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Capacity for Economic Recovery CFLA 2009 Annual Conference - Ottawa Funding What our industry needs for a sustainable recovery…

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Presentation on theme: "Capacity for Economic Recovery CFLA 2009 Annual Conference - Ottawa Funding What our industry needs for a sustainable recovery…"— Presentation transcript:

1 Capacity for Economic Recovery CFLA 2009 Annual Conference - Ottawa Funding What our industry needs for a sustainable recovery…

2 Capacity for Economic Recovery CFLA 2009 Annual Conference - Ottawa Optimism and Liquidity are not the same thing!

3 Capacity for Economic Recovery CFLA 2009 Annual Conference - Ottawa CFLA Thanks the Following: CIBC World Markets Royal Bank of Canada GE Capital CIT MCAP National Leasing Group Foss National Leasing Leasemaster (JPLM) ADD Capital Blue Chip Leasing TAO Honda Finance Canada GMACFS Ford Credit Somerville National Centre For Spatial Economics DBRS S&P Clubb Finance PayNet

4 Capacity for Economic Recovery CFLA 2009 Annual Conference - Ottawa Today's Agenda Consequences of a weakened Commercial Finance Industry for Canadian Business and for the Canadian Economy The Canadian Credit Crisis and the impact on the Vehicle and Equipment Finance Industry What is needed to maintain the health of the industry –Status of Available Sources of Funding –Long Term Supply Stability – Market Must Stabilize

5 Capacity for Economic Recovery CFLA 2009 Annual Conference - Ottawa Canadian Business Credit Source: 2008 Federal Budget- Minister of Finance Business Credit Outstanding in 2007 Billions of dollars Cumulative Change in Business Credit Since August 2008

6 Capacity for Economic Recovery CFLA 2009 Annual Conference - Ottawa Effective Flow of Capital to Canadian Business is critical to the economic recovery Independent and Captive Finance Companies are effective at “push” strategies for deploying capital to SME’s Bank Lessors traditionally use a “Pull” strategy The combination of both strategies optimizes the amount of funding provided to main street Canada Without all channels the economic recovery will likely stall

7 Capacity for Economic Recovery CFLA 2009 Annual Conference - Ottawa Industry Canada Small Business Quarterly, August 2009 Small businesses accounted for 97.8 percent of employer establishments (in Canada) Small businesses are defined as having fewer than 100 employees, medium-sized businesses having 100 to 499 employees and large businesses having 500 or more employees There are 2,314,563 businesses that fit this category

8 Capacity for Economic Recovery CFLA 2009 Annual Conference - Ottawa Multiple Distribution Channels Critical to optimizing amount of available capital Domestic Bank Lessors Foreign Bank Lessor –Wells Fargo, B of A –Key International Lease and Finance Co.’s –GE Capital, DLL, CIT –CSI, ARI, PHH Domestic Independents –NLG, MCAP, Equirex –Foss, JPLM, Jim Pattison, TransportAction Captive Vehicle Finance –Ford, GMACFS –Honda, Toyota, Nissan, VW, Mercedes, BMW Captive Equipment –Dell, Cisco, Pitney Bowes, IBM –CAT, John Deere, CNH Floor Planning –Clubb Finance

9 Capacity for Economic Recovery CFLA 2009 Annual Conference - Ottawa Canadian Bankers Association August 2009, Pre Budget Consultations – Submission to the House of Commons Standing Committee on Finance “In the fall of 2008, just as the global financing market were at their most fragile, Canadian bank lending to businesses accelerated as other sources of financing contracted. Despite the fact that banks were increasing their share of the business financing market, they were not able to fill the credit gap completely.”

10 Capacity for Economic Recovery CFLA 2009 Annual Conference - Ottawa Interviews Finance Companies –Small/Medium Independent Equipment –Small/Medium Independent Vehicle –Large Non Bank –Consumer Vehicle Retail –Fleet Vehicles Funding Sources –Bank Sponsored Conduits –Life Insurance Companies –Non-Bank Conduits –Export Development Canada (EDC)

11 Capacity for Economic Recovery CFLA 2009 Annual Conference - Ottawa Why funding is still constrained! The Paradigm Shift is still in process

12 Capacity for Economic Recovery CFLA 2009 Annual Conference - Ottawa Sovereign wealth funds The return of the “Dinosaurs” Institutional Investors Depositors Pension funds Foreign pension funds Direct originators with placement capabilities Commercial Finance Borrowers Banks SIVs Asset backed securities Conduits Warehouse Lines The “Shadow Banking” Era Commercial Finance Borrowers Institutional Investors Depositors Pension funds

13 Capacity for Economic Recovery CFLA 2009 Annual Conference - Ottawa Current Opinion TEC (Canadian CEO Organization) Anderson Economic Report August A major concern with sustained recovery forecasts is whether they adequately incorporate the collapse in securitized credit flows and the longer-term implications of a U.S. balance sheet recession. Econometric forecasting models using time series data over the last 60 years do not know how to deal with these issues. In these models, if you keep interest rates low enough for long enough, you will get a “V-shaped” economic recovery. It (the Bank of Canada) finds that the level of its FCI is now above its 10-year average, implying that credit conditions have returned to normal. We find this hard to believe and are worried that the Bank of Canada is underestimating the problems in financial markets.

14 Capacity for Economic Recovery CFLA 2009 Annual Conference - Ottawa Current Sentiment Wholesale funding and debt securitization is still basically shut-down on both sides of the border. Toxic collateralized debt obligations (CDO’s) are still toxic. The financial system still has serious design flaws left over from creative financing. The shadow banking system is not working and it supplied over half of the credit growth in the U.S. (and a large part in Canada) over the past decade. Large corporations can access the debt markets but small and medium-sized businesses are finding their access to credit reduced. Commercial real estate borrowers facing debt repayments are unable to roll-over debt. Households and firms will continue to emphasize debt minimization. The next decade will not see a return of leveraged growth. It will take years for credit flows to return to normal. –TEC (Canadian CEO Organization) Anderson Economic Report August 2009.

15 Capacity for Economic Recovery CFLA 2009 Annual Conference - Ottawa Outstanding Commercial Paper – Canada Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Non-ABCP ABCP Bil. C$ ~ C$32 Bil Defaulted Nonbank ABCP Subject to Montreal Restructuring Process Prior to Dec. 2007, Canadian ABCP not rated by Standard & Poor’s Note: Data for 2009 as of June 30th. Source: Bank of Canada

16 Capacity for Economic Recovery CFLA 2009 Annual Conference - Ottawa General Status of Funding Type of FinancingTermsPricing Portfolio SalesLoss ReservesDiscount to Book Warehouse LineTighterRate Lower Spread Higher Bank Term DebtTighterRate Lower Spread Higher Private SecuritizationTighterHigher ABSTighter-If AvailableHigher ABCPTighter – If AvailableHigher Secured Credit FacilityPositive Revisions150bps over GoC Bond EDCUndefinedUndetermined

17 Capacity for Economic Recovery CFLA 2009 Annual Conference - Ottawa Lost Funding Capacity General Policy Change Bank Lines ReducedOperating Credit Lines reviewed and reduced to “average historical usage” Bank Term Debt Facilities Reduced Historical Available Credit Reduced or cancelled. Multiple Ratings from agencies Need for two or more ratings eliminates access for many small finance corporations with excellent historical performance Securitization Advance Rate Reduced Amount advanced per funding reduced requiring higher equity participation from Lessor Change to Debt Equity Ratios Change in ratios requires equity to increase capacity at a time when equity is expensive. Concentration by Lessee, Vendor and SIC Maximum Exposure per customer has decreased Eligible AssetsRestrictions on Vehicle Make, Model and Brand, Restriction on types of equipment Minimum Credit Standards Higher Credit Scores required to qualify for funding Documentation Requirements Higher level of due diligence and therefore greater administrative costs.

18 Capacity for Economic Recovery CFLA 2009 Annual Conference - Ottawa General Status of Funding Portfolio Sales: Buyers are looking for deep discounts. Sellers are those in need of cash Warehouse Lines: Independent Commercial Finance is still nervous about bank commitment to maintaining or increasing warehouse facilities without a demonstrated growth in take out capacity (ABCP/ABS) Bank Term Debt: Available to existing clients often with strong pricing but restrictive terms

19 Capacity for Economic Recovery CFLA 2009 Annual Conference - Ottawa Private Securitization Small and Medium sized vehicle and equipment lessors have utilized the leverage and pricing of this product to build significant market share. The insurance companies funding this program have continued to support existing clients but the insurance industry is under significant strain and it has impacted terms and supply.

20 Capacity for Economic Recovery CFLA 2009 Annual Conference - Ottawa

21 Capacity for Economic Recovery CFLA 2009 Annual Conference - Ottawa Spread Changes

22 Capacity for Economic Recovery CFLA 2009 Annual Conference - Ottawa Private Securitization Fewer Players Expecting Greater Performance Credit Box has Tightened Greater monitoring Pricing beginning to Stabilize Support for Existing Clients

23 Capacity for Economic Recovery CFLA 2009 Annual Conference - Ottawa ABCP and ABS Market New Realities –Global Liquidity Standard-A Limited Resource –More Bond Ratings –Greater Transparency –Much Greater Fees and Administration Expense –Higher Pricing –Term more Popular than CP

24 Capacity for Economic Recovery CFLA 2009 Annual Conference - Ottawa 2007 ABCP Market Largest Funding Component of the Canadian Commercial Paper Market 50% of the non-government short-term debt market 21 Conduit Sponsors – 65 multi-seller ABCP Programs No Rating Downgrades

25 Capacity for Economic Recovery CFLA 2009 Annual Conference - Ottawa Current Opinion Standard and Poor’s Ratings Digest August 17, 2009 “Canadian Finance Companies are Tapping Foreign ABCP Conduits” “Domestic funding for Canadian ABCP has become more difficult to obtain. The decline which began in Mid 2007, is evident in the Bank of Canada’s monthly data. The decline continued even after the completion of the nonbank ABCP restructuring in January 2009.”

26 Capacity for Economic Recovery CFLA 2009 Annual Conference - Ottawa

27 Capacity for Economic Recovery CFLA 2009 Annual Conference - Ottawa

28 Capacity for Economic Recovery CFLA 2009 Annual Conference - Ottawa Current Supply vs. Future Demand Access to supply now favors banks as a result of government support ABCP and ABS markets remain inadequate Loss of Non Bank Sponsored ABCP and ABS appears permanent. Diversity of Distribution is “at risk”

29 Secured Credit Facility Intention and Commitment Strong September 17th Revisions Show Potential Success Needs to Be Measured by Flow of Funds Most Domestic Commercial Finance Companies are still ineligible and are now at a greater disadvantage. Curious Hidden Message …

30 Why Ignatieff on the Cover?

31 Revisions to Secured Credit Facility Program Risk of Refinancing at Bullet Eliminated (True Match Financing of Cash Flows). Ability to customize documentation. Eligible Assets Expanded Standby Servicer Pricing and Allocation Process Amended.

32 Capacity for Economic Recovery CFLA 2009 Annual Conference - Ottawa Multiple Distribution Channels Critical to optimizing amount of available capital Domestic Bank Lessors Foreign Bank Lessor –Wells Fargo, B of A –Key International Lease and Finance Co.’s –GE Capital, DLL, CIT –CSI, ARI, PHH Domestic Independents –NLG, MCAP, Equirex –Foss, JPLM, Jim Pattison, TransportAction Captive Vehicle Finance –Ford, GMACFS –Honda, Toyota, Nissan, VW, Mercedes, BMW Captive Equipment –Dell, Cisco, Pitney Bowes, IBM –CAT, John Deere, CNH Floor Planning –Clubb Finance

33 Domestic Finance Companies Insulate From Risk of Global Exits ABN AMRO IRWIN Commercial Finance KEY Equipment Finance GE Capital National City Capital CITI Leasing Canada CIT GMAC Chrysler CoActiv

34 Issues Remain Domestic Canadian Finance Companies are now at a major disadvantage. Available business credit and the disparity of terms need to be closely monitored. No clear replacement for non-bank sponsored ABS and ABCP sales exists.

35 Capacity for Economic Recovery CFLA 2009 Annual Conference - Ottawa Export Development Canada Mandate has been expanded to flow to greater number of companies Finance Companies need to justify an “Export” related Financing Need Existing Relationship with Chartered Banks has enabled flow of funds No Structure to flow funding to Non-Banks

36 The Bottom Line Domestic Independent Finance Companies Are At an Artificially Steep Disadvantage Diverse Distribution Channels are critical to getting funding to Main Street Vehicle and Equipment ABS and ABCP are fundamentally sound but buyers remain scarce. Fear is still driving the market. Secured Credit Facility will help restore ABCP and ABS supply and terms.


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