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M&A - Back from the dead?

Just a few months ago at the start of the current recession, there was much talk, anticipation and excitement on the ‘buy’ side about the prospect of numerous portfolios coming on to the market at hugely discounted prices. It was expected that some lessors would have to sell their crown jewels just to stay afloat while a lack of liquidity would cause others to head for the emergency exit and sell what they could for whatever sum could be agreed.  So many theories and strategies were prepared by specialist M&A firms we almost ran out of code words !

On the ‘sell ‘side, those wanting to retire and sell the business, balance their sector exposure, move off some unexpected problems, faced a different set of challenges.  How do I part with my prize – or not so prized - assets? For many lessors, years or even decades of growth, have meant little practice in selling.   My (usually unappreciated) words of comfort/support to lessors preparing for sale has been ‘Due Diligence is good for the soul. It will tell you more about your business than you could possibly believe’.  That saying was never disproved but did lead to some alternative strategies about how to react to whatever problem or opportunity had been identified.  

Well, what happened to all of the M&A activity?  Of all the talk  - as usual – turned out to be mostly that – just talk.   Certainly, portfolios were for sale – some of them were even quite good, some were OK – just, but most were far from that and were perhaps an attempt to off load portfolios of dubious quality that wouldn’t be discovered in all the excitement of the expected ‘gold rush’.   Such vendors were doubly disappointed – firstly because the leasing community is usually pretty smart and even when at fever pitch, some pretty wise heads remain cool and still ask awkward questions.  Also, the pricing levels were usually unrealistic.  As a general rule,  anything at more than a 15-20% discount to NBV needed some serious probing.  There were – and perhaps still are – some serious discounts for some books but obvious questions on the topic of ‘who, what and why’ usually produce an answer along the lines of anything that cheap will cost you dear in the short to medium term!

Also, the market for buyers was pretty tough. The almost complete lack of liquidity in the market meant that even if portfolios did survive any decent DD analysis, there were very few sources of debt available to support any purchase irrespective of its price or strategic value.  I don’t believe that anyone really imagined the seriousness of the coming situation in the heady days of September/October 2008 when we spoke about trimming portfolios, attaining a better sector exposure profile  - and taking advantage of the downturn to make your operations as fit as possible. 

Certainly, there is now more money available for the right project. Although some larger consultancies have withdrawn from asset finance M&A, Invigors are engaged on a number of programmes at present with real chances of success.  BUT they have been a long time in the making and have been a combination of a long hard slog, patience, painstaking attention to detail and we have certainly not found any easy answers to some of the issues being faced. 

Just a few specific questions to ask about any portfolio are usually enough to send shivers or a tingle up the spine of the acquirer:-

• Is it really for sale – why; do I know/trust the vendor?
• Do I need it - can I buy it?
• Do I have the capability to do the ‘right’ deal?
• What will I do with it – can I integrate it or do I need duplicate systems – avoid at all costs !
• What is the net return after all costs – is growth by acquisition the only answer?
• .......and finally, always, ALWAYS trust your first instincts.

This latter point, in the midst of these most uncertain of times, is where market experience really pays off.  Anyone can be an advisor, but only a few can listen to and understand what you feel as well as what you say.  And today, tomorrow and for the foreseeable future that is one of the most important DD skills to practice.  No one can shrink to greatness but to take advantage of the current situation demands a deep knowledge of the market, attention to detail, good connections – and some luck if it is to all go as well as expected.

If you would like to discuss this subject further, Invigors' M&A team is very much open for business - contact Chris Boobyer on +44 (0)845 003 1000 or e-mail chris.boobyer@invigors.com

Authored by Chris Boobyer

Budget Review April 2009

In his Budget statement this year the Chancellor presented a relatively upbeat projection for moving out of recession towards the end of this year. This involves a significant cost to the Government’s finances with massive levels of borrowings in each of the next few years. Unfortunately most other forecasters take a much more pessimistic view and the general expectation is that the Chancellor will yet again be revising his forecasts down and further tax rises are expected to be required after the 2010 election.

Specific tax and related measures affecting the leasing industry are:

• A temporary first year capital allowance of 40% for expenditure on plant and machinery incurred in the 12 months from April 2009. However, this does not apply to expenditure on assets for leasing, to cars or to assets that only qualify for WDA at 10%. Various organisations, including the FLA, had been promoting an increase in capital allowances as a route to stimulating investment. The exclusion of leased assets from this increased allowance, especially when linked with the enhanced tax loss carry back arrangements, will mean that it will be relatively more attractive for the user rather than the lessor to be eligible to claim capital allowances on eligible assets. This will favour HP, loans and long funding leases against leases where the lessor retains the entitlement to capital allowances.
• Confirmation that the new capital allowance and lease rental restriction scheme for cars applies from 1 April, with WDA at 20% for cars emitting 160g/km of CO2 or less and 10% for higher emissions. Alongside this, there are changes to the income tax benefit in kind rules, including the CO2 bandings being reduced by 5g/km from April 2011.
• Relaxation and a temporary deferral of the “worldwide debt cap” restriction, although the subsequent Finance Bill still seems to leave concerns for wholly UK groups involved in operating leasing.
• Various relaxations are being made to the sale of lessors legislation (FA 2006 Sch10) in areas identified in the Summer 2008 consultation where the existing provisions imposed an unreasonable liability and there is also an extension to 5 years in the period over which the expense can be relieved.
• There are changes to the sale and leaseback rules, to remove some avoidance opportunities. In addition changes are being made to the provisions covering disposals of income streams without a disposal of the underlying asset.
• A car scrappage allowance of £2,000 has been introduced as a reduction in the price of a new car when one over 10 years old (and owned for at least 12 months) is traded in. The cost will be shared between the Government and participating car manufacturers.
• The Finance Bill includes clauses to implement the revised EU VAT “place of supply” rules for services from 1 January 2010, impacting on cross border leasing.

To discuss the implications of the 2009 Budget further contact George Tonks on +44 (0)845 003 1000 or e-mail george.tonks@invigors.com.

Authored by George Tonks

Vendor Finance - Relationships under strain

Invigors recently conducted some pan European research on the impact of the credit crunch on the relationship between vendors and their funding partners.  Predictably the current business climate is tough. Over 70% of vendors surveyed had experienced a decrease in sales over the last 12 months and only 9% expected there to be any improvement over the coming year.  That said, many were aware of increasing pending demand which would be released once the economic climate showed signs of improvement.

Over 90% of vendors had witnessed a decrease in the availability of funding during the past 12 months and in the ‘flight to quality’ which is mainly towards the public sector, the market is becoming very overcrowded and subject to price competition.  Funder service levels to vendors have in many cases showed a decline for usually two reasons; either the funder has downsized and is now reliant on less experienced staff or is so overwhelmed by demand that they have been unable to cope.

55% of vendors said lower acceptance rates had a direct impact on their sales performance.  Sectors worst affected appeared to be markets such as CEE and also the dealer channel – some vendors felt that many of the latter won’t survive. Vendors commented that sales targets had been missed as a consequence of funders’ withdrawal from some sectors with flow systems being particularly impacted where support was withdrawn.

The current situation has led over 40% of vendors interviewed to actively consider establishing their own captive operation. Many feel exposed because they had invested heavily in either solus or duo funder relationships which now threaten their survival.  For this reason many vendors do not feel in control of their own business and are considering a captive, or variant thereof, as a possible answer.

Finally, the quality of communication between funders and vendors had changed - not always for the better. Some funders had worked hard at advising, discussing and agreeing future actions affecting the vendor's business whereas others had simply advised changes - often with minimal notice. These latter actions threatened and in some cased destroyed business relationships often built up over many years

To learn more about our research into the changing Vendor Finance relationships contact Mike Roberts on +44 (0)845 003 1000 or e-mail mike.roberts@invigors.com.

New tax regime for cars

Final proposals for the new capital allowance and rental regime for cars are included within the Finance Bill, published on 30 April. The new provisions are confirmed as taking effect from April this year, but generally do not apply to cars acquired or to leases entered into before that date.

Under the new capital allowance rules, cars with CO2 emissions of over 160g/km will only qualify for 10% writing down allowances. This replaces the current system where allowances have been restricted to £3,000 pa per car, which historically has affected cars costing over £12,000 (although the April 2008 changes have affected that value). The new rules will also bring these 10% cars into a capital allowance pool, so that there will no longer be a balancing allowance on disposal.

The restricted tax deduction for car leasing rentals is also being changed for leases entered into from April 2009. A straight 15% disallowance for cars with CO2 emissions of over 160g/km will replace the current formula based on the car’s cost and £12,000. In addition for new leases this restriction will apply no more than once in any lease chain.

These changes will affect any company that owns or leases cars. For lessors, pricing and the relative attractiveness of different financing products will need to be addressed, which may lead to changes in product offerings. There will also be matters to deal with on the transition into the new regime. In addition, the deferred tax effect and its impact on returns will need to be considered.

To discuss these changes and the impact on your business contact George Tonks on +44 (0)845 003 1000 or e-mail george.tonks@invigors.com.

Authored by George Tonks

IASB/ FASB proposals to put all leases on balance sheet

In late March the IASB and FASB finally issued their joint discussion paper on leases, aimed at removing the current “off-balance sheet” treatment of operating leases for lessees. This is the first formal step towards a new accounting standard, to be in place by mid 2011. There are some areas where the two Boards differ in their views on the detail and these will need to be resolved before a common standard can be issued. The paper does not address lessor accounting, which will be considered in the future.

Under the current accounting standards (IAS17 and FAS13, as well as SSAP21), leases are divided between finance (or capital) and operating leases, with no asset or liability appearing on the lessee’s balance sheet for an operating lease. These new proposals will abolish that distinction and require lessees to recognise an asset and a liability on the balance sheet for any lease. The impact for lessees will be increased gearing disclosed on the balance sheet and the need to undertake potentially complex calculations. Consequential impacts will be on the availability of financial facilities and banking covenants.

A study undertaken by the University of Stirling around 10 years ago showed overall gearing as a result of capitalising all leases for their sample of 200 companies increasing by a factor of over 200%, whilst for some individual companies the effects would be even more dramatic. The principal impact comes from property leases, although there can be significant effects for other major assets currently financed on operating leases.

The proposals are that at the start of any lease the lessee should include on its balance sheet an asset and a liability equal to the present value of the minimum lease payments over the lease term, with the lease term being assessed on a “most likely” basis. The asset and the liability would then reduce over the lease term, using an “amortised cost” basis. The discussion paper, which runs to over 100 pages sets out detailed arguments and proposals around lessee accounting, although no clear conclusion in reached on a number of areas of detail.

The overall stance of the European equipment leasing industry is to not disagree with the principles behind the proposals, but to seek to minimise the impact through exclusion of leases that are not material or core to the lessee’s business.

For more information contact George Tonks on +44 (0)845 003 1000 or e-mail george.tonks@invigors.com

Authored by George Tonks

Taking Advantage of the Economic Downturn – 6 key insights

In October we ran the first in a series of Asset Finance Executive Briefings, featuring a series of high profile guest speakers. As you would expect, the seminar generated lively engagement and key insights to help asset finance executives shape their future business strategies. 6 of these insights were:-

1. The good news is that although investment levels are down, the attraction to customers of some fundamental benefits of asset finance (extra line of credit, liquidity and cashflow protection, transfer of disposition risk) has never been stronger. Funding margins can be attractive even for strong credits, and a number of traditional non-finance customers are now switching. New business is available for sales teams that are suitably trained, focused and motivated.
2. Competitor weaknesses will appear rapidly. There will be opportunities to target their best customers and staff but this will require the combination of articulate market intelligence processes and the ability to shift sales focus and marketing activity at speed. It’s no good having a direct mail and telesales campaign landing 3 months later - the opportunity will be long gone!
3. Bad debt has grown rapidly, and notably within the SME and broker sectors. Liquidity and capital shortages are likely to drive a) higher margin expectations from these areas b) tighter scrutiny of the profitability of broker accounts, including funder withdrawals from some or all the market c) lower broker commissions d) broker consolidation.
4. In some sectors, bad debts have gone from all-time lows to all-time highs within a 12 month period. Bad debts over the next 12 months will be driven by lending decisions made during a previously benign period of economic growth. Many credit and collections staff, at least up to middle management level, will have no experience of operating in current conditions and need up-skilling fast. It’s likely processes and procedures will need to change.
5. Finance companies will be pressured into re-gearing, typically from 9:1 to 6-7:1. As ROE requirements won’t change or may even increase, there is likely to be a) a drive towards increased operating efficiencies, including through increased scale, b) market withdrawal from sub-scale players, or those with aggressive profitability targets c) M&A activity to drive scale and consolidation.
6. M&A deals (large and small) are available for those with funding capacity. Deals are more likely to be done bilaterally than by public auction, and at considerable speed. In this environment you need at least a pre-researched, target list of companies you’d like to acquire to reduce the risk of a rushing a bad decision. And be bold in your target choices - previously unbuyable businesses may now be within your grasp.

This drives two key insights of my own:-

• Invigors exists to help finance providers with exactly these sorts of issues – if you don’t have the skills or capacity to move as fast as you need to in the current market, please call us on +44 (0)845 003 1000 or e-mail peter.hunt@invigors.com (even just to bounce around some ideas).
• The next Asset Finance Executive Briefing is on 20^th November and will focus on ways of increasing profitability for finance providers, an essential requirement for many businesses. For more information and to register please call +44 (0)845 003 1000, at our website, or by downloading the brochure here.

Key questions facing Captives and Vendors

While the credit crunch has been breaking around us the initial impacts on Captive and Vendor Finance Companies has generally been indirect in nature, such as a rising delinquencies. Now as we head down into a recession there are a number of key questions, challenges and actions that Captives and Vendor Finance companies should be addressing. It is a good time for leasing companies to review their positioning and assess how well they can survive the turbulence ahead.

Some of the key challenges and actions are:-

Portfolio Credit risk profile. In the present environment the leasing companies will need to understand the latest credit risk profile of their existing portfolio. As various industrial segments consolidate during this recession, and other customers credit ratings change, the Leasing Company needs to be sure of the true risk they are taking.

Collections. Now is the right time to invest in the collections process to reduce aged tails. It would make sense to promote the direct debit penetration on new business to improve the process. Equally if the recession is as bad as some fear then you will need to check that the legal collections process has the capacity to handle increased activity.

Partners. Having a slick process to pay partners for business in a short period of time will ease their liquidity concerns and gain you more business. However you need to have a clear view of any exposure you have to them and their financial stability to weather the storm. What contingency plans do you have to cover the marketplace should one fail?

Interest Rates. Despite headline rate reductions the true cost of new borrowings is likely to rise as the financial institutions seek to increase their provision levels and recoup their profitability. This will interact with pricing issues and could result in squeezed margins.

Residuals. To the extent there are residual positions these need to be reviewed to validate if they are still achievable. Particularly if new products are being discounted and there is a glut of off lease equipment to be disposed of, it will make the realisation of residuals more challenging.

Expenses. With a squeeze on margins is the expense base appropriate for the current environment and activity? If cuts are being made then you need to ensure that core business activities are protected.

These are some of the key questions and actions. It is always beneficial to make an objective and honest assessment of your business so you can identify both the strengths and weaknesses and take appropriate action on a timely basis.

• New Customers. With the increasing focus on capital utilisation although general activity may be down there may be an increase in leasing. Given that the marketplace is going to get tough you may end up with less competition as some businesses withdraw. Keeping in touch with the market will leave you well positioned to take up any opportunities as they arise.
• New Resources. Building on this last point, as businesses withdraw there may be good quality resources available to help position yourself for the future.
• New Partners. Equally if competitors withdraw from the market then the opportunity arises to secure new partners and outlets if you are nimble and know what you are looking for.
• New Portfolios. The inevitable consequence of businesses withdrawing from the marketplace is that portfolios may be available for purchase. If you have the funding lines available and the right team and advice to manage the due diligence process and negotiate the deal then you could emerge from this recession bigger and better!

Of course other competitors may move in to your segment or a vendor may decide to create a captive, however we are probably all used to those sorts of challenges.

If you would like to discuss a structured ‘fitness assessment’ or any other issues raised by this article please contact Brian Thompson on +44(0)845 003 1000 or email brian.thompson@invigors.com

Authored by Brian Thompson

The Credit Crunch and Capital/Gearing

Much has been said in recent weeks about banks raising additional capital as a consequence of the credit crunch. Whilst some of this is to replenish capital eroded through losses, the amounts being raised are typically much higher than the reported losses. In addition, banks have been reducing their lending and other exposures and so reducing their minimum regulatory capital requirements.

The overall effect of the measures taken is that capital ratios generally will be higher in future than they have been over recent years. This reduction in gearing will be felt by asset finance businesses as well, with a direct impact on companies within banking groups and a reduction in the appetite of banks to finance independent companies. For example, a company that has been used to operating with gearing of 9:1 may find that it now has to operate at 6:1. Reduced gearing will then affect profitability in terms of both reported profits and return on equity or economic value added; even reducing these below hurdle rates.

As a consequence all companies in the financial services sector should be reconsidering operating models, margins and expense structures to ensure these are appropriate to delivering financial and other targets. Some business sectors may be uneconomic on current bases, with major restructuring or divestment required. Others may find that third party divestments allow the opportunity to create a financially viable scale operation.

Invigors has the expertise and experience to work with you to reassess your business and to structure it for the new economic climate. To find out more contact George Tonks on +44 (0)845 003 1000 or e-mail george.tonks@invigors.com

Now is the time to demonstrate leadership

The top jobs in our industry are tough – we need to demonstrate we are on top of the game and able to think and lead our teams towards a competitive future. I am sure that by now everyone is fed up with the saying "We are really lucky to be witnessing such dramatic events ……etc." Undoubtedly,this is history in the making but whilst the global crisis may be out of our hands local solutions are definitely within reach.

Is it difficult to do good business? Yes. Are we see any shortage of demand? No. Are funders making money? Well, if they are not making strong margins now then there really is a problem - but the bottom line may be a different story!

Never before have banks or leasing operations been forced to take such a good look at themselves. Some are horrified at what they see – and some are even more horrified at what they don’t know. For example, current cost income ratios: what should they be – what’s the plan? Which are the most efficient costs – internal/external sales, marketing, customer support, Collections?

These ‘live wire’ costs play havoc with your bottom line and ratios – but do you know all there is to know about them? They should now be your specialist subject.

To start thinking about getting the business into better shape here are some practical actions discussed at the Invigors Executive Briefing last month:

1. Maximise the return from existing customers – use intelligent applications with pre-underwritten credit lines and offers of help to customers not sure of where to go for funding. This is as much about recalibration of risk as marketing. Focus on what is best for today – and tomorrow; and then look again the day after.
2. Don’t give customers surprises – other than good ones, e.g. "We have been thinking about you – many of our customers are worried about their finance contracts – you shouldn’t be. Here are your current commitments – this is what else we can do for you."
3. Critically review your business sources – which ones are too hot to handle / not profitable? Now is the time to jettison your unwanted baggage.
4. This is no time for order takers – a practical application of knowledge and experience is now very much required. Undertake a skills audit; focus on three key things to improve your finance sales. Make sure everyone is up to speed and competent.
5. Who are the top performing sales people and why? Don’t just measure volume; customer quality is critical; what are their territories and customer concentration; is their success built on solid foundations or luck?
6. Refresh the gene pool – there is available talent in the market through no fault of their own. Grab them but make sure you know what you are getting and how you can develop them further.
7. How many steps from customer to CEO? Is it two, three, four…. Anything more than three needs more thought in today’s market. How fast can you actually react to changes in demand; what are your customers trying to tell you – are you to far away to hear them?
8. How much of the back office is automated – are you satisfied with the cost savings – how do you know? Customer access to systems i.e. self serve, is the most efficient way of reducing resource costs providing the customer experience is excellent. When did you last take a customer journey – and when did you do the last competitor comparison?
9. Communicate, communicate, communicate – with everyone! Customers, staff – and their families, shareholders – your local business community. There are many people in our companies and in our communities who don’t know which way to go.

We have to restructure our businesses – now, today - when it is exactly the right time to do it, not tomorrow when it may be too late. To discuss how this approach could be applied to your business contact Chris Boobyer on +44 (0)845 003 1000 or e-mail chris.boobyer@invigors.com

Authored by Chris Boobyer

Smaller leasing companies – a question of survival?

After the seismic shifts in the banking world over the last few weeks the aftershocks continue to be felt across the leasing industry, not least amongst the smaller leasing companies, many of whom rely on continued market liquidity in order to be able to operate.

For many, the year started well enough with many achieving strong volumes in the first half of 2008. But the short-term outlook is bleak, either because experiments in non-core areas like venture leasing or property have left them with significant write-offs or because the supply of funding from lenders and block discounters of receivables has been capped or frozen.

There is certainly no shortage of transactions coming from brokers, some of whom are struggling to place decent “mid-range” transactions at high margins, which only months ago would have been snapped up by smaller lessors. One small lessor commented to me that he sees brokers working twice as hard to generate the same income – some would view this as no bad thing and a long-awaited shift of power away from the brokers to the lessors. But when brokers CVs start appearing in the market, it’s likely that customers and lessors will be suffering just as much.

Indeed most of the quoted smaller lessors have seen their share prices drop significantly in the last 12 months. The outlook for 2009 is not expected to improve as SME failures drive increased write-offs for those who have pushed the credit boundaries.

Selling either the business or the portfolio at anything close to book value is viewed as almost impossible at the moment, so what can smaller companies do to survive? The answer lies in looking at the current environment as an opportunity and applying a series of straightforward but effective tests to every part of the business – from basic overheads to future strategy – to determine the optimal outcome for both survival and future growth.

Invigors has unrivalled experience and a unique understanding of the way in which smaller leasing companies operate. Consequently we can deliver a fast, cost-effective review and action plan to enable the best possible advantage to be taken from today’s difficult circumstances. To learn more contact Richard Guilbert on +44 (0)845 003 1000 or e-mail richard.guilbert@invigors.com.

Marketing in a recession – your best investment?

Over the years I’ve read many articles – usually backed by some form of statistical analysis – that concluded that those companies who maintain or grow marketing spend in the right way during a recession come out of it in a stronger market position, ahead of competitors who took the more traditional view that marketing as a soft cost could be cut without materially damaging the business.

For example, the PIMS (“Profit Impact of Market Strategy”) statistical body of work studied nearly 1000 businesses across a wide range of sectors and found that as the economic recovery phase began, companies that increased marketing spend during a recession gained market share three times faster than those who had cut budgets.

In its analysis, PIMS distinguished between “good costs” and “bad costs” during a recession. “Good costs” were found to be those associated with marketing, R&D / product innovation and product quality (for asset finance the term product includes some elements of the service offering).

Unfortunately for lessors, “bad costs” included fixed assets acquired to improve competitiveness and productivity (since the benefits are usually competed away to gain volume and fill capacity).

Below are a few thoughts on how the marketing budget should be spent, and why it’s so important.

Spend smarter – focus on the right customers

Focus on the right customers. You really can’t afford to be using scarce marketing or sales resources on customers that have no value to the organisation. With the appropriate analysis, within a couple of weeks you could have real understanding and focus on your profitable customers.

This will drive difficult decisions but should lead to a switch in sales, marketing and organisational effort. Customers offering marginal return may be retained for scale economy reasons or as they offer good future prospects, but a significant proportion of your customer base should not necessarily be the focus of future sales or marketing effort.

This is true whether your customer base is end users, vendors, brokers or dealers.

Customer behaviours are changing (and fast!) – you can’t stay the same

It’s time to really know your customers. As their business come under pressure, so their buying behaviour will change. Asset buying processes are likely to lengthen. Replacement cycles will extend, not necessarily bad news for the incumbent lessor. Price pressures on the asset and any related financing are likely to grow. Manufacturers will be desperate to achieve equipment volumes, pushing for high vendor finance acceptance rates. Focus is likely to shift from “acquire for growth” to a survival mentality, with emphasis on risk minimization, maintaining cashflow, reducing ownership costs, and so on.

This offers plenty of great messages for the asset finance sector, but unless you understand this shifting dynamic, how it relates to your specific customer base and the key elements of product and communication that customers will value, it’ll be hard to provide a value proposition that differentiates from desperate, margin-cutting competitors chasing an ever-reducing volume of new business.

If anything, now is the time to increase rather than cut research costs, as your need to learn about customers increases. Attitudes and behaviours can change fast so make sure ongoing customer feedback gets to key decision-makers - for example encourage the CEO to attend a monthly focus group of customers to stay on top of “live” market demands.

Trust + cross-sell = lifetime profit

Even in the good times, trust is a key requirement of any financial institution. Right now, with high levels of customer pain and uncertainty there’s a real need for you to stay true to brand values, ensuring customers feel comfortable doing business with you and that you’ll always support them. Cutting account administration or driving shortened customer service call times may be counter-productive.

The approach should inform the way you sell and the people you employ (or if you’re cutting back, who you retain). It should drive marketing messages, including sales copywriting and imagery.

Importantly, linked with appropriate customer contact strategies it should reduce customer defections and increase the likelihood of successful cross-sales of other financial products.

Mine your existing customer base

Your primary focus needs to be on retaining and expanding existing customer relationships not acquiring new ones. New customers have no track record with you so can’t trust you in the way a satisfied customer can. Existing customers should be cheaper to sell to. Customer insight metrics can help you focus targeted communications that drive cross-sell, upsell and referrals.

Make sure you know your customer demographics and buying patterns and find ways to market to them effectively, including an event-based marketing approach (events being everything from end of lease, end of financial year, seasonal buying programmes etc). Also look at how you can extend repayment periods (protecting customers’ cashflow while increasing interest income, possibly with a small restructuring fee) or offer sale and leaseback on long life assets.

Products and promotions

Price emphasis is likely to be strong with more emphasis on must-have than nice-to-have product features. Bundled products can be expected to come under scrutiny - contract hire and other asset management organisations should consider that some segments would welcome an unbundled, menu-driven offering with separated pricing (this may also help trade people up from straight finance).

Asset stocks are likely to grow. This provides a great opportunity to offer stocking finance, either as a stand-alone item for creditworthy dealers and/or to lock out competitors financing retail assets. In the same way, vendor finance programmes and captives can lock out competitor brands by with a strong stocking finance offer.

Customers may also be more open to a working capital cross-sell on products like invoice discounting.

Customer buying cycles will lengthen, which will increase the period in which customers may compare alternative financing offers. Inevitably this can impact sales efficiencies and conversion rates, with increased switching risk. Finance providers developing promotional offers with vendors may wish to put a clear timescale on their offer. Another tactic may be to reduce the valid length of the financing proposal, especially when cost of funds uncertainty exists.

Marketing suppliers tend to get hit hard during recessions. As a result, you should be able to negotiate good deals across your supply base, including advertising space, design and print.

Don’t forget the future – invest in growth

Invest in growing markets. Not all customer or asset segments will be affected equally and some will continue to grow, for example renewable energy assets. National markets will be affected in different ways – while recent events have slowed emerging market growth, many continue to expand and create financing opportunities at an attractive rate.

It’s marketing’s role to identify these segments and a market entry strategy (or penetration strategy if you’re already in place) that will quickly drive volume and payback.

Be smarter than your competitors

Competitors will be under pressure just like you. By understanding their strengths and weaknesses, and make sure that market feedback is rapid and well structured, you’ll be able to increase new business volumes through the customers of poorly performing competitors or those exiting the market. You may also be able to attract their best staff.

Have a powerful business case

At a time when others in the organisation may be losing their jobs, no-one is going to volunteer to offer the marketing department an increased budget without a very good reason. Make sure you’ve made the business rationale clear, can access the right blend of strategic marketing skills and can justify to the CEO and CFO why each item of spend is important. Link marketing to key business imperatives. Maintain strong financial and marketing performance metrics. Focus on projects with identifiable paybacks.

High marketing spend in the current economic climate represents a bold move for a CEO or CFO to sanction and all the money in the world won’t matter if you don’t have a sound customer proposition. But as the driver of future profitable growth and judiciously spent, it could be the best investment you make.

To discuss how the effectiveness of your marketing spend can be maximised contact Peter Hunt on +44 (0)845 003 1000 or e-mail peter.hunt@invigors.com

Asset Finance Business Confidence Survey – Battening down the hatches

Invigors, in conjunction with Leasing Life, recently conducted a pan-European survey of professionals across the asset finance industry. The objective was to establish a benchmark of business confidence within the sector and to provide some pointers as to the direction in which the industry is heading.

Despite optimism on new business volumes and a bullish outlook regarding the potential for acquisition, there is clear evidence that a storm is now hitting the industry. Worries over bad debt and restricted availability of capital is resulting in tougher underwriting criteria, reduced service levels and pressure to reduce costs. While many lessors see opportunities in the current fallout, our survey raises questions on whether all these ambitions can be realised.

Outlook on new business still bullish

Notwithstanding the credit crunch and recent turmoil in the markets, over half of those taking part in the survey still expected an increase in new business over the next six months - with most anticipating an increase of over 5%. Survey respondents from Continental Europe were notably more optimistic than those in the UK, where the effects of the credit crunch appear to be more keenly felt.

Focus on increasing margins

It is no surprise that many lessors are looking to improve margins. 45% of respondents expected margins to increase over the next six months with over 20% anticipating a rise in excess of 25 basis points overall. No more than 15% expected margins to fall and most of these thought the decrease would be under 25 bps.

Banks or bank-owned lessors were the most aggressive on margins. Nearly 80% of these expected margin growth over the next six months with the majority predicting an increase in excess of 25 basis points. Other groups were more mixed in their response, under 40% of independent finance companies expected margins to improve while brokers and captives were clearly under more pressure with no more than a third anticipating any form of improvement.

Bad debt remains a concern

There was little optimism apparent when it comes to bad debt. None of the respondents expected this to fall during the next six months. Nearly two-thirds of those surveyed thought bad debt would increase, though most believed this increase was unlikely to exceed 25%.

The research supported evidence of a relationship between margin growth and bad debt. Nearly three-quarters of those anticipating margins to increase also expected an increase in bad debt. Funders are clearly looking to increase margins in order to cover a growing bad debt ratio, and there's a growing recognition of the need to achieve a return on the increasingly scarce liquidity available to them.

Capital availability is being squeezed for some lessors. Just over half of those surveyed expect capital availability for their business to remain the same but 37% expected this to decrease over the next six months - typically by up to 10%.

The impact of credit crunch can be seen in restricted availability of capital, tighter underwriting criteria, cost reductions, and aversion to risk. Nonetheless the survey findings are not as pessimistic as events elsewhere in the finance industry would suggest. Is the asset finance sector in denial or is it more robust than other finance sectors under the cosh?

To obtain a copy of the survey findings, please e-mail richard.ryan@invigors.com

Vendor Programmes - weathering the storm

As yet another storm moves through the Caribbean there is uncertainty and concern about the course it will take, its severity and what sort of evasive action should be taken. For many lessors in Western Europe (and in the UK in particular) there is similar uncertainty and concern about the course and severity of the current economic situation.

Lessors are speaking openly about their expectation that the level of write-offs is still a long way from its peak. For some, the economic indicators are moving towards a point where evasive action (in some sectors at least) seems like the only sensible thing to do, even though margin pressure has eased off.

In the world of vendor finance, an economic downturn can put severe strains on the best of relationships between financier and manufacturer/supplier. The usual flash point (the “downturn conflict”) occurs as manufacturer customers look to free up their bank lines by taking credit from other sources. The increased flow of transactions within the programme, usually from the weaker credits, comes at exactly the time that the finance company is looking to tighten up its credit underwriting. This can also be combined with a reduction in programme resourcing as the financier seeks to reduce costs ahead of an expected reduction in profitability.

So just when the manufacturer feels they are starting to deliver the long-requested “increased lease penetration”, the financier seems to want less business and worse still, may be removing resource support. The result can be at best an unpleasant tension and at worst the end of the programme. It’s worth remembering that Invigors’ research indicated that 60% of vendors had changed their finance partner in the last 2 years.

What can be done to avoid this situation? We have developed a 7 stage best practice approach to vendor programme planning, implementation and management. Within this approach, the key to avoiding the downturn conflict is way back in the planning and implementation stages of the programme where it is vital to anticipate issues and have a joint plan of action which the financier and manufacturer agree to. If this is created as part of a programme value model, there is a greater level of understanding of the credit and financial implications of an economic downturn for both parties and the action that will need to be taken to maintain a robust and viable programme.

But with the storm imminent and no agreed plan of action between financier and manufacturer, what can be done to minimise damage to or loss of valuable but vulnerable programmes?

Actually, quite a lot. Our Programme Review Plan provides a focused and effective way of evaluating key strengths and weaknesses in a programme, identifying short-term corrective actions and mapping out medium-term enhancements. One example of this is to provide clear guidance and training to the manufacturer sales force on which customers should be encouraged to seek finance and which should not in the current climate.

The costs of working with an impaired, sub-optimal programme or worse still, losing it entirely are high. The lead time on finding a replacement programme can be very long.

So emerging from a downturn conflict with a stronger programme and relationship is a good place to start re-building after the storm has passed. If you’d like to discuss how to do this, contact Richard Guilbert on 0845 003 1000 or email richard.guilbert@invigors.com.

Software Leasing – UK tax issues clarified

Over the summer, HMRC have moved to provide further clarification of their position on software financing transactions.  There has been considerable uncertainty of the correct tax treatment of many transactions over recent years, with concern that some transactions could result in tax being paid on considerably more than the economic profit from the transaction.

This historical uncertainty has arisen because of difficulties in translating software transactions into the specific rules set out in the tax legislation.  In particular there are specific tax rules for “intangible assets” and also for claiming tax relief on software “owned” by a lessor through the capital allowances regime, with software brought within this regime provided there is a “right to use or otherwise deal with” it.  This is further complicated by the use of standard leasing terminology for transactions which are not standard leases.

HMRC have now confirmed that, for direct tax purposes, they will seek to ensure that the tax treatment follows the structure of the transaction and allows the tax payable to correspond to the lessor’s economic profit.  Whilst this removes the major concerns around software transactions, HMRC will expect to see transactions classified correctly within tax returns and the appropriate elections submitted, so that a review of existing processes should be made.

If you want to discuss how this announcement from HMRC or other tax issues affect your leasing/ financing transactions and the implications for structuring of transactions please contact George Tonks on 0845 003 1000 or e-mail george.tonks@invigors.com.

Marketing Outsourcing - a flexible alternative

In our current climate, marketing departments are being challenged to deliver greater impact and productivity with reduced budgets and significant pressure on resources.

Yet a dynamic marketing function is a vital element in the delivery of sustainable business growth and profitability. As a result businesses both large and small are looking for smarter and more cost effective ways to manage their resources. A more flexible solution may be the answer.

The outsourcing of marketing activities can take a number of forms, from a partnership with an agency for a specific project or contracting out a speciality such as communications or research, through to a full outsourced function, developing and supporting the delivery of business strategy.

When considering an outsourced solution it is vital that you deal with an organization and individuals that you trust, who have high degrees of expertise and experience and that robust processes are in place to ensure that activity is controlled and measured appropriately.

A first step involves a comprehensive audit of current marketing practices, activities and effectiveness, providing a foundation for building the marketing structure to best deliver for the business.

At Invigors we have extensive experience in supporting a wide range of marketing activities,

• The development of the marketing plan,
• Market research, insight and analysis
• The management of new market and product development
• Value proposition development
• Marketing communications planning and execution
• Marketing services provision

We take a very flexible approach to the way we work, aligning our involvement to the precise needs and situation of our customers, whether the requirement is for a small specific project with very clearly defined deliverables, or  fully dedicated resources on an ongoing basis. Our team has extensive experience in both the management of marketing functions and in the asset finance industry, so we are ideally paced to understand the business needs and deliver a real vale add solution.

Whichever form it takes, marketing outsourcing can provide a very powerful and cost effective alternative to the use of in-house resources. It can give access to complementary expertise, a new perspective on issues and opportunities, flexibility in the management of headcount and a real focus on delivering impact and value.

If you are interested in discussing more about outsourcing marketing activities please contact Mike Roberts on +44 845 003 1000 or e-mail mike.roberts@invigors.com

Authored by Mike Roberts