How important is LTV in today's truck finance market?

How important is LTV in today's truck finance market?
I would answer; it depends on the borrower’s credit.

I have been accused of being overly conservative when it comes to valuing collateral and I've been told that because of my sub-prime experience that I place far too much weight on the value collateral while reviewing a transaction. This may be true; however, my retort would be; "is the credit really as good as you think it is?"

I have now been a part of several transactions in which a customer's credit was ranked far stronger than it really was by an internal credit Department. It is my assumption, that this is due to the current economic environment that we find ourselves in and due to pressure from sales management and staff.

In today's economic environment, it appears that good credit deals are becoming far and few between and therefore, I believe unwittingly, most of my clients have started relaxing some of the credit standards in order to drive volume. A transaction that would've been thoroughly reviewed and considered a solid C credit is now passing is a B credit and structured accordingly.

It is my belief that this is extremely shortsighted and will create portfolio issues and an increase in delinquency in the near future,explaining my weight on loan-to-value ratios.I believe that the industry is fooling itself into thinking that we, as an industry, are accepting “top-tier credits” when in reality three years ago, these transactions would have been considered run-of-the-mill.It is also my belief that there will be a freight slow down due to low customer demand, and a change to “just-in-time ordering “by most retail outlets.

We have already seen this as freight demand has become more sporadic. One week, you are having trouble finding enough trucks to move your freight, and the second week you're having a hard time finding a back-haul for that original load that seemed all too urgent at the time.

I've also seen this in my personal life as I have been steered more towards smaller online purchases by the retailers. Most of these retail stores  are now offering free shipping on these orders, because the merchant no longer carries that item in their store due to the increase in overhead costs.

Think about it.

FedEx and UPS and other small package shippers are showing increasing revenues, and this trend is continuing. What does that leave for the LTL carrier or the truckload carrier?

I don't have a crystal ball, but the trucking industry will need to adapt to these supply line changes and this adaptation will change the economic business model of the midsize trucking company.

If your main customer is that midsize trucking company, that three years ago would have been a middle tier credit, why are we treating them like top-tier customers? Why are we all of a sudden not paying attention to the collateral values on the transaction? Why are we pricing these deals at such a thin margin?

Is your leasing company relaxing credit standards and structure requirements in order to drive volume?

Will these trucking companies still be strong if the market profile changes?

I am really curious, as I see this becoming a trend which I, personally don't see is healthy. But, it appears that I am in the minority.

Are my concerns unjustified?

What are your thoughts?

In two years, I will look back and read this blog (and hopefully, comments) and let you know.

Enjoy your favorite beverage and ride the wave.

John