funds- the future of leasing?
The present credit crunch has, allegedly, been caused by US
mortgage lenders granting loans to individuals who, too often,
failed to repay the loan. Loans have been made to individuals and
families who were overstretched to make the repayment when credit
was cheap – and who were financially unable to deal with higher
interest rates. Worse still, sectors of the sub-prime US property
market were oversubscribed, so there was no fallback, by way of
repossession to recoup the failed payments.
Go deeper with GlobalData
Access deeper industry intelligence
Experience unmatched clarity with a single platform that combines unique data, AI, and human expertise.
While the Federal Reserve, the European Central Bank and Bank of
England have pumped eye-watering amounts of credit into the banking
system, the cynic might claim the system is still
near-constipated.The closing of ranks and credit among institutions
that normally lend on the wholesale market against longer-term debt
has manifested itself in the United Kingdom in the run on Northern
Rock.The skies are dark with chickens coming home to roost.The
fiasco created for the UK financial services industry is
incalculable – and long term.
Impact on finance
What are the likely implications for the finance industry? And
what might be the next round of developments? The first industry
response has been an immediate tightening of credit across the
banking sector.Available credit capacity is being saved for
favoured clients, ongoing agreements tightened and rules enforced
more rigidly.
Thus, there are rumours that long-term credit – mortgages –
through building societies and other sources are becoming harder to
obtain. In turn, buyers and sellers are hibernating, financially.
Credit cards, too are being reassessed and securitisations appear
to be getting tighter and more transparent. Conventional business
loans have also become harder to raise, with the criteria lifted –
even if interest rates are being held.
US Tariffs are shifting - will you react or anticipate?
Don’t let policy changes catch you off guard. Stay proactive with real-time data and expert analysis.
By GlobalDataSo what does this mean for the leasing
industry?
In future, leasing will be more tightly regulated by lessors, at
least in the short term if liquidity remains in short supply. Given
a shortage of liquidity, the demand to sell on leased assets will
become more important and that, in turn, will lead to a greater
demand for quality. Quality, both in terms of the assets leased and
of the potential lessee may attract more scrutiny which, in turn,
will mean a tightening up of risk management, greater enforcement
of rules and due diligence. Quite simply, it will be a return to
strict best-business practice.
Reduction in leasing volumes?
Could the present credit crunch lead to a reduction in the
overall leasing industry? The availability of funds for leasing
will be there but the conditions of lease may be much tougher.A
pruning of some poorly performing current leasing deals and higher
barriers to entry may well become the norm.
On the other side of the equation, given a tightening of credit
from the traditional sources of long-term finance, might we see new
players entering the market?
A number of sovereign wealth funds [state-owned funds] have,
over the past few years, bulged with cash driven by
industrialisation and the escalating price of oil.Various analysts
value these funds in excess of $2.5Tr (£1.2Tr).And with a world
appetite for oil in excess of 85m barrels a day, there is a lot of
cashflow into those funds.
Perhaps the best known are the funds of Russia, Brunei,
Singapore, Malaysia, the United Arab Emirates, other Gulf States,
Saudi Arabia and Norway.
Sovereign wealth funds may represent government pension funds,
long-term investment funds or the assumed wealth of the ruling
families.The issue is they are vast, growing and being managed more
commercially.These funds already own substantial chunks of some of
the world’s leading banks; they also have significant holdings in
at least one global leasing company – and such cash-hungry
enterprises could attract future direct investment rather than
funding at arm’s length through the intermediary of a global
bank.
An ongoing capital and cash famine from the conventional
sources, whether a genuine reduction in capacity or a knee-jerk
reaction to anything not backed by investment-grade credentials,
could possibly create a climate for significant growth in the
involvement of sovereign wealth funds in asset finance – with the
associated strategic political implications. The author is KPMG
professor of automotive management at the University of Buckingham
Business School ❙
