Since the subprime mortgage bubble burst in 2008, people have been trying to spot the seeds of a future crisis.
While many are focused on geopolitical issues, out-of-whack algos or a major rise in rates, there is a less likely bubble that is starting to emerge: leasing.
Leasing is on the rise. According to the 2017 Global Leasing Report, the top 50 leasing markets grew new business by 6.5 percent, marking the fifth consecutive year of growth, and the reasons for this are apparent. Bank lending has come under considerable strain since 2008 as capital requirements have increased dramatically. At the same time, the reasonably lengthy period of low growth in many major economies has rendered several companies and individuals less flush, and, therefore, less able or willing to make purchases outright. Combine these factors with the geopolitical uncertainty arising from Brexit, anxiety over China’s growth and an unexpected U.S. president, and the numbers make sense.
Nowhere is this more apparent than the airline and automotive industries. Last year, Emirates Airline came out in favor of further leasing arrangements following the completion of a $1 billion, 12-year leasing deal. In a June 2017 report entitled “Insight Asset Management,” independent consultancy firm IBA cited multiple unscheduled redeliveries in the last 12 months. This was due to regional economic problems, cash flow reductions and exchange rate pressure at airlines, as the U.S. dollar (in which most airlines bear costs) strengthened against earnings, which are typically in local currencies. This contributed to the recent leasing problems at South African Airways, where the value of the South African rand fell to an all-time low against the U.S. dollar in December 2016.
In the automotive world, there are worries regarding the rate of credit growth. In November 2016, The Federal Reserve System Bank warned that subprime car loan delinquencies were a significant concern. According to The Finance and Leasing Association, a staggering £31.6 billion pounds was borrowed for car purchases in the United Kingdom in 2016 – an increase of 12 percent over the previous year.
This increase in leasing is sparking a change to accounting rules. In January 2019, IFRS 16 is due to replace IAS 17, a standard that has remained unchanged for more than 30 years. Chairman Hans Hoogervorst of the International Accounting Standards Board declared that the old standard did not reflect economic reality. While there is still some time until the implementation deadline, the general industry view is that, given the scale of the changes to come, firms should not delay their preparations.
Until recently, corporates have managed financing activities in siloed spreadsheets that are separate from the central treasury and cash management systems. While this may have been sufficient in the past, forward-thinking corporates are now increasingly looking for a single view of risk across the organization, which companies can achieve with a treasury and risk system that incorporates all aspects of financing risk. With risk levels on the rise, treasurers must now focus their attention on getting this right.
OpenLink provides a critical, consolidated view of enterprise-wide treasury, cash, commodities and currency risk exposure on a single platform. Organizations can make rapid, smart decisions in response to market fluctuations with the visibility necessary to perform effective financial commodity hedging. Leaders are empowered with the insight required to reduce operational risk, manage input price and currency volatility, and improve company cash flow and profitability.
OpenLink enables the automation of financing and leasing operations on the same platform, providing a structured view of risk holistically, satisfying the increased demand for fully comprehensive treasury and risk management solutions.