Contrary to popular belief, now is a great time to start a Capital Markets Group within your leasing organization, or beef up your existing group. In the first of two parts, we’ll take a look at why current industry challenges set the stage for this kind of business development.
Timing may seem strange as leasing companies face the toughest industry conditions seen in years - so let me explain.
As most large organizations conduct a thorough top to bottom review of their risk management policies and infrastructure, several themes are dominating the scene:
a) Capital allocated to your leasing company or the availability of capital is scarcer and/or more expensive
b) The risk folks want to lower credit exposure limits in terms of individual credits, industries, and/or collateral types
c) It’s tougher to find a deal that will meet more stringent underwriting standards and meet higher pricing requirements translating to the need to look at more deals.
Despite these incredible challenges, I bet most of you are expected to grow your assets and your bottom line in 2010.
Now the good news: a professional Capital Markets Group can address each of these challenges head on. The best groups include both buy and sell capabilities and there are benefits of having both. But your organization may only need one side of this equation.
The days of unlimited and cheap capital are likely long gone; therefore, allocating capital judiciously is now more important than ever. The ability to sell down existing credit exposure to free up availability to accommodate a new customer request or to allow you to step up and control a larger deal maximizes the output of your capital allocation. How many of you have passed on pursuing a new opportunity with an existing client because your credit folks don’t want to add to existing exposure? This is where having an experienced syndication group that can assist in evaluating the “sale-ability” of existing assets with a client or help execute a syndication strategy for a new deal for them may help you deepen a customer relationship.
It’s natural for salespeople to be reluctant to introduce syndication to a client. But in my experience, if you have a talented syndication team, the usefulness of syndication to the customer, the relationship manager, and the organization becomes evident. Some of the most successful salespeople incorporate syndication capabilities as one of the many arrows in their quiver, and are able to sell the benefit of “one stop shopping” that syndication offers their clients.
Assets as a Tool
Equipment lease and loan assets are not all meant to sit on your books never to be touched again until expiration. I know there are several organizations that rarely, if ever, sell assets out of their portfolio. This may be short sighted, assuming that the assets on the books can’t be replaced with even higher yielding and more desirable assets. Selling equipment lease or loan assets out of your portfolio may be an effective tool to help manage the exposure to individual credits, industries, and/or collateral types as mentioned above. These types of assets may be the most liquid for that customer in your portfolio.
There are also times when accelerating a residual gain or future interest income from an asset to a current period may be needed to meet income goals. I’m not advocating becoming addicted to selling long-term assets to pop short-term gains, but you should consider it being a part of your earnings management arsenal. This strategy can exploit changing market conditions in terms of pricing requirements, appetite for a certain credit, or residual value expectations. You may be able to replace lower spread business put on the books a few years ago with higher spread assets available today on the same credit. Your treasury folks may charge you breakage costs to sell an asset out of your portfolio but the benefit may still outweigh the cost.