The asset finance and leasing industry has proven the benefits of itself since the start of the credit crisis and has the stats to back it up. So why aren’t more lessors joining the market across the continent? Chris Boobyer asks why this is the case
There was a time, not so very long ago, when asset finance was a core part of the UK and wider European economy. There was an established and stable balance between the demand and supply sides of the equation in the finance market. And so there should be, given the benefits to both users and providers alike – funding term matched to asset life; amortisation profiles matched to asset income generation; the ability to structure bespoke rental patterns; the capability of funding everything from commercial aircraft to local delivery vans and everything in between for users, and low LGD rates and an above commodity funding return for funders.
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So, given the advantages, and the government encouraged and supported demand for increased business investment and support for the critical SME sector, why does asset finance not appear to be anything like as popular with funders now? In fact, given recent announcements and not so public actions, there seems to be an increasing move away from the asset finance market and certainly a culling of the hard earned senior executive experience base.
The asset finance industry quickly understood and reacted to the problems caused by the economic crash of 2008-10 and remained confident throughout that it knew its customers well, had a good understanding of the assets it was financing and that the underlying documentation was sound – as it should be, given the precedents, experience and talent that we enjoy in both the professional teams and seasoned practitioners who are dedicated to our industry.
What was not expected after all of the problems caused by panic measures by banks in earlier recessions was the removal of wholesale lines and the closure of secondary financing conduits. The actions of a few probably did more to exacerbate the crisis and concentrate risk at a time when cooler heads should have prevailed. How could it have been helpful or economically positive to remove two of the most efficient funding distribution systems to syndicate risk and encourage investment participation at a time when businesses were reeling at unexpected economic shocks. Continuation of investment was critical, if not to avoid the problem, but potentially to soften or cushion some of its impact, yet two of the stool’s three legs were unceremoniously sawn off.
The UK FLA data tells the public version of the underrated performance story of the industry at the start, during, and at its emergence from the crisis. The only indicator published by the FLA relates to transactions which are one payment in arrears with another immediately due – the so called ’60 day arrears’ statistic – and this one, although occasionally moving around, definitely does not lie! Taking the most popular leasing and asset finance variants of full payout and hire purchase the respective averages for these two facilities over the last seven years is in Table 1.
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By GlobalDataTherefore, one could argue that if a transaction, having reached the 60-day arrears stage, then continued into more advanced default and ended at legal/claims/repossession, then assuming 100% LGD the loss would never have exceeded 2.6% of balances for leasing full payout and 3% of balances for hire purchase. Compare that to losses experienced by banks and other specialist funders in other mature markets and the difference is plain to see. It’s a shame that the industry associations appear to have lost the battle regarding the value of security in a leased or title retained asset finance transaction. Its superior arrears performance in times of crisis and ability to recover is plain to see, if anyone cares to look.
The Balances Outstanding table is supported by the excellent Leaseurope-Deloitte report Implicit Risk Weights for SME Leasing in Europe published last year. The report was based on a study sample of 1.5 million contracts from 10 major European lessors operating in 17 European markets. It reported that regulatory capital requirements overestimate the ‘riskiness’ of leasing to SMEs. An average one-year default rate of 2.64% compares well with an equivalent retail SME portfolio of EU banks. The same study sample produced a default rate of 2.8% in 2010 compared to the European Banking Authority EU-wide rate of 4.5%.
Individual funders will have their own private truth to tell which will also be informed by actual loss data which one must suppose would further improve the already efficient picture above. Why then are the industry associations not shouting this performance data from the rooftops? Leasing and asset finance survived the recession in a solid, unthreatening way and should be an object lesson for how to fund a crisis and regenerate an economy under threat of lack of investment. However, the same FLA stats reveal the sorry underlying state of balances outstanding – an accurate measure of historic and current finance supply.
So, given the reported pent-up demand, continuing suppressed appetite from bank funders, increasing business confidence and GDP forecasts, why are we seeing the exodus from hitherto established and successful funders from the UK and European markets?
Lessees and hirers who have survived thus far can reasonably be expected to have learned from the process, be leaner and fitter as a result and seeking opportunities to re-awaken their hibernating businesses and start material investment to secure material growth.
There is no counter argument to the strong correlation between GDP and new business volumes in the UK and European markets – both have turned upwards in all but the most pessimistic scenarios so why are some lessors exiting? Isn’t now the time to be coming into the market, not going home?
Chris Boobyer is a senior partner at Invigors EMEA
