The walk to recovery
Money (or, rather, finance) really does make the world go round. So – as truck manufacturers and operators discovered during 2009 – there can be multiple repercussions when that finance suddenly dries up. NADINE VON MOLTKE evaluates how the local trucking market has responded to this challenge.
It all started towards the end of 2008, when ABSA’s Commercial Asset Finance (CAF) division dropped a bombshell: forthwith, ABSA CAF would be dramatically tightening its lending criteria for commercial transport operators. A letter to this effect was sent to all the division’s clients in early December 2008, detailing these changes.
According to the letter, ABSA would no longer consider doing business with new start-up operations, customers with no current exposure to lending institutions, or customers wanting to do first-time business with CAF.
Lending criteria for existing clients also changed. In order to secure finance they would now need to meet a strict set of criteria. Not only would CAF require proof of turnover in excess of R100 million per annum, together with a ratio of free-cash-flow-to-debt greater than 30%, and a debt-to-turnover ratio of less than 40%. Over and above this, a minimum deposit of 20% would be required; no cross-border transactions would be allowed; VAT would need to be repaid in equal instalments over the first six months or as a lump sum in month four; and the maximum lending period for new trucks would be 60 months, with 36 months for used assets.
While ABSA’s knee-jerk reaction to the global credit crisis was the local transport community’s first reality check in terms of what was to come, it was unfortunately not the last.
“Transport is a high-risk, volatile market,” explains Chris de Kock, executive head, sales and marketing at WesBank. “When the economy experiences a dip, the transport sector follows suit.” The result was painfully obvious throughout 2009: contracts were lost; operators began under-cutting each other to secure jobs at the expense of profits; finance became increasingly difficult to obtain from finance houses wary of operators who were not in tight control of their businesses; and truck sales dropped by almost 50%.
Fingers were increasingly pointed at finance houses, who were seen to be a large contributor to the industry’s woes. “We were involved in many discussions with operators who were under pressure, particularly operators who were considering financing new trucks, but whose financial status or balance sheets were not conducive to more debt,” explains Kathy Bell, head: transport solutions, Standard Bank Vehicle and Asset Finance. “In fact, many of these operators’ numbers reflected severe declines in transaction volumes. For many of them, it was more prudent to manage their businesses with even tighter controls until the economic cycle improved, rather than increasing their debt,” she continues.
“Our approach to the transport industry has always been consistent. This includes stress-testing cash flows and evaluating the usual financial/balance sheet information,” she explains. “We also conduct an in-depth analysis of an operators’ business. This includes an evaluation of the entire business, from what type of operation it is, to what management systems are in place, to how drivers are selected and trained. We even evaluate how the transported commodities are loaded and off-loaded, how routes are scheduled, and how the operator’s payload efficiency factor is measured. The types of contractual arrangements in place and the quality of the relationship that exists between the consignor and consignee are also examined, and become a factor in considering the sustainability of the operator’s business.
“Each operator might work according to very different benchmarks, which they use to ensure that their businesses are continuously striving towards achieving the lowest cost of operation. However, the common denominator in all successful transport operations is having excellent controls in place and being able to respond to any exceptions to normal operating conditions timeously, thereby remedying these issues before costs exceed profit margins.
“It is encouraging to see that established operators who have managed every aspect of their businesses have survived the worst economic conditions in local and global markets since the 1930s,” she adds.
Tougher operating conditions, fewer contracts and a tight market certainly served to separate successful operators from those who could not manage their businesses efficiently in 2009. However, more stringent operating conditions also contributed towards creating a new business model in which finance institutions, manufacturers and operators now work closely together to build successful businesses.
“A year ago our approval rate was 20% of all applications that were tabled,” says Michael Kaiser, managing director of MAN Financial Services (SA). “Today we approve 80% of all tabled applications. We have learnt a lot more about the businesses of our customers this past year. Our sales team no longer points potential and existing MAN clients towards our financial services division; they are portfolio managers who analyse, evaluate and support our clients’ businesses throughout and following the financing process.”
In this way financiers and manufacturers alike have a better idea of the businesses they are financing, which in turn allows them to help their clients operate successfully.
“Standard Bank, together with the manufacturers whose products our clients use, work together to support our customer base,” explains Bell. “This support process may entail visiting the customer’s main depots to understand how they ensure that all relevant legislation and regulations are adhered to, as well as discussions pertaining to pending legislative changes, such as AARTO, and the potential impact of these changes on their businesses, whether positive or negative.
“However, the transaction volume for new business in 2009 which required specialist input was significantly down when compared to 2008,” she admits. “In support of customers who were experiencing cash-flow pressures, dedicated expertise was provided and one-on-one discussions with customers were conducted at their premises across the country. Where possible suitable arrangements were made and payments were restructured. If an operation indicated viability in the medium to long term, customers were assisted.
“In a nutshell, industry felt the effects of the supply of transport services outstripping demand. The result was tight margins under pressure, as some operators sacrificed safety margins for turn-over. Many less experienced operators were tempted to cut costs instead of maximising efficiencies and enhancing productivity. We encouraged our clients to run the most efficient businesses they could whilst adhering to vehicle maintenance and driver safety priorities,” Bell insists.
WesBank’s De Kock reveals that another change resulting from last year’s upheaval is a greater sharing of risk. “We made good inroads into this market during 2009, but these were based on a very different model to the way commercial finance previously worked.”
In particular, WesBank has formed a number of alliances to penetrate the trucking market. “The pooling of skills and sharing of risks has made these alliances very successful,” he says. “Both supplier and financer now share the risk when offering sustainable financing solutions to the client.
“Operating contracts have to be firmer than ever before, which is of course beneficial to transporters. Ultimately, the entire value chain needs to work more efficiently: from the manufacturer supplying the right products to its clients, to how the transport operation works on the ground.”
In this way, of course, everyone’s investments are secure – from the bank to the operator to the manufacturer. Which is why changes to the more relaxed finance model of 2005/6 have the potential to create more sustainable operations. Nevertheless, the real winners during 2009 (if any winners can be said to exist in such a market) were the independent, manufacturer-orientated finance houses.
“As an independent finance house we are very flexible,” explains Gerard van Keulen, managing director of Scania Finance SA. “We can make quick decisions; we are not hindered by lengthy credit approval processes and, of course, the availability of our services supports the success of our sister company, Scania South Africa, in the local market.”
The trucking expertise of Scania South Africa’s staff – coupled with the financial expertise of the team at Scania Finance – provides clients with a solid skills base that understands Scania trucks, local transport conditions, how a successful operation is run and, of course, how to protect assets.
“One of the reasons why Scania Finance has been so successful in South Africa is because we are quick to react to our customers and their needs,” Keulen elaborates. “We nurture open and comfortable lines of communication with our clients, which means we are aware of any problems as they occur and are able to assist in solving them.”
Of course, if a customer is not performing, missing payments and avoiding the Scania Finance team, they are equally quick to react. “If an asset needs to be recovered we do so quickly and efficiently. Recovered assets need to re-enter the market as quickly as possible to keep the brand strong and our books healthy. If we are in good shape, our ability to support our customers is that much stronger.”
Once again, the financier’s close relationship with its sister company ensures that recovered assets avoid the auction block and instead re-enter the market through clients with whom Scania either has an existing relationship or will foster one.
On the whole, however, debts are protected because the assets are protected. Full packages for Scania clients include not only the facility to finance a Scania asset, but insurance and maintenance plans to keep that asset in full working order.
Similarly, Mercedes-Benz South Africa and MAN Truck and Bus also benefited in 2009 through their ability to offer in-house finance.
More recently, Nissan Diesel South Africa created UD Financial Services – a joint venture between the manufacturer and WesBank – to facilitate credit for Nissan Diesel clients.
“We are positive that providing these facilities will give us back some numbers in the extra-heavy market,” reveals Raymond Shulz, manager: marketing and retail services at Nissan Diesel SA. However, he is quick to point out that the facilities will need to be based on sound business principles.
“UD will not influence credit decisions solely for the sake of market share,” he says. “We want our customers to have access to finance, but we also want a sustainable local transport industry.”
The year ahead
“We do not expect the truck market to really start picking up for at least another six months,” comments De Kock. “There is too much capacity within the market in terms of trucks and heavy machinery at the moment. Until that capacity is used up, corporates will simply not be buying.”
Shulz is also cautious about the immediate future of the truck market. “The credit market in general must still recover from the shockwaves of 2009,” he believes. “At least there are no longer limitations on operators such as a minimum of R100 million turnover, which should open up access to finance; but operators’ financials must still prove the transaction to be viable.
“We are, however, seeing some leniency with deposits as well as an improvement in credit,” he continues. “Last year outright declines were the norm rather than the exception. I am relatively certain we will see an increase in the percentage of approvals as we progress into 2010.”
According to Bell however, 2010 has started with operators entering replacement cycles for the prime movers in their fleets. “Many operators extended their replacement cycles by a few months from last year to monitor the resilience of the economy and the return of meaningful freight and goods volumes on their existing contracts, prior to committing to the purchase of new vehicles,” she explains.
While expectations of at least a partial recovery in the market can be seen across the board, it is equally clear that 2009 has left its mark on the local truck finance industry. “After last year we have learnt to walk rather than run,” says Keulen. “2009 was Scania Finance’s best year to date since entering the South African market a decade ago, but it also taught us to be more alert to our customers’ needs so that together we can ensure a viable business.”