Credit Crunch: The fleet finance outlook The general perception is that car leasing and contract hire is less exposed to credit crunch concerns compared with consumer car finance The packaging of collateralised debt obligations for onward sale in financial markets whether through securitisation bond issues, or through the bank conduit vehicles of the kind that have hit liquidity problems in the funding of mortgage loan books has been used fairly widely in consumer car lending, but much less so in leasing and contract hire.
The general perception is that car leasing and contract hire is
less exposed to “credit crunch” concerns compared with consumer car
finance. The packaging of collateralised debt obligations for
onward sale in financial markets – whether through securitisation
bond issues, or through the bank conduit vehicles of the kind that
have hit liquidity problems in the funding of mortgage loan books –
has been used fairly widely in consumer car lending, but much less
so in leasing and contract hire.
As motor finance consultant Colin Tourick nevertheless noted,
“Banks and other financial institutions are the major funders of
fleet leasing companies. So the question is whether the credit
crunch will cause them to reappraise their lending. I hope and
expect that funders will come to the view that this is an excellent
market in which to lend, and that they need not alter their
strategies.”
George Tonks, partner at the Invigors consultancy, sounded a
slightly more cautious note. “We can expect to see more realistic
lending criteria, with a widening of margins for credit risk,
although the banks must lend in some way in order to profit from
their deposit base. Within their own credit business banks will
have a generally lower risk appetite. This could lead them to write
more leasing and HP type business at the expense of unsecured loans
– but also to prefer shorter finance periods”, he said.
Tonks expected independent lessors to find it rather more
challenging to compete against banks and the better capitalised of
the manufacturer captives in current conditions. “Where independent
lessors are funded by banks, it is the funders’ perceptions of risk
that matter, rather than the lessors’ own views. It will come down
to issues such as the nature and quality of the lessor’s customers,
its level of reserves available to absorb bad debts and the quality
of its management”, he said.
As to whether underlying credit risk in motor leasing and
contract hire business has deteriorated since before the credit
crunch, Tourick said: “The jury is still out. While there are
indicators of greater financial pressure on consumers within the
past few months, the UK economy is still growing and there is not
much evidence of an imminent recession. Most well managed lessors
should find little change in their non-performing assets, at least
for the time being. Even if things do get tough they have good
asset security in the vehicles. Margins probably should increase,
but not necessarily because the credit risk has worsened. Margins
have been too low anyway.”
See p10 for more on the credit crunch
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