Can things get any worse? Britain is in its longest recession
ever, and the conservative governor of the Bank of England, Mervyn
King, last month condemned the outlandish and immoral bonuses
publicly-owned banks are paying their executives.
King’s dislike of risk and his
aversion to regulation, which he thinks will simply suffocate
innovation, meanwhile, are messages that strike at the heart of the
leasing industry.
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Leasing has had its equivalent,
albeit on a far smaller scale, of the subprime mortgage crisis; of
lessors transacting risky deals just to increase the size of their
books.
We saw it in the wave of leases
linked to such dodgy suppliers as Business Telecoms and Elumina
Iberica. We will see more of these deals in the future, largely
because the leasing system both wants it to happen, and also allows
it to happen.
Leasing regulation remains weak,
powerless and ineffective in many countries in Europe, in
particular in the UK. As a result, there is no incentive for the
leasing industry to clean up its act.
King might believe it suffocates
innovation, but who wants innovation in the leasing industry when a
doubling of bad debt can cause profits to tumble. We saw this
revealed in Lombard’s profits plummet last year, and again last
month at Hitachi Capital (see page 8) where a rise in bad debt
impairment charges in the 12 months to April 2009 from £15,000 to
£11 million contributed to its multi-million profit loss.
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By GlobalDataImpairments, admittedly, are
unavoidable, particularly in this climate. There were almost 1,500
more company liquidations in the second quarter this year in
Britain than there were in the same period last year.
Also, arrears figures sourced from
leasing associations across Europe reveal that June was a
particularly bad time for bad debt.
The UK’s Finance & Leasing
Association figures show that, for the month of May, finance leases
with balances in arrears of more than 31 days reached 4
percent.
Some of this bad debt is linked to
insolvencies and frauds, both of which continue to take place in
higher numbers than before the recession. As we went to press last
month, we learned that a law firm in northern England went bust
owing significant sums to lessors.
But there are still signs of
recovery.
“Generally arrears have been falling
since June” Chris Stamper, head of ING Lease UK, told me last
month.
“Not sure the worst is over because
insolvency levels are still high and often hit when you least
expect them, but generally it is much better.”
Also, Elliott Lennick, head of MAN
Financial Services, said that, although he is still seeing
liquidations of smaller customers, across Europe risk costs and
impairments are not increasing, his business is no longer being
forced to reschedule debts, and in recent months it completed a
£200 million securitisation in order to refinance itself.
Business is getting better, even if
the size and shape of the new world order has still yet to be
defined.
Brendan Malkin
brendan.malkin@vrlfinancialnews.com
