Regulation, technology, maturing markets, autonomous vehicles…Ger Regan, VP, Equipment Finance, Abu Dhabi Finance, is quickly running through the challenges and changes that are shaping the truck and fleet industry as we enter a new decade. Looking at those issues and many others, he has realised that his own industry needs to be adjusting its way of thinking to keep pace.
“We as financial institutions need to look at ourselves and say where is the financial industry at the moment and what level are we at with a view to be able to support that change going forward,” he begins before asking: “And I think we have to ask ourselves what level do we think we’re at?
“I can see the serious challenges and processes: the importance of relationships; the need for alignment and the upcoming changes that are going to affect our industry going forward. And to meet them, financial institutions are going to need to focus on the relationships and the need for alignment between them and the distributors; (as well as) the need for alignment and understanding between the client and the end-user.”
A legal framework for equipment leasing was announced in the UAE last year. Designed to protect both banks and the end-user, the hope is that it will encourage banks to lend as they can retain ownership of the asset. At the same time, contractors and operators will have greater access to new equipment and vehicles.
“This has a huge – and will have a huge impact – on the industry in the next year-and-a-half to two years. The law itself came into effect in January 2019. The definition between lessor or relationship began lessor or lessee whereby the lessor shall own the lease asset for the purpose of leasing it,” he explains.
“Now, what does all that mean? Well, while the law has been announced, it’s currently still going through the regulatory change process; it is still going through the regulatory joining of arms between the Emirates Development Bank, the government and the RTA.”
He adds that during a recent meeting with the Emirates Development Bank it had been explained to him that the EDB is sensibly working on the development of a lease register which is similar to the Emirates movable collateral registry that encourages the registration of assets, collateral, or equipment.
“So, in the next six months, the lease registry should be developed. What does that mean? Central bank collaboration with the RTA on changing the structure of the ownership documentation. How is that going to happen? How is that going to impact us again?” He asks. “My own judgment is to assume there has to be changes in some way to reflect the ownership structure from lessor to lessee. How does it affects us as institutions, as funders? In terms of regulation and licencing it remains to be seen what the central bank does but I’m sure there are going to be new regulations applied against the provision of a finance lease.”
While to the uninitiated the terms used in the law can seem impenetrably difficult to understand, Regan believes this could stimulate the trading and sale of assets in the market – a critical way for fleets to gain and retain business, as well as control their costs. To see how this could play out, he looks back at his own experience working both alongside and inside financial institutions.
“I was head of recoveries in the Royal Bank of Scotland between 2008 and 2011 during the recession. And I joined Ritchie Brothers Auctioneers in 2011. So, as part of my own educational learning development, I’ve been lucky enough to see the whole process of equipment finance from financing to recovery to debt recovery management.
“My role in Ritchie’s allowed me to work with institutions and gain an understanding of the value of asset funding recovery. What was the impact? How do financial institutions operate? What’s the legal recourse to value in an asset? How do distributors work with their customers when it comes to value recovery? Ritchie’s gave me the idea that a 15 year old Mercedes Actros or a Volvo FH12 is still worth ten or fifteen thousand dollars in the market, even with a million kilometres on the clock.”
His experience at Ritchie’s is in contrast to what he found while working in an asset management role and the realisation that releasing value of an asset can be a complex and legally fraught process; and stifling the flow of money in the system.
He argues that the new law could be a fresh start for all the parties on the asset money tree, including the banking sector which he feels needs to be better at working with the distributors of equipment and vehicles, as well as, ultimately, the end-users of the assets banks like ADF are financing.
“We’re going to have to look at our risk policies. We’re going to have to enhance ourselves towards more asset management, operational change, financial technology. But most importantly, there is the potential of new market entrants and an opening of the doors to greater funding opportunities for the industry that are there in the next two years,” he remarks before explaining how both fleets and financers can benefit.
“The protection of the lease law gives institutions ownership rights. It remains to be seen how the definition and the actual activity takes place but it at least gives us the opportunity to be working with the distributor and OEM. It also gives us the chance to be flexible when working with residual value; enhancing deal structures (like looking at a term of a lease for three or four years; looking at all refinancing that lease back out; keeping the total cost of ownership low, keeping the EMI low.”
Taking a breath mid-flow, he pauses to argue that the new rules could also be a benefit to the manufacturers.
“There will be a greater role for the OEM to enhance their presence within the region and most importantly, greater training and development.”
According to Regan, the move should also enhance the used equipment market and ensure assets are entering in better condition and buyers will have more channels to look through when buying pre-owned trucks or equipment.
While he maybe advocating that his industry must take a look inwardly to be better prepared and more active in the sectors needing financing, Regan is also a firm believer that banks, OEMS, distributors, fleet owners have to be willing to collaborate for often and work together for the shared goal of growth in the market.
“Our role really is to align ourselves within the distributor and OEM environment. But what I find in the market at the moment is that many institutions are more or less sitting back. We wait for the deals to happen. We have relationship managers that are not active and visibly active within the distributor environment.
“Michael Peng (the famed US business writer and author) wrote that working relationships are a valuable tool to overcome any deficiencies within the economic environment. Strategies must originate through loyal networks. Those loyal networks are institutional based and originate from financial partnerships. It’s up to us – and I use the word as a group, the triangle between a distributor, financier and end-user – to put ourselves in that position.”
Continuing his point he says that new lines of communication need to be established between the distributors and financial institutions.
“A communication gap exists and there is a need for a distributor and OEM to push…. we need to be pushed,” he emphasises. “Distributors need to push me and other institutions in a way that you need to be able to try and get out of them what we can, which is a financial services model.”
Regan is both critic and counsellor when looking at the role distributors have played in financing fleet purchasing. He argues that by filling a void of financing in the market they have risked theirs and others businesses.
“At the end of the day, financial literacy and risk management is not the responsibility of the distributor,” he remarks. “However, because of the lack of partners available – financial partners who are actually looking for their business – and often the fear of losing the deal, they look at taking on the on-book risk themselves. And when the onboard risk goes bad, the client default impacts their whole overall profitability.”
He recognises that the banks themselves are not always able to offer the flexible financing that distributors have been offering fleets. He says however that is now being addressed and an end-to-end and flexible package can be put together to support the distributor’s customer.
“Distributors are not banks. We as institutions have the ability to assess the clients through the ADCB, the central bank, through their own reporting, through world checks, through all types of financial models available to us.”
Before closing, Regan urges the distributors to use his and financial sector’s expertise to navigate their way through the currently challenging market environment.
“If anybody wants to give me a call about any aspect of funding, any aspect of asset re-marketing, customers that have residual fleet, we can grow your business. We can support your business, maybe not as innovatively as we would like at the moment, but we can certainly put the wheels in motion to try and align with future changes down the line.”