Keeping a pulse on the equipment quality, movement, and activity helps you head off and plan for any trends or issues that might be emerging within the collateral base. In different economic climates various risks emerge that can be mitigated via close monitoring and communications with the client. These key monitoring areas can be seen below:
- Equipment Maintenance
- Capital Expenditure
- Market Tracking
In tracking these it’s important to understand the company’s data and operations management systems, establish a clear line of reporting on a monthly basis, and know the context and impact of the data you might request and review.
Equipment Maintenance: Maintaining Quality
The condition and quality of the fleet is a key driver in the salability and value of the collateral. In times of uncertainty and business challenges companies often identify maintenance as an area to save and improve cashflow. Decreased maintenance might reduce cash availability downstream as appraisal inspections are conducted. Lenders should consider tracking:
• How has the maintenance spend been tracking?
• What is the volume of down units on a month to month basis, what’s the average down time?
• Are the assets still being maintained in accordance with OEM standards?
Answering these questions should provide certainty that the collateral quality has not deteriorated. Should there be any issues an additional inspection might be discussed to check the physical condition of the assets.
Utilization: Collateral Performance
Lenders are rightfully monitoring cashflow on a month-to-month basis. However, this singular view might not provide the complete story on how this figure might shifting each month. Observing utilization can better help understand seasonality, cashflow trends, and returns on the different types of collateral the company owns.
When looking at construction equipment and rental / dealer operations there are a couple key metrics which should be considered: physical utilization and financial utilization. A clear handle on both of these should help in both understanding variability in cashflow and how that might be trending on a future basis.
CAPEX: Changing Fleet Composition
As companies make investments and manage their equipment base the expenditures in fleet investment will naturally be tied to the borrowing availability at any point in time. As expenditures slow the company will likely be faced with a reduced credit facility in the next appraisal. Likewise, when companies invest in asset types divergent from their core the availability on those assets may be more or less than what they might forecast. Understanding the potential value on these should reduce friction as these come into the facility and companies can understand the cash output they might need.
Lastly, lenders should be aware and keep an eye on key market drivers that might impact end markets in which their collateral is utilized. Most recently, the decline in oil prices has impacted key segments of the construction equipment market such as mobile cranes. Independently, COVID-19 has driven underperformance in the secondary market across equipment types in drastic ways over the past few weeks. Regular communication around these with your appraiser will enable better modeling and prediction in collateral values in between appraisals.
A comprehensive collateral monitoring approach is key as it reduces any potential looming risks that might only be picked up in the appraisal and keeps lenders and borrowers eye-to-eye.
This concludes the series on ‘ABL Guidance for Construction Equipment.’ Hopefully, this will provide more tools and strategies for managing your Asset Based Lending business and for engaging with your customers.
COVID-19 has driven a high level of uncertainty in the market as the estimated end point is unknown and economic implications are changing on a day to day basis. Rouse has been tracking this in detail and can provide a more complete overview of this were beneficial.
For further information or discussion feel free to contact Raffi Aharonian (Raffi.Aharonian@rouseservices.com) or Jacob McCarthy (Jacob.McCarthy@rouseservices.com).