Three and a half years of freight recession have reshaped the truck financing market in two ways at once: the credit profiles of the carriers most dependent on borrowing have deteriorated, while many of the lenders that once served them have withdrawn from the sector. The result is a financing bottleneck that is now affecting an equipment replacement cycle the trucking industry has already been waiting on for two years.
Kirk Mann stayed in the market.
As executive vice president and general manager of the transportation vendor solutions business at Mitsubishi HC Capital America, Mann continued financing trucks throughout the downturn and watched a significant number of financed vehicles return through repossessions.
“There are a lot of lenders, banks that left, and so we’ve had the benefit of being one of the lenders actually lending money in this space,” Mann told FreightWaves.
According to Mann, the remaining competition largely consists of OEM captive finance companies, a handful of major independent lenders and several bank-led groups.
The carriers that failed during the downturn were disproportionately young businesses. On average, 85% of motor carriers with fewer than two years of operating experience and their own operating authority failed over a three-year period, Mann said.
The asset bubble that fueled the failures
In January 2023, Mann was at Mitsubishi HC Capital’s Chicago offices with Wayne Pass, the company’s then-chief credit officer for vendor solutions, who has since retired. Mann asked Pass what a Freightliner Cascadia 13-speed equipped with a tall sleeper and carrying fewer than 500,000 miles was worth.
They each independently wrote down $45,000.
Mann then asked how much Mitsubishi HC Capital was financing those trucks for.
The answer was approximately $110,000.
“I remember we were in a bubble. It was an asset bubble of enormous proportions,” Mann said.
The scale of that bubble becomes clearer when looking at historical truck values. According to J.D. Power’s Commercial Truck Guidelines, a typical four-year-old sleeper tractor sold at auction for approximately $30,000 to $50,000 during the 11-year period between the Great Recession and the COVID-19 pandemic.
That same type of truck reached almost $118,000 in early 2022. That represented a 136% increase over the highest pre-COVID peak recorded in the same dataset.
Values have since fallen considerably. ACT Research’s State of the Industry: U.S. Classes 3-8 Used Trucks report puts the average retail price for Class 8 trucks at $60,986 as of September.
Mitsubishi HC Capital knowingly continued lending into the inflated market.
“We made the decision to stay in that market even though we knew there was a tremendous asset bubble, because we wanted people to know we were there,” Mann said. He added that, with the benefit of hindsight, the company would probably approach its risk exposure differently if given the opportunity to repeat the strategy.
The eventual correction came through a wave of repossessions.
As trucking conditions deteriorated, many operators could no longer maintain their payments, sending large numbers of trucks back to lenders. Mitsubishi HC Capital subsequently built a dedicated asset management function and improved its recoveries on transportation assets by 15%, according to Equipment Finance News.
Fewer lenders, weaker borrower profiles
Carriers who believe lenders have tightened their credit standards are only partly correct, Mann said.
From Mitsubishi HC Capital’s perspective, the underwriting philosophy and process have not fundamentally changed. What has changed is the financial condition of the customers seeking financing.
The prolonged downturn weakened carrier credit profiles, meaning that the same underwriting standards now produce fewer approvals.
Normal freight cycles generally last 12 to 18 months. This downturn lasted nearly three times as long, allowing financial pressure to accumulate across the industry.
The cost of financing now reflects those differences in credit quality. Investment-grade private fleets can access rates of roughly 5.25%, while lower-credit small operators can face rates of 12% or more and are often required to provide a deposit, Mann noted during a FreightWaves Today interview.
Fleets operating between 50 and 200 trucks are also increasingly reaching Mitsubishi HC Capital through dealer relationships.
Replacement demand is finally returning
For much of the past two years, the industry expected EPA 2027 regulations to trigger a major pre-buy of trucks.
Mann is not convinced.
“I don’t think it’s a lot of EPA pre-buy. I think it’s just simply replacement demand and people have released themselves to go ahead and replace their trucks,” he said.
Manufacturers themselves remain divided over how they intend to deal with the 2027 requirements. Some are preparing compliant trucks, while others plan to continue producing legacy models by relying on banked credits or paying the associated penalty.
That uncertainty is making 2027 pricing difficult to predict.
Mann said his team regularly checks with dealers and receives different assessments depending on which truck manufacturers they represent. He does not anticipate a sufficiently large spike in demand to significantly alter purchasing behavior.
Nevertheless, activity through the dealer channel is already increasing.
Mitsubishi HC Capital’s over-the-road financing volume has risen by approximately 30%, Mann said. The increase is being driven primarily by medium-sized and large fleets replacing equipment they kept well beyond the normal trade cycle.
Fleets purchasing trucks are overwhelmingly buying new equipment. Mann estimates that approximately 80% of purchases are new, with late-model used trucks making up the remainder when those vehicles are still under warranty and meet fleet specifications. He described the figure as a qualitative estimate.
What the market is not seeing, however, is significant fleet expansion.
“I don’t think what you’re seeing today is fleet expansion for sure,” Mann said.
Manufacturers have limited production capacity, meaning available build slots can disappear quickly as demand recovers. When normal replacement demand is combined with three years of deferred equipment replacement, the resulting need is greater than the number of available build slots.
Mann attributes the improving rates of activity less to a recovery in freight demand than to capacity leaving the market.
Private fleets that experienced lower volumes in their own businesses increasingly used their trucks for the for-hire market during the downturn. That brought additional capacity into an already oversupplied freight environment.
The result was further pressure on prices and an extremely difficult operating environment for for-hire carriers over the three-and-a-half-year period.
Cost per mile is becoming critical to lenders
For carriers seeking financing today, financial statements are no longer enough.
Mann says one metric has become particularly important: cost per mile.
“For the larger customers, every lender out there that does the bigger fleet deals, they want to see that the fleet understands their cost per mile,” he said. “If you don’t understand your cost per mile, nothing else really matters.”
Financial statements coming out of the recession naturally will not resemble those produced during the stronger 2021 market. As a result, lenders are examining borrowers more closely when assessing new equipment financing.
Carriers that cannot demonstrate a detailed understanding of their operating costs are at a disadvantage when trying to convince lenders to fund new assets.
Mann is particularly direct on this point. If an operator cannot explain its cost per mile across all expense categories, he said he would have little interest in doing business with that customer.
The categories include driver pay, maintenance, insurance and the other expenses directly associated with operating a truck.
For carriers that made poor capital allocation decisions or purchased equipment at the wrong point in the cycle, the financing environment is therefore more demanding, but not necessarily closed.
The key is demonstrating that the business is improving.
“What you’re trying to do is you’re trying to tell a story and paint a picture of improvement,” Mann said.
For lenders, the issue ultimately comes down to whether revenue is supported by disciplined expense management. Strong revenue alone cannot compensate for uncontrolled costs, particularly after a downturn that has already damaged the financial position of so many carriers.
