Canada’s reputation for solidity extends to its leasing industry, where predictions of respectable economic growth over the next few years are matched by expectations of steady expansion in lease activity. Paul Golden reports
An overview of the Canadian lease market published in September by the Canadian Finance & Leasing Association (CFLA) observes that although economic growth in Canada continues to compare favourably with most developed nations, the risk of weaker growth in those nations, along with many less developed and developing countries, places limits on the domestic economy, which grew by 2% in 2013, up from 1.7% in 2012.
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Public and private investment in machinery and equipment rose by only 0.1% in 2013 but, in inflation-adjusted terms, business spending on non-residential construction and machinery and equipment led the economy last year.
The Canadian economy is expected to grow by 2.1% in 2014 and by 2.5% in 2015 and spending on machinery and equipment and non-residential construction, along with exports is expected to lead the economy over this period.
The CFLA report – which was prepared by Robin Somerville, director of the Centre for Spatial Economics – forecasts growth in business spending on new machinery and equipment of 9% this year and 7% in 2015.
A survey undertaken by Statistics Canada on public and private investment intentions for 2014 anticipates a 3.9% or C$4.2bn (2.9bn) increase in public and private machinery and equipment capital spending this year. Growth in spending on new equipment varied across the country in 2013 with strong gains in Atlantic Canada and the Prairies and declines in Ontario, Quebec and British Columbia.
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By GlobalDataSpending patterns are expected to shift in 2014 with Ontario, Quebec and Alberta leading the country, while Manitoba/Saskatchewan and British Columbia lag and Atlantic Canada keeps pace.
On an industry basis, the weakest sectors for public and private machinery and equipment spending in 2013 were mining and oil and gas extraction along with most private and not-for-profit service sectors. Areas of strength included agriculture, forestry and fishing, construction, wholesale trade, transportation and warehousing, real estate and leasing, and the public sector.
The report states that the mining and oil and gas extraction sectors will remain weak in 2014, along with the retail, accommodation and food services sectors, while referring to expected strong investment in the manufacturing, wholesale, transportation and warehousing and arts, entertainment and recreation sectors.
The federal government continues to support the securitisation of equipment and vehicle lease and loan portfolios through the Funding Platform for Independent Lenders (F-PIL) programme. This is a public-private partnership between the Business Development Bank of Canada and TAO Asset Management that provides funding on commercial terms and on a match-fund basis to independent small and medium-sized finance or leasing companies that extend financing for vehicles and/or commercial equipment.
For the past two years, CFLA has been engaged in a comprehensive review of the gathering and interpretation of data on the asset-based finance industry in Canada. The definition of asset-based finance has been broadened to include leases, secured loans, conditional sales contracts and lines of credit provided to finance the purchase of machinery, equipment and vehicles in Canada where the finance company retained ownership of the asset for the life of the contract.
New business volume estimates are divided between public and private sector new machinery and equipment, the fleet vehicle and the retail vehicle markets. Machinery and equipment excludes passenger vehicles and light trucks acquired by public and private enterprises (the fleet vehicle segment) but includes heavy trucks and other transportation equipment.
Asset-based finance new business volumes are heavily influenced by trends in the economy. The recession of the 1990s led to a decline in new business volumes as did the financial crisis starting in 2008 and the subsequent great recession. Total new business volumes rose from an estimated C$43bn in 1990 to C$107bn in 2013.
New business volumes are dominated by the retail vehicle segment which accounted for 67% of the total in 1990 and 68% in 2013. The fleet vehicle market’s share of total new business has fallen from 11% in 1990 to 7% in 2013 so the overall motor vehicle share of the market slipped from 78% in 1990 to 75% in 2013. The equipment and commercial vehicle segment was 33% of the total in 1990 and 32% in 2013.
The Alta Group produces an independent set of estimates of new asset-based financing of equipment and commercial vehicles in Canada. Its research estimates the volume of new business in 2013 to be C$34.7bn, corroborating the C$34.3bn estimate generated by the CFLA. The Alta Group also provides a breakdown of this new financing by provider. Banks and credit unions account for 62% of new business, government agencies for 10%, while independent and captive finance companies combine for 26% of the total.
The Centre for Spatial Economics estimates that with the retail vehicle market added to the equipment and commercial vehicle market, the banks accounted for between 50% and 60% of all asset-based finance and leasing transactions in 2013. Manufacturers’ captives, including the car-makers’ financing arms, are the second-largest segment of providers of asset-based finance, but they remain well behind the banks, accounting for about a quarter of the value of assets financed in 2013.
Narrowing the type of financing to just leasing, it’s estimated that leasing’s share of asset-based financing new business was 39% (or C$13.2bn) of financed equipment and commercial vehicles and 14% (C$10.1bn) of the financed retail vehicle market in 2013. Leasing financed 12% of all new public and private machinery and equipment spending in 2013 and accounted for 12% of the total value of the (new and used) retail vehicle market in Canada.
The value of asset-based finance assets in Canada is estimated to be C$314bn in 2013, up from C$138bn in 1990. The shares of total assets for retail and fleet vehicles and machinery and equipment segments are very similar to those reported for new business volumes.
Investment in non-residential construction machinery and equipment is rising and capital expenditure on plant machinery and equipment is also growing, says Anthony Zambon, director at Wells Fargo Equipment Finance Canada. "We’re also seeing a continuing decline in delinquency and defaults and this is the experience of other lease companies we speak to – current rates are at all-time lows," Zambon says.
Geographically (and contrary to the findings of the Statistics Canada survey), he refers to the oil and gas sector in the western provinces as a strong source of business, but an unexpectedly positive trend over the last six months has been increased manufacturing activity. The rise of the Canadian dollar has meant that manufacturers in Ontario are now looking to upgrade their equipment as their goods and services become more competitive in the US market.
Zambon explains that his company’s lease business falls into three categories. "We have a network of manufacturers and dealers across North America to whom we provide sales solutions," he says.
"We also support a direct customer base with their capital expenditure requirements in the construction and transportation sector, and finally we support our Canadian Wells Fargo bank group customers with equipment finance. These businesses have all performed well this year and we expect to see similar performance in 2015."
Businesses that trade with the US will experience greater demand as GDP growth rises and are investing to increase their productivity and profitability, he adds. "As a result we expect to see more equipment finance opportunities in 2015."
While the sheer size of Canada makes regional disparities inevitable, the market is in good shape overall with lease activity in Alberta in particular thriving on the back of oil and gas exploration and food and agriculture, says Peter Horan, country manager, De Lage Landen Canada.
De Lage Landen operates in four principal business sectors in Canada – office technology; health care; construction/transportation/industrial; and food and agriculture.
"We started in Canada with a significant presence in office technology," Horan explains. "Growth in construction/transportation/industrial and food and agriculture has been steady single-digit, and health care growth has been more modest."
Horan says the company’s overall business in Canada has increased by 60% since 2012 and expects double-digit growth in 2015 and 2016, roughly four times the growth of the economy.
He says the fact that banks that own leasing companies don’t necessarily break out their leasing portfolio or differentiate between leases and loans makes it difficult to determine the breakdown of market share between bank-owned, independent and manufacturer-owned lessors.
"There’s been considerable industry consolidation over the last decade with many small or medium-sized independents being acquired by banks or other independents to such an extent that from an M&A perspective Canada is pretty much closed and there are fewer than half as many lease companies as there were 10 years ago."
According to Horan, the Canadian government has not taken any direct or indirect action to support the lease finance industry beyond developing a state-owned captive in the agricultural lease market (Farm Credit Canada) with a portfolio worth around C$30bn.
The solidity of the Canadian banking system is one of the main reasons why he expects the leasing market to continue to grow steadily over the next 12-18 months. "There are only five major Canadian banks and they serve more than 95% of the domestic market," Horan says. "These institutions are well capitalised and under-leveraged compared to the US or Europe."
Changes over the last 12 months include National Leasing Group’s acquisition of New Brunswick-based, privately held commercial leasing company UMA Finance in July in a deal president Tom Pundyk said was expected to contribute to National Leasing’s growth objectives in eastern Canada, especially in the forestry, transportation and construction industries.
"There have been some new entrants in the Canadian leasing market that have added to the level of competition for business," says Miles Macdonell, senior vice-president sales at National Leasing. "We are very optimistic about the year ahead. Although there’s strong competition, we feel there are opportunities across the entire market."
In November 2013, LeasePlan confirmed that it would open for business in Canada from the beginning of this year having signed a licensing agreement with Canadian company Foss National Leasing that would see Foss National Leasing operate the newly formed LeasePlan Canada subsidiary.
Blake Macaskill, managing director at CIT Canada observes that rates have remained relatively unchanged for a number of years and that there are multiple avenues to source financing for customers of all sizes.
"Leasing companies look to be performing well with good metrics, including consistently low write-offs and low delinquencies," Macaskill says.
He refers to a growing need to include more than just the base equipment in a leasing transaction as one of the most significant developments in this market over the last 12 months.
"Customers are requesting the inclusion of services, software, warranties and maintenance on the lease schedule," says Macaskill. "This total solution financing with enhanced flexibility is the expectation looking forward."
Modest but stable growth has been pretty much a constant of the Canadian economy over the last few years and Macaskill says this has benefitted the leasing industry. "We have a well-run and balanced regulatory approach by the federal government. A consistent approach by the government over time has allowed leasing companies to work in a stable and predictable regulatory environment."
Strong sectors line up with where the economy is expanding and there is also growth in sectors that support these activities.
"Resources are a backbone in the Canadian economy and equipment related to these sectors is always being purchased," adds Macaskill. "Corporate compliance and governance are another reason companies make purchases and this often drives new purchases of equipment or technology."
Macaskill observes that economic forecasts point to modest growth for 2014 from 2013 and expects lease market growth to lag slightly behind overall economic growth. "We’re looking at modest growth in 2015 for the Canadian economy and would expect the same across the leasing industry as a whole," he concludes.
