Brian Cantwell speaks to Eoin Moore, managing director of the structured asset solutions team at Commerzbank, about driving change in the UK SME leasing and lending market
Last August Commerzbank provided a £50m (70.1m) committed financing facility with the European Investment Fund (EIF) for UK broker and lender Kennet Equipment Leasing, which is part of the Star Asset Finance group.
The facility has enabled Kennet and the Star Asset Finance group to extend their financing to existing and new customers, providing financing to SMEs in the UK.
Eoin Moore, managing director on the structured asset solutions team at Commerzbank, speaks to Leasing Life about the market and about the debt facility it offered to Kennet last year.
What should a broker of Kennet’s size and weight be doing in the market now?
I think it is a very interesting time in the market and the prospects for brokers are currently very positive. There has been good recent growth in small ticket leasing and significant further growth potential remains. Brokers are a key origination channel in this space. In addition, many brokers also have their own leasing books but in most cases these have remained relatively small due to difficulties in obtaining financing in recent years. This is now beginning to change as funding conditions are starting to improve.
Alongside this, there has been a significant increase in interest in the small ticket leasing and asset finance market from private equity and other acquirers. There is a consolidation process underway that will lead to a change in market structure and I would expect this to have an impact on competitive dynamics over time.
Many small-ticket brokers and independent funders are therefore currently faced with the decision of committing to the market and exploiting the near-term growth opportunity, or selling their company and realising the value of the business.
What was the reasoning for Commerzbank to get involved in the UK SME market?
Although funding conditions are starting to improve, brokers and independent funders in the small ticket leasing space have struggled to obtain financing since 2008. A number of key funding providers exited the market in the years following the financial crisis and this left a significant financing gap. This particularly related to RCF-type structures, with block facilities becoming the key source of financing for most companies. Block financing is a critical source of funding for small ticket leasing companies, but can become restrictive when companies reach a certain scale and are looking to significantly grow their leasing book.
Many brokers have strong underwriting expertise and a specialist understanding of the small ticket asset class. They also have direct customer relationships. We were aware of a number of brokers and independent funders that were seeking to accelerate the growth of their direct leasing business but were struggling to obtain financing facilities with the required size and flexibility.
The idea was that if you back an established broker with the right experience and systems, and provide wholesale funding on reasonable terms, there is the potential to develop a new lessor of substantial scale in the UK. The acquisition of Kennet Equipment Leasing by Star Capital, and their plans for expansion of this business, provided us with such an opportunity. The equity investment from Star Capital, combined with our debt facility, has given Kennet and the broader Star Asset Finance group the required funding to substantially increase the scale of its business and provide significant incremental finance to UK SMEs.
How does the relationship work?
We see the facility that we provided to Kennet as a partnership. We want to work with them as they develop the company, and explore other sources of finance beyond our existing facility as and when required. The ambition for us and EIF is to support the company in its development up to the point where it can potentially access even cheaper funding via the capital markets.
Generally speaking, we believe that securitisation is a very efficient form of financing for established small ticket leasing companies. It can provide the opportunity for independent leasing companies to optimize their cost of funding, and put themselves on a similar footing to banks who have access to cheap wholesale funding but who are arguably not as well placed to address the specific financing needs of the small ticket segment of the market.
The securitisation market has stalled in Europe – how would it work?
While the ABS market in Europe is certainly less active than in the past, leasing assets are still a very attractive asset class for investors if deals are properly structured. In particular, small ticket equipment leasing has a number of characteristics that appeal to investors including high granularity, attractive excess spread and low default rates. We have seen a number of small ticket leasing ABS deals recently completed across several markets in Europe.
As leasing companies grow their business, they need a diversity of funding sources. Secured loans are typically used to fund the initial phase of expansion. Lessors can then access a range of additional funding options as the lease portfolio increases in size, including securitisation either via conduit or term ABS financing and then unsecured loans over time.
The key attraction of a securitisation for issuers is that they achieve a refinancing on attractive terms and potentially at a higher advance rate, thus releasing equity for further growth of their business. Typically the minimum transaction size for a term ABS deal is around the £200m – £250m.
So how does the deal sit now?
Kennet and the Star Asset Finance group are successfully expanding, and Star Capital has made a number of follow-on acquisitions. The facility that we provided is highly structured and tailored to the group’s specific needs, and we believe it will support the company in realising its growth ambitions.