Insolvency?
When I am writing this column I know I’m talking to the industry
rather to its clients. Every so often a topic comes up that is best
aired within the industry and would not go down too well if read by
the industry’s clients. My subject this month fits squarely into
that category.
I was chatting to an
industry insider who said something that stunned me. “You know,
Colin,” he said, “a few contract hire companies are now technically
insolvent, they just haven’t recognised it yet”.
Can that be true?
I have seen evidence of declining margins as contract hire
companies have struggled to keep up their market shares, and many
players are experiencing reduced order levels. The downturn has
lasted more than a year so it is having an effect on current
reported profitability – but surely not by enough to make any
business insolvent.
Portfolio of problems
After an 11 per cent decline in the last year (though I have
seen conflicting figures) used vehicle prices may be stabilising.
These price reductions have had a direct impact on contract hire
companies’ bottom lines. Assuming an average contract hire company
is geared 10:1, (though in many cases they are geared up much more
than this by their bank parent companies,) an 11 per cent decline
in used vehicle values will certainly dent a company’s share
capital and reserves but will not of itself make it
insolvent.
That leaves us looking at the rest of the portfolio, and whether
the residuals have been set correctly. Around a third of the
industry’s fleet will have come off lease since the credit crunch
started, and these vehicles will have suffered the 11 per cent
reduction referred to above.
The remaining two-thirds of the portfolio that existed 12 months
ago is yet to come off lease. For many companies we are moving into
the time of year when the auditors will be looking at the assets on
the balance sheet and deciding whether they are valued correctly.
Most contract hire companies will have to make provisions for RV
losses. However, whilst an 11 per cent write-down would cause most
contract hire companies’ results to go into the red, this would
still not make them insolvent. To do that the number would need to
be nearer 30 per cent.
Looking at business written in the last year or so, if a player
had taken a particularly aggressive position on RVs in 2007, or had
not moved its RVs down significantly in 2008, this could require
very large provisions now that would wipe out a sizeable chunk of
the company’s equity. But not all of it.
So no, I don’t know of any contract hire companies that are
insolvent or are likely to become so in the foreseeable future.
What I do know, however, is that the situation is uncomfortable for
many players (losses, provisions, and fierce competition as
mentioned above, tightening of credit lines, and so on). And things
could get a whole lot worse if used vehicle prices decline
sharply.
Professor Colin Tourick, fleet industry consultant,
www.tourick.com
