The 2008 Crisis: When asset-based finance nearly died
An extract from UNSTOPPABLE ~ The story of asset-based finance & leasing in Canada
Tom Pundyk at National Leasing was among those who watched the liquidity
crunch take its devastating toll. “A pile of independent leasing businesses closed
after 2008 because their funding taps closed. They had no more money, and it
takes time find new funding sources. Many companies got terribly beaten up.”
“There were all kinds of war stories,” added Jeff Hartley at Foss National
Leasing. “I would argue that virtually every leasing company came close to
insolvency at some time. A couple just dodged the bullet, but more out of luck
than good management.” Besides the difficulty of securing funding at
reasonable cost, asset-based finance and leasing companies were hit on the
other side of their business by their customers’ financial woes. Lessees unable to
meet their bills stopped paying their monthly fees, forcing lessors to
repossess vehicles and equipment and sell them at bargain basement prices.
Residual values plummeted. “Independent leasing companies were struggling
and getting killed with residuals,” said Lease-Win’s Ron Rubinoff. “We saw
many companies and individuals just walk away from their leases rather
than take the buy-out option and purchase the vehicles at the end of the
lease term.”
Rubinoff closed his company’s leasing operations in 2008, not because of its
own credit problems but because of the squeeze on existing and potential
customers. As he explained, “Lease-Win was part of a public company,
Chesswood Income Fund. As Lease-Win only represented a small portion of
the public entity, we thought we would try and sell it. The problem was that
the prospective purchasers—not us—had difficulty securing the necessary
financing, so we elected to wind down the company.”
…
The Detroit carmakers in retreat
When Ontario’s finance minister, Dwight Duncan, flew back from a meeting at
Chrysler early in November 2008, the fate of those soon to be affected by the collapse
of the North American auto industry and the global financial crisis weighed heavily on
his mind. The lights of the homes and factories stretched from his home town of
Windsor all along the 401 Highway corridor to Ottawa. He realized then that no one
really knew what was coming, or how severe the depression in auto sales would be.
The North American auto manufacturers were among the most prominent
casualties of the financial crisis. GM and Chrysler were forced into
bankruptcy court, while Ford had to mortgage almost all its assets, including
the famous blue oval logo. Ford was spared from bankruptcy thanks largely to
a $25 billion loan that it negotiated in the nick of time, in late 2006.
…
All the carmakers were hit by the loss of confidence in the asset-backed
securities market, where their financing arms typically resold their lease
portfolios. “The credit crisis froze the asset-based paper market, which is
how most of the funders in the leasing space in Canada financed their
business,” explained Peter Andrew. “There was an immediate effect because
of the trouble faced by automobile manufacturers.”
GM, Ford, and Chrysler were among the United States’ biggest corporations,
and their troubles sent ripples of anxiety through the banking system. Banks
became increasingly nervous about their loans to automakers, so the
automakers that depended on banks for credit had no choice but to set aside
hundreds of millions of dollars in provisions to cover their obligations. In
2006, GM was forced to sell 51 percent of its GMAC financial services arm to
Cerberus Capital Management, a private equity firm. Cerberus also bought
Chrysler Financial a year later.
Larry Baldesarra, president of Toyota Financial Services Canada,
pointed out that the plight of the Detroit captives stemmed from the
troubles of the parent companies rather than the captives themselves. “These
were very good companies,” said Baldesarra. “I knew them well; they were
well managed, with good people.”
…
Consumer leasing gives way to loans
A combination of the carmakers’ troubles and heightened risk aversion
among lenders brought consumer vehicle leasing to a virtual standstill. In
August 2008, Chrysler Financial announced it was getting out of leasing. Ford
Motor Credit and then GMAC said shortly afterwards that they were “scaling
back.” Tightened terms and higher monthly payments meant that, to all
intents and purposes, their leasing business also ground to a halt.
Similarly, most foreign carmakers were forced to cut back their lease
programs due to prohibitively high funding costs. Ford Credit’s Primus
Financial Services division, set up to ser- vice the import brands, stopped
offering leases. Ford Credit also ended its affiliation with Mazda, leaving
the Japan-based automaker without a lease program.
…
Crisis of confidence
Through the fall of 2008 and into 2009, it was clear to policy-makers and
analysts that the Canadian economy was set for a long period of stagnation
unless ways could be found to get credit flowing again. Rob Wright, then
the deputy minister of finance, noted that banks and credit unions had
provided conventional lending of $271 billion, or only 24 percent, of the
$1.125 trillion in outstanding business credit in Canada in 2007. In other
words, more than three-quarters of business credit came from other sources:
$306 billion from the equity markets and $458 billion from non-equity
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financial markets (including an estimate by the Centre of Spatial Economics
of up to $100 billion from finance companies and the asset-based finance
subsidiaries of the banks and credit unions).84
The banks really were the last man standing. Bond and equity markets
essentially closed down, and the other non- bank finance companies had
nowhere to go to access funds. The banks stepped up, but not sufficiently to
appease all critics. There were segments of the market that complained that
they could not get access to funds (at least not from their traditional
providers). Some may not have had a strong relationship with banks before
the crisis. But once the crisis hit, the banks definitely were not in the mood
to take on anything that could be perceived as high risk.
The asset-based finance and leasing industry faced a serious challenge.
Investors had been unnerved by worthless—often fraudulent—sub-prime real
estate mortgages passed off in the United States as legitimate and even blue chip
investments. The industry urgently needed to differentiate its sound products
from those tainted by the financial crisis. It needed to offer reassurance that
equipment and vehicles could back safe and profitable investments.
“The equipment and vehicle assets securitized by the asset- backed
financing and leasing industry were totally different,” said Angela
Armstrong. “Unfortunately we got tarred with the same brush.”
David Powell outlined the dilemma facing the industry: “Essentially,
securitization as a financing method for both real estate mortgage–backed
securities and asset-backed securities was similar, but the quality of the
assets secured as collateral was totally different. These were equipment and
vehicle assets that were being used and paid for by real customers. The cost
and availability of funds in no way reflected the risk that the industry or its
business represented. Rather it reflected a sys- tem-wide ‘capital rationing.’
Traditional funders were deploying their cash elsewhere to meet the pressures
they were experiencing because of the global crisis.”
CFLA takes action
The asset-based finance and leasing industry, with the CFLA in the
forefront, was determined to step up to the plate and demonstrate that it
could be part of the solution. But it faced a particular problem of its own
making. In this largely unregulated industry, people had deliberately avoided
much contact with governments in the past. As a consequence, most
policymakers knew little about the sector, what it did, and how it functioned.
The CFLA had a double challenge: first, to educate politicians and government
officials on how the industry should be part of the solution to stimulate the
recovery and, second, to reassure them that there was minimal risk to
taxpayers. Discussions with Finance Department officials revolved around
ways to temporarily “replace” private funding for the industry until market
confidence returned.
For more, read Unstoppable ~ The Story of the asset-based finance and leasing industry in Canada.
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Unstoppable tells the previously untold story of
a business that has grown to be the largest
source of debt financing to Canadian companies
and consumers outside of traditional banking.
This book covers the rollercoaster ride of assetbased finance, now a $300 billion business,
through interviews with business trailblazers
such as Jim Pattison and Steve Hudson, who
led the industry for the past half century. It is an
entertaining and personal business history that
will inspire both students of Canadian business
history and entrepreneurs alike. Unstoppable
shows how this form of finance helped to grow
Canada’s economy by financing equipment and
vehicles of all kinds. It chronicles the rise and
fall and rise again of car leasing and the
industry’s struggle to stay alive in the depths of
several recessions, most recently in 2008-2009.
The business not only survived, it thrived, mainly
because of the Canadian business leaders who
were determined to keep credit flowing, even in
the worst of times.
Beth Parker writes for business and
organizations in Canada and the United States.
Her clients range from Fortune 500 companies
to start-up entrepreneurs. Beth has an English
degree from the University of Toronto (Victoria
College) and an MA in journalism from the
University of Western Ontario.
RELEASED: September 2014
Published by Barlow Books
Available in hardcover and ebook formats from
Amazon.ca
Price: $16.37 (print); $9.99 (ebook)
The untold story of how entrepreneurs created a new type of finance in Canada
Reviews
“Unstoppable is a pioneering look into a vital sector of Canada’s economy. It tells of entrepreneurs: their
visions, setbacks and successes. It documents booms and busts, risks and rewards, as leasing expanded
with many of Canada’s most dynamic businesses. And it reveals asset-based finance’s importance to the
investments that drive growth and support Canadians’ quality of life.”
William B.P. Robson, President and CEO, C.D. Howe Institute
“Despite the rocky 2008-9 period that witnessed a major reduction in asset-backed financing and leasing
in Canada, the industry has thundered ahead with over $300 billion in transactions today. It is for good
reason why this industry is “unstoppable” but to find out, read this well put-together history. It is a very
enjoyable review of an industry that is should be understood by any one working in finance.”
Dr. Jack M. Mintz, Palmer Chair of Public Policy, and Director of the School of Public Policy,
University of Calgary
“Unstoppable tells the story of asset-based finance and leasing in Canada an often ignored but a
important part of the Canadian financial system. From the earliest beginnings the subsector has made the
financing of vehicles, office equipment as well as specialized equipment more efficient. This is a notable
contribution to our understanding not only of asset based financing but of the whole financial system.”
Joe Martin, Director of Canadian Business and Financial History, Rotman School of Management,
University of Toronto
To learn more about the people and products that built the industry and moved it to success, read
Unstoppable ~ The Story of the asset-based finance and leasing industry in Canada.