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August 1, 2009updated 12 Apr 2017 4:34pm

Cover story – On the block

Mid-tier lessors face an uncertain future as some block discounters reduce funding lines This company is committed to the long-term support of block discounting, and in order to move forward is undertaking a full review of all customers

By Jason T

Mid-tier lessors face an uncertain
future as some block discounters reduce funding lines. Jason T Hesse reports.

 

“This company is committed to the
long-term support of block discounting, and in order to move
forward is undertaking a full review of all customers…”

This was the opening paragraph of a letter
sent by a major block discounter to all of its customers last
month.

Like many other players in the market, the
funder is reviewing who it has block discounting facilities with,
and whether these should be reduced or not.

While historically not a main source of
funding for lessors, block discounting has become a vital
additional source of funding for leasing companies looking to
expand their books – particularly middle-tier SME lessors.

“We know for certain that a number of blockers
have pulled out of the market recently, only to keep their existing
lines open,” said one such lessor, who did not want his name
published.

“Blockers will always have a place,” said
another, “but I don’t think that they’ll be as pivotal in the
future. We’re all looking for alternative lines of debt, so
blockers have to make a decision as to whether they will be
commercially minded or not. Otherwise we’ll all just move away from
them, sooner rather than later.”

Speaking to Leasing Life, several
lessors claimed that the Co-operative Bank, Kingston Asset Finance
and Venture Finance had all taken a decision to close to new
business and focus on their existing relationships instead. At the
time of going to print, none have confirmed this.

However, most of the bigger players, such as
Hitachi Capital, ING Lease, Siemens Financial Services and
Kaupthing, Singer & Friedlander are all still open for
business, although perhaps with stricter policies in place.

“We’re very much in the new business market,”
said Robert Munn, divisional managing director for Hitachi Capital
Business Finance, which oversees an eight-strong block discounting
team led by Shaun Carroll.

Across the business, Hitachi Capital has a
budget in excess of £250 million (€292 million) in new lending this
year, which includes block discounting lines for new customers. The
business currently has around 90 block discounting customers,
although Munn said that only around 60 of these were active.

“Like all finance companies, it could be they
have stopped lending because they are suffering from arrears and
bad debt,” he said, explaining why some customers were not active.
“Or they might have taken a strategy to stop accepting new business
to protect the investments and keep themselves afloat during the
recession.”

Blockers reducing
lines

Today, Hitachi Capital stands out as one of
the funders most willing to take on new business. Its current
blocking facilities range from £250,000 up to £5 million, to make
up a portfolio of over £100 million, although it is likely to
increase its book this year.

But the industry is more concerned about the
blockers which are reducing lines, or even withdrawing from the
discounting market entirely. This is having a direct impact not
only on the industry itself, but on lessors’ customers too – the
SMEs that make up the British economy.

“In addition to bank funding lines, block
discounting is an essential tool for the SME funders,” Richard
Jackson, managing director of ECF Asset Finance, said.

“It is an important tool for us and any
withdrawal from the marketplace by block discounters would have a
serious impact on the ability of the middle-tier finance companies
to fund their SME customers.”

One lessor that has been directly impacted by
a blocker’s withdrawal is small ticket lessor 1PM plc.

It lost one of its funders in March this year
when it withdrew from the market entirely. In total, 1PM saw its
funding lines cut by 15 percent, but it is still using blockers
today.

“We still have some block discounting lines,
they’re fundamental to the business,” Mike Johnson, the company’s
chairman, told Leasing Life last month, adding that he was
not particularly worried about his lines.

“We’ve got a nucleus that we are comfortable
with,” he said. “We don’t need to look for new facilities, we’re
quite comfortable with where we are.”

So, what can lessors do to keep their block
discounting lines open?

“It’s all about relationships,” said Hitachi
Capital’s Munn. “You basically have to have robust lending policies
and the right procedures and systems to credit-approve and collect
from customers.”

Munn added that audits had become much more
important, and that lessors should expect funders to look closely
at the experience of their directors and sales staff, and the
quality of lessors’ customer-base.

But even with the right type of business, the
future of block discounting lines continue to be uncertain – one
lessor even said that he expected that the number of block
discounters would generally reduce over the next 12 months.

He said: “There is a well-known reluctance by
some blockers to expand because it’s deemed to be financing the
competition – so why should they do that in these troubled
times?”

However, until the funders decide to pull out
completely, block discounting will continue to be a key funding
line – even though it may only be available to an elite class of
lessors.

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