Recently, when discussing value trends with a group of lenders, the following question was raised:
"From a collateral perspective, is it more secure to lend X percentage against used equipment than on new equipment because of there being less dissipation of value over time?"
At Loeb, we agree with the statement. Another lender in the room indicated he didn't follow, he stated:
"New equipment is new, therefore more valuable."
For example, a machine costs $100 brand new and its FLV at one year is $65. The lender advanced 100% of the new cost on a 5 year note. The outstanding loan value at the one year mark is approximately $85. The loan to value is 1.31.
A machine costs $75 used and its FLV at one year is $65. The lender advanced 100% of the used cost on a 5 year note. The outstanding loan value at the one year mark is approximately $63. The loan to value is 0.97.
This is the reason that lenders who issue leases/loans on new equipment for 3 or 5 years recognize they are underwater from a value perspective for the first period of their loan. That is the cash flow/ability to pay component of the underwriting credit decision.
Both new equipment and used equipment can be secure collateral. The understanding needs to be in place that, when looking at the opinion of value curve, at what point is the lender joining the curve? The higher up the curve (meaning the newer or new equipment) will dissipate more value than a similar used unit that starts at a lower value.
Understanding value today is critical. Understanding where that value is going is just as critical.
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