VEHICLE FINANCE: Funding faces uncertain future

Plans by more wholesale funders to enter the vehicle finance market this year should lead to lower lease rates and easier credit during 2011. But some industry experts are warning that the aftershocks from almost three years of economic upheaval are not over yet.

John Lewis, chief executive of the BVRLA, is confident that more banks will return to the vehicle rental and leasing market. He believes funders are taking a more positive view of vehicle finance, recognising the excellent returns and low risk associated with it.

The underlying lack of cheap credit has been one of the major drivers for change in the industry after the boom years of the first half of the decade. Consolidation and collapse within the banking sector has also been dramatic.

Figures from researcher ExpertEye show there were at least 19 funders willing to supply finance to vehicle lessors in 2006. By October 2009, that had dropped to 10 and more have gone since then. Major players such as HBOS and Alliance & Leicester have been absorbed into bigger entities or exited the market.

Roddy Graham, commercial director of Leasedrive Velo, says: “The shortage of asset financiers has seen some banks push up the cost of money, even in a low interest-rate economy. You could argue that it was artificially low but now it’s gone too far the other way.”

Graham is unwilling to give actual figures but says the ‘spread’, a measure of the margin that banks make, has more than doubled in three years. Leasedrive Velo has reacted by bringing in a new funder, Investec, and Graham says others, including Santander, are now looking at the market.

Asset financiers have also tightened their lending criteria and often ‘look through’ the leasing company to check the financial status of the end-user. Mike Moore, Deloitte director, says this has affected who the leasing companies can do business with.

“The lending policies of core funders, behind the lessors, have changed. Depending on how they are financed, some end-users have been running into credit rating issues and that has meant having to outright purchase, with the lessors giving support services.”

Figures from the Finance & Leasing Association reveal that the proportion of business cars on leases has been dropping, from 66% in 2008 to 64% in 2009 and 57% in 2010. The remaining deals were mainly hire purchase, although some finance was provided in the form of loans.

The key question is: where do we go from here? Perhaps not surprisingly, each sub-sector (independent, bank-owned, carmaker-owned) within the leasing industry will tell you they are in a strong position.

Roddy Graham, representing the independents, is realistic enough to admit that “the halcyon days of low wholesale money” are over as funders focus “very, very hard on recovering margin”. But he also questions whether the banks actually want to run vehicle finance companies themselves.

“I think the banks are asking themselves if they should be in this sector at all and we know at least one bank-owned business is up for sale,” he says. “Banks like the sector from the point of view of lending money, but do they want to also be involved in the risk?”

On the other hand, Stuart Houlston, managing director of bank-owned Lombard Vehicle Management, says: “Our criteria for lending has not changed – we are open for business and have the capital available to meet demand from credit-worthy businesses and we remain committed to helping the sector grow.”

Indeed, he takes a swipe at the independents: “The recession has pushed some lenders to withdraw or cap their exposures to the market, the impact of which has been felt within those businesses who need access to funding through financiers.

“Lombard continues to remain committed to businesses of all sizes and across all sectors through our asset-backed funding solutions. This is a significant advantage that we enjoy over straight debt-based lenders.”

Genuine multi-make, car manufacturer-owned leasing companies have been among the casualties of the financial crisis and only BMW-owned Alphabet remains. The company has made clear its ambition to grow to become a top-five funder by 2015.

Mark Sinclair, Alphabet director, says: “The UK banking sector still hasn’t emerged from the turmoil of the financial crisis and, from a lessee’s perspective, the market is still a long way from where it was before the crash. Those leasing companies that have direct access to their own funds are at a clear advantage.

“In Alphabet’s case, we have access to competitive funding from outside the UK banking sector and while some players have been actively shedding what they regarded as marginal customers, we took on over 3000 new accounts last year.”

However, Sinclair warns there may be rocky times ahead.

“The cheap money that the banks have tapped into through the Bank of England comes to an end this year. The banks will have to refinance around £110 billion on the open market over the next 12 months and then find something like £500 billion by the end of 2012,” he says.

“That will mean the finance element of lease rentals will go up for leasing companies that depend on them for funding. It is possible that some leasing customers could find doors opening to them in 2011 only to see them shut again in 2012.”