Pre lending reviews, turnaround funding and early warning systems – Fred Crawley discovers how there are more ways than ever for lessors to avoid the pain of client insolvency.

As the leasing industry has cottoned on to the need to spot clients in distress as early as possible, companies specialising in business recovery and restructuring have begun offering their services as an “early warning” service for lessors.

Turnaround lender Gordon Brothers (GB) is known to be in talks with a lender about such a programme, while advisory firm and intermediary Vantis has seen a big increase in the number of funders looking to have portfolios reviewed for possible trouble ahead.

One of the major problems faced by asset financiers in the wake of recession has been the perception of lenders as being out of touch with their customers’ financial problems up until the point of missed payments, or worse, bankruptcy.

Mark O’Neil, joint managing director of Vantis’ Commercial and Asset Finance division (VCAF), thinks this is a result of a historical tendency for many lenders, when thinking of clients in distress, to only consider asset value realisation in the event of a liquidation.

He thinks that as client insolvencies have increased, lessors have begun to think “less transactionally”, looking at all the issues surrounding a business holding financed assets, and the revenue generated by those assets as part of a going concern, rather than as a disposals prospect.

In essence, this means that leasing companies have become more concerned with ensuring the survival of clients – a trend that has aligned their interests with those of turnaround lenders such as Gordon Brothers.

Alex Brick, GB’s European CEO, explains how it works in the case of a leasing client that has been identified as distressed: “Our aim is to support a restructuring with additional liquidity, and then provide management support (or in some circumstances replace management) to help the restructuring of the business.”

Presuming the client is then returned to profitability, GB can convert remaining debt into equity and go on to enjoy the gains on the share value of the newly successful business. Meanwhile, the leasing company is ensured continuing payments as a result of GB’s short term fund offering, and avoids a potentially messy insolvency.

However, while Brick feels that a successful restructuring can take place “very late in the day”, it is crucial to act as early as possible. “If your customer is already missing payments, it’s probably too late – you need to restructure long before the client is in danger of insolvency.”

GB’s knowledge of this timescale is what has caused it to be recently approached to provide an early warning system for a large lender, something that many international firms have gone to great expense to build for themselves.

Barclays Asset & Sales Finance, for example, was quick in diverting senior sales resources to form such a programme in 2008, while UniCredit Leasing, under risk director Jens Hagen, reorganised vast swathes of staff to spot turbulence in client balance sheets in time to avert disaster.

VCAF, which acts as an intermediary for leasing companies, has taken things one step further by offering funders pre-lend reviews of companies whose funding requests it has interviewed.

Mark O’Neil of VCAF says that such a service highlights important issues in a client’s business from the very start of a contract, and gives lenders an idea of what product will best suit a company’s balance sheet – such as altered payment structures for businesses with seasonal income.

In addition, when VCAF introduces a deal on behalf of a client, it will stay in touch with the lessee at least on a quarterly basis in order to assess its ability to pay lease instalments and offer further assistance as required. “The client can often be afraid to talk to the lender about financial difficulty,” says O’Neil, “and so we will talk on their behalf”.

The kind of skills that Vantis and GB are demonstrating by looking at lessors’ balance sheets for stress points will not be wasted when the current climate of high insolvency risk fades away, however.

VCAF, for example, has recently been asked by a large bank to look over a portfolio -  not one of its own, but that it seeks to buy. With the risk lessons of the recession well learnt, the M&A climate, when it returns to health, will be one much more concerned with the future health of businesses in targeted portfolios.

How soon will that be? “There are more companies in the leasing market than you might think, waiting with their cheque books in hand” says O’Neil. Watch this space.

Article contributed by Fred Crawley – Senior Reporter, Leasing Life & Motor Finance