The economic environment was very
difficult for all areas of the UK economy in 2009. The lack of
confidence and liquidity in the banking sector will continue into
2010 despite a number of key indicators confirming the worst of the
recession is over.

The impact of the aftermath of the recession
and the resultant losses is that the banking community is trying to
repair its balance sheets. As a result, there remains a shortage of
funds for all customers, irrespective of their quality and strength
of covenant. In addition, a number of banks have withdrawn from
segments of the leasing market and are concentrating on
cross-selling a variety of products to their core customers.

The cost of capital has increased
significantly over the past 12 months, and banks are clearly
focused on achieving a higher level of return for their scarce
capital. The clear objective is to ensure the return is
commensurate with the risk.

The volume-driven pricing, which was evident
prior to the recession, is unlikely to return in the medium-term.
However, we are aware of examples over the past 12 months where
certain customers have experienced three- to four-fold increases in
margins. More recently there is evidence that the banks are
marginally relaxing their pricing.

There is also a positive aspect to the current
economic environment in that a number of companies consider there
are real opportunities to grow their business, and we are engaged
in identifying portfolio and company acquisition targets in a
number of sectors.

Last year was a particularly difficult year
for the vehicle sector, with the dramatic fall in second-hand
vehicle prices of over 25 percent.

However, the market has improved in the second
half of 2009 due to a shortage of second-hand vehicles and pent-up
demand where customers were deferring changing their vehicles
during the worst of the recession.

If the shortage of liquidity eases and
customer demand returns, the vehicle sector should enjoy a more
profitable 2010. We expect continued distress in 2010 for the
rental sector, for all asset types including vehicles. Meanwhile,
the large-ticket leasing market was almost nonexistent in 2009.

The consumer sector has resulted in a wide
variety of engagements in the past year, and we see further
opportunities in this market segment in 2010. Some of our clients
are considering ways to improve their profitability and outsourcing
of certain services such as cash collections or portfolio
administration. As the economy comes out of recession, companies
will be better placed to grow their business without a
corresponding increase in their cost base.

The coming year will bring further challenges
to the leasing sector with the proposed changes to the balance
sheet treatment of leases.

There is a lot of uncertainty and discussion
taking place and this will continue throughout the year. We hope
there is clarification and a clear way forward before the target
implementation in 2011.

The authors are associate
directors of Grant Thornton