In the wake of share issues by
three leasing companies, Fred Crawley ponders the pros and cons of
the securities route over other forms of debt raising, and asks
whether equity funding works for leasing firms.
Go deeper with GlobalData
Recent capital raises by three listed leasing
companies suggest things may be moving again in this fairly limited
sector.
For AIM-quoted 1pm plc, a fresh issue of
equity in March saw £1.1m (€1.3m) raised for much-needed portfolio
growth, arranged via a new stockbroker, WH Ireland, which was taken
on in August last year.
AIM-listed lessors Private & Commercial
Finance and St Helen’s Finance have also gone down similar routes
recently.
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By GlobalDataAt the start of March, 1pm’s financial
director Rod Channon stepped down from his position, as the company
reeled in the wake of £220,000 interim losses caused by heavy
write-offs in the second half of 2009.
A reduction in block discounting facilities,
among other factors, had constricted both volumes and margins of
new business, and funding through equity seemed an attractive
option.
Nevertheless, with the AIM market continuing
to shrink and investment interest still in the recessionary
doldrums, raising new funds was not an easy prospect. The effort
involved a number of roadshows and presentations by 1pm, and was
carried through by “a lot of enthusiasm” on the part of 1pm’s
management and their broker, a source said.
1pm managing director Maria Hampton said
leasing was “generally seen as quite high risk” by potential
investors. She added, however, that a straightforward business
model – in 1pm’s case, broker-led SME business with sub-£30,000
ticket sizes – helped a lot in presenting the case.
Directors make a good
case
Obviously, 1pm’s directors made a good case –
considerably more stock was sold than had been hoped for. The
equity was sold at a 33% discount, however, comparable to the
knock-down price for which Lloyds Banking Group bought HBOS last
year.
A spokesperson for W H Ireland said the recent
issue had been “something we were very pleased to have achieved,
especially given that funds raised were in excess of
expectations”.
Taking the equity route in terms of funding
has not only reduced 1pm’s exposure to block discounters, but has
given it more freedom to make lending decisions, and a higher
margin on new business due to the lower cost of funding from the
balance sheet.
1pm chairman Mike Johnson is well known for
saying that cash is the raw material of his business, a phrase that
appears to underpin 1pm’s case to potential investors.
Equity-funded portfolio growth, the reasoning
goes, means lower gearing, higher margins, and better results for
shareholders.
The most significant of those shareholders is
Ron Russell, a director of 1pm, who, after significant share
purchases over the last year, now holds nearly 29% of the company’s
stock.
As a result of the issue, 1pm now claims new
business levels ahead of expectations, and says the second half of
its financial year, ending in 31 May, will “accelerate” the
business’s return to profitability. Nevertheless, a loss is still
expected, meaning investors will likely be waiting to see
dividends.
Another AIM-listed lessor, Private &
Commercial Finance, raised £1.35m in share capital in September
last year, followed by a further £95,000 last October, and may be
looking to use equity funding to fuel acquisitions in coming
months.
P&CF used the funds to repay loan notes
and strengthen its balance sheet, but from a sturdier financial
position than 1pm – for the six months ending 30 September 2009, it
reported a £121,000 profit on a portfolio of £150m.
P&CF managing director, Robert Murray,
said equity funding had been an excellent way to maintain the
company’s portfolio growth, but admitted it held less benefits now
than it had done when P&CF first floated in September 1998.
High cost
Murray said that the advantage in access to
senior debt funding lines once conveyed by listing had been much
diminished the last two years.
In addition, P&CF’s CEO Scott Maybury
explained that the current high cost of an equity fund raising, and
the dilution caused by raising capital when P&CF’s share price
(£0.065/share) is considerably less than its net asset value
(£0.15/share), will reduce the attraction of this route for some
time.
Nevertheless, besides boosting margins and
portfolio growth, new share capital could still mean more to
P&CF – in 2000, it raised listed loan notes to acquire TMV
finance and United Motor Finance, and is certainly keen to make
similar purchases again.
However, it seems most likely the company will
wait for senior debt availability to improve, as well as its own
share value to strengthen, before making any decisive moves.
P&CF announces its results for the year ended 31 March 2010 in
late June.
Other listed lessors seem to be using their
fundraising position to embark on strategic activity, with a recent
example being St Helen’s Finance.
The company, a lessor listed on the PLUS
market, raised funds in March of this year for a new professions
finance subsidiary, SHF Legal, using a convertible loan note
offering by City of London Group (COLG).
As a result of the deal, COLG gained the
option to acquire a 20% equity stake in SHF legal for £125,000 for
a limited period, and provided a £1m lending facility for a new
product line.
In addition, COLG acquired the option to
acquire a further 5% of SHF Legal for £132,000 at any time up to 31
March 2013.
Then, in April, SHF followed this up by
completing placement of a new £430,000 convertible loan note, in
part to fund a new energy sector business finance subsidiary.
According to a statement by the company, the
remainder of the money will be used as expansion capital, including
“submission of an FSA regulatory application to enable the group to
increase its range of activities”.
Time in the sun
St Helen’s results will be released on 28 May
28, but until then it appears to be very quiet on the subject of
how it will use its recently raised funds, other than what has been
said officially.
“Life is changing. We are a publicly listed
company, and I don’t feel it is appropriate to talk about it at the
moment,” said Norman Kenvyn, the company’s managing director.
Although listed leasing companies have faced a
fairly bleak investment climate over the last two years, it seems
they may be about to have their time in the sun, if they can make
good with funds raised in recent months.
