Favourable economic data has boosted confidence amongst asset finance providers in Ireland, although there is a clear recognition that Brexit uncertainty has affected – and will continue to impact – demand.
An SME credit demand survey published in June found that internal funds/retained earnings continued to be the main source of finance for fixed asset acquisitions by SMEs in Ireland.
This figure rose by six percentage points over the previous 12 months, from 69% in March 2016 to 75% in March 2017.
Among those businesses who requested bank finance in the period October 2016 to March 2017, leasing was the most commonly requested product, after new loans. The survey also found that just one in five of all SMEs had requested bank finance in the past six months, down from 26% during the same period in 2016.
Yet although the percentage of businesses requesting leasing products fell sharply from 29% in March last year to 21% for the same period this year, the percentage of fixed asset acquisitions funded by leasing has remained consistent at 10% since 2015.
The decline rate for leasing applications was the lowest for all the major lending products, with 84% of requests approved and only 5% immediately rejected.
Irish businesses’ appetite for leasing is evidenced by various market developments over the last 12-18 months. For example, in June, First Citizen Finance announced raising new capital to expand its agricultural and small business equipment finance operations, and underpin its entry into the commercial real estate finance market.
In the same month, Bluestone Asset Finance (Ireland) completed an asset-backed security issuance with a €30m financing of auto and equipment finance receivables.
Earlier in the year, ALD signed an agreement to acquire Merrion Fleet, the number two full-service leasing operator in Ireland.
In late 2016, the Strategic Banking Corporation of Ireland and Fexco Asset Finance revealed a €70m funding package for small businesses, while the Ireland Strategic Investment Fund took a €30m equity stake in Finance Ireland.
leading in aircraft
Ireland has been the global leader in aircraft leasing since the founding of the industry in the 1970s.
The National Civil Aviation Development Forum’s leasing and finance working group estimates that around 1,800 people are directly employed in the aircraft leasing industry, with more than 60% of all aircraft under operating leases managed from Ireland.
However, information on the size of the overall leasing market remains elusive in the absence of a central body representing the sector. The only indication of wider market trends comes from data provided by the Irish members of the Asset Based Finance Association for the first quarter of this year, which indicates that sales volumes rose by 7% in the 12 months to March 2017.
Ireland’s status as the fastest-growing economy in Europe has resulted in the continued healthy growth and expansion of the asset financing sector explains Kieran O’Brien, Irish associate at Invigors.
GDP expanded by 5.2% in 2016, supported by a healthy expansion of private consumption and buoyant investment, including in the construction sector. Strong, broad-based job creation brought unemployment down to 6.4% in May – its lowest level in a decade – while inflation remained low as the pickup in energy prices and upward pressure from services were partly offset by the impact of the weakness of the UK currency.
Higher-than-projected revenues, particularly corporate income tax receipts, supported a decline in the 2016 fiscal deficit to 0.6% of GDP, thus contributing to a further moderation of public debt. GDP is projected to grow by 3.9% in 2017, propelled by strong domestic demand.
Over the medium term, growth is projected to decelerate and converge towards its potential of about 3%, and inflation is set to stabilise at just below 2%.
However, the main banks’ asset financing operations are facing significant challenges from constraints on optimising their returns, maintaining balance sheet ratios and complying with a heavy regulatory burden says O’Brien. “This has created opportunities for new entrants into the market with the addition of new local players and growing operations from the asset financing divisions of international banks.”
O’Brien suggests that the Irish asset financing market – excluding the aircraft leasing sector – is still not as mature or well developed as in the UK or the rest of Europe.
As a result, he explains, there are more opportunities for new independent players to enter the market and offer compelling financing propositions in addition to the traditional leasing products.
“Asset financing providers need to consider the changing global customer profile and requirements,” he continues.
“The reality is that businesses are earning less from their traditional sales channels and need to have additional lines of income. asset financing companies need to place a greater emphasis on equipment relationship management, which will not only better support their customers but will also generate multiple new income lines.”
Ireland is a global hub for aircraft leasing, with many of the leading players located in Dublin, and the expectation is that this sector will continue its phenomenal growth over the coming years. By contrast, in mainstream equipment finance, the establishment of captive and vendor financing operations has been disappointing over the past number of years, according to O’Brien.
“Nonetheless, there are major opportunities for companies – especially in the manufacturing and ICT sectors – to look again at the advantages of setting up their own financing capabilities as a means of strengthening their established footprint with their customers,” he adds.
Ronan Kelly, head of sales – asset finance at Capitalflow – which in October 2016 announced plans for a €300m fund to provide asset finance, invoice finance and asset based lending to Irish SMEs – agrees that there are a number of lenders doing very well outside of the pillar banks.
“The asset finance market is growing as SME confidence increases across sectors such as construction, transport and haulage, agriculture, printing, engineering and manufacturing,” he says. “Most small companies are looking to expand and add additional equipment and capital assets in order to increase productivity and turnover.”
While the small-ticket (€1,000-25,000) market is active across all asset classes, financing of second-hand hard assets is challenging since the major players are focused on financing new equipment. That is the view of Eugene O’Donovan, CEO of SME Finance & Leasing Solutions, who says his business has been boosted by an increase in the volume of enquiries from potential new dealers offering finance packages.
“The motor vehicle finance market is very active with strong competition between vendor finance and other providers, with vendor finance rates ranging from 0% to 5.9%,” he continues.
“Competition for new plant financing is also intense as all lessors are keen for large-ticket business.”
realisation of benefits
Grenke Ireland managing director Justin Twiddy says he is encouraged by the growing realisation of the benefits of asset finance, and an increase in the number of independent finance providers coming into the market.
“IT equipment has always performed well – the distribution channel is well educated and informed about how leasing works so tends to lead with leasing into installations,” he notes.
“Software has shown the least growth, but this is due to more cloud-based solutions that would now be accessed via a subscription service.”
Twiddy suggests that more SMEs are realising that there are alternatives to the mainstream banks, and that there is a growing appreciation of the merits of working with independent finance providers.
Asked to assess the most significant developments in the market over the last 18 months, O’Brien refers to the explosion of financial technology operations disrupting traditional banks as having an increasing impact on the asset financing sector.
“The sector must adapt its operational systems and processes to compete – alternative options are for asset finance companies to start their own financial technology operations or enter some form of joint venture with existing entities,” he says.
The IFRS accounting rule changes that come into effect from the start of 2019 have potentially significant implications for Irish lease customers.
By eliminating the distinction between operating and finance leases, lessees’ operating leases will have to be reflected on their balance sheets, and profits will be negatively impacted as interest costs will be front-end loaded in profit and loss accounts.
According to O’Brien, asset financiers need to respond to this challenge by working with their customers and considering options such as changing leasing structures so they are treated as service contracts rather than leases.
He also recommends that consideration should be given to shorter-term leases, which would have the effect of reducing balance sheet amounts.
O’Donovan says his company is targeting more dealers and encouraging them to promote the merits of monthly payments to their customers as an alternative to buying second hand.
“This approach means the customer has access to new equipment and can conserve their financial resources,” he explains.
“Across the market over the remainder of 2017 and into 2018 we anticipate continued growth, especially in the construction sector as new house builds increase and this will feed through to the rest of market.”
O’Donovan expects increased activity in the used car market as current PCPs come to end and potential customers look to refinance the balloon payment, not having fully understood the product initially marketed to them.
“There is also an opportunity to develop block discounting in Ireland along the lines of the UK market,” he adds.
“Grenke is actively working with all channels to inform and educate them of the benefits of asset finance to help businesses grow as well as working with bodies such as Independent Finance Providers Ireland to collectively promote the regulation and development of the sector,” observes Twiddy.
Invigors sees growth opportunities for asset financers to support companies engaged in a number of different sectors including manufacturing, ICT and transport by expanding their footprint with their customers through establishing financing capabilities.
These financing capabilities can range from vendor finance partner relationships with local asset finance providers through to full captive financing provided by these companies or a hybrid of either of these options.
“Asset financers can grow their businesses by becoming true differentiators with their customers where they become their trusted advisors,” concludes O’Brien.
“Examples of these areas of support are in managing the customer’s installed asset base and providing flexible service-based solutions as well as lifecycle management.”
Analysis: the brexit factor
Nowhere outside the UK has the impact of its decision to leave the European Union (EU) been more widely debated than in Ireland, where the Irish Business and Employers Confederation recently called on the EU to provide state aid to Irish exporters in the event that the UK quits the customs union.
Given Ireland’s unique position in relation to the UK market and the border issues relating to Northern Ireland, Brexit has created a huge degree of uncertainty for the wider Irish economy – including the asset financing market, explains Invigors’ Kieran O’Brien.
The main potential areas of concern include asset valuations, taxation, tariffs, interest rates and foreign exchange rates.
“All of this creates uncertainty on companies’ investment plans with a consequent impact on the asset financing sector,” O’Brien adds.
“In addition to the potential economic impacts, there will be significant additional operational burdens placed on asset financing operations to handle the increasing compliance and regulatory requirements. Companies with UK customers and/or UK operations need to get Brexit operational teams in place to identify the various risks and build out risk mitigation plans.”
According to Capitalflow’s Ronan Kelly, many small Irish business that export to or import from the UK have slowed their decision-making on purchasing capital assets, as they are waiting to see what is going to happen with the trade agreements.
“With the volatility in sterling there has been an increase in assets being purchased from the UK across all sectors for new and used assets,” he explains.
Changes in the euro-sterling exchange rate have led to more equipment being bought from the UK agrees SME Finance & Leasing Solutions’ Eugene O’Donovan.
“Going forward we feel there will be more sourcing from the EU as duties will not apply,” he adds.