Following last month’s round of
government bailouts and banking nationalisations, Leasing
Life
, in conjunction with Invigors, examines how this is
impacting on the daily activities of the European asset finance
industry. Richard Ryan reports.

Richard RyanSome say the scale of the current economic crisis is
far bigger than has been experienced before. But how are leasing
companies really being affected by it, particularly in their
day-to-day decision making?

Judging by reactions from lessors to questions about how they
are faring in all areas of their front- and back-end businesses, it
would appear broadly they are keeping their heads above water, at
least for now.

For instance, liquidity and cost of capital are still front of
mind for lessors, although there is no evidence yet of the
situation worsening.

Staying on their toes

But there are absolutely no grounds for complacency. The outlook
for volume growth, which was comparatively
positive in our business confidence survey (see Leasing
Life October, issue number 181), is now much more
mixed.

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Roger Skinner, director of Masterlease Group, said in this
respect the playing field has completely changed: “The absolute
focus for lessors will be on capital rather than asset growth.”

However, some intermediaries are still enjoying buoyant levels
of business, particularly where other lessors have withdrawn from
the market.

Paul Barker, business development director of Capital Solutions
Group (CSG), commented that it is still busy with new business,
partly because “banks are not as active as they have been,
particularly in IT assets”.

Across the other side of Europe, in Lithuania, Vidas Danielius,
director of product strategy and planning at UAB Hansa Lizingas,
noted that the impact of economic recession is now being felt:
“Customers are experiencing a drop in demand impacting investment
levels and the strength of their financial position.”

This is reducing the number of credit applications and is also
leading to a decline in applicant quality, he added.

Feeling the crunch

Vendors are also now being hit by the economic downturn, though
the impact of this on the demand for finance can have some positive
repercussions. Sandy Neville, director of EMEA Funding and
Operations for EMC Europe, a computer systems supplier, said that
in the past month customers have increasingly either deferred
decisions or reduced the size of their orders.

“We’ve not fallen off a cliff, though the numbers this year are
likely to be down,” he said.

Interestingly, he noted that tougher economic circumstances are
increasing interest in asset finance, although he added it is too
early to tell whether this would impact penetration rates.

“We’re getting many more enquiries from companies, including
those that would never have leased previously. Because of the
longish sales cycle in our business we’ll have to wait to see if
this translates into a real increase in business, but the level of
enquiries for finance is definitely up,” Neville said.

Recent figures from the Finance & Leasing Association show
that growth in unsecured lending has slowed to a much greater
extent than that of asset finance.

Sandy Neville offered anecdotal evidence of this at a European
level in respect of software financing.

“Over the past 12 to 18 months we’ve turned to unsecured deals
[in the area of software financing]. These are mainly comprised of
loans and other types of financing, which the banks have been happy
to accept. Now they’re not, and we’re turning back to lending
secured on the asset, so there’s a return to the leasing model,”
Neville explains.

Underwriting changes

The impact of the credit crisis on lessors’ underwriting
policies
was particularly evident. While funds were
generally still available, some of the lending criteria had become
much more stringent.

Frans Jansen, managing director of specialist finance broker
Leasing Services, based in The Netherlands, said that “all lines of
credit are still in place, but underwriting criteria have tightened
significantly”.

He added: “With existing funders, there is a trend towards
asking for down payment amounts of up to 50 percent by some
funders, which is unrealistic.”

In contrast to the October business confidence survey,
bad debt levels for respondents in Western Europe
have so far seen little change, whereas for those in Central and
Eastern Europe levels were increasing, but apparently “still in
target range”.

Support is necessary

Support from parent companies and funders was seen as critical
to surviving in the market. Respondents did not report restricted
access to capital, though this emerged as an important factor in
the October survey. However, there was a focus on responsible
lending.

Paul Barker added that CSG’s funding lines are
all still in place and stable, and that, while underwriting
criteria had tightened, lending rates are now more realistic than
they were before the crunch occurred.

UniCredit Leasing passed on the increased cost of funds to its
customers back in March.

“We could not afford to reduce our margins, so a strategic
decision was taken to raise our costs immediately,” said Manuela
Pachoinig, head of sales for the CEE markets.

The lessor is looking at its lending criteria, particularly in
the truck, trailer and construction sector, where volumes are
decreasing.

“We are being more cautious,” added Pachoinig. “We have no
intention on restricting amounts being financed, but we are
continuing to monitor our portfolios and are ready to react
quickly.”

The October survey indicated that credit
decision
times had extended and this was confirmed in our
subsequent conversations.

Sandy Neville, of EMC, said that all of its funders are likely
to take longer to reach a decision, though the decision outcome
hadn’t changed so far. Credit turn-around times had typically
doubled, he added, and this was because decisions were being
referred further up the organisation.

“For all decisions, without exception, the process has
elongated. For bank-owned leasing companies, it’s the parent bank
that deals now have to go to for sign-off. There’s an extra layer
in the decision and this takes longer.”

Enrico Indelicato, a partner at the Italian arm of Newcourt, an
independent broker and consultancy in the vendor finance sector,
added that this was affecting decision and payment times.

“We hadn’t suffered until now from restrictions in credit
approvals, but increased bureaucracy and controls over compliance
have been negatively affecting credit and payment turn-around
time,” he said.

Mixed opinions

Respondents’ opinion of pricing and terms was mixed. Generally,
the view across Europe was that rates have risen because of
increases in the cost of funds, which in turn are linked to
wholesale rates.

Sandy Neville, of EMC, noted that “in terms of rates, margins
haven’t changed, but because of liquidity constraints the cost of
underlying borrowing has risen”, while Frans Jansen, of Leasing
Services, added that passing on price increases was not proving to
be a problem.

“Pricing is increasing because of shortage of liquidity, but
increases are linked to the interbank pricing level and can be
justified with customers in current market conditions,” he
said.

Some sharp increases in rates were reported from the Baltic
countries, particularly in the vehicle market.

“Pricing is increasing. The car market has seen dramatic
increases in fixed rates, from 3.5 percent last year to 10 percent
currently,” Vidas Danielius said.

Although there was understandable caution regarding business
outlook, several of those interviewed saw opportunities in the
market. Some commented that as competitors exited the market they
would expand to take up the business.

Enrico Indelicato, of Newcourt, said that those able to stay the
course in vendor finance would be able to capitalise on their
experience and relationships with vendors as less-well-positioned
funders were forced to move out.

“The fact that some funders are abandoning the market represents
an opportunity for professional advisors in vendor finance who,
thanks to their experience and know-how, have vendors’ and funders’
trust,” said Indelicato.

Vidas Danielius agreed that customer relationships remain key to
future success: “There is no better time than this to prove to
customers that we can support them and engage with them to help
solve their problems.”

Optimistic future for the Baltics

Danielius was also still positive about the outlook for the
Baltic states. Despite a sharp reduction in historic lending
volumes, which were growing at 40 percent per annum, he expected
single-digit growth in the market this year.

Similarly, Paul Barker, of CSG, felt that the outlook for his
company remained positive as business levels remained high.

“There is plenty of business out there, but you need to work
harder and smarter to win it,” he said.

The company’s focus is now on maintaining its funding lines and
avoiding overtrading.

Despite the pressure on expenditure highlighted in the October
survey, two of those interviewed commented on the need for funders
to continue to invest in systems and
technologies
.

Winners and losers

Interviewees held firm views on what would characterise the
winners and losers in today’s highly uncertain lending environment.
Roger Skinner, of Masterlease, emphasised that the winners in the
current market would be those who focused on a return on capital
aligned with a growth strategy, especially in markets where
competitors were contracting and contract margins remain strong due
to a lack of market maturity for certain leasing services.

Others agreed, adding that it was also essential to ensure
capital is allocated to deliver the maximum return and to spread
risk. For intermediaries, Paul Barker, of CSG, believes it must
seek successful niches and not “put all your eggs in one
basket”.

Losers will be those funders that are “unable to access
liquidity and do not rapidly adjust pricing to reflect the scarcity
value of capital, market risk and customer risk,” according to
Roger Skinner.

In terms of success in vendor finance, Enrico Indelicato
believes in the strength of long-term relationships underpinned by
reliability, transparency and expertise.

Those in the market for the short term “who in the past promised
marvellous service, easy credit and excellent rates are now those
who mainly are suffering from the crisis and, in some cases,
abandoning vendors and market.”

Important lessons

What of the lessons learnt from the crisis so far? Vidas
Danielius commented that the crisis didn’t just happen overnight
and there is always a need for funders to demonstrate responsible
lending policies.

He also believes businesses need to plan more logically and be
prepared for more change in future in order to respond to a
deteriorating economy.

Paul Barker said it is important to have a “robust business
model that works in both good and bad times”, while Roger Skinner
said the industry needed to get “back to basics” in terms of
capital adequacy and the rules of lending.

Funders, Skinner added, should “not ignore the fundamentals in
balance-sheet management, for example, borrow long, lend
shorter.

“They should appropriately gear their business and drive towards
a risk-adjusted return on capital”.

Back to basics, indeed.

Richard Ryan is a partner at Invigors