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September 4, 2012updated 12 Apr 2017 4:06pm

Taking the bull by the horns

The bailout of Spanish banks by the eurozone countries, which has been estimated initially at 100bn but could end up totalling 300bn, will not have a direct impact on the countrys leasing industry.

By Claire Hack

Although sources say Spain’s bailout should have no direct effect on leasing, the industry finds itself in a greatly reduced market where firms are protecting existing investments rather than chasing new ones. However, this is creating opportunities for some foreign lessors to pick up business, writes Claire Hack

The bailout of Spanish banks by the eurozone countries, which has been estimated initially at €100bn but could end up totalling €300bn, will not have a direct impact on the country’s leasing industry.

That is the bold assessment Spanish leasing association (AEL) director Manuel Garcia gave Leasing Life this month, although the leasing sector of Europe’s fifth-largest economy is not entirely unaffected by the ongoing debt crisis.

“The situation they refer to as ‘rescue’ or ‘bailout’ in no way affects the leasing industry, because it’s really marginal in the Spanish financial system,” Garcia said.

“The industry is affected because, given the general economic situation, consumption [is falling], and business investment is reduced.”

Leasing in Spain has been gaining ground over the last three years in the wake of the global financial crisis, as businesses look to alternative forms of lending in the absence of traditional debt finance.

Part of the reason for this is that both leasing and renting offer attractive tax advantages in Spain, said Garcia.

Manuel Gracia, AEL“Leasing is growing [thanks to] the knowledge of the companies of these formulas, which are a way without comparison to address business investments,” he said.

This is not to say, however, the sector has been unaffected by the economic crisis, he added. Despite the new opportunities presented to fill gaps in the market, the sector is not as thriving as it was before the crisis hit.

“At this time, demand is falling naturally [and, by way of] reducing consumption, companies do not invest,” Garcia said.

In the first quarter of 2012 there was a 24% fall in new business volumes compared with the same period in 2011, to a total of €1.04bn. The total number of new contracts came to 19,068. Over the course of the last 18 months, Garcia said, there has also been an increase in the number of defaults.

During this period, the Spanish leasing sector has been faced with a sharp slowdown, and has seen companies prioritising new projects by solvency and profitability, he added.

“In general, the interest of businesses [has been] more in seeking funding and liquidity instead of new investment in equipment,” Garcia said.

“To do this, at this association, we have worked [on finding] alternative channels for our associates, managing regulatory changes and encouraging the industrial sector in the country to [look at] leasing and renting formulas to improve the efficiency and competitiveness of their respective products.”

Despite his optimism, however, Garcia admits it has not been possible to avoid repercussions within the leasing industry following the impact of the latest wave of economic chaos in Spain.

The state of the economy, which has seen an increase in household cost-cutting and subsequent reduction in consumption, produced an increase in defaults although Garcia noted it is more controlled today.

The turnover ratio has likewise been affected, but, more than the ratio itself, the overall portfolio condensed by of the reduction of new business, he said.

More positively, new cases of default have, according to Garcia, remained at the same level compared with last year, and in some areas, have even been reduced.

Both the leasing and renting industries are closely tied to the fortunes of companies in Spain, Garcia added, which have had years of steady, uninterrupted growth until the global economic downturn. The cumulative total value of new contracts over the course of the past 10 years, when the Spanish economy was in a stronger position, exceeded €140bn, and the total average value of each portfolio was in excess of €45bn.

More recently, however, the leasing industry’s success has been much less pronounced. “The product and the industry will continue to decline until there is a stable situation to allow overall employment [to rise], and increase [financing] consumption,” said Garcia.

Those companies which do not offer other financing solutions will work to keep the new business they have already gained, he added, and will concentrate on projects where the client does not have issues with solvency and profitability. This will lend significant weight to the ability of operations that have been struggling to find funding in the wake of the latest financial crisis in Spain to invest in new equipment.

“The decline and growth of business investment in recent years suggests that Spanish companies will have to significantly increase their purchases in the coming months and years,” Garcia said.

Such companies will be “waiting for the opportunity for the leasing sector to reinitiate a path of growth and recovery of the historical figures [seen in] the sector,” he added.

Funding demand

Spain Q1 2012 by sectorAt present, Garcia added, despite its difficulties, leasing has become one of the most accessible methods of investment for businesses in Spain.

“Depending on the characteristics of the project and the needs of the company, this product is the best solution at a time when liquidity in the market is reduced,” he said.

Compared to other financiers, leasing companies “provide precise business assets, their services cover the needs of their customers and do not require the [same method of] payment as any other formula to create new projects.”

Nearby countries, such as France, have not experienced the same reduction in new contracts, Garcia said, but it is also true that the growth in Spain in the years preceding the crisis exceeded that of its neighbours.

The leasing industry in Italy, meanwhile, has remained relatively flat, he added, while Portugal has suffered much more than Spain.

It is important, furthermore, to emphasise the benefits of leasing to Spanish businesses, according to Garcia.

“In Spain leasing and renting are financial instruments whose characteristics and tax benefits compete very well with other traditional bank financing,” Garcia added.

“All of them have decreased, but leasing and renting probably less than other products as it facilitates productive business investment.”

Pain in Spain

Those leasing companies coming into Spain from other countries, on the other hand, have not been as successful as local lessors in gaining ground in recent months.

SüdRenting España, the Barcelona-based Spanish arm of German company SüdLeasing, has been no exception.

“Our customers got trapped by liquidity issues as the short term banking lines were reduced,” Alejo Lopez, director general of SüdRenting España, said. “They started to delay or stop payments and we need to increase provisions as result.”

Spain new business volumeHe agreed with Garcia that the bailout of the Spanish banking system would have no direct impact on SüdRenting’s business but said in Europe in general, the economic crisis has taken a significant toll on the company.

“The price of the collateral assets has dropped as result of the economic crisis in Europe,” he said.

“Most of the foreign companies have stopped investment in our country so we had a smaller market for financing machinery.”

As a result, SüdRenting has stopped pursuing growth in Spain, Lopez added.”The company has decided to stop [looking for] new business and will focus on the management of the existing portfolio,” he said.

The company has also made “substantial losses for the last two years, for first time in the life of the company in Spain.”

Indeed, Lopez used just one word to describe the outlook for the company over the course of the next 18 months – negative.

More than that, he said, there are no growth opportunities for the company to pursue in the coming months. For Lopez the challenge is to “recover arrears and equipment under the chapter 11 process, limiting the potential losses,” he said.

SüdRenting España has not done any business with neighbouring countries, such as France or Portugal, Lopez added, and in his experience, businesses in Spain have been more inclined to buy equipment outright.

“Companies prefer to own rather than lease, besides which, traditional loans had lower rates, and customer focus was on price and not added service or tax advantages,” he said.

In the course of the last 18 months, however, the company has at least managed to recover its top five biggest arrears.

The major disappointment for the company, meanwhile, has been the lack of support for the industry from the Spanish government. The legal process in Spain is not supporting leasing companies, due in pat to the time to resolve issues with the consequence of dropping prices for the finance leases, Lopez said.

Conservative approach

For Dutch lessor De Lage Landen, however, the financial crisis in Spain has not been as damaging to business.

Mike Janse, De Lage Landen general manager for Spain and Portugal, said: “We’re part of Rabobank – it’s a Dutch bank, so it hasn’t been directly affected.

“We get our funding via Rabobank, outside Spain. It’s quite positive in the sense that we see traditional banks in Spain retreating from the leasing market, and that has created opportunities for us.”

As Garcia suggested, furthermore, De Lage Landen has been able to use the current economic situation in Spain to increase its presence in the country.

For DLL, problems within the banking system have been, “an opportunity to gain additional market share,” Janse said. “The bail out will have no direct impact for us, as we’re not directly part of the Spanish banking system.”

To improve its market share, he added, the company has taken a more careful approach when taking on new business in Spain.

“We also want to be quite sure we’re relatively conservative in our credit approach, specifically towards the financial and public sector,” Janse said.

Behind this, he said, is the fact that the Spanish economy has been contracting for the last three years.

Mike Janse, De Lage Landen“The whole eurozone crisis has had an impact in general and the impact on the Spanish economy is that, since 2009, the country has been in recession,” Janse said.

“This will take a long time to recover from. This year specifically, investment volumes are going down again, and that means there’s an impact on new business volumes.”

This, in turn, has led to a fall in sales among De Lage Landen’s vendor partners.

“Our partners sell a lot less and that’s in all sectors – not only in food and agriculture, in which we’re very active.”

In the tractor market, furthermore, the segment as a whole is heading for its lowest level of leasing penetration since the early 1970s.

“In the tractor market, it’s forecast that the total market will be about 9,000 units,” Janse said. “This is not a small impact – it’s tremendous. You have to go 40 years back to see volumes like that in a market like agri.”

If this forecast is correct, it will mark a 59% fall compared with the number of units leased in 2007.

“In that market specifically, a normal level would be about 15,000 to 16,000 units. In 2007, it went up to 22,000,” Janse said. “Not even the construction sector [has been impacted as much], and that is more or less completely non-existent now.”

At De Lage Landen specifically, there have been two major concerns over the course of the last year.

First, Janse said, the recovery of the Spanish economy has been slower than the company has expected or hoped.

The second concern, he added, is that the number of cases of fraud have risen as a result of the financial difficulties experienced across the country and across Europe.

“We have seen some instances of fraud – maybe more than in other European countries. Thanks to our strong mitigation measures, the impact has been limited,” Janse said. “You see the number of cases increasing – it’s difficult to say in numbers, but I would say you couldn’t call it an insignificant increase; we see a link between the difficult economic circumstances and this increase.”

Compared with the asset finance sector in Portugal, however, of which Janse is also in charge at De Lage Landen, the Spanish leasing industry has struggled much less.

“I know what’s going on in Portugal and it’s worse off. Its GDP is decreasing 3% to 4% – it’s very difficult and we’re restricted in our credit acceptance,” Janse said.

“We’re being very careful there and control it very well. It’s another model we have in Spain.”

In Spain, the expectation now is that by the end of this year, the number of units leased will stop falling, and, into 2013, it will begin to climb again.

“Hopefully, we will reach the bottom this year and see a slight improvement next year. Investment levels in Spain have been decreasing in Spain since 2008,” Janse said.

Reaching sustainable levels

At De Lage Landen’s Spanish arm, Janse is expecting significant growth in total business volumes for the full year.

“Volumes for this year including commercial financing are expected to be about €250m – that’s an increase of about 20 per cent compared with last year,” he said.

“We are increasing volumes in this market. It’s more sustainable compared to before the crisis.”

Volumes are moving closer to levels last seen before the economic meltdown in Spain and across Europe, Janse added.

“2007 was our top year with €300m in volumes. In 2008, it was €150m. Since then, we’ve been increasing slightly every year.

There have been areas, however, where the company has seen some difficulties, Janse told Leasing Life.

The crisis in Spain has, for example, led to rises in the number and size of defaults among clients.

“We’ve seen impact on transportation and construction – we’ve seen huge defaults. Our biggest achievement has been stabilising the portfolio due to our very active repossession strategy,” Janse said. “We repossessed a lot of defaulted equipment and sold into the market mainly outside Spain. That’s minimised our losses on those leases.”

As the year progresses into the second half, he added, the future remains uncertain for the Spanish economy, for the leasing industry and for De Lage Landen.

“The outlook is very unsure. We expect and hope that the bail out of the banks will be the last real intervention,” Janse said.

“We expect a very difficult 2012 and a not so great 2013. That means we will continue our strategy of being relatively conservative on our acceptances.”

Alongside this conservative strategy, De Lage Landen will look to increase its vendor business as a number of potential partners have already directly approached the company, and it has also been approaching them.

As well as increasing its vendor activity, Janse said, De Lage Landen is also working on business development in Spain, and has begun offering insurance linked to leasing.

Unlike SüdRenting, the company is looking at growth opportunities, including moves into new business sectors in the country.

“We can have a sustainable model in Spain. We’re moving more into the food side and we’re strong on agri. But we are also looking into expansion into technology finance, health care and industrial equipment,” Janse said.

“We’re also looking at renewable energy. It was hit hard by the crisis but we’re really looking at opportunities where we’re not reliant on government subsidies.”

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