There have been financial and banking crises before, but the
current one, on its global scale, is surely “rocking the boat”.
Some experts say the credit crisis could be nearing its finale,
while others suggest it might merely be the first stage of much
longer turbulence. We will only know who is correct as events
continue to unfold, but the credit crunch is a massive stress test
for the global financial system. It signifies a crisis when a
credit boom has been extinguished by “natural causes”.
Powerful global forces are at play and their impact, both
domestically and internationally, are extremely uncertain and
difficult to predict. Economic and market interconnectedness has
become more complex and potent, and unwelcome developments are
easily and speedily transmitted globally. However, we all have to
get on with running our businesses and, although the way we get to
our objectives may change, the objectives themselves don’t
change.
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In mid-March, the International Monetary Fund (IMF) called for
“decisive policy action” to strengthen the global financial system,
noting authorities worldwide must also “think the unthinkable” so
they can better anticipate and react to potential global economic
risks.
Financial markets
They went on to say the first priority must be to reverse the
spreading strains in global financial markets and to restore the
normal functioning of the financial system in advanced economies
because there is a critical need to assure market liquidity. Policy
actions worldwide, so far, “may not prove to be adequate” to deal
with the “low probability but high-impact events” that may
materialise and undermine global financial stability.
The IMF points to the potential for a global financial
decelerator that could amplify the impact of financial turmoil on
the economy. It emphasised: “A downward credit spiral, driven by
rising defaults or margin calls that force asset sales even as the
value of collateral deteriorates, could produce new rounds of
de-leveraging and asset-price deflation.” Will tighter credit
conditions combine with asset-price weakness or, worse, feed off
each other? This is of more concern to our industry.
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By GlobalDataIn the past two issues of Leasing Life, I covered the
importance of adequate risk mitigation and business controls. I
mentioned some asset financiers – including certain “seniors” – are
reviewing their strategy and highlighted potential people issues in
our industry.
These are ongoing and deepening concerns. Moreover, there is
evidence that some banks across the globe are considering whether
it is time to pull out of leasing or, at least, out of some of the
less profitable activities. Certainly, many banks are reluctant to
consider new activities that, under normal circumstances, would be
attractive investments. Even those that are being considered are
carrying substantially increased pricing – not surprisingly, it is
in times like these that the focus is back on ‘pricing for
risk’.
The media is full of tales of banking’s woes. One example from
the other side of the world, which is being followed up in Western
media, are the troubles besetting Allco Finance Group (AFG), the
diversified global financial services business listed on the
Australian Stock Exchange.
AFG hit the headlines when its operations, finances and outlook
were adversely affected by global credit market developments and
equity market volatility. The group has embarked on a restructuring
programme to focus on its core asset classes of aviation, shipping,
rail and real estate, and dispose of non-core assets to reduce
debt. It is in discussions with its banks to restructure its debt
facilities. Further ramifications are doubtless yet to unfold and
other examples of beleaguered banks will be found closer to
home.
I have alluded to the ability to access funding as being the
important differentiator for asset financiers and, of course, this
in turn will affect some customers as they look for funding on
favourable terms. More stringent lending conditions, and the
increased cost of finance, are at the fore, raising concerns about
the knock-on effect on investment.
Under the microscope
Uncertainty and fears are causing more companies to review their
investment plans, and to be more selective in support of existing
activities. There is strong evidence that specific leasing
activities are under the microscope and that the time has come to
weed out the underperformers – we expect to see some divisions,
subsidiaries and departments of major leasing groups either sold or
closed down.
In the UK, Government data shows that business investment for Q4
2007 was 1.7 per cent higher than the same period of 2006 and 0.5
per cent lower than the previous quarter.
An indicator of future trends may lie in the latest quarterly
Business Opinion Survey from the Institute of Directors. This
showed business investment optimism has fallen sharply and, while
the IoD cautions there is both good and bad news, the collapse in
optimism is significant, largely because a sharp swing in business
investment could potentially turn an economic slowdown into a
recession. Despite the tail-off in future optimism, actual
performance remains strong. As the IoD acknowledges, this is a
tricky survey to interpret. We need to see whether pessimism
translates into reality.
History does not give a clear steer on what happens next in this
period of global uncertainty.
The author is chairman of The Alta Group, ‘Advisors to the
Asset Finance Industry’
