The credit squeeze is a diverse
and complex matter. What is clear is that it is having a
significant impact on the global leasing sector, with the word
squeeze already being replaced with “global recession” by many
commentators. But in the leasing environment this doesn’t
necessarily have to translate into doom and gloom.

The credit crunch has caused the flow of funds in the wholesale
money markets to dramatically dry up. Money is scarce, and banks
are now considering the best options for utilising their scarce
capital. Despite the recent capital injections by governments
globally, the shortage of funds is pushing up money market
wholesale rates.

LIBOR, in normal markets, is about 20 basis points (bps) above
the Bank of England’s base rate. Since the sub-prime crisis broke,
the gap has widened markedly and it is now nearly 200 bps above

The effect of the credit crunch is notable in the changing
structure of the leasing industry:

• Capital is scarce – in larger organisations decisions have to
be taken as to the best route for deploying capital. Better returns
may be found elsewhere in other banking products. The result may be
consolidation in the industry or reduced competition.

• Liquidity has decreased, with costs of funds notably
increasing – especially if based on LIBOR. There is now a clear
market advantage to those institutions able to price a variable
rate transaction on base rate.

• The market rate for leasing transactions has increased as,
coupled with an impending recession, the risk-reward profile has
altered significantly.

• Many borrowers may look to tax-based leasing to obtain
indirect route to capital allowances. However, the tax shelter of
some financial institutions has diminished significantly.

• There will be a concentration towards relatively better
quality covenants and asset categories.

Despite the evident market restructure, there are opportunities
for all, should the lessor be positioned to capitalise upon

Derren Sanders

The author is managing director of HSBC Equipment