The outlook for leasing companies in Europe, the Middle East and Africa (EMEA) is likely to deteriorate in 2023 due to funding uncertainty and, in some subsectors, pressure on asset quality, Fitch Ratings reported.
Analysts believe that as the recession takes hold, reduced economic activity will weaken the demand for leased equipment, with a knock-on effect on revenues. However, larger businesses that are less reliant on construction activity, have a broad inventory of assets and are able to diversify into specialist sub-sectors, will be better placed to survive the downturn. Businesses that can exploit economies of scale to improve their purchasing power and better manage their liquidity pressures may be in a position to choose equipment rental and leasing over ownership.
David Pierce, director of non-bank financial institutions, said: “EMEA developed markets finance and leasing companies face less supportive funding markets in 2023, alongside pressure on profitability from cost-base inflation and potential impairments. However, the impact on stronger-rated names is mitigated by their proactive hedging and management of debt maturity profiles in recent years, limiting near-term refinancing risks.”
According to the Fitch briefing document on the leasing outlook in 2023 for developed markets: “Lessors of both equipment and vehicle fleets also continue to face some near-term supply-chain constraints, which affects their ability to replace or grow inventory.”
2023: Commercial fleets
Fitch analysts expect shortages in semiconductors and raw materials to keep new car output below demand until 2024, which will have a knock-on effect on new business growth for the top fleet lessors, but material shortages are also expected to boost their gains from high prices for used cars, with benefits for profitability in 2023, albeit less than the gains realised in 2022.
Efforts by lessors to maintain a modern fleet offering will likely expose these companies to rising interest costs which will weigh down on profitability as inflation itself pushes up other expenses.
Also, high residual values (RV) for vehicles are expected to offset RV risk for cars bought in 2021–2023 that come off their lease arrangements after three to four years, Fitch said. “Supply-chain constraints also support higher residual value gains in the meantime, particularly with regard to the sale of used cars.
Meanwhile, rolling-stock lessors, prominent in the railway industry, can expect an increase in the cost of capital that will offer “benefits in respect of raising barriers to entry, while long contracts in the passenger segment support utilisation rates and cashflow stability,” Fitch said.
Issuers of bonds have, up until recently, benefited from historically low-interest rates that have allowed corporates “to extend debt maturities and, where possible, fix borrowing rates for the medium-term,” Fitch reported.
But, the uptick in interest rates in developed economies that has accompanied rising inflation in the wake of the pandemic is expected to put finances under pressure.
“Inflation also offers some benefit to contract repricing on long-life assets, in the absence of major near-term capital expenditure requirements.
“We expect cost-of-living pressures to negatively affect debt purchasers and servicers’ collection rates.
“The recessionary environment should also offer the opportunity of increased availability of non-performing loans for purchase after two years of balance-sheet shrinkage, but greater investment alongside weaker collections may raise leverage from recent low levels,” Fitch Ratings said.