Sources of Finance

Question 1

How do bank owned asset finance providers source funds?

Answer 1

Raised on the wholesale markets, involving trading of large amounts with other companies and governments and between financial institutions at relatively low margins
Economies of scale due to lower admin costs compared to the money involved
From central treasury, operation of the parent bank - some parent banks prohibit them sourcing from anywhere else.
Typically at LIBOR with no margin added

Question 2

What are the issues for bank owned sourcing of finance

Answer 2

Due to stricter capital requirements, the ability to expand has been restricted and there is a finite pot of funds
Increases the cost of borrowing

Question 3

What is the bank owned responses to tightening of funds?

Answer 3

• Selling off part of the portfolio to ensure lessor is able to meet new business needs
• Back to Back finance - where bank acts as an intermediate lessor, where they lease the asset from a head lessor and sub-lease to end user
• Borrowing funds from 3rd party lenders (corporate bonds or loans)

Question 4

What are the other sources of finance for bank owned?

Answer 4

• European Investment Bank - borrows money on capital markets, where long term borrowing is required AAA credit, favourable lending terms and competitive rates
• Securitisation - Pooling contractual arrangements and repackaging it is a interest bearing security tool that can be traded on the capital markets (Lessor provides debt instrument via the lease repayments on the agreements)
• Sale of receivables - selling the lease repayments due, normally used for managing credit exposure rather than raising capital - usually on a non-recourse basis therefore buyer is assuming credit risk

Question 5

What are the sources of finance for independents?

Answer 5

The main challenge is access to capital (equity or debt)

• Arrange a bank loan
• Share capital loans from directors or owners
• Block discounting - advanced raised capital within finance agreement (using a batch of customer agreements, known as block agreements) = usually 80% and can be with several providers (if default contracts are collected and remaining payments) - not unusual to broker deals out and block discounting
• Sale of customer agreements

Question 6

What are the ways of entering agreement for an independent?

Answer 6

• As an agent for another asset finance provider and agreements automatically owned by the other asset finance provider = who also buys the asset being financed from the vendor
• Can enter as principle then sell it the customer payments (as a sale of receivable) - most of the time it is a disclosed sale, customer can make payments direct to the buyer
• Private equity from provides finance in return for sale

Question 7

What sources of finance for captive?

Answer 7

• Issuing of shares or debt instruments from parent company
• Joint venture in which both the captive and parent raise finance through shares and debt
• Bank loans
• Block discounting, sale of customer agreements
  BUT
• Block discounting rarely used by captives as typically provides only 80% compared to possible 100% through sale of customer agreements