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

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ASSET FINANCE INTERNATIONAL

IN ASSOCIATION WITH

WHITE CLARKE GROUP

White Clarke Group

United States Asset and Auto

Finance Country Survey


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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


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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



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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


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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.

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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


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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


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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.


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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%.


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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.


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


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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%


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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%.


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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.


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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.


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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


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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


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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.


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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


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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


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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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

[email protected]


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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.

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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.

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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.

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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.

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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


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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

Documents

201310 White Clarke Group Usa Asset and Auto Finance Country Survey