Fall 2018 • volume 6 • issue 3 | www.canadianequipmentfinance.com
Will the USMCA grow the Canadian market? CFLA REPORT: M&E market to strengthen MARKET REPORT: Auto sector strong but facing challenges LEGAL/REGULATORY: How to benefit from Construction Act changes
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contents Fall 2018 Volume 6 Number 3 Publisher and Editor-in-Chief Steve Lloyd steve@canadianequipmentfinance.com Editor Brendan Read brendan@canadianequipmentfinance.com
CFLA REPORT: M&E market to strengthen: CMO report »4
NEWS »6
Creative Direction / Production Jennifer O’Neill jennifer@canadianequipmentfinance.com
FEATURE
Photographer Gary Tannyan
USMCA removes uncertainty
Advertising Sales Mark Henry mark@canadianequipmentfinance.com For subscription, circulation and change of address information, contact
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New trade agreement generally positive for auto industry »12 More stability but investment still lacklustre: C.D. Howe Institute »14
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DM Magazine www.dmn.ca Financial operations www.financialoperations.ca
Market Report Auto sector strong but facing challenges: DBRS »15
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Auto firms focusing on new services: Frost & Sullivan »16
Legal/Regulatory
Management Strategy
How to benefit from Construction Act changes »17
Why small businesses go online for equipment finance »21
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canadianequipmentfinance.com | Fall 2018 | CANADIAN EQUIPMENT FINANCE
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CFLA Report
M&E market to strengthen: CMO report By Brendan Read
ropelled by a stronger economy, the Canadian machinery and equipment (M&E) market is expected to strengthen significantly from 2018 into 2019, according to the soon to be released 2017-2018 Canadian Market Overview (CMO) report from the Canadian Finance and Leasing Association (CFLA). All asset finance market segments are projected to grow at three per cent overall in 2018, said the CMO, which has been prepared for the CFLA by Quantitative Economic Decisions, Inc. (QEDinc). But M&E spending is leading the charge with four per cent growth, followed by commercial and consumer retail vehicle markets at just under three per cent. While the general economy performed well in 2017, financed M&E spending has risen what the CMO said was a “disappointing” 1.4 per cent. Meanwhile motor vehicle sales set new records leading to an increase in all new assets financed of 5.3 per cent to $122 billion for a total of $402 billion in assets financed. The value of new M&E, excluding commercial vehicles, financed in 2017
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Source: Statistics Canada, Quantitative Economic Decisions, Inc., DesRosiers Automotive Consultants
was $20 billion, up marginally from $19.9 billion in 2016. Meanwhile the value of commercial or fleet vehicles financed was $13.2 billion, up from $12.5 billion and the value of consumer or retail vehicles was $94.8 billion, up from $89.2 billion. The value of new assets financed in 2017 is estimated to be $128 billion, up from $122 billion in 2016; the total value
Table 1 - Asset-based Finance Market in Canada Millions of Dollars 2017 2016
Total Finance Assets Machinery & Equipment Market Fleet Vehicle Market Retail Vehicle Market Equipment & Commercial Vehicles Total Vehicle Market
401,537 75,922 39,827 285,788 115,748 325,615
378,923 77,103 36,219 265,602 113,321 301,820
6.0% -1.5% 10.0% 7.6% 2.1% 7.9%
5.7% -3.7% 11.9% 8.0% 0.7% 8.4%
Total New Business Machinery & Equipment Market Fleet Vehicle Market Consumer Vehicle Market Equipment & Commercial Vehicles Total Vehicle Market
128,074 20,044 13,230 94,800 33,274 108,030
121,597 19,887 12,510 89,200 32,397 101,710
5.3% 0.8% 5.8% 6.3% 2.7% 6.2%
2.6% -16.4% 7.9% 7.2% -8.4% 7.3%
Source: Canadian Finance and Leasing Association, DesRosiers Automotive Consultants Inc.
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% Growth 2017 2016
CANADIAN EQUIPMENT FINANCE | Fall 2018 | canadianequipmentfinance.com
of assets financed in Canada is $402 billion, said the CMO (see Table 1).
Asset, province and sector trends Statistics Canada’s national accounts expenditure data reports a 7.6 per cent increase in M&E spending for the first half of 2018 relative to the same period last year, suggesting, said the CMO, “that spending could be stronger than anticipated by survey respondents earlier in the year”. The Statistics Canada survey of public and private investment intentions for 2018 anticipates a 3.5 per cent or $2.8 billion rise in public and private M&E capital spending this year following a 1.4 per cent increase in 2017. The CMO report provides a chart that shows the determinants of assetbased finance market growth since 1992 along with their outlook for 2018 and 2019. The 2019 forecast is derived from QEDinc’s Summer 2018 forecast. The M&E investment data is from Statistics Canada’s public and private investment survey and includes its outlook for 2018.
CFLA Report DesRosiers Automotive Consultants anticipates a softer market for light vehicles in 2018 and 2019. It said the recent sales growth far exceeds the rise in the driving age population, thereby leaving the sector vulnerable to a shift in
It remains to be seen whether the recent increase in interest rates will dampen new capital spending over the remainder of the year, said the CMO. New motor vehicle sales have set new records over the last few years, but
Table 2 - Public & Private Spending on New Machinery & Equipment
Millions of Dollars 2018 F 2017
Canada Atlantic Provinces Quebec Ontario Manitoba Saskatchewan Alberta British Columbia
83,372 4,600 14,608 31,330 2,757 4,297 13,796 11,296
% Growth 2018 F 2017
80,552 4,625 13,775 29,865 2,875 4,582 13,830 10,463
3.5% -0.5% 6.1% 4.9% -4.1% -6.2% -0.2% 8.0%
1.4% 1.0% 8.1% 4.8% -12.7% 7.2% -9.8% 2.8%
Source: Statistics Canada (Table 34-10-0035-01)
Table 3 - Public & Private Spending on New Machinery & Equipment by NAICS Sector
Millions of Dollars 2018 F 2017
% Growth 2018 F 2017
All Industries Agriculture, forestry, fishing & hunting Mining, quarrying & oil and gas extraction Utilities Construction Manufacturing Wholesale trade Retail trade Transportation & warehousing Information & cultural industries Finance & insurance Real estate, rental & leasing Professional, scientific & technical services Management of companies & enterprises Administrative & support, waste management Educational services Health care & social assistance Arts, entertainment & recreation Accommodation & food services Other services (except public administration) Public administration
83,372 4,073 4,576 6,302 5,377 12,521 2,377 2,977 11,519 5,524 2,413 8,809 1,751 215 1,270 1,809 3,008 648 1,291 520 6,395
3.5% -2.1% 10.3% 13.6% 0.1% 9.5% -3.1% 1.1% -5.4% 6.9% -11.1% 8.2% -4.1% -16.3% 24.1% -5.8% -4.7% 18.2% 5.7% 7.1% 9.2%
80,552 4,159 4,150 5,547 5,373 11,433 2,454 2,944 12,178 5,167 2,714 8,141 1,825 257 1,023 1,920 3,155 548 1,221 485 5,859
1.4% 1.9% -28.3% 2.7% 6.4% -4.7% 2.5% -3.3% 9.6% -2.2% 11.8% 4.8% -1.7% 34.7% -2.9% 7.2% 15.0% -28.4% -22.9% -31.6% 33.4%
Source: Statistics Canada (Table 34-10-0035-01)
Note: NAICS stands for North American Industry Classification System.
Table 4 - Canadian Asset-based Finance Market Penetration Rates
2017
2016
34,439 83,372 41%
33,274 80,552 41%
32,397 79,432 41%
Consumer Market New Motor Vehicle Sales (units) 1,652,473 Lease 641,000 Loan 886,000 Lease Penetration Rate 39% Finance Penetration Rate 92%
1,689,205 622,000 931,000 37% 92%
1,298,228 524,000 938,000 33% 91%
Equipment & Commercial Vehicles New Business Spending on New Machinery & Equipment Finance Penetration Rate
Source: CFLA, Statistics Canada, DesRosiers Automotive Consultants Inc.
2018 F
economic factors, such as rising interest rates. Growth in spending on new equipment varied across the country in 2017 (see Table 2) with strong gains in Quebec, Saskatchewan and Ontario being offset by declines in Manitoba and Alberta. Spending patterns are expected to shift slightly in 2017 with British Columbia making strong gains while Saskatchewan losses ground. On an industry basis the areas of strength include the public sector, health care and social assistance and finance and insurance (see Table 3). In 2018, the mining and oil and gas extraction sector is expected to rebound and strong growth is anticipated for the utilities and manufacturing sectors. Public sector spending is also expected to continue to expand as governments across the country continue spending to renew and expand public infrastructure. In turn the weakest sectors for public and private M&E spending in 2017 continued to be mining and oil and gas extraction along with arts, entertainment and recreation, accommodation and food services and other private services.
Market penetration rates Estimates of equipment and commercial vehicle new business activity in 2017 were generated using PMG Intelligence’s 2017 survey, CFLA/PayNet Canadian Equipment Lending Index, the CFLA’s membership information and from DesRosiers Automotive Consultants for the consumer and fleet vehicle markets. The finance penetration rate for equipment and commercial vehicles is derived as the share of new business in that segment divided by Statistics Canada’s public and private investment spending intentions survey. In 2017, the penetration rate remained unchanged from 2016 at 41 per cent and is expected to remain there in 2018 (see Table 4). The penetration rates for the consumer new motor vehicle sales segment are based on units sold (the dollar value ratios are very similar to those for the units)1.The value of new and used retail
Continued on page 20
canadianequipmentfinance.com | Fall 2018 | CANADIAN EQUIPMENT FINANCE
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News
U.S. equipment market strengthens: Foundation report Investment in equipment and software in the U.S. is projected to expand by 7.9 per cent in 2018, according to the Q4 update to the 2018 Equipment Leasing & Finance U.S. Economic Outlook by the Equipment Leasing & Finance Foundation, up from seven per cent forecasted in the Q3 Economic Outlook. Strong economic momentum should drive investment activity through the rest of the year, though certain industries appear to be peaking and may begin to weaken in the months ahead, said the report. Overall, the U.S. economy is expected to grow 2.9 per cent in 2018, unchanged from the most recent forecast and well above last year’s 2.2 per cent growth rate. The Foundation’s report, which is focused on the $1 trillion equipment leasing and finance industry, highlights key trends in equipment investment and places them in the context of the broader U.S. economic climate. “The equipment finance industry appears to be on sound footing with solid growth prospects in the months ahead,” said Jeffry D. Elliott, Foundation chairman and senior managing director of Huntington Equipment Finance. “Overall, investment in most equipment verticals should remain healthy through the remainder of 2018 and into early 2019.” Q4 report highlights Highlights from the report include: ◉◉ Capital spending has been solid to date this year. Business confidence levels are currently elevated, supported by strong fundamentals in the U.S. economy. This should translate into steady 6
expansion in equipment and software investment through the rest of the year; ◉◉ Credit market conditions remain healthy for Q4, with little change in supply or demand relative to Q3. Despite the late stage of the credit cycle and rising interest rates, financial stress decreased in the second quarter. The Federal Reserve is likely to raise its benchmark interest rate once more in 2018 for a total of four rate hikes over the year to curb inflationary pressures; and ◉◉ Overall, 2018 is likely to be a solid year for the U.S. economy and may approach 2015’s 2.9 per cent expansion as the best year for growth since the recession. The U.S. economy has continued to post strong gains throughout 2018, with positive contributions to the gross domestic product (GDP) from most major sectors of the economy. There are, however, some clouds on the horizon. The Foundation’s Q4 report identified several international and political threats to U.S. economic growth over the next several months. A number of key developing economies are showing signs of distress that could spill over to the U.S. if these trends continue. Major shifts in trade policy, particularly the trade war with China and potentially increased domestic political dysfunction could also “take the air out of the U.S. economy”. Equipment and software vertical trends The Foundation-Keybridge U.S. Equipment & Software Investment Momentum Monitor, which is
CANADIAN EQUIPMENT FINANCE | Fall 2018 | canadianequipmentfinance.com
included in the report, tracks 12 equipment and software investment verticals. In addition, the Momentum Monitor Sector Matrix provides a customized data visualization of current values of each of the 12 verticals based on recent momentum and historical strength. Overall, investment in most equipment verticals should remain solid in 2018. Over the next three to six months: ◉◉ Agriculture machinery investment growth is likely to slow; ◉◉ Construction machinery investment growth should hold steady; ◉◉ Materials handling equipment investment growth should remain modest; ◉◉ All other industrial equipment investment growth is likely to continue to decelerate; ◉◉ Medical equipment investment growth will likely remain stable; ◉◉ Mining and oilfield machinery investment growth may strengthen; ◉◉ Aircraft investment growth should remain solid; ◉◉ Ship and boat investment growth is expected to accelerate;
◉◉ Railroad equipment investment growth should improve; ◉◉ Trucks investment growth should remain solid; ◉◉ Computer investment growth should remain solid; and ◉◉ Software investment growth may soften. “Business and consumer confidence remain elevated and the labour market is strong and getting stronger,” said the Foundation. “Despite downside risks to growth, the near-term outlook for the U.S. economy remains bright.” The Foundation produces the Equipment Leasing & Finance U.S. Economic Outlook report in partnership with economic and public policy consulting firm Keybridge Research. The annual economic forecast provides a three to six-month outlook for industry investment with data, including a summary of investment trends in key equipment markets, credit market conditions, the U.S. macroeconomic outlook and key economic indicators. The Q4 report is the final update to the 2018 Annual Outlook before the publication of the 2019 Annual Outlook in December.
For breaking news and in-depth features, visit our website at www.canadianequipmentfinance.com
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LTi announces executive leadership formation LTi Technology Solutions has announced plans to leverage industry talent and strength to capitalize on strategic market opportunities. Organizational changes, including a realignment of the senior leadership structure under Jeff Van Slyke, LTi’s president and CEO, Jeff Van Slyke, LTi’s reflect the president and CEO. company’s focus on its growth objectives. As part of LTi’s ongoing efforts to enhance operational efficiency, Bill Weeks has been appointed senior vice president and chief Bill Weeks, senior vice operating president and chief officer. operating officer. He will be responsible for internal and external customer delivery as well as assuring continued product excellence. With over 20 years of finance industry experience, Bill is a seasoned executive bringing valuable industry knowledge to the organization, said LTi. Bill has served as senior vice president and chief information officer at SquareTwo Financial, where he was integral in steering the company’s technology objectives. He also served as senior vice president
and chief information officer at Key Equipment Finance where his contributions helped the business to become the engaged partner it is today. Bill has received many awards for his talents from various publications, including the Denver Business Journal’s CIO of the Year (2013) and CIO Magazine’s CIO 100 Award (2012 & 2015). LTi also announced that Bryan Hunt, vice president of sales and marketing, has been promoted to senior vice president Bryan Hunt, senior vice and chief president and chief revenue revenue officer. officer. He will be responsible for market penetration and revenue optimization. Bryan has been with LTi since 2006 and has made great contributions to the growth of the business, said the company. Philip Rieck, vice president of research and development, has also been promoted to senior vice president and chief technology Philip Rieck, senior vice officer. president and chief With two technology officer. decades of experience in software development, Philip’s expertise will guide product eminence and architectural quality, said LTi.
Securefact, PPSA Canada partner Securefact and PPSA Canada have a new strategic partnership to provide clients through access to PPSA Canada’s lien management solutions and Securefact’s digital Know Your Customer (KYC) solutions. The partnership provides a comprehensive set of services for financing companies to automate lending decisions and asset protection, including real time due diligence on customers and streamlined workflows to perfect liens. “When making the decision to dedicate our focus toward digital KYC solutions, we needed a strong partner with the knowledge and experience to ensure our existing PPSA clients would be in good hands,” said David Sudbury, president
and CEO of Securefact. “Our partnership with PPSA Canada has not only provided a seamless transition, but also offered many value-added services to enhance the clients’ experience.” “We are pleased and proud to enter into a strategic and synergistic partnership with Securefact to offer premium, state-of-the-art lien management solutions,” said Donald C. Larkin, president of PPSA Canada. “We believe the integration of our lien management software with Securefact’s identity and business verification solutions will place our mutual clients at the vanguard of technology and provide the most advanced suite of products and services available.”
To send press announcements, please direct them to Brendan Read, Editor, at brendan@canadianequipmentfinance.com
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News
Ritchie Bros. intros RB Asset Solutions
Ritchie Bros.’ latest solution for the market, RB Asset Solutions is a complete end-to-end asset management and disposition system. The new cloud-based software as a service (SaaS) solution brings together a suite of tools and services to help customers better manage, analyze and sell their assets. Customers will be able to access a complete inventory management system, data analytics and dashboards, branded e-commerce sites, and multiple external sales channels from any Internetenabled device. “RB Asset Solutions provides an innovative SaaS-based offering to our customers, leveraging the power of our technologies, global reach and network effects driven by our platform, “said Ravi Saligram, CEO, Ritchie Bros. “It will allow our customers ultimate flexibility and ease of use in disposing their equipment on their own, selling directly to affiliated customers or cascading through any of our multichannel solutions, while optimizing price realization. We believe RB Asset Solutions, with its unique way of connecting with customers, will result in stickiness and enduring customer relationships.” Ritchie Bros. brands Mascus and IronPlanet both have a wealth of experience offering SaaS solutions, with close to 100 inventory management systems and 800-plus branded e-commerce sites already developed for customers. RB Asset Solutions combines the best tools and services from each of their offerings into one system along with new and improved features, including: ◉◉ An updated inventory management system; ◉◉ New data offerings; and 8
◉◉ Easy access to multiple Ritchie Bros. sales channels: live, onsite unreserved auctions (Ritchie Bros. Auctioneers), weekly featured online events (IronPlanet) and a daily marketplace (Marketplace-E).
Several customers are already using many of the tools featured in RB Asset Solutions, including Shell, CatUsed.com, Toyota and Volvo Construction Equipment. “These tools have accelerated and standardized the way we manage our lease returns,” said Tara Stryker, director, remarketing services, Volvo Construction Equipment N.A. “From an easy-to-use self-inspection tool, detailed inventory management system and a user-friendly and multilingual e-commerce site, RB Asset Solutions provides us the tools and services we need to optimize our remarketing capabilities in order to increase our machines’ values at every stage of the lifecycle.” Here’s a more detailed look at RB Asset Solutions tools and services: ◉◉ Inventory management system. This cloud-based inventory management system will help businesses get their fleets organized. They will be able to centralize and manage inventory in one place, get a real-time overview of all assets, including equipment status and availability, trade assets within their networks and create communities for their various dealers or branches; ◉◉ Custom-designed, branded mobile webshop. Automatically offers a selection of used equipment to buyers through this
CANADIAN EQUIPMENT FINANCE | Fall 2018 | canadianequipmentfinance.com
e-commerce site, which can be limited to an in-house network (for dealerships), or can be published externally for anyone to see; ◉◉ Data analytics and market trends. Provides access to price indicators and depreciation curves, as well as market and seller trends to help customers make better and data-driven decisions; ◉◉ Inspections. Users can inspect equipment and upload photos and information to the inventory management system through a mobile app or hire Ritchie Bros.’ Asset Appraisals team to perform complete inspections of their assets; and ◉◉ Multiple sales channels. With the click of a button, customers will be able to cascade assets to one or more disposition channels. These include their customdesigned and branded webshop, the Mascus global online equipment listing service, Marketplace-E’s global online equipment marketplace, IronPlanet’s weekly online auctions and Ritchie Bros. Auctioneers’ live onsite auctions with online bidding. “We believe RB Asset Solutions presents one of the most powerful remarketing and disposition tools in the industry,” said Matt Ackley, senior vice president, product management and digital marketing, Ritchie Bros. “The tools and services included will help customers fully understand and optimize the value of their equipment. In addition to the world-class inventory management system, customers can access data
analytics to help them choose the perfect time to sell their assets: selling through their branded e-commerce site or one of Ritchie Bros. proven sales channels.”
Fleet Connect, Toyota to deliver IoTenabled services Fleet Complete, which provides connected vehicle solutions has a new programme with Toyota Connected to accelerate the delivery of Internet of Things (IoT)-enabled services within Toyota vehicles to enhance fleet customers’ mobile resource effectiveness and efficiencies. Leveraging big data, powered by Toyota Connected Data Services, Fleet Complete’s CONNVEX platform will enable fleet owners to improve driver and vehicle safety as well as reduce total cost of ownership and fleet downtime through real-time visibility of GPS, fuel level, odometer readings and tire pressure. The programme includes easy activation of Fleet Complete software in all eligible connected Toyota vehicles without the need for hardware compatibility or device installation. These innovative capabilities will enable both granular and
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more panoramic insights into mobile resource management, including the ability to observe driver behaviour events and safety notifications.
“Toyota is a long-standing global automotive leader with an innovative vision for the future of connected mobility,” said Tony Lourakis,
CEO of Fleet Complete. “We are excited to collaborate with them on this new programme. It will be a joint effort in discovering the next
generation of connected car capabilities for businesses of any size and propel our overarching goal of ‘Helping Fleets Thrive’.”
U.S. industry compensation increased moderately: ELFA Compensation in the U.S. equipment finance industry increased moderately in 2017, according to the 2018 Equipment Leasing and Finance Compensation Survey from the Equipment Leasing and Finance Association (ELFA) and McLagan. Industry new business volume totals exceeded prior year growth, contributing to a moderate rise in compensation. Highlights of the survey include: ◉◉ Total compensation was up on a year-over-year basis for most functions and levels. On a “same store” basis (constant incumbents in multiple survey years), total compensation was up modestly (~1–6 per cent) at median for key revenuegenerating functions from 2016 to 2017. Infrastructure functions received comparable, albeit slightly
lower, increases at median (~3-5 per cent); ◉◉ Salaries were up slightly on a year-over-year basis. On a same store basis, origination roles tended to have increases around two per cent at the median. Firms differentiated salaries on a functional basis as more than 25 per cent of incumbents did not receive increases in vendor and direct origination. Salaries tended to rise between 2–3 per cent for infrastructure roles; and ◉◉ Increases tended to be larger at the junior and intermediate levels across both the infrastructure and revenuegenerating functions.
representing a cross section of the equipment finance sector, including independent, bank and captive leasing and finance companies. Firms provide data for more than 90 executive, front-office and support positions, including a breakdown of salary (for 2017 and 2018), incentives (including cash bonuses and commissions), long-term awards and total compensation by company type. The survey
is a collaborative initiative between ELFA and McLagan, a performance/reward consulting and benchmarking firm for the financial services industry. For a complete copy of the 2018 Equipment Leasing and Finance Compensation Survey report, please contact Bill Choi at bchoi@elfaonline.org or 202-238-3413. Note: Survey results are only available for purchase by firms who commit to participation in the 2018 survey.
The 2018 Equipment Leasing and Finance Compensation Survey measures compensation rates for the 2017 fiscal year as reported by more than 75 equipment finance companies
To send press announcements, please direct them to Brendan Read, Editor, at
brendan@canadianequipmentfinance.com
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News
RMA productively partners with Enterprise Fleet Management The Rural Municipalities of Alberta (RMA) is partnering with Enterprise Fleet Management to give its members easier access to the company’s fleet management solutions and realize subsequent cost savings. By taking advantage of the partnership with Enterprise, RMA members can save a projected 20 to 25 per cent of the holding cost of their vehicles. As vendor of record Enterprise Fleet Management’s services are available to all RMA members without the need for onerous procurement processes and the associated administrative costs, saving small municipalities and public entities valuable time and money. The fleet management company’s services include vehicle acquisition, funding, aftermarket equipment, maintenance programmes, fuel and risk management and driver safety, corporate rental, registration, disposal and reporting.
RMA’s membership exceeds 800 municipalities and public entities throughout Alberta. The organization is also affiliated with the Saskatchewan Association of Rural Municipalities, Saskatchewan Urban Municipalities Association and the Association of Manitoba Municipalities. The Enterprise Fleet Management partnership extends to these organizations as well, permitting a total of approximately 1,800 members to take full advantage of its benefits. Through its network of more than 50 fully staffed offices, Enterprise Fleet Management manages a fleet of more than 520,000 vehicles throughout Canada and the U.S. The business provides full-service fleet management for companies, government agencies and organizations operating medium-sized fleets of 20 or more vehicles, as well as those seeking an alternative to employee reimbursement
programmes. “In addition to being an expert in vehicle management, Enterprise Fleet Management has an excellent understanding of our membership through their history of partnerships with hundreds of local government agencies,” said Dave Dextraze, manager of trade, Rural Municipalities of Alberta. “RMA is committed to supporting our members’ diverse needs, and this partnership with Enterprise Fleet Management will save money and months of work for many of our over 1,800 members across Western and Central Canada.” Enterprise has already delivered vehicles to the County of Newell and Cardston County as part of the partnership. In the first year alone, Cardston County has reduced its vehicle maintenance over 90 per cent. “It has been a pleasure working with the Enterprise Fleet Management team to modernize our light truck fleet,”
said Paul Hascarl, director of operations, Cardston County. “Since working with Enterprise, we have greatly reduced our fuel consumption, maintenance and repair costs, in addition to modernizing our fleet. We are now entering the second phase of our partnership and have been consistently impressed with the service we have received and Enterprise’s wealth of knowledge on vehicle management.” “We’re excited to be partnering with RMA to bring our fleet services to its diverse range of members,” said Dan Lord, director of Enterprise Fleet Management in Alberta. “By working with Enterprise Fleet Management, RMA members can customize their vehicles and services to meet their exact needs and save ongoing fleet operation costs: all while being assured that RMA has done the due diligence and taken care of the paperwork.”
CLFP announces five academies for 2019 The Certified Lease & Finance Professional (CLFP) Foundation has scheduled the first five Academies for Lease & Finance Professionals (ALFP) for 2019 in various U.S. locations. The ALFP is a three-day event designed to fully prepare an individual to sit for the CLFP exam assuming that the candidate has read and studied The Certified Lease & Finance Professionals’ Handbook prior to attending the class. During the first two days, all of the
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required sections of the CLFP exam are covered in-depth and on the third day, the exam is offered, but not mandatory. The schedule for 2019 as of presstime is: ◉◉ January 3-5, Scottsdale, Arizona, hosted by Ascentium Capital; ◉◉ February 7-9, Seattle, Washington, hosted by Financial Pacific Leasing; ◉◉ March 21- 23, Albany, Minnesota (internal Academy for Stearns Bank employees);
CANADIAN EQUIPMENT FINANCE | Fall 2018 | canadianequipmentfinance.com
◉◉ April 18- 20, St. Cloud, Minnesota, co-hosted by Northland Capital and Oakmont Capital; and ◉◉ May 9 -11, Chicago, Illinois, hosted by ECS Financial. In 2018 the CLFP Foundation partnered with nine different equipment finance companies to host the Academies and over 140 equipment finance professionals attended a class. The CLFP designation identifies an individual as a knowledgeable professional to
employers, clients, customers and peers in the equipment finance industry. There are currently 632 active CLFP and CLFP Associates in the United States, Canada and Australia. For more information, call Executive Director Reid Raykovich, CLFP at (206) 535-6281 or visit www.CLFPFoundation.org. To register for an Academy, visit www.clfpfoundation.org/alfp-calendar. Registration to each event is limited.
2019 ISSUES & EDITORIAL THEMES Issue Spring Construction
Construction is a key equipment and financing market. This issue looks at market trends, developments and impacting factors, such as economic growth, private and public sector investment and government policies. It also looks at key new equipment and management techniques. All sectors: commercial, industrial, institutional and residential will be covered. Special Report: Auction & Remarketing EDITORIAL DEADLINE: February 22nd
Issue Summer Transportation
Transportation literally drives the economy, and the equipment finance market. This issue examines demand, developments and change factors for vehicle acquisition and fleet management across all modes. It will also look at impacting regulatory matters such as licensing and “going green” initiatives. Special Report: Fleet Financing EDITORIAL DEADLINE: May 23rd
Issue Fall Technology
This issue takes readers on a deep dive into the technology developments that affect equipment buying, financing and management. Are organizations making use of proven technology tools to run their businesses more efficiently? Will they provide ironclad security in today’s dangerous environment? Special Report: Auto Dealer Financing EDITORIAL DEADLINE: August 23rd
Issue Winter Resources
The resource sector is the bedrock of Canada’s economy. This issue will look at the agricultural, fishing, forestry, energy and mining industry trends that shape the demand for financed specialized equipment. There will be a look at new tools and methods that enable greater productivity and growth. Special Report: IoT & Data Analytics, Manufacturing EDITORIAL DEADLINE: November 22nd
Plus…
Each issue includes regular editorial columns which look at …Market Report …Your Business …Management Strategy.
Call us to learn more about how to leverage these editorial opportunities with Advertising, Online Campaigns, Editorial Roundtables, and more. Phone: 905-201-6600 • Toll Free: 1-800-668-1838 • www.canadianequipmentfinance.com
Feature
USMCA removes uncertainty New trade agreement generally positive for auto industry
By Robert Streda
he U.S. and Canadian governments announced on September 30, 2018 their tentative agreement on a revision of the North American Free Trade Agreement (NAFTA). The pending agreement follows a similar pact negotiated between the United States and Mexico in August 2018.
T
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The revised NAFTA, to be formally designated as the U.S.-Mexico-Canada Agreement (the USMCA), remains subject to ratification by the respective U.S., Canadian and Mexican legislative bodies: which is expected some time in 2019.
Automotive highlights The USMCA includes some notable changes to NAFTA. The country of
CANADIAN EQUIPMENT FINANCE | Fall 2018 | canadianequipmentfinance.com
origin rules have been revised, under which automotive vehicles will be required to have 75 per cent of their components manufactured in the U.S., Mexico or Canada to qualify for zero tariffs, raising the threshold from its current level of 62.5 per cent under NAFTA. Additionally, the USMCA stipulates that 40 per cent to 45 per cent of any duty-free vehicle components must be
Feature produced by workers earning at least USD $16 per hour. In the event that these conditions are not met, regional automotive imports into the U.S. will be subject to the most-favoured nation (MFN) tariff of 2.5 per cent. If the U.S. applies tariffs to automobiles pursuant to Section 232 of the Trade Expansion Act (under the guise of national security and estimated to attain a level possibly as high as 25 per cent), both Mexico and Canada have obtained exclusions from such measures via separate side letters embedded in the USMCA. For Mexico, exclusions will be capped at 2.6 million vehicle units and USD $108 billion in auto parts annually. For Canada, exclusions will also be subject to an annual cap of 2.6 million units and USD $32.4 billion on exported auto parts.
actual terms, the pending agreement on the USMCA removes considerable uncertainty that has affected the sector, enabling automotive companies to pursue their planned initiatives with the benefit of some additional clarity.
Favourable Canadian industry impacts Moreover, the effect of the USMCA on the automotive industry in Canada is deemed to be favourable, although the positive impact is likely to be somewhat less beneficial than initial indications may suggest. The increased North American content and related worker earning/production requirements appear to encourage investment in the U.S. and Canada rather than in Mexico. However, such investment would likely be allocated to the U.S. (particularly the
The effect of the USMCA on the automotive industry in Canada is deemed to be favourable, although the positive impact is likely to be somewhat less beneficial than initial indications may suggest. DBRS notes that, in all cases, exclusion limits are significantly higher than historical levels, enabling considerable further growth in automotive exports into the U.S. from both Canada and Mexico.
Uncertainty removal Investments and strategic actions in the automotive industry are subject to long time horizons. Uncertainties about the renegotiation of NAFTA (in addition to those surrounding Brexit) have effectively caused several automotive original equipment manufacturers (OEMs) and suppliers to pause/ reconsider their investment decisions in the affected regions. As such, almost irrespective of the
OEM costs may increase As the USMCA seeks to increase the relative U.S. and Canadian content in automotive vehicles in place of lower cost jurisdictions, this will likely result in a moderate increase in the industry’s aggregate cost position. OEMs with a highly integrated presence in North America will likely be less affected than other manufacturers where the flow of vehicles and components materially includes other regions (e.g. Europe and Asia), although DBRS notes that such cost headwinds for all OEMs appear well manageable. However, notwithstanding the tentative USMCA, Section 232 tariffs imposed on steel and aluminum remain, effectively raising costs on all OEMs active in the U.S., including those that primarily purchase their steel and aluminum domestically, given the inflationary effect of such tariffs even on local sources.
No anticipated ratings changes
southern states) rather than to Canada, given its closer proximity to Mexico where numerous OEM assembly plants are located. Additionally, absent Section 232 tariffs, the MFN tariff would be applicable to vehicles that are not eligible for zero tariffs. Accordingly, in such cases, the cost of non-compliance in the form of imposed tariffs would be substantially outweighed by costs associated with the requisite shifting of any given manufacturing footprint to attain compliance. Notwithstanding these considerations, at the very least, the USMCA may decelerate the negative trend on Canada’s relative share of total North American automotive production, which has been subject to an ongoing decline for the past several years.
DBRS does not anticipate making any changes to our automotive issuer ratings as a result of the USMCA. Financial risk assessments (FRAs) remain rather solid for all DBRS-rated automotive manufacturers. OEMs have benefitted from favourable automotive conditions for the past several years, with global volumes subject to consecutive annual increases since 2010. Moreover, North America (substantially the U.S.) remains among the most profitable markets for several OEMs, despite a slight contraction in sales volumes in recent years from record levels. As such, FRAs for all DBRS-rated OEMs have considerable cushion to absorb any moderate cost increases attributable to the USMCA while remaining commensurate with their respective ratings. However, additional cost headwinds including alternative powertrain development (e.g. electric vehicles), product compliance (e.g. safety and emissions) and new mobility businesses (e.g. fleet management and transportation-as-a-service) are likely to have more impact over the medium term. Robert Streda is senior vice president, autos, DBRS (www.dbrs.com). He can be reached at rstreda@dbrs.com.
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Feature
More stability but investment still lacklustre: C.D. Howe Institute eak machinery and equipment (M&E) investments have helped grease a slippage in Canadian business investment compared with other leading countries since the mid-decade, according to a new study by the C.D. Howe Institute, Tooling Up: Canada Needs More Robust Capital Investment. And while the new U.S.-MexicoCanada Agreement (USMCA) that replaces NAFTA will add trade stability that will help encourage capital including M&E investments, there are other outstanding issues that will continue to lead to lacklustre business investment. “When it looked like Canada may be left out of a new trade agreement, the uncertainty that prevailed put in doubt the future of any business investment, from both domestic and foreign investors. With a new agreement in place, one that keeps in place the trading relationship with Canada’s largest export market, much of that unease should be put to
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rest,” said Jeremy Kronick, associate director of research, C.D. Howe Institute. “However, the gap between Canadian investment per worker and investment per worker in other developed nations —a gap that is set to worsen in 2018—cannot be explained by external trade uncertainty alone. And the USMCA does not address the other explanations we put forth: uncompetitive taxation, disadvantages in energy and electricity prices, internal trade barriers [and] access to external financing including through asset-based financiers. As such, we may have stopped further bleeding in investment by coming to an 11th-hour agreement on trade with the U.S. and Mexico, but many other challenges remain.”
Canadian businesses spend much less per worker Citing the latest figures from Statistics Canada and the Organisation for
CANADIAN EQUIPMENT FINANCE | Fall 2018 | canadianequipmentfinance.com
Economic Co-operation and Development (OECD) the C.D. Howe Institute study, authored by William B.P. Robson, Jeremy Kronick and Jacob Kim, said they suggest that Canadian businesses will invest about $13,900 per worker in 2018. By contrast, businesses across the OECD will invest about $19,700 per worker and that U.S. businesses will invest about $23,200 per worker. About a decade ago, fixed capital investment on M&E and structures —non-residential buildings and engineering—was similar in value: in 2006, Canadian business spent $103 billion on structures and $95 billion on M&E, reported the study. But by 2017, capital construction spending was $155 billion while M&E spending was only about half that amount, or $81 billion. “Although all private-sector investment has presumably passed Continued on page 20
Market report
Auto sector strong but facing challenges: DBRS uto lease securitizations have continued to exhibit strong residual value performance in Canada, which can be attributed in part to the growing demand for light trucks even as gas prices rise, according to DBRS’s recent Retail Auto Securitization in Canada: Performance Update report. But securitized auto loan and lease transactions continue to show increasing loan terms amid a challenging Canadian economic environment, said the report. While regional pressures in Western Canada have largely subsided, indicated by overall unemployment returning to pre-financial crisis levels, rising interest rates and increased business competition from the U.S. threaten to unsettle heavily indebted Canadian consumers. DBRSrated transactions, however, continue to perform well, as demonstrated by the loss levels in securitized pools.
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Market headwinds and strengths The DBRS report identified several market headwinds that are affecting auto loan and lease transactions: ◉◉ Canadian competitiveness relative to the U.S.; ◉◉ Rising interest rates; ◉◉ Increased adoption of long-term contracts (84-month loans/60-month leases); ◉◉ High loan-to-value (LTV) evidenced by continued low annual percentage rates (APRs) and customers rolling negative equity into new purchases;
◉◉ Increasing downside risk to used vehicle values as supply increases; ◉◉ Increasing lease volumes adds to used vehicle pricing pressures; and ◉◉ High consumer debt levels. The report also identified several strengths supporting auto loan and lease transactions: ◉◉ Established underwriters with stable performance and prime borrowers with consistently strong credit scores; ◉◉ Conservative base case loss estimates that reflect increasing risks and are reevaluated frequently; ◉◉ Structural features, including eligibility criteria and non-amortizing credit enhancement, providing additional protection; ◉◉ Consideration of third-party residual value estimates in setting base residual values in lease transactions; ◉◉ Diversification by geography and vehicle type; and ◉◉ Brand and model diversification in the asset-backed commercial paper (ABCP) conduit markets.
Manageable losses DBRS reported that auto loan originators tightened their underwriting practices following the 2007–2008 financial crisis but began taking more risk as the economy recovered and demand for vehicles returned. While it has witnessed increased losses in the owned and managed portfolios of some
manufacturers; however, to date, losses in securitized transactions remain manageable. They are being supported, it said, by lowered overall unemployment across the country, except for Manitoba, Newfoundland and Labrador and Saskatchewan and a stronger-thanexpected used car market.
Used vehicle market: stable through 2018 Canadian used vehicle values continued to defy expectations of a pullback and remained stable at their highest levels since 2001, said the DBRS report. However, downward pressure continues to mount as lease and fleet maturities accelerate. The report identified the used market’s strengths: ◉◉ Healthy certified pre-owned market; ◉◉ Rising new vehicle prices provide support for used vehicle prices; ◉◉ Weak Canadian dollar attracts U.S. buyers; and ◉◉ Manageable used vehicle volatility. The report also noted these market challenges: ◉◉ Prices potentially negatively affected by increase in auction supply as lease and fleet maturities accelerate; ◉◉ Prices affected by manufacturer initiatives, including the extent to which they make use of the daily rental channel and the level of incentives spent to stimulate new car sales; and ◉◉ Record growth of luxury vehicle sales,
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Market Report which typically exhibit higher used price volatility. Vehicle replacement demand on an aging fleet (average vehicle age of 9.7 years in 2016 compared with 8.9 years in 2007), steadily increasing new car prices and a weak Canadian dollar should provide some resistance to falling prices, said the report. Further, examination of historical prices provides evidence of range-bound volatility, with the peak decline of approximately 11.6 per cent over a period of about 15 months in 2002-2003. DBRS noted that these ranges are well within transaction assumptions and that the Canadian used car market has demonstrated resilience compared with a more volatile U.S. market. The standard deviation of the ADESA Canada Used Vehicle Price Index from January 2000 to
August 2018 (indexed to January 2000) is 2.8 per cent, compared with 5.5 per cent and 7.1 per cent for ADESA’s U.S. Wholesale Used Vehicle Price data and the Manheim Used Vehicle Value Index, respectively, over the same period.
Light trucks, subcompact SUVs gain Light trucks: crossovers, sport-utility vehicles (SUVs), minivans and light-duty pickup trucks have generally experienced lower residual value losses and higher residual value gains compared with passenger cars, said the DBRS report. This is not surprising, given the relative popularity of light trucks in Canada since 2010. Historically, light truck sales were generally more sensitive to gasoline prices than passenger car sales; however,
DBRS observed that this relationship has weakened as their sales have continued gaining steam year after year, despite rising fuel costs. As of August 2018, year-to-date light truck sales grew 3.2 per cent year over year whereas passenger car sales tumbled 9.2 per cent over the same period. The increasing appeal of light trucks, owing to better styling and driving feel compared with earlier models, and increased product offerings from manufacturers, have helped sustain the growing demand for these vehicles, even in the face of rising gas prices, said the report. But consumer tolerance is not unlimited, as evidenced by the 56 per cent increase in subcompact SUV sales year-to-date August 2018 compared with the single-digit increase in light truck sales.
Auto firms focusing on new services: Frost & Sullivan igital disruption is revolutionizing the automotive industry, enabling a value shift from individual consumption to collaborative consumption, according to Frost & Sullivan. As a result, original equipment manufacturers (OEMs) are looking at alternative sources of revenue, such as shared mobility, connected car services, financial services and logistics services. The demand for shared mobility services, such as carsharing, ridehailing and dynamic shuttles, is increasing, with these services expanding globally, it said. To compete effectively, OEMs are launching their own mobility services, partnering with mobility start-ups that are providing these services, as well as launching their own mobility sub-brands under which all mobility-related projects will be unified. “We observe increasing efforts from OEMs, Tier 1 suppliers and start-ups to enter the car data monetization space through various verticals, such as developing new apps, hardware/interfaces
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(smartphone pairing) and offering services related to the type of data collected,” said Abhishek Iyer, mobility research analyst at Frost & Sullivan. “OEMs are partnering with technology companies to share data (with customer consent) to recommended third-party service providers, such as insurance companies and smart parking service providers. Tier 1 companies are investing in start-ups that focus on data-driven platforms, AI [artificial intelligence] and machine learning to leverage IoT [Internet of Things] applications.” Frost & Sullivan’s recent analysis, Mobility and Other Downstream Services Market, Forecast to 2030, provides a comprehensive analysis of trends, perspectives and market forecasts through 2030. As OEMs continue to focus on connected, autonomous, shared and electric (CASE) strategies and automotive technology companies shift toward becoming providers of mobility and related services, the core focus of the mobility industry will be on providing
CANADIAN EQUIPMENT FINANCE | Fall 2018 | canadianequipmentfinance.com
a completely shared and connected ecosystem. Between 2017 and 2022, OEMs will seek to develop capabilities from a suite of solution providers and data aggregators to offer effective information to consumers across industries and smart city projects. There are three key strategies Frost & Sullivan experts identify as growth paths for automotive companies in the shared mobility market: 1. Be a shared mobility operator. 2. Serve as a fleet provider to operators. 3. Manufacture custom-made vehicles for shared mobility operators. “In addition, OEMs in the shared mobility space need to transition to subscription-based, event-based, and revenue-sharing business models,” said Iyer. “The automotive supply chain is changing drastically, driven by new players and big bets in new technology areas. OEMs need to take appropriate steps now to fill the gaps and stay on par with the competition.”
Legal/Regulatory
How to benefit from Construction Act changes By Matt Johnner
ecent amendments to the Construction Act in the province of Ontario have resulted in two monumental regulation changes. The first, “prompt pay”, ensures that borrowers pay their builders within 45 days and that the builders pay their subcontractors within 14 days of that. The second, “adjudication of disputes”, establishes proper protocol if a builder feels like their subcontractor did not do a quality job and wishes to withhold payment.
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Adjusting to the regulations In short, both amendments have been put in place to increase transparency in the construction finance industry. And, while these new regulations do not go into full effect until October 2019, it is important to begin thinking about how our industry is going to adjust. The Canadian economy is thriving, and the construction industry has played a large part in that. With record construction comes demand for new equipment. And, more often than not, builders need loans larger than what their go-to banks or credit unions can offer in order to buy or lease proper construction equipment. When this happens, the financial institutions have the option to participate some of those loans out to other lenders in order to best serve the borrowers. Unfortunately, traditional participations have been timeconsuming while manual processes lack the now-necessary transparency.
How mobile cloud platforms can help With the Construction Act’s new amendments in mind, it is important that our industry does everything possible to increase visibility for every
party involved in construction finance processes. The best way to accomplish this is to implement innovative new technologies that efficiently and effectively automate the entire loan participation process. A mobile, cloud-based platform can manage the complete lifecycle of a new or existing loan participation. It is completely electronic, eliminating manual paper processes and it even includes a virtual marketplace that allows financial institutions to reach new potential participants. This type of technology allows financial institutions to expand the number of new loans they offer and effectively manage their balance sheets, while simultaneously eliminating inefficient processes in order to improve the borrower experience. For instance, let’s say that a large construction company wants to buy $50 million of equipment to keep up with its current project demand. Unfortunately, the company’s favourite bank has a loan limit of $20 million. The construction company wants to work with the bank but needs $30 million more. The bank doesn’t want to lose a great customer to a competitor, but simply cannot offer a loan of that size. The solution? The bank participates with another lender or two in order to finance the equipment purchase. And, with specialized mobile technology to aid in this process, all steps of the participation are managed including borrower interest, loan packaging, sharing with partners, negotiating, closing, ongoing reporting, data analytics and regulatory support. No longer must the financial institution deal with delays, paper files, e-mail attachments or postal mail services. They can close loans faster
and even cost-effectively participate in smaller deals that they may have originally declined due to the amount of time and effort it took in the past.
The necessity of new technology By participating loans using a mobile, cloud-based platform financial institutions can effectively diversify their assets, reduce credit risk and keep loyal customers coming back year after year. With over 38,000 construction companies in Ontario alone, it is vital that financial institutions implement proper technology to aid in the loan participation process in order to effectively handle equipment financing in light of the Construction Act. And, as professionals in charge of equipment leasing and financing for these construction companies, it is vital to partner with a financial institution that is capable of managing efficient and transparent loan participations. It is not enough to settle for arduous, manual processes when the construction demand is so high. It is time to take control of both compliance and speed with technology that benefits everyone. Matt Johnner is president and co-founder of BankLabs (www.banklabs.com), a provider of innovative mobile technology products that help community banks and credit unions improve efficiency, differentiate with customers, create new fee income, increase deposits and create marketplace options that expand business opportunities. BankLabs is also devoted to serving the construction industry through technology.
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your Business
Creating risk management communications paths By Justin Smulison
rganizations are realizing the value of enterprise risk management (ERM) and its ability to provide leadership with an overall view of the risks their companies face. Boards of directors have expressed the need for specific information in order for them to be proactive, underscoring the need for effective ERM programmes. Unfortunately, simply walking over to someone’s office is not as pragmatic or effective as it once was. This article offers suggestions for establishing communication methods that will help managers determine pertinent information and how to deliver it to the right executives.
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Examining information need According to the National Association of Corporate Directors’ 2017-2018 NACD Public Company Governance Survey, “Directors themselves admit that they need to do a better job in contributing to strategy. 71 per cent of directors indicate that their boards must better understand the risks and opportunities that affect performance and drive strategic choices over the next 12 months.” The survey noted that “fewer boards also hear directly from specialist functions, such as internal audit (39 per cent), compliance and ethics (30 per cent), and enterprise risk management (20 per cent), which poses a much deeper and perhaps more independent perspective on the strength of the corporate culture than the CEO does.” The Committee of Sponsoring Organizations of the Treadway Commission (COSO)’s updated framework, Enterprise Risk Management—Integrating with Strategy and Performance, also recognizes leadership’s role in ERM. It cites “tone from the top” as the single most 18
important cultural aspect of a successful programme. As COSO noted, ERM will continue to change and adapt to today’s rapidly evolving risk environment. The benefits derived from the right focus will produce a strong return on investment (ROI) and ability to capitalize on risk.
ERM’s evolutionary stages An evolutionary path has emerged with respect to the state of ERM within an organization and can often serve as a guide to how ERM information can best be communicated throughout it. The path can be broken down into three categories: 1. Emerging: Emerging organizations may only be armed with risk registers and desires to implement ERM programmes with adequate executive reporting. While it can be difficult for them to demonstrate the ROI of implementing working programmes, they recognize that there are many downsides to not acting on this initiative, from financial to operational. 2. Evolving: In these organizations, ERM programmes have been implemented and are in the process of continuous improvement. 3. Exploiting: An organization with a fully implemented and monitored ERM programme is delivering significant value to the organization and allowing it to exploit risk to the benefit of all stakeholders. Executive leadership is keenly aware of both the upside and downside risks facing the organization and adjusts strategy to mitigate key risks and avoid the negative ramifications.
IDing key information recipients and funneling As your organization develops risk reports, you should identify and prioritize which individuals should receive the information and how it
CANADIAN EQUIPMENT FINANCE | Fall 2018 | canadianequipmentfinance.com
should be presented. Models and methods will vary by company, but examples include: ◉◉ Board risk committee. As an emerging best practice, boards of directors are now increasingly forming board risk committees. As with other board committees, the risk committee should have its own charter that allows it to operate as a strategic asset and defines its responsibilities and authority. In lieu of a board risk committee, at a minimum, an organization should have an internal risk executive committee that regularly reports to the board; ◉◉ Internal ERM engagement model by risk category. Using an organizationally-specific risk categorization system, an engagement model that specifically outlines senior leadership responsibility for enterprise risk and better defines accountability for specific risk categories; ◉◉ Key risk accountability matrix by risk owner. Building on the engagement model, a key risk accountability matrix will allow an organization to track key risks. Organized around critical risks, it helps ensure accountability within an organization for risk ownership; ◉◉ Heat map of key risks. The risk heat map continues to be a useful tool for quickly understanding what the key risks are and what value at risk is in the aggregate. Heat maps have come a long way in recent years and can include the ability to drill down into risk ownership and risk mitigation plans; and ◉◉ Risk register with mitigation plans by risk owner. Most organizations practicing any form of risk management currently use a risk register, which is usually a more exhaustive list of risks laid out in an Excel format. While executive reporting is typically limited to key
Your Business risks given the time constraints of the C-suite and board of directors, such a list will usually be maintained. Examples of risk registers are extremely varied but need to serve the organization’s needs. The structure of your communication process should dictate what gets included in the board risk report. A business context statement, risk appetite statement, risk tolerance calculation and emerging risk review are all items that can bolster any ERM strategy by delivering pertinent information. They provide goals, high-level snapshots, material financial impact and how external factors—such as technology and global trends—should be considered.
Shifting the focus Determining an ERM programme’s ROI is difficult. However, research from the Corporate Executive Board shows that strategic or operational risks often cause the biggest declines in shareholder value.
The structure of your communication process should dictate what gets included in the board risk report. According to its 2015 study, How to Live with Risks, strategic risks have comprised 86 per cent of the significant losses in organizations’ market value in the past decade, with operating, legal and financial reporting making up the difference. However, auditors only spend six per cent of their time investigating the strategic initiatives that supposedly hemorrhage funds, and a combined 80 per cent on operations and financial reporting. These findings have prompted more organizations to reexamine their focus on enterprise risks. The old ways of transferring risk through the purchase of insurance and calling it “risk management” no longer suffices for
any organization. Organizational leaders want improved transparency and better accountability of enhanced risk reporting for managing key material risks, whether to minimize downside risk or exploit upside risk. Establishing a communication process within their framework via the methods suggested here is key to achieving that goal. Without it, vital information may remain as merely e-mails that go unread or seen too late. Justin Smulison is RIMS business content writer. This article is based on a recent RIMS professional report, titled Risk Communication to the C-Suite and Board of Directors: Visualizing Enterprise Risk Management Information. Its authors are David J. Young, Christine Novotny, ARM, RIMS-CRMP and Julie Cain, who are risk management professionals and educators. Visit www.rims.org for the full report, which includes diagrams and visual aids of the processes detailed above.
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Continued
M&E market to strengthen: CMO report Continued from page 5
Table 5 - New Business Finance by Credit Instrument and Source in 2017
Equipment & Commercial Retail Vehicles Vehicles $ millions % share $ millions % share
Finance by Credit Instrument Lease Secured Loan Line of Credit Credit Card
12,610 7,501 9,318 3,844
38% 23% 28% 12%
26,000 68,800
27% 73%
Finance by Source Banks Independent Finance Companies Manufacturers’ Captive Finance Co. Other Finance Companies
13,924 8,917 7,621 2,811
42% 27% 23% 8%
36,644 10,519 47,636
39% 11% 50%
Figures may not add up due to rounding. Source: Canadian Finance and Leasing Association, DesRosiers Automotive Consultants Inc.
Note: The CMO Annual Report presents the highlights of the Canadian Market Survey 2017-2018. A more detailed version will be available to CFLA members on the association’s web site www.cfla-acfl.ca.
vehicle leases declined rapidly after 2007 from $20 billion down to just $3 billion in 2009. New leasing of new and used retail vehicles recovered to $24 billion in 2017 and is forecast to reach $26 billion in 2018. While the lease rate on new vehicles
More stability but investment still lacklustre: C.D. Howe Institute Continued from page 14
similar productivity and profitability tests, the relative weakness of M&E investment raises special concerns,” said the study. “Canadian weakness in M&E investment contrasts strongly with a much more robust U.S. performance.”
Asset-based financing strengthens The C.D. Howe Institute study reported a return of and a relatively greater role for asset-based financing. The method, it said, appears to have supported 41 per cent of the total Canadian M&E capital spending in 2017, six per cent higher than in 2006, before the financial crisis: it had dropped to a low of 25 per cent in 2009. 20
is still below the 2005 peak of 45 percent it is rapidly approaching that level. The lease penetration rate rose to 37 per cent in 2017 and expected to be 39 per cent in 2018. The overall share of new consumer vehicles financed is relatively constant at just over 90 per cent. The study also reported that banks and independent finance companies have increased their shares of assetbased financing by five and seven per cent respectively, while captive finance companies’ share has fallen by 13 per cent since 2013. In 2017, banks accounted for 42 per cent of new assetbased financing, independent finance companies had 27 per cent and captive finance companies accounted for 23 per cent. “The recent robust lending performance of independent finance companies suggests some healthy competition in the sector,” said the study. “That is a good sign for M&E investment generally, since stricter regulation and capital requirements make it harder for banks to lend to small businesses.” “But the collapse of the asset-backed commercial paper [ABCP] market during the financial crisis meant that many non-bank capital providers lost a crucial source of funding,” it added. “Without the ABCP market, banks become the
CANADIAN EQUIPMENT FINANCE | Fall 2018 | canadianequipmentfinance.com
Leases top commercial credit instrument At 38 per cent, leases are the top credit instrument for financing equipment and commercial vehicles followed by lines of credit at 28 per cent, with banks supplying 42 per cent of this credit in 2017, said the CMO (see Table 5). New business finance by credit instrument and source is estimated for equipment and commercial vehicles from PMG Intelligence’s surveys and from DesRosiers Automotive Consultants’ vehicle finance model. Secured loans account for 73 per cent of new and used retail vehicle finance with 50 per cent of this credit supplied by manufacturers’ captive finance companies in 2017. Banks supplied 39 per cent of this credit and independent finance companies supplied the remaining 11 per cent. 1 Note: this table excludes consumer purchases of used motor vehicles.
logical source for funding for them— potentially reducing competition in the sector as a whole.”
Policy steps To raise Canadian business investment per worker the C.D. Howe Institute study recommended that policymakers reduce and restructure taxes, including business property taxes, institute more generous depreciation allowances and enable faster tax write-offs. They should also institute measures to ensure competitive well functioning markets for different financing types, such as asset-based financing and non-bank lending. Decisionmakers should also reduce domestic protectionism, move to open bottlenecks on major infrastructure projects and act to limit electricity prices increases. “Canadian workers need better tools to increase their individual, and our collective, prosperity. Helping them get those tools is a task for all Canadian governments,” concluded the study.
Management Strategy
Why small businesses go online for equipment finance
By John Elliott
hile it may seem that megacorporations dominate our economy, in actual fact according to the Government of Canada over 90 per cent of Canadian businesses are considered small businesses1. But many small businesses struggle with cash flow and gaining access to capital to finance their operations and to acquire equipment. According to the Equipment Leasing & Finance Foundation, approximately eight out of 10 U.S. businesses use financing as a means to acquire equipment2. However, traditional routes are failing to keep up with small businesses and their behavioural shifts when they are looking to secure equipment financing.
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Equipment financing problems Traditionally, the primary way of obtaining equipment financing was to get a loan or line of credit from one’s
bank or explore equipment leasing options through their suppliers. While both of these options support the utility of equipment financing they fall short in meeting what has become the expected customer experience. Here’s why: ◉◉ Traditional banks are slow and usually require a lot of internal financial details, financial statements and personal guarantees; ◉◉ Banks can have lengthy turnaround times for reviewing applications; ◉◉ Business owners are required to physically be present to initiate and move through the process; ◉◉ Banks have traditionally lagged behind many other industries that have been disrupted, i.e. hotels, retail, taxis which now provide better user experiences aided by technology, such as with mobile apps; ◉◉ Time and resource-constrained business owners cannot shop and compare options effectively through conventional channels. As a result, they often settle for equipment
financing only offered through suppliers or their banks; and ◉◉ Business owners are disconnected from market options and rates and this can lead to ill-informed decisions.
Small business financing trends Finding the best equipment financing rates and a great user (customer) experience is now becoming a fundamental part of the journey for small business owners seeking capital. Many owners are now beginning their search online to secure financing: much like shopping for any other product. At the same time traditional banks and other lending institutions are realizing they need to explore their options in order to offer customers online financing opportunities. Mobile, including mobile apps and browsing, is also becoming more relevant for small businesses to access financing options. Kabbage, a technology company that connects small businesses with capital, reported that 17 per cent of small
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Management Strategy business loans are now through mobile and growing3. Here are several other key trends: ◉◉ Continued trend to seeking equipment financing online to find the best rates and user experience; ◉◉ Niche or disruptive online finance companies are winning customers because of the value and experience they provide versus the rates they offer; ◉◉ Equipment suppliers are partnering with equipment finance companies to give their customers means to apply for financing directly from their web sites; ◉◉ Traditional banks are now taking the technology revolution seriously and are exploring their own options to get in front of customers online by exploring new services, partnerships and integrations; and ◉◉ A generational shift in business ownership will further solidify online and mobile as core channels to securing equipment financing.
AI and blockchain use In the near future expect to see the use of artificial intelligence (AI), machine learning and blockchain in the equipment finance industry to assist customers. These tools promise to reshape the industry. Initially powered by their own historical and market data, AI will allow finance companies to make better and faster credit decisions by learning specific industry, demographic and individual customer behaviours. They can then offer quick and accurate credit decisions as well as customized finance offerings to current customers without human intervention. Blockchain technology will eventually permit complete asset lifecycle management. The shared ledger will allow all parties: manufacturers, distributors, dealers, finance companies, customers/lessees, those engaged in destruction and regulatory bodies to record transactions that are secured and verifiable by smart contracts as the assets move through the supply chains. This reduces processing time, fraud risks and overhead costs associated with intermediaries, thus maintaining the security, integrity and validity of contracts and equipment. 22
The trend to move online and mobile for small business equipment financing will become eventually the norm. Online equipment financing benefits Small business owners are going online for the best equipment leasing services for many of the same reasons they already use other online services, like accounting, customer relationship management (CRM), marketing automation and project management. Here’s why: ◉◉ Quick and effortless access to the best financing options with the least amount of input; ◉◉ Convenience and time savings (the time of day when they get around to it is often outside traditional business hours); ◉◉ Greater personal comfort level. They can be more open when completing their applications and not feel selfconscious about credit woes or financial details like they would be when completing them in-person at the dealer level; ◉◉ Equipment leasing marketplaces can provide interest, time and cost savings by enabling comparison shopping for lenders: much like shopping for hotels or flights; ◉◉ Support for many different credit profiles and business types; ◉◉ Access points to credit and capital through mobile, web and dealer portals; ◉◉ Online convenience versus offline burden; and ◉◉ Privacy: only those that need to see the information have access to it.
Best places to finance equipment online Here are four suppliers that merit examination by small businesses: 1. EquipmentWallet.com. It focuses exclusively on equipment leasing and financing and is armed with a roster of conventional, specialized and institutional lenders. Businesses are
CANADIAN EQUIPMENT FINANCE | Fall 2018 | canadianequipmentfinance.com
matched with lenders that bid for the client’s business. 2. LeaseQ.com. This online platform focuses on equipment leasing with support from many leading lenders. Lender pricing is built into the system and allows borrowers to comparison shop in a matter of seconds. 3. Fundera.com provides an array of business financing options from term loans to business start-up loans and equipment financing. They use both technology and advisors to help assist clients in choosing the best financing options for their businesses. 4. Lendio.com offers businesses access to many online financing options, such as lines of credit, short-term loans and equipment financing. They have also introduced a franchise model where local representatives help make business owners aware of Lendio and its services and how businesses can benefit. The trend to move online and mobile for small business equipment financing will continue to become more commonplace and eventually the norm. As lenders and mobile technology become more aligned to service small business demands, this will further increase use cases and the adoption by small businesses. Shopping for equipment financing online allows businesses to eliminate many barriers to accessing capital they have encountered in the past. John Elliott is founder of EquipmentWallet.com. He is an expert in the equipment leasing field. He has worked for private and bank-owned equipment leasing companies, co-founded a private equipment leasing company and founded a technology-based equipment leasing marketplace. He has also been instrumental in developing other digital assets such as dealer web application solutions in the equipment financing industry. You can reach him at john@equipmentwallet.com. 1 Innovation, Science and Economic Development Canada, Small Business Branch, “Key Small Business Statistics”, June 2016. 2 Equipment Leasing & Finance Foundation, “U.S. Equipment Finance Market Study: 2016 – 2017”, study. 3 Kabbage, “Kabbage Data Shows High Growth Rate of Mobile Lending Among Small Business Owners”, press release, March 28, 2018.
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