Coronavirus has put funders and funding models in the spotlight. Lindsay Town, chief executive of IAA-Advisory, says Covid-19 offers an opportunity at improving the wholesale funding market for asset finance providers.
As we progress further into the true impact of the pandemic on business in the UK and globally, there are many ramifications of a temporary and probably medium-term impact on credit performance and end-customer liquidity.
Requests for second (or even third!) rounds of payment deferrals will continue, and the original breathing space will not be enough for many.
Not only does this strain the corporate customers but many forget the strain this is placing on many funders and specifically on their methods of funding.
The important high-level issue of how asset finance companies are funded, and the impact on those providing the funding, is something that has never been sufficiently explored in the UK.
To be fair, the current model would appear to have been fairly robust for a considerable time, with a few blips on the way. This will arguably not be the case in the near and medium-term, and so we are presented with the opportunity to develop a new paradigm for the industry
The old refrain of “equity takes the strain” remains as true as ever, but many asset finance providers are traditionally in the category of “thin capital” and the intermediary market needs broad-based healthy funding panels to be able to effectively serve their client base while also reducing the risk to equity investors.
Moreover, as economies stumble back to the “post-pandemic” world we must be at the forefront to be able to assist businesses acquire, use, and sell assets of all types. In order to do that the industry needs efficient capital and debt, and there lies a possible material challenge.
Whilst back in the mists of time the UK asset finance industry was dominated by large bank-owned players and funding was a function of parent banking groups. That world has substantially gone.
With the growth of independent and non-bank owned providers, together with a rise in intermediaries there is no longer this core central deep pool of parental funding. The rise of products such as block discounting from their rather mundane roots to become a core product illustrates some of the change.
However, when allied with the equally popular “sale of receivables” structures we can see one major, glaring and fundamentally problematic fact – the industry funds the industry (a situation which is broadly akin to times past when certain banks funded themselves exclusively via the interbank loan market; few if any of those banks survive today).
Therefore, if the industry catches a cold, the funding sources share that cold and strain starts to show.
If one is a provider of block discounting, the expected strategy would be to tighten terms and availability, as it would with a sale of receivables product. The woes of the industry catching a cold are therefore magnified. This may produce a worse wholesale funding outcome than if funds came from more disparate sources and alternatives were more readily available.
The reliance on a limited product range can cause additional issues for lessors if the wholesale funding market shifts in step, which is likely and wholly rational when there are only a few players. A shift in collateral requirements in a “thin capital” industry will potentially cause many issues if equity is raised in a rushed or forced fashion. It will certainly make returns for lessors look less appealing if leverage ratios are materially changed.
We have an opportunity as an industry to look at improving the wholesale market for funding and avoid the “industry funding the industry” risks that we have been happy to carry for many years.
This requires a degree of change though. No “new” funder is just a simple “ask and receive”, the industry needs to develop a far better way of presenting results, data, forecasts and process to attract new sources.
None of this is impossible, it just requires a strong will to take a hard look at what is required. We can see at the “high end” the achievements in the public markets with the securitisation transactions undertaken over the years by the likes of Bibby, Leaseplan, Investec, Lloyds and DLL.
Whilst securitisation is not always the answer, some of the disciplines and approaches have massive relevance irrespective of the market of execution or the scale.
Areas such as the “traditional” syndicated loan market, pension/life funds, private placements, non-UK lenders/investors and others can all play a part in building a more resilient and responsive wholesale market.
It needs the will and drive to make the investment case and adopt the discipline of those external markets to demonstrate what we inside the industry know: Asset finance is a strong investment proposition.