Inform

Uncertainty remains over lease accounting changes

Authored by George Tonks

The lengthy discussions of the accounting standards setters on lease accounting have continued to generate confusion over recent months. Despite the intended timetable of issuing final proposals before the end of this month, the two bodies that set accounting standards for large companies, the IASB and FASB, still seem to have a long way to go to reach a conclusion on some aspects of lessor accounting. It now seems likely that there will be some slippage in the Boards’ timetable, but proposals are still expected during the summer, with a view to finalisation by mid 2011. Consequently adoption being required from 2012 still remains likely.

Alongside this, the continued failure to engage with lessor organisations has generated further frustration within the leasing community, as shown by the press release issued by Leaseurope towards the end of May. It is to be hoped that the Boards accept the comments now being made, have a sensible discussion before making any definitive proposals and allow proper public discussion of their proposals before reaching a final position. However we should not be too optimistic of this happening, given the evidence of the last 12 months.

In brief, the new accounting proposals will ensure that lessees have to include all leases on their balance sheets, so removing the current “off-balance sheet finance” of operating leases, although it appears that leases which cannot exceed one year will be excluded from this requirement. However the lessee’s balance sheet value at the start of the lease will be the present value of the minimum lease payments, so that a lower rental commitment for the lessee will translate into a reduced balance sheet value for the lease. In addition, the detailed accounting requirements imposed on lessors will be changed, although exactly how is still to be determined and the outcome of the current deliberations will affect the recognition of profit by lessors. During 2009, the Boards had proposed that lessors’ balance sheets should show assets for both the physical leased asset and the financial asset of rentals due, together with a liability for the “performance obligation” to allow the lessee to use the asset during the term of the lease, but we now seem to be spared from this effective grossing up of balance sheets.

If you would like to discuss how the forthcoming changes in lease accounting will affect your business please contact George Tonks on +44 (0)845 003 1000 or e-mail george.tonks@invigors.com.

The state of the UK leasing nation

Authored by Chris Boobyer

Now that the UK general election is out of the way and the new government and politicians are gearing up to tell the populace how bad things really are I thought it might be useful to look at the state of the UK leasing nation and review what has been going on and what might happen in the immediate future.

Firstly, there are the most recent FLA statistics for Q1 2010. At first sight things looked quite rosy - apart that is from the collapse of the big ticket market. Big ticket volumes were already struggling through a reduction of about one third from around £1bn in March 2006 to around £700m in 2009, however it has now all but collapsed to just £89m in March 2010 – a drop of 87% in just one year.

At first sight a Business finance volume increase of 11% on the same period last year – the first increase since September 2008 - seems like excellent news, especially when combined with a 2% increase in Consumer finance for the same period. Unfortunately this apparent good news is probably illusory and whilst there is no helpful letter from an outgoing official to say what has happened there are sets of tyre tracks that give us a clue !

Closer examination of the statistics reveals that if new car finance is excluded from Business and Consumer finance volumes then the growth figures fall to below 2% and an actual volume reduction respectively. This means then that generally, UK businesses are still not investing in assets to produce wealth or protect jobs and that future economic growth is likely to remain stunted.

Depending on who is asked the question, the reasons why range from a lack of demand to a continuing restriction on the availability of finance. Certainly, a number of SME’s to whom I have spoken during some recent research still rate this as the number one issue affecting their plans for investment. Conversation with a number of banks and lessors indicate a significant swing to restrict lending to ‘own bank’ customers and, for some, a reduction or curtailment of facilities for smaller independent asset finance companies wholesale or block lines. Therefore, what they don’t have they can’t give.

Clearly asset finance in the UK still needs help and Invigors supports any FLA member or government action to devise a scheme to give lenders – and their credit officers – confidence once again to start lending for business assets in order to promote the UK's economic regeneration. However we believe that any such scheme should be closer to the government loan schemes of the past rather than the complex organisms recently considered.

If the UK government does finally start to take notice of lobbying by the FLA and practical advice from asset finance practitioners we might even find a way of securing faster economic growth though the adoption of asset finance as the preferred investment option. Keep everything crossed!

To discuss the strategic implications of future changes in the UK leasing market contact Chris Boobyer on +44 (0)845 003 1000 or e-mail chris.boobyer@invigors.com.

New legislation to affect consumer and SME finance across the EU

Authored by Ludwig Fischer and Thomas Scharrenberg

Writing consumer finance business in the past has always required special procedures and documentation in order to comply with local legal provisions for consumer protection. From this year these requirements will be further tightened in most European countries.

In 2010 all EU members are required to adopt the EU Directive 2008/48/EC on credit agreements for consumers. The intention is to increase consumer protection by requiring the financial services industry to provide a comprehensive set of standard information to the customer according to SECCI (Standard European Consumer Credit Information ) prior to signing the contract. Not only that but in the case of a credit decline based on credit reference agency information, the industry will be required to provide details on the reasons for the decline to the consumer.

Although the legislative procedures are not finalised yet in many countries, the financial services industry will certainly face an additional administrative burden when doing business with consumers. In Germany for example the BDL (German Leasing Association) legal sub-council has put together a 7 page document with detailed procedural descriptions and template recommendations to assist lenders in complying with the expected new rules.

The industry is required to change quickly as the new rules will have to be in place soon, for example June 2010 is the expected go live date in Austria and Germany. As a consequence several German leasing companies which have previously served the consumer market on an opportunistic basis have now decided to exit the consumer finance market completely in order to avoid the additional bureaucracy and costs. Will the gap be filled by existing lenders or is there an opportunity for new entrants?

However the impact of this legislation is more significant than that. According to the EU Directive these extended consumer rights will also have to be applied to founders of new businesses with the result that the financial services industry in Germany is about to pull back from this market as well. At a time when lenders are being urged by governments - and the EU - to lend to the SME sector, here is legislation being imposed which will have precisely the opposite effect! For those lenders that remain in the market, less competition should provide the opportunity to increase margins provided that this is not offset by the cost of legislative compliance.

For more information on legislative changes in Germany contact Ludwig Fischer on +49 7073 913 265; e-mail ludwig.fischer@invigors.com, or Thomas Scharrenberg on +49 212 64285520; e-mail thomas.scharrenberg@invigors.com.

Trend from vendor to captive finance seems likely

Authored by Peter Hunt

Both presentations from speakers at Invigors’ last Asset Finance Executive Briefing and post-event survey feedback from delegates suggest that an increasing number of manufacturers will move towards a captive finance model over the next 3 years.

The speakers highlighted a number of reasons for this trend, notably the increased importance of finance in stimulating equipment sales, continuity of funding supply, willingness to take operating lease positions, sale complexity including soft assets and services, asset lifecycle management and full service integration.

As well as pure captives, a range of hybrid business models are likely to be developed. For example, in CEE where manufacturer volumes in each country tend to be lower and country variations significant (such as in asset repossession), some form of virtual captive with regional funders looks more likely.

According to the post-event survey, other trends that appear to be emerging are:-

• More manufacturers will change their financing model or finance partner than has historically been the case
• To be successful, finance providers will need to integrate more closely with manufacturers
• Finance companies will need to increase their focus on new product and service development
• Overall, providing finance in BRIC markets will be more important than CEE markets, for international manufacturers

In total, these represent significant challenges for finance providers and will drive a changing competitive landscape.

Our thanks go to Cormac Costelloe, Paul Sheeran, Elliot Lennick and Manuela Pachoining for their thoughtful contributions on the day.

If you were unable to attend our last Asset Finance Executive Briefing and would like to learn more about the issues discussed then please contact Peter Hunt on +44 (0)845 003 1000 or e-mail peter.hunt@invigors.com.

Is research too important for the marketing mix?

Authored by Peter Hunt

Most finance companies and industry suppliers do little or no research. Tucked away in an already-squeezed marketing budget, research spend becomes an irrelevance and has little impact on the business. Why should it be any different.

1. More sales, more profitability

Customers don’t always tell sales people the whole truth or all the reasons for their decisions. Fairly common organisational responses are to latch onto false headlines (often pushing margins down) or believe that it’s too hard to compete in a particular market segment. Before reducing profitability for the whole business based on poor information or the response of a limited proportion of the prospect base, research lets you get the facts from an unbiased perspective. Payback can be rapid and ROI high.

In all markets, it’s true that for some customers price is everything. But think of corporates like people and you’ll appreciate that we don’t always want the cheapest at any price. Research helps you segment and focus your proposition on customers who truly value a broader range of service, relationship or extended product features, driving increased product profitability, a more stable customer base and higher conversion ratios. Let the price-chasers self-select a different supplier.

2. Increased performance of existing business operations

Once a deal is on the books, a natural drive towards process efficiency and cost containment sometimes fails to pick up what’s important in terms of maximising profit for the business. Linked to a quantified understanding of the flow of deals running through your business and the cost and revenue impacts of in-life events, research lets you understand commercial situations to apply costs where they’re valued, and avoid loss situations.

Bizarrely it’s often great service that is the most damaging. As an example I go back to my days running the CRM programme for a FTSE 100 life assurer. The relevant customer services manager was very proud of the speed with which early terminations were dealt with and paid out – but didn’t appreciate that this had a negative impact on profitability. Research allowed me to show that in many cases, early termination was not the best course of action for the customer and could be avoided by providing advice to incoming callers, allowing us to retain and enhance valuable income streams.

3. Improved profile for customers and staff

Put simply and as long as you act upon its findings, research shows you care. Customers and staff want to feel that their opinions matter and that you will do something about their concerns. As a result, they increase their bond with you. If a research project aimed at understanding how to improve staff performance and morale saves two sets of recruitment fees in a year, it probably pays for itself – before you even consider its findings!

Companies are in the market for the best employees as well as the best customers. Thoughtful publication of research findings can create the impression of a progressive, dynamic organisation – exactly where the best talent want to work.

4. Payback on research

Research is generally viewed as a budget cost. Yet it can drive increased performance in every part of your business, including as an income generator. Used wisely, it can achieve a rapid payback and strong ROI, with a host an ancillary benefits.

To discuss these issues and understand how research can be used to improve the profitability of your business contact Peter Hunt on +44 (0)845 003 1000 or e-mail peter.hunt@invigors.com.

UK Budget

Authored by George Tonks

The UK Budget statement presented by the Chancellor, Alistair Darling on 24 March was primarily a pre-election signal for the Labour party, with general statements of intent rather than any substance. Given the impending general election there is no chance of any substantive legislative changes being passed by the current Parliament and many tax rates for the next fiscal year had already been announced. We are therefore left knowing that soon after May, the Chancellor (even if it is still Mr Darling) will need to start giving more detail on how the UK’s excessive borrowings will be tackled, through tax rises and public sector spending cuts.

There are always two issues for the asset finance industry from a Budget statement, the economy and tax. On the general economic position, the overview remains of concern, but with an indication of a continuing slow improvement. This should mean (a) that new business will pick up and (b) a reduction in default and bad debts. In terms of tax changes, new announcements of particular significance to the industry were very limited. The annual investment allowance is being increased to £100k and, despite lobbying by the leasing industry, there is no change to the basis on which this is available. Hence this remains available only to the owner of equipment, providing a discrimination against leasing. However the absence of any announcement on the temporary 40% first year allowance means that this will disappear from the start of April, so at least putting leasing on a level playing field in that regard. Meanwhile car finance will be affected by the complex interactions of various tax changes announced previously particularly on VED, the ending of the scrappage scheme and the pent up demand from the lack of new business car registrations last year. Leasing specific tax changes announced were restricted to some minor changes to the mechanics of the election in respect of sales of leasing companies introduced by the PBR in December, which are likely to have very limited impact.

For more detail on the Budget statement and how this could affect your business or for information on tax issues affecting leasing and asset finance business contact George Tonks on +44 (0)845 003 1000 or e-mail george.tonks@invigors.com.

Regulation – a new challenge for the leasing industry in Germany

Authored by Thomas Scharrenberg

Unlike many other European countries the German finance leasing market has previously not been regulated and it was quite easy to start and run a leasing business until 2008. But things have changed and it was the industry itself which unintentionally caused this change.

The German leasing industry had complained about a competitive disadvantage compared to banks regarding trade tax treatment. In 2008 its lobbying finally succeeded and the leasing business obtained the same favourable trade tax treatment as bank loans. But the new legislation had a political price, as of 2009 the industry was taken under the regulation of the Federal Financial Supervisory Authority (“BaFin”) and any organisation wishing to provide financial services now needed written authorisation. As a consequence finance leasing companies now have to comply with the German Banking Act (“Kreditwesengesetz”).

Although the level of regulation is much lower than applied to fully authorised banks it is a challenge for the leasing industry to cope with the new requirements such as ensuring appropriate risk management and control systems, adequate business contingency plan and well documented processes. In addition leasing companies have to fulfil specific reporting requirements such as submission of annual reports and accounts to BaFin as well as regular filings for large exposures or any changes to shareholders, directors, auditors or other relevant matters.

It is obvious that leasing companies which are bank subsidiaries should have only minor issues in coping with the new requirements as they already had most of the necessary structures and processes in place. But independent and especially smaller leasing companies are struggling to comply with the new standards, even though each existing company was only required to notify BaFin.

New market entrants however have to get a BaFin authorisation prior to starting their business. Applications must demonstrate a capable management and the new organisation’s ability to meet the standards. Although BaFin is the authority that grants the licence, the involvement of Deutsche Bundesbank is mandatory as BaFin requests this authority’s opinion prior to making a decision. As a consequence the application process requires a highly professional approach and a well defined project plan.

Invigors is currently providing clients with the advice and practical support to enable them to meet the BaFin regulatory requirements.  For further information on the German market contact Ludwig Fischer on +49 7073 913 265; e-mail ludwig.fischer@invigors.com, or Thomas Scharrenberg on +49 212 64285520; e-mail thomas.scharrenberg@invigors.com.

Lease Accounting - an interim update

Authored by George Tonks

Avid readers of previous newsletters will recall that the bodies responsible for accounting standards are working on revisions to the rules for lease accounting, with the aim of issuing new proposals in Summer this year. The work still seems to be on track to meet this timetable, which could then mean the new rules taking effect for many people from 2012. We will produce a full review of the proposals once they are published but, in the meantime, a brief update is given below.

The principal aim of the accounting bodies in providing new accounting rules for leasing is to stop the current use of operating leases to provide off-balance sheet finance for lessees. Therefore the main plank for these proposals will be that any lease will give rise to a liability and an asset on the lessee’s balance sheet. There has been some discussion about excluding small value or shorter term leases, but the accounting bodies do not accept these arguments on principle. Consequently lessors have concerns that these new accounting rules will adversely affect the commercial attractiveness of equipment leasing for customers. Whilst this concern has been raised by Leaseurope and others, the accounting bodies seem to be intransigent at present.

Alongside lessee accounting, lessor accounting is under discussion, with the likely proposals still evolving. However, there are two areas which give concern for lessors. Firstly, the accounting bodies take the view that a lease gives the lessor two assets: one in respect of ownership of the equipment and the other for the rentals due from the lessee, together with a liability for the “performance obligation” to allow the lessee use of the equipment over the term of the lease. They are at present unsure whether the liability should be netted off the assets on the balance sheet, or whether the balance sheet should be presented on a “grossed up” basis. If the latter option is selected, then return on assets would be reduced and there could be an effect on regulatory capital requirements.

The second issue of concern on lessor accounting is an apparent shift in the borderline for revenue recognition, particularly for captive lessors. At present “manufacturer/ dealer” lessors are allowed to recognise a “selling profit” under a finance lease, but not under an operating lease. The discussion so far points towards the recognition of a selling profit only where the lease is an “in-substance sale”, which would exclude many current finance lease transactions. 

For more information on the current position or to discuss potential impacts on your business, contact George Tonks on +44 (0)845 003 1000 or e-mail george.tonks@invigors.com.

Who will fill the SME financing gap?

Authored by Peter Hunt

As economic activity recovers and investment increases, there is a significant risk that supply-side weaknesses will restrict the asset finance market for SMEs in the UK.

This should be a material concern for policy makers – notably, March’s budget included a requirement on RBS and Lloyds to provide £41bn of business loans (gross lending) over the next year for SMEs. At the same time, it creates commercial opportunity for a major new player to enter the market.

5 questions a new entrant may ask are:-

1. Is there a competitive space?

Yes – large funders came to rely heavily on broker introductions for the SME market. The exit of a number of those funders has resulted in huge capacity taken out of the market that cannot be filled by the smaller, entrepreneurial funders now dipping their toes back into the market.

With capital rationing, a strategic focus on existing bank customers and a material distrust of the broker market, potential for expansion of the big UK banks in this space seems limited. The capacity gap looks set to remain.

2. Are the returns acceptable?

Yes – spreads have increased and are much more attractive than a couple of years ago. Limited funding supply has and will continue to offer strong margin performance. Bad debt will continue to improve, potentially creating a very positive scenario for portfolio profits in 2011/12.

3. Can competitive advantage be achieved?

Yes - the industry model involving funders and brokers became fairly dysfunctional with poor co-ordination and realisation of sustainable value for all parties. A funder seeking to enter the broker market should develop a new business model (for more detail, I’m happy to provide a copy of a presentation I gave at a recent Executive Briefing). The good news is a growing recognition amongst the broker community that change is essential.

Targeting SMEs via the broker market is not the only route to market, and currently there is no brand-led “people’s champion” providing the implicit guarantee of simplified, fair, good value products to SMEs. The potential for such an organisation to operate by phone and internet (assuming risks can be managed) could be a game-changer.

4. Are the risks acceptable and can they be mitigated?

Yes – many of the risks currently associated with the SME market are wrapped up in the broker sector where through-life risks were managed poorly and in an unco-ordinated manner. These can be mitigated by good business design and effective process management. Going direct materially simplifies the risk picture further.

5. Is it achievable?

Yes – assuming the new entrant has access to funding to grow a significant portfolio, combined with the foresight, business design and commercial skills to make it happen. We’d be delighted to help!

If you would like to discuss this subject further,please contact Peter Hunt on +44 (0)845 003 1000 or e-mail peter.hunt@invigors.com.

UK Pre-Budget Report

Authored by George Tonks

The Chancellor delivered his UK pre-Budget report on 9 December, confirming that the recession had been deeper than he had previously forecast, but predicting that the UK would return to growth from late 2009. Various positive comments followed about the state of the UK economy after 2010, although that will be after the next election, so we may well be under a different fiscal regime at that point. The growth in public sector borrowing was reported as higher than previously forecast, although not as bad as some had feared, with action proposed to reduce that and public sector spending from 2011/12. The overall picture given by the Chancellor should lead to more positive conditions for asset finance companies, although it is only his forecast.

A number of initiatives on “green” issues and the extension of the EFG may bring opportunities for asset finance companies.

On tax issues, the main headlines went to the new 50% levy on bankers’ bonuses in excess of £25,000, although we will have to wait and see whether this turns out to be simply a populist gimmick, or whether it has any substantial effect. Of more mainstream significance to asset finance companies is the further increase in NI rates and the confirmation of the return of the main VAT rate to 17.5% from 1 January 2010. Interestingly, at the same time, the Irish Government was announcing a 0.5% cut in its VAT rate, to 21%, although it had initially increased the VAT rate in response to the economic crisis. Also at the start of December, the UK Government had announced that HP transactions following the finance company’s normal commercial practice could fall outside the anti-forestalling provisions.

Further tax changes included an election to apply an alternative methodology for the effect of FA 2006 Sch10 (change of ownership of a lessor company), a move to ensure a staged sale of a lessor company falls within FA 2006 Sch10 and anti-avoidance provisions attacking structured arrangements which seek to take part of the income from an equipment lease out of UK tax, whilst still claiming full tax reliefs.

If you would like to find out more on any of these matters please contact George Tonks on +44 (0)845 003 1000 or e-mail: george.tonks@invigors.com

Crisis in the German leasing market

Authored by Ludwig Fischer, Invigors Germany

After an all-time high in 2008, the German Leasing Association (BDL) recently reported a record decline in results for 2009. Although the BDL includes only 10% of asset finance companies in Germany, these represent approximately 90% of new business volumes so it's reasonable to assume that their data is very representative of the leasing market as a whole.

Overall the BDL is forecasting new business volumes to fall by 22.6% in 2009 to Euro 42.1bn, the most dramatic drop in its history. The majority of this is equipment leasing (defined as moveable capital goods) which is forecast to shrink by 22.7% to Euro 39.3bn compared to 2008. The decline is mirrored in overall capital equipment investment levels which are projected to fall by 20% this year, according to the latest forecasts from the Munich-based ifo institute. What is also notable is that, in previous economic downturns, the asset finance industry played a stabilising role in maintaining lending levels but in the current recession the reverse has been true as, even with reduced levels of investment, the leasing penetration rate has decreased slightly to 21.1%

The reasons for this steep decline in asset finance new business are not hard to find. A collapse in demand for capital equipment, partly caused by the sudden and rapid fall in German exports as a result of the global recession, has been combined with severe restrictions on capital availability from the financial sector plus the consequences of tax reform in 2008 which hit the asset finance industry quite hard. A recent survey amongst BDL members revealed that two-thirds of independent asset finance businesses claim to have restricted access to liquidity which is significantly impacting their ability to write new business.

A more worrying fact is the increasingly negative year-on-year growth trend over the past four quarters. The decline in Q1/2009 was 11.8%, this accelerated to 18.1% in Q2, and 25.5% in Q3. A decrease of 27.5% is projected for Q4. Moreover this trend has been evident across the board, for the first time ever all asset categories in the equipment leasing sector are showing an accelerating decline.

Will the German asset finance market turn round in 2010? The ifo institute are forecasting that GDP growth will recover to 1.7% next year while investment in machinery and equipment will grow by a sluggish 1%. Normally this would imply that asset finance volumes would return to growth levels of 5-7% but with the current restrictions on capital availability that remains highly uncertain. The latest ifo survey shows that business confidence is returning to Germany but, given the current shape of the leasing industry, will there be the funding available to support it?

If you're interested in learning more about the opportunities offered in German asset finance market then contact Ludwig Fischer on +49 7073 913 265 or e-mail ludwig.fischer@invigors.com.

Lease Accounting - Standards reform back on track

Authored by George Tonks

The International Accounting Standards Board and the US Financial Accounting Standards Board have continued to discuss the reform of lease accounting since issuing their joint discussion paper in March. They are continuing on track to issue a formal exposure draft of the new accounting standard in Q2 of 2010, with the final standard following about one year later, so that it seems likely that changes will be effective from 2012. These changes are additional to the change in IAS 16 which results in some leasing companies reporting substantially increased turnover this year.

Having made the decision in 2008 that consideration of lessor accounting should be deferred, the Boards now seem determined to bring it back into this new accounting standard, with time spent at each of the last two monthly meetings on lessor issues. The Boards have also indicated that “in-substance purchases” should be outside the scope of the new accounting standard, although they have not clarified what that phrase means.

The IASB/ FASB proposals for revising lessee accounting are now well developed:

• Lessees will report an asset and a liability for any lease, with the initial asset and liability amounts equal to the present value of the minimum lease payments over the longest period for which the lessee is more likely than not to lease the asset;
• Each of the liability and asset will be amortised over the period of the lease on similar bases to those currently required for finance leases;
• Contingent rentals and residual value guarantees should be included within the balance sheet asset and liability, based on the expected value of payments;
• There should be a reassessment of the balance sheet asset and liability at each reporting date.

Their proposals for lessor accounting are beginning to take shape, but remain less definite at this stage:

• The balance sheet to show assets for the ownership of the asset and also for the amounts receivable from the lessee, together with a liability for the performance obligation to allow the lessee use of the asset;
• The initial measurement of the asset in respect of amounts receivable from the lessee should be the present value of those amounts. It seems likely that subsequent measurement will be on the amortised cost basis using an effective interest approach;
• The initial measurement of the liability in respect of the performance obligation should equal the value given to the amounts receivable from the lessee and the subsequent measurement of this liability should reflect the decrease in the lessor’s obligation to permit the lessee to use the asset;
• The lessor should not be permitted to recognise revenue at the start of a lease;
• The treatment by the lessor of lessee options and contingent rentals should mirror those for lessees.

The developments that will take place over the next few months will be important to lessors in terms of the attractiveness of leasing as a product with lease structures, profit recognition and capital requirements all being heavily affected by the outcome.

For more detail on the issues covered by this report please contact George Tonks on +44 (0)845 003 1000 or e-mail: george.tonks@invigors.com.

Italy - has the market now turned the corner?

Authored by Alessandro Iacono, Invigors Italy

Italy is the third largest country in Europe in terms of leasing volumes generating 38.8bn Euro of new business in 2008, somewhat less than the UK and Germany but slightly ahead of France.

Following four years of continuous growth, the leasing industry in Italy experienced its first real reversal in 2008 with a fall in new business volumes of 20.8% compared to the previous year. All asset categories were affected but to a differing degree, worst hit was the real estate sector which contracted by 32.4% in that year. This has always been the largest segment of the leasing industry in Italy, unlike Germany and the UK accounting for 15bn Euro of new business in 2008.

The large drop in the leasing market outpaced the much smaller fall of 3.0% in gross fixed investments which occurred in 2008 which resulted in an overall decline in the lease penetration rate to 11.8%, back down to 2001 levels. The reason for this decline is clear, a combination of reduced capital investment and the credit crunch in financial services.

These changes also brought about some structural changes to the industry. The leasing sector in Italy has always been very polarised, with the major funders accounting for over half of new business volumes and a large number of much smaller players accounting for the remainder. In 2008 the top ten largest funders increased their share of new lending to 68% of the total market, up from 63% in 2007. It was clear that the larger, better capitalised funders, typically with their origins in banking, were much better placed to ride out the crisis than their small-medium competitors, many of which have experienced significant difficulty causing some to virtually cease new lending activities.

So, the Italian asset finance market was declining in 2008 even before the storm hit other European countries. What's happened in 2009? The downturn in lending accelerated dramatically in the fourth quarter of 2008 and continued in the first two quarters of 2009. However there were some weak signs of recovery in Q3/2009 and anecdotal evidence suggests that this has continued into Q4. Perhaps we can tentatively conclude that the most acute phase of the downturn has now passed, especially as recent estimates of new orders, inventories and also industrial production levels are showing weak but significant signs of recovery.

Moreover, general availability of credit appears to be improving although it remains tight. Recent surveys show that the number of companies unable to obtain funding from various credit institutions has remained stable and is no longer worsening. As we have seen previously, with the level of new leasing business closely correlated to fixed capital investment, as the latter improves in 2010 then we can expect an ongoing, though difficult, recovery in the leasing market.

If you're interested in exploring opportunities in the Italian leasing market, contact Alessandro Iacono on +39 (06) 955 57 317 or e-mail: alessandro.iacono@invigors.com.

Green Assets Financing in Germany – a Strategy out of the Crisis?

Authored by Ludwig Fischer, Invigors Germany

Given the uncertain outlook for the German asset finance market, new ideas and strategies are required in order to escape from the current downward spiral. Is "Green Asset Financing" a strategy out of the crisis?

Although most of the major leasing companies have been willing to fund this market for a couple of years, “green assets” still only account for marginal business volumes compared to traditional assets. Nevertheless Germany has been an early adopter in this market and the current worldwide campaigns against global warming will further support investments in biomass, solar, wind and hydro energy production assets. Production of renewable energy is a significant and fast growing business with total turnover of 24.6 billion euro in 2007. Beside the big projects like off-shore wind farms there are numerous smaller investments in local solar photovoltaic (PV) installations, combined heat and power plants or biomass energy production systems which fall well within the standard ticket sizes of the leasing industry.

Investment in the renewable energy market requires that leasing companies take into account different technical, legal and economical considerations compared to traditional assets like production machinery, cars, vans or IT. Most of the installations are non-standardized but individual plants and installations are designed and constructed with standard components. Consequently the engineering concept and design needs to be evaluated in order to determine the level of performance risk associated with funding these assets.

With premises-mounted solar PV systems legal considerations need to be taken into account in order to ensure that the assets are not intrinsically tied to the real estate asset on which they are installed. Or in the case of energy contracts for combined heat and power plants, a careful evaluation of the detailed contract terms with the third parties is crucial as typically the contractor’s creditworthiness is insufficient for the funding required. The assignment of a back up service provider can help to reduce this credit risk.

From a RoI perspective almost no investment in renewable energy technologies can currently compete with those based on traditional energies without some form of subsidy. Consequently a detailed knowledge of the terms and conditions (and their changes over the course of time) of renewables incentive programs like the German EEG (“Gesetz zum Vorrang erneuerbarer Energien” – a law which promotes investment in renewable energy sources through the use of feed-in tariffs) is essential in order to evaluate the rate of return on the investment.

Leasing companies have to build up their own expertise in these areas. But the complexity of the market often requires external consultancy and support in order to assess the legal, technical and economic risks of both the generic technologies and specific projects. There are individual specialists and associations available in the German market which some leasing companies are already cooperating with. Creating a specialist centre of excellence which combines solid sales and back office expertise in the renewable energy market would allow leasing companies to mitigate the specific risks and find new sustainable growth opportunities.

Finally there is one common challenge which is faced by almost all investments in renewable energies - lengthy RoI cycles require long payment terms which often do not match leasing companies’ funding capabilities. Capital market funding is often limited to 7-8 years whereas investments in solar PV for example would require 15 years or longer. At this level government intervention is necessary to encourage institutions like the publicly owned KfW to expand their economic development schemes by funding leasing companies in green asset projects in order to boost this business and promote environmental investments.

Are you interested in learning more about green asset funding in Germany? Do you think this could have implications for other markets in Europe? To learn more contact Ludwig Fischer on +49 7073 913 265 or e-mail ludwig.fischer@invigors.com

Outlook for 2010 - Poised for Growth?

What is the outlook for 2010? Is the industry now poised for a return to growth or facing a period of stagnation or even further decline? After 2009 even stagnation would seem like good news, a quick review of national leasing associations highlights some dramatic falls in new business volumes during the year. For example, in France ASF reported that equipment finance is 25% down year-on-year in Q3, with similar falls in Germany reported by BDL. In Italy ASSILEA is forecasting finance volumes down 23% for the year while in the UK, data just published by the FLA shows that business finance was down 33% year-on-year in October. The year looks like ending even worse in Eastern Europe with leasing down over 50% in the Czech Republic and over 70% in Romania.

Despite the bad news this year it appears that the industry feels more confident about 2010. In the recent European Asset Finance Business Confidence survey published by Invigors and Leasing Life, respondents expressed a more optimistic view of the next six months, particularly when compared to the previous survey undertaken in April. Last month nearly two-thirds expected new business volumes to increase over the next six months, up from 45% in April.

The most recent survey also suggests that lessors are gaining better control over bad debt. Only 35% of respondents expected bad debt to increase in the next six months, down from a high of 77% in April. 25% anticipated bad debt will fall while the remainder expected no change. A combination of rising new business volumes and improving bad debt is feeding through into expectations of increased profits. Half of those surveyed in November believe that their organisation's profits will increase over the next six months, up from 40% in April.

Although business volumes are expected to grow in 2010, it appears that the improvement in margins, identified in previous surveys, has reached a plateau for many. Only 27% of respondents expected margins to improve over the next six months, just half the same proportion in April. 48% predicted margins to remain the same, double the number in April.

With business volumes, bad debt and profits moving in the right direction, more financiers are now targeting growth. Two thirds of respondents stated that their companies were specifically seeking growth, an increase from just 40% in April. The market sectors targeted varied considerably, though healthcare and green assets such as waste management and renewable energy appear to be popular.

It is apparent from the comments made that some funders have weathered the recession much better than others and are now poised for growth. These businesses plan to achieve growth at the expense of the competition whether the overall market for asset finance recovers, or remains at its current low level. It is clear that agile and well-funded businesses are best placed to respond to the rapidly changing economic and competitive environment while their less adaptable competitors will continue to shrink their business and withdraw from sectors of the market from necessity rather than choice.