What has happened to my M&E collateral value?

Once recovered from implementing the Paycheck Protection Program, small business lenders may turn their attention to their portfolios of existing C&I and ABL accounts and begin to wonder…

What has happened to my machinery and equipment collateral value over the past three months?

Lending clients are coming to us with this question and their assumptions of the answer. They either assume that machinery and equipment (M&E) is going to take a huge value hit across the board because of market uncertainty and a coming flood of liquidations; or they assume that the stimulus packages which have kept small businesses afloat will allow the market value of M&E to recover quickly once stay-at-home orders are lifted and business resumes.

Neither assumption is safe, of course, but that doesn’t mean you can’t have some assurances of the market values of your collateral. Below are two guidance points in order to help assuage lenders’ concerns and guide decision making regarding M&E collateral in the coming weeks and months.

Please read on, and feel free to contact us or comment with any questions.

Guidance Point #1: Don't be tempted to blindly apply general economic trends to specific M&E assets or packages of assets.

“M&E” encompasses a wide range of asset types which are associated with a wide variety of industries. Consider these four asset types commonly found in small business M&E collateral packages:

Semi tractor

CNC machine tool

Bulldozer

Digital printing press

Each of these M&E-classified assets is likely to be on the books for $100,000+. But the market values of these four assets exist entirely independent of one another. The transportation, manufacturing, heavy construction, and marketing industries each rely on economic, political, technological, and consumer trends which may or may not have any effect on other industries.

Consider just the semi tractor. Each semi tractor is configured with a certain weight capacity, engine size, transmission, cab size, and so on. Depending on the specifics, the semi tractor you hold as collateral might be commonly used for long-haul trucking, urban delivery routes, heavy machinery hauling, or regional warehouse distribution, to name just a few possibilities.

Each of these intended uses is associated with different industries. Two trucks may look the same on the outside, but one built for aggregate delivery to regional road construction sites is not going to rise and fall in value in accordance with one built for cross-country consumer goods shipping.

The same situation applies to the other three types of M&E on the list, and to any type of M&E in your collateral portfolio. Very few large and valuable M&E assets are “general” in nature. If your small business borrower invested six figures into a piece of equipment, they likely ordered something which was specifically designed for use in their industry vertical.

Guidance Point #2: You don’t need a crystal ball – the market data exists.

2020 should have taught us all that we cannot predict the future. (These days, we often struggle just to understand the present!) Accurately forecasting future values of M&E assets is simply not possible at this point.

To understand the reason for this, consider a few broad domestic industry categories:

Mining

Auto manufacturing

Agriculture

Aerospace and defense

What do these and other major domestic industries all have in common? For one thing, they support vast supply chains, including countless small business operators utilizing industry-specific M&E assets. For another, they are very politically important.

These two factors mean that in any given week – especially during periods of instability, when politicians are eager to take action – one House bill, one cabinet appointment, or one Tweet can alter forecasts for entire industries and, therefore, market values for entire classes of relevant M&E assets.

Because of this, it is wiser to rely on the market data we can find than to try to predict future trends.

Some industries (transportation, construction, and farming, for example) experience such a large volume of machinery transactions that one can see industry trends affecting the marketplace for used assets on a monthly basis. Manufacturing and other industries may not experience the same volume of asset transactions, but dealers and liquidators can attest to current demand and value trends on the ground even if the statistical data is not as organized or robust.

By this time (early May), we are far enough into this situation that the market data needed to value your M&E collateral exists; a great many M&E assets have been bought and sold over the past few months. Admittedly, until markets stabilize the data may only be relevant for a week or month at a time, but it is out there and a good appraiser should be able to identify and interpret it in order to give you meaningful and current M&E valuations.

Tim Roy, ASA, Senior M&E Appraiser

Capitale Analytics

[email protected]