Buying leasing portfolios in the current climate could
be an attractive option. Grant Thornton partner Tarun Mistry runs
through the potential pitfalls and how to avoid them.
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Acquisition is a quick and popular way to grow any business.
Now, more than ever, caution must be observed when negotiating that
next corporate transaction. This article explores the general key
risks associated with acquiring a leasing business. Obviously,
specific issues with an individual transaction will need to be
considered.
Funding risk
While many transactions historically occurred as an asset
portfolio and debt facility package, many sales are now offered
without a debt facility in place. A number of financial
institutions, for example, are seeking to liquidate their asset
leasing portfolios as a means of generating liquidity. As a result,
acquirers may need to secure a debt finance facility at the time of
acquisition.
It goes without saying that debt funding in the current
environment is difficult. These difficulties will be magnified if
there are concerns about the business model.
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By GlobalDataAlso, acquirers should expect to contribute greater levels of
equity than they have in the past.
Asset risk
The market value of any leasing portfolio is subject to a degree
of uncertainty. Determining the value will result in lengthy
discussions between vendor and potential acquirer. Market values
must be determined with respect to recent asset remarketing
evidence where available, and acquirers must bear in mind that most
asset values have decreased in recent times and a level of
uncertainty will remain for some time. Specific consideration
should be given to return conditions, assets approaching the end of
their lease term, and those subject to default and vulnerable to
voluntary terminations.
Credit risk
The credit risk inherent in a portfolio is likely to be greater
than recent historical experience. Therefore future losses will be
difficult to predict. Detailed analysis of underlying asset
categories and customer types should be performed. Any exposures to
large customers should be subject to even more in-depth
investigation.
The underwriting policies of many asset leasing organisations
have been relaxed gradually over the course of the past few years.
The impact of such practices may not yet be evident in the results
of lessors.
Acquirers should ensure that any changes to underwriting
policies do not expose the business to significant losses post
acquisition.
Other major issues to consider are what covenants exist in the
portfolio, and whether there are any early-warnings in the leases
that might highlight potential losses in the future.
Cross-defaults should also be considered where the lease may be
triggered in-line with the lessees’ other facilities. Indeed, the
lease may trigger other facilities, placing the acquirer in a crowd
of other creditors.
Service risk
The ability of the target company to continue to provide
contractual services, and the possibility of it facing penalties in
the future, should be evaluated. The service cash flows need to be
considered, especially in a run-off or ageing portfolio scenario.
Thorough review of contractual agreements and associated side
letters will hopefully identify all potential service liabilities
and their timing.
Other risks
Acquirers should also undertake a thorough review of forecasts
and their underlying assumptions, investigate any foreign exchange
exposures, review financial reporting procedures, gain a thorough
understanding of the business operations, and consider commercial,
taxation, compliance and information technology risks.
While there are significant risks associated with acquiring an
asset leasing business in the current environment, a thorough due
diligence process will ensure any exposures are understood. Certain
transaction values are currently low by historical standards and
acquisitions could generate significant synergy benefits. However,
without a thorough due diligence process, numerous issues may arise
in the future.
Buyers, be wary, and don’t underestimate post-acquisition
integration issues.
The author is head of leasing and asset finance at Grant
Thornton UK
