Default levels rise

The recession is entering the ugly stage for fleet lessors. Stage
one, of course, hit a year ago when lessors suddenly discovered
their funding costs began to rise, their funders began to reduce
the availability of debt and the used car market began to slide.
All of those effects have been well documented in the press and in
these pages, so we won’t revisit them now. 

Colin TourickStage two arrived in the
spring when lessors found that their clients were ordering fewer
cars. Demand for company cars is directly related to employment
levels and the general economic outlook. Demand has cooled in most
sectors of the economy and even the most optimistic boards in the
most solid companies have realised they have to act to protect
their businesses. Employment levels are dropping and companies are
suffering, all of which augurs badly for the contract hire
companies that supply their vehicles. In this situation, I’m not
sure it helps when ministers openly use the word ‘crisis’, but
that’s what we’ve got.

And so we enter stage three, where lessors find their clients
pay late, not at all, or go bust. This was brought home to me
vividly last week when the MD of a large contract hire company
said: “Colin, on Monday of this week we received notice that 27 of
our clients have gone into administration.” 

I hate this stage. It involves promises that aren’t kept,
uncertainty for the lessor, repossessions, expense, provisions and
losses. And I am pretty sure we are just seeing the beginning of
 The contract hire industry is reacting in a variety of ways.
As in war, the first casualty of a recession seems to be truth, and
there’s no question about it, there is an awful lot of gossip about
at present, much of which is far from the truth.

Missing the gist

It is said, probably apocryphally but nonetheless insightfully,
that in World War I the message “Send reinforcements, we’re going
to advance” ended up being received as “Send three and four-pence,
we’re going to a dance”, but at least everybody along that
communication chain had a shared interest in the correct message
arriving. Currently, “we’re going to concentrate on our core
clients rather than look for new ones” is being delivered  as
“they’re no longer going to fund all manufacturers’ cars,” “they’ve
run out of cash and are in trouble,” and even “they are unable to
continue trading.” 

The jury is out on whether the Chancellor’s economic stimulation
package will achieve its desired objectives. There’s a lot of worry
about the debt burden the country will be left with in a few years
time once and the effect on sterling. A country that imports a lot
cannot endure a poor exchange rate for long without inflation
rising. Nonetheless, the new lower VAT rate will give a welcome
short-term boost to fleet lessors who were suffering from the
decline in used car prices: they will now keep more of the sales
price of each vehicle and hand over less to HMRC. Good!

Professor Colin Tourick, fleet management