Peter Hunt discovers that life is not easy for
big ticket lessors as demand drops, terms keep growing and the
infamous tax-based leasing has all but vanished.
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How times change. April and May’s FLA big ticket volumes were
the worst for over two years.
This followed a period of seemingly
effortless ability to maintain volumes while the rest of the market
nosedived.
Feedback from big ticket funders reflects this
dynamic. It also helps to explain why volumes held up for as long
as they did, and as well as they did.
“Fairly grim,” was the market summary of one
arranger. He also reported that there was lower demand, deals were
taking longer, and a reduction in money supply to the sector.
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By GlobalDataAnother highlighted that funding commitments
made before the credit crunch were still being exercised.
No doubt these committed positions have come
to look more attractive to lessees as market conditions have
deteriorated.
It seems likely that take up from lessees will
have been strong, and in some cases have artificially pushed up
funding volumes.
At least margins have increased. One
transportation specialist argued that deals that had gone for 125
to 150 basis points (bps) margins were now attracting 250 to 300
bps, often on very strong credits.
The risk-reward seems to have improved
materially at a time when many funders have retreated.
According to one bank financier, the last two
years have seen a fundamental change in lessee demands.
He said that two years ago it was all about
“price, price, price” while now the focus for customers has shifted
to “first, can I get liquidity, then, what forms of liquidity are
available to me, and finally price”.
Martyn Apsey, a portfolio manager in Asset
Protection at specialist RV insurer QBE, made a similar comment,
indicating that two years ago competitive pricing pressure, a
determination to grow volumes and a less cautious approach to risk
had seen some lessors “taking RV risk for free”, content with only
a thin funding margin.
Now, many of those same lenders are refusing
to contemplate any RV risk, with QBE insuring assets that they
“would not have got close to” in previous times.
A good example of this has been with Boeing
737-800s, an asset that in the past would have been readily funded
by many big ticket lessors.
There have also been some key changes in deal
structures. Tax-based leasing has largely disappeared, and in some
cases it has not been mourned too much.
Too complex for many
One commentator made the point that
tax-based leasing has been made too complex for many treasurers,
although added that this is not the case for smaller
transactions.
No doubt removal of this layer of complexity
has also reduced the cost of transactions for lessors and lessees
alike.
Maturity profiles have shortened. Long life
assets that were once financed over 15 to 20 years are now being
financed over seven years.
One impact of this is that some lessees are
struggling to make sense of payback periods – perhaps a reason why
arrangers and specialists in asset protection see new
opportunities.
Simon Hamilton, managing director of
Paris-based arranger Chetwode SAS, emphasised that his firm has
been able to locate a few funders offering longer maturity periods
on specific asset classes, and is thus able to offer competitive
advantage in sectors with long-life assets.
QBE, whose pricing and appetite have remained
largely unchanged through the recession, is still prepared to take
a 10- or 12-year position on certain asset types, though this is
longer than the term available from many lessors.
Having previously focused his business on
risk-mitigated transactions within secure value chains, over the
past 12 months Hamilton’s business has realigned to concentrate on
different assets, deal structures and, in many cases, types of
funding institutions.
Some fundamentals remain, however, with
Chetwode’s emphasis on quality lessees and assets being supported
by strong underlying contracts, seeing through to the end-user to
ensure a commitment, and ability to pay lease rentals over a number
of years.
Cyclical assets such as automotive
manufacturing equipment – though still strong assets – are now
considered lower priority as funding is difficult to secure.
Chetwode added that asset values have
collapsed and trade buyers often see financial institutions as
“easy victims”.
One good example is when companies acquire the
leased assets of a struggling competitor – without specialist asset
knowledge, losses can be substantial but are at least partly
avoidable.
If funders really did take asset risk for
free, they may now be paying for their impetuosity.
Hamilton’s experience highlights that changes
may be necessary but that the fundamentals are still the same and,
in some cases, now seem to be more carefully applied.
In the words of one player: “Even if we get
the receivables stream [as security], we still want the asset.”
His natural concern was that without asset
coverage, a disruption to the receivable stream – such as a supply
dispute – would leave him with nothing as security, while the asset
would help mitigate his risk.
Another commentator suggested things had gone
too far, with banks now “scared of their own shadows”. Hopefully
not for too long, however, as those that can fund now can perhaps
make significant profits.
According to those in the know, the current
window will last a while, maybe 18 to 24 months.
The author is a partner at the
consulting and services firm Invigors LLP
