LTV- Does it even Matter?

In the truck leasing industry right now, everybody seems concerned about collateral values. 

Leasing companies are trying to scramble all over themselves to determine what projected depreciation rates are for each specific collateral type. I know, because I have done this and as I was preparing my collateral evaluation tool, a thought occurred to me (which happens occasionally). 

How do we know that these values are accurate?

• Are we basing our values off auction (Repo) results? If we are, then that tells us what collateral is worth today but doesn't tell us what it will be worth throughout the life of the loan or lease.
• Are we using a NADA? How are we sure that their values are accurate? Are we using the correct regions? What is the reliability of their data?
• Are you using the black book? How often is that updated?

All of these tools are extremely valuable when used properly, however each one of these tools has a fatal limitation as neither of these tools can predict what our collateral will be worth in the future.

(I'm not sure if there is any product I can do this with any type of reasonable accuracy, and if there is I would like somebody to comment and let me know where I can purchase this information).

In my opinion, as collateral values become harder and harder to determine, we must take one of two avenues of self-defense. 

• The first option is to tighten our current credit standards. It is obvious but sometimes neglected in our decision-making that the better the credit profile, the lower the risk. (Yes, the Sky is blue)

• The second Avenue would be a return to risk based pricing. This increase in market rate will allow leasing and finance companies to store up sufficient loss reserves in order to mitigate any further economic deterioration or reduction in collateral values. (Why are we letting the market drive down our yields?)

Of course, there is a third option and that is to keep doing what we're doing. I don't necessarily see this is successful. There are banks that are financing transportation equipment at far below market rates in order to increase the size of their portfolios. I'm not exactly sure that they know what they are getting into, and this market aggressiveness is setting customer expectations and driving down yields across the board. Again, in my opinion, I don't see this as sustainable as sooner or later losses due to market unawareness and collateral ignorance will drive them out of the market.

On a bright note, I am reasonably certain that collateral values will stabilize as manufacturers adapt their technology to meet new emission requirements. We have already seen an increased demand in 2011 engines, as they considered far more reliable than their 2010 counterparts.

I am also reasonably certain that we will see a decrease in the popularity of “retrofitting” older engines with emissions control devices in order to meet the new guidelines. The reason for this is very practical. The retrofits are not popular among their users because, in the user's opinion, they are shortening the life of the engines and often causing further mechanical complications.

All in all, who knows exactly what the future will bring but I do know that the transportation industry has always bounced back. And for those who are aware and educated, the transportation market remains to be a profitable business segment.

Thank you for taking the time to read my humble blog.