auto & asset finance country survey 2015

ASSET FINANCE INTERNATIONAL

IN ASSOCIATION WITHWHITE CLARKE GROUP

AUTO & ASSET FINANCE COUNTRY SURVEY 2015

United States

US ASSET AND AUTO FINANCE COUNTRY SURVEY 2015

White Clarke Group

White Clarke Group is the market leader in software solutions and business consultancy to the automotive and asset finance sector for retail, fleet and wholesale. White Clarke Group solutions enable end-to-end credit processing and administration to streamline business practice, cut operational cost and deliver outstanding customer service. White Clarke Group has a 23-year track record of leadership and innovation in finance technology, consultancy and new market entry. Clients value White Clarke Group's industry knowledge, market intelligence and innovation. The company employs some 600 finance and technology professionals, with offices in the UK, USA, Canada, China, Australia, Austria and Germany.

White Clarke Group publish the Global Leasing Report, which is part of The World Leasing Yearbook. To download a copy please go to:

www.whiteclarkegroup.com/knowledge-centre

Acknowledgements

Gary Amos, Head of Commercial Finance Americas, Siemens Financial Services;Jeff Berg, US Country Manager, DLL;Bill Bosco, Principal, Leasing 101;Jonathan Dodds, CEO – Americas, White Clarke Group;Chris Enbom, CEO, Allegiant Partners;David C. Mirsky, Chief Executive Officer, Pacific Rim Capital;Bob Rinaldi, CEO, Commercial Industrial Finance, and Chair of ELFA;Alan Sikora, CEO, First American Equipment Finance, a City National Bank company;Nick Small, Managing Director, CIT Equipment Finance, US;Adam Warner, President, Key Equipment Finance;Marguerite Watanabe, President, Connections Insights;Stephen T. Whelan, Partner, Blank Rome LLP.

http://www.whiteclarkegroup.com/http://www.assetfinanceinternational.com

Publisher: Edward Peck Editor: Brian Rogerson Author: Nigel Carn Asset Finance International Ltd.

39 Manor Way,London SE3 9XGUNITED KINGDOMTelephone: +44 (0) 207 617 7830

© Asset Finance International, 2015, All rights reserved. No part of this publication may be reproduced or used in any form or by any means – graphic; electronic; or mechanical, including photocopying, recording, taping or information storage and retrieval systems – without written permission from the publishers.


Contents

The US at a glance 5

Equipment and auto finance and leasing in the US 7

New business in 2015 11Business confidence 11Auto sector leasing growth continues 12Increasing industry oversight 14

Enhancing the customer journey 15

The rise of the online customer 15Improving the finance experience 16Availability on demand 16Transparency, today and tomorrow 16The way the customer wants it 16

Economic background 18

Business climate 19Bank consolidation 20Global competitiveness 21Asia-Pacific links 22

What the experts say 23

Maintaining momentum 23Leasing market dynamics 24Constraints on growth 26Prospects for growth 27Alternative sources of funding 27Better customer service 29Customer motivation 30Issues for auto lenders 31Lease accounting progress 32


The legal and regulatory environment 33

Delivery and acceptance 33Hell and high water 33Asset-backed securities 34UCC mischief 35

Lease accounting project nearing completion 37

Overview impact 37The IASB version 38Lessor classification 39Other areas 39A look ahead 40New rules expected in early 2015 41


5 © A

sset

Fin

ance

Inte

rnat

iona

l, al

l rig

hts

rese

rved

.

The US at a glance

This new Asset Finance International country survey aims to provide a balanced assessment of the latest developments in the equipment and auto finance and leasing markets in the US. Key areas covered and principal findings include:

• Figures from the industry body, the Equipment Leasing and Finance Association (ELFA), show that new business volumes (NBV) in the US equipment leasing market by 6.7% to $118 billion in 2014. The rate of growth was lower than in recent years but well ahead of the GDP growth rate.

• Independent lessors experienced strongest growth in 2014, followed by banks, whilst captives saw weak growth. The greatest NBV growth by market segment was for small-ticket business, with middle-ticket also growing strongly; however, the large-ticket segment experienced a decline in volume.

• Assets under management grew 8.6% in 2014, return on assets remained at 1.7% for the third year running, and net income increased 15% compared to the year before.

• In 2015 to date, equipment leasing NBV has continued to increase, with the first eight months showing growth of 6% on the same period a year earlier. However, the pace is slowing.

• Business confidence is relatively high, and the forecast is for investment in equipment and software to grow around 5% in 2015, down slightly on the previous year.

• The auto sector is in robust health, fleet share of the market is growing, and leasing as a method of auto finance continues to show a good rate of growth.

ASSET FINANCE INTERNATIONAL IN ASSOCIATION WITH CHP CONSULTING

CHP Consulting US Auto Finance Market 2014: Navigating a path through a changed landscape

Achieve Morewith ALFA Systems.

Competitive asset finance operators are constantly innovating, delivering more value to customers and using fewer resources. CHP’s ALFA Systems enables forward-thinking businesses to meet and exceed the most demanding of challenges.

How to Transform an Asset Finance Company Through Systems ImplementationDownload the series today from chpconsulting.com/rft

THE RIGHT FIRST TIME SERIES

www.chpconsulting.com

from CHP Consulting

The definitive platform for asset finance. Powerful systems, latest technology, assured delivery.


6 © A

sset

Fin

ance

Inte

rnat

iona

l, al

l rig

hts

rese

rved

.

• There has been a gradual increase in risk in auto finance, leading to concerns over the growing number of auto finance companies providing loans to often high-risk customers. The recently set up Consumer Financial Protection Bureau (CFPB) aims to provide extra oversight and customer protection.

• A special article examines how auto finance companies are focusing on improving the customer experience, where learning to leverage technology will be key to enhancing the auto financing customer journey.

• The US economy performed relatively strongly over the past year, continuing to pull out of recession but still susceptible to setbacks caused by global headwinds. One consequence has been the Federal Reserve continuing to delay raising interest rates.

• A number of factors in the economic climate are positive, which have helped raise small business confidence to an all-time high.

• There is less opportunity for small firms to get finance from traditional local banks, as the presence of these has dwindled since the recession due to takeovers by large national institutions.

• Global interconnectedness is increasing, and the US needs to work hard to maintain its competitiveness in global markets.

• A wide range of industry leaders in equipment and auto leasing in the US have provided insights on the opportunities and challenges the market faces in the near and medium terms. Opinions are given on areas of topical interest, including:

- Keeping the momentum going in the equipment leasing industry;

- What might act to constrain leasing growth and which asset finance sectors offer the best prospects for growth in the coming 12 months;

- The changing face of the lending landscape, with bank consolidation at one end and the rise of alternative sources of funding at the small business end;

- How to deliver smarter client solutions through technological and other innovation; and

- Issues affecting auto finance providers, such as increased oversight and the increase in the sub-prime sector.

• This country survey concludes with two specially commissioned articles from experts in their field. The first concerns significant developments in the legal and regulatory environment over the last year, and what to look forward to.

• The final article provides an important update on the latest developments in the lease accounting project, work on which is finally nearing completion.


7 © A

sset

Fin

ance

Inte

rnat

iona

l, al

l rig

hts

rese

rved

.

Equipment and auto finance and leasing in the US

Not surprisingly for the world’s largest economy, the US has the largest equipment and auto finance industry in the world. The US equipment finance sector alone is valued at over US$900 billion, and its interests are represented by the Equipment Leasing and Finance Association (ELFA).

ELFA produces an annual Survey of Equipment Finance Activity (SEFA) that covers key statistical, financial and operations information on the domestic equipment finance industry. However, given the size and diversity of the overall market, data from SEFA, from which selected details appear below, should only be taken as a guideline to industry-wide activity rather than an accurate representation. SEFA figures do not include data on auto leasing (including floorplan finance), real estate and ‘non-equipment finance operations’. Details of the 2015 survey, which is based on responses from 100 ELFA member companies, can be found at http://www.elfaonline.org/Research/?fa=Studies

According to the 2015 SEFA, equipment finance new business volume (NBV) increased by 6.7% to $118 billion in 2014. This actually represents a continuation of the decline in the rate of growth witnessed in recent years, although it remains well above the 2.4% rate of growth of the overall economy.

Overall NBV growth rate

Source: ELFA

The banks put on healthy new business in 2014, with volume growing by 7.4% to nearly $65 billion. Independents grew by considerably the fastest rate, with a 17.6% increase to $16.6 billion in 2014. However, captives managed little more than 1% growth in NBV to $37 billion.

2008 2009 2010 2011 2012 2013 2014

Year-on-year growth

25.0%

15.0%

5.0%

-5.0%

-15.0%

-25.0%

-35.0%

-2.2%

-30.3%

3.9%

16.5% 16.4%9.3%

6.7%

http://www.elfaonline.org/Research/?fa=Studies


8 © A

sset

Fin

ance

Inte

rnat

iona

l, al

l rig

hts

rese

rved

.

NBV by type of lender ($ billion)

Source: ELFA

2013 ($bn) 2014 ($bn) Y-o-Y change (%)

70

60

50

40

30

20

10

0

20.0%

15.0%

10.0%

5.0%

0.0%Banks

60.1

7.4%

64.5

Captives Independents

36.4

1.3%

36.9

14.1

17.6%

16.6

The banks remained the largest type of lender by some margin, with over half of the market share, while the independents’ share of the total grew to over 14%. This came at the expense of captive lenders, whose market share fell from 33% to 31%.

Market share of NBV (%)

Source: Asset Finance International, ELFA

Over recent years, NBV growth rates by type of lender have fluctuated but always been in positive territory. The most growth on average has been for the independents, whilst the trend for banks and captives is of gradual descent. It must be hoped that the dramatic drop in 2013−14 growth for captives is an anomaly after three years of double-digit increases.

0

10

20

30

40

50

60

70

80

90

100

Independents

Captives

Banks

2013 2014

54.4 54.7

32.9 31.3

14.112.8


9 © A

sset

Fin

ance

Inte

rnat

iona

l, al

l rig

hts

rese

rved

.

Change in NBV growth rate, by lender


The largest market segment remains the middle-ticket, with NBV of just under $60 billion in 2014, up by nearly 8%. The small-ticket segment performed even better with year-on-year growth of 9%. However, there was a 2% decline in large-ticket NBV, partly because of a sluggish corporate aircraft sector, as well as depressed IT & related technology services and medical equipment.

2010–11 2011–12 2012–13 2013–14

Banks Captives Independents

25.0%

20.0%

15.0%

10.0%

5.0%

0.0%

NBV by market segment

Source: ELFA

70

60

50

40

30

20

10

0

10.0%

8.0%

6.0%

4.0%

2.0%

0.0%

-2.0%

-4.0%16.8

-2.4%

16.4

Middle ticket

55.5

7.9%

59.8 38.2

9.0%

41.7

This dip into negative growth is the first for any market segment in recent years, although the overall trends are of a gradual decline in growth rates, with small-ticket business being least affected.

Small ticketLarge ticket

2013 ($bn) 2014 ($bn) Y-o-Y change (%)


10 © A

sset

Fin

ance

Inte

rnat

iona

l, al

l rig

hts

rese

rved

.

Change in NBV growth rate, by market segment


There has been a gradual downward trend since 2012 in the percentage of finance providers with growing NBV, but the proportion remains well above two-thirds of businesses.

Businesses with growing vs declining NBV (%)

Source: ELFA

Looking at finance provided per equipment type, the most important sectors in 2014 for NBV growth were trucks & trailers, construction equipment and railroad stock. Prime end-user industries for new business were, unsurprisingly, truck transportation and construction, but also included agriculture, wholesale/retail, and arts, entertainment and recreation services.

Assets under management grew 8.6% in 2014 to $243 billion, while return on assets remained at 1.7% for the third year running, a level that is deemed healthy in the finance sector. Importantly, net income soared by over 15% compared to the year before, helped by increased lease and loan revenues and lower interest expenses.

There remain economic headwinds and uncertainties, but the equipment leasing market continues to grow. Despite some moderate trends, the SEFA Executive Summary concluded: “In all, Survey results showed a healthy and growing industry with respectable increases in NBV, strengthened by adherence to business models and sustained by steady, low rates of delinquencies and charge-offs.”

2010–11 2011–12 2012–13 2013–14

Small ticket Middle ticket Large ticket

40.0%

30.0%

20.0%

10.0%

0.0%

-10.0%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%100

90

80

70

60

50

40

30

20

10

0

Growing Declining

2010 2011 2012 2013 2014

28.3

71.7

75.7

24.3

78.6

21.4

72.5

27.5

69.0

31.0


11 © A

sset

Fin

ance

Inte

rnat

iona

l, al

l rig

hts

rese

rved

.

MLFI-25 new business volumes

Source: Asset Finance International, ELFAELFA’s MLFI is at http://www.elfaonline.org/Research/MLFI/

New business in 2015

The ELFA Monthly Leasing and Finance Index (MLFI-25) shows that, from a sample of 25 major member companies, the trend in NBV has been upward overall in 2015, following the usual slow start after an end-of-year spike. NBV for the first eight months of 2015 amounted to $62.7 billion, an increase of 6% on the same period a year earlier.

However, NBV of $6.9 billion in August 2015 represents a 7% fall on the same month a year earlier, and an 18% drop from $8.4 billion in July 2015.

August 2015 is the first month to show a decrease in NBV compared with the same month the year before since November 2014, although the increases were modest between March and July 2015.

Business confidence

The Equipment Leasing and Finance Foundation (ELFF) produces the Monthly Confidence Index for the Equipment Finance Industry (MCI-EFI), a qualitative assessment of both the prevailing business conditions and expectations for the future as reported by key US leasing industry executives.

The overall MCI-EFI for August 2015 was 67.4, the highest value for three months and a sharp rise against the index of 62.6 for the previous month. In fact, apart from a spike between March and May 2015, this is the highest level of confidence in the last two years and reflects a gradual but steady increase in optimism, fuelled by economic conditions and consumer sentiment.

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

NBV ($ billion) Monthly y-o-y change (%)

Aug-13

Oct-13

Dec-13

Feb-1

4Apr-

14Ju

n-13

Aug-14

Oct-14

Dec-14

Feb-1

5

Aug-15

Apr-15

Jun-1

5

$bn

14.0

12.0

10.0

8.0

6.0

4.0

2.0

0.0

30.0

25.0

20.0

15.0

10.0

5.0

0.0

-5.0

-10.0

%

http://www.elfaonline.org/Research/MLFI/


12 © A

sset

Fin

ance

Inte

rnat

iona

l, al

l rig

hts

rese

rved

.

Business confidence, Aug 2013-Aug 2015

Source: ELFF MCI-EFI, http://www.leasefoundation.org/research/mci/

Following the March peak, confidence was hit by weak investment brought about by headwinds that included sharp cuts to the energy sector, a strong US dollar and a stuttering manufacturing sector. This has been reflected in some seesawing investment figures, with the growth rate of investment in equipment and software rising from 1.6% in Q4 2014 to 3.9% in Q1 2015, before falling back to 1.7% in Q2 2015.

Regarding the near-term outlook for equipment leasing, the ELFF view in October 2015 was that concerns remain over the headwinds that limited investment growth in the second quarter, but there would be a modest pick-up in the second half of the year. The Foundation revised down its overall forecast for equipment and software investment growth to 4.1% in 2015, compared with 6.0% in 2014 (Source: ELFF, Q4 2015 Equipment Leasing & Finance U.S. Economic Outlook). This forecast still compares favourably with predictions for the US economy as a whole − the International Monetary Fund projection is for 2.5% real GDP growth in 2015, rising to 3.0% in 2016 (Source: IMF, World Economic Outlook Update, July 2015).

Auto sector leasing growth continues

The auto sector has been in robust health over the last two to three years, generally undaunted by global economic hiccups. According to data gathered by market researchers J.D. Power and LMC Automotive, the seasonally adjusted annualized rate (SAAR) for total light-vehicle sales is forecast at 17.1 million units for 2015, an increase of 3% over 2014, with the outlook remaining strong.

Fleet volume is growing, with the share of total sales estimated at 13.8% for August 2015, up from around 11% a year ago.

Data from Experian Automotive show that, in Q2 2015, 86% of new vehicle acquisitions in the US were bought with financing, a slight increase over the same period a year earlier and continuing a gradual growth trend over the past five years. Of all new vehicles financed in the period, leases accounted for 31%, the fourth consecutive second quarter increase over the year before. Well over a quarter of all new auto purchases are leased, and leasing accounts for one in seven of all auto

Aug

-13

75.0

70.0

65.0

60.0

55.0

50.0

61.0 61.3

64.963.3

55.856.9

54.0

63.464.2

61.461.4

65.465.1 65.163.0 62.6

67.467.566.1 66.3

72.170.7

58.960.260.4

Sep-

13

Oct

-13

Nov

-13

Dec

-13

Jan-

14

Feb-

14

Mar

-14

Apr

-14

May

-14

Jun-

14

Jul-1

4

Aug

-14

Sep-

14

Oct

-14

Nov

-14

Dec

-14

Jan-

15

Feb-

15

Mar

-15

Apr

-15

May

-15

Jun-

15

Jul-1

5

Aug

-15

http://www.leasefoundation.org/research/mci/


13 © A

sset

Fin

ance

Inte

rnat

iona

l, al

l rig

hts

rese

rved

.

transactions, both new and used. (Source: Experian Automotive, State of the Automotive Finance Market, Second Quarter 2015.)

Leasing − auto market share

Source: Experian Automotive

34.72%

16.83%

14.46%

7.15%

Bank

Captive

Credit Union

Finance

BHPH

26.80%

Q2 2010 Q2 2011 Q2 2012 Q2 2013 Q2 2014 Q2 2015

35.0%

30.0%

25.0%

20.0%

15.0%

10.0%

5.0%

0.0%

10.49% 10.66% 11.36%12.96%

14.82%14.46%

19.00% 19.10% 20.10%

23.40%25.63%

26.92%

31.38%30.16%27.64%

24.40%23.62%23.79%

Leasing % of all new financing Leasing % of all new sales Leasing % of total sales

The banks remain the largest auto finance provider with over a third share of the market, followed by captives with 27%. However, both these segments lost market share compared with the same period a year earlier. The lender type which gained the most year-on-year was the ‘finance’ segment, which includes leasing, and this segment increased market share by 6.5% on the same period a year earlier to over 14%.

Q2 2015 total auto loan market share

Source: Experian Automotive

With interest rates remaining low the outlook for the immediate future is good, as auto growth could be slowed when interest rates rise.

There has been a gradual increase in risk in auto leasing, with sub-prime lending reaching a recent high of 7.24% in Q2 2015; however, 75% of leasing is still in the prime or super-prime categories.


14 © A

sset

Fin

ance

Inte

rnat

iona

l, al

l rig

hts

rese

rved

.

Increasing industry oversight

Industry regulators have been concerned about the rise in the number of auto finance companies providing loans to often high-risk customers who were deemed to have too little protection.

To this end, the Consumer Financial Protection Bureau (CFPB) was established under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and, from September 2015 widened its supervisory oversight of auto lending to include larger non-bank auto lenders, including captive lenders which had not been subject to such scrutiny at the federal level. The CFPB now has the power to supervise any non-bank auto finance company that makes, acquires or refinances 10,000 or more loans or leases in a year – in 2013 this amounted to fewer than 40 companies.

CFPB investigations have led to rulings against lenders such as Ally Financial and American Honda Finance, among others, which have provoked considerable opposition from industry groups such as the National Automobile Dealers Association which want the extension to the agency’s remit reversed.

Nonetheless, losses on car loans taken out by sub-prime borrowers are continuing to climb, indicated by data on bond deals sold on Wall Street. These involve the bundling together of car loans into sub-prime auto asset-backed securities (ABS) which are sold to big investors. However, an increasing volume of these is coming from smaller, less established issuers, leading to competition for market share and lower credit standards, which could drag established lenders with them. According to data compiled by financial information firm Bloomberg, nearly $17 billion of bonds backed by sub-prime auto loans were sold in the first seven months of 2015, helping fuel auto sales but also providing the CFPB with a reason to monitor the market.


15 © A

sset

Fin

ance

Inte

rnat

iona

l, al

l rig

hts

rese

rved

.

Enhancing the customer journey

Learning to leverage technology will be key to enhancing the auto financing customer journey, writes auto finance specialist Marguerite Watanabe

Today, the focus for numerous industries is on how to improve the customer experience. This is certainly the case in the auto industry, but it becomes especially interesting in the auto financing arena given that the majority of auto loans and leases are ‘indirect’, i.e. arranged by the dealer with the consumer. The deals completed directly between the consumer and the lender still only represent a small percentage of vehicles bought and financed. Though the relationship is generally not direct, there is the opportunity to improve the auto financing consumer journey through technology, transparency and ‘tailorability’.

The rise of the online customer

Consumer expectations are evolving. This is not just about the often-discussed millennials, but includes the baby boomers, the Y and Z Generations and beyond. The expectations of all consumers are changing, as are the factors that lead to customer satisfaction, retention, loyalty, delight and all the other goals of market researchers. And, for those trying to reach these consumers effectively and efficiently, access to consumer data, Big and small, has grown tremendously. The ability for consumer marketers to dissect consumer needs and apply them to product development, marketing messages, etc. has been greatly enhanced with data and is now possible in real-time.


16 © A

sset

Fin

ance

Inte

rnat

iona

l, al

l rig

hts

rese

rved

.

In the automotive retail business, the purchase process is also changing and, in fact, has been for many years. Pre-purchase online vehicle research has long been the norm, though bridging that gap between the online consumer experience and the in-dealership one is an area in which improvement is still needed. And, while dealerships are still more bricks and mortar than not, enhancing the showroom and service-shop experiences has been the focus of many dealers in recent years. However, improving the customer experience has as much to do with understanding what the vehicle buyers want as it does having dealers reinvent themselves. Some of the reinvention is driven by self-motivation, but competition from market disrupters and regulatory compliance has also contributed.

For the majority of consumers today, more and more is done online and on multiple devices. We get information online and we communicate online. We use multiple apps to conduct our daily business on computers, tablets, smartphones and now watches. Via these devices, today’s car buyers can research vehicles, rate and compare dealers, apply for financing, make payments, schedule service appointments and more. So the consumer journey for auto financing must include these devices.

Improving the finance experience

The auto financing experience is a part of the consumer journey that deserves attention. In the indirect financing world, the consumer connection begins when the financing source purchases the retail instalment contract or lease from the dealer. Or does it? Is the only customer experience with the financing side of the business with the onboarding, servicing, collections and loan/lease termination processes? Can the auto financing source, the captive, the bank, the independent auto finance company, make an impact on the consumer experience? The answer is absolutely yes, but the industry as a whole is only now beginning to explore what this means.

Whether it’s for finance research, the selection of options, the application process, loan/lease payments or terminations, the financing leg of the consumer journey does have an impact on consumer satisfaction. It is often noted that the second biggest purchase for most consumers is their vehicle. Therefore we must look the ways that financing can drive up satisfaction.

Availability on demand

Consumers today insist on communicating, connecting and doing commerce with product and solutions providers on their terms. These terms include when, where and how they will do so. And, with social media, they will let everyone know if you are doing a good job or not. Auto financing sources need to utilize technology and partner even more closely with dealers in meeting these consumer needs. This means allowing consumers to use technology they’re most familiar with and for the financing sources to implement technology advancements that will allow consumers to access financing the way they want.


17 © A

sset

Fin

ance

Inte

rnat

iona

l, al

l rig

hts

rese

rved

.

Transparency, today and tomorrow

A product’s market credibility is based on consumers’ trust of the provider and product. In auto financing, clarity is vital. Doubt on hidden fees and charges plagues the industry, but open communication of options and costs at the point of sale will ease this. In addition to the industry’s efforts to improve consumer awareness around the financing process, dealers and auto financing sources must together find a technology-driven way to engage and empower the consumer. Furthermore, auto financing sources will need to continue on this path of transparency throughout the life of the loan.

The way the customer wants it

Consumers will increasingly demand financing options that fit their needs, for loan terms, payment dates, preferred communication methods, etc. Most legacy systems do not allow this, but going forward, this flexibility or ‘tailorability’ will become more and more important in auto financing.

Creating a better customer journey on the financing side of the vehicle purchase will be key to overall customer satisfaction and a healthy industry. This will need to be done in partnership with the auto dealers who, in many cases, are ahead of the finance sources already. Using technology to be transparent and tailor products specifically to consumer needs will be the focus of the industry and will enhance operational performance as well as customer satisfaction.

Marguerite Watanabe is president of independent consultant Connections Insights. Connections Insights has worked since 2006 with international clients, including auto financing sources, auto manufacturers, software and data providers, business processing outsourcers, consulting firms and trade associations.

+1 678-520-3385

[email protected]

mailto:[email protected]


18 © A

sset

Fin

ance

Inte

rnat

iona

l, al

l rig

hts

rese

rved

.

Economic background

The US economy has continued its relatively strong performance over the past year. According to the latest figures from the Bureau of Economic Analysis, GDP expanded 2.70% in Q2 2015 over the same quarter of the previous year, and at an annualized rate of 3.90% for that quarter over the previous quarter. This second figure was upgraded twice on the back of strengthening fundamentals following a disappointing first quarter.

However, progress has been by no means serene, with global turbulence causing fluctuations even in the world’s largest economy.

US GDP growth rate (%)

Source: U.S. Bureau of Economic Analysis

Nonetheless, as the economy pulls out of recession and with the ending of quantitative easing in October 2014 the focus of financial institutions, lenders and borrowers has been on when interest rates will rise. Keeping rates at near zero, which the Federal Reserve has done since December 2008, is a more traditional way of supporting the economy than QE, but rates will have to rise at some point.

In its previous US Country Survey published in September 2014, Asset Finance International wrote that the consensus view was that the anticipated rate of expansion would necessitate the Fed raising the interest rate fairly soon, probably in the first half of 2015. At that point, the Fed expected interest rates to be around the 1.25−1.50% level by the end of 2015.

Since then, however, caution has predominated as the Fed has stuck to its policy of keeping rates low in order to maintain economic momentum − and this has proved trickier than expected.

Had the Q2 2015 figures been more positive, the most anticipated monetary event of the year might have happened in September. Instead, it was a non-event as the Fed chose again not to raise interest rates.

Fed chair Janet Yellen stated: “The outlook abroad appears to have become more uncertain of late, and heightened concerns about growth in China and other emerging market economies have led to notable volatility in financial markets,” adding that recent developments, including the fall in equity prices and further appreciation of the dollar, have tightened overall financial conditions. She concluded: “These

Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q22012 2012 2013 2013 2013 2013 2014 2014 2014 2014 2015 2015

Y-o-Y change Change over previous quarter

5.0%

4.0%

3.0%

2.0%

1.0%

0.0%

-1.0%

-20%


19 © A

sset

Fin

ance

Inte

rnat

iona

l, al

l rig

hts

rese

rved

.

developments may restrain US economic activity somewhat and are likely to put further downward pressure on inflation in the near term. Given the significant economic and financial interconnections between the US and the rest of the world, the situation abroad bears close watching.”

There is still a chance that US interest rates may be increased before the end of 2015, but the numbers in favour are decreasing and the IMF has cautioned against a rise before 2016. The level of inflation will be an influence − the Fed’s preferred measure of inflation is the core personal consumption expenditures (PCE) rate, and its latest forecasts are for it not returning to near the target rate until 2017. However, the theory is that interest rate changes have an 18-month lag before the full impact is felt.

Core PCE inflation (excluding food and energy)

Source: U.S. Bureau of Economic Analysis

Business climate

There are encouraging signs, including steadily falling numbers of unemployed and rising numbers of employed persons. There has been a continuation of the trend for more jobs to be created through ‘reshoring’ and foreign direct investment (FDI) by overseas firms than are lost through ‘offshoring’.

The reshoring trend – bringing back manufacturing operations that have been moved offshore – has grown as the previously perceived advantages of lower production costs and increased efficiency have tended to be overturned by the realization that it probably makes sense to have the place of production near to the consumer – and US manufacturers have the world’s biggest consumer market on their doorstep. Firms are more competitive in their home market, and reshoring offers local benefits not only directly in terms of jobs, but in opportunities to other firms such as service providers, dealers, and of course finance providers.

A key indicator of the health of the economy is its small and medium-sized enterprise (SME) sector, and its confidence as shown in the level of borrowing and investment. The current strength of US SMEs is indicated in the Thomson Reuters/PayNet Small Business Lending Index (SBLI), which reached 143 in July 2015 – an all-time high point over the past 10 years. Borrowings and investment grew 9% over the previous month, and 19% compared with the same month a year earlier. Although

2.50%

2.00%

1.50%

1.00%

0.50%

0.00%Dec

2014

Jan

2015

Feb

2015

March

2015

April

2015

May

2015

June

2015

July

2015 Target


20 © A

sset

Fin

ance

Inte

rnat

iona

l, al

l rig

hts

rese

rved

.

there have been regular and marked fluctuations, the trend line over the past six years has been moving upward.

Thomson Reuters/PayNet Small Business Lending Index (SBLI), January 2005−July 2015

Source: PayNet, Inc.

Reiterating the point made by Janet Yellen regarding the links between the US and global economic and financial conditions, the recent PayNet 2Q2015 Small Business Credit Outlook observed: “Although small business receives little direct sales from foreign markets, the interconnectedness of the US economy to global markets will ultimately impact small businesses, and this will, in turn, affect the credit quality of small business debt.”

Nonetheless, for many SMEs the outlook is encouraging and their investment intentions are positive. Recent research by GE Capital in its 2015 Capex Barometer reveals that over 70% of US SMEs are optimistic about the future.

Bank consolidation

In addition, the Capex Barometer shows that over half (58%) of US SMEs consider leasing equipment via a vendor agreement or structured finance to be a preferred financing method, and that they also tend to prefer to seek financing from a manufacturer rather than a traditional ‘high street’ bank.


21 © A

sset

Fin

ance

Inte

rnat

iona

l, al

l rig

hts

rese

rved

.

In fact, the bank landscape has been radically altered by the financial recession, with numerous truly local banks being taken over by large national banks. The post-crash scenario of economic stagnation, low interest rates and heightened regulatory oversight has conspired against the small banks.

Prior to the banking crisis in 2008, more than 100 bank start-ups were licensed in the US every year; in the last five years there have been just two new commercial lenders, with the most recent opening in July 2015. Whether this opening is the start of a new trend is open to debate, but the situation highlights a reduction in sources of loans for SMEs, especially lenders with local knowledge.

According to Federal Deposit Insurance Corporation (FDIC) statistics, while community banks provided 22% of all bank lending in 2014 (compared to 41% by the top five banks), they still provided 51% of loans to small businesses and a massive 77% of agricultural loans.

Alternative sources of funding such as peer-to-peer lending are emerging but are limited in size and scope whilst needing to raise their acceptability rating. There should be great opportunities for asset finance providers such as independent leasing companies.

Global competitiveness

As referred to above, the interconnections between the US and the rest of the world are significant and, in the case of China, growing steadily.

Chinese FDI into the US is at a low level compared with, say, the UK, Germany and Japan, but China’s overseas investment has been increasing over the last five years and it now represents the fastest growing source of FDI in the US. There has been particular interest in investment in the auto services and supplies sector.

It is instructive to see how the world’s largest economy compares in competitiveness with what is currently the second largest. The World Economic Forum’s annual Global Competitiveness Report assesses the competitiveness landscape of national economies, providing insight into the drivers of their productivity and prosperity. Various aspects of competitiveness are captured in 12 pillars, which make up the Global Competitiveness Index (GCI), as shown in the chart below.

In virtually all the pillars, the US is well ahead of China – the glaring exception being the macroeconomic environment, in which the US ranking is lower due to its much larger budget balance and higher level of government debt as proportions of GDP.

In the most recent GCI for 2015−2016, the US was ranked third globally out of 140 economies, while China was 28th. However, China’s economy is defined in the Global Competitiveness Report as being some way behind the US in terms of development – efficiency-driven, rather than innovation-driven – and it will be interesting to see where the differences in ranking are closed, and how quickly.


22 © A

sset

Fin

ance

Inte

rnat

iona

l, al

l rig

hts

rese

rved

.

The US and China ranked against each other and the rest of the world

Source: Global Competitiveness Report 2015-2016, World Economic Forum, Switzerland

Asia-Pacific links

One recently agreed development which will involve the US but not initially China is a new Pacific trade zone – the Trans-Pacific Partnership (TPP). Following five years of negotiations between 12 countries (the US, with Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam), the TPP will lower trade barriers and is expected to open up markets for exports, including cars.

The TPP still requires ratification by each country, and faces a rigorous examination by the US Congress, but when finalized it will be the largest ever regional trade deal, representing nearly 40% of global GDP, even before the longer-term vision that would see the addition of other Asia-Pacific nations including the Philippines, South Korea, Taiwan, Thailand and, presumably, eventually China. It is being heavily backed by the Obama administration as an export booster and job creator.

0 20 40 60 80 100 120

12th pillar: Innovation

11th pillar: Business sophistication

10th pillar: Market size

9th pillar: Technological readiness

8th pillar: Financial market development

7th pillar: Labour market e�ciency

6th pillar: Goods market e�ciency

5th pillar: Higher education & training

4th pillar: Health & primary education

3rd pillar: Macroeconomic environment

2nd pillar: Infrastructure

1st pillar: Institutions

Overall ranking

0 20 40 60 80 100 120

US China

32828

5111

3996

5146

446

6816

584

375

5417

742

14

384

31


23 © A

sset

Fin

ance

Inte

rnat

iona

l, al

l rig

hts

rese

rved

.

What the experts say

Asset Finance International sought the views of industry leaders in equipment and auto finance and leasing in the US, in order to provide a greater insight into the current state of the market, the opportunities and challenges it faces in the near and medium term, the direction of market trends and the outlook for the coming year.

Maintaining momentum

The first topic for debate concerned the fact that, while the US economy and the leasing industry have continued to show growth, the rate of growth in equipment leasing seems to have slowed in 2014 – so how optimistic is the industry that upward momentum will continue?

The consensus was that equipment leasing will at least continue to grow at a faster pace than the overall economy, and that weakness in the economy will be the likely factor in keeping a brake on leasing growth.

The current Chair of ELFA, Bob Rinaldi of Commercial Industrial Finance, provided an overview, stating: “I am optimistic that growth will continue, albeit at a slightly faster pace than in 2014/15, mostly due to the positively trending jobs figures over the past eight months. That ultimately will help consumer spending which makes up the majority of the US GDP and in turn drives business capital spending.”

Others agreed that the momentum in the leasing market will be boosted if the national economy continues to expand, which should be the case barring a domestic or international crisis. However, as in recent years, growth is varied across the industry, as pointed out by Jeff Berg of DLL (formerly De Lage Landen): “While some sectors are outpacing the general economy, others are impacted by the challenges of commodity pricing or other sector-specific factors.”

Gary Amos of Siemens Financial Services noted a cautious outlook amongst businesses: “Increasing uncertainty in the wider global economy is ebbing business confidence and is expected to lead to a slight slowing of the economy which will accordingly impact the equipment finance and leasing industry in the US,” adding: “Whilst there is generally a positive growth outlook in our industry, recent data from the ELFA monthly confidence index indicates a short-term decline in confidence in the US equipment finance market.”

Concerns were raised that larger corporations are still just replacing old equipment rather than investing due to expansion, but upgrading stock has at least been a benefit to specialist lessors. First American Equipment Finance’s Alan Sikora explained: “In the industry segments that First American serves, we are seeing strong growth. We are experiencing increased demand from clients who use leasing to hedge technological obsolescence. The pace of technology advancements is increasing, and demand to regularly refresh equipment is increasing proportionately.”

Such demands have not been experienced across the board. For Adam Warner of Key Equipment Finance, “the pace at which the entire

Bob Rinaldi


24 © A

sset

Fin

ance

Inte

rnat

iona

l, al

l rig

hts

rese

rved

.

industry is growing has slowed,” he said, “but each industry vertical tells a different story. The most surprising has been the slower growth in the tech sector. I believe this is primarily due to how technology consumption is changing to a usage or cloud model.”

However, he added that other sectors, such as truck transportation and construction, have seen more solid growth, and concluded: “I am optimistic that industry growth will continue to outpace GDP growth but the industry in general would certainly benefit from stronger economic signs.”

This point was echoed by lessors with a smaller business bias and summed up by Chris Enbom of Allegiant Partners, who observed: “Our niche is equipment finance for smaller companies, primarily in service

industries. Many of our customers continue to be conservative in terms of expansion of their businesses. If the US economy continues to grow, even modestly, we think there will be continued growth for the smaller service-based companies,” although he added that these companies “are still fairly gun-shy after the Great Recession and from the seemingly never-ending stream of confidence-eroding economic news from outside of the US.”

Leasing market dynamics

So what will sustain leasing growth going forward, and will the dynamics change? The emphasis of most responses was firmly on innovation, particularly of the technological variety, with the economy a major presence in the background.

In the plain words of Nick Small of CIT Equipment Finance, “economic growth is the cornerstone support for sustained leasing growth. I don’t see the dynamics changing. From my experience, the single most important determinant of leasing growth is the nation’s GDP growth rate.”

Pacific Rim Capital’s Dave Mirsky took this up, saying: “The only thing that will sustain leasing growth is improved business-to-business capital expenditure. The economy has to be self-sustaining and robust for this to occur.” But, he added, “although growing, it is currently somewhat anaemic and the stock market drop has spooked many companies, which view that as a harbinger.”

Aside from the recent stock market jitters exacerbated by concerns over the global economy, the job situation in the US has been improving, a factor highlighted by Bob Rinaldi, who stated that leasing growth should be sustained by “employment trends continuing, which then should provide the needed inputs for a more positive consumer and business sentiment going forward.”

But there was firm agreement on the importance of innovation, as described by Adam Warner: “Innovation will be the key driver for leasing growth. That innovation will start with the products and services being financed such as clean energy, new technologies and improved and more efficient types of collateral. Our industry will quickly create products to lease and finance those innovations to our commercial clients.”

Chris Enbom

“Industry growth will continue to outpace GDP growth but the industry in general would certainly benefit from stronger economic signs”

Dave Mirsky

“Innovation will be the key driver for leasing growth. Our industry will quickly create products to lease and finance those innovations to our commercial clients”


25 © A

sset

Fin

ance

Inte

rnat

iona

l, al

l rig

hts

rese

rved

.

Jeff Berg agreed, commenting: “Innovation around our products and services in concert with our partners’ growing requirements will sustain our growth going forward.” He expanded on this, saying: “In this regard, we see three key areas of focus in the coming years. First, we see a global trend from ownership to usage. Already in our business, we see rental and circular economic models becoming more attractive to asset users in our various markets. Our industry could be instrumental in driving this change even further by offering more financial solutions to aid manufacturers in moving their customers from asset ownership to fee-for-service.”

He continued, adding an international perspective: “Next, many manufacturers want their leasing partner to have a global footprint – to

function as a one-stop shop that combines global oversight with knowledge of local culture and regulations in order to be more agile and react faster to changing market needs.”

Finally, he stated, the speed of delivery and pace of digital services, or digitalization, is accelerating. “In the coming years,” he said, “the migration towards digital will continue to play an increasingly important and central role in business solutions.”

Technological development and the rise of digitalization are key to innovation, as Gary Amos explained: “The fact that leasing helps to enable the equipment acquisition process for business is well-established. This is no different to auto leasing, which remains the mainstay of how cars are acquired. The difference going forward will be that the dynamics will be influenced by the future role of technology and the development of digitalization across a broad spectrum of industries.” So, he stressed, there will be the need to align future finance solutions with the changing technology arena.

He added that traditional leasing providers, such as banks, are typically focused within their current footprint and customer, as an adjacency to core financial instruments, and that will continue. “Within the more specialist leasing-focused environment,” he continued, “future sustainability will be underpinned by those financiers that understand the dynamics and implications of today’s megatrends, such as globalization, urbanization, climate change, digital transformation and demographic changes, and that have a deep understanding of the impact on businesses’ changing equipment and technology needs.”

The manufacturing sector is expected to increasingly digitalize operations, which will drive the need for technology upgrades. This will create new growth channels for finance organizations that can successfully align their financial products with the evolving manufacturing product portfolio.

From the standpoint of a software solutions provider, Jonathan Dodds of White Clarke Group commented on the significance of technological innovation, noting that “the need to service clients in the most efficient and effective manner has never been of greater importance. The use of flexible and adaptable technology will help to maintain customer satisfaction which in turn will sustain leasing growth.”

Jeff Berg

“The use of flexible and adaptable technology will help to maintain customer satisfaction which in turn will sustain leasing growth”


26 © A

sset

Fin

ance

Inte

rnat

iona

l, al

l rig

hts

rese

rved

.

Constraints on growth

Such positive statements about the potential for leasing to continue growing prompted the next question from Asset Finance International to the panel of experts: What do you see as the primary constraints on leasing growth, and will the rise in interest rates, when it comes, have any adverse effect?

The overwhelming view was that the economy and global headwinds provide the prime challenges, summed up by Chris Enbom: “I think the primary constraint on leasing growth is confidence that the economy will continue to grow, which seems to hinge primarily on whether China, Europe, and other economic regions can avoid recession for various reasons.”

A combative point was made by Bob Rinaldi, who stated the view that businesses are not getting encouragement from government: “The constraint to our growth frankly is the willingness of businesses to move ahead with their growth plans. There has to be the proper environment for that and I don’t see that happening until this administration leaves office. For the past six-plus years we have had what I would call a silent boycott by US businesses. This administration has threatened, vilified and regulated the foundational premise of business formation. Is that too harsh?”

But Nick Small took a more benign view, observing: “Now that the Great Recession is behind us and the credit crisis along with it, very

few companies or organizations have difficulty finding a finance company to approve their equipment lease. It is difficult to identify any serious constraints on leasing growth in the US today. The economy is decent, not great, but good enough to support and encourage leasing. Neither inflation nor deflation appear to be threats. Demand for new equipment is strong. And lastly, demand for new equipment is strong.”

However, a different opinion of the ever-present issue of rules and regulations was provided by Jeff Berg, who commented: “Changing accounting rules as well as the ever changing regulatory environment will continue to put pressure on the entire industry.”

On the question of the impact on the industry of a rise in interest rates, everyone was reasonably bullish, assuming the rise is not too large. Adam Warner commented: “I think a moderate rise in interest rates would be beneficial to our industry. Margins are way too compressed and it causes lessors to cut spending on innovation and hiring to achieve acceptable returns.”

And Alan Sikora added: “In a higher interest rate environment, equipment leasing companies may have the opportunity to show greater differentiation from loan-type products, which could be a positive for the industry.”

Of course, a rise in interest rates will lead to an uptick in leasing rates, but as Gary Amos said: “History has shown us that natural market resizing will occur during any economic cycle. When lending costs increase there is normally at least a short to medium-term impact on demand, as the market adjusts, depending on the nature of the rate rises.”

Nick Small

“In a higher interest rate environment, equipment leasing companies may have the opportunity to show greater differentiation from loan-type products, which could be a positive for the industry”


27 © A

sset

Fin

ance

Inte

rnat

iona

l, al

l rig

hts

rese

rved

.

However, he pointed to the underlying need to update and upgrade equipment and technology as a hangover from the financial crisis and the subsequent sustained period of underinvestment, concluding: “As a result, those lenders that understand the cycle and have access to capital and competitive costs will be well placed to meet the expected demand for finance for future capital investment.”

Prospects for growth

Asset Finance International asked the panel to forecast leasing market growth in 2015 and 2016, and suggest which asset finance sectors offer the best prospects for growth in the coming 12 months.

Leasing market growth predictions varied, but were positive. At the top end of the range, independent lessor Pacific Rim Capital’s Dave Mirsky expects “10-15% growth.”

Also forecasting double-digit growth, Chris Enbom of smaller business specialist Allegiant Partners stated: “We expect the US leasing market for small companies to grow by more than 10%,” adding a comment from the PayNet 2Q2015 Small Business Credit Outlook referred to earlier in this report: “Small businesses remain an anchor of safety and steady growth at this time.”

Other growth forecasts tended to be at a more conservative level in the lower single-digit range. DLL's Jeff Berg commented: “Overall for 2015 and 2016 we are again forecasting continued slow growth. While some sectors we serve are outpacing the general economy due to deferred purchasing activity from prior years, others are impacted by the challenges of commodity pricing as our customers prepare for a slower outlook.”

As for market sector prospects, technology was the most commonly cited, with construction, transportation and machinery also tipped.

In the view of Adam Warner of Key Equipment Finance, “there will be additional investment in new technology and alternative energy, and if the economy continues to grow, investment in commercial and residential building will bode well for construction equipment.”

Commercial Industrial Finance’s Bob Rinaldi agreed that investment in one market benefits other sectors. He favours manufacturing, stating: “I think the manufacturing industry

in general will be a good sector, and the same for the equipment that that industry utilizes which is broad (machine tools to software to transportation).”

Alternative sources of funding

The lending landscape is facing serious potential change in its make-up, with consolidation of finance providers at the top end, and the arrival of new funding sources such as peer-to-peer lending and crowdfunding at the small business end.

The panel was, of course, well aware of this and their view of the future make-up of the asset finance market centred mainly on adaptability.

Adam Warner

"Small businesses remain an anchor of safety and steady growth at this time"


28 © A

sset

Fin

ance

Inte

rnat

iona

l, al

l rig

hts

rese

rved

.

The area where the new lenders will most likely succeed in the near term is enhanced customer experience through financial technology, or FinTech, a point made by First American’s Alan Sikora: “Changing customer buying preferences favour consumer-type buying convenience, even for complex products. To survive and thrive in the next decade, most US-based equipment finance businesses will need to leverage technology to simplify the client experience, like many

FinTech companies do today.”

This was taken up by Nick Small of CIT Equipment Finance, who said: “Innovation in the financial services market appears to be alive and well. The ability today for entrepreneurs and start-ups to leverage the internet and new technology is accelerating the creation of new business approaches. Traditional financial services companies appear to be embracing many of these technologies, whether through acquisitions or building it themselves, or both.”

He added that lessors are recognizing the importance of the online financing market, which is growing in popularity with small businesses as they can get access to funds within hours of applying. “These business owners need faster access to working capital and equipment financing than their banks can provide,” he said.

In the opinion of Gary Amos of Siemens Financial Services, there could potentially be concentration of providers addressing particular asset classes or markets as some very large portfolios are divested and acquired by other lenders. “At the other end of the market,” he continued, “boutique lending in the crowdfunding and peer-to-peer arena is certainly a popular topic. The challenge for these funders will be to prove the success of their business models and demonstrate how

sustainable these platforms can be in practice, which should become clearer as those portfolios mature and returns are monetized. What is important is how these market changes, at both ends of the finance spectrum, will impact the customer experience. Speed, ease of doing business and portability of the origination engine for the customer will remain of paramount importance to all lenders, and the vendors and customers they serve.”

For Chris Enbom, there is likely to be an increase in the separation between companies that specialize in originating small-ticket transactions and wholesale lenders, “for a variety of reasons, but primarily due to underwriting costs for banks and other institutions.” However, he continued: “I am not overly optimistic that peer-to-peer lending will take off in a big way in our industry, but I think that technology/marketing-driven operators of secured and unsecured lending platforms that sell transactions on a wholesale basis to banks and other institutions are here to stay.”

That there is increasing competition for business is not in doubt. Dave Mirsky was of the opinion that “that there will be more competition for simple loans and conditional sales contracts which will squeeze bank margins. Larger ticket ($1-5 million) leases, written for the right reasons and for the right equipment will not be affected.”

Alan Sikora

Gary Amos

“The ability today for entrepreneurs and start-ups to leverage the internet and new technology is accelerating the creation of new business approaches”


29 © A

sset

Fin

ance

Inte

rnat

iona

l, al

l rig

hts

rese

rved

.

Others expressed doubts about whether alternative lenders will take market share from more traditional financing sources, but it was agreed that they can fill a financing gap in that they are prepared to take on more risk. However, this raises other issues, as noted by Adam Warner, who said: “The questions around alternative lenders centre on their ability to manage through an economic downturn and what types of government regulations may come as a result.”

In conclusion, Bob Rinaldi observed: “I think FinTech will continue to grow and gain credibility. So, from that perspective I believe it will have some beneficial impact on the make-up of our industry. Change is scary I know, but change is necessary. Our industry is not immune from being disrupted as so many other industries have been. Either we adapt and innovate or we become just a speed bump at some point.”

And Nick Small summed up, with a reminder of the globalization that technological advances bring: “If the last century has proved anything about forecasting in the business world, it’s that predicting the future make-up of any market is nearly impossible. Technological innovation is disrupting nearly every industry. New competitors are leveraging low-cost technologies to attack traditional markets and are challenging accepted doctrine of how to compete and win. Moreover, it is commonplace to find these competitors coming from foreign lands. Global competition is the norm and will only become more intense. So, all we can say with certainty about the equipment finance industry in the coming years is that it likely will look significantly different than it does today.”

Better customer service

Following on from this, the panel considered the practical steps that asset finance companies should be taking today, using available technology and data, to run their businesses more effectively and deliver smarter solutions to their clients.

The conversation ranged far wider than technology, but starting with the undeniable pace of developments in this field, Jeff Berg commented: “The technology landscape has radically changed over the last 24 months and I expect that to continue. We are using technologies and data to help us create a better customer experience while also supporting operational excellence in the background. There is no perfect suite of solutions, rather a constant evolution as we integrate new tools into our offerings which offer customers a faster, more reliable and easier way of doing business.”

He highlighted the growing importance for lessors and manufacturers of the Internet of Things, which will be used more and more to deliver data which will make more effective and efficient use of the complete technical lifecycle of assets. “Through monitoring assets we gain insights on optimal product usage and residual value development of assets,” he said. “This defines the most suitable timing to move assets to other phases in the product lifecycle. Fleet management and asset tracking are solutions supporting this process. They provide valuable data during a product lifecycle.”

“Our industry is not immune from being disrupted as so many other industries have been. Either we adapt and innovate or we become just a speed bump at some point”

“There is no perfect suite of solutions, rather a constant evolution as we integrate new tools into our offerings which offer customers a faster, more reliable and easier way of doing business”


30 © A

sset

Fin

ance

Inte

rnat

iona

l, al

l rig

hts

rese

rved

.

Looking at the auto sector, Jonathan Dodds of White Clarke Group noted: “Auto sales are up, fleet volume is rising, and leasing’s share of the market is continuing to grow. Technology and big data are as essential to auto finance providers in providing faster processes and increased customer satisfaction as online research is to the consumer. Lessors need to be flexible and have adaptable processes.”

Continuing on the theme of digitalization of financial services, which continues to develop and create opportunities for new products and service offerings for clients, Gary Amos stated: “Leveraging big data, including smart data mining and analysis in new and different ways can make a significant contribution to the future development of the industry.”

Insights gained through smart data analysis gives businesses the potential to increase operating margins, Amos said, adding: “The challenge for the industry is to extend current practices to embrace the opportunities provided through digitalization throughout the value chain, from origination to disposal, and develop new insights into actionable value propositions and service offerings that will enhance the customer experience.”

Customer motivation

A number of other important practicalities were stressed by the panel of experts in addition to big data, including more traditional methods of client information analysis. Adam Warner commented: “There is a lot of talk about big data but I think the real opportunities are in analysing your regular client information to determine buying habits, relationship profitability and sales efforts. All revenue is not equal, as some types drive stronger profits. There are a lot of data tools available to analyse that revenue and profitability information so that your sales organization knows what types of clients generate the optimal returns.”

One hugely important element of most finance providers’ operations is their staff, who interact with customers and sales processes, as emphasized by Alan Sikora. He stressed: “Businesses should consider empowering front-line employees to drive systems and process innovation. As they interact with clients and use the business’ systems, they naturally uncover opportunities to improve the ways in which service is delivered. Empowering those colleagues to move their new ideas forward is an excellent business practice.”

And the message from Chris Enbom on the need for lessors to invest was blunt: “Continue to invest heavily in marketing, sales, operations, credit scoring and customer service solutions, or you will not exist in five or 10 years.”

Nick Small concluded: “Technology and data are simply tools to better execute on your value proposition for the benefit of your customers, employees and investors. In my view, the practical steps are the same that any successful business has followed. The challenge for almost any organization after it reaches maturity is understanding the reality of its markets and continuing the never-ending battle of creating the right products and services that customers desire and are willing to pay for at prices that meet a company’s economic model and risk requirements.”

Jonathan Dodds

“Leveraging big data, including smart data mining and analysis in new and different ways can make a significant contribution to the future development of the industry”

“Continue to invest heavily in marketing, sales, operations, credit scoring and customer service solutions, or you will not exist in five or 10 years”


31 © A

sset

Fin

ance

Inte

rnat

iona

l, al

l rig

hts

rese

rved

.

Issues for auto lenders

There have been some changes in the auto finance landscape recently, the first being regulatory and the requirements of the Consumer Financial Protection Bureau (CFPB) regarding potential discrimination in credit rating.

As described earlier in this report (see ‘Increasing industry oversight’), the CFPB was established to protect consumers in the marketplace for financial products and services, following changes to the financial services sector introduced under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Financial institutions that do not comply with CFPB rules can face heavy fines and penalties.

Asset Finance International asked the panel for any comment on whether the CFPB’s compliance requirements are likely to hinder or encourage new auto finance business. The majority of the panel do not have direct involvement in consumer finance, but those who did comment were not impressed.

Chris Enbom responded by saying: “The CFPB will only hinder auto finance and lending to other asset classes if the Executive Branch of our government continues to focus on disparate impact instead of disparate treatment.”

He elaborated: “Currently, under the Equal Credit Opportunity Act (ECOA), we are not allowed to make credit decisions based on race, gender, etc. The government seems to be on a quest for finance companies to engage in some sort of social engineering we do not really understand nor are we prepared to facilitate unless the cost of financing to all customers increases.”

And it drew the following reaction from Bob Rinaldi: “HINDER HINDER HINDER HINDER HINDER HINDER HINDER (I am yelling, can you tell). This is the case with the unintended (or intended) impact of most of Dodd-Frank, which is why we have had the slowest recovery in history coming off of a recession.”

The other issue that has affected the US auto market recently is that research shows that loan periods for sub-prime and now prime auto customers are increasingly being made over five years, and even up to seven years, and might such longer-period auto loans be storing up trouble for the future?

“We have had the slowest recovery in history coming off of a recession”


32 © A

sset

Fin

ance

Inte

rnat

iona

l, al

l rig

hts

rese

rved

.

The reaction to this was mostly in agreement, although Adam Warner played down the importance, saying: “In any sector, longer tenors add additional risk as they are more likely to run into unforeseen circumstances. However, longer auto lease terms may not add that much additional risk because, in general, Americans tend to budget for continual auto payments. In other words, we like new cars!”

Lease accounting progress

Finally, the panel was asked for their views on progress in the deliberations by the lease accounting boards. The deliberations between the Boards – the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) – have been protracted to say the least, but seem to be nearing a conclusion.

This has led to doubt on the framework and the timing of a new standard, and uncertainty is never a good thing in any market. The consensus is that new rules will be published by the end of 2015, which should help create a better working environment for equipment leasing companies once the element of uncertainty on lease accounting is removed.

Opinions varied as to how much effect there will be. Dave Mirsky stated: “I do not anticipate much change in lessee behaviour because the final version does not seem as onerous as some of the previous ones.”

Chris Enbom agreed regarding smaller companies, as “our typical product is an equipment financing agreement, aka a loan, so we do not expect to see a direct impact from new rules.” However, he added: “There are many larger companies that will be looking for products that shift even more risk onto equipment finance companies in the form of service agreements or short-term rentals that will require a rethinking of certain business models.”

There remains uncertainty as to the result of having different standards for the US compared with Europe. Adam Warner commented: “My opinion is that the FASB was right to separate from the IASB on matters relating to expensing of the interest, and many European lessors I have talked to on this matter seem to feel the same.”

For Jeff Berg, the new standard “will most likely lead to different regulations for IFRS versus US GAAP, specifically for lessee accounting of operating leases. This will result in additional complexities as well as costs as we work towards the implementation.”

Some final observations came from Bob Rinaldi: “I think they are figuring out how hard this is going to be to implement and get half-way right in terms of impact on all stakeholders for the sake of what they believe is greater transparency. I liken their approach over the past 10 years on this project with the analogy of reacting to dirty windows on a building, and instead of cleaning them up a little they chose to tear the building down − amazing when you think about it. The project just took on a life of its own with the actors needing a result at any cost. But what do I know?”

This topic is covered in greater depth in the article ‘Lease accounting project nearing completion’ later in this report.


33 © A

sset

Fin

ance

Inte

rnat

iona

l, al

l rig

hts

rese

rved

.

The legal and regulatory environment

Stephen T. Whelan assesses recent developments in the US equipment and auto finance market

The year 2015 witnessed several noteworthy developments in equipment and auto finance, from both the courts and regulatory agencies. This article discusses the more important events, some of which are of immediate significance and one of which will come down the chimney on Christmas Eve, 2016.

Delivery and acceptance

In Wells Fargo Equipment Finance, Inc. v. Titan Leasing, Inc., the Seventh Circuit Court of Appeals ruled in favour of Wells Fargo in a dispute involving a lease of a locomotive where the contract provided that shipment of the locomotive constituted acceptance thereof by the lessee. When the item was delivered to the lessee, it was rejected because the lessee asserted that repairs were needed. Meanwhile, the lessor had pledged the lease to Wells Fargo as collateral for a loan, under which the lessor had warranted that the equipment “has been delivered and accepted by the Lessee and the Lessee has acknowledged receipt and acceptance of such Equipment.” When Wells Fargo learned that the lessee had neither accepted the equipment nor made any lease payments, it declared an event of default, accelerated its loan, and asserted recourse against Titan Leasing for breach of its warranty.

In reversing the trial court decision which had relied upon the lease contract language, the appellate court cited the more detailed loan agreement warranty, which required both delivery and acceptance. The court observed that delivery and acknowledgment of acceptance are significant indicators that the obligations of the lessee have commenced and that the lender is justified in making a loan where the principal source of repayment would be rental payments under the lease. This favourable decision, not only for leveraged lease lenders but also for equipment financiers which purchase leases from third party originators, underscores the wisdom of requiring that the lessee certify its receipt and acceptance of the equipment and that it has no knowledge of any claims or defenses against the lessor.

Hell and high water

In General Electric Capital Corp. v. FPL Service Corp., the lessee’s premises were flooded during Hurricane Sandy and the leased equipment was destroyed. When the lessor sued to enforce the lease, the lessee asserted that it should not be responsible because the destruction made its performance commercially impossible and because it was not possible to insure the equipment against this kind of risk. Rejecting the lessee’s claim, the court observed that the contract “expressly deals with improbable contingencies by assigning the risk of those contingencies” to the lessee. Significantly for readers of this Survey, the court went on to announce that “hell or high water” clauses would be enforceable “regardless of whether they are found in a lease or secured transaction.” The circumstances of this dispute have led some wags to refer to this case as one involving “hell and high water.”


34 © A

sset

Fin

ance

Inte

rnat

iona

l, al

l rig

hts

rese

rved

.

Asset-backed securities

The Dodd-Frank Wall Street Reform and Investor Protection Act of 2010 contained several provisions which impact securitization of auto and other equipment leases and loans. During the past year, two of those provisions were implemented in Regulations issued by the Securities and Exchange Commission.

• Regulation RR applies to auto and equipment asset-backed securities (ABS), both privately placed and publicly offered, issued on or after December 24, 2016. It covers mandatory risk retention, hence the moniker Regulation RR. Anyone who sponsors an ABS transaction by selling or transferring assets, either directly or indirectly, to the issuer of the ABS must retain a portion of the risk that those assets will suffer losses. The general rule is that the sponsor must retain the aggregate credit risk equal to 5% of the fair value of the assets transferred to the issuer of the ABS.

There are various way to accomplish risk retention. Horizontal risk retention involves the sponsor holding the first level of risk if any assets default and recoveries are inadequate to cover the contract balance of the defaulted lease or loan. Horizontal risk retention would begin with the excess cash flow from the collateral pool, the residual values of the leased equipment, and the sponsor’s ownership of any of the most subordinated classes of ABS.

Vertical risk retention requires that the sponsor hold the same percentage of every one of the ABS interests, including the equity securities of the issuer. A reserve account which complies with the Regulation RR requirements also can be used to satisfy all or a portion of the 5% risk retention requirement.

• Third party due diligence has spawned two new SEC rules: 15Ga-2 and 17g-10, both effective June 15, 2015. Like Regulation RR, they apply to both public and private offerings. Unlike that Regulation, these Rules were inspired by a desire to improve the process by which ABS receive ratings. Increasingly, ABS sponsors have employed third party due diligence providers to verify the accuracy of the data in the sponsor’s offering document, the conformity of the assets to the sponsor’s underwriting standards, or sponsor’s compliance with laws applicable to its kind of contract. The Rules describe investigation such as this, as eliciting factors “material to the likelihood” that the issuer of the ABS will pay interest and principal in accordance with the ABS documents.

Form ABS-15G is to contain the “findings and conclusions” of any third party due diligence (3PDD) provider’s report delivered to the issuer or the investment banker. The form is to be signed by the entity which received the report and is to be filed on EDGAR (the Electronic Data Gathering, Analysis, and Retrieval system) five business days before the “first sale” of the ABS. Form ABS Due Diligence-15E is to be posted by the sponsor on its Rule 17g-5 Website and delivered “promptly” to any nationally recognized statistical rating organization that requests a copy. Just like Form ABS-15G, this form must summarize the 3PDD provider’s “findings and conclusions” and also must describe the 3PDD process “sufficiently detailed to provide an understanding of the steps taken in performing the review”.


35 © A

sset

Fin

ance

Inte

rnat

iona

l, al

l rig

hts

rese

rved

.

UCC mischief

Readers of this article may be surprised to learn that the Uniform Commercial Code (UCC) financing statement filing system has been abused in recent years, such as by correctional facility inmates filing an all assets financing statement against the judge who sentenced them to prison, when the judge obviously was not a borrower from the inmate and had not pledged any collateral to him. Consequently, legislation has been introduced in various states to address this situation by providing an expedited procedure for termination of unauthorized filings. Early in 2015, Utah Senate Bill 93 not only covered this situation but also, as originally written, would have had some pernicious effects.

For one thing, the debtor who challenged the validity of a filing would have been entitled to a fast-track procedure under which the filing office would have been instructed to terminate the filing promptly after receiving notice from the debtor that it was challenging the financing statement. The secured party would have been entitled to receive notice of the proposed termination but powerless to stop it; its only remedy would have been to bring an action against the filing office to reinstate the filing.

Moreover, during the pendency of that action, the terminated filing would not be effective against a good faith purchaser of any of the collateral from the debtor (a good faith purchaser could be a buyer or a secured lender), thereby enabling a scurrilous debtor to game the system by challenging a duly authorized filing, having it terminated, and then selling or pledging the same collateral to a good faith third party. If the debtor, having double financed the property, were to disappear or declare bankruptcy, then the original secured party would have lost its perfected security interest and be left with an unsecured claim for damages against the feckless debtor.

Alerted to this troublesome proposal, the Equipment Leasing and Finance Association (ELFA) formed a task force of UCC practitioners and succeeded in convincing the Bill’s sponsor to modify several provisions of the Bill. Among other things, these changes made it easier for a secured party to become an ‘established filer’ so that any debtor challenge to one of its filings would have to be reviewed by the filing office to determine − before any termination statement were filed − whether the established filer’s financing statement was unauthorized and filed “with the intent to harass or defraud” the debtor. The revisions also deleted the ability of a good faith purchaser to claim priority over a secured party’s challenged financing statement − even if that terminated financing statement eventually were reinstated. Senate Bill 93 became law, but with much less dangerous consequences than as introduced. Secured creditors nonetheless should communicate with the Utah filing office and do what is needed to receive established filer status.

New Jersey also addressed filing of fraudulent UCC financing statements, as well as adopted new administrative rules affecting the UCC filing process generally:

1) requiring electronic filing of all UCC records;

2) changing the effective date of filing, to the ‘work day’ when the Division of Revenue and Enterprise Services (the central UCC filing office) has verified that the financing statement complies with the legal filing requirements;


36 © A

sset

Fin

ance

Inte

rnat

iona

l, al

l rig

hts

rese

rved

.

3) requiring the actual legal name of the secured party (or its agent or trustee) to appear on the financing statement; and

4) mandating that the collateral description include a statement that all of the identified collateral falls within the scope of UCC Article 9.

One effect of these rules may be to inspire secured parties to make filings with the assistance of experienced filing entities such as Corporation Service Company.

Stephen T. Whelan is a partner in the New York City office of law firm Blank Rome LLP and a member of the ELFA Board of Directors.

[email protected]

mailto:[email protected]


37 © A

sset

Fin

ance

Inte

rnat

iona

l, al

l rig

hts

rese

rved

.

Lease accounting project nearing completion

Bill Bosco provides an update on the latest developments in the lease accounting project

Work is virtually completed on the lease accounting project of the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB).

Both Boards have issued ‘fatal flaws’ drafts of the new standard to selected organizations for final comments. We at the Equipment Leasing and Finance Association understand that there are no surprises in the drafts versus what we know from their outlines of decisions made to date posted on their websites. They appear to be on track to sign and issue the new standard by year-end 2015, with a possible effective date of 2018.

The Boards will issue separate standards with major differences in lessee accounting but with lessor accounting substantially converged as they adopted existing GAAP for lessors with few changes. One difference in the versions of lessor accounting is the FASB decided to incorporate concepts from the new revenue recognition standard for determining when a sale takes place in sales-type leases and sale leasebacks, whereas the IASB did not.

Overview impact

The new rules will dramatically change the way leases are accounted for by lessees. The rules will impact the balance sheets of every company, US or IFRS based, that must produce audited financial statements subject to Generally Accepted Accounting Principles (GAAP).

The companies most impacted will be those that lease real estate and large-ticket equipment assets. The list of most impacted companies includes retailers, airlines, rail and truck transportation companies, parcel delivery companies and banks. Virtually every company leases assets, especially real estate which is estimated to be 75−80% of the amounts of operating lease assets and liabilities to be capitalized.

The P&L of US companies will not be impacted, while the P&L and capital of IFRS companies will be negatively impacted due to the front loading of lease costs for the former operating lease under the IASB one lease model.

The FASB version

Regarding lessee accounting the FASB has agreed with the position of many preparers and users including the US leasing industry and the Equipment Leasing and Finance Association (ELFA) on critical recognition and financial reporting matters. They are maintaining a two lease model where some leases are classified as financed purchases of the underlying asset (Type A leases) while other leases are classified as operating leases (Type B leases) when they merely are the acquisition of a temporary right to use an asset for a part of its useful life.


38 © A

sset

Fin

ance

Inte

rnat

iona

l, al

l rig

hts

rese

rved

.

We are hoping the FASB will drop the Type A and Type B designations as they mentioned they would at a recent meeting. In their comment letters to the exposure drafts, independent stakeholders such as the American Institute of Certified Public Accountants (AICPA) and American Accounting Association had both said that lenders and credit analysts need the lease assets and liabilities broken down (finance vs. operating) as a critical component of their decision-making process. They recognize that reflecting the economic substance of the two major classes of leases is important information for users of financial statements.

Type A finance leases will be accounted for as a purchase of an asset and a loan by the lessee just as capital leases are accounted for under existing GAAP. The asset will be amortized over the lease term or, if it is reasonably certain they will exercise a purchase option, the useful life of the underlying asset. Interest will be imputed on the loan using the rate used to measure the liability. Typically, this will be the lessee’s incremental borrowing rate. The lessee rarely knows the implicit rate in a lease as they do not know the residual value. They would know the implicit rate if there was a bargain purchase option in the lease or in a Terminal Rental Adjustment Clause (TRAC) lease or TRAC-like lease where the lessee has a purchase option and residual guarantee set at the same price.

Type B operating leases will be measured using the same present value of lease payments approach as finance leases. The lease expense recognized will be the straight line average rent expense which is a combination of the imputed interest on the lease liability and a ‘plug’ for the amortization of the right of use asset (ROU). It will be displayed on the income statement as a single expense called rent expense.

The ROU assets for Type B operating and Type A finance leases must be reported separately and separate from other property, plant and equipment. The reason is so that users of financial statements understand which assets are owned and which assets are leased. Only owned assets are collateral available to lenders in a bankruptcy liquidation. The Type B operating lease and Type A finance lease liabilities must also be reported separately and separate from other liabilities. The Type B operating lease liability is an ‘other’ liability – not debt – as it does not survive a bankruptcy as a claim competing with other debt for the assets of the bankrupt estate. This change alone will have a hugely beneficial impact as it will avoid unintended consequences such as changes in financial ratios/measures and technical defaults of debt limit covenants in lending agreements.

The IASB version

In contrast, the IASB has decided that all leases create assets and are financings. In their opinion, the assets and liabilities created by all leases are no different than other assets and liabilities. They conclude that since the lessee controls the use of the asset and is obligated to make payments over the lease term it represents a financing of the right to use the asset. That is all true, but the lessee neither owns the physical asset nor is the liability debt in the context of a bankruptcy liquidation. These facts about the legal nature of an operating lease impact the decision to extend credit. A lender needs to understand how it would recover its loan in a worst case liquidation scenario.


39 © A

sset

Fin

ance

Inte

rnat

iona

l, al

l rig

hts

rese

rved

.

The IASB decided on a a single-model approach, whereby lessees would account for all leases (other than short-term leases and small value asset leases) as finance leases which feature a front-loaded expense profile due to the combination of the imputed interest component (a declining cost pattern) and straight line asset amortization components of the lease cost. The costs in the income statement will be presented as interest expense and amortization expense. They also combine the presentation of the leased ROU assets and liabilities created by leases, making it impossible for users to know the breakdown. Because the operating lease liability is therefore considered debt, debt covenants will be violated. Because the ROU assets from operating leases are combined with finance lease assets, bank regulators will not have the information to grant capital relief for operating leases as they do now, since operating leases are executory contracts that are voided in bankruptcy.

Lessor classification

As for lessor classification, both Boards agreed to retain their respective lessor models. IASB lessors will look to the IAS 17 model for classification while the FASB will retain their FAS 13 model with minor changes. Overall, the decision is viewed as good news because it means lessors can continue to use their current lessor accounting systems.

The FASB decided to conform certain issues to the new Revenue Recognition concept of control to define whether a sale has occurred. As a result, sales type classification is only allowed under the FASB version where the terms of the lease alone transfer control to the lessee. This approach ignores any third party involvement such as a residual guarantee or residual insurance to increase the cash flows considered in the Present Value test. Third party involvement would still be a consideration in determining if a lease is a finance or operating lease. The difference is if third party involvement is needed to increase the PV to qualify as a finance lease, it is not a sales type lease and the ‘gross profit’ is deferred and amortized as lease/interest revenue. Said another way, the implicit rate used to recognize lease revenue is very high as it considers the asset cost as the investment amount in the implicit rate calculation.

The FASB does provide additional guidance versus the IASB to determine if a sale has taken place in a sale leaseback when a purchase option is included in the lease terms. The FASB allows sale treatment where the purchase option is at fair market value and the asset is not specialized and is readily available in the marketplace.

Other areas

The FASB and IASB versions differ as to when a lessee must adjust a lease for changes in variable payments due to a change in an index or a rate. The IASB requires lessees to adjust lease accounting when the contractual rents change. The FASB requires recording a change only when an action by the lessee modifies the lease, changes the lease terms, elects an option or does something in its control to change whether it is reasonably certain to exercise an option.

IASB required lessee disclosures are more extensive than under the FASB version.


40 © A

sset

Fin

ance

Inte

rnat

iona

l, al

l rig

hts

rese

rved

.

Impacts − Operational

Lessees with many leases will need to acquire a system to account for their capitalized operating leases. They will need to capture information for all leases existing on the transition date and load the information to produce the necessary comparative statements. In the US, required financial statements for SEC-registered companies means balance sheets for 2017 and 2018 and P&L for 2016, 2017 and 2018. They should begin the project to extract necessary lease data as soon as possible.

Lessees will have to develop a process for accounting for new leases with internal controls. Since operating lease obligations were only reported in the footnotes, existing processes are inadequate. More information will be required regarding the determination of the lease term and lease payments. Lessees will need to evaluate renewal and purchase options to determine if any are reasonably assured of exercise. They will need to determine if any payment is likely under residual guarantees it is providing to lessors. They will need to track variable rents based on an index (like CPI) or a rate (like LIBOR) and possible payments under residual guarantees.

Impacts − Financial

US investment grade lessees will not see much change on the ratios and measures analysts and lenders employ as those analysts are sophisticated and ‘get into the numbers’ in detail. Small and medium-sized companies many have to assist their lenders, which often are smaller banks and finance companies (possibly not as sophisticated as those that deal in the investment grade market) with calculations, especially in treating the operating lease liability as a non-debt liability. Return on Assets and the Quick Ratio will deteriorate but most other ratios and measures are not impacted under the FASB version.

The IASB one lease model will cause most ratios and measures to change for the worse. IFRS companies will see the ratios and measures deteriorate for three reasons – more assets on balance sheet (reduced ROA, Quick Ratio), accelerated costs (reduced ROA) and permanent lost equity (increased Debt to Equity). Strangely, Return on Equity will increase as you have less equity and EBITDA increases as above-the-line rent expense is replaced by below-the-line interest and amortization.

It is likely the market will adjust to the new rules as an accounting change like capitalizing leases should not change the financial strength of a company. In addition, the change in lease accounting will impact all companies. One concern is that there will be more significant changes to the financial statement of those companies that have longer-term leases and/or lease more assets than their peers.

A look ahead

As of September 2015, it appears the Boards will have few public meetings other than to deal with what they call ‘sweep’ issues – small changes discovered in the fatal flaws reviews and feedback. We can read the current project outlines on the Boards’ websites to understand what the final rules will be in general. Lessees especially should be concerned and read the outlines if they have large operating lease portfolios as capturing the data will be a large undertaking.


41 © A

sset

Fin

ance

Inte

rnat

iona

l, al

l rig

hts

rese

rved

.

New rules expected in early 2015

As mentioned above, a final standard is expected to be completed by year-end 2015. Based on this expectation and the news that the Revenue Recognition standard transition date was moved out to 2018, is seems logical that 2018 will be the Leases project transition date.

Bill Bosco is the Principal of Leasing 101, a member of the ELFA Financial Accounting Committee since 1988, and a member of the FASB/IASB Leases Project working group. Note: This article does not reflect developments or Board deliberations after August 2015. For the latest updates, visit the ELFA lease-accounting web page at www.elfaonline.org/Issues/Accounting/

http://www.elfaonline.org/Issues/Accounting/

whiteclarkegroup.com

Social | Mobile | Agile | Robust | Tailored

Full lifecycle management

Retail, fleet and wholesale

Easy and flexible to deploy

Intuitive business rules engine

Powerful workflow capabilities

In-life case management

Document management

Web-based, self-service

and mobile access

Works across multiple countries

Smart end-to-end Auto and Asset Finance So�ware

auto & asset finance country survey 2015

Documents