Rick Daubenspeck, the national director at BDO Valuation Advisors, an international firm specialising in the valuation of fixed assets, talks to Fred Crawley about the growing demand for third-party review of leased asset portfolios.
Leasing Life (LL): In the context of an overall deterioration in customer credit quality, how have considerations of asset value become more important to lessors looking at new transactions?
Rick Daubenspeck (RD): Lessors are becoming more focused on the value of the actual asset being leased as opposed to relying solely on the credit side of the equation. Even with customer credit risk easing off, they are becoming more concerned with making sure that the value of a leased asset will cover financial exposure.
LL: What other factors have led to a greater interest in valuations?
RD: The major issue is the attempt by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) to redefine how lessors will be accounting for their leases.
The new standard will replace FAS 13 in the US and IAS 17 in those countries using international financial reporting standards, and looks like it could well lead to the review of billions of dollars in equipment leases.
LL: Are there any areas in which asset value has become particularly crucial?
RD: Any time that there are assets involved that are outside of a lessor’s comfort zone, they are going to rely more on an outside opinion of value.
This is true in particular for the growing field of renewable energy. For most lessors, this is an area that they have never been involved with and do not fully understand – it can be somewhat intimidating.
It’s still relatively new and, although no longer considered a “flash in the pan” sector, it is outside the industry’s common base of knowledge.
As such, lenders are looking outside their businesses more often for guidance in establishing the economic useful life and residuals of these assets.
LL: How is underwriting changing in the renewables sector as the market matures?
RD: It’s not that underwriting is necessarily changing – more that it is recognising value not just in assets but in the avoidance of the increasing cost of energy.
Currently inflation is running at approximately 2.5% to 2.75% on average, while the cost of electricity is increasing in the 4.5% to 5.0% range annually (figures apply to the US).
Often, the true value of a renewable energy source is in the savings gained from not having to purchase electricity from the grid. For non-renewable energy transactions, the leasing industry as a whole is recognising the importance of understanding the value of an asset as being critical when entering a transaction.
LL: What sort of interest are you seeing most from lessors working with traditional assets?
RD: Many lessors who have a portfolio filled with more traditional leased assets (for example, trucks and trailers, manufacturing equipment, forklifts, and so on) are starting to recognise the importance of a “new set of eyes” to review current transactions and determine potential risks.
Often when we do something repeatedly we become somewhat complacent and removed from alternative viewpoints – all of us have done this at some point or another.
The downside of this is that we can miss something new that has occurred or that is going to occur, and which might impact the value of traditional assets in a way we might not be able to recognise if we don’t take the opportunity to approach valuation from a different angle now and then.
Valuations are a third-party opinion based upon current facts and data that we are able to accumulate and review.
Sometimes, internal decisions can be insulated from recent factors affecting a particular industry or equipment type without underwriters even knowing it.
LL: What advantages does a lessor gain in working with an external valuation agent rather than using an internal department?
RD: Although lessors like to save money and keep staff busy by having them review the same portfolios that they are setting the residuals on, this is not necessarily the smartest way to go about it – in a way, it’s almost like having students grading their own papers.
How independent and forthcoming can people be if transactions that they set the residuals on are either at or approaching risk of losing money?
Using an external valuation provider who doesn’t have any direct risk in whether a deal is ‘underwater’ or not provides a lessor with the most reasonable way of determining whether specific transactions or portfolios will make as opposed to lose money.
The sooner a lessor knows whether or not a transaction is in danger of losing money, the sooner they can act and impose actions to try and avoid losing money.
LL: Have you seen an increase in the number of companies looking at valuation with an eye to buying and selling portfolios? Do you see an uptick coming in the M&A market?
RD: Although plenty in the leasing industry have recently seen a steady increase in new business, they still recognise there could be value in either selling off or obtaining an existing portfolio of leases.
When new deals are scarce – and for many they remain so – lessors will look towards their portfolios as a means to continue to do business.
In addition, they can also look to get rid of some deals that they no longer are comfortable with from an economic standpoint – as such, the business of buying and selling of portfolios has been rather brisk.
There is no reason why this trend would not continue, even with the increase in newer business.