Leasing Life - 1/10/07

As lessors struggle to source extra funding to grow their own book, brokers are continuing their march forward Katherine Gregory, Brian Rogerson and Brendan Malkin.

While small and medium-sized leasing companies, on the whole, broke more work than they write on their own books, most are striving to increase the amount they underwrite, a-cording to research conducted for this report. However, often they are forestalled from doing so because of a lack of external funding.

On average, a leasing company writes 40.6 per cent of business on its own book and brokes to a third party 56.5 per cent of its business, according to Leasing Life research (see Table 3 on page 11).

The view that lessors are urgently seeking greater funding in order to increase the size of their own book is well expressed by Michael Bycroft, director of Forest Asset Finance, who said lack of funding sources is the perennial problem for brokers.

Also, Calando Finance Ltd said it is intent on building up its own book, but, in the meantime, will stick to acting as a broker, arranging block discounting facilities for small businesses with rental outlets, mainly television dealers. Exposures on its own book range from 2, 000 to 25, 000, with a maximum primary lease period of three years. The size of the broker business, as illustrated in this report, reflects the growing need by lessors to use brokers' services.

Alistair Day, director at Systematic Finance, said that lie foresees future growth in the broker market as the larger lessors increasingly fall behind in their ability to operate difficult and niche type deals. Graham Allen, a manager at Allied Finance, said: "Motor finance houses are now much keener to court brokers.

Also, Andrew Bullard, sales director at State Securities, said: "Brokers are the future sales teams for the finance industry. The UK finance industry is not providing the sales teams for the future and this gap will be filled by brokers, but we need to ensure they are properly trained."

Trustworthy

Concerns with brokers

However, some brokers expressed concerns at the conduct of some lessors. Arnold Edward, chairman of Black Arrow Finance Ltd, said he often experienced "unresponsive and unpredictable lessors, which causes significant difficulties when placing a deal with the right funder". One reason for this, lie explained, is the "inability of a good proportion of funders to understand that what they are selling, first and foremost, is an underwriting service". Also, not all lessors fund the entire deal requested, some brokers complained. Graham Adams, MD of City & European Asset Finance, said: "By and large, lessors tend to underfund their broker teams such that the service you get is not always what you require. " Others complained about lessors lacking a proper understanding of the need for quick response times and a quality service. Also, Alan Rutherford, principal of Macleod Morrisson, said funders have "little knowledge on specialist areas that they should know about".

Also, commission rates given to brokers by lessors fluctuate. Auckland Financial Services, for instance, offers deals to ING Lease, Universal Leasing, Bank of Scotland and Investec-although the latter two finance companies demand "finer rates", according to Christine A Daulby, its director. Daulby added: "We have been in business such a long time that we are well known to most lenders. For example, Investec was started by staff from Bank of Scotland, which, in turn, employed people from British Linen Bank, which had previously employed staff from Sales Lease with whom we dealt many years ago."

Lessors' perspective

What do lessors think of brokers? Considering brokers were rarely used by the banks just three years ago, lessors' perceptions of brokers appear to have changed dramatically. Robert Keep, managing director of group asset finance at General Capital, attributes a large proportion of its success to its broker channels, which constitute about 50 per cent of its business. "Brokers are fundamental in the company moving forward, "he said. "We are currently trying to reshape and relaunch our brokerage offering because we find them an essential element of our business. " Syscap identified the broker market as being in `vogue' again and said many of the big name lessors are courting the broker channel for new routes to market. According to Sean Read, Syscap' s chief operating officer: "Brokers offer something different compared to their one lessors: this includes a greater field presence, a more versatile approach to getting deals done, ability to place a far broader credit mix.

TABLE 3: RESPONDENTS'SPLIT BETWEEN BUSINESS OWNED AND BROKED A Company Academy Leasing Alliance & General Leasing Ltd Allied Finance Auckland Financial Services Ballyvesey Asset Management Bibby Leasing Ltd Black Arrow Finance Ltd & Red Arrow Leasing Calando Finance Ltd Choice Finance UK Ltd City & European Asset Finance Ltd Davenham Group Pic Forest Asset Finance General Capital Group Pic Genesis Capital Pic GHA Finance Gresham Financial Services Ltd St Helen's Finance Heritable Asset Finance Hermes Group Ltd K&M Finance Ltd Kingsway Finance & Leasing Pic Liberty Leasing Pic Macleod Morrison Finance Merchant House Finance Ltd Michael Gerson Ltd Northern Asset Finance Ltd One World Leasing Oxford Leasing & Finance Ltd Park Finance Group Ltd Plus Finance Ltd Potential Asset Finance Private & Commercial Finance Group Quartz Finance Ltd SME Eurofinance Pic State Securities Pic Syscap Ltd Systematic Finance Pic Theisen Securities Ltd Troman Finance Ltd UniLink Finance Ltd Source: Leasing Life

Syndicate when required, and a tendency to focus on niche markets. Read also said brokers are becoming increasingly sophisticated and added that brokers are starting to offer better service to their key accounts than some of the bigger lessors.

Some lessors reported using brokers because that is how they have dealt most with in the past when sourcing work. In the case of Heritable Asset Finance, around 90 per cent of its business is sourced from brokers. One key reason for this is that its managing director, Chris Welch, worked previously at ING Lease' s broker business. When he founded Heritable, its staff included former ING colleagues, plus the broker clients he had developed whole at ING. Heritable today uses around 150 brokers, 20 more than it did at launch date. However, not all lessors have experienced positive relationships with the brokers.

Michael Gerson, of the leasing company by the same name, said fraud is a major headache he bas to face in his business. Some of this, he said, is caused by brokers, "Like everyone else, name are good and some are bad, "he said. Adding that he had experienced "lots of fraud", Gerson provided the following as typical examples of fraud of which he has been the victim: goods being sold to multiple leasing companies when officially one is involved; non-existent goods being put under lease and hyper inflating the actual value of goods. Another is where an intermediary promises a three-year guarantee, or a five-year service agreement, without say-so from the lessor.

Keep echoed this view when he said the government should introduce legislation to bring in sharper restrictions on the setting up of brokerages ensure that the brokerages that make it through the red tape "face a financial risk associated with sharp or inappropriate practice".

Nonetheless, the broker market is in a state of flux and, generally, it is growing in profitability. Managing director ofTheisen, Philip Bailey, said the broker market is moving more into the financial arrangement side of leasing transactions, whereas financial managers are finding it more difficult to move into the broking sector.

Despite efforts by many lessors to grow their own book, and broke less, the asset finance broker market continues to grow apace. According to the (NACFB) there are 800-asset finance brokers in the UK, 400 of w, which are serious. If current conditions remain in place, and banks continue to downsize their sales forces, the demand for brokers will continue.