With the economic slowdown, asset
management has become increasingly more important. Scott Hussey,
head of asset management at HSBC Equipment Finance UK, explains to
Jason T Hesse why, and reveals what the best
locations are for offloading used assets.

Scott Hussey joined HSBC Equipment Finance UK with the task of
setting up and running an asset management function for the lessor.
Two and a half years later, Hussey’s role has become more important
than ever. The current economic turmoil has made asset managers the
‘go-to’ people to accurately predict residual values, which lie at
the heart of a leasing company’s successful operation.

Hussey, a qualified chartered surveyor, believes that asset
management is central to all leasing products, irrespective of
residual value.

“Asset management is a vital component for monitoring and
analysing asset-cycle performance,” he says. “Ultimately, it
manages risk positions and becomes a profit-centre if operated
correctly.”

HSBC EF did not have an asset management function before Hussey
joined the business, but it has now become one of the company’s key
departments.

Adding value

The current instability in the market place has made calculating
residual values more complicated, Hussey explains: “If you have RVs
that are maturing now or over the next 12 months, I expect you’re
going to have to work harder to achieve the minimum RV level; and
really, that’s the game of asset management – to add value over and
above the RV, looking to make an income.”

The reduction in GDP may equate to lower manufacturing output,
less new business and perhaps capital procurement restrictions, he
says.

“Machinery and business assets are not being replaced. Not only
might this mean fewer assets for lessors to fund, but also that the
asset lifecycle is extended,” he adds.

The lower demand for machinery and business assets is leading to
new transaction prices and a decline in the market values of used
assets.

“It is no longer acceptable to see a 10 percent discount on a
commercial vehicle. I expect the norm in the next 18 to 24 months
to be nearer a discount of 20 percent, irrespective of any
manufacturer rebate,” he explains. “The normal marketplace for
assets is drying up – you only have to pick up any copy of any
asset journal to see the large quantities of used assets currently
available for sale.”

The basic rule to consider, believes Hussey, is that assets need
to be assessed on a case-by-case scenario. When dealing with an
asset, lessors need to look at its manufacturer, its user, its
application, its maintenance – the whole picture.

“It’s important to examine the individual assets and how they
fit as part of a portfolio,” he says. “What similar assets do you
have in your book, when are they coming back, and with what RV? You
need to compare your assets and build your portfolio productively,
because you don’t want all your assets coming back at the same
time.”

Although the credit crunch is making everyone talk about “doom
and gloom”, Hussey believes that in reality it is important to
remember that residual values forecast a value over a certain
number of years in the future. The UK and the global economy have
peaks and troughs, and this can be related to equipment values,
too.

“Asset management is a vital component for monitoring and
analysing asset-cycle performance. Ultimately, it manages risk
positions and becomes a profit-centre if operated correctly”

“In times like these,” he says, “short-term realisations of
second-hand user equipment will be lower. But that’s not to say
that this will be the case in five years. Do you base RVs on
current knowledge, or do you look back and see what you’ve done
previously as well? Not only should lessors be looking at the
future, but why not begin to look more globally?”

As an example, Hussey explains how large quantities of
construction equipment have a global specification, and therefore a
global secondary market. Lessors should be thinking about exploring
these markets that are experiencing growth.

Hussey quotes statistics from Eurostat, which show a clear
reduction in construction output year-on-year, with large downturns
in Spain and the UK. But he is also keen to point out the areas
where there is opportunity.

“Both France and Sweden reported positive growth, and Poland is
seeing construction output some 20 percent higher,” he remarks.

He believes it is “highly possible” that one market could offset
another, thus “enabling valuation offset and stability”. Being part
of a global bank certainly helps Hussey with this. HSBC EF can
exploit HSBC’s address book, which gives the lessor not only a lot
of its business, but also a global database on which it can rely on
for remarketing assets.

Looking internationally

Looking internationally, Hussey sees Australia as a market where
there is still strong demand for certain asset types, especially in
the mining and engineering sectors, due to large ongoing
infrastructure projects. The United States, on the other hand, has
seen construction equipment fall around 30 percent in value, with a
sharp decline in the plastics industry as well.

“Comments from the US are not positive, with an evident ‘wait
and see’ mentality, with more problems expected in Q109,” says
Hussey.

Leasing businesses need to know about the assets that they are
funding, he believes, and the recent economic turmoil has
highlighted the importance of asset management for lessors. There
is little doubt that in these times of extreme risk and
uncertainty, asset managers will continue to play an even more
important strategic role in the industry.