The credit crunch and contract hire

Will the credit crunch affect the vehicle leasing market? It’s a
question that has popped up in my work a couple of times in the
last few weeks. 

Problems in the US sub-prime mortgage market have made banks
less willing to lend to each other, and the interconnectedness of
international banks has made this problem spill over into the UK
market. If a bank loses £500m on sub-prime debts, and is geared say
10:1, those losses will stop it from lending £5bn, which is a large
number indeed. This credit tightness encourages banks to focus
their lending on higher quality customers or to increase their
rates, or both. Hence falling UK base rates have not led to falling
UK mortgage rates. In fact, quite the reverse.

Some privately owned contract hire companies – mainly those
outside the top 50 – will find their funders reduce the level of
credit on offer or increase their lending rates. This will squeeze
lessor profitability and make these companies less creditworthy. A
nasty vicious circle indeed. 

Bank-owned lessors will feel the credit squeeze too, with their
parent companies having less cash to play with and therefore
requiring higher returns for the use of group resources. 

Manufacturer-owned lessors may also be affected. Their parent
companies have significant debt mountains and are likely to see a
tightening of their own funding lines.

The bright side?

This of course is a pessimistic prognosis. I’m rather hopeful
about the government’s plan to inject funding against the security
of the banks’ assets. This is a rather strange arrangement: It
seems a government cannot bail out struggling lenders (e.g.
Northern Rock) without a deafening roar of complaint from the press
and the opposition, but when the government announced that this new
package would be secured against banks’ assets there was barely a
murmur of dissent, even though those assets are likely to be
property-related. House prices are falling and many banks have
portfolios full of recently-granted mortgages where 95 per cent,
100 per cent or even more of the house purchase price was advanced.
So the taxpayer may be getting less security from these assets than
might have been thought.

However, I’m not knocking this idea. I think it’s brave and if
it does the trick we will all be delighted. £50bn has been
mentioned so far, a not insignificant amount. If this works, and
the deal is good enough for the banks to use it, much-needed
liquidity will be delivered into the market and the problem may
just go away.

The credit crunch has taken the gloss off a period when contract
hire companies might have expected a small boost in business. Even
though the economic outlook is not all that rosy we now understand
that the Budget changed the economics of company car purchase.
Companies that previously bought higher value company cars outright
are now better off using contract hire instead for all but the
highest CO2 cars. Let’s hope the industry trumpets this advantage
loud and clear to its clients.

Colin Tourick

Motor Finance Issue: 43 – May 08
Published for the web: May 27 08 11:44
Last Updated: May 27 08 11:50