Fleet Panel Says Banks Reward Struggling Carriers

July 14, 2009

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Equipment financing was a popular topic during the recent Refrigerated Division meeting of the Truckload Carriers Association, held last week in Torrey Pines, Calif. The panel of senior managers at leading reefer fleets concluded, though, that financing is not the problem facing fleets today: It is the failure of lending institutions to foreclose on poorly performing fleets, to the detriment of the better carriers
that meet their obligations and conduct their businesses in a professional manner.

Many times over, the message was stated: The carriers at risk are those that are performing, even if only marginally. Banks are very reluctant to foreclose on carriers that are not making payments on equipment.

"If you're doing well, the banks love you," said an outspoken John Kaburick, chief executive officer of Henderson Trucking. "If you're in debt, they're frightened to pull the plug." Agreeing, fellow panelist Ed Ruhe from Classic Carriers said, "Either you own the bank, or the bank owns you."

The consensus was that to stay healthy, a carrier must have an excellent balance sheet that has to be updated and submitted to the lender almost weekly. The alternative was to load up with so much debt the bank would be frightened to shut you down.

To some extent this conundrum is driving equipment purchase decisions.

One speaker said he was going to pre-purchase in 2009 in part for this reason. But other factors in the decision were interest rates, which are currently not at historic lows but are likely going to be lower than next year's, and the fact that 2007 engines were not good at their introduction. "I'm not going to be a guinea pig again," he said.

Ed Ruhe agreed on the interest rates, citing the Obama administration's spending and the likely impact on rates as we go forward.

This was in contradiction to Kaburick's stated objective of holding off on equipment purchasing until the 2010s come along with their promised fuel economy improvements.

Overall, the consensus was that banks are reluctant to finance trucking in the new environment. If they are, the cost of money is as much as double. So panelists said they are going to lenders familiar with the industry or to captive finance through the truck makers.

Russell Stubbs commented that his company, FFE, leased a substantial part of its equipment, preferring to "use cash for the business, not rolling stock." He said the trade-ins for power units are at 42 months and trailers at six to seven years. "Talking to bankers is about as much fun as talking to shippers," Stubbs added, referencing the tough times even refrigerated carriers are seeing at the negotiating table.

Lenders frightened to shut down unprofitable carriers are part of the problem, panelists agreed. Equipment financing costs account for 20-30 cents per mile, but carriers that are making interest-only payments, or none at all, are able to undercut profitable carriers and drive the rates down. Panelists concluded that banks have a responsibility to close down underperforming carriers in order to allow those who can pay their bills to survive in the current tough environment.

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