Specialist bank Investec has backed the UK asset finance market by running securitisation vehicles on its leasing contracts to raise funds – the first £264m vehicle in 2013, and a second for a similar figure by the end of this year. Brian Cantwell talks to Mike Francis, head of asset finance at Investec
Why are securisations a good plan for the bank?
From our perspective it’s diversifying funding sources and matching our liabilities with the assets. We give our database an update; it’s the first securitisation that’s been done in the small-ticket UK space. We hope to get a second securitisation out pretty soon targeting the small-ticket lease book – about the same as last time, about £250m to £300m, for later this year. There’s no rush to do it. I’d expect the same sort of mix of investors as last time. We have about 87% AAA investments, which is a good sign of investor’s perception of SME risk in the UK.
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Doesn’t the second bond bring a lot of liquidity into the bank’s balance sheets?
It certainly refreshes the liquidity. Everyone has different capital treatment because with securitisation now you need to keep a certain amount of it under what they call a ‘skin in the game’ which is a minimum of 5% of the total loan value by law: lessors can’t sell all of the securitisation.
Is it a vote of confidence in the UK SME market?
I believe so; it’s a good market. Investors have the perception that there is confidence in the UK SME market. We’re a bank and we can fund ourselves in a variety of ways, but securitisation is a good method at the moment. We have got ourselves set up to do it – obviously it being the second bond, it will be a lot easier than the first, which was fairly complicated because of the ratings processes.
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By GlobalDataWhy are private equity firms getting involved with the UK leasing market?
I think the UK model prices more realistically [than counterparts in the EU]. We think price to credit risk in the UK is better than across Europe. I do some work with Leaseurope and I’m amazed how low returns are to European lessors. Lessors have to make money and have to get a return on capital; running a lease book is expensive. It’s also labour-intensive especially if you run assets that come with maintenance, or with split payments. Lessors provide a service as well as just their funding. In Europe lessors only seem to price for vanilla funding.
What’s wrapped up in the cost of running the service?
It’s quite labour-intensive. Obviously there are credit risk functions and a customer service function because, to take an example in office equipment, if the photocopier doesn’t work, the first person they call is the funder, as they are paying for it. We deal with that, although we might be collecting maintenance money for a manufacturer or a supplier as well. It’s funding the sale of the asset in the first place, and that’s the service, because it’s more than just offering the corporate a line of credit.
Do you think then that the UK’s more astute?
I think that British banks learned from the recession. OK, we’ve got a couple that are still state-owned. But plenty of others learned the lesson that if they priced too cheaply they needed to keep the pricing levels at a sensible level. I’m not talking medium rates or anything like that – I’m talking one or two percentage points from where they were in the past. If you speak to any of the lessors in the market at the moment, you’ll find that the bad debt rate is very low as banks are looking to keep companies going rather than push them over the edge.
My big bugbear in the UK is all about the lack of confidence SMEs have in receiving funding, rather than anything else. Everyone talks about funding not getting down to SMEs, but I really think that with the number of funders in the UK asset finance space, there isn’t a deal that wouldn’t get done unless it was totally unworkable. We used to own a brokerage and we had 26 funders linked to that, and you can place pretty much anything. It’s far more the case that companies think they won’t be able to get any finance, hence they won’t make the investment decision.
SMEs are very bruised, and they have shored up their finances, and are very wary to expand and buy new equipment. They are trying to make do. I think they feel that they can’t get funding, which is wrong.
What about growth in the UK?
If you look at the FLA statistics, the level of asset financing has moved between £20bn and £25bn per annum up and down over the years. We’ve never grown that market size. Banks and lessors fight among ourselves, but we ought to be concentrating (certainly some of the industry bodies) on raising awareness of the product.
We all know that a corporate should diversify its funding sources as much as possible.
A lot of the problems in the recession were caused by companies only using overdrafts as a funding tool and then getting caught out when the bank called in the overdraft. Whereas if you have an asset finance deal structured for equipment over five years, you can pay for it over five years. It makes much more sense. It’s a simplistic argument, but that’s what we need to be doing.
Is there a British reluctance to go into debt?
If you look at North America, there’s a massive amount of corporate lending through asset finance and leasing. It’s a normal thing, but over in the UK it hasn’t gone the same direction. I don’t think the industry has advertised itself very well over the last 10 to 15 years, and I don’t think that we educate children about finance properly. It’s just gone into the national curriculum that we educate children in ways of funding, both personal and corporate. As a nation we’re not particularly financially savvy at the moment.
Would it be more efficient for lessors to have a wider distribution of super-brokers?
The brokers are a great reach market and we use it – 95% of our business comes through broker channels, because they’re there at the point of sale. At the end of the day they rely on people coming forward and seeking funding, so it’s getting the message out there that funding’s available. We make 260 deals a day through the broker network.
What challenge do alternative lenders pose to the market?
I have no problem with any level of funders; if people come in, they come in. I don’t think that the word is ‘alternative’ to describe them; as long as [alternative lenders] get to a part of the market that wasn’t there already and don’t come in on the premise that they can charge extremely high rates, then there’s a place for them.
The new regulation coming into the market is key: with the FCA taking over the regulation of leasing from the OFT there’s now a far higher level of regulation. As a bank, we already have most of it in our processes already.
We’re relatively happy about that – I actually think it’s a great opportunity for the market.
