Fighting on all fronts

The cancellation of Birmingham’s
Commercial Vehicle Show, which was due to take place later this
month, is the clearest sign yet of exactly how troubled
Britain’s commercial vehicle sector is these days.

Calling off the show, one of the key events
for British transport and logistics operators – which last year
brought together over 600 exhibitors and some 30,000 visitors –
shows CV companies are no longer committed to large international
exhibitions and also are trying to keep a low profile during one of
the most challenging times they have ever faced.

In a slump

Few in the CV sector have not been
hit hard by the downturn, from manufacturers facing a decrease in
sales, to rental and leasing companies troubled by a slump in
residual values and a sharp rise in customer insolvencies.

Lombard, for instance, in recent weeks not
only stopped taking deals from brokers (see March
issue), but also reduced its van financing activity some time
ago as a result of the economic downturn. It is understood that it
has since returned to the marketplace, albeit cautiously, and
sources claim it is undercutting them on prices.

The market is reaching an all-time low, with
figures for February from the Society of Motor Manufacturers and
Traders (SMMT) showing that registrations slumped year-on-year by
51 percent, with trucks plunging 42 percent and vans by 58
percent.

The heavy van sector also declined by almost
55 percent, while trucks weighing up to six tonnes were 51 percent
down, according to the SMMT’s latest figures.

This follows an already considerable fall in
January when new truck registrations declined by 32 percent and
vans by 47 percent.

To cope with the situation the SMMT has asked
the government to make it easier for manufacturers to get access to
finance and credit. Vans have been hardest hit by the downturn and
this is reflected in the plight of UK van maker LDV, a subsidiary
of the Russian GAZ group.

In February, as it was literally “running out
of cash”, it asked the government for a £30 million (€32.3 million)
loan for a proposed management buyout. This was reduced to £5
million a few weeks later, an amount it considered to be sufficient
to stay afloat.

It warned that over 2,000 jobs are at risk in
its factories and dealer networks. Last month, LDV workers agreed
to take a 10 percent pay cut to support the buyout, and the company
has started to offer vans to creditors to offset its debts.

LDV’s main funder is Commercial Vehicle
Finance (CVF), a wholly-owned subsidiary of BNP Paribas Lease
Group.

CVF’s general manager, Mike Owen, last month
told Leasing Life that the main impact has been that when
CVF set its budget last year, it did so “not during a buoyant
market, but definitely not on LDV struggling in the way they
are”.

CVF has recently devalued its own loan book in
response to the crisis and has made some changes to the way it
approaches RVs.

“We’ve been doing long-term deals with RVs at
the end or balloons, but we are now second-guessing the RVs at the
end and therefore long-term RVs have become quite a big problem for
us,” said Owen. In addition the acceptance rate on its van deals
has dropped from 75 to 56 percent after the lessor tightened its
risk criteria.

On a more positive note, however, Owen said he
has seen resale values improve in recent weeks, and also the
availability of credit has not declined.

Not just a single
sector

It is not just bank-owned lessors
facing problems, though, as CV captives also face large volumes of
unused stock on their books which they ordered when the economic
times were better.

This matches comments from sources that claim
that some lessors have “half of their vehicles standing in their
yard”.

Britain’s biggest van hire businesses have been
particularly badly hit. Last month 1car1, a large
independently-owned van and car rental company, went into
administration, leaving 200 people without a job and another 600 at
risk of losing theirs.

Its administrators, PricewaterhouseCoopers,
blamed the company’s collapse on tightening in available credit,
which has meant that “replenishment of the vehicle fleet has been
difficult to fulfil”.

Northgate, the largest van rental company in
the UK, also has not been immune from the downturn. The firm, which
has over 133,000 vehicles in the UK and Spain, has warned that its
full-year profits, to be announced at the end of April, will be
significantly lower than market expectations and it is in talks
with its banks to amend its debt covenants.

The London Stock Exchange-listed firm, in its
recently-published interim management report, said that since
December 2008 market conditions have deteriorated, with further
declines in used vehicle residual values and a softening in demand
for vehicle rental.

This has translated into impairment charges
totalling almost £150 million. Of these, some £54 million related
to goodwill from the acquisition of the Spanish business, £32
million to the goodwill in the UK business, and £60 million to
drops in residual values.

Effects

According to experts, residual value
drops have meant that van rental companies, which are geared-up to
make profits on disposal, are actually not making any profit at
all, which would explain why several face insolvency.

Another problem for rental companies – which
is linked to the drying up of funding lines – is that rental
companies can buy fewer vans today then they used to be able to.
Historically, the more vans they bought, the higher the rebates –
or cashbacks – they received from manufacturers, according to Tarun
Mistry, head of asset finance at Grant Thornton, the
accountants.

Another problem is that fewer manufacturers
are offering ‘buyback’ schemes, in which they re-purchase a vehicle
from a leasing company if it does not sell it. As a result, lessors
today are taking more residual value risk on assets which are
dropping in value. Consequently, these extra costs faced by lessors
are being passed on to the rental companies.