What do lessors face in the year ahead? Here,
Leasing Life examines the challenges and
opportunities.
Go deeper with GlobalData
Legal headaches: far worse is to come
For every problem faced by the MD of a leasing company in 2009,
there is at least one lawyer trying to pick up the pieces.
Treasury departments, for instance, like all other parts of
leasing companies, will have their own set of legal challenges,
most of which are a direct result of the economic slowdown.
First, interest rate credit swaps, frequently entered into by
larger lessors, are no longer the ultimate weapon of risk avoidance
they used to be. Lessors will increasingly find that some
counterparties to their swap agreements no longer exist. This
effectively nulls and voids such agreements, meaning lessors, which
had based lessee payments on the existence of these swaps, will
have to renegotiate terms with their customers. Whether they will
be able to do so or not, say lawyers, is uncertain and any
resolution requires entering a legal minefield.
How well do you really know your competitors?
Access the most comprehensive Company Profiles on the market, powered by GlobalData. Save hours of research. Gain competitive edge.
Thank you!
Your download email will arrive shortly
Not ready to buy yet? Download a free sample
We are confident about the unique quality of our Company Profiles. However, we want you to make the most beneficial decision for your business, so we offer a free sample that you can download by submitting the below form
By GlobalDataRenegotiations are also expected as lessors fall foul of new
risk modelling they bought into when they signed up to Basel
II.
Under its predecessor, Basel I, lessors needed reserves of 8
percent of the value of a loan or debt deal, irrespective of two
factors: how much security there was in place and customer credit
worthiness. That all changed under Basel II which linked the
reserves level to these two factors based on complex risk
modelling.
The problem now faced by Basel II compliant lessors is that most
of their clients are less credit worthy today compared with a year
ago. As a result, their required reserves levels will increase.
This extra burden will have to be forced on to clients in the form
of increased rental rates.
However, as with swaps, doing so will mean either renegotiating
contracts, or even launching litigation.
Potentially far more serious, though, is the threat to lessors
posed by lessees failing to provide adequate security. Typically,
particularly in complex leasing structures, often involving
cross-border leases, lessee’s obligations are secured by bonds and
securities issued by financial institutions.
Considering many of these – such as Lehman and AIG – have
collapsed or seen their credit rating plummet – then the value of
the lease securities have dropped as well. Leasing companies will
require these near worthless securities, often up to the amount of
the leasing deal itself, to be supplemented with alternatives ones,
or with cash collateral.
This is not always possible.
Norton Rose partner Alistair Macrae says: “It is likely many
lessees will simply be unable to comply with these requirements, so
deals will either go into default or require restructuring.”
Court action has already started in the US on this point, and
considering a lot of securities issues arise in lease deals
involving European lessees, it won’t be long before a flood of such
cases reach English law firms.
The spiralling number of customer insolvencies will mean
European lessors will have to pay careful attention to governing
laws on rights of title owners in cases of default, relief from
forfeiture, title to recover, and so on.
All this could lead to any of the following: renegotiation of
terms, debt rescheduling, invoking of over-riding principles, asset
returns, lease terminations, a restructuring of the way lessors
access funds, and many others.
Meanwhile, lawyers expect a Europe-wide increase in regulation
to hit the asset finance industry. In England, for instance, the
risk management arm of the Financial Services Authority is expected
to look closely at asset finance during 2009.
Also, on the back of the 2007 case Wilson vs Hurstanger, in
which a lender was held to be liable for a broker’s fiduciary duty
(for failing to disclose the correct value of his commission),
lawyers predict greater oversight of lessor-intermediary
relations.
Lease technology: from disaster comes
opportunity
Companies developing software systems for the leasing sector
will have a challenging year ahead – but opportunities will
arise.
The credit crisis is likely to give rise to some consolidation.
Companies specialising in front-office are expected to team up with
back-office specialists. Also, as it becomes tougher for lessors to
source new business, there will be a greater emphasis on collection
management.
As insolvencies increase in number, companies offering
back-office administration are likely to boost operations. LPM
Outsourcing, for example, recently decided to bolster its levels of
‘run-out’ activities. This involves company administrators
outsourcing to LPM the running of the insolvent lessee’s lease
book. LPM has recently recruited extra staff, as it expects
operations to grow to levels it saw in the early 1990s, the last UK
recession.
Meanwhile, as business levels drop-off and lessors scramble
around for less business, lenders will need to make faster credit
decisions to stay ahead of competition. Volvo FS in France is a
recent example, and others are expected to follow suit. The captive
recently installed SysperTec’s technology that enables automation
of credit acceptance. This allows dealers to determine the
creditworthiness of a client without waiting for head office
approval. This reduces processing time to as little as one
minute.
Also, as leasing companies take on more ‘green projects’,
software companies are likely to follow suit. NetSol Technologies
has been quick off the mark, launching in December a software tool
to manage “green power purchase agreements” for “environmentally
fit companies”.
Lease tax and accountancy: just got harder
Lease tax and accountancy in 2009 is set to be more complicated
than ever. Lessors will have to juggle getting relief for capital
expenditures, dealing with foreign currency leases, handling novel
types of residual value, and lease classification.
However, experts say the anti-avoidance legislation, Schedule
10, will be the most important accounting issue for UK leasing and
asset finance companies.
This legislation aims to deter lessors from selling a company to
take advantage of tax depreciation benefits. While there is clearly
a need for anti-avoidance legislation in the UK, the far-reaching
measures in Schedule 10 impose an unfair burden on lessors trying
to sell a company honestly. Inevitably, this issue will need
review.
End-user accounting issues will also be high on lessors’
agendas. The revision of IAS 17, which sets how an asset is
registered on a balance sheet, has huge implications for leasing
companies.
New forms of financing: time to take risks
With lowering liquidity in the finance industry, competition
among lessors for traditional business lines can only become more
intense in 2009. While many leasing companies are retreating to
core assets and traditional lease products, many options exist for
innovative lessors with the resources to branch into new forms of
financing.
One option is invoice discounting, a product which sits well
alongside fixed asset financing, according to Asset Based Finance
Association CEO Kate Sharp. Sharp adds that invoice discounting is
legally straightforward and provides a high rate of recovery in the
event of client failure.
Another exotic, and potentially rewarding, financing option is
turnaround finance, which involves financing of businesses
threatened with insolvency. Libby Aird-Brown, of turnaround
specialist TPM, said that while this market was expanding,
“turnaround finance can be a risky business” and “those who will
succeed are those who bring many experience with them”.
On a less risky note, finance providers in the UK may wish to
participate in the government’s Small Business Finance and Small
Firms Loans Guarantee schemes, comprising government/private joint
ventures for provision of funds to SMEs.
