Survival of the fittest

The transport industry is suffering the effects of the credit
crunch more than most, reports Brian Rogerson,
with lessors viewing residuals with alarm.

UK commercial vehicle lessors are currently viewing their
portfolios with some alarm. Following a bull market over the past
five or so years, when demand has risen steadily and the supply of
CVs has been restricted, residual values – which often turned out
to be higher than originally set – are now falling steadily.

“It is survival of the fittest,” said the managing director of
one transport company on the day in April when around 100 hauliers
descended on London to deliver a coffin, signalling the possible
death of road haulage, as diesel prices continued to rise and the
economic downturn and credit squeeze began to claim casualties.

Also, in the past six months, six notable UK haulage companies
have ceased trading and placed either in administration or
receivership. Around 4,000 employees have faced the prospect of
unemployment and more than 3,000 commercial vehicles are up for
sale and lessors face unpaid rentals, missing vehicles, and, of
course, potentially significant writedowns.

The UK CV market experience echoes that of the US,
where 935 hauliers are reported to have failed during the first
three months of 2008.

At the same time, there is an apparent spate of fleet managers
seeking acquisition so that they can exit the industry with some
cash in their pockets.

Perversely, sales of trucks grew by 9.2 percent during July –
but most industry observers put this down to a dramatic shortening
of lead times by manufacturers and long-planned orders coming
available rather than a spike in current demand. Overall, CV
registrations fell by 13.2 percent in July, although are still some
1.4 percent up in the year-to-date.

Society of Motor Manufacturers and Traders (SMMT) chief
executive Paul Everitt said: “Strong truck registrations continue
to balance weaker performance in other commercial vehicle sectors.
In the current economic climate, it comes as no surprise that van
registrations have fallen and, at 2.5 percent down year-to-date,
give a strong indication as to the pressures felt by businesses in
the UK.”

Last month Plimsoll Publishing examined the UK road haulage
market and revealed that, of the 2,000 companies it surveyed,
around 1,335 are holding or increasing sales on last year – but
almost half are making less profit than last year. Around 23
percent of operators are selling at a loss, while 29 percent are in
more debt now than they were last year.

“Residual values of commercials have remained quite high until
recently because of long manufacturers’ lead times,” said Robin
Dickeson, manager of CV Affairs at the SMMT. “There is no doubt
they are now falling back as lead times shorten. Furthermore, order
intake, which until this year was around 150 percent of order
capacity, has also dropped significantly.”

At this time of undoubted crisis in the CV sector Leasing
Life asked CV lessors their views on the market. When asked
which finance product they used most commonly, contract hire topped
the list at 39 percent, followed by finance lease at 22 percent,
hire purchase (21 percent), operating lease (16 percent) and
short-term rental (2 percent).

Most CV leasing companies have been affected by the economic
downturn. Scania Finance admits to “a reduced appetite for offering
VAT deferrals”, while Seven Asset Management (SAM) is increasingly
“concentrating on core business values and our unique selling
points”.

Specialist Fleet Services (SFS), which as its name suggests has
“a statutory duty to deal with waste collection/removal and refuse
vehicles and their supporting units”, and whose clients are
predominantly in the public sector, claims not to have been
affected by the economic downturn.

However, in response to the industry crisis, Potential Asset
Finance (Potential) managing director Colin Swanston has fine-tuned
the company’s underwriting criteria.

He remarked: “Whereas we were prepared to advance up to guide
trade price, now we will fund only 90 percent of trade as a
maximum.”

Specialist CV funders, Swanston said, are facing great client
pressure to maintain their customary underwriting levels, whereas
generalist lessors, such as Potential, are more likely now to take
trade references and look “far closer” at prospective CV
borrowers.

“In short,” he said, “we are far tighter at the front end and
having to work much harder at the back end at remarketing.”

Another sign of the times is the incidence of repossessed CVs
appearing far less well maintained than usual.

Swanston added: “We have to refurbish and remarket more than we
ever did. Having a vehicle hire company in the group [Potential
Vehicle Hire] is an advantage since we can put the vehicles out on
short-term hire and get our investment back.”

Meanwhile, CV residuals are falling. Andrew Mackay of SFS
estimated that commercial RVs have reduced on average by around 15
percent since the beginning of 2008.

David Pantry of SAM said: “The reduction has varied by make and
model, although premium trucks have tended to hold their
value.”

Elliot Lennick, managing director of MAN Financial Services UK,
stressed that, because of the imbalance between supply and demand,
MAN Financial Services has been able to control RVs.

“However, we shall continue to monitor the situation and react
accordingly,” he said.

Edward Symmons recently held a sale of CVs at which only 35 per
cent of units were cleared.

David Corbett, partner with responsibility for machinery and
business assets at the auction house, said: “Over the past six
weeks the bottom has dropped out of the CV market and the overseas
market has fallen also.”

Corbett warned that downward movement has been so swift that the
trade guides have fallen behind in recording up-to-date values. He
told Leasing Life that he would urge lessors seeking to
remarket CVs to check what is available and get a valuer to
estimate accordingly.

Potential’s Swanston said the company was experiencing greater
difficulty in remarketing CVs. Potential recently took possession
of two 15-month-old Mercedes-Benz tractor units that proved
difficult to remarket.

“Fortunately,” he said, “we found someone prepared to rent them
for a two-year period.”

Meanwhile, Tallon & Associates director Richard Stark said
that whereas the 7.5-12 tonnes CV sector was still holding steady,
18-tonner values are slowing down and Tippers and Hook Loaders are
“steadily tailing off”.

Stark stressed: “Good-quality tractor units by leading
manufacturers are still selling well and some eight-year old units
are still in demand abroad. However, the good health of the UK
retail sector is paramount for all vehicles operating in the
distributive trades. There are signs these are now slowing – as are
the building materials and construction sectors.”

Hitachi Capital Commercial Vehicle Services, as a lessor that
deals predominantly in the utilities sector, is escaping much of
the RV downturn. Nevertheless, managing director Jon Lawes said the
company is “noticing a reduction in proceeds – we are not losing
money but we are not making as much as we did previously”.

Overall, the immediate future for CV leasing looks gloomy,
especially as prices are driven ever lower as a growing number of
CVs are offered to a shrinking customer base. Nevertheless, some
industry observers are sanguine.

Barry Travis, product content manager for commercial vehicles at
CAP, said: “The CV sector is facing its worst time since the 1980s.
We would need a pretty strong downturn in fuel prices to avoid a
sector recession, which we seem unlikely to get. Nevertheless, it
is a resilient market and the old saying ‘if you have got it, a
truck brought it’ will still hold true.”

One lessor told Leasing Life that once the upturn comes
around the UK “may end up with only three big hauliers”. Meanwhile,
Jon Lawes believes that, come the upturn, compliance and
environmental issues will be an integral part of a lessor’s
offering. He says that those transport companies that rely on bank
funding should “re-examine their funding lines” because banks will
inevitably assess their presence in the sector.

Robin Dickeson stresses that, for lessors, caution should be the
watchword.

George Alexander, chief commercial vehicle editor at
EurotaxGlass, predicted: “Providing volumes do not grow too much in
a sluggish marketplace, and with the hope that by the start of
winter the worst of the UK’s economic problems are in remission,
things could look more promising by spring 2009.”