NEW YORK CITY — The converging economic issues of the past year – the subprime mortgage meltdown, the collapse of the credit and default swap markets, the continuing decline in real estate values, and the volatility of energy and commodity prices – have significantly changed the equipment finance business. The automatic vending and coin-operated amusements industry is a part of the nation’s $650 billion equipment finance sector, which fuels national economic growth.
The current phase of the nation’s credit crisis began in early September when Lehman Brothers Holdings Inc. collapsed. The 158-year-old financial institution filed for bankruptcy on September 15, throwing the credit markets into disarray. Unlike previous institutional failures, the federal government did not offer a bailout plan for Lehman, triggering a global cash crunch. And this week, the House of Representatives defeated the White House’s historic $700 billion rescue proposal.
As Lehman’s troubles began to unfold, much of the coin-op industry was assembled in Las Vegas for the Amusement and Music Operators Association’s International Expo, celebrating AMOA’s 60th anniversary. The September 10-12 trade show offered a first look at some of the most innovative jukebox and amusement product seen in decades. But this week’s events in the financial markets and on Capitol Hill have operators and factories wondering about the credit facilities that put games and jukeboxes out on the street.
Like every other industry dependent on the availability of capital, vending will be impacted by this week’s events, said Bob Geschine, president of H. Betti Industries. HBI is parent of Betson Enterprises, the nation’s largest coin-op equipment distributor. It’s also the marketing arm of Raw Thrills videogames and the exclusive representative of several proprietary amusement products.
Betson and other distributors have seen an increase in requests for credit in recent months. “We expect this trend to grow as credit markets continue to tighten up,” Geschine said. “The ability to lend to credit-worthy operators is there and we anticipate little disruption in the flow.”
While traditional credit lines for core operators remain strong, he cautioned that Betson and other lenders are requiring more information about operations to assess customers’ ability to repay loans. Newcomers to the business will be treated with much greater scrutiny, he added.
Leasing is the fastest-growing product in Betson’s financing portfolio, becoming the cornerstone of its selling model. Scarcely used five years ago, it’s now employed to fund over half the purchases made by operators. During the credit crunch, Geschine noted, the leasing model will work even better because the distributor retains ownership of the property, monthly payments are lower and operators can exit an agreement before it terminates.
David Cohen, chief executive of Firestone Financial Corp., the industry’s oldest and largest financier, warns that this credit crisis is real and will impact every industry at all levels. He underscores the importance of the passage of a rescue plan that is designed to restore banks and ultimately trust. “Without debt, or credit, the economy will stop,” he said, “and that’s not an option.”
Firestone’s ability to lend is based on the financial strength of its partners, which include Bank of America. Like Betson’s Geschine, he warns that the standards for operators will become more stringent.
The Firestone chief also is concerned about short-term interest rates. “It’s simple supply and demand economics,” he explained. “When the credit supply dries up, it will cost more.”
The current management team at Firestone, he pointed out, has seen two serious downward economic cycles since the early 1980s. “We will recover,” Cohen said, “but the questions remain: How long will it take? And what will be the impact?”
It could take long than usual.
One year ago, VT’s financial editor, Allan Z. Gilbert, predicted that credit would get tighter. “We will see a lot more legislation and it will get draconian. Credit standards will get tougher, so be prepared,” he warned (see VT, August 2007).
“If we get a bailout package that actually works, we will get through the credit crisis,” he said, echoing Cohen’s remarks. “But beyond the problems the bailout will fix, there are bigger ones in our economy, and I’m afraid it will take some time to work through them, not the usual three- to six-month recession in my opinion.”
The credit crisis, Gilbert explained, is not a result of banks not having enough money to lend. “They have it, but are afraid to lend it because they think other banks won’t lend money to them. So it’s a liquidity issue.
“Banks can keep creating loans,” he continued, “but they have a legal obligation to only lend up to a certain multiple of their capital, and they do that by borrowing from and lending to each other. What’s happening now is that banks are afraid to spend cash because if they don’t meet their legal reserve requirements, no one will lend to them, and then they’re technically insolvent. If we get a bailout package, which I expect Congress will accomplish this week, it will solve the problem by re-liquefying banks.”
Gilbert added that major credit card companies, a source of financing on which many small business owners depend, announced this week that they are reducing credit limits for 60% of their cardholders. “An awful lot of small operators finance their equipment with credit cards, and they are going to have a tougher time finding the money they need,” he cautioned.
The VENDING TIMES financial editor, himself a former operator, said rising unemployment and the weakened state of the economy will take its toll on the vending industry. “If people aren’t working, they’re not eating out of the machines. Even if they are working, they’re so strapped with gas and rising food expenses, they have less money to spend on frivolity,” he said.
“They’ll still eat lunch, but maybe they’ll brown bag, and they might not buy that candy bar,” Gilbert said, “Per capita spending will drop. There’s not anything new this time. It will just be more difficult for operators to be profitable, as it always is when the economy is struggling. There’s nothing unique about this turn, I just think it will take a little longer to get through it.”
Likewise, Firestone’s Cohen and Betson’s Geschine are concerned about location traffic at amusement and jukebox stops. “Location traffic may slow down,” Geschine noted.