While uncertainty may surround the election of America’s
next Commander-in-chief, Grant Collinson discovers the country’s
equipment leasing industry is more certain of its
future.

 

In 2012, the American public will go to the polls to elect their
president and shape the political landscape for the next four
years. Mitt Romney and Newt Gingrich are head-to-head in the
Republican primaries, with Romney taking Iowa and New Hampshire and
Newt Gingrich having just grabbed South Carolina at the time of
writing. Whoever wins will run the race for the White House this
November against incumbent Democrat Barack Obama, who is enjoying a
fillip in the polls.

“We are
quite positive about 2012,” William G Sutton, president and chief
executive of the Equipment Leasing and Finance Association (ELFA),
the US leasing trade body, tells Leasing Life.

“Our foundation [the Equipment
Leasing and Finance Foundation – ELFF] does forward-looking
research on our industry and, in its economic outlook for 2012, it
estimates investment in equipment and software is going to grow by
about 9% this year.”

The ELFF prediction, made late last
year, is below the 10.5% growth US leasing boasted in 2011, but
Sutton describes the projected growth as healthy and strong.

Sutton explains the 2011 growth,
which he describes as a steady and constant increase in new
business volumes, was thanks to the US economy slowly recovering,
which resulted in a good level of business activity across
different industry sectors.

“Obviously, the economy is growing
steadily and there is a lot of replacement activity going on right
now because of the hiatus taken during the recession,” he says.

“We don’t have any way of tracking
individual contracts, but anecdotally, our members are telling us
this is a healthy replacement business right now.”

As part of the ELFF’s prediction
for this year of an increase in equipment replacement activity, the
organisation issued 10 acquisition trends for 2012.

They identify a gradual increase in
equipment acquisition in the US, with certain markets above the
average level. For example, software finance is predicted to grow
around 10%. Aging equipment, says the ELFF, will drive the need for
replacement acquisitions which will contribute to boost leasing
business volumes.

One lessor hoping to take advantage
of this buoyant market is US-based bank CIT. In particular the
group’s vendor finance division anticipates a strong performance in
2011 to continue into 2012.

Ron
Arrington, global president of CIT Vendor Finance, describes the
vendor arm as core to the group, and told Leasing Life CIT
Vendor Finance had $4.5bn (€3.5bn) in financing and leasing assets
as at 30 September 2011, the latest available figures, and new
business volume was approximately $600m for the third quarter of
2011 and $1.7bn for the nine-month period to the end of
September.

“Appetite for equipment purchase is
driven by current economic conditions and confidence in future
economic growth,” says Arrington, looking ahead.

“As economic conditions improve,
the purchase of new equipment also tends to increase because, as
confidence grows, pent-up demand is unleashed. Many customers are
considering the cost to own and maintain equipment, and as
equipment ages, this analysis will drive equipment purchases as
well, especially in the technology market.”

Netherlands-headquartered De Lage
Landen, which has a strong presence in the States, ranked ninth by
net assets in the Monitor 100 list of the largest leasing companies
in the US, also hopes acquisition appetite will lead to continued
growth in 2012.

The Rabobank-owned lessor is
expecting to post a strong performance when it publishes its 2011
results in March, according to Maarten Viskaal, senior
vice-president of operations, Vendor Finance at De Lage Landen.

“It was an exceptionally strong
year, not only for De Lage Landen’s US-based operations, but for
our entire global network,” Viskaal tells Leasing
Life.

He explained that the US division
makes up about a 30% of the company-wide portfolio.

“Its role in the overall results is
significant and contributed well to the overall group net
profit.”

He attributed De Lage Landen’s
positive performance to steady new business growth and a good level
of control over cost base.

“If I had to spotlight two
[reasons],” he says, “they would be our strong asset management
performance and our risk costs. Non-performing assets and contract
defaults trended well and our recoveries in those situations were
strong.”

 

According to Viskaal, De Lage
Landen – which specialises in the food and agribusiness, office
technology, health care, clean technology, construction, industrial
and transportation markets across its global network – like Sutton
is confident of a strong 2012 performance in the US and
globally.

The confidence expressed by the
ELFA is backed by a leasing industry enjoying strong penetration
rates thanks to widespread understanding in the US of the benefits
of asset finance.

“Each industry, and each industry’s
business model, is unique, but overall the benefits of equipment
leasing and financing are well known in the United States,” says
Sutton.

“We did a study in 2007 on the
propensity to finance equipment and three-quarters of small firms
do it, three-quarters of medium firms do it and over half of large
firms use equipment leasing for all of the reasons you know – it
enables planning, maintains cash flow, preserves capital; the
standard activities which show the benefit of equipment
leasing.”

Sutton adds that the flexibility of
equipment financing is especially appreciated in the US against the
backdrop of a complex and uncertain economic environment.

“We did a study in 2004,” continues
Sutton, “which said the most important value of leasing in the
United States is facilitating the acquisition, maintenance and
replacement of equipment in a systematic and convenient way – that
was the gist of that study. So what we see now is the more complex
the economic environment, the better we [the leasing industry] look.”

At the time of writing, the US
leasing body did not have more up-to-date comparable research but
Sutton said anecdotal evidence from ELFA members made him confident
there has been little change in the propensity of businesses to
lease.

“We don’t have any data
post-recession but we don’t see anything which indicates either an
increase or a decrease [in the market penetration].

“What we do see,” he adds, “is we
are on target to return to pre-recession new business volumes, we
are estimating, by the end of 2012. I think the demand is
definitely still there.”

As a lack of up-to-date data
hinders assessment of the US leasing market against its European
counterpart, Alan Leesmith, a director at global asset finance
consultancy IAA-Advisory, says direct comparison is always
tricky.

“The markets are difficult to
compare directly; Europe will say it is the bigger
and the US will say it has the bigger leasing industry,” he
says.

“Both markets are substantial, but
I think US leasing has got a greater market penetration than the
European industry.”

 

Leesmith says figures from European
leasing trade association Leaseurope – including non-member
European lessors – put total new business at €252bn for 2010. ELFA
described the US leasing market as a $628bn (€510bn) industry in
2011 and records new business volume for 2010 at $559bn.

Leesmith continues: “The American
market has now recovered well since the global recession, whereas
the European market has been slower to do so.”

While, anecdotally at least, the
leasing industry in the US enjoys higher demand than in Europe, De
Lage Landen’s transatlantic business provides an opportunity to
compare the two strongest leasing markets.

“Aside from the scale of the
business, which tends to be larger in the US market,” says Viskaal,
who is based in the US, “you would see a fairly consistent spread
across all of our verticals worldwide. With many of the same vendor
partners.”

One significant difference between
De Lage Landen’s operations in the US and Europe is while the
company is a major player in European fleet through subsidiary
Athlon, the group’s US operation does not offer a fleet line
despite car leasing contributing around 10% of the global
business’s lease portfolio.

Despite this, Viskaal says both
divisions produce more or less the same kind of numbers at the top
and bottom line.

More generally, Viskaal identifies
a disparity in the types of leasing companies that dominate the
market.

“The competitive landscape is a bit
different in terms of who are the ‘dominant players’ in each
market,” he says.

While the giants of European
leasing are almost all bank-owned, like De Lage Landen, the US
industry has a more diverse pack, including industrial heavyweights
such as GE Capital, independent lessors, and a significant number
of captives.

Viskaal adds the difference in
competition affects how De Lage Landen competes in the US
market.

IAA-Advisory’s Leesmith agrees that
the US market presents challenges different from those experienced
in Europe, which can prove a hindrance to Europeans with an eye for
transatlantic expansion.

“It is very difficult for foreign
lessors to penetrate the US market, because it is such a vast
market you hardly make any impression.

“There are thousands of small banks
in America and far more independents operating out there.

“It is easier [for independents] within a bigger market – it is easier to raise capital. We don’t
have a unified market in Europe. You can’t run Europe like you can
America. A lot of leasing companies in the US are regional as well
– they can afford to be and still have good businesses.”

CIT’s Arrington agrees the market
is challenging: “We compete with companies that provide equipment
financing, including commercial banks, independent finance
companies and captives.”

The Monitor 100 list places CIT
eighth by net assets and third among bank-owned companies, behind
Banc of America Leasing and Wells Fargo Equipment Finance. The
commercial finance arm of US industrial giant GE leads the
table.

Leesmith suggests the US leasing
market also benefits from national unity compared to multi-state
Europe.

“Both markets can learn from the
other, but an advantage the US has got is its members all belong to
one big leasing association, which can then represent the lessor
and
operate in a bigger way,” says Leesmith.

“Although Leaseurope represents far
more lessors in total, it is effectively made up of national
associations. Leaseurope does a fantastic job and a fantastic
amount for its members, but this difference makes it harder for
Leaseurope to do some of the things the ELFA can do for its
members.

“It is a bigger challenge in Europe
as well, because of all the different national legislation to deal
with.”

Any difference in strategy being
employed in the US appears to be paying off for De Lage Landen, as
the company is one of few successful European representatives in
the US leasing market.

The reason behind this success,
says Viskaal, is ‘synergies’.

“In 1999, De Lage Landen acquired
the US leasing business of Tokai Financial Services. Both companies
were primarily focused on vendor finance, but with little overlap
in terms of equipment markets and customers. Tokai’s forte was
small-ticket, retail finance with a concentration in office
equipment and a fledgling position in the IT and health care
markets.

At the time, DLL’s business in
Europe leaned more towards middle-ticket, wholesale finance
solutions with a broader distribution across many equipment
markets, including food and agribusiness, construction and
industrial.

Viskaal says De Lage Landen now has
leading positions in both markets and is strong across all of the
mentioned equipment verticals, which he also puts down to the
company’s global workforce. The acquisition 13 years ago “was a
case of 1+1 equalling 3 or more”, adds the vendor finance
leader.

As to who will be successful in the
election in November, ELFA’s Sutton would not be drawn, nor would
he state if the leasing industry had a preference. The ELFA does
not endorse one party over the other, he said.

“Our business is about working with
both sides of the aisle to ensure our industry is treated properly
– not only in the legislative, but in the regulatory process.

“Which ever party wins we’ll still
have to deal with the question of economic prosperity by restoring
some level of certainty to issues on the regulatory front and on
the legislative front in a manner which will allow businesses to
invest.”

The regulatory uncertainty to which
Sutton refers is one of the few clouds on the otherwise clear US
leasing horizon for the ELFA.

“Obviously, there are some
uncertainties out there,” says Sutton. “The regulatory arena here
in the US is a definite uncertainty; the activities surrounding
deficit reduction and tax reform provide a level of uncertainty
which tends to keep investment dollars on the sidelines.”

Uncertainty for the ELFA and many
US financial institutions comes in the form of the Wall Street
Reform and Consumer Protection Act, commonly known as the
Dodd-Frank Act.

The legislation was enacted in July
2010 in the wake of the financial crisis sparked by the collapse of
Lehman Brothers, and is intended as a preventative measure against
a similar financial crisis by creating new financial regulatory
processes that enforce transparency and accountability while
implementing rules for consumer protection

The Act, named after its architects
Senator Chris Dodd and Representative Barney Frank, has led to
uncertainty for investors, says Sutton, because regulatory
frameworks and processes have yet to be finalised.

“The Act directed the various
agencies within the federal government, such as the Securities and
Exchange Commission, to develop regulatory frameworks to various
aspects of the Act, and this regulatory process is taking a long
time.

“[Agencies] are working through the
process where there is a proposed rule making, then a comment
period and then there is the back-and-forth of industry comments
and the regulators asking questions and doing fact-finding. All of
that has added to the uncertainty, and so stepping through the
regulatory process in an orderly fashion is very important to
us.”

Sutton also says how the US
government will tackle the fiscal deficit and tax reform has also
created legislative uncertainty.

“Although these types of processes
take a very long time, the more definition you can apply as you
step through the process gives more certainty to the business
environment,” he adds.

Another process which takes a long
time is the joint FASB and IASB proposed lease accounting changes.
ELFA and its research foundation ELFF recently produced an impact
study on the potential effects of the changes on the US economy.
Its findings make sobering reading.

The study, conducted by analysis
firm IHS Global Services, suggested the lease accounting changes,
due for a second exposure to industry consultation later this year,
could wipe up to $10bn off US GDP and up to $96bn off the net worth
of US companies.

“The ELFF’s economic impact study
was based on a snapshot of where the project is right now and where
the probable next step will be,” says Sutton.

“Obviously, we need to see the new
exposure draft when it comes out. When it comes out we will have
another 120-day comment period, so we will be able to mobilise our
industry, our customers and analysts to comment on the draft.

“We’ve got to see what the FASB and
the ISAB come out with on the next exposure and look at the
technical aspects of it – we have three or four specific outcomes
on the technical aspect we would like to see which address our
optimum outcomes.”

The ELFA has published the four
outcomes which it hopes to see in the second exposure draft
scheduled for release in the second quarter of 2012:

• Recognise that there are at least
  two types of leases. Retain the time tested distinction between
  capital leases and operating leases and retain straight-line
  expense recognition for the leases that are now considered
  operating leases.
• Offer relief from the complexity
  and compliance burden of the proposal in areas such as transition,
  adjustment of estimates in the lease term, accounting for variable
  rents and disclosures.
• Preserve the netting in leveraged
  lease accounting that allows lease providers to reduce the cost to
  lease users by hundreds of basis points.
• Preserve sales-type lease gross
  profit recognition that allows captive companies to charge lower
  rates (as much as 100 basis points).

Of course beyond domestic
regulation and shared global issues, the economic maelstrom across
the Atlantic has not gone unnoticed.

“The real wild card in all of this
is the European economic situation,” says Sutton, “we really don’t
know how that is going to affect us. We can’t predict that because
it cuts across so many different industries and so many different
business models.”

Despite the sovereign debt crisis
dominating financial news in Europe and leading to several
countries losing their coveted AAA credit ratings, across the pond
things are generally looking up for the leasing industry, thanks in
no small part to recovering GDP.

“They are no longer quite as
worried as Europe is about the recession or volumes taking a hit,”
says Leesmith. “There is a very bullish feeling in the market over
there.”

Arrington anticipates “measured
growth” in the US economy in 2012 to lead to continued growth for
CIT Vendor Finance, and Sutton agrees the success of equipment
leasing is tied inexorably to the wider economy.

“Absolutely the number one economic factor [affecting US
leasing] is steady GDP growth,” says Sutton. “That will have the
single most positive effect on our industry. That may be a blinding
statement of the obvious but that has the single most positive
effect.” With US economists projecting a 2-3% GDP growth in 2012
and ELFA estimating 9% growth in leasing, it would be difficult for
a US lessor not to feel positive about 2012.

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2012