2008 10 03 Verhelle presentation at LeasEurope


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ELFA Chairman (WIlliam H. Verhelle) presentation at 2008 LeasEurope in Madrid, Spain.

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  • Headwinds of the credit market dislocation are unlikely to abate anytime soon Record wide spreads on the various derivative related indexes such as CMBX, ABX, and LCDX suggest liquidity will remain constrained Markets such as CMBS are basically closed This crisis is going to be longer Breadth of the issue is bigger than the Russian crisis Effect will be deeper and global
  • Implications for commercial finance: Over supply of capital and liquidity New entrants (CDO, SIV, Hedge funds) Margin compression Liberal credit structures Exceptionally strong credit quality
  • Spreading to other asset classes such as student loans, auto lending, and credit cards Monoline wraps decline in value
  • Globally, over $420 billion of writedowns and unusual charges. Writedowns and unusual charges include any credit related writedowns (CDOs, RMBS, CMBS, leveraged loans, excess provisions etc.) Globally, over $169 billion of additional sub-prime exposure in CDOs, Direct RMBS, and Direct sub-prime lending (excluding SIVs and Conduits) (Bill, the original numbers were $144B in write downs and $445B in additional exposure. Based on Reuters, $420B in writedowns have been taken. I adjusted the additional exposure number to reflect the approximate difference. FYI—the Reuters numbers are as of 9/11, and the graph is linked to the complete data if you want to see who the 19 Entities are or change the included institutions. Tracey
  • Globally, over $588 billion of writedowns and unusual charges but about $1.7 trillion in estimated reduced lending capacity Assumes 8:1 equity Bill—according the Reuters data on last slide (from 9/11/08), the new write-down number is $420 billion. According to Bloomberg (from 10/1/08) the new write-down number is $588 billion . Tracey
  • Banks hunker down and severely capital constrained A wave of bank failures expected, especially for the ones with residential mortgage exposure Lenders have been taking less reserves to enhance profitability Recent increase in delinquencies and charge-offs may force lenders to revisit this practice
  • Regulators pressure banks for tightening lending standards Appetite for risk has dropped Pricing increases, fee increases for credit facilities
  • Significant financing risk exists for commercial finance companies that rely on the capital markets including the securitization market to finance large portions of their assets (via CLO-collateralized loan obligations) In times of market stress, the securitization markets could become more expensive or not available With competition weakened, supply to the middle market is being constrained Subscale commercial finance businesses will go out of business Catalysts for recovery – The only real potential catalyst we see for a quick rebound in the stocks is a broad recovery in the credit markets, on the back of aggressive governmental action in the residential market. Should this happen, there could be material upside for the stocks
  • Old model doesn’t work The engineered finance era: These funding methods (SIVs, ABS, Conduits, Warehouse lines) are temporarily unavailable The return of the “Dinosaurs”: Developing funding strategies that are similar to those used prior to securitization Many investor classes are flush with excess capital; with uncertain debt and equity market conditions, those investors are still actively seeking private investment opportunities Need to access large amount of pent up liquidity that exists in today’s market. Winners are going to find new pools of liquidity Private capital Large industrials Pension funds Sovereign wealth funds
  • 2008 10 03 Verhelle presentation at LeasEurope

    1. 1. Market Update U.S. Credit Crisis Presented by: Bill Verhelle, Chairman Equipment Leasing and Finance Association Frederick E. Wolfert William H. Verhelle Senior Advisor CEO Aquiline Capital Partners, LLC First American Equipment Finance
    2. 3. The Acquired The Acquirers
    3. 5. Credit market dislocation of historic proportions Savings & loan crisis Leveraged lending & commercial real estate crisis Technology bubble and 9-11 attack Ongoing sub-prime crisis Historical average (~ 6%) Note: GDP data is inflation adjusted Source: Bureau of Economic Analysis GDP growth Russian crisis
    4. 6. Several years of strong economic growth Note: GDP data is inflation adjusted Source: Bureau of Economic Analysis GDP Growth 2004 – 2008 trend line
    5. 7. The Storm has hit… “Rolling Thunder” Home prices falling Sub-prime securitization crisis Loss of confidence in rating agencies Other asset classes affected Frozen credit markets
    6. 8. Historic sub-prime related write-downs ($ in billions ) Source: Reuters, as of 2008-09-11
    7. 9. Reduction of global lending capacity <ul><li>Global write-downs: $588 billion equity </li></ul><ul><li>Assumed leverage: 11.5x </li></ul><ul><li>Estimated global lending capacity removed: $588 x 11.5 = $6.7 trillion </li></ul>The impact on capacity is bigger than the headline numbers
    8. 10. U.S. banks – quarterly delinquency Source: Federal Reserve Board
    9. 11. U.S. banks – quarterly charge offs Source: Federal Reserve Board
    10. 12. U.S. Banks: Charge-offs, Reserves and Delinquencies Source: Federal Reserve
    11. 13. Source: 2006 ELA Survey of Industry Activity U.S. equipment finance industry charge-offs have increased only slightly Source: 2008 ELFA Survey of Equipment Finance Activity Full-Year Loss (Charge-Offs) % of Net Receivables
    12. 14. U.S. equipment finance past due receivables Source: MLFI-25
    13. 15. U.S. equipment finance losses (charge-offs) as a % of net receivables Source: MLFI-25
    14. 16. Credit approval ratios as % of all applications Source: MLFI-25
    15. 17. Equipment finance originations remain steady (in billions) Source: MLFI-25
    16. 18. U.S. banks tighten lending standards Net % of Bank Respondents Tightening Standards for C&I Lending Net % of Bank Respondents Increasing Spreads of Loan Rates Over Banks’ Costs of Funds Source: Federal Reserve
    17. 19. The equipment leasing and finance industry is capital constrained… … Creating both opportunities and challenges. Lower Higher Depository Structured Vehicle Capital Markets Reliant Existing Credit and Capital Exposure
    18. 20. Years of tightening U.S. equipment finance spreads 6.68% 6.80% 7.40% 8.30% Average pre-tax yield Average pre-tax spread Average cost of funds 8.18% Source: 2008 ELFA Survey of Equipment Finance Activity
    19. 21. “ Back to the future?” 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 “Engineered Finance” Era Commercial Finance Borrowers Institutional Investors Depositors Pension funds
    20. 22. U.S. credit markets summary <ul><ul><li>The effects of the credit market turmoil may be long-lasting </li></ul></ul><ul><ul><li>Commercial finance companies with liquidity should be able to take advantage of an attractive spread environment </li></ul></ul><ul><ul><li>Portfolios containing marginal credits will become a greater concern as the economy moves toward recession </li></ul></ul><ul><ul><li>Financing challenges exist for commercial finance companies that rely on the capital markets, including the securitization market </li></ul></ul><ul><ul><li>Catalysts for a Recovery — A broad recovery in the credit markets is unlikely until the residential real estate market stabilizes </li></ul></ul>
    21. 23. Additional challenges in the U.S. equipment finance marketplace <ul><li>Margin compression (seeing improvement in 2008) </li></ul><ul><li>Changing accounting standards; off-balance sheet treatment and expected changes </li></ul><ul><li>Effects of regulatory response to the mortgage crisis </li></ul><ul><li>Uncertainty regarding future U.S. tax policy </li></ul>
    22. 24. Bill Verhelle, Chairman Equipment Leasing and Finance Association