Published on 02 March 2010

The equipment funding industry is a very complex one, with a diverse mix of players. For instance, there are the major banks, regional banks, the international banks, along with non-bank lenders such as GE and Capital Finance.

Major brand-name manufacturers also have their own finance arms. Market heavyweights like Caterpillar, Canon and Fuji Xerox are prominent names in this arena. While Toyota, BMW, Mercedes and others run car leasing as a major business in its own right. Of the 90-odd members of the Australian Equipment Lessors Association (AELA), more than 60 are financiers, says the group’s director John Bills. “The balance are service providers to the first group. Mergers have meant some members have been taken over and disappeared, but new players have emerged to take their place in the market,” he said.

“2009 was a lot better than many of my members thought it would be, but the environment varies from company to company.” Bills also says that levels of leasing business have held up reasonably well in the GFC. “That, of course, had a lot to do with the tax allowance, introduced from 31 December 2008, which gave an immediate tax write-off of around 30 per cent and 50 per cent to large and small businesses, respectively.”

“While this initiative was phased out for large businesses at the end of June 09, and for small businesses with turnovers of less than $2 million by the end of December, it was a very generous incentive to buy capital equipment, and our members are the ones who finance that capital expenditure.”

Whether the taxpayers’ money has been enough to pull the industry out of the doldrums is still unclear. “After one month, it’s too early to tell if the incentives were phased out too soon. However, it’s clear business is not booming: a look at the RBA’s figures on financial aggregates shows business credit has declined over the past year. Business has pulled its horns in: large businesses have raised equity and decreased debt, and small business is struggling for funding,” says Bills, sounding a very cautious note.

Securitisation opens up more leasing deals

Making an emphatic return to favour in 2010, securitisation is one major source of funding for lease financiers large and small. “Issuance in the Asian structured finance market will rise moderately in 2010, as investor interest makes a comeback, and the price gap between investors and sponsors narrows,” says Moody’s in a new report on the industry.

The agency also looked specifically at the Australian market, giving a stable outlook for collateral performance for Australian asset-backed securities (ABS) in 2010. “The rating outlook is also stable, due to sound asset quality and robust transaction structures,” says Moody’s.
The performance of Australian ABS transactions bodes well for all players in the industry. In the immediate aftermath of the onset of the global financial crisis during the first half of 2009, uncertain macroeconomic conditions and used motor vehicle markets translated into increasing delinquencies and losses, but performance metrics have now stabilised.

Although the unusually low levels of credit impairment seen earlier in the decade may not return for some time, the better-than-expected performance of the Australian economy points to the recent stabilisation trends extending into 2010.

Moody’s says recent developments in the auto sector are encouraging. Vehicle sales are returning to trend with growth evident in some subsectors, and global auto manufacturers are starting to see the light at the end of the tunnel. “We believe that in time the improving conditions in the sector will translate to reduced pressure on recovery rates in Australian ABS,” says Moody’s.

An appetite for expansion

Two good indicators of a positive outlook for the Australian asset finance industry are an increasing interest in expansion and an appetite for technological change.

As Kathryn Cussell, director of CHP Consulting Australia (CHP), a supplier of software and consultancy services to the asset finance industry, notes: “As a global consultancy, we have the advantage of seeing first-hand how the Australian leasing industry has been less affected by the credit squeeze than its European and North American counterparts.

“In particular, we’ve been talking to a number of prospects about the possibility of expanding their operations beyond Australia’s borders, and how we can help them do that in a cost-effective and painless way. Our prediction is that the major surviving asset lenders will need the capacity for global presence to maximise their effectiveness and growth .”

With this aim in view, CHP has developed and launched the latest version of its ALFA software solution, ALFA v5. ALFA v5 comes as the result of two years of research and development, and over $10m in fresh investment. It is set to augment previous versions of ALFA as the market-leading system, and is designed to have a particular appeal for multinational asset lenders.

Speaking at ALFA v5’s Sydney launch last month, Cussell explained that ALFA “introduces full multicountry functionality, allowing lessors with international ambitions to conduct business simultaneously in any country, language, currency and accounting standard using a single platform.”

“We have changed our technology stack to be purely web-based while retaining our existing functional heritage so that we are better equipped to service our clients’ global ambitions and desire to keep pace with IT change,” she said, noting the value of investing in the latest technologies. “ALFA v5 gives users the opportunity to work purely from a familiar web browser, while minimising deployment and ownership costs, simplifying integration and providing a fully scaleable, virtualised solution,” she said at the launch, adding: “This new generation of software enables our clients to overcome the challenges of different geographical territories while continuing to drive down operational costs”.

In the wake of the ALFA v5 launch, Cussell says interest has remained strong from existing global players and regional clients looking for a
stable platform on which to build and expand into other markets: “We believe that the strong finance market and patchwork of varying territories
in the Asia-Pacific region are the perfect combination for realising the benefits offered by ALFA v5.”

On the top

So, the prospects for the Australian economy remain good, even though businesses’ access to funding will be tight for some time yet. Large Australian financiers in particular are poised for expansion beyond Australia. “We’ve seen a number of our clients come to us with requirements for expansion into Asia-Pac,” says Cussell.

It’s here that solutions such as CHP’s ALFA v5 will prove their true worth to a wide range of users.

The above was published online by Australian Banking & Finance on 16 February 2010. Reproduced by permission of the publisher.