(LtoR: Christian Roelofs, Finativ; Warren Mutch, Shawbrook Bank; Andrew Boyle, LGB & Co)

Asset finance companies facing rapidly changing interest rates should review their funding and business strategies to ensure that they are suited to a more challenging trading environment.

This is likely to be the advice at the Funding your portfolio session at the forthcoming Asset Finance Connect UK Conference on 5 December in London. The session includes panelists Andrew Boyle managing director, capital markets at LGB & Co; Ryan Whitworth, regional sales director, Leumi ABL, Warren Mutch, head of speciality finance, Shawbrook Bank, and Mark Picken, CEO, Shire Leasing.

At present smaller asset finance companies which are reliant on fixed rate block discounting for their funding arrangements are relatively protected from the immediate effects of higher market interest rates on their current portfolios but face both higher rates of interest and higher levels of default which may make it harder to write new deals.

“Those who are more highly leveraged and short of unencumbered replacement paper may be more at risk.” comments Warren Mutch, head of specialty finance at Shawbrook Bank. “But there is no need to panic” he reassures. “the market is well supported by a diverse range of block funders, who are experienced in supporting lenders through difficult times, which is a good thing for the leasing industry”.

“Mid-sized finance companies who have variable rate warehouse facilities may have some exposure if they have not hedged through swaps or interest rate caps “ said Stef Wolvaardt, CFO at Simply, but added that he is not aware of any who are currently at risk.

Large banks and captives will have more sophisticated strategies in place to cope with episodes of severe, specific stress. They will have run rigorous scenario-based analysis of their portfolios and should be able to model the impacts of this week’s market turmoil reasonably well.

“The long-standing benign conditions in the market may well mean that many finance companies are not prepared for a return to conditions that were considered normal twenty years ago, when interest rates and defaults were higher” said Christian Roelofs, CEO of Finativ.

“During COVID-19 we saw some finance companies suspending new business not because they were particularly worried about credit risk, but because they had to get their new business team working on administrating forbearance across their portfolios. It will be interesting to see how many of them learned the lesson, and are ready for increased work levels in portfolio management, collections and recovery in the coming months.”

David Betteley points out that government behaviour during the COVID-19 crisis is probably not an indicator of how they are likely to behave during the forthcoming recession. “COVID was really quite different to what is happening now – when there was forbearance and government intervention. A lot of finance companies continued to trade as normal. I don’t expect to see the same government intervention this time round.”

“At present funders have not passed on the full rate increase to their customers.” Said Stefan Wolvaardt. “Borrowers who are offered a good deal right now should take it quickly, or risk seeing it withdrawn”. It seems unlikely that many lenders are betting on this being a spike in interest rates.

“This is not the end, it’s the beginning and finance companies need to review their strategies and ensure they are prepared. As a result, this may lead to increased pricing to allow for an increase in expected losses but that only helps with new business. Wider changes and efficiencies may be required to maintain current profitability ” said Christian Roelofs.

“The good news for leasing providers is that so far collections performance has been good,” said Warren Mutch. “Challenges are probably on the way but are not yet evident. This gives lenders some room for manoeuvre.”

Andrew Boyle, managing director, capital markets at LGB & Co. Ltd argues that the focus for finance companies should be on managing their existing portfolios and not necessarily on growth and increasing market share.

“Taking into account the increasing cost of funds and the threat of a recession, leasing companies should reassess their strategy. The desired leverage is the starting point. Is it time to dial down growth plans and focus on maintaining better equity coverage? Is the current situation an opportunity to decline marginal proposals and upgrade the quality of the book? Is it time for a review of business sectors exposures? It is wise to think of rising funding costs as a wake-up call to review both funding and business strategies.”

Delegates wishing to attend the Asset Finance Connect Conference can take advantage of the early bird rates by acting before October 8th. Just like finance deals, after then the cheaper rates will disappear suddenly. Click on the link to book online.