In the middle of an ongoing
recession, Leasing Life brings together some of the industry’s
leading decision makers to discuss doing business in a downturn and
strategies to improve the market.
In the first of a series of round
table discussions aimed at identifying the issues looming large for
the UK’s leasing decision makers, Leasing Life met with eight of
the industry’s key players at Grant Thornton’s London headquarters
in June, to set out the pros, cons and quirks of doing business in
a developing recession.
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The following text presents a selection of the
questions asked on that day, and the answers provided by panellists
from all corners of the industry.
Question to Tarun Mistry:
We’ve obviously been on a bit of a rollercoaster ride in the
leasing world over the past 12 months. What are the top issues that
you are hearing about from the readers?
Mistry: The first
quarter has been a very tough quarter. I have given a couple of
speeches on where the economy is headed, based on what we have seen
in the first quarter, and, essentially, we will see more of the
same for the rest of 2009.
But there has been some resilience in the
market. We have not seen many leasing companies go bust because
leasing businesses are flexible and can manage their overheads.
However, we have seen many that have stopped or reduced new
lending.
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By GlobalDataWhile general economic conditions are poor,
the leasing players that survive this current economic downturn may
come out stronger. Asset finance is generally seen as a better way
of lending and leasing will certainly remain an important part of
corporate finance.
Sam Geneen: In my
opinion, the leasing industry has done remarkably badly. We are not
even in the recession proper yet; we’re still just entering it.
What we have had is two years of a banking
crisis – and now it is starting to impact our customers.
Many more firms would have gone out of
business, but the banks have been told, ‘You can’t let these
companies go bust.’ So no, I do not think the UK finance industry
is performing particularly well and I believe that we have a long
way to go.
There will be a future, but who the survivors
will be… I think the independents will really struggle.
Question to Richard Carter:
Richard, how has the recession impacted on your ability to lend and
on your use of brokers and lending? What is the risk-reward
equation that you employ when considering whether or not to lend?
Who do you consider to be a ‘good customer’ and how do you judge
this?
Carter: We are one
of the banks sufficiently capitalised to keep putting assets into
the market and a big challenge is finding the right opportunities
to do that. Keeping lending while also pricing for risk is really
important. Have we done that correctly? Time will tell.
Looking at the broker market, we recognise
that our customers use brokers as trusted advisers and we do use
brokers wherever the customer wants to use them. However, it is
true to say we are restricting our use of that channel.
The risk-reward dilemma is a huge issue at the
moment. We are obviously lending on an asset-secured basis, taking
into account relative certainty of cashflow.
Changing asset values are something we have to
work harder on, but trying to price in this market is quite
difficult. We are open for business, yes, but at the right margins.
And that means pricing has gone up, relatively speaking – but that
is the impact of limited liquidity in the market.
We are being careful in those areas, and
looking primarily at supporting our own customers, since non-HSBC
customers can potentially bring added risk to our profile, but we
are still open for business to new customers.
Phillip White: The
broker market is a cyclical thing. As soon as we come out of
recession, people will want to sell at low margins, and the brokers
will pick business up.
We started life 18 years ago as a
broker. Today, we are both brokers and lessors. We actually believe
that the lessor is our customer as well as the end user, and it is
critical that both we and the lessor make money out of the process.
I do think that the broker community has become an easy source of
blame.
Question to John Barter:
John, what impact have you seen from within the broker market? Are
you having more difficulty in securing funding? How are you
convincing funders to lend? What are the alternatives?
Barter: I really
have not seen the leasing market in such an appalling state in 30
years. There are many things I could say: many funders have not
just moved the goalposts on underwriting criteria – they have taken
the pitch, stands and stadium, driven them 35 miles down the road
and dumped them there.
Ninety percent of the brokers I have known for
all of my career are experiencing the worst time they have ever
had. The key thing is that the bread and butter deals that formed
the mainstay of broker business have just stopped.
The customers you would normally see have
disappeared and people with large sales-forces are down 50, 60 and
70 percent on staff. The number of brokers will decay rapidly, but
I expect the smaller companies will actually have less trouble. It
will be the medium companies, with a couple of dozen staff, that
find they have the biggest problems.
White: But the
lessors have allowed this to happen. A deal is only a good deal if
every party in the deal is happy. Perhaps it is an old fashioned
sentiment to say that you have to create deals that all parties are
happy with.
Question to Nigel Greenaway:
Nigel, what impact has the government’s buy-out of your parent
company, RBS, had on business? Is leasing a popular thing for the
parent to be investing in at the moment? How has this impacted on
your ability to acquire funds?
Greenaway: We are fortunate in that
we have been doing this since 1970. Our clients are mainly in the
construction and agriculture industries, and we are acknowledged as
experts in those sectors.
This is also recognised at RBS, so we’ve had
no restrictions on our access to funds.
We feel we have a relationship with our
customers in which they feel they can talk to us and we will do our
best to help them manage their way out of the situation.
We want our customers to still be in the
business on the other side of the recession. Construction went into
the recession first and we are confident that it will come out of
it first as well. The majority of the private sector business we do
is hire purchase and most of our leasing business is with local
authorities.
White: Any credit
support from the manufacturers themselves?
Greenaway: We are seeing some 0
percent finance schemes. That is helping a bit. Customers think:
‘If I lock into this 0 percent now, I will enjoy this for the next
three years. Having 0 percent finance means I will put myself in a
positive position coming out of the recession.’
Roughly 50 percent of what JCB sells in the UK
is financed, and we get 90 percent of that business. Also, the
proportion of non-JCB business has grown.
Question to Tarun Mistry:
Tarun, as the recession deepens, what is the role that Grant
Thornton plays in the leasing industry?
Mistry: Over the past two years, we
have been developing sector specialisms; rather than recruiting
more accountants, we have recruited people who have been in the
industry and worked on the other side of the fence.
A lot of what we are doing is distress-related
in some way or other. We have been doing a lot of restructuring
work and also advising banks on how to manage and minimise that
exposure going forward – for example, should they reduce their
lending?
We are also doing a lot of corporate finance.
Now is a good opportunity to make acquisitions and we are in a
position to advise on the possibilities for doing so.
Question to Gerry Moon:
Gerry, an obvious impact of the recession is the fact that more
companies are being subjected to bad debts and greater risk of
insolvency. Many leasing firms are not set up with a collections
side to their business. Should they be outsourcing this? Is this a
trend to increase?
Moon: I think yes.
In my time at Fortis, we thought we were good, and focused on
collections – especially in the corporate sector – and then we went
into the consumer market and we found that there were a minority of
customers who were very imaginative in how not to pay.
We eventually outsourced to ensure we had the
relevant expertise, but we spend a lot of time investigating
potential suppliers of outsourcing services.
It is very important that suppliers can
reflect the culture of your business and there is joint
accountability for the success of the project.
Question to Sam Geneen: Sam,
having just heard what Gerry has had to say about the outsourcing
market, would you concur with his comments? How has Five Arrows
approached the challenge of debt recovery and
insolvency?
Geneen: If you
outsource, you don’t get rid of the operation or the problem. We
have been providing outsourcing for 20 years. The real success of
outsourcing is working in partnership – that is the key. It’s a
team play and, if this works, the decision on outsourcing will be
successful.
Our largest clients have chosen outsourcing
for many reasons – economies of scale, speed of response, headcount
and, of course, technical expertise. There has to be a compelling
reason for outsourcing, and cost saving is important.
White: We know what
we are good at and collections is not it. It is about identifying
an outsourcing provider who shares our pain and shares our joy.
It’s not just about fulfilment – they have to deliver some real
strategic value.
Question to Phillip White:
Phillip, what practical changes have you made to your business
since the recession? How are you dealing with insolvency and bad
debts? How do you feel about outsourcing in this area?
White: We are no
different to any organisation in the financial services arena. It
has given us an opportunity to look long and hard at what we do and
how we do it. We say our biggest investment is in our people, and
we have taken the opportunity to follow that.
Training is important. At the Syscap Academy
which we run, if staff get to level 3, they sit an external exam,
through the Institute of Sales and Marketing Management. This
delivers back some value and encourages us to attract and retain
the best people.
Question to Carol Roberts:
Carol, as an independent finance company, what strategies does
Bibby Leasing have in place to deal with debt recovery and
insolvency? What are the added risks to your business from being a
private company? How does this impact on your rates?
Roberts: We have
maximized the use of our ‘in-house’ resources – we have had sales,
new business and collections teams on default. The use of a ‘face
to face’ approach at an earlier stage has got us better results in
both finding out the circumstances of distressed clients, and
getting payment.
There is no doubt that this has worked. We are
very lucky to have a strong and dedicated collections/recoveries
team, and have also maximised our in house legal resources to
reduce costs. We have ensured that we have a quick turnaround on
asset sales to avoid a stockpile of assets.
Greenaway: We
always say we are playing in one sandpit, the construction
industry, and we must not do anything to mess it up. We work
closely with our distressed clients, helping them survive the
recession, and in turn they will buy from us afterwards. The
loyalty factor thus gained can last for up to five years, and we
have gained a strong reputation in that sector.
That said, we’re not to be seen as a soft
touch. Because we know that market so well, we know how to do
collections and recoveries in it – like the Canadian Mounted
Police, we always get our man.
Mistry: We have
seen more asset funders willing to consider debt restructuring
options rather than take their assets back. This has allowed
multi-asset funder restructurings to be agreed to rescue businesses
and protect security for the lenders.
Question to Giles Brand:
Giles, Norton Rose is one of the leading UK law practices in the
field of tax-based lease and financing structures. What are you
seeing happening in the market at the moment? Is fraud increasing?
What are the most common problems you are seeing in the sector and
what rights do lenders and lessees have when it comes to recouping
bad debts?
Brand: The sector
of the market in which we have typically been most involved is the
so-called big ticket sector and, in this sector, the incidence of
fraud is very low.
The scope for fraud is much reduced, you tend
to be dealing with very big companies and not individuals, and the
type of assets being leased tend to have title registers. Fraud is,
therefore, really not on the radar.
We do not see as much of RBS and HBOS as we
used to do in the housing sector. The one thing that has affected
the big ticket sector is the changes in the capital allowances
legislation in the past four years.
Utilisation of capital allowances is an
important part of these deals. Since July 2005, when HMRC’s
technical note on changes to the capital allowances rules turned
the big ticket sector on its head, it has become more complicated
to structure a lease in order to achieve the parties’ desired
position with respect to capital allowances.
Question to Nigel Greenaway:
Nigel, JCB do a lot of work in the public sector – how is this
market playing out versus the private sector? What role do you
think government has to play in all of this?
Greenaway: We’ve
seen a 90 percent increase in our local authority book because
other people have pulled out of the sector. When it comes to doing
the deals, the people who were previously very active just do not
have access to funds.
A local authority typically spends its budget
and then bundles a quantity of invoices together and structures a
lease around them. If the bundle of assets contains JCB equipment,
then often we will be asked to lease the whole package.
One other thing we have noticed is that
restrictions on budgets will push public lessees even more towards
leasing, because that is the only way they can do things.
Government is making procurement more expensive for local
authorities than it should be.
Question to Philip White:
Philip, are you finding that more people are looking to lease
rather than buy in the current market? IT is historically high
volume, low margins – is this still the case? Are your margins
being squeezed further? What are the opportunities and growth
areas?
White: The
challenge we have is that those that want funding most are the ones
that are hardest to fund. SMEs are crying out for different sources
of funds because the banks do not want to lend. But we do fund
substantially in the public sector and we fund in schools.
Budgets have been cut by around £250 million
(€297 million) as the government continues to have funding
problems. There is insufficient commitment in budgets to meet their
manifesto commitments.
You have to have affinity with these sectors –
including the academic sector – and there are good margins to be
made. We are seeing increasing demand, especially in the IT
sector.
Question to Giles Brand:
Giles, what are the tax and legal implications of working across
borders? Are there any new regulatory requirements that could
impact on working internationally?
Brand: If you are
writing a cross-border deal out of the UK, at present you can lease
anywhere in the world.
One of the main issues you come across is tax
and, in particular, VAT. With EU VAT, you need to look at the place
of supply regulations to see where the supply for VAT is treated as
taking place and, therefore, if VAT is payable and, if so, at what
rate (and whether you may need to be registered for VAT in the
jurisdiction where the supply is treated as taking place in order
to recover any VAT paid).
Changes are being planned in the EU with
regard to VAT, with a shift from the supply being treated as being
made where the person who makes the supply is located (in the
context of a lease, the lessor), with a number of exceptions, to
being treated as taking place where the recipient (the lessee) is
located, with a much smaller number of exceptions.
You’ve also got to look out for non-EU sales
taxes – for example, in container leasing, when the containers are
sold initially to the lessor or subsequently by the lessor at the
end of the lease, they can be anywhere in the world, and this may
give rise to sales tax in a country where a number of the
containers are located at the relevant time.
Question to Richard Carter:
Richard, where does HSBC believe that new opportunities lie in this
market? How does the UK compare to the rest of the
world?
Carter: Say you
were to look at how we have developed our invoice finance business
– it was very much a UK business with a proven model, that has been
proliferated as our business has grown. We have exported it to Hong
Kong and Latin America, and now a European franchise is
developing.
We do not have a lot of expertise in
cross-border, apart from with big-ticket deals, and that is an
opportunity for us going forward. We have just got to get it right.
The issue is to get a platform for deals, develop it in-country and
do it with local banking systems, then get global support laid on
top of it.
The remainder of this year is going to be very
difficult in the UK. But does HSBC’s position present us with an
opportunity to broaden our lease position in the UK? Our strategy
will depend on how quickly other funders come back.
The green sector is not clear in terms of
asset valuations. We just do not know about it yet. It does present
opportunities, but it is just a question of making sure we treat
them carefully.
Brand: What has to
stop is this torrent of legislation with regard to capital
allowances, and legislation in the form of HMRC technical
notes.
Things are different from only a few years ago
– UK banks, that have traditionally undertaken a lot of leasing
business, have made losses rather than profits, and had restraints
put on their use of capital.
The leasing businesses of banks have to
compete for capital against other lines of business, based on –
among other things – return on capital, and returns on leasing at
the present moment are not particularly good.
Whatever government is next in power, it needs
to understand that the current legislation is interfering with an
important sector of the financial services industry in the UK,
which employs a lot of people and for which the UK is seen globally
as a centre of
excellence.
It needs to be supported and, above all, have
legislative stability, and not be left to suffer the effects of
continuous legislative change.
Mistry: We have
been through difficult economic times and it will be some months
before we see clear stable economic growth. However, leasing
companies are restructuring their businesses on all aspects and
tightening their credit criteria.
In overview, it also appears that leasing
company objectives have also moved away from volume to improved
margin and quality of new business, which can only be a good thing
for future profitability.
