Norbert Kistermann: Mid-size leasing refinancing in times of a changing sector

Even Aristotle said “wealth lies not in ownership but in the use of things” and thus in a way expressed the core idea behind leasing back in antiquity. Even if the leasing sector in Germany just celebrated its 50th anniversary in 2012, the founding of the first leasing company in 1962 marked the beginning of an unparalleled success story. Within the past decades, the then new-fangled financing method has developed into a driving force behind investments and innovations, which has lastly resulted in almost 200 billion euros worth of leased assets being on the market. It is no surprise then that with an annual new business worth 50 billion euros, the leasing percentage of all externally financed procurements amounts to more than 53 per cent. From company cars, to copiers, fork lifts and x-ray equipment all the way to photovoltaic systems – the leasing model has firmly established itself and with an 85 per cent share of beneficiaries in German SMEs has won over a loyal and demanding customer group. Numerous world market leaders appreciate the “pay-as-you-earn principle”, which along with the advantages of exact cost calculability and relief on liquidity can also eliminate the need for investing equity.

Companies also expect to benefit from the specific knowledge of the equipment funders. This expectation is understand­­able due to product knowledge and the related goods and market know-how. The leasing sector tends to meet this ex­­pectation with a considerably in­­creased willingness for implementing innovations and investments in new markets. Leas­­ing com­panies can play out this advantage for Ger­­man industry, in particular when compared to traditional, often conservative loan financing by credit institutions.

However, even despite its strength and robustness, the leasing sector suffered painful cut-backs as a result of the re­­ces­­sion triggered by the financial crisis – the peak of which was marked by a de­­­cline in new business by 23 per cent in 2009. Aggravating this drop in demand was the regulatory and bank-related reac­­­tion to the tense finance market situation and the general turmoil in the sec­­tor. The business world for these companies has changed dramatically with the clas­­si­­fication of leasing and factoring companies as financial services, which brought with it the supervision by BaFin (Federal Financial Supervisory Authority). Although they now benefit from the excise tax priv­­ileges as do banks and equal supervisory treatment as credit institutions, they must comply with significantly stricter reporting obligations resulting from the commitment to the “KWG-light” (a simplified version of the German Banking Act). The resulting reporting obligations and the minimum requirements for risk manage­­ment increase the complexity and costs for bureaucracy, external invoicing, risk management and, lastly, for the entire venture. It is apparent that these sweeping changes have created a cumbersome administrative and financial burden, par­­ticularly for smaller leasing companies. The result for many is withdrawing from the active leasing business and the repo­­si­­tioning as mere brokers without their own financing function.

 

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However, not only leasing companies, but also numerous leasing refinancing insti­­­­­tutions, reacted to the market changes and shifted their activities to other busi­­ness sectors and customer segments. In­­­house financing difficulties and in­­creased equity requirements have forced the insti­­tutions to reduce their risk exposures. This particularly affected the accommo­­dating, quickly amortising and competing leasing business – the reduction of avail­­able financing instruments increased the pressure on the entire sector. The num­­ber of leasing-affine banks dropped con­­sid­­erably as a result of this turmoil, so that the number of active leasing refinancing institutions has today shrunk to a modest number.

The regulatory and bank-related develop­­ments were particularly felt by the group of independent leasing companies, which are generally more sensitive to market fluctuations, i.e. those companies without company-own connections to manu­­facturers looking for new business. And it is exactly this group which, in light of the current and future challenges, should closely examine its strategic focus and the selection of their refinancing institutions. These considerations shift the priority of the proper mix of refinancing and service to the foreground and pose the following questions: Which provider can supply me with the required capital at reasonable terms over the long run? Who has the capability of directing new business my way through cross-selling and who is able to devise tailored fi­­nancing concepts for my lessees through flexibility and entrepreneurship?

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At this point, the opportunity presents itself to specialised, small and medium-sized financial services providers of be­­coming strong partners for independent leasing companies. Only those companies who offer precise answers and offer sustainable concepts will establish them­selves as true growth supporters. How­­ever, for financial institutions to fulfil these requirements requires not only the right product portfolio for the end customer, but also a tried and proven prac­­­tice in the area of alternative refinancing.

It is recommendable on the product side to be able to offer a variety of opportu­­n­­ities based on a wide-ranging platform and compatible infrastructure, in order to then efficiently satisfy customer wishes. Such products tailored to the end customer can be found, for example, in workshops or restaurant financing, where the depth of customisation has endless vari­­a­­tions and therefore requires a high adapt­­ability by the participating companies. Combinations of different financing options for investments by end customers can then be designed by the partner bank and sold by the lessor. Through this coop­­eration, the end customer not only re­­ceives the product selection with the cus­­tomised “best fit”, but this can also result in higher income on the part of the bank and the leasing company – a classic win-win situation.

A decisive role in a customer’s selection of the right refinancing mix is the size and background of the leasing companies. The spectrum includes, in the com­­monly long-term time frame, the loan financing as well as the issuing of bonds. In contrast, forfeiting is a popular refinancing instrument in the medium-term, which can be supplemented in an attrac­­tive manner by customer-specific ABS transactions. Special attention should be paid to the last two alternatives, particu­­larly in light of the relaxation of the crises-ridden securitisation market. These make a risk transfer possible, which in turn releases additional growth potential.

No matter what form of cooperation les­­sors and refinancing institutions agree on, the close, mutual coordination will always be and remain the critical factor for success. Complementary contractual ties of a leasing company with a bank specialising in this segment appears to be an ex­­cel­­lent prerequisite, whereby em­­bedding a financing institution in a com­­pre­­hensive leasing concept appears virtually ideal.

The Gallinat Bank AG, as a member of the ALBIS Leasing Group, has pursued exactly this high-growth path over the past years. As a system platform, it refinances the group-own leasing companies and makes its entire product offering available to small and medium-sized leasing companies.

IMG_9333_Beitrag-2The author is a member of the board of the Gallinat-Bank AG. During his profes­­sional ca­­reer, he was a member of the manage­­ment of Corporate Banking at BHF-Bank be­­­fore be­­­coming a member of the Exec­­utive Com­­­mittee Corporate Banking at Dresdner Bank and lastly the Co-Head Glob­­­al Banking Client Coverage at Dresd­­ner Kleinwort. Norbert Kis­­termann was Senior Advisor for M&A and Private Equity before joining Gallinat-Bank.