equipment finance roundtable discussion

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BUSRide presents a two-part, educational roundtable discussion on motorcoach equipment finance.

TRANSCRIPT

Page 1: Equipment Finance Roundtable Discussion
Page 2: Equipment Finance Roundtable Discussion

BUSRIDE | E Q U I P M E N T F I N A N C E2 busride.com

Page 3: Equipment Finance Roundtable Discussion

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Table of Contents

Official BUSRide Roundtable Discussion: To lease or to buy? That is the question 4 About Advantage Funding 7 About CH Bus Sales 9 About Prevost 11 About REV Group 13

Page 4: Equipment Finance Roundtable Discussion

BUSRIDE | E Q U I P M E N T F I N A N C E4 busride.com

BUSRide spoke with a select group of financial thought leaders in the bus and motorcoach industry for a roundtable discussion on the issues, trends and practices that affect operators’ borrowing, acquisitions and all-around financial health.

Craig Lentzsch, executive chairman of All Aboard America! Holdings and former president and CEO of Greyhound Lines, Inc., moderated this high-level discussion with the following panelists:

Craig Lentzsch: Please introduce yourselves and tell us your company’s relevance to the bus industry.

Al Damiani: Advantage Funding is a commercial finance company that’s been in business for about 18 years financing motorcoaches as well as other commercial transportation vehicles for our entire history. We are a wholly-owned subsidiary of Macquarie Group, which acquired us in July 2015.

Bob Foley: CH Bus Holding has a wholly-owned subsidiary, Coach Finance Group, that finances motorcoaches. I personally have been involved in financing motorcoaches in the industry since 1985.

David Scoular: Prevost sells motorcoaches and I personally have 20 years of financial experience.

Matt Hotchkiss: I’ve been with Wells Fargo Equipment Finance for about 14 years. Prior to that I worked at ABC Bus Financial Services and GE Capital. I came to Wells Fargo to develop its bus segment, and my focus has been primarily motorcoach. I’m originating business in the coach market, but also managing all bus segments including shuttle bus, school bus, transit and motorcoach.

Greg Berg: REV Group is a diversified manufacturer of transportation equipment and I’ve been in the industry for 25 years.

We bus operators are typically not as financially sophisticated as all of you. Identifying for us the different financial products in the marketplace, as well as their pros and cons, is critical to your process. As operators, it’s also critical we thoroughly understand what your products will do for us. So if you’re talking to a bus operator and they’re trying to figure out whether to finance a coach with you for resale – what’s your perspective on their decision process?

Hotchkiss: The primary products that we offer in this market are either going to be loans or standard TRAC leases. We provide other types of leases, but they’re less common than loans and TRAC leases so for the purposes of this question, I will focus on these two. In my

opinion, the primary factor in this decision is who can utilize the depreciation benefit the most – the operator or the finance company? If an operator has adequate tax write-offs already, either because of having enough depreciation, having net operating loss carryovers, or just not making a lot of taxable income – it makes sense to let the finance company take the depreciation, because that translates into an interest rate that will be significantly lower than what the loan interest rate will be — and that’s going to help the cashflow significantly.

With Bonus Depreciation currently available, the interest rate between a loan and a lease can be up to 100 or 125 basis points depending on the time of the year and the finance term. This has a significant positive impact on cashflow.

There are variations here, but if you’re financing a half-million dollar bus for seven years, you can save as much as $30,000 over the term doing a TRAC lease.

Damiani: From our perspective, I agree with what Matt is saying in terms of who shares the depreciation and the tax benefits. But we find that for a smaller operator they are more concerned with cashflow, so many times a lease versus loan decision is made based on whether the sales tax is paid upfront or over the term of the contract. In states where sales tax is due upfront we typically write more leases. We find in many cases this is a crucial piece whereby they make the decision less so from the income tax standpoint.

That means that they’re basically deferring the sales tax over the time of the lease. They’re not avoiding it all together?

Damiani: That’s right. They’re not avoiding it. It’s just that the customer pays the sales tax over the contract term versus a lump sum upfront, which could be rather substantial for a lot of these customers, especially the smaller operators.

Berg: I think both Al and Matt hit the nail on the head. It’s really all about your tax planning. I think our customers might not have an exact handle on their tax planning in Q1 or Q2 – they are looking at new contracts and other variables early in the year. They don’t know where they will end up at the end of the year from a net income perspective yet. Come Q3 and Q4, our customers have a better handle on their tax planning. They will know at that point if a loan or

Greg Berg, director of commercial finance, REV Group

Al Damiani, president and CEO, Advantage Funding

Robert Foley, president and CEO, CH Bus Sales

Matthew Hotchkiss, vice president – Commercial Vehicle

Group, Wells Fargo Equipment Finance

David Scoular, director of financial services, Prevost

Equipment Finance / To Lease or to Buy: That is the Question

Page 5: Equipment Finance Roundtable Discussion

a lease will best suit their needs. No one product is really the sole answer for our customers.

Foley: I would only add a little twist to the decision process, in which operators have specific contracts, i.e. a college to transport students for activities or possibly an employee shuttle contract for a specific period of time. It could be a two or three-year contract, and they’re not sure if they want to commit to owning a vehicle and then having to deal with selling it at the end of the contract if the contract is not renewed. There are also lease options that fit with these types of contracts.

We talked about three different kinds of financing. We talked about purchase money financing – referring to borrowing money against the value of a motorcoach and paying that off over time as one product.Another product being a TRAC lease where it is a lease for tax purposes, but usually treated as a purchase for balance sheet purposes. There’s a true lease, where the lessee has no interest in the residual value of the equipment. And then there is a hybrid called a split TRAC. Please talk about the difference in those four products and how it affects financial statements and cost of financing?

Scoular: The split TRAC lease is basically a glorified lease. It has some off-balance sheet items, but it’s not a fair market value lease. TRAC is similar to the split TRAC but it is not an off-balance sheet lease as the split TRAC and true Operating Lease are considered. The loan is obviously on the balance sheet. Typically with loans there is money down and leases are completed with advance payments as they are not allowed per accounting rules to have equity.

From financial statement standpoints, loans are going to count

against the operators’ cashflow and leverage, while the leases are generally just cashflow items since they are not typically balance sheet items. In the long run, since the coach finance business is cashflow driven, the leases and loans are captured fairly equally as most lenders also review the operators overall debt/lease schedule against their fleet list.

Berg: Once these new rules go into effect, the split TRAC lease basically goes away because it has no benefit anymore. There’s no such thing as an off-balance sheet starting in 2019.

Are your companies going to change the way you look at the customer’s balance sheet when the rules change?

Scoular: I think, overall, not as much as everyone thinks. Again, in the coach finance business it’s mainly about cashflow, which is P&L driven, and leverage secondarily – which is where the balance sheet items flow through.

Hotchkiss: I think it just gives us a more accurate picture of the customer’s balance sheet. With the way we calculate it now, we try to estimate what the off-balance sheet debt is by either looking at lease expense or lease payments. So, we’re kind of doing it already. We’re probably not always accurate on how we calculate it now, and that’s really the purpose of the law – to make disclosure transparent.

Damiani: I agree with that. It’s going to make our lives a lot easier as it will enhance financial transparency. Currently we need to request full fleet and debt schedules, as typically many customers do not carry all of their debt obligations on the balance sheet. Under the new rules all lease and loan obligations will be on the balance sheet which will

enhance our ability to accurately assess cashflow.

Are all of the financings you’re talking about fixed rate financings, or are there floating rate versions ofthese products?

Berg: Yes, there are, just not that many. In an increasing rate environment, I wouldn’t recommend it at this point, not for the long-term.

Scoular: Loans can be floating rate, but given the potential rising rate environment it has been and will be seldom used. Leases are fixed but in actuality, leases don’t have rates. They only have payments or rentals.

Why should your customers borrow money and hawk their equipment as opposed to leasing? What’s the positive side of that approach?

Scoular: The loan offers operators the ability to depreciate the asset on their books versus recording the rental as an expense on the P&L. The recent bonus depreciation is also more favorable to owning than leasing. In reality, the coaches are used as collateral in leases similarly as they are used as collateral on a loan, so the main difference is for leverage calculations.

Foley: Well, I really think it goes back to the discussion that we had earlier when it was loan versus lease. If they have income that they need to shelter, they should look at a loan. If they’re focused on cashflow and they don’t have a lot of income, then they’re better off looking at a lower rate through a TRAC lease. If they are looking to add a vehicle for a specific contract, they may want a true lease to match the terms of the contract.

How does residual value affect this decision? Is it a consideration?

Scoular: Well, that’s the big difference. All leases have residuals, something in backend, so if it’s a difference between buying and leasing, you can buy a straight 84-month and not have it balloon for seven years. TRAC leases still have the residual finance and still have something to do at the end. That’s another difference between loan and lease.

You get the cashflow benefit in leasing, but you pay for it eventually, right?

Scoular: Potentially yes, if you decide to keep the coach and refinance the residual. If you trade or sell the unit, you may see some benefit in the cashflow savings.

Hotchkiss: It goes back to what your depreciation appetite is. If you don’t need the accelerated depreciation, then you are better off leasing. If you are paying more taxes today because of not taking accelerated depreciation, then you need to measure that against the cashflow savings of the lease.

Read the August / September 2016 edition of BUSRide for the second chapter of this roundtable discussion – Getting Your ‘Financial House’ In Order – What Lenders Look For.

Equipment Finance / To Lease or to Buy: That is the Question

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www.advantagefund.com888-246-4091

that bend with your needsAt Advantage Funding, we see things differently.

Flexible solutions

Advantage Funding knows your industry and the forces that drive it. We’re passionate about getting you the funds you need. Whatever your challenge, get the advantage of our creative loan structuring.

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7busride.com | BUSRIDE

Headquartered in Lake Success, NY, Advantage Funding is one of the largest transportation finance firms in the United States. But to our customers, we’re so much more: Financial partners. Problem solvers. Trusted advisors. We’ve been helping commercial and vocational transportation companies grow for nearly 20 years. Whatever your specialty, from towing to livery, first-response to motor coaches, waste-hauling to vocational trucks, we can help you obtain the financing solutions you need to grow and thrive. Our success is built on three guiding principles:

• Understanding the intricacies of the transportation industry• Taking a genuine interest in our customers and their needs• Offering products and services that give those we serve a distinct

advantage—regardless of credit historyWe know your business. We care about your success. And, we

have the flexibility to create solutions for you when banks and others cannot.

Our MissionAt Advantage Funding, we’re committed to being the best at what

we do—helping our clients develop, fund and maintain their vehicle and fleet acquisition strategies. We strive to provide the best financing value in the ground transportation industry while building lasting relationships with those we serve. Our customers are vehicle dealers, distributors, manufacturers, and end users who are seeking innovative solutions that banks and other financial institutions cannot provide. Whether you’re in the market for a single sedan or a fleet of vocational trucks, our aim is to provide you with easy financing and leasing programs that improve your profits and productivity. First, we listen carefully to your needs. Then, we put our nearly 20 years of experience to work for you, designing customized leases and loans that help you preserve cash flow and keep your business on the road.

Our HistoryAdvantage Funding was founded in 1997 by finance professionals

with extensive backgrounds in the transportation industry. With distinct creativity and a hunger for innovation, our founders knew they could bring a fresh perspective to transportation financing customers. Our company started small and through hard work, experienced 20% growth each year for nine consecutive years—steadily adding customers and employees. Key to our growth has been our focus on a personal approach to every transaction and our referrals from satisfied customers. As of July 31, 2015, Advantage Funding became a wholly owned subsidiary of Macquarie’s Corporate and Asset Finance group (CAF). Macquarie Group is a global financial services provider with offices in 28 countries. Its expertise covers advisory and capital markets, trading and hedging, funds management, asset finance, financing, research and retail financial services. Macquarie’s corporate and asset finance division specializes in the aircraft, motor vehicle, technology, healthcare, manufacturing, industrial, energy, rail and mining sectors. Its lending business specializes in corporate and real estate investing and lending. As at March 31, 2015 Macquarie had $28.7 billion globally in loans and leases under management. Today, Advantage Funding has more than 50 employees. Customers range from one-vehicle businesses to companies with large fleets. Despite our rapid growth, we continue to stay true to our original vision: providing flexible financial solutions, delivering timely service, and building long-term customer relationships.

Click here for more information!

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THE smart choice

For more information, contact CH Bus Sales at:877-723-4045 or visit www.chbussales.com

CH Bus Sales is the exclusive distributor of Temsa motorcoaches in the U.S.

…for A TRUSTED NAME. When you choose CH Bus Sales, you’re making a decision to work with some of the most experienced management and service teams in the industry.  We’ve partnered with Temsa – a great quality European manufacturer – to provide you with dependable products that match our reliable service.  Now that’s a winning combination. Our team is focused on helping you improve your business. 

When you buy a Temsa, you become our partner in success and a part of our family. 

We believe in relationships that last, and service that comes in first.

chbus-8.5x11-2-trusted.indd 1 5/5/16 4:45 PM

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9busride.com | BUSRIDE

CH Bus Sales began as the exclusive distributor of TEMSA motorcoaches in September of 2011 by first solidifying an industry experienced ownership and management team. CH Bus first distributed the TS 35 mid-size motorcoach in response to the recognized industry trend of charter and tour groups getting smaller. Now the industry had a high quality and comfortable coach that offered all the amenities of a full-size coach but was more economical to purchase. With much success in this niche market, CH introduced a smaller 30-foot, fully integral, mid-size coach in 2012, which seats up to 34 passengers. Once the TEMSA brand grew in the market, it was only a matter of time that operators would be looking for a full-size model. After many years of thoughtful construction, CH Bus introduced the full-size TS 45 coach in 2014. The supreme quality of manufacturing that TEMSA brings to the market, partnered with the experience of the CH Bus Sales team is a driving force for success that is unmatched.

Company Contacts

Sales Contacts

Services

More About CH Bus Sales:

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BEST VIEW FROM EVERY ANGLE.Prevost coaches deliver the luxury experience that today’s charter travelers are looking for. With their fuel-efficient powertrain and low-maintenance design, they’re as comfortable on your balance sheet as they are for your passengers.

www.prevostcar.com

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CARRYING THE INDUSTRY FORWARD FOR 90 YEARS AND COUNTING.

In 1924, Eugene Prevost, a carpenter by trade, built the fi rst wooden motorcoach body. Today, the Prevost name is synonymous with dependability, performance, and craftsmanship. Though much has changed in regard to the materials, designs, and manufacturing processes used to create Prevost motorcoaches, our long-standing commitment to building and servicing quality vehicles remains the same. We are looking forward to many more decades of leading the industry with innovation and providing safe, comfortable, and memorable journeys for all of your passengers.

For more information: USA 336-393-3929 Canada 418-883-3391 www.prevostcar.com

Cabinet-maker Eugene Prevost created his first wooden coach body in 1924. Since that modest beginning, Prevost’s legacy of fine craftsmanship and superior quality has been passed from generation to generation. Over the years, our inspiration and expertise have kept us on the cutting edge of design and technology.

Our uncompromising commitment to quality and continuous improvement, and our dedication to safety and sustainability are instilled in every aspect of our business – from our birthplace in Sainte Claire, Quebec, and to our North American parts and service facilities.

The Strength and Values of VolvoAs part of the Volvo Group, Prevost has access to the

financial strength, product development capabilities, and quality manufacturing technology of one of the world’s largest manufacturers of heavy-duty diesel engines, and the second-largest motorcoach and transit bus manufacturing group.

Volvo recognizes a clear responsibility to reduce the environmental impact of its products, and safety has been a guiding principle since the company was founded in 1927. Over the years, a series of pioneering innovations has made Volvo a world leader in automotive safety.

Dedication to safe, professional driversPrevost recognizes that motorcoach operators are greatly

challenged in recruiting, training and retaining qualified drivers. To that end, Prevost and the United Motorcoach Association (UMA) have joined forces to update and expand the Bus and Motorcoach Academy, creating a new program called Prevost Preparatory School for Professional Motorcoach Drivers, or “Prevost Prep.”

Presented by Prevost, UMA and the College of Southern Maryland, Prevost Prep is designed specifically for drivers to meet the driver training needs of the motorcoach industry.

The course prepares prospective drivers to pass the CDL written exam and provides a thorough review of applicable industry regulations for those already licensed.

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SOME BUSES WERE MADE TO CARRY OUT TASKS.

OURS WERE MADE TO ACCOMPLISH MISSIONS.

What do school, shuttle, luxury and transit buses all have in common?

Purpose. Each are called to perform duties that impact lives. We never lose sight of that responsibility and place it into every vehicle we make.

We are REV and we make eight of the hardest working, most reliable, bus brands on the road.

www.REVGroup.com

Finance Through REV Group - Flexible term vehicle loans with competitive rates and TRAC/Split TRAC/FMV leasing options available.

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REV is a leading manufacturer of motor vehicles for bus, emergency, specialty and recreation markets worldwide. Our companies innovate, design and build products that connect and protect thousands of people every day.

REV’s lineup of products includes ambulances, fire trucks, shuttle buses, transit buses, terminal trucks, street sweepers, luxury motorhomes and wheelchair accessible vans. REV owns 26 brands, employs more than 6,000 people in 16 different plants in the U.S. and produces more than 20,000 specialty vehicles annually.

Visit www.revgroup.com for more information!

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www.busride.com