2025 CLFP Recertification

Equipment Valuations

The primary role of Asset Management is to help the lender understand the upfront value of the equipment investment and the value at the end of the lease. The type of Asset Management can vary based on a company’s lending activities, but it remains an important factor for all companies.

Determining the upfront value of equipment is critical in preventing fraud, ensuring advance amounts are appropriate, and minimizing any value deficiencies upon default.  User-to-user equipment sales (Private Party Transactions) generally involve more risk than manufacturer-to-user or vendor-to-user sales. Used equipment values can be more difficult to accurately determine than new equipment sold by the original manufacturer.  Accurately assessing the value of used equipment will require knowledge of the hours/miles, asset condition, and overall remaining useful life (which can differ for the same equipment depending on the industry). Requiring equipment inspections for user-to-user equipment sales and used equipment sales can reduce the risk of advancing more than the equipment’s value, resulting in a collateral deficit vs. the net investment, creating a greater risk of loss in the event of default. This can be a balancing act between efficiencies and loss prevention.

Determining the value at the end of the lease is part art, part science.  It is nearly impossible to accurately predict equipment values 3, 5, 7, or 10 years from now, and the longer the lease term, the more difficult this becomes.  The industry has seen some incredibly high values recently and some quite low values recently, none of which could have been predicted several years ago.  Companies providing financing for more specialized equipment face greater valuation challenges.

Consider the 2021 – 2022 time period, when supply chain challenges caused by COVID-19 (which nobody predicted) created a shortage of available equipment, sometimes significant shortages. This supply/demand imbalance resulted in high equipment values—if one wanted new equipment, it was simply unavailable, which drove up used equipment values (provided there was used equipment available). 

Consider the current period, where dealers/sellers of equipment are flush with both new and used equipment.  This demand/supply imbalance has resulted in reduced equipment values for many new or used assets. When some industries/regions experienced unexpected growth throughout COVID, companies purchased equipment to meet increased business demands. As societal norms returned, some found no need for additional equipment, increasing the availability of used equipment.

During the 2021 – 2022 period, many lenders realized significant gains at maturity due to elevated equipment values (vs. predictions at origination).  During the current period, however, some lenders are experiencing losses, especially upon default.

For transactions originated in the 2021 – 2022 period when equipment values were high and costs potentially “elevated,” obligors defaulting when values are depressed leads to increased losses by the lender.  Additionally, lenders would be prudent to recognize that their value curves throughout the term of the transaction might need to be adjusted compared to “normal times” based on the elevated values/equipment cost at origination.