It was once the “grubby” end of banking, but as globalisation brings economies closer, banks are seeing opportunities in asset finance, writes Jonathan Shapiro.
Every day thousands of ships, planes, trucks and trains keep the economy ticking by moving people and goods around the world.
Under the ground, earth moving machinery extracts resources which are then placed on trains and trucks and transported to ports.
On the seas, 50,000 ships carry 650 billion tonnes of goods. In the air, 72.7 million flights move 4.5 billion passengers and 85.6 million tonnes of cargo each year.
Underlying the hundreds of carriages, tankers, jets and drills is an intricate system of financing that is growing ever more important. Welcome to the world of asset finance.
Asset finance focuses on movable assets. If it can be unbolted, boxed and sent somewhere else, it falls into asset finance. Asset finance often overlaps with project or infrastructure finance but it’s the financing of trains, rather than the railway system, the aircraft rather than the airport.
“Our portfolio is quite diverse… major mobile mining equipment , exposure in passenger and freight rolling stock, ships, commercial aircraft, a good range of diversified and manufacturing equipment,” said Nick Fletcher of the CBA.
Fletcher heads up CBA’s asset based finance team of 35, which looks to structure and fund asset finance transactions for a range of clients.
In a typical asset finance transaction, the bank lends to the owner, who enters into an operating lease agreement with the user for a term – usually five to seven years. The rentals paid to the owner by the user pays down the debt, but only to a residual value.
The user has access to an asset without having to own the asset and hold it on its balance sheet, the financier earns the rental income and the difference between the residual value and the realised value and the bank or lender earns the interest on the debt, backed by a real asset.
Financing moveable objects has its nuances.
“It takes a blended view on both the credit covenant needing to establish serviceability for lease or rental payments as well as forming a critical view of the security the underlying asset provides in terms of resale or reuse,” said Fletcher. Historically, the role of an asset finance team was to optimise tax and accounting laws that can technically be operated anywhere.
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