Is now the time to reduce margins to boost volumes?

Published in Asset Finance Europe April 2010

The asset finance industry has navigated some troubled waters over the last couple of years, and the outcome has been different for individual players. One recurring theme though, for those strong enough to have weathered the storm, is that their margins have held up well. Everyone always knew there would be winners and losers from the recession, and, if some of my recent conversations are representative, it seems that some of the stronger players with access to cash are now wondering whether now might be the time to drive home their success by trimming their margins to boost the size of their portfolios.

Which takes us to the question: what is the best way to profitably boost volumes?

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How to buy … fleet finance

Published in Fleet World, April 2010

It is remarkably easy to buy fleet finance. You call one of the many suppliers of fleet finance – banks, finance and leasing companies or contract hire companies – tell them what you want, compare their prices and services and choose the one that seems offers what you want and the best combination of price and quality.

The hard bit, in fact, is to work out what you want. There are many different ways to finance your company cars, including outright purchase, contract hire, operating lease, contract purchase, finance lease, hire purchase, conditional sale, credit sale (as part of an employee car ownership scheme), salary sacrifice, loans, bank overdrafts and cash, and if you want to release cash from your fleet you could consider a sale and lease back too.

Broadly, these products fall into two camps: those that help you buy a vehicle and those where you pay for its use then hand it back. Continue reading

Should fleet managers be worried about the proposed lease accounting changes?

Published in Asset Finance Europe, November 2009

For decades, the accounting rules (SSAP21, then IAS17) have classified lease as either finance leases or operating leases (contract hire).  Finance leases were like loans; the hirer was committed to pay back the lessor’s total investment. Operating leases were like long term rentals; the lessor kept the residual value risk and needed to sell the asset to recover its investment in full. So finance leases were shown as liabilities on lessees’ balance sheet whereas operating leases were accounted for ‘off balance sheet’; the lease payments being expensed in the profit and loss account and the future rental liability shown as a note to the accounts.

Investment analysts have never much liked these classifications. Continue reading

Finance Leases

Published in Fleet News, July 2009

A finance lease is a financing agreement that transfers “substantially all of the risks and rewards of ownership of the asset to the lessee”. In plain English this means that it puts you, the lessee, in much the same position as you would have been had you bought the asset.
It features some of the elements of contract hire: You pay monthly rentals, you hand the vehicle back at the end of the agreement, you cannot become the owner and the tax treatment is the same as for contract hire.
But it also has elements that make it similar to purchasing a vehicle on, say, lease purchase: Continue reading

It’s not all doom and gloom out there.

Last October I started thinking about writing a new book on Best Practice in fleet management.

I knew I wouldn’t just be able to sit at a keyboard and start typing; I’d have to get out there and talk to some subject-matter experts about what they were doing. Best Practice is certainly out there but I would have to go out and look for it.

I made a list of the people I wanted to talk to. The list was remarkably long. I certainly needed to talk to contract hire companies, accountants and so on but I also wanted to talk to some fleet managers. Some are doing great things but too often their stories don’t get heard. I realised that if I was going to do this project justice I would have to talk to an awful lot of people first.

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A week in the life

Published in Fleet News, December 2008

Monday

Met a new client. They need to reduce their fleet costs – fast. Long, detailed conversation about every aspect of their fleet. There are plenty of cost-saving opportunities. The trick, as always, is to get the right balance so the Finance, Operations and HR directors all end up happy.

Tuesday

Strategic planning session with the MD of a contract hire company. He knows times are hard but is committed to emerging from the recession amongst the winners. They have some choices to make; products, routes to market, how to use their resources, IT systems and pricing. Pricing is one of my pet subjects; endlessly fascinating.

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Insolvency?

Published in Motor Finance, October 2008

When I am writing this column I know I’m talking to the industry rather to its clients. Every so often a topic comes up that is best aired within the industry and would not go down too well if read by the industry’s clients. My subject this month fits squarely into that category.

I was chatting today to an industry insider who said something that stunned me. “You know Colin”, he said, “a few contract hire companies are now technically insolvent, they just haven’t recognised it yet”.

Can that be true?

I have seen evidence of declining margins as contract hire companies have struggled to keep up their market shares, and many players are experiencing reduced order levels. The downturn has lasted more than a year so it is having an effect on current reported profitability – but surely not by enough to make any business insolvent.

After an 11% decline in the last year (though I have seen conflicting figures) used vehicle prices may be stabilising. These price reductions have had a direct impact on contract hire companies’ bottom lines. Assuming an average contract hire company is geared 10:1, (though in many cases they are geared up much more than this by their bank parent companies,) an 11% decline in used vehicle values will certainly dent a company’s share capital and reserves but will not of itself make it insolvent.

That leaves us looking at the rest of the portfolio, and whether the residuals have been set correctly. Around a third of the industry’s fleet will have come off lease since the credit crunch started, and these vehicles will have suffered the 11% reduction referred to above. The remaining two thirds of the portfolio that existed 12 months ago is yet to come off lease. For many companies we are moving into the time of year when the auditors will be looking at the assets on the balance sheet and deciding whether they are valued correctly. Most contract hire companies will have to make provisions for RV losses. However, whilst an 11% write-down would cause most contract hire companies’ results to go into the red, this would still not make them insolvent. To do that the number would need to be nearer 30%.

Looking at business written in the last year or so, if a player had taken a particularly aggressive position on RVs in 2007, or had not moved its RVs down significantly in 2008, this could require very large provisions now that would wipe out a sizeable chunk of the company’s equity. But not all of it.

So no, I don’t know of any contract hire companies that are insolvent or are likely to become so in the foreseeable future. What I do know, however, is that the situation is uncomfortable for many players (losses, provisions, and fierce competition as mentioned above, tightening of credit lines, etc). And things could get a whole lost worse if used vehicle prices decline sharply.

Professor Colin Tourick