Element Financial’s fortunes tied with U.S. recovery

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Equipment financing company Element Financial Corp. has attracted investors through rapid growth and acquisitions. But for the company to keep the party going in 2015, both management and the U.S. economy need to have a good year.

Toronto-based Element built its business on enabling automotive fleets, rail companies and other firms to finance equipment for commercial use. Founder and chief executive Steven Hudson says that where large banks once dominated the space, the financial crisis saw them step away from it. And the company's new estimates for equipment loans and revenues in 2015 indicate there's still plenty of room to grow.

This year, there's a lot riding on the U.S. recovery for Element. The company recently released projections showing 75 per cent of new business will come from south of the border next year, as the continued upswing in the U.S. economy spurs more industrial and manufacturing companies to reinvest in their businesses.

Since Element's management forecasts are based on an exchange rate of $1.10 for every U.S. dollar, there could be room for even better results if the loonie languishes, said Paul Holden, analyst at CIBC World Markets, in a note to clients. The United States could benefit further if decreasing oil prices give some industrial businesses a boost. "We maintain our view that to the extent lower oil prices are good for corporate America, lower oil prices will be good for equipment leasing demand," Mr. Holden said.

Element went public in late 2011. The stock soared more than 95 per cent last year, but the share price has wavered through 2014, up just a couple of per cent year to date.

The company arrived at a turning point this summer when it made the $1.4-billion (U.S.) acquisition of PHH Corp, a U.S. auto fleet leasing business. With that transformative acquisition completed, the company needs to show the markets that it can integrate PHH's business, as Element transitions toward fuelling growth through higher profit.

In its recent projections, Element's management team announced ambitious plans to originate $6.5-billion (Canadian) of new equipment loans and leases in 2015, an increase of about 35 per cent over 2014, thanks in large part to the strengthening U.S. market.

Element also seeks to receive investment-grade credit ratings next year, which would allow the company to access the capital markets and lower its funding costs. John Sadler, senior vice-president of corporate affairs at Element said the company is pursuing additional credit ratings, and plans to access the medium-term note market.

In the meantime, Element is strengthening its governance by adding two Bay Street veterans to its board, with eight decades of experience in Canadian financial services between them.

William Lovatt, who is retiring as chief financial officer of Great-West Lifeco Inc., has a background in investments and worked with the Finance Department on the financial markets liquidity advisory committee formed during the financial crisis.

The other new addition is Richard Venn, who spent many years with Canadian Imperial Bank of Commerce, including a role leading merchant and investment banking operations.

The appointments bring prestige, and position the company well in the U.S.

That's because the new board members replace directors formerly employed by Ernst & Young, LLP, who are Element's current auditors.

That would have been an obstacle to U.S. registration for either debt or equity financing, Mr. Sadler said. Now, Element has more flexibility.

Many analysts are optimistic that the company is in a position to deliver on its promises this year, and that investors will benefit.

"We see it as one of the rare investment opportunities where strong growth opportunities are well aligned with the availability of capital, coupled with a strong and experienced management team that should be able to confidently execute on the business plan," said Phil Hardie, analyst at Scotia Capital, in a note.