With lessors setting pricing in mid-ticket deals too low
and volumes down, is there any room for optimism?
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A good example of this is in the middle ticket
market (up to £5 million [€5.5 million]) where, according to Paul
Bartley, one of the directors at Close Leasing, the firm is
“absolutely swamped” with new business proposals.
Close Leasing shares introducers of new
business (corporate finance advisers, broker, accountants and so
on) with many other sources of funding. A number of those sources
have now “dried up” and with a notable market exit in September,
Close Leasing has seen a significant spike in new business
proposals.
Rather than being a complimentary line of
credit for bank customers, under current conditions Close Leasing
appears to have become a direct replacement for those customers
unable to secure funding by previously available sources.
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By GlobalDataThe need for selectivity remains high to
ensure quality of business in terms of the source of introduction,
counterparty risk and transaction structure.
Established underwriting criteria still need
to be fulfilled. Assuming unsuitable deals can be rejected quickly,
it seems this approach will assist Close Leasing in maintaining
front and middle-office operating efficiencies, especially when
transactions need to be structured and a hands-on underwriting
approach is taken (every customer is visited before underwriting a
deal).
While funding supply has reduced in the
market, competition still remains. Like others in the £100,000-£5
million market, Bartley observed that mainstream lenders continue
to set their pricing sights too low, in some cases operating around
200 basis points below what would otherwise be considered
acceptable by customers.
Often this means lenders have perhaps not
taken a full view of the risks associated with a transaction, or
have reverted to type in winning deals on rate in order to achieve
volume.
By way of example, another funder mentioned a
commercial vehicle fleet transaction that had been lost to a
competitor prepared to operate at a margin under 1 percent, even in
current conditions.
Bartley indicated a frequent response of
lessors when a customer indicates that another financier has
offered a low rate (whether this is true or not) is to match the
perceived lower rate, with the result that the yield is repeatedly
reduced and a collective momentum to lower rates becomes
embedded.
Lack of funding capacity
Much better, he argues, would be for
lessors to remain firm to their original, risk-based pricing and
occasionally lose deals, but retaining acceptable levels of
profitability within the business on their books.
With natural concentrations
occurring in middle ticket, structured finance portfolios and the
risk that a small number of bad debts can have a material bottom
line impact, the advice seems sound.
Simon Brook, a director of Capitas Finance, a
UK-based lease broker, is on the other side of the
introducer/funder divide and recognises the full force of funder
withdrawals.
Looking at the impact on end customers, Brook
believes that lack of funding capacity may – ultimately – have a
negative effect across the real economy.
Both Bartley and Brook see that market volumes
have declined, with a number of sectors struggling – construction,
automotive, plant and crane hire being good examples. Recycling and
renewable energy, as well as mining and quarrying, were cited as
sectors where sizable recent transactions had been completed.
The IT sector has been sluggish, but Brook
observed that companies still needed to upgrade, albeit the period
between upgrades had typically extended by a year.
With a significant focus on the IT sector, one
piece of good news for Brook is the increased importance of asset
finance for vendors and systems integrators, keen to find a
financial solution to their own customer requirements. The profile
of IT finance customers appears to have changed, with larger
companies more willing to engage than before – though Brook
identified that this is usually driven through the
vendor/integrator sales process.
One area where Brook was seeing less success
was in placing sale and leaseback business, giving the recent
example of a well funded mid-sized company who had recently
acquired a competitor from the administrator and was looking to use
the acquired company’s machinery to generate funding.
Brook intimated that most funders are now
extremely nervous of leaseback arrangements, seeing them as the
actions of cashflow-troubled firms. By comparison, Bartley
continues to see refinancing opportunities, in particular
mentioning the consolidation of manufacturing businesses.
In terms of the near future, both Brook and
Bartley see little change, though with some indications that the
trough has bottomed out and slow but steady increase in demand may
occur over the next six to 18 months. Until companies are more
convinced of an upturn, customers in the £100,000-£5 million ticket
bracket are likely to remain cautious, especially when extending
the use of an existing asset remains a practical alternative.
The author is a partner at the
consulting and services firm Invigors
