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Key Decisions Ahead in the Transportation and Logistics Industry

Date: Jul 22, 2021 @ 05:00 AM
Filed Under: Industry Trends

The last 15 months have seen unprecedented changes in the asset-based lending and credit markets due to the COVID-19 pandemic. As a result, lenders, credit institutions, the government and investors were put on the defensive and needed to bridge, buy time or simply amend and extend into 2021. As businesses recover further in 2021, there is an opportunity for the asset-based lending community to re-address the way they appraise, evaluate, monitor and make credit decisions for new opportunities and existing portfolio companies. Given the rapidly changing and evolving landscape, lenders should consider seeking the services of professionals in the industry for real-time, market and transaction data-driven advice, specifically when making decisions to either extend and support a troubled credit or move to protect and monetize their collateral.

To illustrate the landscape described above, take for example the Transportation Industry and many of its sub-sectors. Much like many other industries in 2021, the prolonged delay in new delivery from OEMs coupled with growing demand for services in the sector has continued to drive used pricing and recovery values to unprecedented levels in some areas. In our dealings and conversations with clients, customers and dealers, many cannot recall a time in their career where used pricing was so high. This, of course, can be welcome news to lenders seeking to monetize collateral in the near-term, be it through private sale or auction. However, the market will certainly change in the coming quarters as new deliveries inch closer and dealers and buyers shift their focus away from used. Monitoring this shift, in addition to taking into consideration inflated pricing while evaluating new credit opportunities, will be critical for lenders and investors over the next six to 12 months.

If we take a look at three distinct sectors within the Transportation industry – Truck Tractors, Trailers (Reefer or Dry Van) and Motorcoach – we observe some similarities and a few differences when analyzing industry demand and pricing. While the first two have seen huge increases in demand and pricing, the Motorcoach industry has suffered tremendously during the pandemic, so much that Congress passed the CERTS Act providing $2 billion in relief to bus, motorcoach and passenger vessel companies throughout the country. Lenders across these three industry segments can take actions to improve their underwriting methodologies and collateral monitoring practices.

The market for used truck tractors – over the road, day cabs, sleepers, heavy haul, oilfield specific – has possibly never been stronger than it is today. On average, we are seeing year-over-year value increases of 30 percent to 40 percent on like units. Operators and end users, especially smaller scale businesses, do not (and will not for some time) have a direct line into the OEMs like some major fleet owners do and are forced to be creative and/or pay above normal market prices for good used trucks. Many buyers are having such a hard time finding trucks that they will drop down into truck categories or specs that do not traditionally make sense. For example, we have observed purchases of heavier spec oilfield trucks being purchased and slightly modified for over the road use, which is of course not ideal from a MPG standpoint. All of this activity has resulted in limited used inventory available and continued price increases. Lenders should move to monetize collateral in its possession now in advance of a shift in new/used availability. Additionally, we are advising clients to carefully consider appraised values while evaluating new credit opportunities today as residual values may be misaligned several years from now based on a normalized pricing environment.

The market for used trailers, particularly dry van trailers, is incredibly strong today. It has been commonplace for lenders or investors in possession of end-of-lease trailers to sell units for more than the original amount financed. Auction and private sale pricing remains very strong across almost all OEM models including older trailers dating back to 2011. The continued boom in the US economy and corresponding consumer demand, coupled with the behavioral consumer shift to increased online shopping, has fueled unprecedented demand for logistics and delivery services. Like the truck market, new trailer delivery timelines continue to push out well into 2022 for all sizes of fleet owners. As large fleet operators bring in end-of-cycle trailers, they have customers lined up ready to take as many as they can at continuously increased pricing. Again, lenders or investors need to carefully consider deploying medium to long-term capital in what is likely a more short-term pricing environment. Demand for services will likely only continue to grow, but fleet availability and pricing will have material impacts on collateral value over time.

As highlighted above, the Motorcoach and general tourism industry were decimated in 2020 and early 2021 due to the pandemic. Demand and pricing for used inventory plummeted and remains soft, even as federal and state guidelines have eased in recent months. For lenders with exposure to this segment, the value-maximizing move has been to corral, protect and service the collateral that its customers cannot continue to make payments on as their businesses have suffered, rather than fire sale collateral to opportunistic buyers or via auction. Patience and a carefully crafted long-term service and remarketing plan will yield vastly improved recovery values as the industry rebounds. For lenders who continue to monitor collateral remaining with its customer base, regularly scheduled inspections and maintenance will prove critical to maintaining the health of the asset base. Customers benefiting from the CERTS Act will enjoy a well-deserved breath of relief, and as the tourism industry continues to recover in the months ahead, return to providing critical transportation services to our schools, businesses and citizens across the Nation.

In summary, asset-based lenders and investors with current or future portfolio exposure to the Transportation sector, depending on the sub-sector, should carefully monitor their collateral as opportunities arise to monetize now versus in the future, or as opportunities arise to finance or re-finance customers over timeframes extending beyond the expected normalization of used inventory demand and pricing.

Photos of Jim Lightburn and Kyle Asher of Nations Capital, Inc interviewed by ABL Advisor

Jim Lightburn and Jim Burke
Nations Capital, Inc.
Jim Lightburn is President at Nations Capital, Inc. He has spent over 20 years in the Commercial, Industrial & Retail distressed investing, liquidation and restructuring space. He works with clients to design and implement comprehensive, global solutions across a broad spectrum of asset classes. He has held senior level leadership positions where he has managed all aspects of large commercial and industrial engagements including due diligence, financial modeling, operations, legal negotiations, business development and marketing. He has expertise in wholesale inventory, machinery and equipment, intellectual property, and accounts receivable.

Jim Burke is Executive Vice President at Nations Capital, Inc. He has spent over 13 years in the distressed investing and restructuring industry, primarily focusing on the commercial and industrial sector. His expertise spans a wide range of industries including construction, oil and gas, transportation, mining, aerospace, motor sports, textiles and consumer products. He has overseen business development, deal structure, negotiation and execution for investments within various structures including M&A, bankruptcy, receivership, ABCs and private sale. He is also responsible for developing key corporate partnerships over the course of his career.
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