access that credit? (OEMs) will be able to lend to people who need pieces of equipment but it might not be at the most desirable rate. I don’t think it’s a significant issue for these guys to access capital.”
The question was worth asking, because one of the main problems with the current credit crunch is that banks are reluctant to lend money to each other. And, in many aspects, companies such as Volvo Financial Services, Mack Financial Services, Paccar Financial, Navistar Financial or Daimler Truck Financial are very similar to banks, as their main source of revenue and profit is the interest on the loans they provide to their customers.
But to lend money, you need to have access to it. Yet, a question remains -are there any new truck purchases to finance out there with carriers struggling with low freight volumes? Yes, but not a lot.
Freight volume: worst since 1992
During the same conference call, Noel Perry, managing director and senior consultant, FTR Associates, said that he forecasts 2009 to be the worst year since 1992 in terms of freight demand, underlining that profit margins were down for three consecutive years in the trucking industry.
On the other hand, his partner Jon Starks, transportation analyst, truck, trailer and rail equipment market, thinks that most large fleets are generally very well-managed and that aging truck fleets will have a huge impact on new equipment demand.
“The small guys will be disproportionately impacted. Cash flow and asset purchases will be more difficult as credit lines become stricter, become smaller or simply not available. Larger fleets on the other hand will continue to have access to capital, though for them it may cost more to get less,” he said.
FTR Associates president, Eric Starks, thinks that 2009 will be a tough year for truck dealers.
“You buy a truck, a trailer or a rail car for one reason:because you have freight to move. If you don’t have freight to move, you don’t buy the equipment, it’s pretty much that easy.”
On a more optimistic note, he added: “But the upside is that if the recession is not too long, some fleets might do some pre-buy in 2009 to avoid EPA2010. But it’s gonna be tough to do so because of the credit environment.”He concluded by saying: “There are good years to come. If people can get through this time, then they can make good money beyond 2010.”
OTA survey confirms US trends
It’s important to remember that FTR Associates is an American company and that it prepares its forecasts from a US perspective. That being said, a recent survey conducted by the Ontario Trucking Association (OTA) -among 90 carriers of all sizes, from 10 or less power units to more than 250 -seems to confirm that Canada’s trucking industry is living a very similar reality. The survey -for the entire results, contact OTA at www.ontruck.org– indicates that 24% of respondents are generally optimistic, 34% are pessimistic and 41% are unsure about the economical environment. The good news is that 90% of them say that their customers are paying a reasonable fuel surcharge.
Sixteen per cent of the surveyed carriers think that over the next six months, freight volumes southbound will improve, while 26% think the same way about northbound US freight. The more pessimistic carriers feel that these volumes will decrease by 52% and 28% respectively. Back to equipment buying (and financing), 20% say they plan to buy more tractors in the next three months, 21% of them also want to increase the number of trailers in their fleet within the same period. But it might not be easy, as 72% say they feel that credit is tightening.
Access to capital
When speaking to companies such as Volvo Financial Services, Mack Financial Services, Paccar Financial, Navistar Financial or Daimler Truck Financial, one notices that some of them are walking on eggshells when discussing the credit crisis’ impacts on their own operations.
And it’s quite understandable as, like in all markets, consumer confidence is key.
When Truck News asked if credit availability was an issue for Paccar Financial, Robin Easton, Paccar treasurer and spokesman replied: “Paccar’s excellent AA-credit rating helps the financial services business to consistently access the capital markets for its funding needs.”
Commenting on the situation on behalf of Volvo Financial Services, Jim McNamara told us that “In general, obtaining financing to purchase trucks has been a challenge for some customers, particularly new businesses.
“But Volvo Trucks is still in a position to offer financing to customers with strong credit profiles through our captive finance arm, Volvo Financial Services. And our offerings in this regard are comprehensive and competitive. Volvo Financial Services’ finance policies are comparable for the US and Canadian markets. It maintains a consistent approach to lending and leasing throughout a business cycle which allows VFS to remain active during the current period. Also VFS’s rates are comparable to other lending sources in the Canadian market.”
McNamara added that “VFS does not take unwarranted risks to foster sales, and it remains in a position to offer financing to customers with strong credit profiles. As always, Volvo Financial Services continues to exercise due diligence throughout its US and Canadian financing operations.”
Yet, Volvo’s sister company, Mack, has been very aggressive on the financing front and “sales fostering,” announcing three different packages from Mack Financial Services to incite US customers to buy or lease Mack trucks through its in-house financial arm.
Many may not know this, but Canadians who buy International trucks get financing through GE Capital. But south of the border, customers are taken care of by Navistar Financial, whose vice-president, CFO and treasurer Bill McMenamin, said about GE’s approach in Canada: “GE has always been very supportive of our dealers and customers in providing the financing to help them be successful.” About the US market, he said “Navistar Financial continues to have access to capital to help finance our dealers and customers. We have recently completed two important deals: the early renewal of our $800 million dealer floor plan funding facility; and the extension of our $100 million retail accounts conduit funding facility. We were able to obtain this funding because our expertise in the transportation industry has built the trust of our lenders.
“We’ve been doing this for nearly 60 years, and we know our industry inside and out. This expertise allows us to make sound credit decisions and to maintain the strong portfolio performance our banks require. That said, accessing liquidity is never easy -nor should it be. Regardless of market conditions, we always undergo a rigorous due diligence process to prove ourselves credit-worthy to our lenders.”
Higher interest rates
Our understanding of McMenamin’s answer to Truck News’ question is that, yes, credit is available, bu
t prepare to pay higher interest rates. He confirmed this.
“Yes, the cost of funding has risen dramatically across the board. Like all lenders, we need to achieve a profitability threshold to ensure our continued access to capital, and that means pricing our rates in line with the marketplace. So, yes, as the cost of financing increases for all companies, we are going to need to share some of the increase with our dealers and customers.”
But the good news is that Navistar Financial is going to offset some of the impact.
“We are in business to help dealers and customers purchase International trucks, and we always consider absorbing as much as possible of the fees we are charged, regardless of market conditions. But at the same time, our lenders have always required us to strike a balance between supporting sales and maintaining profitability,” said McMenamin.
We heard similar comments from Steven E. Goodale, vice-president of credit at Daimler Truck Financial.
“As the captive finance company supporting the sales of Daimler Trucks North America, we support our manufacturing partners, our dealers and our customers for the long haul, in good times and in difficult times such as we are experiencing now. Obviously, the current economic situation affects Daimler Truck Financial as well, but we continue to support our dealers and our customers.”
And when asked about a potential increase of interest rates for Daimler Trucks’ customers, he added that dealers and customers should not be overly impacted.
“We need to strike a balance that supports our dealers and customers during this time of volatility in the credit markets. The volatility has its costs, but we have taken the position not to pass on the cost of the volatility to our dealers and customers because we are partners for the long haul.”
But what about financing criteria? Daimler Truck Financial claimed, “We continue to buy deals that meet our lending criteria. We have seen more challenges with owner/operators and small fleets because of a decrease in revenue. We evaluate the ability of the customer to make payments. Many lenders have exited the owner/operator segment because of the economy.”
On the subject of tightening the financing criteria, especially for owner/ operators and smaller fleets, Navistar Financial’s spokesperson said that it will not occur in the immediate future.
“The criteria we’ve been using to make credit decisions remains effective, as evidenced by appropriate levels of repossessions and losses within our portfolios. Our credit parameters remain about the same, but interest rates have risen as we have been forced to pass on our higher borrowing costs to our end customers.”
Underlining that Daimler Truck Financial has been in business for many years, Goodale offered a comparable answer when discussing credit criteria.
“We look at credit-worthiness, the ability to pay, and cash flow. There have been no fundamental changes in our credit positioning. We are in the market for the long-term.”
For most companies we spoke to, the financing strategies (interest rates, exposure to risk, etc.) are no different in Canada than in the US. So, cash or credit? If you picked credit, prepare to pay more cash for it. •