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MAY 2013 • volume 1 • issue 1 |

The 12 Secrets of Commercial Credit Scoring R IE EM UE PR ISS

Quickening of Innovation in Asset-Based Financing Purple Cash Cows and Other Truths Credit UnionsYour New Lender? An Appraiser’s Tale: Life on the Road to Valuations PM40050803

North America’s New Independent Equipment Finance Company

We deliver financing where you sell equipment Element Financial Corporation’s equipment finance specialists have been responsible for creating and operating some of the world’s most successful vendor finance partnerships. We understand how to customize vendor financing solutions that work for equipment manufacturers, dealers and distributors across North America. With $2.0 billion in capital behind us, we're ready to put that independent expertise to work for you. Element Financial Corporation Toronto, Ontario 1-877-534-0019 Element Financial Corporation (USA) Horsham, Pennsylvania 267-960-4000



May 2013 Volume 1 Number 1 Publisher and Editor-in-Chief Steve Lloyd Creative Direction / Production Demigroup

The Next 40 Years. This year marks the 40th anniversary of the Canadian Finance and Leasing Association. President & CEO David Powell looks back and ahead to the next 40 years. »5

ASSOCIATION REPORT: Equipment Finance in the U.S.. The outlook south of the border has an impact on how our market response to the economic winds. William Sutton, EFLA President & CEO, turns his sights on 2013. »6

Photographer Gary Tannyan Advertising Sales Mark Henry Brent White For subscription, circulation and change of address information, contact

Publications Mail Agreement No. 40050803 Return undeliverable Canadian addresses to: Circulation Department

302-137 Main Street North Markham ON L3P 1Y2 t: 905.201.6600 • f: 905.201.6601 Subscriptions available for $40.00 year or $60.00 two years. 2012 Lloydmedia Inc. All rights reserved. The contents of this publication may not be reproduced by any means, in whole or in part, without the prior written consent of the publisher. Printed in Canada Reprint permission requests to use materials published in Canadian Equipment Finance should be directed to the publisher.

FEATURES The 12 Secrets of Commercial Credit Scoring When he calls his report “confessions of a closet quant jock” you know that author Thomas Ware not only revels in the numbers which come with a key part of the finance market, you also know he’s prepared to reveal what he’s learned as well. »12

Cautious Optimism In Asset Finance Taking a world view but clearly setting his eye to take in Canada, guru Jonathan Dodds puts his best thoughts forward to helping us see the opportunities still hiding in an economy that’s slowing. »19

Also Publishers of

If you’re managing your own business, author and advisor Angela Armstrong has some sage advice about leadership, money and the new role of cash. »27


Can you afford not to be in a technology business?

The times may be changing and if you’re not along for the ride even the best ideas or businesses could be damaged by bad tech decisions. What to know, to avoid, and to do now. »30

Credit unions play a growing role in equipment leasing. »31 Succession Planning

Payments Achieving efficient payments processing

March / april 2012 • www.canadiantreasurer.coM

Purple Cash Cows and other Business Truths


Payments Business the Magazine of risk capital and credit.



Call to action for Canadian private business owners


Canadian Treasurer

The Quickening of Innovation In Asset Based Financing It wasn’t too long ago that businesses looked to a small cadre of institutions for credit, trusting time-hallowed, deeply enshrined policies. Whether evolution or revolution, the market’s shifting tides are explained by wellknown lawyer David Chaiton. »22

Navigating a Basel III world

Contact Management Collaboration wins in supply chain finance

Financing harder for small Canadian public companies

Direct Marketing

INTERNATIONAL WATCH: Why India should be a natural fit for a strong leasing industry. »34


An Appraiser’s Tale—Life on the Road to Valuations »38



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Association Report

CFLA: The Next 40 Years By David Powell

This year marks the 40th birthday of the Canadian Finance and Leasing Association, the only organization that advocates on behalf of the asset-backed financing, vehicle and equipment leasing industry in Canada. Like all birthdays an appropriate celebration is being planned to commemorate the occasion. At our annual conference in Halifax this September, we will not only mark the history and accomplishments of the CFLA, we’ll put our focus on the next 40 years with an particular emphasis on developing the next generation of asset-based financiers, the future leaders of our industry. The critical need for an association like ours remains unchanged despite the passing of the years. As governments develop different policies to “repair” the economy and regulators propose new ways to “enhance” the functioning of the marketplace, many of the existing rules are being challenged, changed or discarded. Financing companies constantly face the challenge of new laws and regulations. Our industry has to be present, part of the consultation process or risk being overlooked. As one of our former Chairs put it: “if you’re not at the table, you’re on the menu.” The Association is currently working on issues in eight provinces and territories, and at the federal level. There is one longstanding international file: the latest Exposure Draft on lease accounting from the International Accounting Standards Board (IASB) is expected within the next

month or so. CFLA chairs the international network of eleven equipment and vehicle associations in eight countries that shares information and coordinates global industry views on these evolving standards which will be implemented in Canada in the next few years. In addition to effective industry advocacy, the second of CFLA’s principal responsibilities is to deliver timely, businessrelevant information. The Association is engaged in a comprehensive review of its industry data collection and interpretation process. This is currently one of CFLA’s major initiatives as proper measuring of the industry’s size is a fundamental function of the association. In the past, CFLA has relied on a voluntary survey of member data. In recent years, responses have been inconsistent and unreliable. CFLA is exploring all possible sources of industry data to present a more accurate picture of the industry size and makeup. In late December, CFLA launched the first Quarterly Equipment Lease and Finance Index, which reports economic activity for the commercial equipment finance sector.

“CFLA continues to provide a forum for those in the industry to meet, to exchange on issues of common interest and to learn best practices”

Modelled after the U.S. Equipment Leasing and Financing Association (EFLA) Monthly Leasing and Finance Index (MLFI-25), the CFLA survey has been designed to be shorter, simpler and quarterly, at its start. Eight comparable CFLA equipment finance members have submitted data on a confidential basis and a ninth is expected to join this year. For the time being, the detailed aggregate results are provided to participating members only. More generalized trends may be used by CFLA. The Association’s groundbreaking 2004 report, AssetBacked Financing, Investment and Economic Growth in Canada, is being updated by the Centre for Spatial Economics, a wellrespected firm of economic consultants for release in the next few months.. Among other things, the update will estimate the benefits for the Canadian economy of business spending on machinery, equipment and vehicles financed by the asset-backed financing and leasing industry, with the benefits described in terms of additional Gross Domestic Product (GDP), jobs, and government revenue generated. The final report will provide the association with a valuable document to demonstrate the importance and contribution of the industry to the Canadian economy. As for its other principal responsibilities, CFLA continues to provide a forum for those in the industry to meet, to exchange on issues of common interest and to learn best practices, and its unique 11-session online Canadian Lease Education On-demand program offers a broad introduction to the business of leasing and asset-based financing in Canada. For more on CFLA, please visit our website at About the Author: David Powell is the President & Chief Executive Officer of the Canadian Finance and Leasing Association. | CANADIAN EQUIPMENT FINANCE | MAY 2013


Association Report

Equipment Finance in the United States: Outlook for 2013 By William G. Sutton, CAE

he equipment leasing and finance sector is a $725 billion industry in the United States. The industry not only contributes to businesses’ success, but to U.S. economic growth, manufacturing and jobs. Each year, at the Equipment Leasing & Financing Association, we provide commentary and insights to help businesses develop strategic equipment acquisition plans. We’re happy to share these forecasts with our Canadian colleagues, and here you’ll find the ELFA’s Top 10 Equipment Acquisition Trends for 2013. The trends are distilled from a combination of ELFA data and findings from our research affiliate, the Equipment Leasing & Finance Foundation, and member input from our meetings and conferences. In 2013, businesses considering acquiring equipment will consider numerous enduser benefits while weighing continued uncertainty related to economic conditions and fiscal policies. The Top 10 Trends are: Œ Corporate perceptions of the economic outlook will be a primary driver of business investment decisions. Despite pressing considerations such as technological innovations and aging equipment, the economy will be the true barometer for whether or not businesses acquire new equipment in 2013.  Equipment investment will pick up in the second half of 2013. Equipment investment will grow this year, although the rate of growth will be hampered by fiscal uncertainty. Some companies will remain cautious about taking on large capital investments



even now that important decisions impacting short-term fiscal stability have been made. Ž Pent-up demand will spur investment across varied equipment types. Demand for replacement equipment will drive investment in the construction, agriculture and transportation categories in particular, while other equipment types will await the replacement cycle. However, greater economic improvements will be needed before significant equipment investment expansion takes place.  A continuing low interest rate environment will enable companies to acquire the equipment they need and conserve cash. The prospect of continued low interest rates at least through 2014 will be an incentive for businesses to acquire equipment through financing and still hold on to their cash for uncertainties. In addition to maintaining cash flow, equipment financing will help businesses preserve capital and improve expense planning in challenging economic conditions. A full list of the benefits of acquiring equipment through leasing and


finance is available on ELFA’s website.  A majority of U.S. businesses will use some form of financing for equipment acquisition. In 2013, $742 billion (55%) of the projected $1.3 trillion investment in plant, equipment and software investment in the United States will be financed through loans, leases and lines of credit. Seven out of 10 businesses will use at least one form of financing to acquire equipment. ‘ Business size will impact equipment acquisition. Size will matter when acquiring equipment in 2013. Primarily larger businesses anticipate increasing equipment spending over the next 12 months. Small companies’ high degree of concern about general economic conditions and less access to credit will temper their equipment acquisition plans. ’ The gaining prominence of cloud computing will transform the way businesses pay for IT investments. Along with changes in how companies consume software and hardware, cloud computing will spawn new financing options.

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Association Report Companies will look to equipment financiers for variable payment structures in the cloud. “ Credit market conditions will remain favorable for long-term equipment financing. Businesses will generally find an improving credit supply as they consider equipment acquisitions. ” The one-year extension of bonus depreciation may provide incentives for businesses to acquire equipment. The continuation of the depreciation bonus will allow businesses to deduct up to 50 percent of the cost of new equipment purchases in 2013. • Although the value of lease financing will remain, businesses will begin to adapt their equipment acquisition strategies to comply with long-awaited changes to lease accounting standards. A new draft of proposed changes to lease accounting standards by the Financial Accounting Standards Board and the International Accounting Standards Board is expected this year, enabling


businesses to begin to evaluate how their balance sheets, earnings and other financials will be affected by equipment financing agreements. The last item, the proposal to overhaul the lease accounting standard, is a major priority area for ELFA. We are encouraging lessees and lessors to make their voices heard and submit a comment letter to the accounting boards when the revised exposure draft is released. Another key area of focus for the association this year is comprehensive tax reform. Our Federal Tax Committee has developed a strategic plan for the ELFA’s advocacy efforts to ensure the association is at the forefront in Washington, letting elected officials know how lessees and lessors may be impacted by proposed reforms. These trends and issues provide both challenges and opportunities for our member companies and our association as we continue to be an engine for prosperity while equipping business for success.


The Equipment Leasing and Finance Association (ELFA) is the trade organization representing companies in the U.S. equipment finance sector. Our diverse membership of 575 companies includes independent leasing and finance companies, captive finance companies, investment banks, commercial banks, brokers and packagers, diversified financial services companies and service providers. ELFA’s mission is to serve as “a forum for industry development, a platform to advocate for the industry, and a principal resource for industry information and ethical standards.” We closely monitor industry trends and provide market statistics, benchmarking and analyses that offer insights into the industry outlook. About the Author: William G. Sutton, CAE, is President and CEO of the Equipment Leasing and Finance Association, the trade association that represents companies in the $725 billion equipment finance sector, which includes financial services companies and manufacturers engaged in financing capital goods. For more information, please visit www.ELFAOnline. org or

news digest


For breaking news and in depth news features, visit our website at

Forest products New products vital for recovery in company CEOs foresee a bumpy Canada’s computer and electronic year ahead, but product manufacturing industry expect longterm revenue growth: PwC Forest, paper & packaging (FPP) CEOs are less confident about revenue growth over the next 12 months than their peers in other sectors, but are more optimistic about their company’s revenue prospects in the next three years, according to PwC’s 16th Annual Global CEO Survey released recently in Davos, Switzerland. “The CEOs of forest, paper and packaging companies are a resilient bunch. Recently they’ve faced challenges such as shifting demand and markets, a bumpy economy, overcapacity, environmental issues and rising costs,” said Bruce McIntyre, Leader of PwC’s Forest, Paper and Packing practice in Canada. “CEOs have identified their top three priorities: enhancing operational effectiveness; investing in innovation and R&D; and developing new business models.” Improving operational effectiveness and investing in R&D McIntyre says, “FPP CEOs are intensely focused on trimming any fat from operations.” The survey found 92% of sector CEOs have implemented a cost-reduction initiative in the past 12 months, and 89% are planning to in the coming 12 months. This result is higher than the overall average of 70% of CEOs across all sectors in the PwC survey.

Profits in Canada’s computer and electronic product manufacturing industry slipped to a nine-year low in 2012. In 2013, the industry is counting on a revival in Blackberry’s fortunes for a rebound in its bottom line, according to the Winter 2013 outlook for the industry, part of the Canadian Industrial Profile. “The largest company in the Canadian industry, Blackberry, has gone through a major restructuring and its future depends heavily on the success of its new generation of smartphones,” said Michael Burt, Director, Industrial Economic Trends. “Early sales and response for the new Blackberry puts the industry on track to achieve our 2013 forecast. In the longer term, the performance of Blackberry will shape the industry as a whole.” The computer and electronic product

manufacturing industry suffered through a difficult 2012. Sales dropped sharply in the middle of 2011 and have yet to recover. Production declined by seven per cent last year. Industry employment fell by more than 8,000, on top of the 15,000 jobs lost in 2011. These conditions showed up in the industry’s bottom line, in which profits fell from more than $2 billion in 2011 to just $264 million in 2012. In 2013, production and prices are forecast to increase modestly, while costs are expected to decline. As a result, industry profits are forecast to triple to $846 million. Published by The Conference Board of Canada and the Business Development Bank of Canada, the Canadian Industrial ProfileWinter 2013 provides an annual outlook for five Canadian industries.

U.S. equipment, software investment to grow 5.6% in 2013 Investment in equipment and software in the US is expected to grow 5.6 percent in 2013, according to the Q2 update to the 2013 Equipment Leasing & Finance U.S. Economic Outlook released today by the Equipment Leasing & Finance Foundation. The Foundation increased its 2013 equipment and software investment forecast to 5.6 percent, up from 2.9 percent growth forecast in its 2013 Annual Outlook released in December 2012. The report, which is focused on the $725 billion equipment leasing and finance industry, forecasts equipment investment and capital spending in the United States and evaluates the effects of various related and external factors in play currently and into the foreseeable future.

The Q2 report predicts growth in the first half of the year will be limited by relatively weak demand and fiscal policy uncertainty. By the second half of 2013, however, investment activity is expected to accelerate due to an improving housing sector, a resurgence of the U.S. manufacturing sector, an energy renaissance and relief from policy uncertainty that will have an unlocking effect on business investment. William G. Sutton, CAE, President of the Foundation and President and CEO of the Equipment Leasing and Finance Association, said, “On balance, we expect the positives to outweigh the negatives as businesses begin to feel more confident and ready to invest in capital equipment.” | CANADIAN EQUIPMENT FINANCE | MAY 2013


news digest

U.S. small businesses cut borrowing for second straight month Small U.S. businesses cut back on borrowing in February for a second straight month, hinting at slower growth ahead even as other economic data shows the recovery picked up in the early part of the year. The Thomson Reuters/ PayNet Small Business Lending Index, which measures the overall volume of financing to small U.S. companies, fell to 101.3 from a downwardly revised 111.7 in January, PayNet said on Tuesday. PayNet’s lending index typically correlates to overall economic growth one or two quarters in the future. The U.S. Federal Reserve last September moved to push down long-term borrowing costs with a third round of asset purchases, pledging to keep buying until the labor market improves substantially. That stimulus, coupled with rock-bottom shortterm interest rates since December 2008, has done little to get smaller U.S. firms to expand, the index shows. “They don’t have a conviction that they should go all in,” PayNet founder Bill Phelan said in an interview. Without that conviction, small businesses are not expanding quickly, and are not as apt to hire. The data provides a


counterpart to generally positive signals from the broader economy, including a rise in consumer spending and sentiment, and at least some signs of strength at factories. But small business borrowing grew just 2 percent from a year earlier, the index showed, the slowest year-on-year increase since September. PayNet had initially reported the January figure at 113.1. Perhaps more telling are early signs that financial stress is building. Trucking companies, whose behavior historically has led that of other small businesses, are having more trouble paying back their loans. Delinquencies of 31 to 180 days among transportation service and warehouses companies rose to 1.85 percent in February, up from an all-time low of 1.55 percent last August, Phelan said. Delinquencies in other sectors are down. Overall, accounts overdue by one to six months slid to 1.58 percent from 1.62 percent of all loans made. PayNet collects realtime loan information, such as originations and delinquencies, from more than 250 leading U.S. lenders


National Leasing acquires Canadian lease portfolio of CarQuest Canada National Leasing Group Inc. (National Leasing) today announced its acquisition of the Canadian lease portfolio of CarQuest Canada. CarQuest Canada has also chosen Affiliated Financial Services and National Leasing to provide ongoing lease financing and servicing for its Canadian customers. “We will continue to look for strategic portfolio purchases such as this one to further augment National Leasing’s growth,” said Nick Logan, President and CEO of National Leasing. “Our financial strength allows us to be fast and flexible in purchasing Canadianbased portfolios from vendors in both Canada and the United States. We also have great relationships with many equipment brokers, who we expect will provide an additional source of referrals.” National Leasing provides equipment financing to businesses across Canada. As an innovative leader in the industry, National Leasing invests heavily in customer service and support to ensure that lease origination and administration is quick and easy. CarQuest Canada is a subsidiary of CarQuest Auto Parts, North America’s premier supplier of replacement products, accessories, suppliers and equipment. There are more than 300 CarQuest Canada auto parts stores throughout Canada supplying the professional automotive services industry with replacement parts, tools and equipment.

Engs Commercial Finance selects ASPIRE LeaseTeam, Inc.has announced that Engs Commercial Finance selected and implemented LeaseTeam’s ASPIRE solution. ASPIRE is LeaseTeam’s end-to-end lease and loan management solution. Engs Commercial Finance is an independent commercial transportation finance company focused on new and used equipment purchases across the United States. Engs has been providing financing solutions to vendors, manufacturers and end-users since 1952 and is one of the most respected independent finance companies in the transporta-

tion industry. Engs transactions are sourced through equipment vendors, equipment manufacturers and direct to end-users. Engs is growing rapidly and needed a solution which would ensure that the company’s workflow could efficiently handle the exponential growth of its business. Engs Commercial Finance has expertise in the commercial vehicle industry but also formulates financial solution for trailers, construction equipment and other commercial equipment that positions companies for maximum growth.

news digest

Odessa announces end-of-lease software Odessa Technologies, Inc. the developer of the LeaseWave suite of products, a fully integrated end-to-end lease and loan management solution, announced the introduction of a new product for companies looking to better manage their end of lease processes. LeaseWave End of Lease Management integrates seamlessly with major legacy applications, allowing lessors to retain core business processing in their current environment. Data is pushed to LeaseWave as required, where users perform various activities such as end of term processing, late stage collections, contract modifications, workouts, repossessions and remarketing in a workflow enabled environment. All the necessary adjusting entries needed by the lessor’s accounting department are generated by LeaseWave


and passed back to the legacy application. Furthermore, LeaseWave is integrated with standard surround systems used for equipment inspections, valuations, legal case management, etc., eliminating duplicate data entry and substantially improving process efficiency. “Odessa recognizes that some leasing companies may not be able to make a business case to replace their entire legacy platform,” said Jim Humphrey, Vice President of Sales and Marketing at Odessa. “This product brings the benefit of automation to a key area without disrupting existing platforms or ongoing operations – all at a low business cost. The End of Lease Management product makes it economically feasible to eliminate the manual work-arounds and Excel spreadsheets that are typically

utilized by leasing companies to compensate for the inadequacies of their legacy systems.” Odessa Technologies is a software company exclusively focused on the leasing industry. The company is headquartered in Philadelphia, Pennsylvania and employs a staff of 300 people. Odessa is the developer of the LeaseWave suite of products, a fully integrated browserbased lease and loan management solution, providing an end-to-end origination and portfolio management system for equipment leasing and finance, vehicle leasing and fleet management companies. The LeaseWave suite is specifically engineered to be configurable to accommodate even the most complex business model, as evidenced by Odessa’s diverse customer base.

To send press announcements, please direct them to Steve Lloyd, Editor in Chief, at | CANADIAN EQUIPMENT FINANCE | MAY 2013


Feature Report

Confessions of a Closet Quant Jock



By Thomas Ware

was originally trained as a quant jock: mathematical economics, advanced calculus, statistics, and even some graduate work in model building. But after a short time working in that field, I was drawn to the siren’s call of lending, “doing deals,” and working with the immediate tangible effect of good or bad decisions. Slowly, and quite unintentionally, however, I found myself over the years pulled more and more toward quantitative credit scoring, which was new in the commercial space. At first it was just as an outsider looking in, as the credit officer responsible for implementing scoring, but eventually it was as a model developer or project lead on a development team. In one role or another, I have had the opportunity to work with almost all the major commercial credit scoring companies, as well as with many of the most forward-thinking lending institutions. Not all scoring systems are equal. And, while it’s true that riding a bicycle is faster than walking, most people would prefer the power of a Corvette or, if available, an F-35 Joint Strike Fighter. The differences between scores aren’t quite


Feature Report that extreme, but they’re still substantial, so finding a first-rate scoring solution is likely to have a significant impact on a lender’s bottom line.

#1 – “You Gotta Believe” The mantra of the ’69 Mets has broader applicability. And, the Toronto Blue Jays certainly had to be believers to become the first team based outside of the United States to win the World Series in 1992, only to follow-up with a back-to-back World Series win in 1993. While the power of belief may sound trivial, I have seen cases where predisposition against scoring effectively doomed a project. An airplane pilot barreling down a runway at hundreds of miles per hour just before taking off has to believe the plane will leave the ground, for the alternative, at those speeds, is unthinkable, as is the option of hitting the brakes halfway down the runway. Note, however, that the pilot’s “believing” is not a matter of emotional blind faith, but rather it is based on indisputably tested and documented proof that aerodynamic lift works. This same degree of proof is available in the world of credit scoring, to those willing to examine the evidence. However, not everyone is willing, and this problem is not limited to credit granting. In a fascinating book, What Works on Wall Street, James O’Shaughnessy documents the results of his comprehensive historical analysis of what stock characteristics produce the most favorable returns over the long run. The entire second chapter of the book, however, is an examination of emotional and psychological barriers and human prejudices against purely mathematical odds-making. He summarizes a wide range of studies specifically designed to assess the accuracy of human decision-making which

consistently find patterns of mistaken human decisioning in medicine, politics, gambling, insurance, investment management and other fields. People over-weigh their own personal experiences above that of broader samples (in Stalin’s words “One death is a tragedy, a million, a statistic”). People also read patterns into totally random data sets, prefer complicated, creative explanations to simple solutions, and above all, find statistics to be boring. There is also the human “ego” component underlying the battle of Man vs. Machine. This conflict goes back at least as far as the Luddites destroying machinery in the early nineteenth century, through recent history when IBM’s Deep Blue computer, examining 200 million moves per second, defeated the human world chess champion in 1997. No Olympic runner would ever dream of trying to beat a car in a race. Credit professionals will profit more from thinking about how we can take advantage of technology, as opposed to trying to fight it. No credit manager has ever looked simultaneously at 100,000 deals, remembered all their characteristics at time of application, researched which ones subsequently went bad, and then ferreted out how important each specific factor was in creating a high likelihood of a deal going bad. How can anyone then be surprised when a model that does do all those things ends-up being demonstrably more predictive than the credit manager? If it was possible for IBM to make Deep Blue do what it did, then logically the only way credit scoring wouldn’t be more predictive is if a mediocre job was done in building the credit score, or the score was being used incorrectly.

#2 – Understand Your Goals In the words of Yogi Berra, “If you don’t know where you are going, you will wind up somewhere else.” One of the first and most important steps in the model building process is to define exactly what one is trying to predict. Is it the probability of default? Or is it the probability of experiencing a loss? Or is it overall transaction profitability? Though related, these are quite different things. Default is relatively straightforward, but predicting loss (at least to Basel III standards) first requires predicting the probability of default, then predicting the probability of loss given default (which factors in things like term, down payment, collateral resale value and the ability to recover monies through litigation and other means). Profitability also considers the economics of the transaction, the cost of collecting troublesome accounts even if they never actually default, and perhaps even the incremental impact on vendor deal flow if the application is declined. Most credit scoring models today, however, are simply looking at the probability a transaction will default, and the specific most common “bad” definitions are whether an account will ever reach 60 days, or 90 days past due. Banks sometimes prefer the 60 day metric based on the idea that if an account reaches 60, but not 90, it was still probably an unprofitable account. Leasing companies, and especially those vendor-oriented, tend to prefer a 90 day definition because to them, while an account that reached 60 but not 90 was either break-even or just slightly unprofitable, being able to book the deal helped them make their vendor happy and ensure the flow of future business. For lenders with significant payment misapplication problems, a modeler could even develop a bad definition tailored to ignore delinquencies that appeared to be just administrative (e.g. the account was 90, but the borrower had much bigger accounts that were all current). The best models also consider other circumstances in the definition, such as whether the account had to be extended, whether there was a bankruptcy (which might not show up as a delinquency for a long time) or whether the account was a real nuisance such as 6 x 30 (and the modeler also has the option of counting these as “Indeterminates” – neither “Bad” nor “Good,” and just excluding them from the model build). Another dimension is the time period – does the model predict the probability of default within the next year, within the next two years, etc. Though users generally prefer long time windows, ideally wanting to know if an account will ever go bad, practical considerations usually reduce the performance time window to a year or two. First is the problem that the further out in the future one goes, the harder it is to predict what will happen, and reaching further out is also likely to degrade performance in the more important early years. Second, a lender doesn’t really need to know what happens in four or five years – for most equipment types, the lender is either in, or close to, an equity position in their collateral after two | CANADIAN EQUIPMENT FINANCE | MAY 2013


Feature Report years or, in the case of soft collateral, the term was short enough that the balance is substantially paid down after two years. The bad definition chosen should be the one that’s most useful given the lender’s circumstances and economics. A lender that really wants to steer clear of deals that are likely to go 60 also has to realize and accept the fact that the model that does this will

be highly sensitive to the applicant’s days past due at time of application and therefore volatile from one date to another. For example, an applicant that is 45 days past due on some account at the time they’re scored, will get a much lower score than they will on the following day if that account is paid and goes down to 15 dpd. Though this kind of score volatility is generally unpalatable

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to users, the model is simply responding to the best information available at the time (and indeed such a notable difference in score result is reminiscent of one of the old rules of credit, that no new credit will be extended until all accounts are brought current – models effectively validate that this was a prudent rule). For most lenders, however, a 90 day bad definition is more appropriate as models built with this definition are much less sensitive to light delinquency and as 60 day accounts are still captured when they become 90, but are not, if they cure before reaching 90 – arguably not that bad an account.

There are several choices that need to be made. Which score (or scores) should you use? Should you build custom models or buy generic, pooled-data models? Should you combine them? What about the scores you have been using until now? And the right answer for one transaction type or size segment may not be right for another. The first question is probably to build or buy. Building a custom score has the advantage of really focusing on the specific type of business your institution does and, as such, it should be very predictive. But building has disadvantages too. One disadvantage is cost – modeling firms charge anywhere from $50,000 to $250,000 or more depending on scope of the project, and the historical bureau data necessary to build the model can cost just as much as that again. While it may be possible to find someone willing to build it for less, one needs to be careful not to be penny wise and pound foolish – a lot is riding on the score, and the best analogy I can think of is that no one goes to a “discount” brain

Feature Report surgeon. Another disadvantage of building a custom model is that it requires that the lender have a large portfolio with significant (and electronically available) historical data, and many lenders do not. Finally, since scores require periodic updating to maintain optimal performance, this investment will need to be made again and again every few years. At the other extreme is buying a generic score. The disadvantage here is that the score is so generic that a lot of potential predictive lift is lost, as nuances of your institution’s lending market and borrower profile are washed away in a model primarily built to predict how someone will pay their phone bill. That said, however, such models are still predictive, and for lenders doing very unusual types of lending, can be the best option. A middle ground is a semicustom, which in many ways is the best of both worlds. It’s a pooled-data score built to focus specifically on one or more types of lending, and it doesn’t require any individual lender to make a major investment. At PayNet for example, we have built the PayNet MasterScore®, developed from a broad sample of over 1.2 million term loan and lease contracts from PayNet’s proprietary database. The breadth and quantity of the data allowed us to build the model as nine distinct scorecards, for specific borrower industries (e.g. Transportation, Construction, Agriculture, etc.) and borrower sizes, so that the model is “custom” to each particular lending niche, and trained exclusively on term loan and lease repayment. Not only is such a solution more cost effective, as all the major development costs are, in effect, spread out over many lenders, but it is also likely to be more predictive, since these scorecards are built using a much larger pool

of data, as opposed to just one lender’s own limited data. If a decision has been made to use a generic or semi-custom score, one might be tempted to focus on hit-rate, what percent of the time the score will be available. However, maximum accuracy will be achieved if the score is chosen based on its predictiveness, and then a less predictive score can be used in those cases where the more predictive score is not available. In developing an overall scoring strategy, also keep in mind that different unrelated scores can be easily combined. Indeed, the more different they are, the better. So a commercial score can be combined with a consumer score, or a generic or semi-custom score can be combined with an existing home-grown manually-calculated score, or all of these could be combined (provided it made economic sense to do so). Combining can be done simply by doing a retro analysis, which is calculating what the borrowers’ scores would have been as of when they applied for credit, and then calculating what percent of each score range went bad. When combining two different scores, historical score values are simply calculated for both scores, and the bad rate is simply a matrix showing what the odds are when one score is low and the other high, and vice versa. The bad rates in the cells of the matrix become the new blended score that can then be used for decisioning. Another benefit of going through the retro process is confirming a score’s applicability to your institution’s style of lending, and measuring the score’s overall predictive power for you. Score-building software can also easily combine two or more scores into a single score. Custom scores blending both commercial and consumer data can also be created, and there are also generic scores that have been built with the consumer component already blended in. While such scores are effective, they are probably not as effective as the do-it-yourself type blending described above, just the way an all-in-one stereo system isn’t likely to be as good as a component stereo system with each component chosen to best fit the user’s needs. The most important point, however, is to take advantage of all the predictive information available. If a commercial credit applicant is offering personal credit information, don’t use just a consumer score or just a commercial score, but rather use both, either by combining two scores, or by using a blended score. While it may be tempting to use just one for cost reasons, analyze the cost of incremental losses and foregone approvals – it’s easy to do – before cutting corners. The one exception to this is prescreening, or staging of data-pulls, whereby a less expensive data source is accessed first, and if the credit information found is so negative that the application will be rejected no matter what information is on the other bureaus, then there is no need to spend money pulling additional bureaus for that application.

#4 – Garbage In, Garbage Out Good data is at the heart of credit scoring in two ways. First, there must be a very large quantity of accurate, consistent, relevant and above all detailed data with which to build the scoring model in the first place, because the model is really “learning” the truths of the world from this data. Indeed, I know of no person who has sat down with the credit files of say, 10,000 bad accounts and really tried to analyze why these went bad, and how they differed from 100,000 other accounts booked around the same time that didn’t go bad. The model does all this for us. Compounding the need for large quantities of data (“bads” in particular) is the nature of the most powerful mathematical modeling tool, multivariate regression, which tends to be a “data hog.” The other time that good data is critical is when it’s accessed in real time to feed into the scoring model to produce a credit score and make an actual credit decision. No matter how sophisticated, advanced, thorough and even brilliant a credit scoring model may be, its output can’t be any better than the data that’s used to drive the model. “Fact-based decisioning” requires having the facts. And as a rule, the more targeted and specific the data is to the issue at hand, the more value it will have.

#5 – Like Predicts Like If you were an auto insurance underwriter, trying to predict if a driver was likely to have an accident, wouldn’t you want to know how many accidents the driver had had before? Sure, it would be interesting to know if the driver had been bankrupt, as there is a correlation, but if you’re trying to predict “X” happening in the future, knowing whether “X” happened in the | CANADIAN EQUIPMENT FINANCE | MAY 2013


Feature Report past is almost always the single most important piece of information. As a mathematician would say, “dependent variables make the best independent variables.” Or a historian would say “history repeats itself.” While this may seem obvious, this principle is often ignored in the leasing industry. Many models meant to predict lease/loan repayment use as their primary input trade credit repayment behavior, without even considering the term credit repayment behavior. To some extent this is an example of Rule #4, “Garbage In, Garbage Out” in that building a very predictive model requires using very predictive data, and for models predicting term loan/lease repayment, those built using term loan/lease repayment data are, everything equal, going to be significantly more predictive than those based on trade or other data types.

#6 – Building a Scoring Model is BOTH Art and Science The Golden Rule of scoring is that a model be EDSS, “Empirically Derived and Statistically Sound.” Mathematics are the heart of scoring, but they are not the soul. Think of the math as the ancient Greek Oracle of Delphi – it will correctly answer any and all questions you ask of it, BUT you have to pick what questions to ask, and that is a real Art. So while many models may be mathematically correct and EDSS, some models will be much more predictive than others, depending on the expertise and creativity of their developers. “Expert Systems” are similar to EDSS credit scores in that they are quantitative systems that assign points for various characteristics, and based upon the point total a decision is made. However, Expert Systems are different in that they are not empirically derived; rather the objective of the system is to produce the same decision that an “expert” would if the expert were making the decision, right or wrong. Expert Systems are okay, but they should be statistically validated to be really believable. For example, traditional Chinese herbal medicine has cures for some ailments that Western medicine does not. Yet without having these cures scientifically validated, it’s hard to tell the difference between those that are just superstition and those that really work. Similarly with credit scoring, the most powerful models are built by statistically evaluating the factors that credit experts have learned to be the most important. Under the statistical microscope, some factors will prove to be more important than previously thought and vice versa, or just in certain types of cases, but the key is that industry experience is usually the most fruitful hunting ground for predictive model variables. However, there are challenges. The first is data – you can’t check a truck applicant for “rapid expansion” without either financial statements or bureau data that shows how many trucks they’ve recently financed. Another is expertise – the best statistician isn’t likely to be the most experienced leasing credit person, so making the most predictive models requires a partnership where mathematician and industry expert work closely together. Often a modeler can find ways to quantify abstract concepts that the credit expert cares about but can’t envision putting into a model. For example, every credit professional is going to be more positively predisposed, all else equal, to an application from Canadian Global Systems than one from Willie Henry Enterprises, and when tested statistically, the credit person is right. As a result we’ve included that insight, to the extent it’s statistically supported, into our models. As long as a potential variable “makes sense” (never ignore common sense!) the only real limit is the imagination, and that when tested, the statistics support it. While a variable based on applicant name won’t have a large impact by itself, collectively such incremental insights can be powerful. There is no fixed maximum number of variables that a model can use. Indeed, models are more robust and stable to the extent that they look at a wide variety of factors, including factors that are closely related (with the one caveat that the number of variables needs to be small in relation to the number of transactions that the model is being built on, to prevent what mathematicians call “over-fitting”). For example, while a borrower having a high portion of their transactions being 60 days past due is highly correlated to their having ever been 90 days past due, a model is usually better off for counting both factors, and spreading the weight. This way, in those less frequent (but still common) cases where a borrower is bad on one measure but not the other, the score for the borrower won’t be impacted all one way or the other, depending upon which factor was 16


chosen for the model. Although this often won’t perceptibly improve a model’s statistical lift, it will make it a better model. There is literally an infinite number of possible variables and derived variables a model can use: square root of days past due, percentage of payments that were over 60 days past due, change in the volatility of delinquency, delinquency relative to the norm for a given NAICS Code, borrower province per capital income, debt per employee, the list is endless. No computer system can dream them up, so the only way they’ll get tested to see if they work, is if someone comes up with the idea that maybe “x” is a predictive clue to future bad performance. So although a mathematician who doesn’t know the industry being modeled can still create an “okay” model, creating a really good model requires the combination of industry expertise and modeling expertise. The best models are usually built by teams. Taking a “7th Inning Stretch,” this concludes the first of two parts of The 12 Secrets of Commercial Credit Scoring lineup. Developing a game winning credit scoring strategy means that you have to believe in the inherent merits of credit scoring and define what you want it to predict. As you make your choices, remember that good data is at the heart of credit scoring. Finally, a more accurate assessment of a borrower’s historical patterns and successfully melding both the art and the science of a scoring model are keys to providing additional lift to your credit decisioning process. About the Author: Thomas Ware is PayNet’s Senior Vice President of Analytics & Product Development, and Managing Director of PayNet Analytical Services, which provides credit scores, probability of default and stress test models, strategic business reviews based on peer lender benchmarking, and published economic indices. He has almost 30 years of experience in small business lending working with commercial finance companies and banks, including as General Manager of a billion-dollar finance unit of Case/CNH Capital, and as Senior Vice President and Chief Credit Officer of a commercial lending subsidiary of American Express. He graduated with Distinction in Mathematical Economics from Dartmouth College and has an MBA from Harvard. For more information visit

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Cautious optimism in asset finance as economic growth slows



Feature Report By Jonathan Dodds

hen the world financial system collapsed in 2007, Canada recovered faster from recession than any of the other members of the G7. Its banks remained solid owing to the banking sector’s tradition of conservative lending practices and strong capitalization, and low interest rates encouraged consumer borrowing and spending. The government’s policies for dealing with the fiscal deficit were widely acknowledged as a model to follow. But recently, along with many leading economies, Canada has stuttered. The economy is forecast to grow by a mere 1.6% in 2013. Exports have failed to meet projections, investment has stalled, and it is feared that government austerity measures are constraining growth. The only growth driver would seem to be continued consumer spending and borrowing built on very low interest rates (currently 3% (prime rate) and unlikely to change in the foreseeable future). The outgoing governor of the Bank of Canada, Mark Carney however has sounded the alarm on increasing and potentially unsustainable levels of consumer debt that are inflating a housing bubble in several cities. Business investment is forecast to rise by only 1.7% this year. Canadian firms continue to stockpile cash rather than invest for growth (‘dead cash’, as Carney called it). Yet finance minister Jim Flaherty’s budget on 21 March was more focused on eliminating the federal budget deficit than on encouraging business investment or exports. However, the budget did extended the scheme allowing manufacturers to write off purchases of machinery and equipment faster, but this is likely to have limited impact until business confidence improves.


The effect of the economic situation on asset finance In line with the slowing economy, the general consensus in the asset finance industry is one of caution, but underpinned by some optimism. As Bill Dost, President of D&D Leasing sees it: “The Canadian economy itself, which did not fall off the proverbial cliff like some of our western world counterparts, is getting set for a slow-down in the latter half of this year. This is a combination of business either not seeking financing, not getting financing, or simply wanting to wait it out. While the USA and the UK are pushing for growth and stimulus to drive equipment finance forward you are currently not seeing a great deal of initiatives on the Canadian front, and yet customers still need financing. Perhaps they need to be told it’s safe and smart to start buying again.” Competing with low bank rates can make it more difficult for equipment leasing and financing businesses to maintain margins – they have to manage a slightly higher risk profile in order to achieve better margins. However, current feeling is that Canadian firms are decently priced and you do not see rampant low margins sometimes seen in other countries. But for bigger deals, naturally the banks will always attempt to out-compete the lessor. The strength of the Canadian dollar relative to the US currency is negatively impacting Canadian exports to the US; but on the other hand, improved economic performance in the US will percolate north of the border, thus improving prospects for growth on the Canada equipment leasing industry. Others feel that too much emphasis is placed on the macroeconomic factors. Moe Danis, Vice President, Lease Finance, at Pacific & Western Bank of Canada, suggests: “If companies could focus on their immediate surroundings and assess the prospects, the market would likely be far more robust.” The asset finance sector itself is quite healthy. Leasing volume (new business) in 2012 was estimated to total C$37 billion, an increase of 16% over 2011; of this total, equipment and commercial vehicle leasing accounted for C$20 billion (up 23% on 2011 and represents a market penetration for leasing of 18%) and retail vehicle leasing accounted for C$17 billion (up 9% on 2011). (Source: CFLA)

Growth sectors The asset finance and leasing industry is seen to be performing well under difficult economic pressures. The markets are being sustained by a number of factors, including pent-up demand from delayed purchases of equipment during the downturn, proven

productivity gains from new product innovation, diversification of trading partners outside of the US for Canadian manufacturers, and Asian demand for commodities resulting in capital equipment purchases for Canadian suppliers. The general consensus is that the equipment leasing and financing market in Canada will grow faster than GDP at around 2%, which would indicate shortterm moderate growth at best as overall growth targets have been reduced. Above-average performance should be expected from the commercial vehicle market, where there is some pent-up demand in the system. Other segments highlighted for above-average performance include agriculture, technology (including financing for cloud computing), construction equipment and most definitely resources, where the strong oil industry means growth for oil and gas servicing companies and miners. Companies that deal with Canada’s raw materials are doing very well currently and these are always great prospects for the equipment financing industry. Trucking and logistics are booming, especially in the owner/ operator sector. Clean technology and healthcare also represent bright prospects for the future. Asset finance is of vital importance to the small and medium-sized enterprise (SME) sector, but Canadian SMEs have a traditionally cautious approach to funding, which translates into a ‘wait and see’ approach towards decisions involving capital outlay for new equipment. However, there is considerable demand in the pipeline after a few soft years and with a strong Canadian dollar and very low interest rates, there is stimulus for a pick-up in equipment sales. This is positive for leasing companies in general, but pricing is very competitive, | CANADIAN EQUIPMENT FINANCE | MAY 2013


Feature Report with more dollars chasing fewer deals. Bill Dost concurs: “As for areas with the greatest potential, what we are seeing right now is the rise of the smaller business. The owner operator, 1-5 employee business understands the needs for growth and we are seeing an uptick in this realm of business in both the west and central parts of Canada.” On the other hand, there is also the view that larger businesses are better positioned for recovery as they have the resources to make the necessary capital investments. Large business appears to be stronger, and positioned for recovery. Balance sheets are, in general, quite strong, with manageable debt levels, and resources are available to take advantage of the low rates and strong Canadian dollar. SMEs just do not have the wherewithal to withstand a misstep.

Consolidation and expansion The demand for capital assets is still strong and leasing industry consolidation in recent years has provided opportunity for increased market share for participants who are willing to invest. The commercial equipment finance industry in Canada is progressing through a consolidation cycle, and there is ongoing potential for realignment in the lessor community. A number of large US

“Competing with low bank rates can make it more difficult for equipment leasing and financing business to maintain margins” players have pulled out, offering the potential for Canadian lessors, large and small, to step in and fill the void. Hugh Swandel, Senior Managing Director of The Alta Group in Canada and a Board Director at the CFLA, sees a reshaping of the market, both in types of players and business terms. “Canadian banks were the main acquirers of independent firms, but other firms have also increased activity. Steve Hudson, who was the founder of Newcourt Credit Group, has taken an investment into a small independent firm, Element Financial, and turned it into a multibillion dollar origination platform with a public market cap of $597 million. In addition to Canadian bank and Element acquisitions, GE, CIT, DLL and Wells Fargo are all pursuing growth in Canada.” The changes in the market have increased competition, causing pricing to narrow and credit terms to soften. The number of independent companies has shrunk considerably and it is anticipated that independent activity will be limited to non-conventional credit markets where higher margins can be achieved. Although the number of commercial equipment firms operating in Canada has declined, the remaining players are all well capitalized and are generally becoming more aggressive with pricing and credit terms. The major Canadian players have been purchased by banks over the last couple years; this could lend itself to some great plays by niche players in 2013 and 2014. Bill Dost says: “I believe you are starting to see this slowly, with some newer entrants that want to do things differently and existing smaller players that have decided to work harder for the business. There is great business out there to be bought; it has to be worked for, it has to be demonstrated that one deserves it, and I think people have to be reminded that it’s time to focus, or refocus as it were, on growth.” International expansion is also on the cards, with future growth potential for big lessors going global, particularly for a vendor model shop. For companies that already have a global reach, there is still great opportunity; for example, partnership with vendors in evolving pockets of growth in emerging markets like China and India. However, there is still room for solid growth in established markets such as Canada, the US and Europe for financiers who demonstrate innovation and creativity resulting in enhanced value for customers. About the Author: WCG is the world’s leader in end-to-end automotive and asset finance software solutions and consulting services. Its award-winning software platform offers the end-to-end solutions of choice for Automotive Finance and Asset Finance companies in 27 countries around the globe. For more information please visit

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Acceleration Clauses in the Event of Default – Are they enforceable? By Jonathan Fleisher

ll leases have an acceleration clause when there is a default, however there is not a consistent approach as to what the damages will be. Some leases require the defaulted lessee to pay the balance of payments due without discount while others utilize a net present value formula applying a discount rate close to, but generally below, the interest rate implied in the lease. A few still use “the rule of 78’s” (but few under 50 know what that means). The recent case, Hav-A-Kar Leasing Ltd. v. Vekselshtein 2012 ONCA 826 (“Hav-A-Kar”) discussed this matter but may have not quite got it right. In Hav-A-Kar the Court accepted acceleration clauses as being enforceable (there was an argument before the Court that they were not). In this case the acceleration clause did not discount payments but required the balance of payment be made. This type of clause is problematic as it gives the lessor a greater return than it would have received had the agreement been fulfilled. This is contrary to the long standing legal principle of awarding damages for a breach of contract, to put the injured party in the same position as if the contract had been properly performed. If the lessor were to collect full payments at the time of default the lessor would be in a better position than had the default not occurred. A net present value calculation, on the other hand, takes the time value of money into account and if properly formulated should place the lessor in the same position it would have been in had the contract been completed. Another long standing principal under Canadian law is that penalty clauses in an agreement may not be enforceable. If the payment amount received by the lessor is viewed as a penalty clause then there is a significant chance that the entire acceleration clause will be thrown out. In most well drafted leases the phrase “a genuine preestimate of damages and not as penalty” is used to obtain this result. If the balance of payment formulation is used without this description, then there is a risk that it would be viewed as a penalty due to the lessor being in a better position, as noted above. In Hav-A-Kar the lease agreement was not surprisingly for a motor vehicle and provided for the balance of payment upon default. When the lessee defaulted and the lessor sued for damages, including enforcement of the accelerated payment clause. The trial judge rejected the lessee’s argument that the payment clause was a penalty, as opposed to a liquidated damages clause. The lessee appealed and was dismissed. The Court of Appeal in making its determination relied on the well established principle that damages for breach of contract should put the plaintiff in the same position as if the contract had been performed. It was found that the accelerated payment clause


was not excessive, it simply put the lessor in the position it would have been if the lessee performed its obligations under the lease agreement. The Court relied on the Supreme Court’s decision Keneric Tractor Sales Ltd. v. Langille, [1987] 2 S.C.R. 440 (“Keneric Tractor”), as precedent for the enforcement of payment acceleration clauses, however this case acknowledges the need to discount future payments to properly reflect the time value of money. The Court ignored the net present value concept in its reliance on Keneric Tractor. Hav-A-Kar also relied on the reasoning in Peachtree II Associates – Dallas LP v. 857486 Ontario Ltd. (2005) 76 O.R. (3d) 362 (C.A.) (“Peachtree”) which allows for the enforcement of penalty clauses based on the courts reluctance to interfere with the parties right to freedom of contract. The likely reasoning, which was not set out in the case, was that the Court recognized the clause in the lease agreement could be considered a penalty clause, but then relied upon Peachtree for the ability to enforce a clause regardless of its a potential penal effect. Another potential factor that the Court may have taken into account but did not specifically address in the decision, is the possibility that the differential between the full value of the remaining payments and the discounted value of those payments was so minute that applying discount would have little relevance; this is particularly likely given that it is a small ticket lease and a low interest rate environment. It would have been helpful in Hav-AKar to know how the court came to its decision. The concern is that a lessor may rely on this decision when drafting its lease and then a subsequent decision is rendered where Hav-A-Kar is accepted in principle, that is acceleration clauses are acceptable, but distinguishes Hav-A-Kar on the formula utilized. A lessor may have its lease acceleration clause struck down when it thought it was following the law. Accordingly, we are advising our client to stay with a net present value calculation. About the Author: Jonathan Fleisher is a partner in the Financial Services and Business Law Groups. His financial services practice focuses on the commercial finance industry with a particular emphasis on innovative crossborder transactions and equipment and asset finance, where he has been recognized as a leading lawyer by the Canadian Legal Lexpert Directory. | CANADIAN EQUIPMENT FINANCE | MAY 2013


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Feature Report


ome would call it evolution: others, revolution. Semantic flourishes aside, financial technologies are increasingly in the foreground as drivers of product differentiation and proliferation in the asset-based financing industry. Not long ago, at least in Canada, businesses looked to a small cadre of national banking institutions, which relied heavily on timehallowed, deeply enshrined, restrictive credit policies. Their gaze very much fixated on balance sheets, these engines of commerce dwarfed both in number and size by their counterparts internationally occupied a central role in funding the operating cash and capital requirements of established businesses . Hidebound by a tightly titrated funding model but with a modicum of support from specialized trade and mercantile finance companies, businesses, far from swooning from lack of cash nevertheless managed to maintain positive growth during the post-war, baby booming years in which our industrial economy expanded in great leaps and bounds. Plant and equipment tended to be financed under the umbrella of general corporate needs. Thus, and this


was certainly true of “smokestack” industries, one or more layers of omnibus financing by way of trust deeds, debentures and similar instruments became the dominant legal framework for the capitalization of mid- and-largesized enterprises. In the ensuing years a service economy began to emerge which increasingly focused on the productive value of specific assets within a corporate enterprise, its intellectual property, royalties, and methods for extracting their value through licensing, franchising and technology sharing arrangements. Advances in technology and accelerated trade in intangibles forced the lending industry in turn to innovate, to find new ways to unlock the intrinsic value of personal property security. And that was done. But this re-thinking was restrained by outmoded concepts of law which could not be so readily moulded to accommodate these new ideas about collateral. Soon, with the inestimable help of the academic and legal communities the government responded with a freshly minted construct forged with inspiration against the anvil of economic necessity. Article 9 of the United States Uniform Commercial Code (“UCC”), which codified a unique and brilliant set of ideas and a spawned its own | CANADIAN EQUIPMENT FINANCE | MAY 2013


Feature Report language to stealthily elude the restrictions of precedent, was born. These revolutionary ideas, which presaged a Brave New World of legal invention found expression under the appellation of “security interests� and comprised an elegantly simple framework for the articulation of rules governing the creation, recognition, priority, registration and enforcement of security interests in personal property.

Secured transactions enhanced our economic growth The law of “secured transactions� has accomplished more than perhaps any other legal innovation of the past century to spur fresh

ideas about financing, and vice versa. This symbiotic relationship, whether real or perceived, inevitable or serendipitous, enhanced our economic growth. It allowed us to slip past the bonds and artifacts of the common law which, in the realm of lending and security, gave primacy to ancient concepts of possession and the nemo dat rule (the ancient proposition of law which holds that a person can give to another no higher property rights than he himself enjoys) which provide the legal foundation for the “first come, first served� analysis in the reconciliation of competing claims to ownership of an asset. Commerce, at least to the south of the Canadian




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border, was energized. Local variations in the rules of the game continued to some extent—persisting even today—however, the entire playing field had been laid open: no longer would the transaction of business be straight-jacketed by arcane, outdated, ill-conceived, moribund and idiosyncratic rules that no longer served the interests of a highly-evolved business matrix with multi-jurisdictional reach and commensurate financing demands. Still, although words like “globalization� were encountered more frequently in business parlance, a fear of foreign domination diminished the free flow of cross-border trade and steadily worsened competition due to extensive, intrusive market regulation. Even though protectionism was the dominant theme of trade policy throughout the entire western world at that time, Canadians suffered disproportionately because of their dependence on trade with the US. Soon, however, encumbered as we were by these restraints, our reputation as miners, fishermen and hewers of wood began to give way to a secondary economy with complicated needs that demanded much more tangible support from the legal system. This support was to be found in the enactment of the Personal Property Security Act (“PPSA�) which came into force in the province of Ontario on April 1st, 1976. Founded upon the principles of Article 9, the Ontario Act eventually spawned counterparts in the remaining provinces and territories of the Dominion save for Quebec, which, in time, enacted analogues in its Civil Code that emulate some of the PPSA’s more prominent features. Since those early days the inexorable march of globalization has witnessed the evaporation of artificial barriers to cross-border, increasing multijurisdictional reach in Canadian businesses and the emergence of a new and vigorous international business class of passport-less companies with a global footprint eager to arbitrage differences in local laws and culture in their tireless search for profit. Canadian banks, no longer in the backwaters, have emerged as global leaders partly in response to this stimulus in trade and in equal measure as a purveyor of world class financial products. Our advanced legal system is viewed with favour internationally, approaching the level of New York (US) and London (GB) as jurisdictions of choice in laws governing consensual international business transactions. The sophistication, predictability and compelling quality of our personal property security laws exert a powerful pheromone in establishing Canada as a major centre of influence in the transaction of commerce.

Strange twist of fate In a strange twist of fate, innovations in financing techniques coupled with an insatiable appetite for

Feature Report growth and ROE / ROI combined calamitously to mount in 2007 an unprecedented challenge to the very existence of our most respected financial institutions around the world, sweeping before them a pervasive array of hapless victims like some financial Tsunami of incredible proportions. Some commentators attribute the financial crisis and resulting recession to simple greed; others point to the “system” itself, a tightly wound, enormously levered and potent time bomb, at once intricate and secretive yet plainly well-understood by the participants moving money from one silo to another according to a sublime set of rules governing a financial structure known to the cognoscenti as a “securitization”. Ingenious analysts working their computers into a frenzy of statistical models, labouring in isolation far removed from the interpersonal channels and human interactions indigenous to the transaction of commerce, had concatenated an amazing technique for the diffusion of credit risk associated with the payment of distinct financial obligations by involving a multiplicity of obligors, each with a minor share of the total number and amount of obligations, in the lending paradigm. The resultant structure gained integrity and strength from the demonstrably trifling impact which default in payment by a small number of obligors would have on the overall performance of the group. By lending into the structure, adding a modest amount of “security” (in the form of cross-collateralization, over-collateralization and reserves) and by contractually spreading the risk of non-payment throughout its constituent parts, the statistical probability of payment of the entire amount to become due approached virtual certainty. How simple, captivating and compelling! Garnering immediate and widespread popularity, the securitization business leapt off the drawing board into vigorous practice in no time at all, only to collapse under its own weight when someone in some distant office farremoved from the worries and concerns of financial regulators, economists and market participants, declined to roll over a series of notes that had fallen due. No one was prepared for the resulting confusion, instilling a panic that instilled terror in every part of the financial sector and beyond. The system, which was highly theoretical, required timely, mechanical action from its participants. There was little or no room for deviation, with the eventual result that one default begat another and another until no one was left standing. The crisis was upon us with incredible rapidity, leaving the financial world breathless. In the short space of time during which securitization gained prominence and popularity, its principles were extended to any asset class that was amenable to its logic, from credit card receivables to

music royalties and beyond. For a while, it seemed as though any asset, no matter how unusual or irregular could be subjected to its structured analysis to generate the desired result by manipulating but a few variables. Traditional credit risk assessment was left at the door and it became possible to monetize and liquidate any property or right that generated a measurable cash flow with virtually any periodicity. In the process, we managed to outfox ourselves, to engage in self-delusion on a massive scale and had unwittingly introduced a pervasive and dangerous infection that would soon hold us all to account. This, too, can be traced to legal and financial creativity as a root cause. It underscores the dark side of innovation and stands as a lesson of historical importance in the genesis of modern financing techniques.

Lessons may not have been learned In recent years considerable effort has been directed to developing ways and means of monetizing cash flow generating assets like water heater rentals, royalties, fixtures, renovations, and other consumer and commercial assets, reminiscent of the surge in asset diversification that brought us to the brink of disaster in 2007. Although we have a heightened understanding of the risks implicit in financing such assets, with current structural requirements that are more conservative than those in preceding years, it is far from clear that these lessons have been learned. There are legal issues embedded in specific asset classes that can raise their head at the most inopportune times, challenging the wisdom that underlies their commoditization. In the case of water heaters, consumer protection policy has been at the forefront of these developments. Cases are moving forward at this very moment because of challenges

to prevailing business practices which have been launched by the Competition Bureau. The insolvency of originators has demonstrated that expectations may not be met due to the exercise of the court’s powers and discretion in connection with proceedings and stay orders under the provisions of the Companies Creditors Arrangement Act (Canada) and the Bankruptcy and Insolvency Act (Canada). PPSA issues have arisen in a variety of contexts involving the application of statutory rules dealing with security interests in fixtures and building materials, and these have impacted the monetization of home improvement loans, condominium retrofit financings and other examples of the confluence of real and personal property security regimes. All of these seemingly unique issues arise from time to time but with stunning regularity, reminding us that monetization is not just a formulaic process. Car leases are very different from renovation contracts and HVAC deals. These differences are not trivial. The challenge for those of us involved in the trenches of equipment finance in Canada is to utilize our sophisticated personal property security and insolvency legislation creatively, but with the requisite degree of knowledge, insight and experience to ensure that we do not run afoul of these increasingly technical laws. Today, the proliferation of new financing techniques and the development of laws to support their use mean both challenges and opportunities for profit. Reading magazines like this one will help you gain a real appreciation of the boundaries. ABOUT THE AUTHOR: As a partner at Torkin Manes law firm in Toronto, Chaiton is widely recognized as an expert in equipment financing, leasing, asset-based lending, corporate finance and banking matters, and has been involved in complex bankruptcy and receivership engagements and represents banks, insurance companies, leasing companies and other purveyors of financial services. A director of the Canadian Finance & Leasing Association, David is a member of its legal committee and was recognized for his contribution to the development of the vehicle leasing and equipment finance industry in Canada when he received its member of the year award. | CANADIAN EQUIPMENT FINANCE | MAY 2013



The 2013 Technology Issue Canadian Equipment Finance presents a special two-way report on technology in the leasing and financing market.

MAY 2013 • voluMe

1 • issue 1 | www.cA nAdiAne

quipMe ntfinAnce.coM


The first part of our Special Report examines the latest technological tools, data systems, asset management software and tech ideas leverage operations to reduce costs, improve services and manage data—and more. Learn about the coming offerings from the industry’s key technology providers. The second part of our Special Report examines the financial opportunities in the technology sector for financing companies.

The 12 Secrets of Commercial Credit Scoring

Quickening of Innovation in Asset-Based Financing Purple Cash Cows and Other Truths

Learn about the ways lenders are improving their funding offerings to companies which want to expand, upgrade, improve and overhaul their technology assets. All this and more in the June issue of Canadian Equipment Finance.

Credit UnionsYour New Lender? An Appraiser’s Tale: Life on the Road to Valuations

WaTch for your Issue In your MaIlBox The fIrsT Week of June.


For AdvErtising inFormAtion ContACt:

sTeve lloyd Publisher and Editor-in-Chief 905-201-6600 x 225

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Mark henry Advertising Representative 905-201-6600 x 223

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Canadian Equipment Finance is a Lloydmedia, Inc publication. Lloydmedia also publishes Payments Business magazine, Canadian Treasurer magazine, Direct Marketing magazine and Contact Management magazine. CANADIAN EQUIPMENT FINANCE | MAY 2013 |

Your Business

Purple Cash Cows and Other Business Truths By Angela Armstrong

ike any great leader, you battled your way to the top. As Caesar Augustus, you’d return from a 20 year campaign to a life of glorious excess (and a little political intrigue), garbed in Tyrian purple robes. Purple has long denoted wealth in human society. Laboriously created by harvesting the organic ink of thousands of molluscs or sea snails, drop by drop, and therefore astronomically expensive, it was exclusive to the Emperor in 4 BC. Fast forward to 1560 A.D., when even Queen Elizabeth I forbade the wearing of purple by any but those whose address boasted a moat. Unless you’re a Fashion Week aficionado, real power in 21st century society no longer rests in the turn of your coat. Instead, it exists in economies that boast buying power. Maybe Elizabeth saw it coming – in the Age


of Exploration, monarchs aggressively invested in risktaking adventurers (latter day entrepreneurs) to grow their empires and secure critical new resources to gain advantage and secure money to shore up throne and fleet. Like those long-ago voyages, modern business is a delicate balance between risktaking and pragmatism. Like those long-ago monarchies, businesses require an ample supply of free cash flow.

Cash is the new purple Cash is the new purple. It confers liquidity, agility, and power. If you don’t think that’s true – look at the toppling dominoes of Wall Street investment banks in 2007-08, each depending on both market confidence and the ability to meet margin calls with real liquidity, to lever assets and trade. As a result of a market-driven overnight collapse of liquidity, of the big 5 Wall Street investment banks operating

in 2007 only 2 remain today. Wall Street, and the global financial markets are forever changed. (Cyprus) While not easy to draw direct comparison between large capital markets and private enterprise, one thing is sure; Cash is still defiantly King, purple robes be

damned. Cash is critical, and in having it, timing is everything. One of our very successful clients reflected on the early days of his business growth. His bank called each morning to ask what his deposit would be and he’d audibly riffle phone messages

Credit Risk Hurting Cash Flow? Make fast, accurate credit decisions with a powerful web-based credit solution. Use our bank reports to compliment historical in-file data with current banking information.

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Your Business off his desk implying they were cheques. After hanging up, he spent hours dialing for dollars collecting receivables to make an honest man of himself. There were some tense moments, he says –he’ll never forget how close he came to simply not surviving. He was persistent, AND lucky. Too little cash, at exactly the wrong times, can kill you. Lenders obsessively calculate and ruminate on cash flow statistics in order to decide how, when and to whom they will lend cash. If you are sceptical, Google “business cash flow” and you’ll find more than 45 million possible responses on cash flow and liquidity. Of course lack of cash flow s one of the top three reasons that businesses fail. equipment finance

Even Amazon was scrutinized

In Feb 2012, Amazon was the subject of concerned analysts. The topic: its free cash flow. Analysts worried that Amazon’s profitability was strained. In January 2013 Jeff Bezos defended Amazon’s new business strategy in spite of lower margins. “It’s the absolute dollar free cash flow per share that you want to maximize. If you can do that by lowering margins, we would do that. Free cash flow, that’s something investors can spend.” Bezos and the analysts naturally have differing opinions about the value of this metric in measuring Amazon’s market recovery. What matters is that they’re having the conversation at all - and cash flow is at the ad_final.pdf 1 4/12/2013 3:20:12 PM centre of it.











Here are the statistics: 1/3 of businesses at any point in time are experiencing cash flow issues. As it was for Wall Street, liquidity is critical to business. (And these are not the kind of liquid assets that my brother- in-law has in his well-appointed wine cellar.) Cash flow problems are easy to detect. Slowing payables, erratic inventory purchases, closed locations or laid-off staff are easy markers. More than half of companies with money challenges blame slow payments from their customers as the reason for their own cash flow issues. Every business is a customer of many others. If YOUR receivables slow to a glacial rate, and you`re churning the dollars out as fast as they come in, your churn rate just took a big

iceberg to the teeth. Suddenly, being called “Titanic” has a whole new meaning.

Loans bridge the gaps Some companies have had to rely on very expensive short term loans to bridge cash flow gaps. David Barker, CTO and Young Entrepreneur of the Year for 4D Data Centres, commented in an interview with Real Business in October 2012: “…for two consecutive months we had to take a short term loan from our majority shareholder to pay our suppliers, which meant that we had a potential cash flow crisis….The problem was that some of our clients, particularly the larger ones, were delaying payment beyond our invoice due date – effectively, using us as a

Your Business cheap source of credit.” And remember, crisis financing is always expensive. And receivables aren’t the only culprit. Even if your clients pay you early every month, hiring staff, investing in equipment and technology, or acquiring competitors, takes capital. Unless your business has the Midas touch (lucky you!) you’re borrowing from current operational cash flow against future growth. Home-owners know that they can’t eat doorknobs. Business owners can’t eat too much inventory, excess production capacity, or new locations with no new growth - all statistically causal factors when businesses hit the wall. And even experienced captains of industry can’t always react quickly enough when the market exuberantly throws a tsunami their way. Private enterprises also suffer Wall Street- like pain. A large rental company we deal with experienced difficulty when their overseas Spanish suppliers hit trouble in 2010 – creating the need for expensive short term arrangements with alternative domestic suppliers. External volatility out of their control put pressure on the value of the security collateral held by their bank, and impacted their ability to borrow against those compressed assets. Put another way – that call from the bank asking what other assets they had to pledge to shore up leverage, was a really bad way to start the day. Like it or not, whether you’re a large public company or a private enterprise, someone’s monitoring your liquidity. What those equity partners, lenders, or institutional shareholders love to see? You, being a cash cow

– meaning you are squarely in the purple. In the public markets, the definition of a cash cow is a company which will have plenty of free cash available after paying its necessary yearly expenses. The value of cash is clear. Œ Free cash can be reinvested to grow a business.  Cash provides a cushion for emergent, unforeseen needs. Ž It can also be paid out to shareholders – requiring little extra effort from those shareholders (who are happier getting dividends than a call for more cash) in order to continue conveying returns and growth. If your business is capital asset intensive, you’re continually balancing the need to invest, with the need to create a return on that investment. Tough to have your proverbial cake and eat it too, huh?

Again, timing is everything. Value investors look for companies whose free cash flow equals more than 10% of sales revenue. Free cash flow is calculated by deducting annual capital expenditures from annual operational cash flow. Property, plant and equipment (PPE) expenses can suck up cash flow with the efficient voracity of a Dyson vacuum cleaner. And the return on their implementation can be long, arduous and uncertain. With all that, what’s a business owner to do? Unlike Monarchs of old who had the ability to levy taxes to improve the state of their

Treasury, most enterprises control sales and expenses. Instead of using your irreplaceable current cash cushion to buy capital assets, why not pay for them over time, through the growth of the business. It’s a great way to maximize ROA. Strategically matched asset-backed financing is the business equivalent of expedition insurance for those early ocean explorers. In Canada there is ample access to complementary sources of capital that use fixed assets as collateral against a matched, strategically defined and timed financial instrument. A controlled amount of third party asset financing gives you power over your short term capital outlays (and therefore important key financial ratios used by banks

to calculate leverage capacity). It also offers diversification of lending – and conservation of that incredibly important asset – your cash on hand. Accessing functional finance solutions such as capital equipment leasing could keep you afloat, especially in choppy waters. Ruling an empire, or growing a business, are tricky ventures at best. Elizabeth I famously said “All my possessions for a moment of time”. How about trading those possessions for cash, which will BUY you time? It’s up to you, but if you’re clever and resourceful, you can become a cash cow, AND stay in the purple. About the Author: Angela Armstrong is president of Prime Capital Consulting, and an expert on telling the whole financial truth. She loves being an entrepreneur, and watching her clients experience success. For 25 years her team has helped business owners leap tall financial hurdles in a single bound by putting the money they need in arms reach.

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Tech Insights

Can you afford not to be in a technology business? By Vladimir Kovacevic

o one said it better than Bob Dylan in his legendary song “The Times They Are a-Changin’”. Although the song was originally written to describe a different environment than what we see today, the lyrics and the message are universally true and timeless. Change is inevitable and a fact of life, but one thing that is different in the last 5 years is the pace of the change. We have gone from changes that take decades to notice and impact our lives, to changes that are measured in months. The most notable and rapid changes are technology related – so how should a modern business deal with this environment? How fast should the change be adopted? How much should be adopted? Can you afford to “wait it out”? The topic is complex and vast – there are many examples of change and technology adoption revitalizing the business and enabling it to soar to new heights, but there are also many examples of change having the exact opposite effect. So, what is the right answer? As with most things that truly matter – there is no simple answer, no magic “one liner” that just makes it work. However, there are guidelines and best practices that when understood and followed can guarantee a positive and successful outcome. Here is a simple 5 step process that will get you started in the right direction: 1. Establish a baseline – it’s impossible to grow and change without a baseline. Rely on



experts that understand both the business and the technology to perform an audit of your existing environment and give you a written report. Use this report as a baseline and starting point for any change. 2. Determine realistic business goals for the next 3, 6, 12, 24 and 36 months. Forget about the technology and focus on the business - every good technology improvement accomplishes a very specific business goal. You must have a “big picture” – without it any solutions that are implemented will cause as many issues as they solve. 3. Identify an in-house “technology champion” – business oriented individual(s) that understand the value and importance of technology, standardization and automation. This person or a group of people need to be able to bridge the gap between technology and business. This is one of the most difficult and sensitive roles and requires a very specific combination of business knowledge and expertise combined with a natural affinity for process improvement. 4. Small steps – series of small changes and improvements

“Whatever your business technology problem may be, others have likely faced it and solved it.”


made over time are easier to manage and control and the value of the end result is much greater than the sum of individual improvements. A word of caution; never lose sight of the “big picture” and make sure that all small projects and improvements are properly fitting and contributing to the “big picture”. 5. Find the right balance between the “in-house” work and “off the shelf” products and don’t be afraid to use them both. This balance greatly depends on the size of the organization and is a topic for discussion in itself, but the rule of thumb is that whatever your business problem may be, others have likely faced it and solved it – so seek the industry experts and look for advice before plunging into custom solutions. More than likely, “there’s an app for that”. The times may be changing, and at it may feel overwhelming and too complex to tackle new technologies, but luckily there are others who are currently going through the same process and others who have already done it. Peers, industry contacts and events are an excellent way to reach out to experts and ensure that changes you are making are done right and in a way that fits your unique business circumstances. When properly implemented, technology can propel businesses to extraordinary heights. About the Author: Vladimir Kovacevic is Chief Technology Officer of Inovatec Systems Corporation. Inovatec helps automotive and equipment finance companies identify and implement operational and efficiency improvements.

Lender Market

Credit unions play growing role in equipment leasing By Art Chamberlain

redit unions across the country actively support small businesses in their communities with loans, payroll services, cheque processing and their daily banking needs. Many have gone a step further and offer equipment leases, either to meet the needs of their members, or to serve business customers who are not members. Some serve non-members through specialized subsidiaries. Credit unions are provincially regulated and restricted to their home province, while the leasing subsidiaries operate in other provinces. For example, Coast Capital Savings, a credit union based in Surrey, B.C., has a subsidiary, Coast Capital Equipment Finance Ltd., that is active from Alberta to Ontario. Brian Joyner, Director, Coast Capital Equipment Finance, says about 70 per cent of its leasing business is outside B.C. Joyner says the key to their successful operation is having expertise in evaluating the hard equipment that is being leased and not venturing outside that area of expertise. “We focus on hard security types at lower finance rates where knowledge of the security is paramount to the risk assessment,” he said. “Leasing is complementary to business lending and equipment financing is a natural extension of the service credit unions provide,” Joyner said. Coast Capital is happy to offer its leasing services to its business members in B.C., but actively seeks new customers looking to finance everything from transport trucks to printing presses. Coast Capital has offered leasing since 2000 when Joyner and a small team of experienced leasing managers joined the credit union. Since the separate subsidiary was established it has enjoyed strong growth and flowed profits back to the credit union and its members.


Lease applicants may be referred to Concentra Concentra Financial, a national credit union company, provides leasing services to credit union business members, private and public | CANADIAN EQUIPMENT FINANCE | MAY 2013


Lender Market sector enterprises seeking equipment, technology and infrastructure financing. Concentra provides the leasing expertise and system. In many cases credit unions originate, approve and fund leases for their existing members and place with Concentra to administer. Credit unions may also refer lease applications to Concentra to approve and fund. “Our relationship with the credit union system allows Canadian communities to retain the financial and other economic benefits that result from these lease transactions,” says Kelly McMurchy, Manager, Credit & Asset Management, Concentra Commercial Leasing Services. One of the many credit unions that Concentra works with is Servus Credit Union, the largest in Alberta. On its website Servus tells its members that in working with Concentra, it can design a lease for almost any type of business and equipment, such as heavy equipment for construction, mining, forestry and energy sectors; grain bins and harvest equipment; utility trucks and trailers; and medical, laboratory and diagnostic equipment. Westminster Savings Credit Union, based in Westminster, B.C., is one of the most active credit unions in the leasing market, both for consumer vehicle leases and business equipment. Through its division WS Leasing Ltd., it has been providing quality, open-end vehicle lease financing for more than 15 years. In early March, Chrysler Canada Inc. announced it would begin offering vehicle leases at its dealerships for the 32


first time since 2008, financed by WS Leasing. In addition, Westminster has a Calgary-based subsidiary, Mercado Capital Corporation, that specializes in equipment leasing. Like Coast Capital’s subsidiary, it is able to offer services to customers in several provinces. Mercado has been providing equipment leasing services to businesses in Western Canada for over 20 years. It is based in Alberta and has associates in British Columbia, Saskatchewan, Manitoba and Ontario. “We are not tied to a single equipment manufacturer: we can provide equipment leases for all makes and models of equipment, across almost every industry,” Mercado says. “Open-ended equipment leases for individuals and businesses and customized fleet leasing services are our specialty.” North Shore Credit Union, based in North Vancouver, B.C., also has two leasing subsidiaries. North Shore Leasing Ltd. provides lease financing to B.C. and Alberta businesses for a wide variety of equipment. North Shore Transport Finance Ltd. provides lease financing for heavy equipment and other forms of transport to businesses in B.C. and Alberta. Closely aligned with North Shore Leasing Ltd., the Transport Finance group works through collaborative partnerships with businesses and the lease broker community to provide finance solutions customized for specific business needs. About the Author: Art Chamberlain is Media Relations Manager at Central 1 Credit Union. He is a veteran journalist, writer, author and editor, with more than 30 years experience in publishing and communications.

Sample Head

Keep up to date and informed by visiting our website daily. Canadian Equipment Finance magazine posts news, insights, updates and breaking stories as they happen. Stay Informed. Keep Ahead.

Visit us online at Canadian Equipment Finance is a Lloydmedia, Inc publication. Lloydmedia also publishes Payments Business magazine, Canadian Treasurer magazine, Direct Marketing magazine and Contact Management magazine. | CANADIAN EQUIPMENT FINANCE | MAY 2013


International Watch

Why India should be a natural fit for a strong leasing industry By Ram Sreekantaiah

he Indian leasing sector is still at the development stage in a market where bank financing is traditionally dominant. However, there are a number of underlying reasons why the recent growth in leasing looks set to continue, and to provide opportunities for both domestic and foreign lessors, despite the considerable obstacles presented by its taxation and regulatory regimes, in particular. First the economy’s size and untapped potential. Although its growth rate has stuttered recently, India is already the 10th largest economy globally, and is predicted to surge to fourth in the next decade. India’s leasing industry is small – in terms of new business volume, it ranks outside



the top 50 globally, while its BRICS peers all sit well within the top 20. There is great opportunity for the expansion of the sector overall, with upper growth estimates at 25-30%, albeit from a low base. Leasing penetration of the loans market is currently no higher than 2-3%, which means that there is enormous potential to grab market share as Indian companies become more aware of the benefits of raising capital off balance sheet as offered by leasing. India recovered from the global financial crisis ahead of most other countries, but inflation caught up with it sooner than elsewhere. Although the RBI argues strongly against accepting high inflation as “the new normal”, the Indian government continues to struggle to control it, and in these circumstances, the benefits of the fixed costs offered by leasing over a variable-rate loan also look increasingly attractive. Second the growing economy’s need to invest in infrastructure. Power and roads are two crucial pillars of infrastructure in any country and in India these sectors are earmarked for the largest planned outlays, and with up to 50% of infrastructure creation going to the private sector, leasing will play a pivotal role. For projects which are significantly capital-intensive with a long payback period, the lease tenor can be matched to the project, enabling the acquisition of the latest technology assets with minimum asset risk, in contrast to traditional debt financing. This is very attractive in the current economic climate as companies seek to defer capital expenditure and raise funds without the need to leverage the balance sheet.

Construction and mining would benefit The burgeoning construction and mining equipment sectors would benefit from lease finance in the same way. There is a huge demand for construction equipment which is primarily seasonal and project-based, giving rise to an inherent need for equipment acquisition on a lease / rental basis. Third, there are also strong signs of growth in the auto finance, vehicle leasing and fleet


International Watch “Momentum is also being given to leasing marketing in India by the entry of multinational companies…strong brands with their experience on global markets…offering reassurance and stability.” sector. Increasing cost pressures are causing companies to seek greater budget control through full service leasing. The total operating lease fleet market is expected to grow by 11% in 2013. But the auto leasing sector in India still needs to be properly marketed. Only a small percentage of corporates have been tapped. Consumer demand for autos is revving up, driven by improving road infrastructure in rural/semiurban areas and a growing and increasing well-educated young population, and although there is an inherent preference among consumers for owning a vehicle outright, that mind-set is gradually changing. Momentum is also being given to leasing marketing in India by the entry of multinational companies such as Japan’s Mizuho Corp, Macquarie Leasing, Volkswagen Financial Services, IBM, Hewlett-Packard and Cisco. These strong brands with their experience on global markets can offer the reassurance and stability that potential customers in the nascent leasing sector are seeking. Where they lead, others will follow. The White Clarke Group India Asset and Auto Finance Industry Survey is newly published and is free to download at http://www. About the Author: Ram Sreekantaiah is CALMS2 Product Quality Assurance Manager of White Clarke Group. WCG is the world’s leader in end-to-end automotive & asset finance software solutions and consulting services. Its award-winning software platform offers the end-to-end solutions of choice for Automotive Finance and Asset Finance companies in 27 countries around the globe.

EDC signs $600 million of new business in India to help grow Canadian supply into major multinationals Export Development Canada (EDC) has booked USD 600 million in new transactions that will facilitate new export business between Canadian companies and Indian multinationals. A number of EDC executives were in India in mid-March as growing opportunities for Canadian exporters and investors in the market has increased demand for the export credit agency’s financing solutions. EDC views the Indian market as a corporate priority, and its Indian infrastructure strategy is designed to help Canadian companies gain access to some of the $1 trillion in planned infrastructure spending there over the next 5 years. “All of EDC’s work in India is geared towards one objective, to facilitate access for Canadian exporters and investors to opportunities created not only by India’s infrastructure development plans, but by all of the secondary subsectors that feed into it as well,” said Todd Winterhalt, Vice-President, International Business Development Group, EDC. “EDC is in India to help open doors for Canadian companies, that’s our job, and one of the important ways that we accomplish that is by providing financing to Indian companies. The financing capacity affords EDC privileged access to senior executives in India, which we can leverage to help raise awareness of Canadian suppliers that could enhance their supply chains and help them grow. The two new transactions that we finalized during our trip are perfect examples of this approach.”

Two way trade reaches $5.1 billion During the trip, EDC concluded a USD 100 M financing agreement with Tata Steel Ltd (TSL). The transaction marks the second loan that EDC has provided to Tata Steel, following a USD 100 million

loan in 2012, and reflects the increasing Canadian supply into Tata Steel’s supply chain, as well as their operations in Canada. EDC also signed a protocol agreement with Aditya Birla Group (ABG), under which EDC will make available up to USD 500 million in financing for the Indian multinational. EDC will consider and underwrite loans under the protocol as opportunities arise out of ABG’s Canadian operations or international operations. EDC has permanent representations in Mumbai and New Delhi, and in 2012, more than 306 Canadian companies undertook more than CAD 2 billion in business with India that was facilitated by EDC. Of note last year, EDC provided USD 100 million in project financing to Hindalco, USD 50 million as part of a larger syndication to Reliance Industries, and USD 20 million to facilitate Rolls Royce Canada’s sub-supply to Gail Limited in India. Two-way trade between Canadian and India reached CAD 5.1 billion in 2012, with pulses, non metallic mineral, aerospace, jewelry and pharma as the leading sectors of trade. EDC’s executives were in India between March 17th and March 21st to meet with new and existing customers, in addition to business development activities with other Indian companies that have the potential to grow their Canadian supply chain. EDC is Canada’s export credit agency, offering innovative commercial solutions to help Canadian exporters and investors expand their international business. EDC’s knowledge and partnerships are used by more than 7,400 Canadian companies and their global customers in nearly 190 markets worldwide each year. EDC is financially self-sustaining and a recognized leader in financial reporting and economic analysis. | CANADIAN EQUIPMENT FINANCE | MAY 2013


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WHERE TO GO. WHAT TO SEE. Find out more about the conferences, exhibitions, seminars and meetings in your industry May 5-7 Equipment Leasing and Finance Association 2013 Legal Forum Charleston , SC

May 8-10 Equipment Leasing and Finance Association AGL&F/ELFA Public Sector Finance Forum, Chicago , IL

May 15-16 Equipment Leasing and Finance Association 2013 Capitol Connections Washington , DC

June 4-7

September 24-26

International Card Manufacturing Association/ ICMA Annual Card Manufacturing & Personalization Expo Washington, DC

Celero Solutions Canadian Financial Technology Conference Regina, SK

June 5-7

September 25

FEI Canada Annual Conference Lake Louise, AB

2nd Women in Payments Symposium & Payments Business Magazine Awards Night Toronto, ON

June 19-20

NBPCA Annual Congress-The Power of Prepaid National Harbor, MD

August TBA

September 9-11 Equipment Leasing and Finance Association Lease and Accountants Finance Conference Austin , TX

May 26-28 Credit Scoring & Risk Strategy Association 20th Annual Conference Lake Muskoka, ON

June 2-4 Equipment Leasing and Finance Association Credit & Collections Management Conference Philadelphia, PA

November 6-8 Association for Governmental Leasing & Finance 2013 Annual Conference Boca Raton , FL

Equipment Leasing and Finance Association Operations and Technology Conference Austin, TX

September 12-14 National Equipment Finance Association Funding Symposium Nashville , TN IFO Canada 3rd Annual Canadian Financial Operations Symposium Toronto, ON

RIMS Canada Horizons--Annual Conference Victoria, BC Equipment Leasing & Finance Asssociation 52nd Annual Convention Orlando, Fl

September 9-10

September 15-17

October 6-9

October 20-22

CAIRP / Annual Conference 2013 Banff, AB

IFO Fusion 2013 Forum & Expo Orlando, FL NACM Credit Congress & Exposition Las Vegas, NV

Canadian Finance & Leasing Association Conference 2013 Halifax, NS

June 26-28

May 19-23

May 19-22

September 18-20

ACT Canada Cardware 2013: Payment Insights Niagara Falls, ON

November 13-17 Commercial Finance Association 69th Annual Convention Los Angeles , CA

November 19-21 Comexposium CARTES & Identification Exhibition 2013 Paris, FR | CANADIAN EQUIPMENT FINANCE | MAY 2013



An Appraiser's Tale: Life on the Road to Valuations By Rob Birnie

n November, Verus Valuations received an urgent assignment to perform a physical inspection of a fleet of crane truck assets reported as being located in Calgary. Our Calgary staff was temporarily unavailable and therefore I headed out from our Vancouver office. It wasn’t until after my flight arrangements were made that I was able to contact the customer to confirm my schedule. That phone call was the first time I heard that the equipment was actually in winter storage in the Lloydminster area. Lloydminster is a unique location in the Canadian market. As it straddles the Alberta/Saskatchewan border, there are a number of interesting factors related to tax and governance jurisdiction which have influence on market values in this area – factors which clearly needed to be reflected in our report. Of more immediate concern to me on my way to catch my flight, was the simple fact that Lloydminster is nowhere near Calgary! Keeping in mind that lenders are under constant pressure to provide immediate financing decisions, in many cases, risk management teams cannot make an informed decision without a physical inspection of the security assets. So I was committed to go. After a quick flight into Calgary and a stop into the car rental agency, I made the 6 hour drive through an early winter snowstorm to arrive at the equipment owner’s shop in Lloydminster. After reviewing maintenance records for each unit in the assignment, the equipment owner let me know that some of the units were just outside the shop and would pose no difficulty for inspection. The balance of the units were in out-of-town winter storage with no available heat/power. In order to meet aggressive time schedules, equipment appraisal assignments are frequently issued before all information




is available from the equipment owner. Unpredictable winter weather conditions, often coupled with the use of reduced cost winter storage facilities (which may be in remote areas without benefit of power or protection from the elements) add an additional complication to completing an accurate appraisal of assets. As Canadians, we are all aware of the damage that can be sustained when equipment is operated without proper pre-heat operations and therefore winter conditions require alternate approaches toward substantiating the value and condition of mothballed equipment. On our drive out of town, the owner mentioned that one of the trucks was at a local storage yard. Unfortunately, this yard was only accessible between 8 and noon. With gates already locked and the unit several hundred meters on the wrong side of a chain link fence, I realized that perhaps I should have brought binoculars to assist with serial number verification. We then continued out to the owner’s storage facility, which was cleverly disguised as a wheat field, located about 30 kilometers outside of town. As an experienced off-roader, I had a moment of doubt when we arrived at the location and the owner didn’t park on the side of the road. He confidently proceeded to drive across the field toward the distant trucks. After 30 meters, the inevitable occurred and we sank in mud and snow. I

jumped out and asked the obvious question, “Got a shovel?” “Nope.” “How about chains?” “I’m afraid not.” Well, okay then. Considering that our complete inventory of recovery gear consisted of a few lengths of 2x4 and the vehicle floor mats, visions of a very long night were flashing through my mind. Suddenly, we saw a highway grader approaching. A quick wave to the operator, a short tug and the truck was returned to solid ground. I then shifted my attention back to the appraisal at hand. Verification of serial numbers, mileage, operating hours and certification status of the trucks was completed without further delay – allowing us to return to town in time for me to drive back to Calgary and make my return flight. The information obtained during our inspection allowed us to complete a detailed market analysis report substantiating the value of the assets. This information allowed the lender to make an informed decision and to meet their committed timeframe. And it didn’t take all that long for me to clean the mud off my boots either. About the Author: Rob Birnie is a Certified Machinery and Equipment Appraiser (CMEA), Master Marine Surveyor (MMS), Senior Business Analyst (SBA) and an active member of the Vancouver Board of Trade. Rob has applied his hands-on experience in mechanical and marine repairs and more than 19 years of insurance damage appraisal, valuation and loss settlement experience to create and direct Verus Valuations.

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