With an increase in deal flow, a hike
in margins and fresh demand in previously inactive sectors, now
could be the time to invest again in the mid-ticket leasing market.
Peter Hunt reports.
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While FLA statistics have
highlighted the continued decline of new business in 2009, at least
some finance companies in the mid-ticket market (£100,000-
£5 million) are starting to see some positive signs that suggest
that things may be turning slowly upwards.
According to Bruce Nelson, a
director at Compass Business Finance, companies have remained
cautious at the start of 2010 but Compass has already noticed more
lessee activity than in 2009.
Compass, which focus on renewable
energy production, industry and the professions, was able to
maintain a level of dealflow in 2009, at least in part due to the
quality of longstanding relationships with end customers and
vendors in its niche markets.
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By GlobalDataCustomers coming back
This seems to have been especially
true in the industrial sector, where Compass’s chosen segments of
print, packaging and plastics are well established, fairly stable
industries. Additionally, Nelson is now seeing customers come back
into the market with a little more confidence and through
necessity, to update production equipment.
As Nelson said: “You can only defer
investment for so long.”
While placing a small amount of
mid-ticket business on their own book, Compass relies heavily on
funders to support transactions over £100,000. From Nelson’s
experience, those funders who continue to support mid-ticket
transactions have been fairly discerning in terms of both which
introducers they are prepared to deal with, and how many
introducers they continue to work with.
From Nelson’s comments it sounds
like Compass has remained on the roster of funders playing in this
market area. Indeed, he indicated that Compass had been able to
place every mid-ticket transaction that they had felt was a
credible deal.
By his analysis, though, many other
brokers in the mid-ticket market must be struggling to maintain
funding sources which may explain the return of some smaller
funders to the market. For example, one name that was mentioned as
a recent entrant closed its doors to new business and went into
run-down some two to three years ago.
While these small new entrants will
bring some much-needed alternatives to the broker community, it
seems unlikely they are able to provide the funding volumes
required should demand materially return.
Margins remain attractive, a point
made not just by Nelson but also Ian Willetts, divisional director
of Close Asset Finance Broker Division. Willetts also suggested
that Close was experiencing an increase in dealflow, a significant
proportion of which was refinancing of industrial assets to support
working capital within the customer’s business.
While credit quality available to
Close and others in this market has improved with the exit of some
of the bank-owned funders, Willetts remains naturally cautious.
Underwriting includes face-to-face
visits for a very high proportion of mid-ticket transactions, which
allows Willetts to make much more informed choices about the
transaction and – essentially – the quality of the customer’s
management team and their ability to support the finance
transaction.
Interestingly, Willetts has not only
been able to identify transactions that looked good on paper but
were rejected when viewed against the poor quality of ongoing
business prospects, but also the reverse where Close was able to
write good business that would have been missed by a remote
underwriting approach.
With much of his customer base SMEs,
Willetts finds that a key success factor is not just asking the
right questions but also understanding how the company’s financials
were prepared (for example, by an external accountant who has no
day-to-day involvement with the business) and how knowledgeable the
company’s executive management are about their finance position and
the impact of their trading activities.
Willetts reported considerable
refinancing activity in the print and construction industries,
though also mentioned a continued demand for the new financing of
exotic cars. While professional footballers inevitably feature in
this customer base, Willetts indicated that these high value cars
covered a wide range of customer types.
Tough market
Despite Nelson’s experience in that
market, one asset category Compass has not entered has been heavy
commercial vehicles. His response was that it has become quite a
tough market, with a number of funders pulling out and a lot of
customer balance sheets have deteriorated.
On the plus side, it is likely that
the top transport companies will have reached their limits through
existing funding lines, which may create opportunities for
secondary funders.
Renewables remains a ‘nascent’
market, where government incentives have yet to be delivered with
the same rigour as in other European markets. As Nelson pointed
out, the UK has around 30 anaerobic digestion plants while Germany
has some 4,500 (a similar difference exists in terms of solar PV
adoption).
While the whole market waits for the
general election to see what a new government may do to stimulate
business investment, financing in the renewables sector is perhaps
the most in need.
The author is a partner at
Invigors, the consulting and services firm
