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Nic Evans, IT director, consultant and Asset Finance Europe Member
Nic Evans argues that lessors lack a clear post-recession business model and suggests some solutions
Historical enterprise: In the 1950s the Emirate of Dubai borrowed money from Kuwait to dredge the creek Khawr Dubayy. Although their more recent investments may not have been so successful, there is no doubt that this deepening of the harbour was a critical step to establish Dubai as a hub for world trade.
In his recent article for Asset Finance Europe, and in other industry forums, Lindsay Town has eloquently argued for the need to develop deeper funding markets and remove barriers that are holding our industry back.
Aside from poor risk management, a common strand in the failures and basket cases in the finance industry over the last two years has been the failure of wholesale funding. In the US the vicious circle with lack of confidence hitting wholesale funding contributed to the fall of both GMAC and CIT. In the UK, Lloyds Bank Group faces a time bomb with half of its total funding maturing in under a year.
Yet I visit investment banks dealing in the same basic commodity of corporate finance, and business is thriving – even though it may not have bounced back quite as much as their casino products. I see it all coming down to the liquidity, efficiency and transparency of syndication markets.
Having come in to this industry as a technologist, I believe that the technology for such syndication processes is already established and mature. This is essential for the efficient and scalable functioning of the markets. What seems to be lacking is the collective finance industry desire for action. This could be because of the lack of a clear business model for such future markets, which in turn prevents agreement on the benefits.
So let us look at some concrete solutions. These markets could develop in several areas:
Deal broking
Let me immediately preface this suggestion by saying this would not be mimicking the personal finance websites, epitomised by those annoying UK adverts for “Compare the Meerkat”. Rather it would be an efficient way for funders to receive the full details of an opportunity to assess risk and pricing, and for corporate treasurers and chief finance officers to fully evaluate quotes, comparing terms and service. It would be broader than the current broker market.
Invigors’ study earlier this year identified the trend for vendor-finance providers to move away from single-funder relationships toward a panel of funders. Without straying into the area of sub judice, perhaps failed Smartfundit.com had one right idea?
More efficient syndication and securitisation of leases
As in the syndicated loans market, leases would be underwritten by a lead funder and then bundled (for smaller deals) or syndicated to other players in the market. The difference between traditional lease syndication practice and this new model for lease syndication, along the lines of the syndicated loans market, would be in efficient data exchange and resulting liquidity. On some matters I would have to defer to legal and accounting experts for the implications. Could the lead funder keep the customer relationship, for collections and end of term arrangements? This would help with the liquidity and tradability of the syndicated deals. Or would a full transfer be needed to get a true sale?
Syndication of leased-backed products
Rather than syndicating the lease as a whole, it could be broken up into component products – the rental stream as sale of receivables, and even the residual. This would broaden the market for syndication, including those with no appetite for one particular risk in a lease. They could even be traded cross-border with the sale of receivables free of the tax and legal implications of the ownership of the leased asset.
The critical distinguishing feature of all these is a standard file of data about the opportunity/deal, the terms of the deal and identification of the customer. The efficiency and transparency of information exchange is the key to liquidity in this new market. The efficiency is also needed to allow better returns on finer margins.
There are obstacles to all this – can I say the ‘silt in the creek’ to be dredged for deeper financial markets? But that is a subject worthy of a further article.
Nic Evans is an IT director and consultant in financial services technology and business change management. He has specialised in international asset finance, working in 12 countries across Europe and America over 20 years with Accenture, Lloyds Bank Group and Key Equipment Finance. He can be contacted by email nic@nicevans.eu or through LinkedIn http://uk.linkedin.com/in/nicevans |
