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.
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.
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