Credit risk managers in vendor finance have a hard time, harder
perhaps than their asset finance colleagues
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Although risk management in leasing is deceivingly simple –
revolving around mitigating bad customer debt and balancing price
vs. margins – it is also fragmented, and changes according to the
different markets and legislation across Europe. For instance,
different European countries may analyse credit risk in relatively
the same way, but the varying type of regulations still determines
the different ways defaults are reported.
When it comes to vendor finance, the same general rules apply,
but the credit risks of the vendor itself, and the technical
quality of the vendor’s product, becomes more important, according
to Ruediger von Foelkersamb, director general of the loan
department atDeutsche Leasing.
“In vendor finance the vendor’s client is taken on the lessor’s
books. So you provide the same risk analysis as in direct business.
But a close cooperation between vendor and lessor provides risk
structures allows lessors to accept even poorer risks when
supported by the vendor,” Foelkersamb says.
He adds that one strategy for risk management in vendor finance
is to achieve different levels of risk covers, such as buy back,
remarketing or structured risk pools.
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By GlobalDataVesa Knatee, CEO of Handelsbanken Finance in Finland, also
identifies that residual value risk is more of an issue in vendor
finance, because of the number of captive finance companies
involved in the market, which are more generally prone to using
operating leasing.
Foelkersamb also says that since operating lease is becoming
more important in general asset finance, the lessor needs a strong
partnership to cover the risk it takes, or alternatively, the
lessor needs to run its own asset management to calculate the
future fair values for potential remarketing.
“This kind of risk is not comparable with a credit risk. It is a
more or less a risk of mercantile devaluation of assets,” he
adds.
Foelkersamb adds that vendor finance will increasingly request
operating leases and structures that avoid impact lessors’ own
balance sheet: “So called off-balance solutions will be the future
due to upcoming IFRS rules.”
In Austria, for example, there is a growing trend for operating
leases across the whole leasing market, particularly in relation to
movable assets, which means there is a growing demand to find the
appropriate instalments to handle RV and hence for lessors to seek
out partnerships with dealers and manufacturers to cover that
risk.
But it’s a different story in terms of credit risk, Rudolf Fric,
managing director at the Austrian Leasing Association says.
Although vendor finance is a traditional instrument in Austria,
particularly in the CEE, the risk sharing models with vendors that
were constructed for lessors to mitigate risk are a thing of the
past. Now, according to Fric, the CEE markets are highly developed
and there is too much competition with local leasing companies and
hence less opportunity to share risk with the manufacturer. But,
asset remarketing and stand by agreements are becoming more of the
norm.
Nevertheless credit checking is advanced in Austria, as it is
mostly handled by the banks, which own most of the Austrian leasing
market.
Credit risk in the Nordic region is managed in the same way as in
the rest of Europe, Kantee says, and is currently experiencing
strong developments, with little bad debt over the past few
years.
“About 15 years ago there was a general downturn in the economy and
a bank crisis in the Nordic countries, but since then we have leant
how to manage bad debt.”
Kantee also points out the relationship between a strong
domestic economic infrastructure and risk mitigation and highlights
the “profitable low risk business” of the Nordic region.
Not only is are the Nordics characterised by strong economic
growth, high margins, bank owned leasing companies – which means
that large exposures are not a problem and a strong sales channel
exists – high rating clients, high recovery rates and a
comprehensive credit bureau, but ratings agencies such as Moddys,
Standard & Poir’s and FITCH have all rated the region as
stable. Furthermore, loan loss as a percentage of lending has
decreased steadily over the past decade and in 2006, Finland,
Norway and Sweden experienced growth rates in book value at 7 per
cent, 13 per cent and 37 per cent respectively, according to
Leaseurope statistics.
“Most importantly”, Kantee adds, “the margins, though low and
thin in the Nordics, is still a little higher than in mid-Europe,
particularly in the small ticket leasing sector. The lower the
margin, the less ability there is for risk provision.”
Credit risk is inevitably higher in Eastern Europe, where the
banking system is more archaic and companies are not as experienced
in the process of asset repossession or effective credit
checking.
In Russia, for example, a long litigation and repossession
process exists. This means that residual value is generally not
applied to a transaction because, in the case of default, the
excessive time taken for the lessor to repossess the equipment back
from the lessee undermines the end market value of the asset.
Furthermore, the availability of customer information also poses
problems, with the lack of credit agencies, a unified credit
history bureau and questionable reliability of customer
financials.
According to Alexander Gogohia, commercial director at Volvo
Financial Services Vostok LLC in Russia, the lack of customer
credit information is also particularly difficult for captive
finance companies that often work with vendors, because they rely
on knowledge of product and industry to make the correct
assessments.
Gogohia also identifies a currency risk, whereby despite the
majority of Russian customers earning dollars or euros, all leasing
transactions are conducted in roubles, which makes funding
expensive.
Tax is also an issue for managing risk in leasing in Russia,
particularly for foreign leasing companies.
“When a leasing company in Russia buys an asset with the goal to
lease it, it needs to pay the whole price up front including the
tax, but then in essence it has the right to get a VAT refund
through lease payments,” Vasily Kashkin, head of the Russian
Leasing Association says. But some companies are unable to recover
the VAT, as the Russian fiscal authorities are sensitive to VAT
claims since leasing is still relatively new in the country.
While managing residual value risk is somewhat unique to the
leasing industry, managing credit risk in leasing is a shared
concern by finance houses throughout Europe, particularly following
the sub-prime crisis, which awoke the financial services industry
to the inherent dangers of bad customer debt and the need for more
effective credit checking.
Although there is much speculation about how this will affect the
leasing industry specifically, discussions by risk and leasing
experts from various European leasing companies at the Jacob
Fleming conference; ‘Managing Risk in Leasing Business’ in
Brussels in September, was reassuring and identified strong
developments and improvements in the field of credit risk
management.
