Transcript Slide 1

Funding
What our industry needs for a
sustainable recovery…
Capacity for Economic Recovery
CFLA 2009 Annual Conference - Ottawa
Optimism and Liquidity are
not the same thing!
Capacity for Economic Recovery
CFLA 2009 Annual Conference - Ottawa
CFLA Thanks the Following:
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CIBC World Markets
Royal Bank of Canada
GE Capital
CIT
MCAP
National Leasing Group
Foss National Leasing
Leasemaster (JPLM)
ADD Capital
Blue Chip Leasing
TAO
Capacity for Economic Recovery
CFLA 2009 Annual Conference - Ottawa
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Honda Finance Canada
GMACFS
Ford Credit
Somerville National
Centre For Spatial
Economics
DBRS
S&P
Clubb Finance
PayNet
Today's Agenda
• Consequences of a weakened Commercial Finance
Industry for Canadian Business and for the Canadian
Economy
• The Canadian Credit Crisis and the impact on the
Vehicle and Equipment Finance Industry
• What is needed to maintain the health of the industry
– Status of Available Sources of Funding
– Long Term Supply Stability – Market Must Stabilize
Capacity for Economic Recovery
CFLA 2009 Annual Conference - Ottawa
Canadian Business Credit
Source: 2008 Federal Budget- Minister of Finance
• Business Credit Outstanding
in 2007
•
Billions of dollars
Billions of dollars
Cumulative Change in Business Credit
Since August 2008
40
35
Other
$90B
Nonequity
Financial
Markets
$458B
Sept
30
Chartered
Banks
$271B
Oct
Nov
Dec
25
20
15
10
5
Equity
$306B
0
-5
-10
-15
Chartered
Banks
Capacity for Economic Recovery
CFLA 2009 Annual Conference - Ottawa
Equity
Non-equity
Financial
Markets
Other
Effective Flow of Capital to Canadian
Business is critical to the economic recovery
• Independent and Captive Finance Companies are
effective at “push” strategies for deploying capital to
SME’s
• Bank Lessors traditionally use a “Pull” strategy
• The combination of both strategies optimizes the amount
of funding provided to main street Canada
• Without all channels the economic recovery will likely
stall
Capacity for Economic Recovery
CFLA 2009 Annual Conference - Ottawa
Industry Canada
Small Business Quarterly, August 2009
• Small businesses accounted for 97.8 percent of
employer establishments (in Canada)
• Small businesses are defined as having fewer than 100
employees, medium-sized businesses having 100 to 499
employees and large businesses having 500 or more
employees
• There are 2,314,563 businesses that fit this category
Capacity for Economic Recovery
CFLA 2009 Annual Conference - Ottawa
Multiple Distribution Channels
Critical to optimizing amount of available capital
• Domestic Bank Lessors
• Foreign Bank Lessor
– Wells Fargo, B of A
– Key
• International Lease and
Finance Co.’s
– GE Capital, DLL, CIT
– CSI, ARI, PHH
• Domestic Independents
– NLG, MCAP, Equirex
– Foss, JPLM, Jim Pattison,
TransportAction
Capacity for Economic Recovery
CFLA 2009 Annual Conference - Ottawa
• Captive Vehicle Finance
– Ford, GMACFS
– Honda, Toyota, Nissan,
VW, Mercedes, BMW
• Captive Equipment
– Dell, Cisco, Pitney Bowes,
IBM
– CAT, John Deere, CNH
• Floor Planning
– Clubb Finance
Canadian Bankers Association
August 2009, Pre Budget Consultations – Submission to the
House of Commons Standing Committee on Finance
• “In the fall of 2008, just as the global financing market
were at their most fragile, Canadian bank lending to
businesses accelerated as other sources of financing
contracted. Despite the fact that banks were increasing
their share of the business financing market, they were
not able to fill the credit gap completely.”
Capacity for Economic Recovery
CFLA 2009 Annual Conference - Ottawa
Interviews
• Finance Companies
– Small/Medium
Independent
Equipment
– Small/Medium
Independent Vehicle
– Large Non Bank
– Consumer Vehicle
Retail
– Fleet Vehicles
Capacity for Economic Recovery
CFLA 2009 Annual Conference - Ottawa
• Funding Sources
– Bank Sponsored
Conduits
– Life Insurance
Companies
– Non-Bank Conduits
– Export Development
Canada (EDC)
Why funding is still
constrained!
The Paradigm Shift is still in
process
Capacity for Economic Recovery
CFLA 2009 Annual Conference - Ottawa
The “Shadow Banking” Era
SIVs
Depositors
Institutional
Investors
Asset
backed
securities
Pension funds
Conduits
Commercial
Finance
Borrowers
Warehouse
Lines
The return of the “Dinosaurs”
Institutional
Investors
Sovereign
wealth funds
Depositors
Pension funds
Foreign pension
funds
Capacity for Economic Recovery
CFLA 2009 Annual Conference - Ottawa
Banks
Direct
originators
with
placement
capabilities
Commercial
Finance
Borrowers
Current Opinion
TEC (Canadian CEO Organization) Anderson Economic Report August 2009.
• A major concern with sustained recovery forecasts is whether
they adequately incorporate the collapse in securitized credit
flows and the longer-term implications of a U.S. balance sheet
recession. Econometric forecasting models using time series
data over the last 60 years do not know how to deal with these
issues. In these models, if you keep interest rates low enough for
long enough, you will get a “V-shaped” economic recovery.
• It (the Bank of Canada) finds that the level of its FCI is now
above its 10-year average, implying that credit conditions have
returned to normal. We find this hard to believe and are
worried that the Bank of Canada is underestimating the
problems in financial markets.
Capacity for Economic Recovery
CFLA 2009 Annual Conference - Ottawa
Current Sentiment
• Wholesale funding and debt securitization is still basically
shut-down on both sides of the border. Toxic collateralized
debt obligations (CDO’s) are still toxic. The financial system
still has serious design flaws left over from creative financing.
The shadow banking system is not working and it supplied
over half of the credit growth in the U.S. (and a large part in
Canada) over the past decade. Large corporations can
access the debt markets but small and medium-sized
businesses are finding their access to credit reduced.
Commercial real estate borrowers facing debt repayments are
unable to roll-over debt. Households and firms will continue to
emphasize debt minimization. The next decade will not see a
return of leveraged growth. It will take years for credit flows to
return to normal.
–
TEC (Canadian CEO Organization) Anderson Economic Report August 2009.
Capacity for Economic Recovery
CFLA 2009 Annual Conference - Ottawa
Outstanding Commercial Paper – Canada
Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.
Prior to Dec. 2007, Canadian ABCP not rated by Standard & Poor’s
120
100
ABCP
Bil. C$
80
60
~ C$32 Bil
Defaulted
Nonbank
ABCP
Non-ABCP
40
20
0
1993
1995
1997
1999
Note: Data for 2009 as of June 30th.
Source: Bank of Canada
Capacity for Economic Recovery
CFLA 2009 Annual Conference - Ottawa
2001
2003
2005
2007
2009
Subject to
Montreal
Restructuring
Process
General Status of Funding
Type of Financing
Terms
Pricing
Loss Reserves
Discount to Book
Warehouse Line
Tighter
Rate Lower
Spread Higher
Bank Term Debt
Tighter
Rate Lower
Spread Higher
Private Securitization
Tighter
Higher
Tighter-If Available
Higher
Tighter – If Available
Higher
Positive Revisions
150bps over GoC Bond
Undefined
Undetermined
Portfolio Sales
ABS
ABCP
Secured Credit Facility
EDC
Capacity for Economic Recovery
CFLA 2009 Annual Conference - Ottawa
Lost Funding Capacity
General Policy Change
Bank Lines Reduced
Operating Credit Lines reviewed and reduced to “average historical usage”
Bank Term Debt Facilities
Reduced
Historical Available Credit Reduced or cancelled.
Multiple Ratings from
agencies
Need for two or more ratings eliminates access for many small finance corporations
with excellent historical performance
Securitization Advance
Rate Reduced
Amount advanced per funding reduced requiring higher equity participation from
Lessor
Change to Debt Equity
Ratios
Change in ratios requires equity to increase capacity at a time when equity is
expensive.
Concentration by Lessee,
Vendor and SIC
Maximum Exposure per customer has decreased
Eligible Assets
Restrictions on Vehicle Make, Model and Brand, Restriction on types of equipment
Minimum Credit
Standards
Higher Credit Scores required to qualify for funding
Documentation
Requirements
Higher level of due diligence and therefore greater administrative costs.
Capacity for Economic Recovery
CFLA 2009 Annual Conference - Ottawa
General Status of Funding
• Portfolio Sales: Buyers are looking for deep discounts.
Sellers are those in need of cash
• Warehouse Lines: Independent Commercial Finance is
still nervous about bank commitment to maintaining or
increasing warehouse facilities without a demonstrated
growth in take out capacity (ABCP/ABS)
• Bank Term Debt: Available to existing clients often with
strong pricing but restrictive terms
Capacity for Economic Recovery
CFLA 2009 Annual Conference - Ottawa
Private Securitization
• Small and Medium sized vehicle and equipment lessors
have utilized the leverage and pricing of this product to
build significant market share.
• The insurance companies funding this program have
continued to support existing clients but the insurance
industry is under significant strain and it has impacted
terms and supply.
Capacity for Economic Recovery
CFLA 2009 Annual Conference - Ottawa
Capacity for Economic Recovery
CFLA 2009 Annual Conference - Ottawa
SLFCN 4.95 06/36 Corp
Date
CAN 4 06/01/16 Corp
11 September 2009
11 August 2009
11 July 2009
11 June 2009
11 May 2009
11 April 2009
11 March 2009
11 February 2009
11 January 2009
11 December 2008
11 November 2008
11 October 2008
11 September 2008
11 August 2008
11 July 2008
11 June 2008
11 May 2008
11 April 2008
11 March 2008
11 February 2008
11 January 2008
11 December 2007
11 November 2007
11 October 2007
11 September 2007
Rate
Life Insurance Bond vs Canada Bond
9
8
7
6
5
4
3
2
1
0
Spread Changes
Insurance Model Price Trends
Bank of Canada Prime
12.00%
Cost of Funds Securitization Facility
10.00%
3yr Govt of Canada
Benchmark Bond Yield
7.49%
Interest Rate
8.00%
6.00%
7.11%
4.65%
3.75%
4.00%
2.00%
1.75%
2.66%
0.25%
1.32%
0.00%
Feb08
Mar08
Apr08
May- Jun- Jul-08 Aug- Sep08
08
08
08
Oct08
Nov08
As of date
Capacity for Economic Recovery
CFLA 2009 Annual Conference - Ottawa
Dec08
Jan09
Feb- Mar09
09
Apr09
May- Jun- Jul-09
09
09
Private Securitization
• Fewer Players Expecting Greater Performance
• Credit Box has Tightened
• Greater monitoring
• Pricing beginning to Stabilize
• Support for Existing Clients
Capacity for Economic Recovery
CFLA 2009 Annual Conference - Ottawa
ABCP and ABS Market
• New Realities
– Global Liquidity Standard-A Limited Resource
– More Bond Ratings
– Greater Transparency
– Much Greater Fees and Administration Expense
– Higher Pricing
– Term more Popular than CP
Capacity for Economic Recovery
CFLA 2009 Annual Conference - Ottawa
2007 ABCP Market
• Largest Funding Component of the Canadian
Commercial Paper Market
• 50% of the non-government short-term debt market
• 21 Conduit Sponsors – 65 multi-seller ABCP Programs
• No Rating Downgrades
Capacity for Economic Recovery
CFLA 2009 Annual Conference - Ottawa
Current Opinion
Standard and Poor’s Ratings Digest August 17, 2009
“Canadian Finance Companies are Tapping Foreign ABCP Conduits”
• “Domestic funding for Canadian ABCP has become
more difficult to obtain. The decline which began in Mid
2007, is evident in the Bank of Canada’s monthly data.
The decline continued even after the completion of the
nonbank ABCP restructuring in January 2009.”
Capacity for Economic Recovery
CFLA 2009 Annual Conference - Ottawa
Capacity for Economic Recovery
CFLA 2009 Annual Conference - Ottawa
Capacity for Economic Recovery
CFLA 2009 Annual Conference - Ottawa
Current Supply vs. Future Demand
• Access to supply now favors banks as a result of
government support
• ABCP and ABS markets remain inadequate
• Loss of Non Bank Sponsored ABCP and ABS appears
permanent.
• Diversity of Distribution is “at risk”
Capacity for Economic Recovery
CFLA 2009 Annual Conference - Ottawa
Secured Credit Facility
• Intention and Commitment Strong
• September 17th Revisions Show Potential
• Success Needs to Be Measured by Flow of Funds
• Most Domestic Commercial Finance Companies are still
ineligible and are now at a greater disadvantage.
• Curious Hidden Message …
Why Ignatieff on the Cover?
Revisions to Secured Credit Facility
Program
• Risk of Refinancing at Bullet Eliminated (True Match Financing of
Cash Flows).
• Ability to customize documentation.
• Eligible Assets Expanded
• Standby Servicer
• Pricing and Allocation Process Amended.
Multiple Distribution Channels
Critical to optimizing amount of available capital
• Domestic Bank Lessors
• Foreign Bank Lessor
– Wells Fargo, B of A
– Key
• International Lease and
Finance Co.’s
– GE Capital, DLL, CIT
– CSI, ARI, PHH
• Domestic Independents
– NLG, MCAP, Equirex
– Foss, JPLM, Jim Pattison,
TransportAction
Capacity for Economic Recovery
CFLA 2009 Annual Conference - Ottawa
• Captive Vehicle Finance
– Ford, GMACFS
– Honda, Toyota, Nissan,
VW, Mercedes, BMW
• Captive Equipment
– Dell, Cisco, Pitney Bowes,
IBM
– CAT, John Deere, CNH
• Floor Planning
– Clubb Finance
Domestic Finance Companies Insulate
From Risk of Global Exits
• ABN AMRO
• IRWIN Commercial
Finance
• KEY Equipment
Finance
• GE Capital
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National City Capital
CITI Leasing Canada
CIT
GMAC
Chrysler
CoActiv
Issues Remain
• Domestic Canadian Finance Companies are now at a
major disadvantage.
• Available business credit and the disparity of terms need
to be closely monitored.
• No clear replacement for non-bank sponsored ABS and
ABCP sales exists.
Export Development Canada
• Mandate has been expanded to flow to greater number
of companies
• Finance Companies need to justify an “Export” related
Financing Need
• Existing Relationship with Chartered Banks has enabled
flow of funds
• No Structure to flow funding to Non-Banks
Capacity for Economic Recovery
CFLA 2009 Annual Conference - Ottawa
The Bottom Line
• Domestic Independent Finance Companies Are At an
Artificially Steep Disadvantage
• Diverse Distribution Channels are critical to getting
funding to Main Street
• Vehicle and Equipment ABS and ABCP are
fundamentally sound but buyers remain scarce.
• Fear is still driving the market. Secured Credit Facility
will help restore ABCP and ABS supply and terms.