I had to add range on the vertical scale of my chart below, because for the first time, one of the rates that I follow closed the week below 2%. That’s the five-year swap rate, which is a pretty good guide for Medical Equipment Finance, most of which is based on five-year terms. If we assume that lenders need 2-3% margin for risk and profit, that means five-year rates should be 4-5%, the lowest yet.
So, if you can bring forward plans to replace or add revenue-generating equipment, you’ll get the lowest rate in a very long time.
The chart above represents over five years of the four interest rates that I record weekly. As stated in previous blogs, the 5-year swap rate (in red) is the most interesting, because it is a pretty good indicator of what rate to expect for Medical Equipment and other finance. The swap rate last Friday was 2.54%, to which we add at least 2% for margin and risk, resulting in rates to my clients in the mid to high 4s.
My analysis of the trend remains down, because we continue to record lower lows and lower highs. But, if you need to invest in income-producing equipment, now would be a good time to lock in a really low 5-year rate. You may also want to consider bringing forward planned investments, such as equipment replacement or major upgrades.
As you’ll see below, the trends remain downward, except the five-year swap rate (the red line), which has gone up since hitting a low of 2.28% in early April. But, it’s only up by 40 points. The big question on the minds of many is, “Are we seeing or have we seen the bottom of this cycle?”.
As an avid chartist, my read is that until we see a break in the cycle of lower highs and lower lows in the long-term trend, it’s still a down market for interest rates. For those interested in Medical Equipment Finance, the five-year swap rate is the most relevant, and it would have to break ‘resistance’ in the high-threes to signal a reversal of the trend.
You may recall from a previous post that lenders apply a margin/risk uplift of about 2% to the swap rate, making the current five-year rates to creditworthy Healthcare and other businesses in the high-fours.
I’ve been recording certain interest rates on a weekly basis for several years, and it’s interesting to note that, for the first time in decades, the five-year swap rate fell to under 3%. (For the uninitiated, the swap rate is the rate at which banks will lend to each other.)
The significance for those who need Medical Equipment Finance or any other form of Asset Finance is that you should be able to secure a five-year loan at close to 5% (assuming that lenders need ~200 basis points for margin and risk).
Also for the first time, the best three-year and five-year term deposits are in ‘lock-step’ at 4.2%.
I had coffee with a banker the other day to discuss his ‘appetite’ for a Goodwill Loan for one of my Radiologist clients who is negotiating the purchase of shares in an established Medical Imaging business. He very clearly identified the cycle that all banks follow, although they’re rarely in sync.
The banks shift back and forth between loose and tight credit policies. His bank is currently in a tightening phase for Goodwill Loans due to a growing number of bad and doubtful debts, mainly among Dentists. It reminded me of my experience at GE Healthcare where the ‘pendulum’ swung back and forth between a focus on market share and a focus on margin.
Monitoring the banks’ fluctuating appetites for the various asset classes is one of the core competencies of a good finance broker. So, save yourself a lot of time and hassle by engaging Sooner Solutions to source the right facility and lender for Medical Equipment Finance, Commercial or Residential Mortgages, Loans for Motor Vehicles, and Goodwill Loans.
The five-year swap rate is trending down again to just over 3%. This bodes well for those who are needing to finance medical equipment, cars, or other assets.
This has nothing to do with Medical Equipment Finance or Finance in general, but it is certainly worthy of comment. Announcements this week from the U.S. and China about reducing carbon emissions mark the beginning of the end for coal. Obama’s new policy to cut carbon emissions by coal-fired power plants is a welcome, although belated, show of leadership on global climate change.
He now needs to finally mandate that all new federal government vehicles will be powered by natural gas, which will not only reduce our dependence on OPEC oil, but will also take advantage of an abundant and relatively cheap American resource. More benefits include underpinning an emerging industry of gas-powered vehicles and a reduction in air pollution.
According to Angus Grigg and John Kehoe in today’s Financial Review, the Chinese announcements have more to do with public opinion about worsening air quality, and the Communist Party’s belief that pollution is the biggest threat to its “monopoly on power”. The article also includes Ross Garnaut’s suggestion that China’s appetite for coal has peaked and could fall by 10% by 2020, after growing by nearly 13% annually from 2000 to 2011. This is what he describes as ”a turnaround of historic dimension and global importance.”
I’m never too busy to be a resource for someone you care about. So, if you or someone you know needs dough, give me a go.
As you can see below, the five-year swap rate bottomed in October, 2012, and all have been essentially flat since August last year. I predict the next move will be up, but I know not when.
Fixed rates are the norm for Medical Equipment Finance, and they’re now a much larger percentage of the loans for residential mortgages at over 33%, according to Mortgage Choice. It appears that I’m not alone in the opinion that we’ve seen the bottom in this rate ‘cycle’. While variable rates remain more popular, it’s surprising that over 23% of borrowers have undiscounted rates. They all need the services of a good finance broker.