Returning to Credit Basics: Conditions

In late 2006, being a California-based truck lender, I jumped with both feet into a swimming pool of sharks and started funding trucks that were part of a localized grant program.

The economics of the situation seemed to make perfect sense. The owner operators were receiving up to a 40% government grant towards the purchase of a newer truck that was 2004 emissions compliant and used a majority of the time in drainage operations at one of the ports.

This program went very well, at first. 

It was shortly after this in 2008 that the California air resources board announced that they were accelerating the compliance timetable and would soon require 2007 emission compliant vehicles in order to operate within the state. 

To make a situation even worse, the local ports accelerated their timeline even more aggressively.

The market conditions of this transaction had changed and as my customers realized that the vehicles that they were paying on, and would still be paying on for another three years, would no longer be compliant or be able to be used for their intended purpose, I began taking extraordinary losses.

These losses were caused by two main conditional factors.

• First, the trucks could no longer be operated for their intended purpose.
• Secondly, it is now difficult to re-market these assets after repossession because they did not meet the emission guidelines required by the current market conditions.

I had to swiftly modify our credit criteria and business model in order to accommodate the effects that the California air resources board had now made to our market.

Now when reviewing a transaction, especially in California, we ensure that the truck meets these environmental guidelines.

Market conditions affect not only collateral values but can have a negative impact upon the companies that we are leasing to.

The owner operators that I had financed had no intention of defaulting. However, when it they were unable to use their collateral for the intended purpose, they could no longer generate enough income to make their truck payment, causing a default.

This default was then made worse as the vehicle they were financing dropped in value had a far accelerated rate, due to its noncompliance. This caused greater losses as it was far more difficult to re-market these trucks because they were no longer in demand. This eventually caused many of my customers to seek bankruptcy protection because they could not pay the high remaining balances owed after their default.

On a brighter note, now California is offering incentive programs to customers purchasing compliant equipment and has set out a relatively stable compliance timetable. 

This timetable has allowed us to determine lifecycle of each asset that we are financing and in conjunction with the California grants has made the current market conditions favorable to those who are aware and know how to navigate through the environmental compliance process.

This example shows how important market conditions are to ensuring a successful transaction and explains further as to why financial institutions have become very specialized in the equipment that they are willing to include in their portfolio.

Any financial institution that is unable to navigate this compliance maze would find it very difficult to do business in the state of California.

From a customer's point of view, this shows that if you are seeking transportation financing that you should seek it from a finance source that specializes in your industry.

Thanks,

John