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  • Introduce self, Alta Group and Swandel and Associates. About Alta The Alta Group is a global consultancy serving equipment leasing and finance companies, investment professionals, manufacturers, banks, and government organizations. Founded in 1992, The Alta Group supports clients in North America; Latin America; Western, Central and Eastern Europe; Australia; and China. For more information, please visit http://www.thealtagroup.com .
  • Our approach to this presentation was a combination of member interviews and a review of available data to adequately assess the current health of our industry.
  • Acknowledge that this presentation would not have been possible without the support and cooperation of the members mentioned above. I sincerely apologize if anyone has been omitted.
  • From the 2008 Federal Budget Chartered banks, despite representing just one-quarter of the total business credit market, have provided virtually all of the net new business credit since August. This has accommodated to a large extent demand for business credit through December, despite virtually no new equity issuance over the period, and a significant decline in net new issuance of asset-backed securities, corporate paper and bonds (included in the "non-equity financial markets" in the chart).
  • Describe the presence of our industry at the auto dealership and the equipment vendor getting the other 75% of business credit out the door.
  • 2,314,563 SMEs buy one $25,000 Vehicle or piece of equipment demand increase by over $50 Billion
  • Mention the need to protect domestic distribution without sounding protectionist.
  • This quote is from last month – remember optimism is not liquidity.
  • What stalled the ability of the majority of our industry to provide financing to Canadian business with a fundamental shift in the sources and terms of financing available to the industry. Progress has been made but there has been a paradigm shift with many consequences to our industry yet to occur!
  • FCI
  • THE LESSON OF 1980-1982: Previously this had been the worst recession since WW2. The first stage was relatively mild and lasted from January to July of 1980. Growth reappeared by the fall but it was not sustainable. A much more serious recession developed between July of 1981 and November of 1982. This is what we have to guard against now. Many Canadians took on too much risk too quickly in late 1980 and early 1981. It now seems likely that the U.S. and Canadian economies will show growth between now and the summer of 2010. However, the U.S. economic stimulus will disappear by mid-2010. The banking system still faces credit losses. Also, the rebalancing of global saving and production is not assured. Americans will be forced to save more and spend less. They will have to live within their means for the first time in a generation. China, Japan and Germany will have to increase domestic demand, and save less, in order to fill the gap left by the retreating American consumer. It seems unlikely that they will. Without the U.S. as the economic locomotive, the China growth story could be yesterday’s news.
  • Draw attention to the gap in lost funding between the amount available Net of Non Bank ABCP
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    1. 1. Funding What our industry needs for a sustainable recovery… Capacity for Economic Recovery CFLA 2009 Annual Conference - Ottawa
    2. 2. Optimism and Liquidity are not the same thing! Capacity for Economic Recovery CFLA 2009 Annual Conference - Ottawa
    3. 3. CFLA Thanks the Following: <ul><li>CIBC World Markets </li></ul><ul><li>Royal Bank of Canada </li></ul><ul><li>GE Capital </li></ul><ul><li>CIT </li></ul><ul><li>MCAP </li></ul><ul><li>National Leasing Group </li></ul><ul><li>Foss National Leasing </li></ul><ul><li>Leasemaster (JPLM) </li></ul><ul><li>ADD Capital </li></ul><ul><li>Blue Chip Leasing </li></ul><ul><li>TAO </li></ul><ul><li>Honda Finance Canada </li></ul><ul><li>GMACFS </li></ul><ul><li>Ford Credit </li></ul><ul><li>Somerville National </li></ul><ul><li>Centre For Spatial Economics </li></ul><ul><li>DBRS </li></ul><ul><li>S&P </li></ul><ul><li>Clubb Finance </li></ul><ul><li>PayNet </li></ul>Capacity for Economic Recovery CFLA 2009 Annual Conference - Ottawa
    4. 4. Today's Agenda <ul><li>Consequences of a weakened Commercial Finance Industry for Canadian Business and for the Canadian Economy </li></ul><ul><li>The Canadian Credit Crisis and the impact on the Vehicle and Equipment Finance Industry </li></ul><ul><li>What is needed to maintain the health of the industry </li></ul><ul><ul><li>Status of Available Sources of Funding </li></ul></ul><ul><ul><li>Long Term Supply Stability – Market Must Stabilize </li></ul></ul>Capacity for Economic Recovery CFLA 2009 Annual Conference - Ottawa
    5. 5. Canadian Business Credit Source: 2008 Federal Budget- Minister of Finance Capacity for Economic Recovery CFLA 2009 Annual Conference - Ottawa <ul><li>Business Credit Outstanding in 2007 </li></ul>Billions of dollars Billions of dollars <ul><li>Cumulative Change in Business Credit Since August 2008 </li></ul>
    6. 6. Effective Flow of Capital to Canadian Business is critical to the economic recovery <ul><li>Independent and Captive Finance Companies are effective at “push” strategies for deploying capital to SME’s </li></ul><ul><li>Bank Lessors traditionally use a “Pull” strategy </li></ul><ul><li>The combination of both strategies optimizes the amount of funding provided to main street Canada </li></ul><ul><li>Without all channels the economic recovery will likely stall </li></ul>Capacity for Economic Recovery CFLA 2009 Annual Conference - Ottawa
    7. 7. Industry Canada Small Business Quarterly, August 2009 <ul><li>Small businesses accounted for 97.8 percent of employer establishments (in Canada) </li></ul><ul><li>Small businesses are defined as having fewer than 100 employees, medium-sized businesses having 100 to 499 employees and large businesses having 500 or more employees </li></ul><ul><li>There are 2,314,563 businesses that fit this category </li></ul>Capacity for Economic Recovery CFLA 2009 Annual Conference - Ottawa
    8. 8. Multiple Distribution Channels Critical to optimizing amount of available capital <ul><li>Domestic Bank Lessors </li></ul><ul><li>Foreign Bank Lessor </li></ul><ul><ul><li>Wells Fargo, B of A </li></ul></ul><ul><ul><li>Key </li></ul></ul><ul><li>International Lease and Finance Co.’s </li></ul><ul><ul><li>GE Capital, DLL, CIT </li></ul></ul><ul><ul><li>CSI, ARI, PHH </li></ul></ul><ul><li>Domestic Independents </li></ul><ul><ul><li>NLG, MCAP, Equirex </li></ul></ul><ul><ul><li>Foss, JPLM, Jim Pattison, TransportAction </li></ul></ul><ul><li>Captive Vehicle Finance </li></ul><ul><ul><li>Ford, GMACFS </li></ul></ul><ul><ul><li>Honda, Toyota, Nissan, VW, Mercedes, BMW </li></ul></ul><ul><li>Captive Equipment </li></ul><ul><ul><li>Dell, Cisco, Pitney Bowes, IBM </li></ul></ul><ul><ul><li>CAT, John Deere, CNH </li></ul></ul><ul><li>Floor Planning </li></ul><ul><ul><li>Clubb Finance </li></ul></ul>Capacity for Economic Recovery CFLA 2009 Annual Conference - Ottawa
    9. 9. Canadian Bankers Association August 2009, Pre Budget Consultations – Submission to the House of Commons Standing Committee on Finance <ul><li>“ In the fall of 2008, just as the global financing market were at their most fragile, Canadian bank lending to businesses accelerated as other sources of financing contracted. Despite the fact that banks were increasing their share of the business financing market, they were not able to fill the credit gap completely.” </li></ul>Capacity for Economic Recovery CFLA 2009 Annual Conference - Ottawa
    10. 10. Interviews <ul><li>Finance Companies </li></ul><ul><ul><li>Small/Medium Independent Equipment </li></ul></ul><ul><ul><li>Small/Medium Independent Vehicle </li></ul></ul><ul><ul><li>Large Non Bank </li></ul></ul><ul><ul><li>Consumer Vehicle Retail </li></ul></ul><ul><ul><li>Fleet Vehicles </li></ul></ul><ul><li>Funding Sources </li></ul><ul><ul><li>Bank Sponsored Conduits </li></ul></ul><ul><ul><li>Life Insurance Companies </li></ul></ul><ul><ul><li>Non-Bank Conduits </li></ul></ul><ul><ul><li>Export Development Canada (EDC) </li></ul></ul>Capacity for Economic Recovery CFLA 2009 Annual Conference - Ottawa
    11. 11. Why funding is still constrained! The Paradigm Shift is still in process Capacity for Economic Recovery CFLA 2009 Annual Conference - Ottawa
    12. 12. Capacity for Economic Recovery CFLA 2009 Annual Conference - Ottawa Sovereign wealth funds The return of the “Dinosaurs” Institutional Investors Depositors Pension funds Foreign pension funds Direct originators with placement capabilities Commercial Finance Borrowers Banks SIVs Asset backed securities Conduits Warehouse Lines The “Shadow Banking” Era Commercial Finance Borrowers Institutional Investors Depositors Pension funds
    13. 13. Current Opinion TEC (Canadian CEO Organization) Anderson Economic Report August 2009. <ul><li>A major concern with sustained recovery forecasts is whether they adequately incorporate the collapse in securitized credit flows and the longer-term implications of a U.S. balance sheet recession. Econometric forecasting models using time series data over the last 60 years do not know how to deal with these issues. In these models, if you keep interest rates low enough for long enough, you will get a “V-shaped” economic recovery. </li></ul><ul><li>It (the Bank of Canada) finds that the level of its FCI is now above its 10-year average, implying that credit conditions have returned to normal. We find this hard to believe and are worried that the Bank of Canada is underestimating the problems in financial markets. </li></ul>Capacity for Economic Recovery CFLA 2009 Annual Conference - Ottawa
    14. 14. Current Sentiment <ul><li>Wholesale funding and debt securitization is still basically shut-down on both sides of the border. Toxic collateralized debt obligations (CDO’s) are still toxic. The financial system still has serious design flaws left over from creative financing. The shadow banking system is not working and it supplied over half of the credit growth in the U.S. (and a large part in Canada) over the past decade. Large corporations can access the debt markets but small and medium-sized businesses are finding their access to credit reduced. Commercial real estate borrowers facing debt repayments are unable to roll-over debt. Households and firms will continue to emphasize debt minimization. The next decade will not see a return of leveraged growth. It will take years for credit flows to return to normal. </li></ul><ul><ul><li>TEC (Canadian CEO Organization) Anderson Economic Report August 2009. </li></ul></ul>Capacity for Economic Recovery CFLA 2009 Annual Conference - Ottawa
    15. 15. Outstanding Commercial Paper – Canada Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Capacity for Economic Recovery CFLA 2009 Annual Conference - Ottawa Non-ABCP ABCP Bil. C$ Prior to Dec. 2007, Canadian ABCP not rated by Standard & Poor’s Note: Data for 2009 as of June 30th. Source: Bank of Canada ~ C$32 Bil Defaulted Nonbank ABCP Subject to Montreal Restructuring Process
    16. 16. General Status of Funding Capacity for Economic Recovery CFLA 2009 Annual Conference - Ottawa Type of Financing Terms Pricing Portfolio Sales Loss Reserves Discount to Book Warehouse Line Tighter Rate Lower Spread Higher Bank Term Debt Tighter Rate Lower Spread Higher Private Securitization Tighter Higher ABS Tighter-If Available Higher ABCP Tighter – If Available Higher Secured Credit Facility Positive Revisions 150bps over GoC Bond EDC Undefined Undetermined
    17. 17. Lost Funding Capacity Capacity for Economic Recovery CFLA 2009 Annual Conference - Ottawa General Policy Change Bank Lines Reduced Operating Credit Lines reviewed and reduced to “average historical usage” Bank Term Debt Facilities Reduced Historical Available Credit Reduced or cancelled. Multiple Ratings from agencies Need for two or more ratings eliminates access for many small finance corporations with excellent historical performance Securitization Advance Rate Reduced Amount advanced per funding reduced requiring higher equity participation from Lessor Change to Debt Equity Ratios Change in ratios requires equity to increase capacity at a time when equity is expensive. Concentration by Lessee, Vendor and SIC Maximum Exposure per customer has decreased Eligible Assets Restrictions on Vehicle Make, Model and Brand, Restriction on types of equipment Minimum Credit Standards Higher Credit Scores required to qualify for funding Documentation Requirements Higher level of due diligence and therefore greater administrative costs.
    18. 18. General Status of Funding <ul><li>Portfolio Sales: Buyers are looking for deep discounts. Sellers are those in need of cash </li></ul><ul><li>Warehouse Lines: Independent Commercial Finance is still nervous about bank commitment to maintaining or increasing warehouse facilities without a demonstrated growth in take out capacity (ABCP/ABS) </li></ul><ul><li>Bank Term Debt: Available to existing clients often with strong pricing but restrictive terms </li></ul>Capacity for Economic Recovery CFLA 2009 Annual Conference - Ottawa
    19. 19. Private Securitization <ul><li>Small and Medium sized vehicle and equipment lessors have utilized the leverage and pricing of this product to build significant market share. </li></ul><ul><li>The insurance companies funding this program have continued to support existing clients but the insurance industry is under significant strain and it has impacted terms and supply. </li></ul>Capacity for Economic Recovery CFLA 2009 Annual Conference - Ottawa
    20. 20. Capacity for Economic Recovery CFLA 2009 Annual Conference - Ottawa
    21. 21. Spread Changes Capacity for Economic Recovery CFLA 2009 Annual Conference - Ottawa
    22. 22. Private Securitization <ul><li>Fewer Players Expecting Greater Performance </li></ul><ul><li>Credit Box has Tightened </li></ul><ul><li>Greater monitoring </li></ul><ul><li>Pricing beginning to Stabilize </li></ul><ul><li>Support for Existing Clients </li></ul>Capacity for Economic Recovery CFLA 2009 Annual Conference - Ottawa
    23. 23. ABCP and ABS Market <ul><li>New Realities </li></ul><ul><ul><li>Global Liquidity Standard-A Limited Resource </li></ul></ul><ul><ul><li>More Bond Ratings </li></ul></ul><ul><ul><li>Greater Transparency </li></ul></ul><ul><ul><li>Much Greater Fees and Administration Expense </li></ul></ul><ul><ul><li>Higher Pricing </li></ul></ul><ul><ul><li>Term more Popular than CP </li></ul></ul>Capacity for Economic Recovery CFLA 2009 Annual Conference - Ottawa
    24. 24. 2007 ABCP Market <ul><li>Largest Funding Component of the Canadian Commercial Paper Market </li></ul><ul><li>50% of the non-government short-term debt market </li></ul><ul><li>21 Conduit Sponsors – 65 multi-seller ABCP Programs </li></ul><ul><li>No Rating Downgrades </li></ul>Capacity for Economic Recovery CFLA 2009 Annual Conference - Ottawa
    25. 25. Current Opinion Standard and Poor’s Ratings Digest August 17, 2009 “Canadian Finance Companies are Tapping Foreign ABCP Conduits” <ul><li>“ Domestic funding for Canadian ABCP has become more difficult to obtain. The decline which began in Mid 2007, is evident in the Bank of Canada’s monthly data. The decline continued even after the completion of the nonbank ABCP restructuring in January 2009.” </li></ul>Capacity for Economic Recovery CFLA 2009 Annual Conference - Ottawa
    26. 26. Capacity for Economic Recovery CFLA 2009 Annual Conference - Ottawa
    27. 27. Capacity for Economic Recovery CFLA 2009 Annual Conference - Ottawa
    28. 28. Current Supply vs. Future Demand <ul><li>Access to supply now favors banks as a result of government support </li></ul><ul><li>ABCP and ABS markets remain inadequate </li></ul><ul><li>Loss of Non Bank Sponsored ABCP and ABS appears permanent. </li></ul><ul><li>Diversity of Distribution is “at risk” </li></ul>Capacity for Economic Recovery CFLA 2009 Annual Conference - Ottawa
    29. 29. Secured Credit Facility <ul><li>Intention and Commitment Strong </li></ul><ul><li>September 17th Revisions Show Potential </li></ul><ul><li>Success Needs to Be Measured by Flow of Funds </li></ul><ul><li>Most Domestic Commercial Finance Companies are still ineligible and are now at a greater disadvantage. </li></ul><ul><li>Curious Hidden Message … </li></ul>
    30. 30. Why Ignatieff on the Cover?
    31. 31. Revisions to Secured Credit Facility Program <ul><li>Risk of Refinancing at Bullet Eliminated (True Match Financing of Cash Flows). </li></ul><ul><li>Ability to customize documentation. </li></ul><ul><li>Eligible Assets Expanded </li></ul><ul><li>Standby Servicer </li></ul><ul><li>Pricing and Allocation Process Amended. </li></ul>
    32. 32. Multiple Distribution Channels Critical to optimizing amount of available capital <ul><li>Domestic Bank Lessors </li></ul><ul><li>Foreign Bank Lessor </li></ul><ul><ul><li>Wells Fargo, B of A </li></ul></ul><ul><ul><li>Key </li></ul></ul><ul><li>International Lease and Finance Co.’s </li></ul><ul><ul><li>GE Capital, DLL, CIT </li></ul></ul><ul><ul><li>CSI, ARI, PHH </li></ul></ul><ul><li>Domestic Independents </li></ul><ul><ul><li>NLG, MCAP, Equirex </li></ul></ul><ul><ul><li>Foss, JPLM, Jim Pattison, TransportAction </li></ul></ul><ul><li>Captive Vehicle Finance </li></ul><ul><ul><li>Ford, GMACFS </li></ul></ul><ul><ul><li>Honda, Toyota, Nissan, VW, Mercedes, BMW </li></ul></ul><ul><li>Captive Equipment </li></ul><ul><ul><li>Dell, Cisco, Pitney Bowes, IBM </li></ul></ul><ul><ul><li>CAT, John Deere, CNH </li></ul></ul><ul><li>Floor Planning </li></ul><ul><ul><li>Clubb Finance </li></ul></ul>Capacity for Economic Recovery CFLA 2009 Annual Conference - Ottawa
    33. 33. Domestic Finance Companies Insulate From Risk of Global Exits <ul><li>ABN AMRO </li></ul><ul><li>IRWIN Commercial Finance </li></ul><ul><li>KEY Equipment Finance </li></ul><ul><li>GE Capital </li></ul><ul><li>National City Capital </li></ul><ul><li>CITI Leasing Canada </li></ul><ul><li>CIT </li></ul><ul><li>GMAC </li></ul><ul><li>Chrysler </li></ul><ul><li>CoActiv </li></ul>
    34. 34. Issues Remain <ul><li>Domestic Canadian Finance Companies are now at a major disadvantage. </li></ul><ul><li>Available business credit and the disparity of terms need to be closely monitored. </li></ul><ul><li>No clear replacement for non-bank sponsored ABS and ABCP sales exists. </li></ul>
    35. 35. Export Development Canada <ul><li>Mandate has been expanded to flow to greater number of companies </li></ul><ul><li>Finance Companies need to justify an “Export” related Financing Need </li></ul><ul><li>Existing Relationship with Chartered Banks has enabled flow of funds </li></ul><ul><li>No Structure to flow funding to Non-Banks </li></ul>Capacity for Economic Recovery CFLA 2009 Annual Conference - Ottawa
    36. 36. The Bottom Line <ul><li>Domestic Independent Finance Companies Are At an Artificially Steep Disadvantage </li></ul><ul><li>Diverse Distribution Channels are critical to getting funding to Main Street </li></ul><ul><li>Vehicle and Equipment ABS and ABCP are fundamentally sound but buyers remain scarce. </li></ul><ul><li>Fear is still driving the market. Secured Credit Facility will help restore ABCP and ABS supply and terms. </li></ul>

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