The latest edition of the quarterly World Leasing Review revealed a common willingness to embrace changing business models, new markets and innovative technology across equipment leasing and finance companies across the world.
As the industry – and indeed, the world – faces a COVID-fuelled economic fallout, the report highlighted the importance of forbearance during the initial stages of the lockdown. In the three months up to June this year, forbearance was the sector’s primary focus, with most leasing businesses in France offering three- or six-month rental deferrals, re-amortising the transactions with the same end-date, capitalising interest during the deferral term and issuing revised payment schedules with significantly higher rentals.
Furthermore, new business volumes across Europe saw considerable drops in March and April across most asset classes, with a marked impact on office equipment, wheeled assets, and construction, but lesser impacts on IT and agricultural financing.
With a 90% fall in activity in certain sectors and another rise in defaults, non-bank small ticket lessors are seeing impacts on their results. As an example, in May this year Grenke reported an increase in loss rates from 1.5% in 2019 to 2.3% in Q1 2020.
Commenting on specialist lenders potentially not having access to finance from the Bank of England, Douglas Grant, director of Conister Finance & Leasing, said: “In recent times, alternative lenders have worked alongside larger more traditional clearing banks, offering a funnel of vital liquidity through tailored and flexible lending solutions to SMEs.
“Since the epidemic took hold, the UK Government has been quick to back sectors that are resilient to recessions and market volatility, providing financial security and protection through initiatives such as the bounce-back loans scheme. Today we are facing a significant double dip recession that could last well into late 2021 and the economy will need these resilient sectors to be protected and their existence guaranteed.
“This is where alternative lenders that understand the very basic needs of specialist SMEs, often in their lending infancy and operating in sectors such as infrastructure, technology and renewables, can provide the additional support and natural lending progression alongside the larger clearing banks.
“According to The City UK, it is estimated that businesses may build up £100 billion of debt by next March which they would be unable to repay with 780,000 SMEs in danger of insolvency. Larger clearing banks, already under pressure from mortgage lending, will not be able to keep the UK SME sector alive by themselves.
“We would welcome both more financial support for the alternative lending sector but also more sustainable initiatives to support SMEs in more resilient sectors from the Bank of England as we come to terms with an increasingly urgent capital hungry economy.”
Shorter but sharper
The Finance & Leasing Association (FLA) have suggested that the rebound in new business volumes will be strong, and the recovery is forecast to be ‘V’ shaped, shorter but sharper than the 2008 recession.
Martin Muessener (pictured above), vice president sales & marketing, Europe and Africa region at Toyota Financial Services explained to a packed audience at an International Asset Finance Network Online virtual conference:
Regarding residuals, we’re seeing a strong impact in the short-term on auto residual values, but medium-term expectations are that these will rebound within a couple of years. We expect to see significant stress on the balance sheets of captives and on actors invested in sub-prime and near-prime car financing that rely heavily on asset values to support credit recoveries.”
In regards to captive finance, financing and leasing capabilities have become an increasingly important differentiator to OEMs to set them apart from competitors without the same capabilities. It is also forecast that captives with a deep knowledge of the assets will be able to make more targeted credit decisions and reclaim some of the volumes lost to the over-liquid banking sector in recent years.
Additionally, the adoption of servitisation services and other “as-a-service” consumption type financing models is set to accelerate as more clients demand increased flexibility and OEMs seek to drive revenue beyond pure hardware sales.
The vast majority of organisations are finding they are having to adjust to the new world order post-pandemic and are realising they may need to create more flexible, client-focused business models and abandon the “monolithic legacy systems frameworks that slow innovation”. This is also hoped to reinforce the use of predictive analytics and data-led dynamic planning, allowing businesses to anticipate performance variation more quickly in client behaviour, risk and asset management domains.
Faring better than expected
In the US, the pandemics impact on new business volumes largely depended on whether a business models exposure to sectors affected by the pandemic such as transportation and hospitality. Many firms providing finance to these sectors were forced to cease originations the short-term.
According to the report, many flow-oriented companies suffered reduced business volumes while many mid-large-ticket lenders with a significant backlog and transactions pipelines witnessed volume pressures in mid-May.
The Equipment Leasing & Finance Association’s (ELFA) Monthly Leasing and Finance Index revealed that new business volumes had fallen sharply in May, plummeting 26% year-over-year. This reflects the widespread disruption, particularly in the construction and hospitality industries.
While some 92% of companies offered payment deferrals, customer acceptance of the offer was much lower than expected with the average deferral extended by small-ticket lessors constituting 15% of their portfolio, twice the level experienced by middle-ticket and large-ticket lessors.
Another ELFA report showed that business investment suffered its largest quarterly decline (6.4%) since the 2008 recession in Q1 2020, with investment in equipment at -16.6%, down from -4.3% in Q4 2019. Similarly, software investment was at 1.3%, down from 2.8% in Q4 2019, although interestingly investment in non-residential structures such as commercial buildings was at 2.6%, up from -7.2% in Q4 2019.
Overall, equipment and software investment plunged 10.5% annualized in Q1, and Q2 declines are expected to be around 20-30%. However, a return to muted growth during the last half of 2020 is thought to be possible should the public health crisis subside and businesses be able to resume normal operations.
Looking to the future, an immediate challenge is the forecast second rush of deferral requests which is likely to build momentum until August. Portfolio quality remains a challenge and in a recent poll by the Equipment Finance Advisor, 65% of respondents expected delinquencies to rise to 6-10% in H2 2020, and 27% of respondents expected delinquencies over 11%.
However, the World Leasing Review revealed that there was a sentiment in the industry that it was faring better than initially expected, with new business volumes returning and portfolio quality improving for lenders that supported borrowers with better risk profiles.
The report concluded that 2021 would look vastly different than initially anticipated, with more remote-work and increased digital solutions.