It’s a question I’ve come up against several times in
recent weeks, as a series of BBC radio broadcasts by investigative
reporter Adrian Goldberg have asked whether the asset finance
industry is tightly regulated enough to avoid posing a large-scale
risk to banks and consumers.
The problem identified is that posed
when lessors have continued to pursue payments from businesses that
have found themselves on the sharp end of deals with rogue
distributors.
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It’s a very simple formula: vendor
signs lessee up to lease on the condition that a future revenue
stream from the vendor or an associate company will compensate for
rentals. Lease is passed to a broker, then to a funder, which buys
the paper. Vendor or associate company fails, leaving customer
paying for lease with no compensatory revenue. Lessor must decide
whether to write off or pursue the outstanding debt.
Definitely unfortunate – but where is
the need for greater regulation of leasing companies? It seems that
in the current media climate of distrust towards the banking
sector, what has been overlooked is that the lessors involved in
these situations are being left in uncomfortable positions by
‘rogue’ vendor action, just as their customers are.
If anything, these sorts of deals underline the need
for lessors and brokers to evaluate counterparty risk in sales
finance agreements. However, this is in their interest to do in any
case, and has been a logical and demonstrable focus for all leasing
businesses in the more risk-conscious years since the
recession.
This in itself raises a relevant point
in considering the ‘new’ crisis in leasing – all the controversies
reported so far by the BBC revolve around deals signed before or
early on in the 2009 recession.
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By GlobalDataI would argue that were it not for the
sudden onset of such hard financial times, many of the supplier
collapses that triggered customer distress may not even have taken
place.
If the supplier controversies are part
of a systemic failure in the leasing industry, then why have there
been no new similar cases in three years?
Yet, at the start of the most recent
programme broadcast by the BBC, Goldberg announced: “Britain’s
banks could be looking at a new toxic debt issue. Some of them are
exposed to millions of pounds of leasing deals gone wrong.”
The second point is fair – there is no
denying that lessors have been exposed to bad debt and collection
costs as a result of collapsed deals.
Bank of Scotland Equipment Finance,
the lessor primarily involved in the Elumina Iberica deals most
recently discussed by Goldberg, went on record as having written
off £2m as a result of the equipment supplier’s collapse.
However, the asset finance industry as
a whole – by Goldberg’s own admission – was an industry worth £19bn
as of 2010.
At the risk of trivialising the
considerable difficulty faced by those affected by these deals, I
would hardly say the sector was facing an epidemic.
In conclusion: yes, leasing companies
should continue striving to be aware of the risks involved when
partnering with new vendors. Yes, it is undesirable for all
concerned when a debt must be pursued on a deal affected by a
vanished supplier.
But is this an issue affecting a
significant proportion of the industry’s business, and is it one
that looks set to re-emerge unless non-specific ‘regulation’ is
piled onto the asset finance industry?
I sincerely doubt it. By those
criteria, I would be happy to say for the record that this isn’t
much of a story.
Fred Crawley
fred.crawley@vrlfinancialnews.com
