Leasiing Life Awards The Finance and Leasing Association
By Simon Jones on 11/12/18 | Category - Asset Finance

           

As we move into our 42nd year in the asset finance industry my office has persuaded me that a reflection on the journey we have taken might be of interest to others and therefore with some humility but substantial pride I agreed to pen this blog.

FAF started its long journey in November 1977 when as a 26 year old chartered surveyor with 5 years of commercial property financing under the belt I felt the need to be self- employed and in charge of my own decisions.  At the time leasing was very much in its infancy and the business began by setting up, running and managing leasing companies for and on behalf of corporate clients at a time when the government was keen to encourage investment into industry by offering 100% first year allowances on all expenditure incurred on plant and equipment.

An introduction from the merchant bank Henry Ansbacher was both timely and effective as we set up our first leasing entity (Epicure Leasemaster) for a business involved in food distribution as well as  being the notable owner of the restaurant A L’ecu de France in Jermyn Street. A restaurant which with some justification boasted one of the finest wine cellars in London.  Our office was based in Eagle House, Jermyn Street above the restaurant which I confess we used more often than perhaps we should – staff discounts were a double edged sword.

Funding for the business was arranged with Julian Hodge under a block discounting facility where we were paying 400 basis points margin over LIBOR – leaving us a challenge to find business at the right level. However with the benefit received from the 100% FYA’s we were able to subsidise the rate of interest we had to charge a customer to a level where we could compete effectively with traditional bank borrowing costs.  It is ironic that the capital allowances initiative which was brought in to encourage investment into industry all those years ago, and did so most effectively, has today moved to where structures designed to take advantage of the greatly reduced level of incentives are subjectively being regarded as being evasive or at best unwelcome tax avoidance.

As the business grew we found the need to set up a broking side where we could place excess business we were generating but could not effectively compete with banks on pricing but where based on our origination and structuring capabilities we could earn introductory fees.  The business grew quickly as each year we had to write more business to not only shelter our clients increasing liability to corporation tax on their mainstream profits but also to cover off the rental income we were receiving from the leases we had written in the previous year.

This inbuilt mechanism for growth drove the leasing industry to dizzy heights in the 1980’s as the product became the preferred source of asset financing against more traditional products.  Then in 1984 Nigel Lawson brought in his budget which announced a reduction in 100% FYA’s in the follow on three years from 100% FYA’s to 75%(1984); 50%(1985); and eventually 25% writing down allowance each year(1986).  At the same time the Chancellor also announced a reduction in the rate of corporation tax from 52% in 1983 to 50% (y/e1984); 45% (y/e1985); 40% (y/e1986); 35% (y/e1987).  The leasing industry drew nervous breath believing it had been taken off at the knees with it’s competitive pricing ability from subsidising interest payable from the FYA’s it received being removed.  This was the first time that a chancellor had set rates so far in advance and it turned out to be a hiatus for the leasing industry where lessors were buying equipment assuming 100% FYA’s and a 52% corporation tax on the lease rentals but in fact the lease rentals coming in over a 5 year period were then being taxed at a lower reduced rate of corporation tax. By pushing the fully taxable stream on the rentals into a later year when the tax rate was lower the lessor made a real saving.

The market quickly recognised this and for a few years leasing facilities on leased plant and equipment were regularly being offered at negative rates of interest because even though the lessee might be paying back less than the capital, on an after tax basis the lessor was still making a handsome return. Days of joy for FAF as the demand for leasing grew quickly.  As a consequence, towards the end of the 1980’s when corporation tax stood at 35% most Lessor finance directors looked at their gearing, which had grown hugely off the back of demand for debt, and decided that to pay the corporation tax at the lower rate of 35% was on balance a better idea than to spend so much time effort and balance sheet capacity in running a leasing business.


There developed for a few years in the late 80’s / early 90’s a strong market in the buying and selling of leasing companies as the industry adjusted itself to the new tax regime and the number of Lessor’s declined.  Nigel Lawson had achieved something quite special in that he had reduced the tax rate but saw the tax "take” increase. Mr Trump of late has yet to achieve the same.  In the early 90’s we sold 25% of the business to Elders Finance – the Australian Merchant Bank – part of the Foster’s Brewing Group.  This was a short lived experience as they fell into difficulties in the recession of the early nineties and we subsequently agreed to terminate the arrangement. This was a difficult time for FAF as the entire economy was suffering from the inertia of business in general.

With some determination and focus we worked our way out of the 90’s recession much wiser for the experience and with a thorough understanding of the concept that "cash is always king”.  At this point we decided that we would turn FAF into a lifestyle business where the shareholders would take out what money was sensible each year rather than attempting to build the balance sheet.  We continued with this strategy without having any debt until 2010 when we decided it was time to re-build the group balance sheet.  There followed a period of interesting change in the business model as we began to build our own rental book through First Asset Rentals Limited. This led to the development of an operating lease strategy when we would take top slice risk on deals which banks were reluctant to fully underwrite in order to deliver the necessary accounting treatment for the customer.  This was followed closely with a residual value product where we use "patient capital” to invest in the residual value of assets at the end of an operating lease.   We have now added the third leg to our stool in the guise of FAF Capital Limited which provides debt to corporates in support of our structured lending products and is itself supported by a range of wholesale funders.  As a small, focused, and intelligent financing business we persist and strive to deliver an exceptional and bespoke service to all of our loyal customers employing the benefit of our many years’ of experience as well as a quality contact base.

Reflections:


The industry has changed enormously over the last 10 years as banks retreat back to their standard product offerings with little appetite for any real transactional innovation or flexibility. A change which has been to our benefit and perhaps the main reason we have managed to stay in business – the ability to move quickly and provide varied and flexible structures for our customers.  Of some concern  is the a dearth of young people coming into the asset finance industry over the last 5 to 10 years – Is this because there isn’t sufficient training or perhaps because there is a need for more self-promotion by the industry as  the skills employed by those financiers in the early years are being over looked.

As with any business big or small two principles remain the same
• "Money IN must always exceed money OUT”
• "Cash is King”

It always amazes me how many times this is forgotten.  The key to a successful business is a happy working environment and the team spirit which we at FAF are fortunate enough to enjoy is well deployed amongst all of our staff and the Board.


As we move towards 2019 we have a strong range of interesting products and are very fortunate to have a dedicated, loyal and highly professional team of asset financing specialists who are as always keen to provide the first class service for which we have become known. We look forward to taking the business forward for the next 42 years.

By Laura Gosshawk on 20/11/18 | Category - Asset Finance

 


2018 Leasing Life Conference & Awards: Winners Announced

 

The winners have now been announced for the thirteenth Leasing Life Awards, which took place at the Hilton Tallinn Park in Tallinn, Estonia on 15 November this year.

The Awards, which were held as a part of Leasing Life Conference, brought together leading figures from a variety of leasing industry backgrounds, to discuss and celebrate the industry’s progress. There was also a chance to explore the latest developments in the market in this year’s conference.

The awards challenged candidates from across Europe to share their recent successes and the achievements of the European asset finance industry in 2018. The winners across 12 categories were carefully selected by the judging panel and honoured in the ceremony hosted by CEO of Alfa – Andrew Denton, Chief Executive of IAA Advisory – Lindsay Town and Editor of Leasing Life – Brian Cantwell.

The panel of judges brought in fresh industry expertise and longstanding knowledge of Europe’s asset finance industry. The judging panel was actively involved in the evaluation process, guaranteeing the independence and transparency of the programme.

"Entries into the awards were of a very high standard this year and our judges had a hard time picking the winners. Of particular interest to the market were the innovation-based and SME lending awards," says Cantwell. "The industry is growing more and more competitive each year and the Leasing Life awards are a great way for lessors to distinguish themselves to customers in the marketplace."

"The European leasing industry is dealing with continuing challenges and uncertain political and economic circumstances. The Leasing Life conference and awards allows these businesses to come together to benchmark their progress and to add to their strategy to limit future risks."

 

 

The list of winners of the 2018 Leasing Life Awards:

Asset Finance Intermediary 2018 – First Asset Finance

Asset Finance Legal Provider 2018 – Stephenson Harwood

SME Champion – Bank Lessor 2018 – Metro Bank

SME Champion – Independent or Privately Owned 2018 – 1pm

Vendor Finance Provider 2018 – DLL

European Lessor 2018 – Societe Generale Equipment Finance

Middle Ticket Corporate Lessor 2018 – ABN AMRO Lease

Digital Innovation 2018 – BNP Paribas Leasing Solutions

Sustainability 2018 – 3 Step IT

Young Professional of the Year 2018 – Mike Green (White Oak UK)

Industry Ambassador of the Year 2018: John Rees (Societe Generale Equipment Finance)

Lifetime Achievement: Cormac Costelloe (Dell Financial Services)

                                        

***

 

Notes to Editors

About Leasing Life Conference & Awards

The Leasing Life Conference & Awards over the past 13 years has become the European asset finance and leasing industry’s signature event. This year, Compelo hosted the conference and awards at the Hilton Tallinn Park, Tallinn on 15 November.

 

Exclusively sponsored by Alfa, the leading global supplier of asset and motor finance software and consultancy services, the awards recognise the achievements of the European asset finance industry in 2018.

 

About Leasing Life

Leasing Life provides essential briefing services across the breadth of the industry. Covering both bank- and manufacturer-funded asset finance across all asset classes, Leasing Life offers comprehensive, exclusive and intelligent coverage through in-depth market profiles, statistical analysis and up-to-the-minute news stories. See more on: http://www.leasinglife.com

 

For more information

For more information, please contact Rachel Archer at rachel.archer@compelo.com or call 44 (0) 20 7936 6591.

 

By Emma Crawshay Jones on 18/09/18 | Category - Asset Finance

"So, what do you do for work?" a common question we are all asked at every drinks party you are made to go to or when you meet a distant family friend. Working in Asset Finance is perhaps not the most common of all answers, let’s be frank! Many of my close friends if I asked them probably would not know what asset finance involves.

Considering that asset finance provides the funding to support 35% of investment spending by businesses in the UK economy (FLA, 2018) we are an important player in the economic success of the UK market. But, does the industry do enough to explain to the younger generation what we do and the career opportunities that exist? 

Previous generations, did not join a high street clearing bank (Barclays, Lloyds, RBS etc.) but instead joined the "hire purchase and leasing" subsidiaries of the banks. For others, it was an "accidental" rather than deliberate career choice. I personally fell into asset finance because of a family member. A significant minority in the industry today like me, joined because a family member was already involved in the industry. Which leads me to two questions - (a) would I have been aware of asset finance as an industry if my father had not been involved, and (b) is it an attractive industry for young people, graduates and non-graduates, to join today.


Well firstly I don’t think I would have joined the asset finance industry if it wasn’t for family. I do think we need more promotion of the industry at university level and the awareness of all the different areas one can go down in asset finance. In saying this, are people going to university less now? With the fees having increased we are seeing less children wanting/able to go to university. According to the Independent Commission on Fees, in 2012, there were 15,000 "missing" applicants who might have been expected to have sought a place on a degree course that academic year but did not. So if less people are going to university, how does the asset finance industry encourage the young to join? Perhaps one answer is for asset finance organisations to go into schools to promote the industry.

I do think the industry is attractive to young people. It is consistently growing and developing in resources. However, there is a lack of training for young people coming through and indeed if you are an employer looking to make new hires there is currently a dearth of talent to call on between the ages of 25 – 35 years of age. This needs addressing urgently as banks are now reducing staff and returning to standardised products.

As the industry moves on so do the people. Whether that be changing careers or retiring, we have to welcome the younger generation to come through and sponsor the industry. On the flipside, the issue of the younger talent replacing those who will be leaving with 30 years’ experience behind them, has been talked about for many years. There is no substitute for experience, especially when it comes to dealing with market downturns and economic recessions. But once they have left, where does that leave the younger generation, and how are we going to close this gap? Will this knowledge be taken with them or previous mistakes that were made in the past, reoccur? I think these people with such experience and knowledge should be encourage more to go into teaching or mentoring, so that their knowledge can be shared to the next generation coming up behind them.

After attending The Leasing Foundation’s,‘Young Business Finance Professionals’ at Hush Mayfair - April 18 2018, I wasn't amazed with the volume of young professionals that attended. As well as the Leasing Foundation; Young Business Finance Professionals programme, there is AF-PA,(the Asset Finance Professionals Association) that regularly holds networking events. So there are organisations out there to help people in the industry to network but is it enough to reach a wide audience of young asset finance professionals, especially those working outside London? Perhaps one way to improve awareness of the industry to the younger generation is to market more on social media, using trends and blogs. Looking at reaching schools across the UK and injecting knowledge to children from a younger age than university.

With a market that has grown dramatically over the past five years, and new business (primarily leasing and hire purchase) growing by 10% in May 2018 compared to the same month last year (FLA, 2018), there is certainly plenty of evidence that we need to support the growth of this industry by educating and promoting to the younger generation to get the word out there that working in asset finance is awesome!

By Laura Gosshawk on 01/08/18 | Category - Asset Finance

After a recent round table with the FLA regarding how to value an asset, the importance of people became even more apparent. With more and more automated processes, automated systems, out sourcing and generally placing as many layers and as much distance between the provider and the customer, I feel lucky to still work within a sector that knows the importance of people and a company that prides itself on maintaining strong relationships with both banks and lenders and our customers.

Computers are great, but they’re quite frankly, scary and our dependence on them giving us all the answers I find quite unsettling. A whole discussion on Artificial Intelligence and the future of that is another matter!

The importance of understanding the value of an asset at the beginning of its life, but also the end of a finance agreement, is paramount to how you structure a deal, for the customer and also to get the best out of the asset. With comments on future automated decision making for asset valuations, something I’m not even sure would be possible for some asset types, the value of the human element is key.

When it comes to people in asset finance it has to start at the very beginning and the customer understanding their asset for the finance to be truly effective, and let’s be honest cost effective. Knowing how it works, how long it will last, what it’s potential down sides are and working around, or within those parameters.

This translates into the customer relaying that through to the finance, either a bank/lender/vendor directly or an intermediary. That key contact should get to know the customer to really understand how they can help, where they can add value and start to build on a relationship rather than one off transaction. It’s this contact that will also determine how a transaction is structured and also presented internally for any kind of sanction or sign off.

A credit committee rather than automated decision on a customer allows for ‘story type’ deals to pass when they might otherwise not. In a world when a set list of parameters gives a ‘yes’ or ‘no’ answer, with nothing in between and no human element to the transaction, where will the more difficult but equally as fruitful transactions go? How will they be placed? And where will that leave start-ups or SME’s with limited financial history?

At the round table discussion, it became apparent when placing a value on an asset at the beginning of its life and also the end, a person with good knowledge of an asset sector is vital. We’re lucky to work with a strong, independent valuation company that gives data driven information on asset sectors/types and their future/residual value. They are also a company comprised of human beings with decades of experience that talking to and gauging further opinion, proof and provoking discussion with can give us more answers than the numbers on a piece of paper sometimes. It’s about getting the right people to work with, not people that give you the answers you want to hear.

This personal element can allow us then to understand the asset values when speaking to lenders. We’ve experienced in the past, some lenders where the internal asset team may not understand the assets as well as they could and this has caused uncompetitive quotes. But it’s not just about accepting this; to get the best of out of lenders for a customer it’s about understanding at what stage of the finance process this is having an impact and addressing it. Taking an asset team to physically see an asset and a customer may sound ridiculously obvious but it also, and I fully appreciate why given constraints on people’s time these days, appears to happen less frequently before a deal is incepted. Having an asset inspection after an agreement has been incepted is a well-known process, however getting to know an asset and customer before quoting on finance can greatly improve an understanding on whether it is something or someone you may wish to work together with.

Inspection of an asset at the end of its finance life also has a substantially important human element. There are return conditions set in legal agreements, but an independent valuer that also understands and knows the asset types being inspected helps asks the right questions at the right times, that sometimes may not otherwise be broached. They may not produce a different outcome but if the customer knows they are being treated fairly it maintains a legitimate and strong trusting relationship. It’s looking at an asset and using the legal framework given, but translating that through to a customer; This takes logic, common sense and good manners that a computer or automated system would not be able to replicate.

From start to finish of the asset finance process and agreement, humans are vital key elements, but lastly I wanted to touch on the human element throughout. We pride ourselves in wanting to build long standing relationships both sides of the fence and it’s this sitting by a customer throughout a life of an agreement that gives insight into what works, what doesn’t work, what they may want to change next time; This could be anything from term, usage, to type of finance. The information they need or want to receive throughout the asset life, the format they want this in, what frustrations around system constraints they endure. It’s also having this contact set up and working with the people in different areas, from procurement to fleet, finance to purchase ledger as they will have different needs and requirements once the finance is in place.

Our human interaction with customers and banks over the years has always been maintained throughout every part of the asset finance process. It’s something that may be impacted by automated decision making and automated valuations in the future, and something we may need to adapt to. However, for now it’s something we pride ourselves on and something, as you will see from the CFO of Veolia UK below, something our customers appreciate too.

David Gerrard, Chief Financial Officer. Veolia UK

"Over 20 years, Veolia has procured one of the UK’s largest fleet of leased commercial vehicles. Throughout that time, we have used the services of First Asset Finance plc to assist in managing all aspects of our leasing programme, from lease inception to termination. The team at First Asset Finance plc have helped to deliver flexible funding solutions throughout the economic cycles and their personable, efficient and knowledgeable approach is respected throughout our group. The team is not seen as one of being a supplier; they are seen as trusted partners."


By Patrick Sherrington on 10/07/18 | Category - Asset Finance

Harry Reasoner once said:

"The thing is, helicopters are different from planes. An airplane by its nature wants to fly, and if not interfered with too strongly by unusual events or by a deliberately incompetent pilot, it will fly. A helicopter does not want to fly. It is maintained in the air by a variety of forces and controls working in opposition to each other, and if there is any disturbance in this delicate balance the helicopter stops flying; immediately and disastrously. There is no such thing as a gliding helicopter." Harry Reasoner, Approach Magazine, November 1973.

Whilst not a direct comparison, the successful financing of a helicopter compared to a more routine piece of equipment can also feel like you are working with "a variety of forces and controls working in opposition to each other".

Helicopters are high value, complicated pieces of machinery, requiring not only regular and careful maintenance in order to preserve the life, and therefore value of the machine, but also exhibit a number of other distinct characteristics, which can sometimes make the financing of them more challenging. To name but a few;

The manufacturer will often require significant upfront payments before considering taking your order, and delivery times can be 18 months from order or more. This presents an immediate financing challenge if the purchaser wishes to preserve their own capital whilst waiting for delivery. In addition to this, helicopters are usually sold in either USD or Euro. This is fine if you, as a Purchaser, have revenue or financing facilities already available in these currencies. However, if not, careful consideration will need to be given to hedging the inevitable exchange rate fluctuations between order and purchase.

An obvious statement, but helicopters are an aviation asset. Many banks have an "if it floats or flys, we don’t fund it" policy.

Helicopters are a mobile, global asset. This is clearly useful for both preserving the value of the asset and opening up potential revenue streams for the asset. However, it does present financing challenges, as many funders will be uncomfortable with the asset being located in jurisdictions they themselves do not operate in; even if a logical case can be presented in terms of demonstrating security and ability to recover the asset. It is therefore important to consider whether your financing partner is either global in it’s operations or has a more limited geographic focus.

Contracted revenue streams; what happens if your bank will only finance in USD but your client wants to pay you in GBP? Another challenge facing the purchaser will potentially come from a mismatch in the revenues generated by the helicopter vs its purchase and financing costs. This can of course be hedged, but this is relatively expensive and uses up further credit lines with your banks.

Beware the Loan to Value test! Whilst helicopters exhibit fairly stable long term values there can be short term spikes in values but again consider the currency angle. Values are usually underpinned by USD or Euro therefore causing issues if your financing has an LTV test and is denominated in anything but these two currencies.

All these considerations, plus a few more to discuss, contribute to narrowing the pool of lenders available to helicopter purchasers, which is where using an independent specialist like First Asset Finance plc can really help. Decades of experience in the helicopter financing sector and a deep knowledge of the Asset Finance market means we can arrange financing facilities bespoke to your individual requirements by partnering you with the right profile of lender not only for your credit but also your asset profile.

 

By Robert Taylor on 11/06/18 | Category - Asset Finance

The Finance and Leasing Association (FLA) lists 79 member firms in its asset finance division, comprising 29 bank owned lessors, 38 independent players and 12 captives.

On the face of it, this diversity should represent a wide choice of funding sources for any business seeking asset finance for business growth, especially SME’s as virtually all the 79 FLA members target the SME market. Indeed most independent and many bank owned providers operate exclusively in the SME sector.

However, does this really result in a wider spectrum of financial choice for SME’s? Even the mid and large corporates who are not served by as many lenders as the SME market do not seem to be receiving the breadth of solutions available as they had on offer several years ago.

 

Financial Choice is reducing whilst Financial Sources are increasing.

I believe the reality of the asset finance market is that most customers actually now face limited financial choices and solutions being offered to them by an ever increasing pool of liquidity. With a few exceptions, independent SME funders operate with similar business strategies, with identical product offerings and have the same appetites for credit and asset risk. Their only USP then becomes price and/or service. And we can all remember what happened a decade ago when liquidity chased pricing.    

Increasing competition among SME asset finance providers has also resulted in the "commoditisation" of asset finance products as bank owned lenders have changed their business models by simplifying their processes closing branches and downsizing staff numbers (especially experienced staff who are more expensive but have seen business cycles), and focussing on delivering "vanilla" asset finance products via online platforms. Maybe partly so regulators can more easily see their books, maybe it’s to have a greater return on capital employed, but if you don’t have the experienced staff and everything is "productized" then innovation is removed as is financial choice for the customer and that ultimately will hurt the UK economy.

Collectively , SMEs now account for 60% of the new business volume originated in the UK leasing and asset finance market and I expect the SME sector will continue to dominate our market in the next decade especially as SME’s are now picking up more and more Government Contract business as larger firms are struggling to manage their contracts effectively. 

The supply of capital targeting the SME asset finance sector has also increased, from new market entrants including challenger banks and disruptor lenders backed by new sources of capital such as private equity and the British Business Bank (the latter are truly focused on finding innovative ways to support UK SME’s).     

You might expect this influx of new capital to result in the market shares of the larger players being diluted, as customers enjoyed a wider choice of funders. In fact, the opposite has happened, according to the latest Asset Finance 50 report published by Asset Finance International. This shows that the combined market share of the UK’s top 10 asset finance providers has increased from 54 % to 58 % over the past three years. Whilst there are challenger and disruptor lenders the larger players are increasing market share, and without doubt we will see more market consolidation in the next 3- 5 years among the newer and emerging asset finance providers (as we are seeing in today’s banking market) , which will also reduce the customer’s financial choice as the range of solutions on offer continues to reduce.  

So, where does this leave the client that requires a more innovative asset finance solution that cannot be provided by a limited product range delivered via a "one size fits all" approach?

Customers in this category will include the 7,000 mid-cap and large businesses in the UK that exceed the size definition of an SME. This group generates a total business turnover that is almost the same as the turnover produced by the whole SME sector. Their asset finance needs, in areas such as operating lease solutions, structured finance and managed services contracts, will simply not be met by funders whose business model is designed to service the straightforward hire purchase demands of SME clients or for that matter, any client.

  

Those funders who are able to offer tailored solutions for larger value asset finance transactions, are often unwilling to underwrite appropriate asset residual value positions, either for risk avoidance, financial reporting or capital adequacy reasons.   

Our aim at First Asset Finance is to deliver a range of solutions that meet the specific needs of both larger asset finance clients and their funders. This includes investing our capital in asset residuals, developing structured finance solutions, managing funder selection through our proven tender panel approach and handling the "nuts and bolts" of deal completion.  

We recognise and appreciate the importance of SME s (to UK PLC), but our mission is to ensure that the asset finance market remains open to meet the wider needs of all clients, particularly in operating leasing and to widen the financial choice of solutions in the market not reduce or commoditise them. We are actively supporting not just the "high street" known names but giving Challenger and Disruptor Lessors Residual Value investments to their customers to enable them to provide operating lease and other solutions that they otherwise could not provide.

We need to widen Financial Choice not reduce it otherwise our economy will not compete domestically or internationally.

 

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