201310 White Clarke Group Usa Asset and Auto Finance Country Survey
-
Upload
adrian-ilie -
Category
Documents
-
view
224 -
download
0
Transcript of 201310 White Clarke Group Usa Asset and Auto Finance Country Survey
-
8/14/2019 201310 White Clarke Group Usa Asset and Auto Finance Country Survey
1/39
ASSET FINANCE INTERNATIONAL
IN ASSOCIATION WITH
WHITE CLARKE GROUP
White Clarke Group
United States Asset and Auto
Finance Country Survey
-
8/14/2019 201310 White Clarke Group Usa Asset and Auto Finance Country Survey
2/39
White Clarke Group
White Clarke Group is the market leader in software solutions and business
consultancy to the automotive and asset finance sector for retail, fleet and
wholesale. WCG solutions enable end-to-end credit processing and
administration to streamline business practice, cut operational cost and
deliver outstanding customer service. WCG has a twenty one year track record
of leadership and innovation in finance technology, consultancy and new
market entry. Clients value WCG industry knowledge, market intelligence and
innovation. The company employs some 500 finance and technology
professionals, with offices in the UK, USA, Canada, China, Australia, Austria
and Germany.
White Clarke Group publish the Global Leasing Report, which is part of The
World Leasing Yearbook. To download a copy please go to:
http://www.whiteclarkegroup.com/knowledge-centre/category/global_leasing_report
Acknowledgements
Brendan Gleeson, group executive vice president, White Clarke Group; Pascal
Bouillon, managing director, Socit Gnrale Equipment Finance (SGEF) USA;
Crit DeMent, chairman and CEO, LEAF Commercial Capital; Jonathan Dodds,
chief executive officer - Americas, White Clarke Group; Chris Enbom, CEO,
Allegiant Partners; Gary Amos, head of Commercial Finance Americas,
Siemens Financial Services (SFS); Mike Pitcher, president and CEO, LeasePlan
USA; Ken Adams, vice president, Business Development Americas, White
Clarke Group; Bill Verhelle, CEO, First American Equipment Finance; Jeff Berg,
US country manager, De Lage Landen; Adam Warner, president, Key
Equipment Finance; Rick Remiker, ELFA chairman and executive vice president
and group head of Specialty Banking, The Huntington National Bank; Dave
Mirsky, CEO, Pacific Rim Capital; Bill Bosco, principal, Leasing 101; Marguerite
Watanabe, president, Connections Insights.http://www.whiteclarkegroup.com/
http://www.assetfinanceinternational.com
Publisher: Edward Peck
Editor: Brian Rogerson
Author: Nigel Carn
Asset Finance International Ltd.,
39 Manor Way,
London SE3 9XG
UNITED KINGDOM
Telephone:+44 (0) 207 617 7830
Asset Finance International, 2013, All rights reserved No part of this publication may be reproduced or used
in any form or by any means graphic; electronic; or mechanical, including photocopying, recording, taping or
information storage and retrieval systems without the written permission from the publishers.
UNITED STATES ASSET ANDAUTO FINANCE SURVEY
-
8/14/2019 201310 White Clarke Group Usa Asset and Auto Finance Country Survey
3/39
Contents
Introduction 04
The leasing market in United States 06
Annual new business volumes 06- by organization type
- by market segment
- by size of organization
- by business model
- by origination channel
- by end user industry
Auto finance 11
Economic overview and outlook 13
Projected GDP 14
Business confidence 15Global competitiveness index 16
Industry view of the leasing market 20
Current economic situation - effect on equipment finance 23
Market drivers 41
Market challenges 25
Growth prospects 27
Outlook for SMEs 28
Sector prospects 30
Floorplan finance 30
Industry consolidation 31M&A scenarios 32
Regulatory issues 33
Accounting for leases 34
US view on lease accounting 37
Bill Bosco, Leasing 101
UNITED STATES ASSET ANDAUTO FINANCE SURVEY
-
8/14/2019 201310 White Clarke Group Usa Asset and Auto Finance Country Survey
4/39
UNITED STATES ASSET ANDAUTO FINANCE SURVEY
Introduction
This is the second Asset Finance International survey of the US equipment and
auto finance industry. A year ago, the issues that caused concern in the industry
included the prospect of an impasse between the President and Congress over
fiscal policy (the so-called fiscal cliff), the ongoing convulsions in the eurozone
and a looming slowdown of Chinas economy. All this could have had a negative
effect on the tentative US recovery, but the longer-term outlook was generally
positive.
Now, 12 months on, some concerns have eased but other problems have
remained resolutely unresolved. The economic revival has been maintained, albeit
at a moderate rate, but enough for the Federal Reserve to announce that it is
considering when to start reducing its programme of quantitative easing (QE3).
This in itself was enough to send a temporary shiver through the stock markets,
but their overall performance this year has been strong. The Fed will start reducingQE3, but the timing greatly depends on the pace and resilience of the economic
recovery.
Meanwhile, the global headwinds remain, and now the US economy is undergoing
further trauma following another impasse over the debt ceiling and, as this survey
went to press, this has resulted in a Federal Government shutdown and only a
short time to avoid an absolute worse-case scenario of default when the
government borrowing limit is reached. All those outside the US, and the majority
within, hope and expect a solution will be reached, but will it again be only
temporary?
4
-
8/14/2019 201310 White Clarke Group Usa Asset and Auto Finance Country Survey
5/39
UNITED STATES ASSET ANDAUTO FINANCE SURVEY
Assuming such a solution is found, the seemingly insuperable differences
between President Obama and some Republicans in Congress will likely continue
to result in a lack of resolution of important policy issues.
Business confidence
None of this is good news for businesses, particularly small businesses and their
customers that need economic growth and stability, and access to finance. Formany of the small and medium-sized enterprises (SMEs) that form the core of the
US economy, traditional sources of credit such as banks have remained difficult to
tap. The asset finance and leasing market, however, is expanding ahead of the
economy and is anticipating accelerating growth in the second half of 2013 and
through 2014.
Although this rate of growth is still only expected to move up slowly through the
gears, there are signs that business confidence is on the rise again, with a greater
percentage of SMEs planning to make capital outlays in the near term. Many
larger firms have access to pent-up capital that, given a more positive economic
outlook, may be invested in equipment. Investment is likely to be encouraged
further by the prospect of the Fed maintaining short-term interest rates at close to
zero.
It should not be forgotten that the US economy is still the largest in the world by
a considerable margin, and that creates commercial opportunities and benefits.
The fundamentals are strong, and many features continue to make US companies
enviably productive, such as strength in research and development, innovation,
and flexibility.
The US asset finance market is also the largest globally by a wide margin, and
although the recession saw some streamlining of operations, there is room for
new entrants. Overall, provision of loans to business has remained muted, but
there is available capital and lessors that are more willing to lend than banks. The
opportunities are there for lessors, and the longer-term prospects are for the
upward trend to gain momentum.
About this survey
This Country Survey aims to provide a balanced view of the equipment finance
and auto leasing market in the US. The survey covers the following areas:
A summary of US leasing activity;
The current economic climate and the incentives for and constraints on doing
business;
Insights from key industry figures on the market, its outlook and the
challenges and opportunities that face it; and
The view on the latest proposals to improve lease accounting.
5
-
8/14/2019 201310 White Clarke Group Usa Asset and Auto Finance Country Survey
6/39
UNITED STATES ASSET ANDAUTO FINANCE SURVEY
The US Leasing Industry
The equipment finance sector is a significant contributor to the US economy.
Investment in equipment and software is projected to total $1.3 trillion in
2013, of which 55% ($742bn) is expected to be financed through loans, leases
and lines of credit. In 2014, the market is predicted to grow by $36bn to
$778bn an increase of just under 5%, which is considerably higher than
predicted GDP growth. (Source: Equipment Leasing & Finance Foundation
(ELFF) Equipment Finance Market Study 2012-2013 see
http://www.leasefoundation.org/IndRsrcs/MO/USMkts/)
The equipment finance and leasing industry in the US is represented by
several organizations, the largest of which is the Equipment Leasing and
Finance Association (ELFA), which was founded as the Association of
Equipment Lessors in 1961. Currently, ELFA represents around 600 member
companies, including affiliates, and membership continues to grow.
Given the size and diversity of the total US market, it is difficult to provide
anything other than guidelines to business volumes. ELFA publishes an annual
Survey of Equipment Finance Activity (SEFA) based on submissions by
reporting members relating to their US business. The 2013 SEFA Report onbusiness volumes in 2012 is the basis for much of the data in the next
section. However, this data should not be taken as a representation of
industry-wide figures. It should be noted that SEFA data does not include data
on auto leasing (including floorplan), real estate and non-equipment finance
operations. Details of the report are at http://www.elfaonline.org/SEFA
Annual new business
New business volume (NBV) grew 16.4% in 2012, maintaining the growth rate
achieved in the previous year. In 2012, banks experienced the greatest level
of growth (22%), followed by captives (11%), while independents grew least
(7%).
The average figures for each business segment by size show that the larger
the lessor, the greater the growth the large-ticket market segment grew
most (31%), whereas the micro-ticket segment actually declined (-5%). Since
the market contracted across the board in 2009, the trend has been for a
greater degree of growth as the ticket size increases.
6
-
8/14/2019 201310 White Clarke Group Usa Asset and Auto Finance Country Survey
7/39
UNITED STATES ASSET ANDAUTO FINANCE SURVEY
7
New business volumes by organization type
Source: ELFA
Source: ELFA
100
80
60
40
20
0
Independents Captives Banks
$90.7 bn
$12.7 bn
$30.1 bn
$48.0 bn
$13.6 bn
$33.3 bn
$58.6 bn
+7.4%
+10.8
%
+22.2
%
$105.6 bn
2011 2012
100
80
60
40
20
0
Small ticketMicro ticket Large ticketMiddle ticket
$90.7 bn+4
.7%
+13.1
%
+15.8
%
+31.1%
$105.6 bn
2011 2012
$5.0 bn
$4.8 bn
$30.0 bn
$51.0 bn
$19.3 bn
$26.5 bn
$44.5 bn
$14.7 bn
New business volumes by market segment
-
8/14/2019 201310 White Clarke Group Usa Asset and Auto Finance Country Survey
8/39
UNITED STATES ASSET ANDAUTO FINANCE SURVEY
8
100
80
60
40
20
0
Grew Declined
2009 2010 2011 2012
52.2%
75.7%
78.6%
47.8%
28.3%
71.7%
24.3% 21.4%
100
80
60
40
20
0
$50m-$250mUnder $50m Over $1bn$250m - $1bn
+31.8
%
+14.7
%
+15.7
%+39.1
%
2011 2012
$4.3 bn
$5.0 bn$10.8 bn
$89.4 bn
$8.2 bn
$77.9 bn
$0.4bn
$0.3 bn
New business volumes by size of organization
Percentage of respondents whose new business volume grew or declined
Source: ELFA
In all, 79% of respondents saw NBV increase in 2012, an increase of 3% on
2011, and continuing the momentum built up after 2010, when the figure was
only 28%.
In terms of NBV by size of organization, there was growth in all market
segments. Organizations with over $1bn in NBV grew by 15%; those with NBV
of $250m to $1bn rose 32%; those with NBV of $50-250m rose 16%; and the
smallest segment (less than $50m NBV) actually rose by the largest amount
at 39%. This would seem to contradict the previously quoted fall in the micro-
ticket segment, but the segments are not interchangeable and it should be
noted that the smallest segment by NBV accounts for less than 1% of the
market total.
-
8/14/2019 201310 White Clarke Group Usa Asset and Auto Finance Country Survey
9/39
UNITED STATES ASSET ANDAUTO FINANCE SURVEY
9
100
80
60
40
20
0
CaptiveDirect MixedThird partyVendor
+10.8
%
+12.0%
+25.6%
+16.1%
+25.7
%
2011 2012
$26.9 bn
$33.3 bn
$9.9 bn
$1.8 bn
$33.6 bn
$21.4 bn
$8.9 bn
$30.1 bn
$28.9 bn
New business volumes by business model
100
80
60
40
20
0
Captive programsVendor programs Third partiesDirect
+21.3
%
+10.9
%
+14.1%
+24.2
%
2011 2012
$10.4 bn
$36.5 bn
$33.3 bn
$25.4 bn
$30.0 bn
$22.3 bn
$30.1 bn
$8.3 bn
New business volumes by origination channel
$1.5 bn
Looking at NBV by business model, where the models are defined as providing
at least 60% of a companys NBV, again growth occurred in all segments in
2012. The segments that grew most were direct origination and third party
origination (both at 26%), followed by mixed origination (16%), vendor
origination (12%) and captive origination (11%).
Moving to NBV by origination channel, total NBV originated direct and through
captive and vendor programs grew 16% in 2012 over 2011. Of this, NBV via
direct origination grew 21%, via vendor programs 14%, and via captive programs
11%. Transactions sourced through third party programs, although smaller in
dollar terms, increased 24%.
-
8/14/2019 201310 White Clarke Group Usa Asset and Auto Finance Country Survey
10/39
The business category with the highest percentage growth in 2012 was
transportation, rising 48% to take 11% of the total market share. This category
contained the equipment sector that had the highest growth in dollar terms
trucks which had a 63% increase in NBV. This indicates that fleets are being
replaced after some years of low investment.
Agriculture, industrial & manufacturing, and construction all lost market share
but still performed relatively well in dollar terms.
The category with the highest rate of decline was telecoms, which fell 26% on2011, although that category represents less than 2% of the total market.
UNITED STATES ASSET ANDAUTO FINANCE SURVEY
10
Services
Agriculture
Industrial andManufacturing
Transportation
Wholesale/Retail
Finance, Insurance,Real Estate
Construction
Federal State andLocal Government
Mining, Oil & GasExploration, Pipelines
Utilities
Telecommunications
Printing, Publishing,Newspapers, Periodicals
Other
21.5%
20.6%
12.3%
12.5%
11.5%
12.4%
11.0%
2012
2011
8.7%
8.7%
8.7%
6.9%
7.0%
6.5%
6.8%
4.5%
4.4%
4.4%
4.3%
3.2%2.8%
1.4%
2.3%
0.9%
1.0%
7.2%
8.0%
New business volumes by end user industry 2012/20111
Other services - includes such services as data processing, administrative support, repair services
Other includes miscellaneous and uncategorized
Note: Trend data is for companies who reported both years. Not all companies supplied end user data by end user industry
0% 5% 10% 15% 20%Source: ELFA
-
8/14/2019 201310 White Clarke Group Usa Asset and Auto Finance Country Survey
11/39
UNITED STATES ASSET ANDAUTO FINANCE SURVEY
Recent new business in 2013
ELFAs Monthly Leasing and Finance Index (MLFI-25) shows that NBV in 2013
has continued to fluctuate, although the trend overall remains an upward one,
despite dipping at the start of the year and tailing off again in the summer. A
year-on-year comparison shows NBV for the first eight months of 2013 up by
7.7% on the same period in 2012.
ELFAs Monthly Leasing and Finance Index is at
http://www.elfaonline.org/Research/MLFI/
Business confidence
Current sentiment in the equipment finance industry regarding business
conditions and prospects is optimistic on the whole, despite moderate levels
of demand. The ELFF September 2013 business confidence index shows
around one-third of responding executives saying they believe business
conditions will improve over the next four months, and two-thirds saying
business conditions will remain the same over the period. Virtually none
thought conditions would deteriorate. This latest index has dipped a fraction
from the previous month, but this follows several consecutive months whereconfidence has risen. (Source: ELFF, Monthly Confidence Index for the
Equipment Finance Industry.
http://www.leasefoundation.org/IndRsrcs/MCI/index.cfm)
11
$14.0
$12.0
$10.0
$8.0
$6.0
$4.0
$2.0
$0.0
Billions(US$)
Jul-11
Aug-11
Sep-11
Oct-11
Nov-11
Dec-11
Jan-12
Feb-12
Mar-12
Apr-12
May-12
Jun-12
Jul-12
Aug-12
Sep-12
Oct-12
Nov-12
Dec-12
Jan-13
Feb-13
Mar-13
Apr-13
May-13
Jun-13
Jul-13
Aug-13
MLFI Cumulative YTD Comparison (2012/2013)
2012: $50.7 ($bn)
2013: $54.6 ($bn)
% change 7.7%
-
8/14/2019 201310 White Clarke Group Usa Asset and Auto Finance Country Survey
12/39
UNITED STATES ASSET ANDAUTO FINANCE SURVEY
12
17.68%
23.79% 23.62%24.40%
27.64%30%
25%
20%
15%
10%Q2 2009 Q2 2010 Q2 2011 Q2 2012 Q2 2013
Source: Experian Automotive
New lease share of new consumer financing
36.14%
8.38%
25.24%
15.31% 14.93%
40%
35%
30%
25%
20%
15%
10%
5%
0%
50%
40%
30%
20%
10%
0%
-10%
-20%Bank BHPH* Captive Credit Finance
Union
Source: Experian Automotive
Automotive loan share market
40.6%
-10.7%
-12.7%-13.9%
4.9%
Year on year change
Market share
*BHPH is Buy here, pay here
Auto finance
Data from Experian Automotive shows that 84.5% of consumers who bought a new vehicle
in Q2 2013 financed the acquisition through a lease or loan, up from 82.5% in Q2 2012, and
the highest level since before the credit crunch in Q2 2008. Of all new vehicles financed,
leases accounted for 27.64% in Q2 2013, up from 24.4% in Q2 2012. Delinquencies have
decreased, and consumers are showing greater confidence in dealing with debt. (Source:
Experian Automotive, State of the Automotive Finance Market, September 2013.)
Of the total auto loan market, banks and captives held more than 60% in Q2 2013, with
captives experiencing by far the biggest year-on-year increase, of over 40%. The only other
category to show a y-o-y increase was finance such as leasing, at 5%.
In addition, research by J.D. Power indicates that retail light-vehicle sales for the combined
months of August and September 2013 are up by more than 10% over the same period last
year a fair sign of the overall health of the industry. The seasonally adjusted annualized
rate (SAAR) for retail light-vehicle sales stands at around 12.4m units, and J.D. Power affiliate
LMC Automotive forecasts total light-vehicle sales of some 15.6m units in 2013. The
proportion represented by fleet vehicles is around 18%.
-
8/14/2019 201310 White Clarke Group Usa Asset and Auto Finance Country Survey
13/39
UNITED STATES ASSET ANDAUTO FINANCE SURVEY
13
98.9
8.7
8.5
8.3 8.38.2
8.18.2 8.2
8.3
8.1
7.87.9
7.8 7.87.9
7.77.6
7.57.6 7.6
7.47.3
9.5%
9%
8.5%
8%
7.5%
7%
Jan 12 Jul 12 Jan 13 Jul 13
United States Unemployment Rate
Source: Bureau of Labor Statistics
Economic overview
In the year since Asset Finance Internationals first survey of the US
equipment and auto finance industry, fears have been raised over many topics,
such as: the fragility of the US economy and its revival post the recession;
weakness in the global economy, particularly regarding the slowdown in
China and, as ever, what is going on in the eurozone; how to deal with the
budget deficit, and whether Congress will simply apply another short-term
solution; and how will business, and the markets, cope when the monetary tapof quantitative easing (QE) starts to be shut off?
As this survey was going to press, at the start of the new US financial year, it
might seem that these issues are worryingly similar to those faced 12 months
ago. Indeed, the fiscal cliff has not vanished, economies worldwide are still
stuttering and markets remain prone to bouts of nerves, and the political
situation externally (and, to an extent, internally) is a cause for concern, but
there are some underlying fundamentals that should be emphasized.
The US economy is growing. It is the largest economy in the world, and once
again is leading the way out of recession. In the last financial year, the Dow
Jones Industrial Average has risen by more than 12%, the S&P 500 Index has
risen more than 16%, and the MSCI ACWI Index of developed and prominent
emerging market indices has risen over 14%.
The fact that Ben Bernanke, chairman of the Federal Reserve, mentioned the
possibility of reducing QE is surely an indicator that the economy is moving in
the right direction, even if it is not growing as fast as some had hoped and
predicted. In September, the Fed surprised markets by deciding against any
imminent reduction in QE3, but the so-called tapering will have to be
introduced sometime soon. There is liquidity in the financial institutions.
-
8/14/2019 201310 White Clarke Group Usa Asset and Auto Finance Country Survey
14/39
UNITED STATES ASSET ANDAUTO FINANCE SURVEY
14
Bernanke had previously summed up the Feds monetary outlook in a July
speech, in which he said: even after purchases end, the Federal Reserve will
be holding its stock of Treasury and agency securities off the market and
reinvesting the proceeds from maturing securities, which will continue to put
downward pressure on longer-term interest rates, support mortgage markets,
and help to make broader financial conditions more accommodative. He
added that near-zero short-term interest rates, and forward guidance that rates
will continue to be exceptionally low, would help maintain a high degree of
monetary accommodation for an extended period after asset purchases end,
even as the economic recovery strengthens and unemployment declines
toward more-normal levels. (Source: Semiannual Monetary Policy Report to
the Congress, 17 July 2013.)
Outlook
There are reasons behind the Feds reluctance to stop the bond-buying
stimulus programme, as conflicting signals are coming from the data: inflation
remains low, as demand stays stubbornly weak; yet positive signs are coming
from the labour market. Unemployment in the US, as reported by the Bureau
of Labor Statistics, continued its gradual progressive decrease to 7.30% in
August 2013, which compares favorably with 8.1% in August a year earlier and
is the lowest monthly total since late 2008. Such a continuing decline is agood sign of a strengthening economy.
The predictions of independent bodies are similar, being positive but with
caveats. In a speech to US business leaders, International Monetary Fund (IMF)
managing director Christine Lagarde noted that the US economy is gaining
strength, stating that this is good news for the US and good news for the
world economy. Lagarde said that, although growth is still modest at well
under 2%, it should accelerate by a full percentage point in 2014, and she
made the point that the private sector is playing a key role as the engine of
growth and job creation. (Source: IMF, The Interconnected Global Economy:
Challenges and Opportunities for the United States and the World, US
Chamber of Commerce, 19 September 2013.)
US GDP, projected change (%)
2013 2014
Real GDP 1.7 2.7
Source: World Economic Outlook Update (July 2013)
However, Lagarde highlighted three key recommendations for US
policymakers:
Fix public finances;
Appropriately calibrate monetary policy; and
Complete financial sector reform.
The Organisation for Economic Cooperation and Development (OECD) offered a
similar forecast to the IMF in its May 2013 Economic Outlook, stating the US
economy should pick up noticeably in 2014. The OECD also pointed to similar
areas that policymakers need to address: Budgetary consolidation is creating
significant headwinds, especially in 2013. Spending cuts should be chosen more
thoughtfully than across-the-board sequestrations, and commitment to a
medium-term plan to restore fiscal stability should be put in place.
-
8/14/2019 201310 White Clarke Group Usa Asset and Auto Finance Country Survey
15/39
UNITED STATES ASSET ANDAUTO FINANCE SURVEY
In its analysis, the Economist Intelligence Unit (EIU) forecasts a similar rate of
growth, with real GDP growth accelerating from 1.6% in 2013 to 2.6% in 2014. In
the EIUs view, The US economy is showing remarkable resilience to the 2013
fiscal tightening, helped by a reviving housing market. In its medium-term
projections, the EIU forecasts annual average GDP growth of 2.3% in 2013-17,
and inflation to average just over 2% in that period. In its longer-term projections,
the EIU predicts real GDP growth will remain at a steady annual average of 2.4%.
Growth and productivity (% change; annual average)
2012-20 2021-30 2012-30
Growth of real GDP per head 1.6 1.7 1.6
Growth of real GDP 2.4 2.4 2.4
Labour productivity growth 1.4 2.1 1.8
Source: EIU
Business confidence
Small and medium-sized businesses are the backbone and engine of the
economy, and confidence in the sector is vital for investment. However, as with
data on the broad economy, conflicting signals are coming from small business
owners, as revealed by the September 2013 Small Business Optimism Report
from the National Federation of Independent Business (NFIB). This shows that in
August optimism was flat, but at a higher level than a year ago; however, the
report stressed: As calm as the Index appears, there was turmoil in the details.
Job creation plans jumped seven points to levels not seen since 2007. Yet, last
month firms shed the largest number of employees in months. Capital spending
and inventory investment plans increased as well, all activities that would put
some energy into GDP growth. But, reports of quarter-to-quarter net gains in
sales deteriorated 17 points and profit trends followed, giving up 13 points.
Expectations for business conditions in six months also became more negative.Yet, sales expectations improved eight points.
Such contradictory figures indicate at the very least a lack of confidence in
economic policy, magnified by the immediate problem of resolving the debt
ceiling issue. Even if, as expected, the fix for this will once again be temporary,
businesses will have some reassurance and expectations should improve.
As noted, there were positive signs regarding investment intentions among small
businesses, with the frequency of reported capital outlays over the past six
months rising three points to 57%. In addition, 25% of business owners stated
they plan to make capital outlays in the next three to six months, a rise of two
points.15
5 12.5 0 0
2.5 10
-0 7.5
-2.5 5
-5 2.5 -15 -7.5
GDP Growth Unemployment Rate Fiscal Balance Current account
2009 2013 2009 2013 2009 2013 2009 2013
-5 -2.5
-10 -5
Source: OECD
-
8/14/2019 201310 White Clarke Group Usa Asset and Auto Finance Country Survey
16/39
UNITED STATES ASSET ANDAUTO FINANCE SURVEY
Business climate
In the 2013 edition of the World Banks (WB) annual Doing Business report,
the US is ranked fourth overall out of 185 countries, which is no change on
2012. The rankings are devised to give an indication of the business
environment, and the nearer a country is to number one in the ranking, the
more conducive the regulatory environment is to operating a business.
Mostly, as would be expected, the US ranks near the top of the separate topics
assessed by the WB, although it has slipped marginally in some. This may be
more a case of other countries improving rather than the US declining.
However, the US is relatively low down on the issue of paying taxes the onlytopic in which it is below the regional average of OECD high income
countries, although the situation has improved in recent years. The salient
point is that on the majority of topics the US is ranked well ahead of many of
the comparator economies, most of which have weak areas whereas the US is
strong across the board.
16
4
7
17
20
24
29
34
91
United States
United Kingdom
Canada
Germany
Japan
Regional average (OECD high income)
France
China
1 185
Ease of doing business rankingSource: Doing businessdatabase
How the US and comparator economies rank on the ease of doing business
-
8/14/2019 201310 White Clarke Group Usa Asset and Auto Finance Country Survey
17/39
UNITED STATES ASSET ANDAUTO FINANCE SURVEY
17
Starting a business (13)
Dealing with construction permits
(17)
Getting electricity (19)
Registering property (25)
Getting credit (4)
Protecting investors (6)
Paying taxes (69)
Trading across borders (22)
Enforcing contracts (6)
Resolving insolvency (16)
How the US ranks on Doing Business topics
Competitiveness
The latest edition for 2013-2014 of the World Economic Forums Global
Competitiveness Report (GCI), which assesses macro and microeconomic
productivity factors, views the potential consequences of a tapering and
eventual halt of QE in the US as a factor that could put future economic
performance at risk. Notwithstanding this challenge, the report pointed out
positives, stating: After having declined for four consecutive years in the
ranking, the US reverses its downward trend, rising by two positions to takefifth place this year and overtaking the Netherlands and Sweden. While the
economy is getting back on track, the deleveraging process in the banking
sector continues to show positive effects on the stability and efficiency of the
countrys financial markets.
Improvements were noted in a number of the GCI rankings, although areas of
relative weakness include: trust in politicians remaining weak (in 50th
position); concerns about the governments ability to maintain arms-length
relationships with the private sector (54th); and a general perception that the
government spends its resources relatively wastefully (76th).
However, the single basic requirement in which the US is seriously deficient
is the macroeconomic environment, which continues to be the countrys
greatest area of weakness (ranked 117th), which is affected by the level of
government debt and the budget deficit, although the report notes that the
deficit is narrowing for the first time since the onset of the financial crisis.
The national credit rating remains strong.
-
8/14/2019 201310 White Clarke Group Usa Asset and Auto Finance Country Survey
18/39
UNITED STATES ASSET ANDAUTO FINANCE SURVEY
18
Infrastructure
Macroeconomic environment
Health and primary education
Higher education
Goods market efficiency
Labour market efficiency
Financial market development
Technological readiness
Market size
Business sophistication
Innovation
Institutions
Source: Global Competitiveness Report 2013-2014 World Economic Forum, Switzerlan
United States Innovation driven economies
Stage of development
US position in the Global Competitiveness Index, 2013-2014
Rank/148 Score/7
GCI 2013-2014 005 5.5
GCI 2012-2013 007 5.5
GCI 2011-2012 005 5.4
Basic requirements (20.0%) 039 5.1
Institutions 035 4.6
Infrastructure 015 5.8
Macroeconomic environment 117 4.0
Health and primary education 034 6.1
Efficiency enhancers (50.0%) 001 5.7
Higher education and training 007 5.8
Goods market efficiency 020 4.9
Labour market efficiency 004 5.4Financial market development 010 5.3
Technological readiness 015 5.7
Market size 001 6.9
Innovation and sophistication factors (21.3%) 006 5.4
Business sophistication 006 5.5
Innovation 007 5.4
Source: Global Competitiveness Report 2013-2014, World Economic Forum,
Switzerland
-
8/14/2019 201310 White Clarke Group Usa Asset and Auto Finance Country Survey
19/39
UNITED STATES ASSET ANDAUTO FINANCE SURVEY
The most problematic factors for doing business, as perceived by the Global
Competitiveness Report respondents, remain in much the same order as last
year, although concerns about tax are firmly to the fore. Issues with inefficient
government bureaucracy move from top of the list to third. After these, as per
the previous year and still viewed as a consistent problem, is access to
financing. One solution to this issue is, of course, financing through leasing.
19
Tax regulations 16.3
Tax rates 15.4
Inefficient government bureaucracy 14.0
Access to financing 08.7
Restrictive labour regulations 07.3
Inadequately educated workforce 06.8
Poor work ethic in national labour force 06.2
Policy instability 05.7
Inflation 04.8
Insufficient capacity to innovate 04.3
Inadequate supply of infrastructure 03.1Corruption 01.7
Poor public health 01.6
Government instability/coups 01.4
Crime and theft 01.4
Foreign currency regulations 01.2
0 5 10 15 20 25Percent of responses
The most problematic factors for doing business
Source: Global Competitiveness Report 2013-2014 World Economic Forum, Switzerland
-
8/14/2019 201310 White Clarke Group Usa Asset and Auto Finance Country Survey
20/39
UNITED STATES ASSET ANDAUTO FINANCE SURVEY
Leaders insights
Asset Financial International interviewed prominent industry leaders and
senior executives at major equipment and auto lessors in the US for their
analysis of the current state of the market, the opportunities and challenges it
faces in the near and medium term, and the direction of market trends.
The effect of the current economic situation on the market
It is five years since the collapse of Lehman Brothers marked the start of the
global financial crisis, which affected all markets as it unfolded and from
which the worlds largest economy had no immunity. Access to capital was
seriously limited and, in the leasing market, volumes declined as lessors had
less capital available and customers postponed equipment purchases.
In the US, recovery in the asset finance market has been aided by the pick-up
in the overall economy. However, as economic growth remains muted, leasing
volumes have only slowly climbed back to previous levels.
Pascal Bouillon, managing director, Socit Gnrale Equipment Finance
(SGEF) USA
Commenting on the economy in general, Pascal Bouillon, managing director,
Socit Gnrale Equipment Finance (SGEF) USA, said: The US economy is in
its strongest position since the 2008-2009 recession, but growth remains sub-par. While there are some signs of improvement (recovery of the housing
market, inexpensive natural gas, financial markets are performing quite well),
there are still multiple headwinds (high oil price, weak growth, uncertainty of
fiscal reforms).
Crit DeMent, chairman and CEO, LEAF Commercial Capital
Opinion among the interviewees was broadly optimistic about the recovery in
the asset finance sector, although not always excited by the pace. Crit
DeMent, chairman and CEO, LEAF Commercial Capital, commented: Weve
recovered to a point that is just about where we were when the recession
started five years ago. In my opinion that is indeed a recovery, but certainly
not a very exciting one.
20
-
8/14/2019 201310 White Clarke Group Usa Asset and Auto Finance Country Survey
21/39
UNITED STATES ASSET ANDAUTO FINANCE SURVEY
Chris Enbom, CEO, Allegiant PartnersOthers registered satisfaction in the recovery, perhaps laced with a degree of
relief. Chris Enbom, CEO, Allegiant Partners, stated: I would say it is
completely recovered from the global financial crisis. The barrier to entry for
new companies is relatively higher than before the crisis, but for firms that
weathered the storm, business is as good as ever. And Dave Mirsky, CEO,
Pacific Rim Capital, said: From our viewpoint, the industry has recovered well
and most providers are experiencing increases in volume.
Gary Amos, head of Commercial Finance Americas, Siemens Financial Services
(SFS)
Gary Amos, head of Commercial Finance Americas, Siemens Financial Services
(SFS), observed: The asset finance industry in the US, having been in a
holding pattern following the financial crisis and unable to grow significantly,
appears to be steering clear of any looming crises and has recently
demonstrated considerable growth. Leasing and finance companies are strong,
coming off reasonably good years; however, political and fiscal uncertaintycontinue to hang over the economy.
Mike Pitcher, president and CEO, LeasePlan USA
An assessment of the state of the market from point of view of the auto
leasing sector was provided by Mike Pitcher, president and CEO, LeasePlanUSA, who said: The industry appears to be healthy and growing. Liquidity,
which was a major issue for our industry during the financial crisis, is no
longer a problem.
21
-
8/14/2019 201310 White Clarke Group Usa Asset and Auto Finance Country Survey
22/39
UNITED STATES ASSET ANDAUTO FINANCE SURVEY
Jonathan Dodds, chief executive officer - Americas, White Clarke GroupJonathan Dodds, chief executive officer - Americas, of software solutions and
consulting services provider White Clarke Group, added: Downsides of the
recession included high rates when capital markets could be accessed;
impacted customers ability to make payments, leading in turn to higher
delinquency rates and potential write-offs; and portfolios shrinking as
purchasing decisions were delayed. All these issues were managed
successfully, however.
Comparing leasing with other funding options such as bank lending, Amos
continued: Banks are increasing market share in the equipment finance
sector because most know their cost of funds for the next few years. Banks
have come to understand and view equipment finance as an important part of
their business since equipment leases fared better during the downturn thannearly any other asset class.
Bill Verhelle, CEO, First American
Equipment Finance
The finance sector overall has shown resilience despite a collapse in publicopinion ratings and has, on the whole, pulled back faster than other sectors. In
the opinion of Bill Verhelle, CEO, First American Equipment Finance, a City
National Bank company, The US equipment finance industry, and the broader
bank lending industry, have both recovered rapidly since 2008/2009. Banks
and financial services firms have generally outperformed other firms during
the recovery.
Jeff Berg, US country manager, De Lage Landen
The need for focus was stressed by Jeff Berg, US country manager, De Lage
Landen, who said: Asset financing is recovering modestly and we continue to
find pockets of growth where we can focus our attention, adding Beyond
economic conditions, the asset finance industry offers convenience and speed
when businesses need it.
22
-
8/14/2019 201310 White Clarke Group Usa Asset and Auto Finance Country Survey
23/39
UNITED STATES ASSET ANDAUTO FINANCE SURVEY
Adam Warner, president, Key Equipment FinanceAlso looking at the recovery across the sector, Adam Warner, president, Key
Equipment Finance, added: I believe that equipment financing has recovered
at a greater pace than traditional business loans due to the pent-up demand
for equipment coming out of the recession.
Still unimpressed by the rate of recovery, DeMent added that there are after-
effects of the recession that continue to influence financial decision making:
In terms of why the recovery and subsequent growth curves are so lethargic,
there are many contributing factors, but I dont necessarily think that they
relate to different forms of equipment financing. The reality is that businesses
are still cautious (what happened five years ago is still a fresh nightmare)
when it comes to capital investment. So this kind of sluggish market affects
every form of financing, not just equipment leasing.
However, Amos concluded: There remains an opportunity for leasing
companies to play an important role in helping the US economic recovery and
supporting necessary investment in equipment albeit in a relatively slow
growth environment.
Market drivers
When asked to comment on the near- and medium-term drivers of the US
equipment and auto finance markets, the element that was generally agreed
upon was that much depends on how the improving economy will affect
business conditions. Adam Warner summed up: There are several drivers for
asset growth in the US, most stemming from the general economic growth of
the nation as often measured by GDP growth, adding: We closely watch
durable goods orders and the purchasing manager index to determine the
likelihood of the need for asset financing.
Rick Remiker, ELFA chairman and executive vice president and group head of
Specialty Banking, The Huntington National Bank
Rick Remiker, ELFA chairman and executive vice president and group head of
Specialty Banking, The Huntington National Bank, explained: Leasing
accelerates in economic expansion periods, where commercial concerns are
investing in new business lines or adding capacity, thus increasing capex
budgets. These periods are usually correlated with a rising or higher interest
rate environment, which favours equipment leases that provide lower
payments and cash flow relief in tight cash flow periods.
23
-
8/14/2019 201310 White Clarke Group Usa Asset and Auto Finance Country Survey
24/39
UNITED STATES ASSET ANDAUTO FINANCE SURVEY
Dave Mirsky, CEO, Pacific Rim CapitalTo this, Dave Mirsky added: The main drivers are interest rates, business
conditions and expectations for the future, along with equipment utilization
needs and expectations of obsolescence. Gary Amos concurred, saying:
There are three main factors driving improvements in the equipment
financing industry: modest easing of lending standards, combined with
historically low interest rates; the need to replace ageing equipment; and a
gradual improvement in companies end-market demand, which supports a
moderate increase in expansionary equipment investment.
The straightforward need to replace equipment was commonly cited, with the
knock-on effect of expectations for growth. Chris Enbom made this point: The
primary driver continues to be replacement equipment, but we are starting to
see some expansion.
Jeff Berg agreed, stating: There is growing need for updated capital
equipment. We, lessors and customers included, have all held on to assets for
a prolonged period and now is the time to make some strategic choices. This
pent-up demand will naturally lead to an increase in sales in the near and
medium term.
In the auto sector, Mike Pitcher agreed that asset replacement is returning
slowly as confidence improves, and sees product quality and customer
discernment as key elements: Business are slowly growing and expanding
again. The quality of the vehicles is improved, and clients are getting more
out of their vehicles than they did in the past. There was an uncertainty in the
market for the past few years that has seemed to ease a bit, and clients are
replacing older vehicles.
Bill Verhelle had a specific viewpoint, stating: We see specialization and
customization as a differentiator in the US commercial equipment finance
marketplace. Otherwise, cost of funds and economies of scale are the most
common competitive strategies in an increasingly crowded, and increasingly
competitive, marketplace.
24
-
8/14/2019 201310 White Clarke Group Usa Asset and Auto Finance Country Survey
25/39
UNITED STATES ASSET ANDAUTO FINANCE SURVEY
Behind all this lies the basic fact that the main driver is economic growth,
with investment in capital goods at the forefront. Businesses need to have
confidence in economic growth being sustained, allied with assurance in
monetary and regulatory policy. Crit DeMent elaborated: Not to oversimplify
the issue, but in my opinion its all about confidence. Whether were talking
about businesses investing capital or consumer spending, as long as there is
uncertainty, there is a reluctance to invest and spend. There are still a lot of
unresolved issues and some new ones that are keeping businesses on the
sidelines. Regulatory issues and the state of the economy are topics that eventoday keep business executives up at night and that inhibit investment
decisions.
He continued: The fact is, however, that there is still demand, and demand
represents opportunities for growth. Demand is held in check because
companies remain cautious. Its easier and less risky to wait and see instead
of acting now. But there is plenty of capital available and the equipment
leasing industry remains strong. As business executives and consumers
become more confident, demand will increase at a greater rate and we will
then be able to make up for lost time and grow at a more favorable rate.
Market challenges
This leads to the main challenges for the market in the near and medium
term, which are often related to market drivers economic conditions being a
case in point. When Asset Finance International asked about the main
challenges a year ago, one overriding concern was the global economy and
the risk that fluctuations and restricted growth could adversely affect the rate
of growth in the US, and that remains a major concern today. Conditions in
the eurozone were a major issue 12 months ago, and these were commonly
mentioned this year, along with slower growth in China, which is becoming
increasingly influential on the global economy. As Adam Warner said, A main
challenge for growth in the US stems from slow global economic growth. The
impact of growth in China and Europe, specific to imports, continues to be a
concern for US manufacturers.
Aside from challenges posed by the global economy, constraints in the
financial sector at home were frequently referred to, such as access to credit
and competition pressure. For Dave Mirsky, the main issues revolve around
liquidity and value: The main challenges are availability of capital, pricing
pressures and commoditization. The lessor must show a compelling reason
that they are unique and can add value to get the conversation away from
price alone.
Rick Remiker stressed the knock-on effect of low overall growth on
purchasing options: Low GDP or economic growth environments reduce
capex budgets, and thus leasing opportunities. Deflationary periods create
lower equipment residual assumptions, which reduce the pricing power ofleasing. Finally, low debt usage creates more emphasis on buying rather than
leasing, due to competitive loan rates and borrowing capacity.
25
-
8/14/2019 201310 White Clarke Group Usa Asset and Auto Finance Country Survey
26/39
UNITED STATES ASSET ANDAUTO FINANCE SURVEY
Access to credit affects small and medium-sized enterprises (SMEs) more than
larger corporates, and SMEs that were stung by the recession remain cautious,
as well as being more vulnerable to any lack of economic stimulus. The
possibility that the recovery will be long and protracted was raised by Chris
Enbom: The US economy, while much improved, is still not recovering as
well as it has at this point compared with other recessions. I see many
parallels with the early 1990s. The credit markets really fell apart in the late
1980s, and it was not until 10 years later the market really began its
significant growth trend again. This may be the case with the 2008 recession we do not see the economy fully mended until 2018. The need to boost
confidence, especially among SMEs, is obvious.
Lessors need to be flexible and adaptable, and prepared for a period of merely
modest growth. Current excess capacity is a challenge mentioned by several
industry experts, which could lead to an over-competitive environment.
Competition for asset finance providers in the specific form of more banks
entering the equipment finance marketplace was brought up by Bill Verhelle,
and the possibility of the market overheating was described by Crit DeMent:
The main challenge is that as an industry, we are accustomed to much
greater demand, so now we find ourselves fighting over the scraps of whats
left. We as an industry need to be smart about how we adapt to the new
reality of a 6% growth rate. When things start to heat up and becomeincreasingly competitive, lenders first tend to fiddle with interest rates, and
then start to relax credit standards. Thats what happened in the run-up to the
fiscal crisis and accompanying recession in 2008 and look how that turned
out.
The important point was made by Jeff Berg that lessors report to shareholders,
who will want to see performance maintained during tighter conditions: The
biggest challenge is that, despite demand, we have to run our organizations
leaner than weve done before in order to recognize our profitability goals and
meet the expectations of our shareholders. He explained: Continuous
improvement is the new norm, we cannot keep doing business the way we
always have and expect the same result. Our customers have greater
expectations than ever before and we need to meet those expectations whilelooking ahead at the same time.
These points were endorsed by Pascal Bouillon, who said: Flight to quality
continues, with competition fighting aggressively for the safest transactions,
driving pricing down. Similarly, there have been new entrants to our
equipment finance market, as the economy is improving. As such, margins are
going down, and there is also increased competition in hiring talent.
DeMent concluded: The biggest risk now is that if we start doing the same
things all over again, well have exactly the same results, except that this
time there will be no bubble to cushion our fall. So the biggest challenge is to
be able to facilitate growth without being reckless, or worse.
26
-
8/14/2019 201310 White Clarke Group Usa Asset and Auto Finance Country Survey
27/39
UNITED STATES ASSET ANDAUTO FINANCE SURVEY
Accounting changes
Another potential constraint that was commonly cited was the ongoing issue
of the proposed changes to lease accounting. The latest exposure draft from
the International Accounting Standards Board (IASB), developed through a
joint project with the US Financial Accounting Standards Board (FASB) in the
light of criticisms that the existing accounting model for leases fails to meet
the needs of users of financial statements, while making some improvements,
has caused concern this topic is covered later in this section and in muchgreater detail in the following section of this survey. The buzz-phrase is
accounting convergence, and on this Adam Warner noted: The proposed
global lease accounting convergence has a negative overhang on financing as
lessees and lessors attempt to identify negative consequences of all operating
lease assets being added to balance sheets, as well as the management and
administration of a much more complex standard.
These various challenges and the immediate effect on the market were
encapsulated by Gary Amos: The economic uncertainty and an onerous
regulatory environment are causing customers to pull back from already
modest equipment acquisition budgets. To this he added: The industry also
faces a challenge to recruit talent, so there are certainly opportunities for
companies that can offer a global reach and have demonstrated financialstrength throughout the recession.
One final obstacle, which serves to re-emphasize the overarching importance
of confidence when it comes to investment, was pointed out by Warner, who
said: US Federal Government policy uncertainty around spending, deficits,
debt increases and tax reform is weighing heavily on consumer and business
confidence.
Growth prospects
With growth in the economy forecast to remain at modest levels over the
coming 12-18 months, the consensus was that the asset finance sector shouldat least grow at a higher rate. As Gary Amos of SFS said: Conditions in the
equipment leasing and finance industry appear to be improving at a faster rate
than the broader economy in the US.
Predictions from the interviewees for the sector as a whole ranged mainly
around the 3-6% level, progressing from nearer the lower rate in 2013 toward
the higher rate in 2014. The ELFA had suggested 6% for 2013, but that has
been revised down to 4.8% due to lower than expected investment growth in
the first half of the year. Interestingly, an exception to those expecting leasing
growth to be ahead of GDP was ELFAs chairman Rick Remiker of The
Huntington National Bank, who repeated his concern over the constraint on
leasing volumes due to lack of capital expenditure, commenting: We expect
equipment finance volumes to lag US GDP growth estimates, due to limitedinvestment prospects for capex spending.
However, some were more optimistic. Crit DeMent of LEAF Commercial
Capital still thought 6% not unreasonable over 2013/2014, and First
American Equipment Finances Bill Verhelle thought 6-7% at best. At the
top end of forecasts was a confident Dave Mirsky of Pacific Rim Capital, who
stated: We are planning for 10% increases for this year and next but will be
disappointed if we dont achieve far more.
27
-
8/14/2019 201310 White Clarke Group Usa Asset and Auto Finance Country Survey
28/39
-
8/14/2019 201310 White Clarke Group Usa Asset and Auto Finance Country Survey
29/39
UNITED STATES ASSET ANDAUTO FINANCE SURVEY
Although several experts thought highly of the prospects for the technology
sector, opinion diverged somewhat over which sub-segments would grow. An
important point was made by Pascal Bouillon of SGEF USA, who said: High-
tech equipment is seen to become a slower growth segment due to the
adoption of tablets and smart phones. In addition, he expected High-tech
finance specialists to become more aggressive in order to offset slower
growth and increased competition.
De Lage Landens Jeff Berg could see technology needs in healthcare makingthat sector attractive, and the needs of a growing global population creating
strong prospects for the food and agriculture sector, but he emphasized:
Regardless of the specialty area, the benefits of use over ownership include
the ability to reuse and recycle assets. We are actively working with several
partners to design products in such a way that they can be safely
disassembled and recycled at the end of the products life.
There was plenty of support for the energy sector. Speaking from the point of
view of a niche specialist, Chris Enbom of Allegiant Partners said: I am on
the board of an energy efficiency finance company and we certainly see great
opportunities in this sector.
Berg saw this as a sector with great potential, stating: The potential for
growth within the clean technology sector, compared to traditional assetfinance sectors, is exponential. We are ultimately drawn to the sector because
we believe in the promotion of sustainability and reducing our carbon
footprint.
The alternative green energy market was generally viewed as being a good
prospect, if perhaps in the longer term, once technology improves and pricing
stabilizes. This is an important area of potential growth in the auto sector,
although it is slow in gaining acceptance among consumers. LeasePlans Mike
Pitcher summed up: The take rate (acceptance) of alternative fuel, and
electric vehicles in particular, is slower than many industry experts predicted.
An overview of the problems for lessors in anticipating market trends was
provided by Crit DeMent: Its hard to say what sectors offer the best future
prospects. I think that when you try and get too granular while peering into
the crystal ball of the future, its pretty easy to go off on a tangent that might
not represent the best course of action. Growth in any given sector is a
function of the management skill, marketing expertise and overall creativity
of the companies that make up the sector. The equipment finance industry
cant control that, nor can we really shape it. Our job is to spot demand as it
ramps up, and then to position ourselves to capitalize on it.
DeMent continued: With that said, I think the key is to look for convergent
technologies that will ultimately lead to what Ill call hybrid sectors. For
example, one could argue that telephony and computers have moved into a
hybrid sector. I think that the ability to spot this type of convergence and then
to adapt your business to take advantage of it is crucial.
Considering so-called new markets, such as renewable resources and
technology, DeMent stressed the need to work through existing channels,
whether the business is in solar panels or resource-efficient office equipment.
He concluded: In both cases, the finance company is best served by working
with existing channel partners to identify and explore green applications of
their products and services, rather than setting out to open up an entirely new
channel.
29
-
8/14/2019 201310 White Clarke Group Usa Asset and Auto Finance Country Survey
30/39
UNITED STATES ASSET ANDAUTO FINANCE SURVEY
Floorplan financeAuto finance specialist Marguerite Watanabe examines the current situation
regarding the auto finance wholesale (inventory or floorplan) lending environment
in the US
Wholesale floorplan financing allows dealers to borrow against retail inventory. The
dealer then repays that debt as their inventory is sold and borrows against the line
of credit to add new inventory. After facing a number of challenging years during
the most recent economic crisis, the wholesale market has recovered robustly andis now a vibrant one.
This renewed vitality can be seen in the numbers: vehicle sales are very strong, for
both new and used cars and light trucks. A major facilitator of this growth has been
that capital is again readily accessible.
There is not only strong support for wholesale lending within captive finance
companies (supplying both new and old vehicles) and banks to franchised dealers,
but also from both traditional dealer funding sources and new market entrants that
are providing floorplan funding to independent (i.e. used vehicle) dealers.
Following the recent hard years, the funder-dealer relationship has strengthened, as
dealers are very appreciative of their wholesale financing sources, especially those
who continued to support them during the crisis.However, challenges still exist, first among which is the intensifying competition
for dealer customers which is beginning, and will continue, to put pressure on
margins.
A second challenge concerns regulation and compliance. Close scrutiny is being
kept on how the emerging regulatory and compliance requirements may impact
the wholesale side of the business, though the current target of regulators is the
retail (consumer financing) side of the business.
Opportunities
There are definite opportunities for business growth for wholesale lenders,including, as mentioned, the funder-dealer relationship, and the ties between
wholesale and retail (consumer financing) programmes will continue to help grow
a lenders business.
In addition, the development of new technologies and business processes are
providing lenders with the tools to reduce operating expenses while providing
greater value and service to their dealers.
With the lending environment shifting to a buyers (i.e. dealers) market, the key
factor for success as a lender is to be able to increase dealer satisfaction. To
achieve this, the funder must understand that providing not just adequate, but
enhanced reporting, including self-servicing reporting, to dealers is crucial.
Another factor for funders to be aware of is that sharing dealer performance in aneasily accessible format for dealers will become more important, especially in a
more rigorous regulatory environment.
Finally, the rapid deployment of financial plans and programmes to dealers which
allow flexible payment options will enable a lender to differentiate itself from its
competitors.
Marguerite Watanabe is president of independent consultant Connections Insights
and has been in the auto and auto finance business for over 25 years. Connections
Insights has worked since 2006 with international clients, including auto financing
sources, auto manufacturers, software and data providers, business processing
outsourcers, consulting firms and trade associations. Tel: +1 678-520-3385
-
8/14/2019 201310 White Clarke Group Usa Asset and Auto Finance Country Survey
31/39
UNITED STATES ASSET ANDAUTO FINANCE SURVEY
Industry consolidation
The aftermath of the recession has seen some realignment in the market, with
smaller independents and some bank-owned lessors seeking strategic
alliances. Established lessors also took the opportunity, or were forced, to
make cost-saving measures and the streamlining of operations inevitably led
to reductions in executive manpower. An outcome of this was that, instead of
the market contracting across the board, there have been new independentsset up by former, experienced management teams. This now sets up a market
where there are enticing merger and acquisition (M&A) possibilities, either for
large, established businesses with acquisition funds, or again for building
strength through alliances in a market which is otherwise expanding at only a
moderate rate.
The situation was described by Gary Amos: There is a strong possibility of
M&A activity post-recession in the US. Throughout the recession, we saw large
numbers of established industry leaders displaced and, as a result, these
lenders reduced headcount and staff positions at all levels. Over time, the
more senior talent re-emerged and created new leasing companies with
alternative sources of debt and equity. These new entities serviced
relationships and partnerships established over the years. Some of thesestronger performing new entities could become targets for larger finance
companies looking for asset growth through M&A.
Pascal Bouillon agreed, adding: There are many more independent leasing
companies in the equipment finance market in the US compared to Europe,
where a vast majority of players are bank owned. While these independent
players suffered a lot during the recession, as they had difficulties getting
refinanced, the current improving economic environment should strengthen
their financial performance and in addition be favorable to the arrival of new
players.
Bouillon continued: Banks should continue to be the most aggressive buyers
of independent leasing companies, taking advantage of their low cost of
funds, although he pointed out the possible cost constraint in the currentenvironment, concluding: However, while there is theoretically real potential
for an increase of M&A activity, price expectations of sellers may be a drag on
M&A activity.
For Chris Enbom, future bank purchases alongside the arrival of new
independents are also likely: The banks will purchase the few remaining
independents, and we will once again see a number of new independents
come into the market.
For Bill Verhelle at First American Equipment Finance, this has already
become a reality, as he explained: The 23rd largest bank in the US [City
National Bank] acquired our medium-sized, independent equipment finance
company a little over a year ago. We have seen more acquisitions recently,
and there is high interest in future deals. In his opinion, The reason for manyof the acquisitions has to do with banks having excess capital to invest. Some
equipment finance business produce above market returns.
31
-
8/14/2019 201310 White Clarke Group Usa Asset and Auto Finance Country Survey
32/39
UNITED STATES ASSET ANDAUTO FINANCE SURVEY
M&A scenarios
These issues were raised by others. Dave Mirsky commented: I fully expect to
see more mergers and acquisitions among lessors and banks because of the
difficulty that lessors have finding capital and the difficulty that banks have in
gaining greater yield. These competing needs create a natural match. In
addition, some lessors are having problems due to pricing pressures. Such
unprofitable lessors will be excellent M&A targets if they have decent
portfolios.
Rick Remiker provided some more detail, highlighting three main factors
behind the increasing likelihood of greater M&A activity, the first being
regulatory and compliance: Small banks are challenged to maintain
enterprise risk management programmes and meet compliance regulations,
which limits their growth and business prospects, thus merging enables
economies of scale to set up proper controls. Small independent lessors will
be faced with similar issues as banks going forward.
The next factor is funding capacity and pricing: Capital markets and bank
funding is primarily available for larger independents, thus merging is a way
to build funding capacity. For banks, the cost of funds is critical to
competitiveness in the industry, thus the larger firms have an advantage
pushing more firms to merge.
The final factor listed by Remiker was what he termed The ageing of industry
leasing experts are retiring and the industry is producing less experienced
leasing personnel, requiring acquisitions to obtain talent.
Another viewpoint came from Adam Warner, who observed that regulation
might restrict larger banks appetite: Banks in the US continue to hold a
major amount of the equipment financing space. M&A activity among large
US banks is less likely due to the regulatory environment so I dont believe
we will see much merger activity in that sector. In addition, Warner put
forward a potential development in the manufacturers captives sector: A
probable scenario could be that manufacturers consider divesting portions of
their captive finance arms but we havent seen this play out as of yet.
Warners point about larger banks was agreed with by Jeff Berg, who said: I
dont think there is a great likelihood of increased M&A in the US. Larger
institutions are equipped to meet Basel III and equity requirements, and have
the necessary infrastructure and resources to weather the headwinds of the
greater economic environment and appropriately address an increasingly
complex regulatory environment.
The subdued economy and the fact that the leasing market is yet to return to
dynamic growth have meant the market remains cautious. As put by Ken
Adams: The fundamentals are returning and there has been some activity in
the past year, but the drive for M&A is still not that strong. The willingness to
invest is being held back by uncertainty, especially over federal policy.
A final comment came from Crit DeMent, who noted: As financing companies
chart their long-term strategies, growth through M&A is clearly a strategic
alternative. When volume is a prime concern, as it always is, you can only
generate so much business by manipulating rates. Beyond that, easing credit
requirements can be risky, so an M&A strategy gets the leasing company
around both of those hurdles. He also pointed out that M&A is a rigorous
process that is fraught with potential pitfalls: Of course, merging with or
acquiring another company presents its own unique set of challenges, so its
not something that a finance company can or should just jump into.
32
-
8/14/2019 201310 White Clarke Group Usa Asset and Auto Finance Country Survey
33/39
UNITED STATES ASSET ANDAUTO FINANCE SURVEY
Regulatory issues
Asset Finance International asked for comments on the current situation
regarding taxation legislation and regulation in the US. Once again, the
concerns that were raised were centered on uncertainty as to what direction
federal policy will take. An important point to note, as made by Rick Remiker,
is that the tax code benefits lessors: Tax is a significant driver of the leasing
product; thus any changes will affect business models for lessors. Taxes are
high now, so that actually supports lease pricing.
An issue raised by some relates to possible limits on deductions. Adam
Warner explained, stating: There are concerns among US lessors about what
comprehensive tax reform for US businesses might look like. For the US to
have a more competitive corporate tax rate as compared to other large global
economies, tax deductions will need to be minimized. Important deductions
that encourage capital formation are the interest expense and depreciation
deductions, adding that, We are spending time educating legislators that
changes to those deductions would have negative impacts for manufacturers
and financial providers.
Corporate tax reform was also brought up by Chris Enbom, who said: We are
concerned about talk amongst legislators that would limit interest deductions
for corporations if comprehensive tax reform is passed. Enbom also voiced
the concern over policy uncertainty affecting the market: Otherwise, the
games being played by congress are slowing the economy due to
uncertainty.
Others tended to agree that if taxation is a problem, it is one suffered by all.
As Bill Verhelle said: Tax legislation and regulation generally affects all
competitors equally, so it is not really a big competitive factor in the US
(although it is often discussed). Regulation does not have too much impact
on well-capitalized businesses lending to larger, highly creditworthy
borrowers. Concerning more thinly capitalized institutions, and with lending
to high-risk businesses, regulation has limited some marketplace activity.
Crit DeMent agreed, saying: Tax and regulatory issues tend to suppressvolume growth because of the uncertainty that they bring into capital
investment decisions. And when business executives are uncertain about
whats happening, they typically sit it out and wait for a better day. The only
thing we can really do is to make sure we understand whats going on, what
the implications are, and then work with our customers to help them make
good equipment investment decisions.
Jeff Berg commented: Right now we are facing several, major national issues,
regardless of what is also occurring at the state and local level. Certainly,
regulatory issues are very real, and a constant in our business, so we have to
thoroughly understand the implications and respond accordingly. Legislation
adds an extra layer of complexity to operations.
DeMent summed up: Tax legislation and regulatory issues in general are anormal part of our business landscape and need to be taken in our stride.
Flying an airliner in turbulent weather is not necessarily easy but if you want
to be an airline pilot, its part of the job. Similarly, adapting and adjusting to
tax and regulatory issues is not easy, but it is a part of our job and something
that we just have to deal with.
33
-
8/14/2019 201310 White Clarke Group Usa Asset and Auto Finance Country Survey
34/39
UNITED STATES ASSET ANDAUTO FINANCE SURVEY
Accounting for leases
The final topic for discussion was the proposed changes to lease accounting
standards, an issue that has been exercising the minds of the accounting standards
organizations for some considerable time. The latest Exposure Draft (ED) produced
by the Leases Project conducted by the International Accounting Standards Board
(IASB) and the US Financial Accounting Standards Board (FASB) seems to have
clarified some points but created more problems elsewhere. This is covered indetail in the next section of this survey, in which the industry view, and objections,
are put by the ELFA.
The consensus among interviewees for this survey was uniformly of the opinion
that the latest proposals would not improve the situation and will not ease
uncertainty in the sector, adding unnecessary complexity and likely to have a
negative impact.
A summary was given by Pascal Bouillon: Among other concerns, the conceptual
basis of the IASB/ FASB proposals remains unclear and the complexity of the
proposed model is still high and raising significant operational issues.
More specifically, regarding proposals affecting operating leases, Gary Amos
commented: The recommendation has caused requests from users of financialstatements and other stakeholders to change the accounting guidance so that
lessees would be required to recognize assets and liabilities arising from leases. If
approved, this change could reduce the percentage of operating leases utilized, as
obligors would be required to include the assets on balance sheet, creating
additional uncertainty around financial fundamentals and underlying covenants.
The comment from Dave Mirsky was direct: We anticipate that the proposed
changes will be damaging to the interests of our industry and will cause more
uncertainty in the sector.
However, not all opinions were that strongly opposed. Mike Pitcher saw some
potential for a positive outcome: While it was something that our industry was
very concerned about, the latest delays with regard to an exposure draft and
implementation time line have eased some of these concerns. In addition, it doesseem that industry input and concerns are being considered in the process.
To this, Jeff Berg added that, whilst believing that the proposed changes will bring
additional complexity to our already fragile external environment we still have a
way to go until approval and will only fully understand the implications when
applied in tomorrows economic context.
The final view on the uncertainty factor came from Crit DeMent, with a sporting
analogy: If youre playing a football game in the rain, you cant wait until the rain
stops to put your offense on the field. You go on offense when you get the ball.
When it comes to accounting standards and regulatory changes, I think that
business works much the same way. If you wait until there are no more changes in
sight to get down to work, youll go out of business before you can even begin. The
only thing that you can do is to take these things in stride, make adjustments asnecessary, and then keep moving forward.
He concluded: Uncertainty is a state of mind and the best antidote for it is a
healthy dose of reality. The game will continue whether you choose to play or not,
so its best to just dive in and do your best.
Benjamin Franklins lines on federal policy are often quoted: Our new Constitution
is now established, and has an appearance that promises permanency; but in this
world nothing can be said to be certain, except death and taxes. Perhaps in
modern times those two certainties can be augmented by the addition of
accounting.
34
-
8/14/2019 201310 White Clarke Group Usa Asset and Auto Finance Country Survey
35/39
UNITED STATES ASSET ANDAUTO FINANCE SURVEY
The US view of the Leases Project
Bill Bosco outlines why the ELFA believes major changes are needed to the
latest Exposure Draft produced by the International Accounting Standards
Board (IASB) and the US Financial Accounting Standards Board (FASB)
The Equipment Leasing and Finance Association continues to support the
project to improve lease accounting. We think that current generally
accepted accounting principles (GAAP) does work well but we respect the
notion that, to a going concern, operating leases create enforceable
obligations that are unique liabilities (not debt) and need a special form of
balance sheet presentation. We think that only minor changes to current
GAAP are needed to achieve the original objective of the project that is, to
put the value of the obligations on the balance sheet. We think the second
Exposure Draft (ED) of the Leases Project went too far in overhauling both
lessee and lessor accounting where changes were not necessary and fails the
cost benefit test.
We think the changes proposed are not improvements over current GAAP, as
follows.
Lessee issues: Lessee lease classification breaks from the traditional alignment with the
US commercial laws and income, property and sales tax rules. It is no
longer based on the substance of the transaction, especially as the
proposed rules apply to equipment leases. We must retain a risks and
rewards-based classification methodology that is the same regardless of
the nature of the leased assets. The proposal treats equipment leases
differently than real estate leases despite the fact that they are legally and
in substance the same types of contracts.
Lenders and credit analysts, especially those who serve small and
medium-sized enterprises (SMEs) and non-investment grade companies
(NiGS), will have less information that is key in their bankruptcy risk
analysis of a lessee as the capital and operating lease assets and liabilitiesare commingled with no information provided to unwind the new flawed
accounting. We think equity analysts do not follow the majority of
companies that lease equipment (SMEs and NiGs) and their needs are
unique to their particular analytical objectives such that they should not
be a driver in how the day-to-day accounting is done for leases to serve
the many compliance needs of preparers and the information needs of
their lenders.
We think that operating lease obligations are not debt in bankruptcy and
that the Boards need to keep in mind the common everyday usage of the
term debt by lenders and credit analysts when deciding to change GAAP
and create a new liability. If analysts think operating leases have debt-like
qualities, they are not saying they are in fact debt. When lenders createdebt limit covenants, their purpose is to limit the preparer from issuing
new debt instruments that will be a competing claim on the preparers
assets that survive bankruptcy.
We think there are two types of leases capital leases and operating
leases (executory contracts). Capital lease accounting works well today.
Operating lease accounting also works well from a P&L (straight line
average rent is the expense for a lease that is an executory contract or
rental) and cash flow presentation perspective, so only the value of the
lease contract should be reflected on the balance sheet with no other
changes. The value of the leased asset and lease liability for an operating
lease on the balance sheet should always be equal (the contract is the35
-
8/14/2019 201310 White Clarke Group Usa Asset and Auto Finance Country Survey
36/39
UNITED STATES ASSET ANDAUTO FINANCE SURVEY
unit of account) except for impairment and initial direct costs.
We think that the hurdle that the lessee must meet to unbundle a bundled
billed lease is too high in that it requires a lessee to find market evidence
of comparable contracts pricing. Lease and service contracts are most
often unique and are not public information. Our recommended relief is to
allow reasonable estimates to be used to avoid overcapitalizing the lease
portion of the contract.
We disagree with the proposed sale leaseback accounting in the ED wheresale treatment is negated if the seller/lessee is granted a purchase option
at an amount less than the sales price. This also is a break from the US
commercial law and tax rules. It also means there will be assets and debt
displayed on a lessees balance sheet that are not considered assets and
debt in a bankruptcy. This also means that lenders and credit analysts will
not have the information needed to evaluate credit risk. We cannot
understand why the accounting results are not the same for a new lease
with a no-bargain purchase option versus a sale leaseback with a non-
bargain purchase option.
Lessor issues:
We think there should not be symmetry in lessee and lessor accounting.
The lessees view is based on risks and rewards do I own the asset or am
I merely renting the asset to acquire a temporary right of use? On the
other hand, in the same transaction, the lessor could be an operating
lessor or a financial lessor. The operating lessor views the asset as its
stock-in-trade and will continue to lease that same asset multiple times
over its life as it comes off each lease, incurring maintenance, insurance
and tax costs. The financial lessor views the lease as a discreet financial
investment, only buying the asset subject to a lessee commitment to
lease and intending to sell it, often at auction, when the asset is returned
at lease expiry. The lessor accounting should reflect the nature of the
lessors transaction; as such, lessor classification should be based on
business model.
We think that current leveraged lease accounting and accounting for tax
credits in lease revenue (not tax expense per the ED) should be retained on
the basis that it reflects the economics of the transactions.
We think that all types of residual guarantees and residual insurance
convert residual assets from physical assets to financial assets.
Cost benefit:
We think the FASB/IASB claim that there is a financial reporting benefit is not
reflected in the comment letters from key stakeholders including the major
accounting firms and FASBs Investors Advisory committee (IAC).
We think the costs to transition and to comply far outweigh any benefit, even
if the issues regarding the flaws cited above are corrected. A major overhaul
of lease accounting is not needed. Remember that included in the initial goal
was saving the costs of analysts and lenders from calculating the as-if
capitalized values of operating leases. This is a simple PV calculation using
reliable, audited footnoted operating lease obligations that is done on an
infrequent, as-needed basis. Instead, the ED imposes complete and costly
changes to both lessee and lessor accounting, requires continuing
reassessments, and requires complex asset level transition calculations.
Those costs are great and we think they have not been accurately measured.
Without any analysis one should conclude that the