Doug Kocsis, president of leasing firm DK Capital in Okemos, MI, had just about nailed down another deal, this one for a PA system for a regional production company. Then he got a call from the lessee. "He called to tell me that the Missouri River was rising," says Kocsis. "That was going to result in cancelled gigs, so he cancelled the purchase."
Stormy Weather
The weather this year has just been one more impediment to the credit markets that have been at the center of the global financial storm since it began five years ago, with mortgage loans consolidated and tranched, the crap ones mixed in with the good ones and dragging the whole infrastructure down. That created a credit crisis and lending drought that still endures to a large extent today, with banks reluctant to lend to businesses that need a reliable flow of capital for everything from equipment purchases to payrolls. The lack of available credit is largely behind the sluggish growth of the economy as it tries to shake off the worst financial meltdown since the 1930s.
Kocsis is doing his best to help it along. He says that the shift in revenue streams from recorded music to live concerts gave his business a bump mid-decade, when transactions like the State Theater in Detroit becoming another of Live Nation's Fillmore franchises and a raft of regional touring sound companies start-ups stimulated demand for capital. The shift from analog to digital consoles also created additional demand for capital purchases, just as the migration to line arrays had done a decade or so earlier. Then, in the wake of the financial crisis, Kocsis has seen demand falter a bit in the last two years, as well as lending requirements tightening up. All of this underscores how sensitive capital lending – and particularly leasing, which offers the ability to more nimbly change inventories to reflect the trends of the moment – is to a wide range of influences, from bad weather to bad bankers.
The credit crunch has eased some and interest rates are at historical lows – the interbank rate is effectively zero, and mortgages are available for as little as 4 percent – if you qualify. That's the rub in the economy, where credit scores and past credit history means more than ever. The nature of the live concert business combined with the fact that many regional companies are relative start-ups compared to the largest firms means that most companies will pay higher loan and lease costs. Companies with A-rated credit can expect to pay rates between 8 and 12 percent, about what you'd pay for a consumer car loan; B- and C-rated applicants will see rates in the low to mid teens, closer to consumer revolving credit lines. But comparing business loans to mortgages is misleading – despite still-falling real estate values, houses continue to have significant collateral value versus equipment that, thanks to the digital paradigm, has ever-less intrinsic value on the secondary market. The live sound market implicitly puts more wear and tear on capital equipment, further reducing its inherent value on the secondary market. The interest rate is always a function of the risk the lender takes on, and in the live touring business, that risk can be substantial.
Case-by-Case
"We can be more aggressive in the equipment leasing market, but we still have to evaluate each deal" and set the terms accordingly, says Kocsis, whose company also serves the lighting, AV presentation, and staging industries. "I have to determine if it's a deal that might go to a hard collection or even a default. On some deals I'll ask for a larger down payment, which gives me a better chance to recover on the secondary market. You have to look at each deal individually."
A lot of leasing activity in the live sound markets is based on regional companies making the move to the next tier within their markets. "We might see a young company going for the next level, adding a JBL line array, for instance, to say they're rider-friendly, to expands their market reach," Kocsis explains.
A recent development is the revival of a venture between DK Capital and amplifier maker Lab.gruppen, something that the company's vice president of sales for touring and installation, Frank Loyko, says shows another side of capital leasing. "It's a way of linking leasing and brand recognition," he explains, noting that the limited-time zero-interest rate on one and two-year leases generated cash sales beyond those that turned into leases. "In a low-interest environment like this, it's a very cost-effective way to generate brand awareness."
But what it also does is suggest that there is more capital in the pool now than there was a few years ago. Credit's not as a fluid as it was when DK and Lab.gruppen did their first such deal seven years ago, but it's a possible harbinger that capital availability continues to increase – as long as – as mentioned earlier – you can qualify to get at some of it. Even promotional deals like this one are still subject to more intense scrutiny than they would have been five years ago. Credit scores and credit history remain crucial to accessing money, as is a good relationship with a lender. Kocsis says that institutional bankers are looking for borrowers with annual turnovers above $3 million; below that, lease agents like DK Capital or All Media Capital, which partners with retailer GC Pro, offer the best opportunity to talk to lenders that you don't have to explain what a line array is to.
