Cyclical recession could be good news for some equipment financiers

PHOENIX — A cyclical recession could open the door for equipment financiers with lending capacity. 

Concerns over a possible recession began as soon as the Federal Reserve began raising interest rates in March 2022. And while the rate hikes have slowed and fears of another structural recession have subsided, the possibility of a less common cyclical recession, or a recession aligned with the business cycle, remains, Jason Turner, chief investment strategist and head of multi-asset strategy at Great Lakes Advisors, said today at the Equipment Leasing and Finance Association’s annual convention. 

“We’ve seen a lot of structural recessions, that’s a bubble popping, that’s 2008, and we’ve seen an event-driven recession in 2020,” he said. “A cyclical recession, one tied to the business cycle, hasn’t happened since the early 1990s.” 

A cyclical recession has the potential to impact all businesses, but companies with excess capital and strong portfolios can weather the storm and grow when other lenders pull back, Turner said. 

“There are companies that enter that type of situation well-positioned with strong balance sheets that can take advantage of destabilization where there are companies that have been living on life support,” he said. “The interest rate is different for different businesses.” 

For lenders with the capacity to make these loans and achieve growth in the current macroeconomic environment, it is hard to justify not taking advantage of the situation, Turner said. 

“You’re obtaining financing for a project, a purchase, a lease; if that is accretive at current levels of lending, why not make the move,” he said. “Why not take advantage of the environment because there are going to be competitors that are weaker now, or they will be weaker over the next six to nine months.” 

Companies that make transactions during the cyclical recession will risk the margins on their transactions for the benefit of increased market share, Turner said. Some larger companies are already attempting to gain on fixed-rate loans and the bond market because of current market conditions. 

“We’ve actually seen that with large businesses. Fortune 500 businesses over the last several years have amped up the amount of fixed-rate loans on their books to the tune of 94%,” he said. “They’re paying an average of 3.1% on that money they took in the bond market the last several years. We have several large Fortune 500 companies that are positive from an interest income perspective because their cash rates are 5%.”