The recession has forced many companies to conduct a root and branch review of the financial standing of their entire business and, in some cases, they are raising cash by completing a sale and leaseback or a sale and rentback on their vehicles.

Sale and leaseback has been a long established mechanism for outright purchase fleets to swiftly switch to leasing.

Meanwhile, sale and rentback is a newer concept that was launched by Northgate Vehicle Hire, Britain’s largest vehicle rental company, early last year but has not yet been followed by other major rental organisations.

In essence both concepts follow the same initial format. A vehicle leasing or rental company buys a company’s fleet for an agreed ‘fair’ market value with the cash raised providing a financial injection into a business at a time when the cost of credit could be high.

However, while a sale and leaseback will ‘lock’ a company in to a contract for a fixed period of time at a fixed monthly price, Northgate points to the fact that its alternative only ‘locks’ a sale and rentback customer in for 10 months. The client then switches to renting vehicles through Northgate’s flexible non-contract Norflex rental product.

But, say experts, sale and leaseback/rentback should not only be seen as a transfer of assets from internal to external funding. It delivers fixed cost monthly budgeting and an opportunity for company’s to fundamentally overhaul fleet policy to immediately strengthen the company’s bottom line and to prepare the business for further economic challenges that may arise.

And, it seems, that despite the cost of raising money to fund sale and leaseback/rentback deals, there is an appetite among leading suppliers for business.

ING Car Lease, for example, says that it has seen a ‘substantial rise’ in the number of fleets investigating sale and leaseback as the credit crunch continues to take its toll on the ability of businesses to borrow money at competitive rates.

But, according to sales director Paul Ormerod, many leasing companies are not seizing the opportunity to fund schemes where businesses are adopting the fleet strategy change for purely financial reasons.

He said: “ING is keen to work with fleets that are considering the change in funding where their key focus is on operational benefits that can be achieved through contract hire in comparison to in-house outright purchase.”

ING is claiming a15% rise in the number of sale and leaseback agreements it has completed in 2008/9 compared with the previous 12 months.

While such business can be viewed as a sign of a tightening credit market, such deals carry a warning with Mr Ormerod saying: “We are making sure sound due diligence is done at the outset to confirm the financial health of the business.”

But, it is also the inability to obtain funds, according to Mr Ormerod, that could be stopping some leasing companies from taking on the risk of financing such contracts during difficult times when financial recovery, where it exists, remains fragile.

 

It is a view shared by fleet consultant John Collins, who until recently was managing director of rental firm Reflex Vehicle Solutions. He said: “Firms have run out of cash and the banks are so stringent on their lending criteria that they don’t want to lend money.”

But, according to Fiona Hall, commercial director of Arval, which is owned by French bank BNP Paribas, a benefit of being a bank-owned business is that ‘we have the resources to fund this type of deal’.

John Kelly, leader of GE’s Key Solutions consultancy team, said: “There is a definite appetite within GE to do more sale and leaseback deals. We see many companies who are following outmoded purchasing policies, often based on historical practice, and for many of them sale and leaseback is a solution that has a long list of advantages.

“Corporate customers are assessing how to make best use of their existing assets and the money they hold and spend, especially when it comes to addressing the key issue of cash flow during the recession.

“Company cars represent a substantial area of expenditure and many of these corporates are entering into detailed examinations of their fleet operations.

“As a result of these exercises, demand is increasing for sale and leaseback because of the benefits it offers in increasing liquidity and the fact that the cost savings made can make a significant difference to the balance sheet.

“Following the initial sale, the introduction of contract hire is in line with the ongoing trend for companies to outsource non-core activities. It is a solution that makes a lot of sense during the recession.

Contract hire providers also point to April changes in the leasing disallowance that was introduced alongside new rules on capital allowance on business cars as a further reason for switching to contract hire.

Calculations show that typically the leasing disallowance changes make contract hire more efficient than ownership, particularly on cars with carbon dioxide emissions of 160 g/km and below.

 

Mark Sinclair, director of Alphabet, said: “Contract hire rentals take account of this differential, making it both explicit and readily visible to the customer. Self-funding, by contrast, may keep this potentially significant cost, with its negative cash flow impact, hidden in the tax line and, by extension, within the businesses’s funding costs.”

Alphabet says that it has responded to two large fleet sale and leaseback tenders in the past couple of weeks and that a big element of the appeal is the transparency leasing brings to fleet costs.

“In the past, companies with wholly-owned fleets viewed contract hire as a ‘black box’ option whose costs were very opaque compared with outright purchase. That has changed dramatically in recent years. Getting vehicle funding right now requires a great deal of specialist expertise,” said Mr Sinclair.

Vehicle leasing providers also say that sale and leaseback/rentback is ideal for companies that do not feel confident about predicting future residual values in the recession.

As Mr Kelly says: “Companies with owned fleets in the current climate can look extremely vulnerable as each drop in residual value can wipe tens of thousands of pounds off the balance sheet.

“Additionally, a volatile secondhand market means companies will have to spend more time and expense on risk assessment and management - time that could be more profitably spent on core business activities.”

It is a view shared by Mr Sinclair, who said: “Companies should be asking themselves whether taking a risk on the future value of cars is part of their business model, especially in the light of market shocks like the one experienced by residual values last year.”

Yet, it is that residual value volatility that has, according to Northgate managing director Phil Moorhouse, resulted in demand for sale and rentback being ‘less than expected’ in an economic climate in which access to funding has been restricted for many companies.

Northgate says it has already converted more than 1,200 vehicles across many sale and rentback deals allowing small and medium enterprises the opportunity to free up capital and has assisted blue chip organisations in halting escalating costs so they can concentrate on core business activity. Companies either rent the same units back at a fixed rate or, if older than 27 months, take immediate delivery of new vehicles.

 

Mr Moorhouse said: “We continue to believe that sale and rentback is an excellent mechanism to enable businesses to reduce risk and introduce flexibility into their fleet operations and that must be the prime objective of every organisation.

“Companies that are already utilising Norflex now realise the fleet flexibility that it offers, particularly in this economic climate. These businesses have been able to use the sale of their fleet to generate cash for their core business activity - cash that may have been harder and expensive to obtain elsewhere.

“But, we believe that falling vehicle residual values have influenced businesses not to make the move. Current vehicle values are below the figures ‘booked’ by organisations so they are not prepared to sell. Instead, they are extending replacement cycles and depreciating the vehicles further.

“Rather than opting for sale and rentback and fleet flexibility, these organisations are buying time by extending replacement cycles while they decide future fleet strategies.”

But Mr Moorhouse maintains: “Companies that are taking this route are only postponing crucial decisions. Sale and rentback is a fantastic way of moving into flexible rental and, in the current climate raising cash. Companies should focus on the long-term benefits of having fleet flexibility.”

Major rental companies such as Avis, Europcar and National Car Rental all say that sale and rentback is not part of their product portfolio. A spokesman for the British Vehicle Rental and Leasing Association added that the funding solution had been pioneered by Northgate because it fitted in with the company’s flexible rental model.

Commenting on the fact that other rental companies have not introduced the concept, Mr Moorhouse said: “I am surprised that sale and rentback remains the preserve of Northgate. However, rental companies need capital to offer sale and rentback and Northgate has that.”

Case study Eurotec Services

Fleet costs were spiralling out of control at Warrington-based Eurotec Services so the company looked for a cost-effective one-stop shop solution.

That led the provider of lighting and heating services to major retail chains, which operates a fleet of 67 cars and vans, to ultimately complete a sale and leaseback with Lombard Vehicle Management.

Lombard says the decision demonstrates the value for an SME not only in switching to leasing but gaining access to the consultancy, buying power and ongoing professional support of a major funding and fleet management provider.

Lombard managing director Stuart Houlston said: “The tougher economic conditions are forcing customers to take the time to consider their approach to vehicle funding more strategically. Sale-and-leaseback deals in particular are likely to continue growing in number in the current environment in order to release cash and provide financial certainty.

“Customers are realising that well-structured leasing and management solutions can not only keep their businesses moving but save money. As a result, despite the economic situation many customers are not only turning to leasing through sale-and-leaseback agreements but are actually seeking comprehensive fleet funding and management solutions and even committing to long-term contracts.”

Eurotec partner Ricky Hall said: “We have worked with a fleet manager on more than one occasion but had not previously developed a proper fleet strategy as the company and fleet has grown.

“We initially leased a small number of senior management cars but since then have purchased vehicles outright. This reached the point where fleet costs were spiralling out of control so we decided to go to a professional provider to create a one-stop solution for a cost-effective and sustainable fleet operation.

“After initially speaking to one of the major high street banks with vehicle funding and management services we used that company as the benchmark and Lombard exceeded their standards. The Lombard solution has been comprehensive and slickly implemented, with competitive pricing and impressively personal attention from dedicated and accessible SME staff.

Following completion of the sale and leaseback, recent months has seen Eurotec take delivery of a new solus fleet of Volkswagen Passats, Transporters, Maxis and Caddys.

Mr Hall added: “There are clear financial benefits to moving from ownership to leasing, and it also relieves much of the administrative burden, which an SME can ill afford. Given the current economic situation this is a very good time to seek professional fleet funding and management support.”

Key benefits

Sale and leaseback

• A cash injection to the business enabling money to be invested in core activities
• The removal of heavily depreciating assets from a company’s balance sheet - protection from residual value risk
• Can improve key business ratios such as return on capital employed (ROCE) and gearing, the ratio of debt to equity
• Delivers cost, time and administrative savings
• Instant access to maintenance savings delivered by the leasing provider
• Detailed management reporting facilities from day one delivered by the leasing provider
• Source: GE Capital

Sale and rentback

• A cash injection to the business enabling money to be invested in core activities
• The removal of heavily depreciating assets from a company’s balance sheet - protection from residual value risk
• Improvement of a company’s gearing ratio - the ratio of debt to equity - and therefore its bottom line
• Customers pay one fully inclusive monthly fee with no additional costs
• No contractual commitment - following an initial 10-month period customers switch to Northgate’s non-contract Norflex rental solution
• No early termination penalties - flexibility to increase or reduce the number of vehicles operated at anytime - or fixed mileage penalty charges
• Vehicle rental is inclusive of maintenance and breakdown
• Source: Northgate Vehicle Hire