At one UK leasing company the
credit crunch is having a particularly nasty effect. Its grim-faced
managing director makes clear that his business is under a lot of
pressure, and that this downturn is being driven by growing levels
of arrears.
His SME customers are causing him the
most headaches, particularly those with turnovers of up to £2
million, which are “already experiencing default levels of up to 8
or 9 percent”. This is only the beginning, however, as he expects
arrears to rise to up to 17 percent.
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Thirty days and increasing
This bleak outlook is reflected
in recent statistics. As at the end of September 2008 Finance &
Leasing Association members recorded that arrears of two or more
payments overdue (31 days plus) for business finance leasing and
hire purchase, excluding high value deals, had increased by some 15
percent to reach 2.3 percent. Furthermore, ‘other finance’
categories had increased by some 27 percent to reach 5.2 percent
(September 2007: 4.1 percent).
Although at the time no arrears
increase was yet discernible in full-payout leasing, or leasing
carrying a residual risk, the impact of the economic crisis on
small to medium-sized enterprises is likely to show a subsequent
deterioration in both these sectors.
More alarming are the
association’s figures for consumer finance at the point-of-sale
where the September 2008 figures show that leasing arrears rose by
55 percent, hire purchase by 24 percent and personal contract
purchase by 12 percent. Direct lenders reported that arrears in the
unsecured lending sector grew by 29 percent to 13.2 percent,
secured loans by 50 percent to 12.6 percent and revolving credit by
2 percent to 23.7 percent.
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By GlobalDataThirty-day-plus arrears for
direct loans in the UK, covering all consumer assets, were recently
sitting at about 12.5 percent – a 24 percent increase compared with
June 2007 when they were at around 10.1 percent. Hire purchase
loans at the 30-day-plus arrears stage showed a 10 percent rise in
July to 7.9 percent.
Over in the United States, arrears
levels are said to be higher than in most of Europe, and worse is
yet to come.
The US Equipment Leasing and Finance
Association (ELFA) revealed on 25 November that the MLFI-25 (which
measures economic activity for the equipment finance sector among
some 25 lessors and banks) was reporting that agreements of more
than 30-days in default had increased to 3.4 percent – the highest
level since August 2007.
However, the largest groups at risk,
both in terms of number of loans as well as balances in default,
are independent leasing companies. At the end of Q208, some 604,967
loans – worth more than $7.5 billion (€5.9 billion) – were 30 days
in arrears.
The next largest arrears grouping is
captive finance companies. By Q208, some 0.6 percent of all captive
loans were 60 days in arrears, an increase of 18 percent
year-on-year. Captives in the US also have the highest average
balance on default loans of $13,979, resulting in more than $1.5
billion being currently at risk. In total, captives hold 531,663
loans worth $7.5 billion.
Bank automotive lending at 30 days in
arrears totalled 278,000 loans ($3.5 billion), and the smallest
group, credit unions, held 181,770 loans worth more than $2 billion
(£1.2 billion) in arrears.
Across all lending groups in the US,
the average 30-day arrears rate is 2.48 percent, with an average
default loan balance of $12,979.
Charge offs have increased to 1.01
percent compared with 0.86 percent the previous month – another
sign of growing trouble.
As the US economy continues to
struggle, automotive arrears are steadily increasing with about $25
billion (£15.5 billion) worth of loans reported to be on an overdue
basis as at October 2008.
Anecdotally, European lessors of all
sizes are reporting concerns about growing arrears levels.
Privately, they talked about “disturbing trends” and “difficult
times” and admit that underwriting criteria are being tightened.
Many lessors are anticipating having to report increased bad debt
levels on their annual reports – and are not seeking to increase
this unnecessarily.
One industry observer commented that
during the recession of the early 1990s, SME leasing default levels
rose on a general basis to about 10 percent and, in some cases, up
to 14 or 15 percent.
“This time, however, it is likely to
be higher because of the severity of the recession,” he stresses.
“Many lessors are witnessing only modest rises in arrears at the
present time. These will escalate during 2009.”
Gary Dawson, Pitney Bowes Finance’s
international commercial director, said that some of its SME
customers were showing early signs of cash-flow difficulties –
almost certainly a problem allied to the high number of
liquidations in the sector.
“As a result,” he says, “we are
adopting a more prudent approach to allocating credit lines to new
customers, but are definitely not cutting or restricting credit
lines for existing customers.”
Another lessor said that the
pre-Budget changes to VAT announced by the UK chancellor on 24
November were, by themselves, likely to cause a rise in
defaults.
“The confusion that will inevitably
occur over the changes needed to leasing documentation, rental
schedules and spreadsheets,” he says, “is likely to give some
lessees, who may be experiencing cash-flow problems at the present
time, ample reason to default on their payments.
“Such confusion has been a source of
problems in the past and is likely to be again.”
Neil Munroe, external affairs director
of Equifax, says: “The odd missed rental payment on a credit search
– which was previously waved through – is now having a far greater
impact on underwriters’ decisions. Lessors are looking closely for
signs of repayment stress.
“They are mining deeper and need more
persuading to accept anything other than cast-iron proposals.”
Few, if any, lessors are not
responding to the crisis they are facing.
Before the credit crunch, lessors
generally wrote off debt when it reached 120 days or 180 days. At
around 65-70 days, lessors tended to make provisions for
impairments. Today, this latter figure is being brought
forward.
Gill Payne, head of collections,
finance litigation and recoveries at Shoosmiths, a law firm, said
some lessors are responding to rises in arrears by outsourcing
their debt collection as their in-house teams struggle to cope.
Although the recession is being viewed
as an opportunity for some lessors to acquire “unwanted” portfolios
from credit crunch-affected companies, such acquisitions may be not
as attractive as first thought.
One lessor which has carried out due
diligence on certain portfolios recently admitted that those viewed
were of such uncertain quality that the value of the book “would be
amply reflected in the offer price”.
Elsewhere, trade credit insurance,
which is customarily used to covering losses from trading with
companies that go bankrupt, is being hit hard by the crunch.
Figures published on 24 November by the Association of British
Insurers (ABI) reveal that for Q308 the number of claims increased
by some 34 per cent to 6,805 (2007: 5,084). The total value of
these claims was £97 million – a 58 per cent increase from £61.4
million in Q307.
One lessor argues that, faced with
such pressure, it is only a matter of time before the credit
insurers themselves lose appetite for many deals, with all the
resultant effect on corporate arrears that will ensue.
With few doubting that arrears level
will rise, the best most lessors can do is to prepare for this
eventuality by improving debt management. As costs rise,
outsourcing the recovery department could be a way forward,
although this is far from ideal.
It is also time now to reconsider
whether the informal practice of signing some bad deals in order to
maintain cashflows is one worth continuing, even when the good
times return.
