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Steve Hudson’s lender sells U.S. equipment-leasing business for $1.25-billion and sees ‘significant opportunity in the non-bank sector’

Gloria Nieto/The Globe and Mail

Steve Hudson's specialty lender, ECN Capital Corp., is fuelling up for its next round of acquisitions through the $1.25-billion (U.S.) sale of its U.S. commercial- and vendor-finance business.

On Tuesday, ECN said it would unload a business that helps companies lease equipment in the United States – everything from construction diggers to big rigs and even large kitchen appliances for franchises. The buyer is Pittsburgh-based bank PNC Financial Services Group, and the value of the basket of financial leases included in the deal is nearly $1.1-billion.

The big question now is what will ECN buy next?

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The U.S. equipment-leasing business has changed since Mr. Hudson bought the operations in 2012. U.S. banks, flush with money from their depositors and without enough loans on the horizon, are looking for ways to put their capital to work. That's taken them into new corners of finance, such as equipment leasing, where their market share is steadily growing. Banks have the advantage of a low cost of funds and wide distribution networks.

These banks are also willing to take lower returns on these loans ECN finds appealing. Mr. Hudson said returns on equity in this business have dropped to less than 8 per cent, from more than 12 per cent, adding that the operations would be better suited to PNC at this point, and that the proceeds could in part be used to reinvest in higher-yielding assets. "We're likely to have some deals to announce," Mr. Hudson said on a conference call regarding the deal.

And even with plans to strengthen the company's balance sheet, Mr. Hudson will have cash burning a hole in his pocket. He said he sees "significant opportunity in the non-bank sector … on asset categories we've discussed in the past."

Jeff Fenwick, analyst at Cormark Securities, said in a note to clients that ECN management has mentioned "the mid-market private debt segment, where yields remain rich and bank competition somewhat less substantial." The private debt market in North America has been undergoing a shift as more private-equity players and asset managers enter the space and large pension funds dip a toe in the market.

But there could be other options for ECN, including buying another specialty finance business in the U.S. or retrenching in the Canadian market, where ECN has kept control of its $1-billion commercial- and vendor-finance business and sees less competition from local lenders. Mr. Hudson already has plans to more than double the size of that business in the next two years.

Mr. Fenwick noted that, in combination with a recent $100-million (Canadian) preferred-share issue, the company could go after a deal for a business with as much as $3-billion in assets.

ECN is still getting its bearings as a public company. In September, 2016, shareholders of Element Financial Corp. voted in favour of splitting the fleet-management and equipment-finance company into two public listings: Element Fleet Management Corp. for fleet-management services, and ECN Capital, for specialty-equipment finance.

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Mr. Hudson took over running ECN, the smaller business that also has rail- and aviation-financing arms, which had been undergoing a strategic review. He described ECN as a "a high-growth, entrepreneurial story" in an interview after the split. ECN has owned and managed assets of $7.5-billion.

Investors should get a better idea of what Mr. Hudson wants to use the money for on March 7, when the company releases financial results and provides a strategic update on its plans for growth.

"The sale of the segment will significantly alter ECN's strategy going forward," said John Aiken, analyst with Barclays Capital, in a note.

ECN's sale is expected to close by early April, 2017, and doesn't have to meet any major regulatory hurdles.

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