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October 4, 2018updated 28 Sep 2018 3:18pm

Yellow goods: building on solid assets

By Christopher Marchant

An area of asset finance that has seen continuing year-on-year growth is construction equipment. With ‘yellow goods’ inexorably tied to projects propelling the construction industry worldwide, Christopher Marchant looks into a strong asset segment to find out whether there is room to keep building the market.

The range of what can be defined as ‘yellow goods’ is vast, including not only tracked equipment such as diggers, but material-handling machines and niche assets such as telescopic handlers.

Supply for yellow goods is growing, while the residual values stay high in a strong used goods market. So, is the market stable enough for further expansion?


The consistency of residual values is one strong point of yellow goods finance. “It is the predictability of the asset and its use,” says Stewart Good, head of manufacturer and dealer services asset finance at Aldermore Bank.

“It allows us to work with the manufacturers so we can construct a compelling and a competitive proposition for the clients. Assuming that the uses of those assets are known from the onset we can predict the value of those assets through the life of the contract.

“In effect, our lending policy takes into account the depreciation and the use of those assets. Obviously, the assets can be used in various different guises, but I think the way we operate as a business is to really understand as best we can what those assets will be used for, and effectively what conditions those assets will be in throughout the life of the contract. That is the big advantage of yellow goods: more often than not, it is the predictability of the value of the assets throughout the duration of the contract.”

The reliability of this asset class means lessors look confidently at its development potential. “In yellow goods, the asset can conserve its value over the time of the lease. In the risk process, thanks to the quality of the asset, we get the opportunity to assess potentially more vulnerable customers,” says Dario Ghislandi, managing director of international business line equipment and logistics for BNP Paribas Leasing Solutions.

“Another advantage is that it is a market where, in the near future, we will have greater room for improvement. Right now the financial offer is still basic; in the ideal moment, something more sophisticated could be developed.”

Paul Jennings, managing director of JCB Finance, a joint venture between RBS and JCB, emphasises the need to fully understand the user-customer’s circumstances.

He notes: “It is about knowing the customer, knowing the customer’s business, knowing the application that the machine is going to go into and knowing the depreciation characteristics of the asset,” adding that currency fluctuations as well as changes in the deployment of the machinery also need to be factored in.

Kevin Bovington, vendor relationship director at Société Générale Equipment Finance (SGEF), says earth-moving equipment is a particularly in-demand asset among yellow goods customers, which range from smaller business to major developers.

Echoing Ghislandi’s point, he highlights a growing demand for more complex finance offerings: “For larger transactions, customers are looking for more creative structuring solutions compared to more traditional loans from their own banks.

“The need to provide asset finance is particularly strong in the £200,000-250,000- and-below range. This regular-flow business is very important, and it’s where you get high penetration numbers in terms of financing.”


One challenge more specific to the yellow goods sector can simply be locating the asset. “Historically there has been a challenge in locating and keeping control of that equipment,” says Bovington.

“By comparison, a vehicle would have a registration number: it is very visible and it is very easy to be found. Construction equipment is subject to a lot more movement and, therefore, more risk.”

Technology may be a key step in resolving these specific issues. Bovington says: “One example of the changes that are happening is in telematics, which controls where those construction assets are now located. This gives finance companies a lot more comfort, knowing you can get a location on pieces of equipment should you need to try and trace something.

“With telematics embedded within the machines, you have actually got technology that is transmitting its location all the time.” And it is not just about tracking of position, but also of usage.

Bovington adds: “This is further developing to provide data about its control of servicing and maintenance as well, so you can find out how that equipment has been used. That’s quite an important factor for a leasing company or a bank that’s financing hard assets like this.”

Good identifies other unique tests facing asset finance for yellow goods, starting with the huge influx of second-hand assets. “Particularly with the large hire companies and some of the manufacturers, there is a tendency for assets to flood the market quite quickly,” he says.

“It may be that there is a major project that’s either just commenced, or there’s one about to end, so when we go out to the secondary market – when we’re looking to sell our assets at the end of term – you can find that there are multiple assets out there of the same configuration. It can change weekly, if not daily. That’s the unpredictable nature of the market where we operate.

“There are also a lot of Tier 2 manufacturers that are pushing yellow assets through the UK. Some of those assets may come from China or Japan where the asset quality is not as good as some of the assets that we would traditionally work with. That can be a little confusing to the end user because he sees a cheaper asset, but the build quality and the resell value of those assets is very different to the traditional Tier 1 manufacturers that we operate with.”


A huge event for the construction industry, and by extension asset finance provision, is the Bauma construction show in Munich – the largest trade show in the world by surface area, uniting all elements of yellow goods and construction.

Taking place every three years, it is next scheduled for April 2019. Emphasising the significance of the “Bauma effect”, Bovington says: “We traditionally see a growth in business and activity in the runup to the show. From now until immediately afterwards we will see high levels of activity with construction companies.

“In a general overview, beyond Bauma the amount of infrastructure projects and large projects globally that are in discussion show that the global market is going to be strong for the next few years.”


Understanding different markets for yellow goods also comes with being close to the actual customers. Jennings says: “JCB Finance has got a machinery sales centre, so we’re active sellers as well. This puts us very close to the market, and helps us to understand both pricing and specification and the demand in the secondary market – for instance, whether our machines are exportable or whether they’re not. Engine technology is enabling lower emissions, and it’s becoming more difficult to get highertechnology machinery to developing countries that don’t have high-grade fuels.”

Not all markets, then, are at the same stage of development. “Some markets are more dynamic, and so it is not a surprise that countries like Germany, the UK and France, for example, are increasing very well,” explains Ghislandi.

“In terms of number of units, we observed that countries like Italy are also increasing to a point we haven’t observed since the 2007 fall in the market. The growth is most important across Germany, the UK and France.”

Still, there are quite a few markets where yellow goods finance can expand yet further. Bovington says: “From a global point of view, first of all there is significant growth in the market worldwide; we are seeing some significant growth in construction. Some of our major vendors that we work with are seeing growth of 15-25% year-on-year.

“What we’re seeing is that decision-making needs to be as rapid as possible, and that presents different challenges in different markets because you haven’t always got the latest accounts and financial information available online. You’ve got to access that information in the fastest way you can to make a credit decision.

Bovington continues: “We are getting more requests globally, and while we’ve always had a very strong business in Europe, we are receiving increasing requests from different regions. I will soon be flying to Russia for meetings, which is the first time from a Société Générale perspective that we’ve gone to Russia to meet our local bank and construction companies to talk about financing.”


As the UK’s impending departure from the UK threatens productivity – to what degree is still being fiercely debated – there is a worry that the slowdown in production could translate into lower demand for heavy assets. For the time being, however, things have not yet gone over the cliff.

“At the moment I’m surprised about the resilience of the market and have been since the Brexit referendum,” says Jennings. “The predictions from the Construction Products Association for the 2018 year expect the whole industry to fall by 0.6%, but given the factors that surround the UK economy, I don’t think that’s too bad a result.”

Likewise, Ghislandi says Leasing Solutions is keeping an eye on developments, but is not feeling any heat just yet.

“In the UK there are still important question marks relating to the Brexit situation,” he says. “Everyone in the company, and also our partners, are trying to understand if it will have some effect on the construction market. We could also see some impact due to the weight of the pound against other currencies. That said, at present the market is going as expected and we have not observed any kind of turbulence.”


Yellow goods are a key cog in the greater productivity machine, and asset finance companies need to provide consistency and professionalism in their consideration of collection and forbearance.

Explaining the BNP Paribas stance, Ghislandi says: “We assess the three elements of manufacturers: the kind of partnership that we have, the asset, and lastly the rating or financial situation of the customer. All these parameters are of key importance. With a better relationship, the right asset and a good financial plan, we are able to certify the majority of the requests we receive.”

Jennings highlights JCB Finance’s own option to provide potential breathing space to a customer that may be having difficulty making payments, saying: “We have a product called HP+. It has been designed to help with seasonality and cash-flow movements for customers. The plant hire industry is fairly seasonal; the agricultural community is seasonal, of course.

“Our HP+ product provides people with the opportunity to take pauses with a 15-day notice, and that’s a two-month pause, three times in any five-year agreement. It’s very warmly received by customers as an added amount of confidence and empathy that we provide them with.”


Looking to the future, Bovington sees an emerging trend of customers seeking more dynamic, savvier asset finance providers. He says: “One of the increasing trends is that customers are requiring more flexibility in the finance contract where possible. This means asset financiers need to look at both the residual value and the value of the asset throughout the term of the agreement.

“This also means the strength of the used equipment market is really important. For us to take a risk on a residual value, we need to know that the market is very liquid and there is a remarketing possibility within the used equipment market for those particular assets.”

Jennings is also adamant that there needs to be greater awareness to attacks from scammers targeting the industry, saying: “I think that the whole industry needs to have more attention focused on fraud and fraud countermeasures. “Many customers and resellers of equipment are being caused harm by fraudulent emails or purporting to change bank account details. That is at a higher level now, and has become commonplace rather than just a once-in-awhile event.

“There is plenty of material being put out by banks. I think that one of the messages that all of us stakeholders in the industry need to take up is to spread the word about malware on computers and the incidence and increasing frequency of fraudulent interference of people passing bank details by email.”

Good sees continual assessment of the market as the only way Aldermore, and others, can adapt promptly to environment changes.

He explains: “What we do is monitor what cost or what value we are gaining on those assets, and we monitor that on a very regular basis. Every month we have a meeting internally within our business, going through the data and results. We are very clear on a daily basis how trends are moving up or down.”

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