CIT’s Belcastro forecasts “opportunistic” growth for US equipment finance sector in 2014

In the US the large capital equipment financing market is predicted to experience continued, steady growth during 2014 – on an opportunistic basis.

In some cases, it may be forced to grow, since companies will have no choice but to continue to invest in replacing their old, outdated equipment.

According to Vince Belcastro, group head and managing director at CIT Capital Equipment Finance, several factors are driving demand for the purchase of large capital equipment in 2014.

“The uncertainty surrounding the federal budget last year,” he said, “resulted in a delay in overall hiring and capital investment plans among company executives. Furthermore, overall investment spending has remained low four years after the end of the Great Recession. As we enter the new year, many middle market executives are relieved that the federal budget has been approved and government spending finalized.

“As a result, capital equipment has been pushed to its useful limits and is at the higher end of its obsolescence scale. Last year’s muted beginning of a replacement cycle should continue to expand and gain momentum into 2014.”

Those sectors likely to witness an increase in demand for capital equipment

With new platforms rolling out and continued demand for automobiles improving, Belcastro believes that the automotive industry will remain strong over the next few years. The energy sector will continue to exhibit heightened demand for new equipment to support growth in the exploration and production of natural gas and petroleum.

“As a result,” he added, “the equipment used to transport energy related and petrochemical products and the equipment used in the manufacturing of these products should see continued and growing demand.

“We are also starting to see a rise in demand for general industrial manufacturing that has resulted in the need to replace equipment, coupled with the construction of new plants and mills related to this expansion. The homebuilding sector should continue to show moderate signs of growth as it did in 2013. Transportation and trucking will continue to go through a replacement cycle as operators modernize and update their fleets due to continued improvements in engine technologies, which will improve fuel efficiency and reliability.”

The financing variables

When asked which are the financing variables that middle market executives should consider before acquiring large ticket equipment? Belcastro said: “Before acquiring heavy equipment, it’s important that middle-market executives understand the total scope of the project that they’re financing and the type of asset they’re purchasing. Some questions they need to ask in advance are: What are their customers demanding? How are they going to use the equipment in their day-to-day operations? What’s the equipment’s estimated useful life? Are there tax benefits? Is there a particular payment structure the company is targeting? Technology also needs to be considered. Are there perceived improvements on the horizon that might be worth waiting for?

He added: “Regulatory changes relating to how the tax code addresses the equipment markets could impact demand for those companies making equipment purchases solely as a way to capture favorable tax treatment. Expired tax breaks effectively have impacted bonus depreciation and other section 179-related deductions and credits those companies would otherwise enjoy.

“While this provision was not passed as part of the current budget, the ‘extender package’ that is currently being considered may have retroactive patch treatment, which could be an excellent savings for business.”

Belcastro forecasts that the large capital equipment financing market in 2014 is likely to experience continued, steady growth that will be opportunistic. In some cases, it may be forced, as companies will have no choice but to continue to invest in replacing their old, outdated equipment. The energy sector will continue to grow as technology around natural gas exploration and production continues to drive the market.

“We would expect domestic manufacturing to continue to increase,” he stressed, “especially in the automotive sectors. We also think the home building sector will continue to show slow, but steady growth. As the economy improves further, trucking and transportation will continue to show slow, but steady improvement.”