CICA/RBC Quarterly Business Monitor Webinar - Equipment Financing Trends Dave Magier

CICA/RBC Quarterly Business Monitor Webinar - Equipment Financing Trends Dave Magier

CICA/RBC Q1 2012 Business Monitor Economic Results Overview

Business and Economic Optimism Continue to Improve 100 % 80 % 60 % 40 % 20 % 0 % National Optimism Business Optimism Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Q3 09 Q4 09 Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q4 11 Q1 12

Key Metric Projections Are Positive And Consistent With Last Quarter 8% 6% 4% 2% 0% -2% -4% -6% -8% Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Q3 09 Q4 09 Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q4 11 Q1 2012 Revenue Profit Employees

Agenda Current Trends Equipment Finance Solutions Questions

Current Trends. a majority intends to increase both investment in machinery and equipment and labour RBC Economics, ECONOMIC AND FINANCIAL MARKET OUTLOOK March 2012

Current Trends

Bank of Canada Historical Rates A good time for strategic investments to drive productivity and diversify revenue 1940 1981 2011

Equipment Financing in Today s Market Place Bundling of solutions progress payment, trade finance and foreign exchange Domestic players are building global networks and expanding their participation in supply chain OEM captive finance arms are offering attractive packages to support sales of new equipment to grow their market share Technology refresh programs multi-vendor projects Retrofit and alternative energy solutions are gaining momentum in this low interest rate environment

Financial and Business Advice Tax HR & Business Banking & Finance Accounting Investments Legal Insurance

Equipment Financing in Today s Market Place Bundle the solution progress payment, trade finance and foreign exchange Example: Clients continue to upgrade their production equipment to reduce labour costs, and enhance their capability for precision manufacturing in order to expand their role in the supply chain $1,000,000 EURO machine being built in Germany Terms: 25% payment with purchase order 50% payment at half way point 15% payment prior to shipping 10% payment upon commissioning Client has not dealt with this particular supplier in the past How is the client managing and mitigating risks against progress payments and foreign exchange?

Equipment Financing in Today s Market Place Bundle the solution progress payment, trade finance and foreign exchange The Progress Payment Issue: Doing business and negotiating payment terms with new or unfamiliar foreign suppliers can involve complexity and risk for importers. Import Letters of Credit issued on your behalf serve to guarantee payment to the exporter provided the exporter delivers the appropriate documentation as prescribed within the Letter of Credit document. Import Letters of Credit are governed by an International set of rules designed to help mitigate risk related to foreign business transactions. Some equipment finance providers can support both the progress payment requirement where a Documentary Letter of credit solution is not required, or they can support the take-out of funds that have been paid via an Import Letter of Credit

Equipment Financing in Today s Market Place Bundle the solution progress payment, trade finance and foreign exchange The Foreign Exchange Issue: A $1,000,000 EURO piece of machinery poses risk for the client if it is a design build, or built on order scenario. The client will enter a CDN$ equipment finance contract. The CDN$ equivalent is approximately $1,265,000 Estimated build time, unforeseen delays etc. put the client at potential risk due to foreign exchange fluctuations. Your equipment finance solution should incorporate options and an appropriate take-out structure to mitigate these potential risks. i.e. Payment made in EURO to supplier, client enters into a CDN$ equipment finance solution - has the foreign exchange risk of approximately $265,000 CDN been mitigated?

Equipment Financing in Today s Market Place Credit Approval Flexibility multiple options under an aggregate approved limit Flexibility is key in properly structuring a company s credit availability In addition to standard items such as a bank operating line (working capital line), corporate expense cards, and real estate finance (commercial mortgage), there are options to support equipment financing. Aggregate Approval Limits provide flexibility and are available from some lenders Revolving Equipment Loan Has an aggregate limit which allows client to select a loan, lease or conditional sale This provides other advisors, like the accounting and tax advisors, to provide further advice around a client s capital expenditure programs

Equipment Financing in Today s Market Place OEM Captive Finance arms are offering attractive rates on NEW equipment Example: new agriculture equipment cash purchase price confirmed at $500,000 finance offer available at vendor 0% financing for 12 months Buyers should consider if this is truly a subsidy being offered by the manufacturer, in other words is there absolutely no further discount available if they offer cash If the answer is no (there is no better price if it were a cash sale) then create a strategy with your equipment finance provider on the options after 12 months: Is the 12 month purchase financing structured as a lease or a loan? what does the finance rate change to after 12 months? Are there better options for ongoing financing after 12 months via my traditional banking relationships? Examine the offer fully and ensure a strategy exists once the 0% (or low rate) finance term expires

Equipment Financing in Today s Market Place Technology refresh programs multi-vendor projects Example: companies with typically 200 or more employees may often be better to have a technology refresh program that is not necessarily affiliated with an Original Equipment Manufacturer (OEM). Equipment finance solutions are available in the market that partners a low cost debt funder with an equipment equity partner. This can create a walk-away or true lease option for clients who tend to continually upgrade and refresh their equipment. Benefits to client Can select various vendors without being tied to a captive finance offer and potentially the requirement to buy future equipment from the same vendor/oem Can support various purchase cycles, quarterly, semi-annually, multiple departments Options are available to purchase, continue to lease, or return the equipment Return of equipment complies with all regulations relative to privacy and environment

Equipment Financing in Today s Market Place Pace of equipment purchases has accelerated clients are vying for position on supplier order books Sale / Leasebacks A company sells equipment that they have previously purchased to a Leasing company, who in turn leases the same equipment back to the company Clients are acting quickly on equipment acquisition where a deal is available for new/used equipment Replenish working capital

Aspects of Ownership As an equipment finance provider we often hear. Once a client receives this advice, they typically: Use all of their cash resources to acquire the equipment Use their working capital line, or a portion of it, to acquire the equipment Ask their lender for a standard term loan with little or no discussion with the lender around options to support their cash flows, asset useful life or hedging of their debt cost (should I fix or float?)

Aspects of Ownership Note: Conditional Sales Contract (CSC) must be new equipment from a Canadian based bona fide vendor Example of a Conditional Sales Contract structure that may be of benefit to your client: $200,000 Capital Equipment Cost 26,000 Harmonized Sales Tax (ONT @ 13% assumed in this example) $226,000 Required Cash Outlay Assume we have financed $226,000 over 3 year term/amortization @ 5% and created a repayment schedule that supports the Input Tax Credit flows for our client. Payment 1 $6003.96 Payment 2 $6003.96 Payment 3 $32000.00 Payment 4 $6003.96... Payment 36 $6003.96 The benefit to the client is that they achieve a 100% finance solution without tapping into their cash, or other working capital lines, and we provide the flexibility of managing their cash flow against their ITC recovery

Aspects of Ownership Joint Election Under Section 16.1 of the Income Tax Act Uses Prescribed Rate set by CRA. Currently 3.56% for May 2012 Potential benefits to a client A lease structure may provide a higher financing amount and/or irregular payment structures (or lower payments if a balloon purchase option is added) compared to standard term finance options being offered The use of Joint Election signed by the client and the Lessor elects that the client is deemed to have purchased the equipment which may provide benefit around Capital Cost Allowance *The Joint Election option should be fully reviewed with proper accounting/tax advisors

Greening Strategies Equipment to improve energy efficiencies and lower business operating costs Clients are seeking additional capital to support a number of energy improvements such as chillers/hvac upgrades, solar systems, wind etc. Transportation fleets are looking to optimize fuel efficiency discuss your client s fleet management strategies and impending government regulations for 2014 Example: $3Million Energy Retrofit. Anticipated initial savings provided by project vendor is $290,000 annually. Simple payback on project was 10.3 years Considerations for client: Should we consider such a large project? Can we create a structure to provide a $0 net cash flow impact? How can we build further flexibility into the finance structure but maintain a fixed cost?

Greening Strategies Note: Operating lease structures may be available in order to meet operating budget requirements versus capital budget requirements. Typically these structures come at a higher cost.

Common Asset Categories Transportation Highway tractors and trailers School Buses Road maintenance equipment Aircraft, Locomotives, Water Vessels Manufacturing Printing equipment Production equipment, Presses, CNC, Injection Moulding Healthcare, Hospitals and Professionals Diagnostic equipment MRI, X-Ray, CAT scan etc. Laboratory equipment spectrometers, centrifuge, etc. Dentists, Doctor offices Construction Industry Excavators, Backhoes, bulldozers Dump Trucks, Cranes, Service Vehicles Agriculture Combines, Tractors Tillers, Irrigation Systems Pole Sheds Moveable Storage Structures General Office & Leaseholds Computer equipment (hardware and software) Telephone systems, Copiers, Furniture, Infrastructure Solar / Renewable Energy Solar Panels, Energy Retrofits

Questions?