Pre-lending reviews, turnaround
funding and early warning systems – Fred Crawley discovers how
there are more ways than ever for lessors to avoid the pain of
client insolvency.
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As the leasing industry cottons on
to the need to spot client distress as early as possible, companies
specialising in business recovery and restructure have begun
offering their services as an ‘early warning’ service for
lessors.
Turnaround lender Gordon Brothers is
in talks with a lender about such a programme, while advisory firm
and intermediary Vantis has seen a big increase in the number of
funders looking to have portfolios reviewed for possible trouble
ahead.
One of the major problems faced by
asset financiers in the wake of the recession has been the
perception of lenders as being out of touch with their customers’
financial problems up until the point of missed payments, or worse,
bankruptcy.
Mark O’Neil, managing director of
the commercial and asset finance division at Vantis, thinks this is
a result of a historical tendency for many lenders to only consider
asset value realisation in the event of a liquidation.
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By GlobalData
He thinks
that, as client insolvencies have increased, lessors have begun to
think “less transactionally”, looking at all the issues surrounding
a business holding financed assets, and the revenue generated by
those assets as part of a going concern, rather than as a disposals
prospect.
In essence, this means that leasing
companies have become more and concerned with ensuring the survival
of clients – a trend that has aligned their interests with those of
turnaround lenders such as Gordon Brothers (GB).
Alex Brick, GB European CEO,
explained how it works in the case of a leasing client that has
been identified as distressed
He said: “Or aim is to support a
restructuring with additional liquidity, and then provide
management support [or in some circumstances replace management] to
help the restructuring of the business.”
Presuming the client is then
returned to profitability, GB can convert remaining debt into
equity and go on to enjoy the gains on the share value of the newly
successful business. Meanwhile, the leasing company is ensured
continuing payments as a result of GB’s short-term fund offering,
and avoids a potentially messy insolvency.
However, while Brick feels a
successful restructuring can take place “very late in the day”, it
is crucial to act as early as possible.
“If your customer is already missing
payments, it’s probably too late – you need to restructure long
before the client is in danger of insolvency,” Brick said.
GB’s knowledge of this timescale is
why it was recently approached to provide an early warning system
for a large lender, something many international firms have gone to
great expense to build for themselves.
Barclays Asset & Sales Finance,
for example, was quick in diverting senior sales resources to form
such a programme in 2008; while UniCredit Leasing, under risk
director Jens Hagen, reorganised vast swathes of staff to spot
turbulence in client balance sheets in time to avert disaster.
Vantis, an advisory firm that also
acts as an intermediary for leasing companies, has taken things one
step further by offering funders pre-lend reviews of companies
whose funding requests it has interviewed.
Vantis commercial and asset finance
division head Mark O’Neil says that such a service highlights
important issues in a client’s business from the very start of a
contract, and gives lenders an idea of what product will best suit
a company’s balance sheet – such as altered payment structures for
businesses with seasonal income.
In addition, when Vantis introduces
a deal on behalf of a client, it will stay in touch with the lessee
on a quarterly basis to assess its ability to pay lease
instalments.
“The client is often quite scared to
talk to the lender about financial difficulty,” said O’Neil, “and
so we will talk on their behalf.”
The kind of skills Vantis and GB are
demonstrating by looking at lessors’ balance sheets for stress
points will not be wasted when the current climate of high
insolvency risk fades away, however.
Vantis, for example, has recently
been asked by a large bank to look over a portfolio – not one of
its own, but one that it seeks to buy. With the risk lessons of the
recession well learnt, the M&A climate, when it returns to
health, will be one much more concerned with the future health of
businesses in targeted portfolios.
How soon will that be?
“There are more companies in the
leasing market than you might think with their cheque books in
hand,” said O’Neil.
Watch this space.
