Lenders say they’re open for business

by Ingrid Phaneuf

TORONTO, Ont. –When it comes to access to credit in the wake of the economic downturn, the good news is it’s slowly becoming more accessible. The bad news is, it’s only becoming more accessible for larger carriers who have already managed to weather the storm.

“Is access to credit getting easier?” asks Vince Piccolo, vice-president of sales at CIT Financial, which specializes in lending to O/Os. “From our point of view, the answer is no.” Repos may be slowing down but they’re still happening he says. “We do our best to try to avoid them so that our clients can keep on operating, but we’re still not seeing any considerable improvement in the market,” Piccolo says.

Piccolo blames downward pressure on rates and the shift to east-west routing from cross-border traffic for decimating Canadian O/Os in recent months. “It’s been really hard on the little guys,” he says, adding dry van truckers have been hit the hardest, while flatbed and reefer operators are doing marginally better. “There aren’t a lot of reefers or flatbeds on the market so they’re more in demand for freight,” he says.

CIT is really only taking new business from carriers who’ve been in business for at least five years, adds Piccolo.

“Our criteria hasn’t changed, we’re still taking 10% down from owner/operators we feel good about, and offering them the same interest rates, depending on how reliable they are.”

Still, Piccolo does hope to see overall economic improvement for the trucking industry in the next year or so, something that lenders who deal with larger carriers are already eagerly anticipating.

In fact, GE Capital has already geared up for new business, by becoming Navistar’s preferred provider of retail financing for trucks and buses in the US (GE Capital has held the same status in Canada since 1986). The company’s new financing relationship, announced March 9, is a clear indication that the economic tide is turning.

“Rate volatility has stabilized and we are cautiously optimistic about the Canadian economy going into the spring,” says Patrick Palerme, president and CEO of GE Capital Canada. “It is trending the right way.”

Credit is available and it’s business as usual at GE Capital, Palerme says, as long as carriers can show they’ve made the right decisions during recent hard times.

“We haven’t changed our underwriting criteria,” he adds. Still, carriers who come shopping for a loan may find themselves being scrutinized slightly more thoroughly than in better times.

“Because we have observed a significant deterioration of companies’ balance sheets as a consequence of the poor economic conditions, we are now asking for more information that will help us reveal trends in financial stability and stable operations,” says Palerme. “For example, even if over 36 months there is an indication of a downward trend, there may be more information that will show that the right actions were taken that will point towards a reasonable forecast of an upward trend and, in such a way, assure creditworthiness.”

Companies may be asked about their latest financial trends, not just annual, but quarterly and monthly, their operations and cash flow (ie. fuel surcharges, accessorial charges for wait times, etc.) and about their business plans.

“We want to see whether the results match their projections, to get a good feel for the company and how it is performing through the current cycle,” says Palerme.

When it comes to lending, Daimler Truck Financial execs are also cautiously optimistic.

“Recovery is slow, and we expect it to remain so throughout 2010,” says managing director, Ian Loveless. “So credit crunch wise, yes, things are slowly getting better.” But Loveless also insists that the company’s lending criteria has not changed throughout the crisis. “We are part of the Daimler Group and as such we have a responsibility to support our dealers and customers, so through the last two years, where we’ve been able to find fundamentals, we’ve continued to lend.”

Basic fundamentals include regularly-maintained balance sheets, good operating ratios and working capital.

“For companies with good track records and good plans, and for fleets who’ve been addressing their issues and needs and have strong balance sheets there’s no need to cut back on our lending practices. The same goes for O/Os. As long as they’ve been keeping up with their payment requirements, we have no reason to alter our standard practices,” says Loveless.

Still, repossession rates have been higher of late, Loveless admits. “But it’s the same situation as in the 2000s, where the industry hit a bump in the road. Our activities are not out of the norm for a cyclical type of business such as trucking.”

When it comes to O/Os, Daimler Financial assesses each operator according to his or her own merits, says Loveless.

“We’re typically not into lending for a high-risk deal,” says Loveless. “We don’t typically charge a higher rate or ask for a larger down payment in order to be able put a deal together.” That said, Loveless says he’s seen the O/O market shrink in Canada. “The customers we’re seeing have come through tough times, weathered the storm and are still a fairly good risk.”

The issue is still overcapacity, he adds. “Sales are down and that’s because of excess capacity that still exists today. It’s also resulted in smaller companies being shuffled out of the business. There’s just not the demand to support them.”

Indeed, the Ontario Trucking Association reported at the end of last year that 34% of carriers suffered freight volume losses of 20% or more in 2009. And as far as purchasing equipment goes, OTA reports 64% of fleets say they will not change their net number of tractors or trailers, while 26% say they’ll add tractors and 29% say they’ll be buying trailers. OTA says those numbers are improvements over previous surveys.

Still, some lenders are already looking forward to the recovery. Multiple mergers may be just around the corner as the economy picks up and capacity starts to diminish, points out Elian Turner, director of investment banking for Scotia Capital.

“What people don’t realize is that through 2009, banks were in contraction mode, but now that they’ve done their housekeeping, they’re looking to grow their assets and lending books. Banks are looking for good companies to invest in and there is no reason to preclude trucking when it comes to mergers and acquisitions.” Still, Turner admits he is not yet seeing many new deals coming up in the trucking sector.

“Clearly, there is still a capacity issue,” says Turner. “But things are getting better. While many carriers were parking trucks during the last 12 or 15 months, we haven’t seen as many bankruptcies as had been envisioned of late. But there still isn’t any reason for people to purchase new equipment when it comes to general freight.”

But Turner expects to see an earlier recovery in some areas of the industry, specifically by carriers who’ve weathered the storm and are looking to ride the next wave.

“We will start seeing a greater meeting of minds between buyers and sellers, a number of owners of businesses probably realize they’ve left a lot of value on the table,” says Turner.

“We had tremendous value creation over the last decade with companies benefiting from strong volumes and strong rates. Earnings were high and so were valuations because private equity firms had money invested in the income trust sector. A lot of owners who consolidated and held during the last 12 months are now asking themselves how long it will be until they return to those potential peak valuations? They’re asking themselves what their earnings will have to look like?”

Mergers and acquisitions in the trucking industry certainly haven’t been happening in the last 12 months and won’t be happening anytime soon, says Turner. But Turner is still looking forward to the next upswing, where he expects a renewed confidence for buyers and financiers alike.

In the
meantime, here’s what you can do to get credit now:

1) Diversify your sources to mitigate risk and benefit from the specialization and/or expertise of your lender.

2) Know what your needs are for the year, and on a quarterly basis.

3) Sit down with your financial partners early on to discuss your financing needs and set up a pre-approved line of credit.

4) Reassess your needs on a quarterly basis.

5) Stay in communication with your financial partners and don’t hesitate to ask them about financial solutions.

6) Have a business plan and discuss it, along with your financing needs, with your financial partner.

7) Tell your lender about your projections and your results.

8) Show how trends in your operations indicate that you have control over your operations and you have an understanding of the business environment you are operating in.

9) Be proactive.

10) Always have your financial statements in order and auditable if not already audited.

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