Leasing Life sheds light
on the assets you should be financing in a downward market

Coin-operated gaming

The coin-operated gaming machine
(coin-op) market, comprising some 250,000-plus machines in the UK,
is certainly not what it used to be.

Whereas the industry boomed in the
opening three years of the decade, a combination of the 2007
smoking ban and an avalanche of pub closures – currently estimated
to be taking place at a rate of 52 pubs per week – is making the
sector a stormy place for lessors to do business.

Most lessees in the sector are
operating companies that acquire machines in bulk and then
distribute them to multiple outlets such as pubs, arcades and
shopping centres.

However, this scenario can sometimes
cause a collections nightmare. An operator holding 400 machines,
say, might circulate those continually between 70 or 80 pubs.
Should the operator go out of business, the lessor unfortunate
enough to have financed the portfolio will have a very difficult
time tracking down the inventory.

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The upside to the rocketing
collections, at least, is that there remains a solid resale market
– the large, slightly run-down coastal amusement arcades in less
fashionable towns such as Cromer, in Norfolk, which pick-up many
ex-pub coin-ops. The key time for sale into this market is around
April, before the summer holiday season is in swing.

The manufacturers that traditionally
dominated the UK market – Barcrest, Games Warehouse, NSM and RMLS –
now probably only supply between 15 and 20 percent of the UK’s
coin-ops between them. In the main they have been supplanted by
East Asian and Spanish imports.

Around 10 years ago, around a dozen
lessors were keen to finance coin-ops, with Siemens Financial
Services, Investec, ING Lease and BoS Finance being particularly
prominent among them. Now, only ING Lease and Siemens Financial
Services are known to do regular business in the area, with Hitachi
Capital and NAB-owned Clydsedale Bank doing very occasional

The deals that are done are generally
large, with major operators as clients – a typical transaction
would include around 1,000 machines, each with a £750 to £1,500
(€850 to €1,700) value. Finance itself would take the form of a
£750,000 to £1.5 million credit line, usually drawn down in three
or more instalments over a six-month period.

Also, due to the “Russian roulette”
collections problem – inherent in financing a portfolio of machines
that are circulated at random around dozens of financially
threatened pubs – lessors generally expect huge amounts of
securities against their lending, such as personal guarantees from
the directors of the operating companies.

Deal terms are usually between 12 and
18 months, although these may be longer for more durable machines
such as penny pushers, crane machines and table football sets.

As in most asset fields, smaller
specialists have remained relatively prosperous – Ruffler Bank,
recently transformed into Aldermore, continues to actively pursue
business in the coin-op asset sector, drawing upon the experience
of industry veteran Jonathan Nail.

Meanwhile, Brian Ward of Stratford
Corporate Finance, a brokerage that deals with a large range of
asset types, but which has long had a hand in the coin-op game,
says that his rate of deal introduction has dropped from around
four or five a month to an average of one a month.

Recession or no recession – if the UK
pub industry continues to collapse, the coin-operated gaming market
will carry on suffering.

Fred Crawley