Despite the depression in the mid-ticket sector, some
lessors claim they have the key to survival even though they have
not altered their pricing and risk models. Peter Hunt reports.
Customer behaviours in the mid-ticket market have changed. There
are less large fleet deals on commercial vehicles as customers move
towards replacing individual vehicles. Some sectors, such as the
coach market, were very heavily hit in 2007/8, with residual values
tumbling.
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Meanwhile, the LCV market has been
“decimated”, while, not surprisingly, materials handling,
commercial vehicles and construction were all reported to be
down.
Some European geographies have been badly
impacted. Spain, for example, was identified as a market with a
large, continuing requirement for construction equipment, but with
significant problems in terms of customer bankruptcies and
delinquencies.
There have been a number of exits that have
reduced competitive pressures, with Bank of Scotland’s demise
pointed to as a key factor in maintaining volumes in otherwise
depressed finance markets.
The print sector was highlighted as one to
treat with caution, in line with its tendency to be the first in
and the first out of recession.
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By GlobalDataLike many other funders, Alliance &
Leicester chose to exit car fleet wholesale funding, in which
residual value risks and individual exposures were significant.
Another funder emphasised the difficulties of
operating with hire companies such as in the crane market, where
cashflow is dependent upon asset utilisation and inventory
management issues can be troublesome.
All things considered, Willie Paterson,
director of Commercial Asset Finance at Alliance & Leicester
(A&L), remains upbeat and said that, in all market areas (other
than wholesale car finance), the company remains on par with
previous years and margins remain acceptable, though
challenging.
Another commentator indicated that while
mid-ticket deals had, until recently, offered relatively low
margins, in the current market it was rare to see spreads under 2
percent. Giles Turner, managing director at SG Equipment Finance
(SGEF), extended this theme, stating that, after 10 years of bad
pricing in the market, 2009 has seen a re-pricing of risk to more
sensible levels.
An additional benefit for SGEF and others has
been access to high quality transactions that would previously have
been under-priced by competitors, especially in hard asset
categories familiar to the finance industry.
Interestingly, a number of interviewees stated
that their underwriting criteria were unchanged despite the
recession, presumably having been fairly robust in the first
place.
Stewart Good, vice-president of European
Originations & International Marketing at Key Equipment
Finance, emphasised the increasingly forensic nature of KEF’s
underwriting approach, looking not just at the position today, but
also the customer’s likely position in 12 to 18 months.
As companies publish weak financial statements
over the coming months, it will be interesting to see if other
firms follow this lead.
For large exposures or marginal credits, KEF,
like other funders, maintains a close watch on company performance
throughout the contract term.
Paterson emphasised that the development
within A&L of focused, specialist asset management teams had
been hugely
beneficial in terms of managing out potential loss situations, with
the result that A&L’s bad debts had been less than a number of
competitors.
Bill Cuff, head of Structured Asset Finance at
HSBC, summed up the outlook of this group of funders well when he
said: “We’ve maintained a good quality customer base throughout the
recession, we’ve remained constant when others have changed or left
the market, and we hope to come out of the recession bigger and
better.”
The author is a Partner at the
consulting and services firm Invigors LLP
Key to mid-ticket
survival
Recent market turmoil has taken its
toll on the mid-ticket market (£100,000 [€117,411] to £5 million).
Bad debts have risen and residual values have fallen, but a number
of funders in this sector continue to do well.
While caution prevails, business sentiment for
these companies appears to be on the rise, with their less
aggressive business models vindicated, focusing on a longer-term
view (often relationship-driven), deep expertise in distinct
niches, a considered approach to risk management and a stable,
thorough approach to underwriting new deals.
This approach is highlighted in the selection
of new business in the mid-ticket sector.
Stewart Good, vice-president, European
originations & international marketing at Key Equipment
Finance, indicated that, while his team were receiving a high
volume of calls from vendors seeking new financing partners, KEF
remained “very selective” in its approach and was forced to
“politely decline” a large proportion of the opportunities
available to it.
Like Giles Turner, managing director at SG
Equipment Finance, Good emphasised the importance of long-term
relationships and a focus not on lowest price, but on a full
package – a consultative approach to vendor and end-customer,
developing the right deal structures, mid-term and end-of-term
options and financing solutions that helped corporate customers
manage their cashflow more effectively, such as capacity-on-demand
financing.
He said: “Key Equipment Finance has no
intention of either reducing or diluting the quality or
qualification criteria of potential new partners or moving into
unknown or unattractive asset territories.
“Quality partner relationships with the right
vendors are more important than the quantity of relationships.”
Both Good and Turner indicated that this
approach, their continued availability of capital at the right
price and the requirement of manufacturers to find ways to close
deals has meant that penetration of individual vendor finance
accounts had increased.
Depending on credit acceptance rates, it seems
likely that this may have driven increased relationship and
front-end operating efficiencies for these firms.
