Asset Finance Europe: Half a world away – it’s up and up, down under…
Alan E. Leesmith, a Principal and Director with The Alta Group, and one of the first of Asset Finance Europe’s members, attended the recent Australian Equipment Leasing Association (AELA) conference. He tells Asset Finance Europe how lessors ‘down under’ are experiencing a rather different recession to the rest of us.
Australia is a country that never went into recession. A country with four major banks – that is four strong major banks - looking for international growth. It has a strong economy with ample resources and exports of coal and iron ore back to the levels of before what we call the global recession. The Kangaroos featured on the Australian dollar could almost be smiling as it became the world’s strongest performing currency in recent months.
The S&P/ASX200 is already up an astonishing 55% so far this year. The restaurants are full - the expensive ones booked well ahead; the shops are full of Christmas shoppers; the pavement cafes are overflowing every day with businessmen in meetings; and people will tell you that nothing has changed in their lives or spending habits.
The general atmosphere is very positive, but of course that does not mean that there have not been any problems. A year ago a major structured finance company with international reach, Allco, had to call in the administrator. But its leasing subsidiary survived and, following acquisition by a fund, it continues to thrive. Another business, Elderslie Finance, was placed in receivership 16 months ago when it failed to redeem debentures falling due.
Similar funding problems
A number of foreign lessors (not surprisingly from Europe and the US) have reduced their activities and last week one major European funder, SG Equipment Finance (SGEF), announced it was to withdraw from the Australian market. The departure is not because SGEF is unhappy with the significant profits its Australian business contributes, but because SG Bank has decided to withdraw and the leasing company is required to follow.
This links to another problem which we will recognise in Europe, some of the vendor lessors and brokers are finding funding more difficult and this will not be helped by the departure of SGEF as, for many years, it has been one of the largest wholesale funders to the leasing market. The funding void caused by its withdrawal will not be easy to replace. So, yes, some leasing businesses have had to reduce staff, but the amazing thing is that people generally tell me that they find new jobs almost immediately. In fact, the Australian Reserve Bank has been flagging the risks to the growth of the Australian economy that may result from a labour shortage.
At the same time, people are changing their whole take on life, with more workers opting for a lighter work load (three or four days a week) with one commentator reporting an attitude of “You know what, my life is just a bit more important than this boom-bust stuff and I don’t want to do that any more”. Those working fewer than 35 hours a week have surged about 10% compared with the same time last year.
Focusing back on the finance industry, this year’s annual AELA conference was well attended and it would appear that the biggest worry that Australian lessors currently have is new regulations in respect of leasing and finance transactions, with a potential extension of consumer credit and European-inspired unfair contract terms legislation, although some have a view that it will never happen.
Much debate at conference
The conference was opened by the AELA Chairman, Andrew Sidery, who briefed delegates on all the latest statistics and news about the Australian market before going on to perform a first-class role chairing the conference for the rest of the day. Although there has been a slow, steady decline in new business volumes over the last two years, estimates for 2009 indicate a fall of less than 10% over 2008 and AELA put the total market at close to $40bn. Wheels (motor and commercial vehicles) make up 60% of finance provided. Not surprisingly the two south eastern states of New South Wales and Victoria account for 60% of the market.
Sidery then introduced David Bennett of Macquarie Capital Advisers who gave a presentation titled “Global Debt Markets – Light at the end of the tunnel”, explaining the different phases that the global economic crisis had been, or was going through, and why Australia had not suffered as badly as elsewhere. This was followed by a presentation from Alain Vervaet, who is well known to us all in Europe for his years of service to the leasing industry and Leaseurope in particular. Vervaet updated the conference on the state of the market and issues that the European industry has been facing with his presentation “Catharsis and Resilience”.
Jason Opperman of Henry Davis York provided some timely hints to lessors regarding “Protection for equipment financiers in distress situations”. We then returned to the international aspect with Jim Ambrose, the immediate past Chair of ELFA, the American Association, explaining why 2009 was “A pivotal year in the US equipment leasing and finance industry”. Ambrose covered US market and industry conditions and performance, the future issues “on the horizon” for the industry, the lessons learned, future opportunities and looked at 2010 and beyond.
An interesting aspect of the conference was a discussion panel made up of an American, Jim Ambrose (past chair of ELFA); a Belgian, Alain Vervaet (past chair of Leaseurope); a Scot, Campbell Paterson (future chair of AELA); and two Australians, David Taylor (past chair of AELA) and Ron Hardaker (Federal Director of AELA). This mix provided the audience with a wide international perspective of the industry. The topics they covered were: pricing and risk, funding in four years time, hybrid finance products and the proposed accounting standard, which all made for a very interesting discussion.
The use of capital
On pricing all agreed that in addition to rates having risen, as they needed to, the big influence on future pricing would be how leasing companies would be measured on the use of capital, particularly compared to returns achievable within other sectors of the banks. There was general agreement on the fact that as an industry we need to move more towards reflecting risk in pricing models. Additionally, Jim Ambrose expressed the view that the difference between winners and losers is the ability to understand the assets being financed. If one can understand how to deploy those assets in a global marketplace then you have a key differentiator and a risk mitigator.
Alain Vervaet stressed that we should approach pricing from the perspective of the cost of economic capital per deal and then add risk pricing. He also made the point that rate pressure has led to a heavy focus on reducing costs. David Taylor expressed concern about how people tend to have short memories and the risk of the return to competitive pricing when we should be focusing on the ability to price different types of risk and, therefore, he urged the industry to concentrate on presenting deals that can be financed.
On the question of funding in four years time we heard some different perspectives. Jim Ambrose expressed the view that independent lessors need to look to banks with deposits as not all will have the stomach, desire or capability to administer leasing companies, but may still wish to be in the market. Campbell Paterson made the point that now his company’s own large deposit base had been absorbed into the bank; it had to fight for funds with other areas of the bank’s business.
The cost of funds
David Taylor mentioned the major effort made by all the banks to attract deposits in a very competitive market and the consequential impact on cost of funds. When the banks were considering where to allocate the funds they currently possessed, they had to focus on the customers to whom they could sell more than one product. Alain Vervaet made the point that a change of philosophy had been forced upon the banks and they had to assess where best overall returns could be achieved when considering the competitive demands of different product lines.
Ways of achieving enhanced support, such as deposits, residual guarantees, etc. were discussed, but it was observed that any ideas had to make sense for the lessor, the vendor and the lessee, otherwise they were not tenable. Residual taking had real risks as has been demonstrated in the car leasing market, but even laying off residual risks has its own inherent risk complexities.
When addressing the accounting standard, the oft-expressed concerns of the industry came to the fore as may be expected, although at least one in the audience (although no doubt many more silent delegates) seemed unaware of all of the extensive lobbying efforts and co-ordinating work on responses by the various global leasing associations that have been working closely to provide an industry response.
Other topics covered were:
- Optimising the asset-disposal process: the online option – which addressed disposing of recovered equipment by internet auction;
- Income tax treatment of equipment finance alternatives by John Bardsley of KPMG; and, as usual, the closing slot was dedicated to the customary;
Regulatory Overview, presented by Steve Edwards and Catherine Shand of AFC. This was an update on regulatory matters, both federal and state. An oft-forgotten fact is that the Australian industry has to deal with both kinds of legislation and that there are six states and two territories which have varying legislation and taxes, although there has been a major drive over the last decade to try to remove or minimise the differences.
Soceroos did well
AELA has always played a major role in influencing this process with strong and regular lobbying of both Federal and state governments and is particularly good at ensuring its members are always kept updated on both prospective and actual changes in these areas.
The conference was closed by the AELA Deputy Chairman, Campbell Paterson, reflecting on the day’s proceedings. As always, in conclusion, a good conference and plenty of networking opportunities but, in keeping, with normal Australian tradition AELA go out of its way to ensure that delegates are provided with a truly international perspective.
In these challenging times at home, it was well worth travelling half way round the world to attend the event and to witness at first hand an upbeat domestic leasing industry. The Australians pride themselves on always getting their work/play priorities right and the Wallabies visit to Twickenham and the Kangaroos trip to Leeds, the Socceroos achievements in Oman, along with the excitement of Tiger Woods in the Australian Masters, show that life is good as the approaching Australian summer beckons to long days on the beaches or sailing in Sydney Harbour.
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