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February 25, 2015updated 12 Apr 2017 3:54pm

Is leasing too narrowly defined?

The Leasing Foundation is continuing its qualitative research into leasing. Brian Cantwell speaks to IAA-Advisory chairman and Leasing Foundation chairman Derek Soper.

By Brian Cantwell

Last year the Leasing Foundation put out its first report into the state of the leasing industry. Called Redefining the Leasing Industry, part of the thinking behind the research was to gauge what leasing meant to those working in the industry, and to explore the roles of those who were essentially still working in the sector, but were calling themselves something other than ‘lessor’.

The Foundation’s aim through talking to 20 relevant leaders, was: "To understand if products such as hire, rental, managed service contracts, subscription contracts and contract hire, many of which incorporate a significant amount and variety of services as well as equipment, are considered to be leasing."

There is a more profound reasoning for the research however than an identity check on the leasing market in 2014. This month, the Finance & Leasing Association (FLA), the UK trade body, said 2014 was a record growth year since the global financial crisis in 2008, with asset finance new business reaching £25.4bn (€33.7bn) in 2014, an increase of 13% compared to the previous year.The FLA said the annual growth rate growth, at 13%, was the highest recorded for at least seven years.

But what if this was only half the story from the FLA, and huge swathes of turnover and profit were being missed because of bank reclassification of its leasing practices?

Suddenly the market could double, or treble, in size simply down to a method of classification on the way that banks describe their leasing activities.

"At present leasing is defined as what leasing companies do, or at any rate some of the things they do," wrote the Foundation last year. "But compared to the whole range of companies that encompass the basic philosophy of leasing – this includes products such as rental, hire, subscription payment, cost per copy and managed services contracts – the current definition of leasing is too narrow."

Whereas the first piece of research spoke to people actively describing themselves as working in leasing, the second part of the research, due for publication in April, is proving trickier as the Foundation aims to speak to this ‘hidden’ leasing market.Leasing Foundation chairman Derek Soper was in typically thoughtful mood when he met with Leasing Life to discuss the genesis of the research, and to give a more detailed explanation.

How has the leasing market become so divided in its opinion of itself?

"To take a long hard look at what’s going on now you need to go back many years. You need to see where this division in the leasing market came from and whether there’s a realistic optimistic outlook.

"A number of things have happened: how the banks have to consider their lending, how the banks consider their position in society, how they regain confidence, how they address the SME market, and respect capital constraints. That puts a lot of different pressures on the thinking within the banks, especially with regards to capital constraints. Central banks don’t like people expanding and going into areas that they don’t understand, so they are very averse to going overseas. A lot of banks are coming away from overseas businesses, so there’s all sorts of things happening. But what has happened as a result of that is that the leasing businesses inside most banks have lost their seniority. They are run by very junior people within the banks, which for us is not really that satisfactory.

"Talking to those guys who are running leasing companies about their future doesn’t carry weight inside the bank, because they don’t know where they are going. The banks are starting to look at leasing as just another lending product. I think that the banks for years realised that the companies that they were hiring to run their leasing companies were different from bankers. They thought about things differently.

"There’s a little story that I referenced in a talk I gave a while ago that serves as an indicator of how different bankers approach the same issue. If you’ve got three people in front of you, a banker, a leasing guy and a merchant or investment banker, and you hand them a set of accounts, watch them very carefully. The banker will move straight to the balance sheet, going from there to the profits and losses. Hand them to a leasing guy, he’ll look at the profits and losses, look at the notes, and then he’ll get to the balance sheet. Hand it to a merchant banker, and he’ll look straight at the list of directors.

"That tells you everything, because the banker’s attitudes haven’t changed. The investment banker will want to know who this banker is and what his business is about, and have I got a good relationship with him?

So, the key is relationships?

"A lot of people like process-driven stuff, but people like relationships. I think that the relationships thing here is in the process of being lost by the banks, and hence you’re starting to see in our industry some new entrants, who would hope to do things differently; who in fact are becoming the talking point of the leasing industry – the Aldermores, the ABN Amros coming back in. Challenger bank’s turnover is small but if they get a loyal customer base, then within their overall capabilities, they could do a very good job, but it’s a small operation.

"The way that central banks are now looking at the people that they regulate is also having an effect on attitudes to leasing. In Germany, France, and other European countries, the regulators are determined to get respectability back; they are determined to be overly cautious where they should be, in relation to capital constraints. Liquidity is important, but it’s the size of the bank’s balance sheet in respect to what it might have to suffer if things went badly wrong that regulators are looking at: these days it should be around 10% or 11%. As a result the banks are looking at ways of redefining themselves. The research that the Foundation is looking fits into that ethos.

What does it need?

"If I look at any bank, and I say to myself I’ve known the guys there for years and years and years, what are they now doing? I went to see someone who runs a bank’s corporate finance department, clearly a very big business, with huge transactions, very complex transactions, but huge volume, massive volume. He’s a leasing guy, and my question to him was: of all those complex financial transactions that you are doing, how many have a strong leasing DNA? Because if you have leasing training you would put leasing documents and transactions together as he is doing. He says a very large proportion of them are ‘leasing’ transactions. Over the next few days I will be seeing people who I would say are in the leasing business: they would say, no we’re not.

These guys say they do not do a transaction which they would call a lease, but they are leases. Another close friend runs a large lease portfolio. He is not allowed by his parent company to call anything a lease. They don’t want to be seen as a leasing company. They call them management service agreement, subscription agreements, all that kind of stuff.

Is that something lessors have to adapt to or challenge?

The piece of research that we are doing is exploratory; and it does seem to me that it’s no good if the leasing industry is isolated from the rest of the world. It’s a very small proportion of total capital equipment that is leased. Even big sectors of the leasing industry don’t call it leasing. A huge sector calls it contract hire. A huge sector calls it hire purchase. So already the leasing industry has had to start calling it other things in order for it to maintain its position, and in my opinion, has not been that successful in it.

"If you take the big banks, the leasing piece is reported via the FLA, but it is part of the banking figures that are given to the Bank of England. All the corporate finance business, none of it is given to the FLA, it’s all given to the Bank of England. Now what I have been trying to find out is whether the Bank of England has any way of looking at what is actually within a leasing definition. What I am told is that it does not have that capability. One of the end-results of our research might be to go along to people like the Bank of England and say this leasing, in a bigger definition, is a sector in its own right, and you ought to find ways of measuring that, because it does look, and this is pure speculation on my part, but looking in from outside it does look as though if you add all this other stuff in, you could well more than double the size of the leasing industry.

"You’d take it over 50% of all capital equipment purchases. That’s a hell of a change, a huge change. How many aeroplane transactions are involved? How many shipping transactions, oil rigs, oil pipelines, all the very big stuff is being done by corporate finance people?

"I think it needs discussing, and bringing out in the open. Also it needs a conclusion as to what to do with that information. And I think that the first part of this project that we did, we did it all by interview, quite in-depth stuff. And so we ignored the statistics and said let’s talk to the people that are doing it. So the first phase we published and I thought it was a good report, but we only talked to people that were in the leasing business, so we got the same stories from people.

"I’m hoping the second report it will be finished at the end of March and published during April. It has to be inventive, because with this area you can’t ask questions about leasing, as they will say they aren’t leasing, despite the type of transactions they’re doing.

"The interviewed people all have different views. Some will say this has been corporate finance for years and years. Others will say actually the only reason it’s as big as it is, is because of the leasing brain. You have to dig deeper and find out why people represent themselves in different ways. I think maybe you come back to pecking order inside the banks. I think people are concerned about pecking order and their jobs, and it’s not just the leasing guys.

"The sectors we’re looking at do not define themselves as "lessors"; the are generally not members of the leasing associations and prefer to label their products differently from leasing.

"Managed service contracts, subscription contracts, hire, shared service contracts, among others are all in the mix. The sector is huge and mainly very large-ticket items, dealt with, in the main, by the corporate finance or project finance departments of the banks, and not the leasing departments."

 

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