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April 10, 2012updated 25 Jan 2022 9:38am

Financing the giant of European leasing

As the eurozone crisis has played out in news reports across the continent, Germany has been positioned as the immutable strongman of the economic area Yet, as Leasing Life investigates the state of German leasing, we discover the economy is not without its challenges.

By Claire Hack

As the eurozone crisis has played out in news reports across the continent, Germany has been positioned as the immutable strongman of the economic area. Yet, as Leasing Life investigates the state of German leasing, we discover the economy is not without its challenges.

Berlin vitory column, winged victory statue GermanyLiquidity is a key concern in Germany, Thomas Stahl, country manager for Germany at De Lage Landen, told Leasing Life.

“In Germany, we see challenges in two areas. First there is a lack of liquidity in the market. Next to that, we are more and more faced with shortages in refinancing,” Stahl said.

“Of course, the German market is very much affected by the overall European debt crisis, just like every other European country. It is the cause for low investments due to lack of financial resources, and [most importantly], the lack of trust.”

Jürgen Mossakowski, chief executive of independent IT lessor CHG Meridian, added that sources of funding for smaller leasing companies and those without the support of a parent company are becoming increasingly rare.

“We have a sound funding base for our future operations, and that’s something that our customers value,” he said.

“Because we are an international organisation, however, we know that there are many companies in other countries that are encountering much greater difficulties in this respect.”

Even captive funder Cisco Capital, which has the support of multinational computing giant Cisco behind it, is considering looking beyond the realm of parent company cash to fund its German operations.

“As a leasing captive of a manufacturer we are currently using the cash of Cisco through intercompany loans, [but] this may change and we may seek after external funds,” Hans-Joachim Wörn, business development manager at Cisco Capital in Germany, said.

The liquidity issue has led to a search for alternative funding resources among all types of leasing firm in Germany, according to Jochen Jehmlich, mananging director of Société Générale Equipment Finance in Germany.

“There is a trend in Germany for lessors to look for a more diverse funding base,” he told Leasing Life.

SGEF Germany itself has turned to the Landesbanken, the investment arms of the German public savings banks, which allows it to draw cheaper funding which it can then pass on to its mittelstand, or SME, customers, said Jehmich.

Other lessors have established their own deposit business like independent IT lessor Grenkeleasing which bought its own bank in 2009 to address what it viewed has a coming refinancing crisis.

“It is a trend which will continue,” adds Jehmlich, “because there is a feeling in the lessor community, especially after 2009, you are more stable if you have more sources of funding.”

 

Regulation issues Growth in German equipment leasing 2011 BDLOne reason behind a potential funding squeeze in leasing is the impending Basel III regulation.

“The leasing sector is mulling the ramifications of Basel III, and the consequences that the limited availability of credit could have both for lessors and leasing customers,” Martin Mudersbach, president of Germany’s leasing association, the Bundesverband Deutscher Leasing-Unternehmen (BDL) said.

DLL’s Stahl agreed German companies are starting to experience liquity issues coupled with higher credit rates from their banks.

“This is where the Basel III effects are becoming visible. The result is that leasing is more and more considered as a preferred way of financing,” he added.

Kai-Otto Landwehr, head of commercial finance at Siemens Financial Services (SFS) Germany, concurred.

“Alternative finance, whether factoring or leasing, will become stronger as regulation and cash requirements become more of an issue. The environment is changing rather than the industry.

“Small businesses especially cannot afford to fund assets. I think leasing will become more important and the concentration of business will be higher,” he said.

The implementation of Basel III is not all good news for leasing in the German market, however. Rich Green, president of CIT Europe, told Leasing Life, while leasing is CIT’s core business, he expects some bank-owned lessors to shrink their business as a result of regulation.

“We are seeing some questions about the effect of Basel III and the potential impact for banks and bank-owned finance companies,” he said.

“Local banks and leasing companies are focusing on their core business and reducing their leasing activity,” he added.

German lessors respond to the funding challenge, Leasing Life April 2011Regulations set out by the German Federal Financial Supervisory Authority (BaFin) have also presented problems, Cisco’s Wörn said.

“The BaFin regulations since 2009 have raised a couple of administrative burdens that affect us by adding more resource and supervision and compliance-matters to our daily lives,” he said.

The regulatory burden has already had a negative impact on some small lessors in the German market, said SGEF’s Jehmich, with some scaling back and starting to operate more as brokers. He added, however, this would not lead to consolidation of the leasing landscape.

“The German leasing industry always expects a strong consolidation but still it is quite diverse and has a lot of lessors compared to other countries where the market is much more concentrated,” he said.

 

Valuable reputation The diversity of the market may, in part, be because leasing in Germany continues to. Smaller companies with fewer than 20 employees [already] have a more positive view on leasing, while large companies are looking to increase their use of leasing,” he said.

The figures Stahl referred to come from a poll carried out by TNS Infratest Financial Research in March and April last year which was commissioned by the BDL.

“The survey showed that smaller companies in particular were more likely to give leasing serious consideration than in earlier years,” said BDL president Mudersbach.

The survey found 76% of all companies with 20 or fewer employees said they would routinely give leasing consideration as an investment option while in the previous survey, conducted in 2007, only 68% said that was the case.

“In addition,” added Mudersbach, “almost four out of five companies in Germany (78 percent) indicated that, regardless of their size, they would consider leasing as a means of financing an investment.”

CHG’s Mossakowski agrees the increase in the use of leasing in Germany in the wake of the financial crisis, is not related to the size of a company.

“Leasing invariably becomes more important when customers need to find other forms of finance as an alternative to conventional loans,” he said.

“This has nothing to do with the size of the company. The significance of leasing has grown considerably over the past few decades. This is partly due to the service provided with each leasing agreement.”

Bank loans and company cash are still the most commonly used sources of funding for German companies, Stahl said, but as the availability of both remains scarce in the country and across Europe, leasing continues to appear attractive.

In terms of external funding sources, according to the BDL, leasing is more or less on a par with traditional credit, at 48 percent and 52 percent of the market respectively.

“Leasing has no negative image at all in Germany,” said SGEF’s Jehmlich, “it is seen as state-of-the-art. Even in some industries, in which 10 years ago it was still weak, leasing has now grown to more significant levels.”

One reason for the continued growth of leasing is the way players across the market have sought to present the leasing option to businesses in increasingly comprehensive services packages.

“We develop compelling solutions for machines, equipment and more. Especially for medium-sized companies, the financing concepts of Commerz Real represent an alternative to classic loan financing,” Frank-Rainer Moll, head of leasing and structured investments at Commerz Real said.

New business by asset type in German Equipment leasing 2011, BDLLeasing providers must also be prepared to tout the benefits of their product to their German customers wherever possible – and there are, according to Stahl, many such benefits to be put forward.

“A company’s liquidity position stays strong, resulting in extra investment opportunities. The costs for leasing are also more spread over the term of the leasing contract, and at the end, the user can choose to return the asset,” he said.

“This freedom also results in possibilities to replace or upgrade equipment during the term of the contract, even including maintenance and services. And the choice between on-balance and off-balance financing can also be attractive for customers.”

Although awareness of leasing has increased in recent years, there is, however, a certain disparity in appetite for its use.

“The appetite for leasing still varies significantly depending on the type of assets financed and the decision chain within the customer’s organisation,” Cédric Fourrier, head of the technology solutions business line, at BNP Paribas Leasing Solutions in Germany, said.

“For instance, within the office and IT equipment markets, covered by the technology solutions business unit of BNP Paribas Leasing Solutions, the same reseller will successfully sell 90 percent of its hardware in office equipment through leasing but only 5% in IT.”

SFS head Landwehr agreed leasing in Germany has strong reputation, especially among the mittelstand and in SFS specialist areas of IT and healthcare but added these are areas where leasing has been traditionally strong.

He said the current appetite for leasing depends on an industry’s historic use of finance.

“In the car market, for example, leasing is normal business; it is the normal way to fund. It is the same in healthcare. Assets which are more traditionally funded by lease continue to be funded this way,” he said.

Heavy industry and infrastructure, however, use leasing less, he said, because they have traditionally been funded by bank loans and company capital and habits can be hard to change.

The legal and tax environment can be an obstacle too, he added.

While leasing has undoubtedly grown in German and the country enjoys the largest leasing market in Europe, according to the latest Leaseurope figures, the industry still suffers from lack of public awareness, said SGEF’s Jehmlich.

Jehmlich suggested, because the industry employs fewer people, relative to the billions in investment Euros it manages, than other financial industries it often fails to figure in the European news agenda.

“The leasing industry is, compared to other industries, like a sleeping giant,” he said.

 

2012 and beyond Regardless of discrepancies across different industries, the German leasing companies of this sleeping giant got off to a good start in 2012, according to Mudersbach, who added the BDL expects further growth in the current year, although at a slower rate than in 2011.

There is, nevertheless, still a certain amount of volatility to contend with in the German market, said DLL’s Stahl.

“The forecast for 2012 is slightly optimistic, but also still cautious. The market development in Germany depends on various factors, on which we cannot [comment] yet,” Stahl said.

“Macroeconomic developments like the Euro crises and higher credit rates will affect the investment climate heavily. We can expect that some financial solutions providers will need to react on these developments by following very cautious strategies,” he added.

This means, therefore, that some leasing companies may face a loss of trust among their customers in the mid to long term.

On top of this, some barriers to entry do exist for companies seeking to enter into leasing agreements in Germany, as well as certain obstacles to funding for lessors themselves.

“A high number of leasing companies share the market in Germany. The financial crisis has significantly reduced the sources of funding for these leasing companies in the last few years, and increased the gap between small and big leasing companies,” BNP Paribas’ Fourrier said.

“Many banks have stopped funding the activity of leasing companies, which need to find new refinancing sources, in a context of increasing cost of funds.”

These constraints, he added, have begun to lead to a concentration of the activity among the biggest leasing companies, while some of the small companies have begun to disappear from the German market altogether.

From a consumer perspective, German small and medium-sized businesses must also be willing to reorganise the financing of their entire portfolio of assets, at least in IT, if they are to secure a deal that will offer the maximum benefit.

“There is not usually much point in agreeing partial funding arrangements that are merely cosmetic,” CHG’s Mossakowski said.

“But totally reorganising the financing of IT portfolios yields more than just financial benefits. Because all IT equipment is centrally registered, administrators know exactly what devices are available,” he added.

total equipment leasing in Germany in 2011. BDLChallenges aside, new business volumes in leasing still represented about 20 percent of all new investments in Germany in 2011, Rudolf Buenten, head of the equipment and logistics solutions business line, also at BNP Paribas Leasing Solutions in Germany, said.

“The volumes increased by 11.8 percent compared to 2010,” Buenten said.

“Passenger cars and commercial vehicles still hold the lion’s share in terms of volumes, [accounting] for 66% of total leasing.”

Larger players in the German and European markets, including captives and bank owned leasing companies such as BNP Paribas Leasing Solutions, have been able to gain a competitive advantage in terms of both availability and cost of funds, Fourrier added.

“BNP Paribas Leasing Solutions managed a very good year 2011 with a 22% increase in new business volume,” he said.

“At the same time, leasing solutions have becoming more and more popular among banks and investors over the last 18 months, especially in the traditional markets covered by BNP Paribas Leasing Solutions.”

Jehmlich, managing director of BNP Paribas’ French-owned rival SGEF, told Leasing Life 2012 started reasonably well after a dip towards the end of 2011.

“If we look now at the first two months of 2012, there is a strong amount of finance being done. I’m not sure it is stronger than 2011, however. After the quarter slowdown we can see the economy picking up again,” he said.

Whether the economy is picking up or not, SGEF’s strategy for the year is safe rather than ambitious.

“Our strategy is conservative in growth with a focus more on profitability – something you will see with a lot of bank-owned lessors.”

Representing the manufacturer-owned lessors, Landwehr of SFS is also fairly conservative in his outlook.

“There is some reluctance to invest so growth will remain fairly flat,” he said.

SFS, which begins its fiscal year in September, has seen a flat quarter one and quarter two, said Landwehr, but added he expects to see that pick up in quarter three and four which is a normal pattern.

More optimistically than his bank-owned rivals, however, SFS commercial finance does have growth strategies and, notwithstanding the spectre of the eurozone crisis, Landwehr is not worried.

“I wouldn’t be CEO if I was worried,” he said. “The market this year will be challenging as always but we are looking forward to facing the challenges.

“Leasing will always be good product for businesses which need to innovate and want to grow,” he added.

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