COVID-19 – The impact on equipment operators, lessors and values
As a result of the COVID-19 pandemic, lessors are responding to “a deluge of requests” for payment holidays. Whilst all sectors are experiencing problems coach operators and equipment rental organisations are identified as being particularly at risk as they are more highly geared to asset finance.
The coach industry is seasonal starting at Easter and given the geographic spread of the travel lockdown and the closure of schools, it is no surprise the sector is one of the worst hit with operators like TJ Walsh and Reay’s already announcing plans to close. There is some good news for the bus sector as government announces financial assistance until the end of June, on the proviso routes and social distancing is maintained.
The vehicle and equipment rental industry, covering a wide range of industries from cars and LCVs, construction plant and event equipment to manufacturing has not been identified for any additional support. Whilst rental companies technically remain open for business the phone is “only ringing to cancel orders” as major events including the Olympics, Glastonbury and Wimbledon are postponed leaving costly equipment lying idle.
Apart from haemorrhaging rental income, additional costs will be incurred by operators to store unutilised assets, maintaining social distancing to manage assets and deal with fractured supply chains for parts and equipment delivery.
The wider equipment leasing industry has responded positively in supporting customers through the crisis thus far with payment holidays however, this creates additional problems for other customers with fewer new credit applications being accepted. As customer problems are evident, some lessors may also need to balance an increasingly distressed book and new lending with their own banking covenants.
The temporary lack of confidence has hit many markets and the values of machinery and equipment assets is no exception, impacting upon lessors as residual values fall if agreement terms are pushed out much longer than 3-months as a result of an expended pandemic.
For those having to sell assets, expect to endure logistical problems in selling equipment and to see less demand and lower realisations in the short term as end-user buyer activity reduces and dealers price risk in this pandemic risk. We know from the 2009 crash that many equipment lessors took to the market and suffered losses trying to appeal to a falling market. This environment is not an economic recession, yet, and given an end to this pandemic soon, expect to see a quicker recovery.
So hold onto assets and review strategy after 3-months to better understand how markets may perform given a longer pandemic. Some good news again evidenced from the 2009 crash, as OEMs furlough operations, supply chains will take time to re-start and during this period used equipment prices can achieve a premium as they jump the delivery queue.
Interestingly, in the longer term will COVID-19 provide any positive or negative market considerations? Will ‘working from home’ become the norm for many, increasing demand for IT and comms and a reduction in demand for transportation and offices? For now, sit tight, keep safe and stay at home.
Author: Tim Chapman, director, Hickman Shearer