Post on 15-Dec-2015
Capacity for Economic RecoveryCFLA 2009 Annual Conference - Ottawa
Funding
What our industry needs for a sustainable recovery…
Capacity for Economic RecoveryCFLA 2009 Annual Conference - Ottawa
Optimism and Liquidity are not the same thing!
Capacity for Economic RecoveryCFLA 2009 Annual Conference - Ottawa
CFLA Thanks the Following:• CIBC World Markets• Royal Bank of Canada• GE Capital• CIT• MCAP• National Leasing Group• Foss National Leasing• Leasemaster (JPLM)• ADD Capital• Blue Chip Leasing• TAO
• Honda Finance Canada• GMACFS• Ford Credit• Somerville National• Centre For Spatial
Economics• DBRS• S&P• Clubb Finance• PayNet
Capacity for Economic RecoveryCFLA 2009 Annual Conference - Ottawa
Today's Agenda
• Consequences of a weakened Commercial Finance Industry for Canadian Business and for the Canadian Economy
• The Canadian Credit Crisis and the impact on the Vehicle and Equipment Finance Industry
• What is needed to maintain the health of the industry– Status of Available Sources of Funding– Long Term Supply Stability – Market Must Stabilize
Capacity for Economic RecoveryCFLA 2009 Annual Conference - Ottawa
Canadian Business CreditSource: 2008 Federal Budget- Minister of Finance
• Business Credit Outstandingin 2007
Billions of dollars Billions of dollars
• Cumulative Change in Business Credit Since August 2008
-15
-10
-5
0
5
10
15
20
25
30
35
40
CharteredBanks
Equity Non-equityFinancialMarkets
Other
Sept Oct Nov Dec
Equity $306B
Other$90B
Chartered Banks $271B
Non-equity
Financial Markets $458B
Capacity for Economic RecoveryCFLA 2009 Annual Conference - Ottawa
Effective Flow of Capital to Canadian Business is critical to the economic recovery
• Independent and Captive Finance Companies are effective at “push” strategies for deploying capital to SME’s
• Bank Lessors traditionally use a “Pull” strategy
• The combination of both strategies optimizes the amount of funding provided to main street Canada
• Without all channels the economic recovery will likely stall
Capacity for Economic RecoveryCFLA 2009 Annual Conference - Ottawa
Industry Canada Small Business Quarterly, August 2009
• Small businesses accounted for 97.8 percent of employer establishments (in Canada)
• Small businesses are defined as having fewer than 100 employees, medium-sized businesses having 100 to 499 employees and large businesses having 500 or more employees
• There are 2,314,563 businesses that fit this category
Capacity for Economic RecoveryCFLA 2009 Annual Conference - Ottawa
Multiple Distribution ChannelsCritical to optimizing amount of available capital
• Domestic Bank Lessors• Foreign Bank Lessor
– Wells Fargo, B of A – Key
• International Lease and Finance Co.’s– GE Capital, DLL, CIT– CSI, ARI, PHH
• Domestic Independents– NLG, MCAP, Equirex– Foss, JPLM, Jim Pattison,
TransportAction
• Captive Vehicle Finance– Ford, GMACFS– Honda, Toyota, Nissan,
VW, Mercedes, BMW
• Captive Equipment– Dell, Cisco, Pitney Bowes,
IBM– CAT, John Deere, CNH
• Floor Planning– Clubb Finance
Capacity for Economic RecoveryCFLA 2009 Annual Conference - Ottawa
Canadian Bankers Association August 2009, Pre Budget Consultations – Submission to the
House of Commons Standing Committee on Finance
• “In the fall of 2008, just as the global financing market were at their most fragile, Canadian bank lending to businesses accelerated as other sources of financing contracted. Despite the fact that banks were increasing their share of the business financing market, they were not able to fill the credit gap completely.”
Capacity for Economic RecoveryCFLA 2009 Annual Conference - Ottawa
Interviews
• Finance Companies– Small/Medium
Independent Equipment
– Small/Medium Independent Vehicle
– Large Non Bank – Consumer Vehicle
Retail– Fleet Vehicles
• Funding Sources– Bank Sponsored
Conduits– Life Insurance
Companies– Non-Bank Conduits– Export Development
Canada (EDC)
Capacity for Economic RecoveryCFLA 2009 Annual Conference - Ottawa
Why funding is still constrained!
The Paradigm Shift is still in process
Capacity for Economic RecoveryCFLA 2009 Annual Conference - Ottawa
Sovereign wealth funds
Sovereign wealth funds
The return of the “Dinosaurs”
Institutional Investors
Institutional Investors
DepositorsDepositors
Pension fundsPension funds
Foreign pension funds
Foreign pension funds
Direct originators
with placement capabilities
Direct originators
with placement capabilities
Commercial Finance
Borrowers
Commercial Finance
Borrowers
BanksBanks
SIVsSIVs
Asset backed
securities
Asset backed
securitiesConduitsConduits
Warehouse Lines
Warehouse Lines
The “Shadow Banking” Era
Commercial Finance
Borrowers
Commercial Finance
Borrowers
Institutional Investors
Institutional Investors
DepositorsDepositors
Pension fundsPension funds
Capacity for Economic RecoveryCFLA 2009 Annual Conference - Ottawa
Current OpinionTEC (Canadian CEO Organization) Anderson Economic Report August 2009.
• A major concern with sustained recovery forecasts is whether they adequately incorporate the collapse in securitized credit flows and the longer-term implications of a U.S. balance sheet recession. Econometric forecasting models using time series data over the last 60 years do not know how to deal with these issues. In these models, if you keep interest rates low enough for long enough, you will get a “V-shaped” economic recovery.
• It (the Bank of Canada) finds that the level of its FCI is now above its 10-year average, implying that credit conditions have returned to normal. We find this hard to believe and are worried that the Bank of Canada is underestimating the problems in financial markets.
Capacity for Economic RecoveryCFLA 2009 Annual Conference - Ottawa
Current Sentiment
• Wholesale funding and debt securitization is still basically shut-down on both sides of the border. Toxic collateralized debt obligations (CDO’s) are still toxic. The financial system still has serious design flaws left over from creative financing. The shadow banking system is not working and it supplied over half of the credit growth in the U.S. (and a large part in Canada) over the past decade. Large corporations can access the debt markets but small and medium-sized businesses are finding their access to credit reduced. Commercial real estate borrowers facing debt repayments are unable to roll-over debt. Households and firms will continue to emphasize debt minimization. The next decade will not see a return of leveraged growth. It will take years for credit flows to return to normal.
– TEC (Canadian CEO Organization) Anderson Economic Report August 2009.
Capacity for Economic RecoveryCFLA 2009 Annual Conference - Ottawa
Outstanding Commercial Paper – CanadaPermission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.
0
20
40
60
80
100
120
1993 1995 1997 1999 2001 2003 2005 2007 2009
Non-ABCP
ABCP
Bil.
C$
~ C$32 BilDefaultedNonbank
ABCP
Subject toMontreal
RestructuringProcess
Prior to Dec. 2007, Canadian ABCP not rated by Standard & Poor’s
Note: Data for 2009 as of June 30th.Source: Bank of Canada
Capacity for Economic RecoveryCFLA 2009 Annual Conference - Ottawa
General Status of Funding
Type of Financing Terms Pricing
Portfolio Sales Loss Reserves Discount to Book
Warehouse Line Tighter Rate Lower
Spread Higher
Bank Term Debt Tighter Rate Lower
Spread Higher
Private Securitization Tighter Higher
ABS Tighter-If Available Higher
ABCP Tighter – If Available Higher
Secured Credit Facility Positive Revisions 150bps over GoC Bond
EDC Undefined Undetermined
Capacity for Economic RecoveryCFLA 2009 Annual Conference - Ottawa
Lost Funding CapacityGeneral Policy Change
Bank Lines Reduced Operating Credit Lines reviewed and reduced to “average historical usage”
Bank Term Debt Facilities Reduced
Historical Available Credit Reduced or cancelled.
Multiple Ratings from agencies
Need for two or more ratings eliminates access for many small finance corporations with excellent historical performance
Securitization Advance Rate Reduced
Amount advanced per funding reduced requiring higher equity participation from Lessor
Change to Debt Equity Ratios
Change in ratios requires equity to increase capacity at a time when equity is expensive.
Concentration by Lessee, Vendor and SIC
Maximum Exposure per customer has decreased
Eligible Assets Restrictions on Vehicle Make, Model and Brand, Restriction on types of equipment
Minimum Credit Standards
Higher Credit Scores required to qualify for funding
Documentation Requirements
Higher level of due diligence and therefore greater administrative costs.
Capacity for Economic RecoveryCFLA 2009 Annual Conference - Ottawa
General Status of Funding
• Portfolio Sales: Buyers are looking for deep discounts. Sellers are those in need of cash
• Warehouse Lines: Independent Commercial Finance is still nervous about bank commitment to maintaining or increasing warehouse facilities without a demonstrated growth in take out capacity (ABCP/ABS)
• Bank Term Debt: Available to existing clients often with strong pricing but restrictive terms
Capacity for Economic RecoveryCFLA 2009 Annual Conference - Ottawa
Private Securitization
• Small and Medium sized vehicle and equipment lessors have utilized the leverage and pricing of this product to build significant market share.
• The insurance companies funding this program have continued to support existing clients but the insurance industry is under significant strain and it has impacted terms and supply.
Capacity for Economic RecoveryCFLA 2009 Annual Conference - Ottawa
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Date
Life Insurance Bond vs Canada Bond
SLFCN 4.95 06/36 Corp CAN 4 06/01/16 Corp
Capacity for Economic RecoveryCFLA 2009 Annual Conference - Ottawa
Spread Changes
Insurance Model Price Trends
0.25%
3.75%
7.11%7.49%
4.65%
1.32%
1.75%2.66%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
Feb-08
Mar-08
Apr-08
May-08
Jun-08
Jul-08 Aug-08
Sep-08
Oct-08
Nov-08
Dec-08
Jan-09
Feb-09
Mar-09
Apr-09
May-09
Jun-09
Jul-09
As of date
Inte
rest
Rat
e
Bank of Canada Prime
Cost of Funds -Securitization Facility
3yr Govt of CanadaBenchmark Bond Yield
Capacity for Economic RecoveryCFLA 2009 Annual Conference - Ottawa
Private Securitization
• Fewer Players Expecting Greater Performance
• Credit Box has Tightened
• Greater monitoring
• Pricing beginning to Stabilize
• Support for Existing Clients
Capacity for Economic RecoveryCFLA 2009 Annual Conference - Ottawa
ABCP and ABS Market
• New Realities– Global Liquidity Standard-A Limited Resource
– More Bond Ratings
– Greater Transparency
– Much Greater Fees and Administration Expense
– Higher Pricing
– Term more Popular than CP
Capacity for Economic RecoveryCFLA 2009 Annual Conference - Ottawa
2007 ABCP Market
• Largest Funding Component of the Canadian Commercial Paper Market
• 50% of the non-government short-term debt market
• 21 Conduit Sponsors – 65 multi-seller ABCP Programs
• No Rating Downgrades
Capacity for Economic RecoveryCFLA 2009 Annual Conference - Ottawa
Current OpinionStandard and Poor’s Ratings Digest August 17, 2009
“Canadian Finance Companies are Tapping Foreign ABCP Conduits”
• “Domestic funding for Canadian ABCP has become more difficult to obtain. The decline which began in Mid 2007, is evident in the Bank of Canada’s monthly data. The decline continued even after the completion of the nonbank ABCP restructuring in January 2009.”
Capacity for Economic RecoveryCFLA 2009 Annual Conference - Ottawa
Current Supply vs. Future Demand
• Access to supply now favors banks as a result of government support
• ABCP and ABS markets remain inadequate
• Loss of Non Bank Sponsored ABCP and ABS appears permanent.
• Diversity of Distribution is “at risk”
Secured Credit Facility
• Intention and Commitment Strong
• September 17th Revisions Show Potential
• Success Needs to Be Measured by Flow of Funds
• Most Domestic Commercial Finance Companies are still ineligible and are now at a greater disadvantage.
• Curious Hidden Message …
Revisions to Secured Credit Facility Program
• Risk of Refinancing at Bullet Eliminated (True Match Financing of Cash Flows).
• Ability to customize documentation.
• Eligible Assets Expanded
• Standby Servicer
• Pricing and Allocation Process Amended.
Capacity for Economic RecoveryCFLA 2009 Annual Conference - Ottawa
Multiple Distribution ChannelsCritical to optimizing amount of available capital
• Domestic Bank Lessors• Foreign Bank Lessor
– Wells Fargo, B of A – Key
• International Lease and Finance Co.’s– GE Capital, DLL, CIT– CSI, ARI, PHH
• Domestic Independents– NLG, MCAP, Equirex– Foss, JPLM, Jim Pattison,
TransportAction
• Captive Vehicle Finance– Ford, GMACFS– Honda, Toyota, Nissan,
VW, Mercedes, BMW
• Captive Equipment– Dell, Cisco, Pitney Bowes,
IBM– CAT, John Deere, CNH
• Floor Planning– Clubb Finance
Domestic Finance Companies Insulate From Risk of Global Exits
• ABN AMRO• IRWIN Commercial
Finance• KEY Equipment
Finance• GE Capital
• National City Capital• CITI Leasing Canada• CIT• GMAC• Chrysler• CoActiv
Issues Remain
• Domestic Canadian Finance Companies are now at a major disadvantage.
• Available business credit and the disparity of terms need to be closely monitored.
• No clear replacement for non-bank sponsored ABS and ABCP sales exists.
Capacity for Economic RecoveryCFLA 2009 Annual Conference - Ottawa
Export Development Canada
• Mandate has been expanded to flow to greater number of companies
• Finance Companies need to justify an “Export” related Financing Need
• Existing Relationship with Chartered Banks has enabled flow of funds
• No Structure to flow funding to Non-Banks
The Bottom Line
• Domestic Independent Finance Companies Are At an Artificially Steep Disadvantage
• Diverse Distribution Channels are critical to getting funding to Main Street
• Vehicle and Equipment ABS and ABCP are fundamentally sound but buyers remain scarce.
• Fear is still driving the market. Secured Credit Facility will help restore ABCP and ABS supply and terms.