Credit diligence and agreementsb

By Hugh Patterson

Finance companies exposed to the current levels of funding risk are being increasingly diligent in assessing credit worthiness, say some materials handling equipment suppliers.

Centra Forklifts (NZ) director Tony Emtage says that “without very strong balance sheets, personal guarantees are being required from directors”. He notes that forklift-supplier direct funding is also changing to conform to these new standards and to minimise risks.

In Tony’s opinion, the ‘2008 to whenever’ recession will definitely expose companies which have sought purchases and sales without looking at the long-term financial implications. That includes both customers and suppliers. The customers will be those who have overcommitted, and the suppliers those who have discounted savagely to increase market share at the expense of return on investment (ROI), he says emphatically.

Tony estimates that about 60 percent of the current national forklift/materials handling fleet is leased, with the other 40 percent of machines owned or in the process of being purchased. However, he believes that purchases and lease agreements could be neck and neck this year given the current financial climate. “It is too early as yet to see any significant change in this mix, but it is expected to lean towards leasing options as cash constraints become more evident,” he says.

Preserving credit lines

Crown Equipment national manager Mike Fogarty also expects companies to move to preserve their lines of credit. That concern could push companies that prefer outright ownership to consider leasing and rental options for forklifts, he says. But it might not happen for a while.

“As long as forklift companies can access finance, [lines of credit] should not be a problem, yet organisations other than banks have traditionally been the source of these funds,” Mike says. “Given the current aversion to financial risk … some of these fund providers may have limits placed on them. This could increase the cost of borrowing … and affect lease rates.”

Flexible leasing

Orix New Zealand national commercial manager Andrew Griffin says more people are seeking flexibility in leasing which is understandable given the term of investment in capital machinery for seven to eight years.

“Obviously people are a little bit nervous if they don’t get renewal. They want to line up the contract term with the lease term. If a contract is not renewed, the leased asset can be de-hired,” Andrew says, adding that local businesses tend to administer their affairs reasonably well and most are “ahead of the game” in terms of what is coming in the next cycle.

The choice with capital investment is primarily about being able to pay, and smaller businesses may have major misconceptions, such as deciding to lease because they want a $100,000 vehicle but don’t have the $20,000 deposit.

The financer does not decide to support the business on the basis of whether the agreement is lease or purchase. “Whether we buy on your behalf, or you buy and pay us back, it’s the same as far as we’re concerned,” Andrew says. “It’s about the strength of your contracts, the flexibility required and the longevity of the asset.”

Gentlemen’s agreements

This is where some struggle because their agreements are not on paper. The person may have been working for several companies for 15 years and have every expectation of doing so for the next 45, but if push comes to shove, the ‘gentleman’s agreement’ cannot be enforced under the law. The situation is even more fragile if the instructions to reduce contracts come from overseas owners.

Andrew says experience with Orix here and in the UK with other large international companies indicates that New Zealand goes its own way in terms of finance, some preferring to lease or rent and others to own. More businesses lease in the UK than in New Zealand, and more lease in northern New Zealand than in the south.

That said, it is hard to establish any trend or any tendency to copy those overseas in the local market. “New Zealand has its own little economy, despite those who always try to link us to Australia,” Andrew says. “We’ve got our own culture, particularly in the South Island.”

A move to leasing

Centra’s Tony Emtage says the change to leasing has been happening in New Zealand over the last seven years, and the pace has picked up in the last three years with logistics managers growing in influence – those managers want controlled costs and to pass these to the supplier.
Tony believes New Zealand is moving more quickly to leasing than North America. The attractions are fixing costs, reducing overheads by closing garages, and the 100 percent deductibility of lease costs on the balance sheet.

However, Crown’s Mike Fogarty says that while fully-maintained leasing makes costs known, the option is not as flexible as short-term rental. “Flexible rental agreements are available in the market, and in a growth economy the downside risk for the forklift company is minimal. Given the present economic climate, companies may be looking to exercise that flexibility and return forklifts that are underutilised. This could prove challenging to some forklift [suppliers] going forward in the current economic environment.”

email this article to a friend