A year for CV leasing?

Across Europe, the commercial
vehicle leasing market is not giving out clear signs of recovery.
It remains in much the same poor state it was in six months ago,
with high numbers of customer insolvencies and correspondingly low
levels of new vehicles entering the market.

Despite this, industry experts say that the
worst is over and that registrations, which dipped sharply during
2009, have started to pick up.

As a result, CV lessors are preparing their
strategies for the year ahead with a renewed sense of optimism.

For many, success in the future lies in more
government support. John Lewis, CEO of the British Vehicle Rental
and Leasing Association (BVRLA), described the commercial vehicle
leasing market as still “very tough”, adding that “the economy may
be picking up, but our members’ customers are still struggling with
problems like high fuel prices and competition from cheaper foreign
hauliers”.

He also described the recovery process as
“patchy”, even within “market sectors that are supposed to be doing
better than others”.

A huge challenge

Registration data from the Society
of Motor Manufacturers and Traders (SMMT) provides a glimpse of
just how big the challenge still is, with a 60 percent decline in
the number of new commercial vehicles coming to the market – on
hire purchase, outright purchase or lease – compared to two years
ago.

In 2009, UK van registrations dropped 35.6
percent to 186,386 units compared with 2008.

In particular, van demand dropped sharply
during 2009, although the decline was less sharp in December when
the dip was just 14 percent.

Jon Lawes, divisional MD for Hitachi Capital
CV Services, said he saw a pick-up in the van market during
August.

Unfortunately, this trend was not mirrored in
the truck sector.While it fell overall by 40 percent during 2009,
to 34,746 units, due to a particularly heavy fall among heavier
trucks, registrations in this sector declined by as much as 47
percent in December 2009.

There is a widespread feeling among truck
lessors that the government is not giving their industry enough
support, and that one thing that could be done to boost the sector
would be the introduction of a truck scrappage scheme.

Lawes pointed out that this would make sense,
as the UK would benefit from replacing the high number of old
trucks on its roads with new models which are far less
polluting.

“A Euro IV or a Euro V is remarkably less
polluting than a Euro I vehicle,” he said.

“If we want to take the environmental
proposition seriously, then the government really needs to support
the truck industry to incentivise brand new vehicles, which would
also help a lot in terms of jobs for manufacturers.”

The BVRLA intends this year to lobby hard on
environmental issues, particularly to ensure that leasing companies
will be able to take advantage of the new 100 percent first-year
allowance for electric van purchases.

“The new commercial vehicle market has
suffered even more than the car market during the recession, and it
is about time the government acted to try and stimulate demand,”
said Lewis.

“We have been asking the government to
introduce more tax incentives that encourage firms to invest in
new, low emission trucks and vans.”

Bad news for brokers

Insolvencies remain a headache. The
number of CV customers entering bankruptcy is roughly as high today
as it was six months ago, largely as the victims are often SMEs
suffering from reduced access to bank funding lines.

This vicious circle is likely to get worse as
finance houses are seeking “stronger organisations”, said one
lessor.

Hitachi Capital claims that it has been less
hard hit than its competitors by the hike in insolvencies, largely
as 85 percent of its customers are A-rated. On average, said Lawes,
just one of its customers per month faces “financial troubles”.

Notwithstanding this, Hitachi, as well as a
number of other lessors, including Lombard, have sought to better
manage their risk by axing their broker lines.

This move has also been taken, according to
Lawes, simply because “finance houses have realised that they not
making any money out of those transactions”.

But it is not all bad news for brokers.
According to the BVRLA, although it is clear that a number of CV
funders have stopped working with brokers, those that remain in the
market “are committed and see the SME sector that brokers serve as
a key growth market”.

Also, lessors themselves are hoping to keep
their heads above water as block discounters and other funders of
leasing companies seem slightly more happy to lend to CV finance
specialists than rental firms.

Fluctuating values

Problems exist for CV lessors,
though, in other areas. The increase in contract extensions has
meant that there is now a huge amount of old trucks in the market,
but because of these assets’ lifecycles many will be at the end of
their lives or will have a very limited value at the end of their
contract extension.

Again, in this respect, the used van market is
slightly better placed than the truck market.

Manheim Auctions’ sales director for
commercial vehicles Alex Wright said that used van values are
actually exceeding 2006 levels, but added that values are still a
long way short of the peaks achieved in at the end of 2007.

He linked the drops suffered at the end of
2008 to the shortage of old vehicles following the launch of new
Euro engine vehicles, as well as manufacturers having to adapt to
the new standards.

The internet has also contributed to the
fluctuation in values.

With the cheapest vehicles now showing at the
front of vehicle retailers’ websites, such as Autotrader, in
response retailers have lowered their vehicles’ prices en masse to
ensure they get to the front of the queue before anyone else.

“Because of the lack of demand, and the
oversupply due to the lack of people buying for financial reasons,
we ended up with an artificial fall,” Wright said.

It is again the car-derived and small-panel
van sectors that are getting “back to normal”, according to
Manheim, and interestingly 4×4 vehicles are at their highest level
in many years.

However, large panel vans – those weighing
more than 3 tonnes – are still a “problematic area” and haven’t
come back yet to 2006 values.

Opportunity in recovery

Although recovery is expected to be
slow, there should be some opportunities not to be missed,
according to Wright.

First, he said, due to a lack of new
registrations over the past two years, there will be a shortage of
used vehicles between now and 2012, when most contracts will come
to an end.

“Because auction remarketing is a demand and
supply ratio, the demand will be much higher than supply, and this
will drive prices up,” Wright said.

Also, with a market that is 60 percent of what
it was two years ago, there might be opportunities for growth,
although this is not likely to happen in 2010, he added.

Tough times for CVs

Life in the CV sector is equally
punishing across continental Europe.

In Italy, for instance, the van market saw a
30 percent drop last year, while truck registrations halved.

This, according to Iveco Capital’s senior
vice-president Franco Augusto, has had a big impact on CV leasing,
even though in percentage terms the share of leasing has
increased.

As insolvencies have gone up, Iveco Capital
business has seen more challenges in Spain, Germany and the CEE
region.

In the UK (which represents roughly 10 percent
of its overall market), although the fall in volumes was
significant, the number of insolvencies was “very limited”, he
said.

But for Augusto, one structural change brought
about by the recession, which has taken place Europe-wide, has been
the permanent increase in margins.

“CV lessors have understood that the risk of
financing needs to be remunerated, which will be an advantage to
customers as well, because they will operate in a healthier
market,” he said.

At the same time, Augusto hopes that the
Italian government will do more to help the sector – a scrappage
scheme on cars and light CVs has had no effects on Iveco’s Daily
range, and trucks have been excluded by tax breaks for
businesses.

He hopes that future legislation will address
these needs