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Equipment finance, enabling strategic focus

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Author(s): Dirk Jan van Swaay, Focus Sector Head, ING Wholesale Banking

Demand for Port capacity in Europe is projected to grow at 5.2 per cent per year in the coming five years, while GDP will only grow at a third that rate. In Asia, port demand will rise an estimated nine per cent per year, compared with GDP growth of 7.4 per cent. Globalisation of Trade continues to fuel demand for Port Activities in Producing (Asia) and Consuming (Europe + Americas) countries. Increased demand affects the dynamics of stevedoring companies.

The need for efficient inter-modal inland and feeder networks affect the way stevedoring companies apply their equipment. With this dynamics, equipment finance like the operational reliability of your equipment is important. Is Equipment Finance enjoying the right attention from decision makers?

Financial Market involvement in the sector, both from the Equity and Debt side is driving the need to have a competitive financial perfor mance. Data on financial perfor mance is becoming a commodity and the analysis is a matter of applying basic financial skills. With this it is important to realise that measurement of performance in absolute terms, i.e. are you making money, is no longer sufficient.

The relative financial performance of a stevedoring activity is part of the Transportation Value Chain and determines the sustainability of the activity. The business is quickly lost if your competitor outperforms you on operational efficiency and cost. Why are volumes increasing? Why are Investors keener to invest
today? What is an Asset Conversion Cycle? Who supplies funding? What characteristics have the products and what is the cost?

Volumes

Demand for the Transportation Value Chain (all transportation costs between producer and consumer) is driven by GDP and the difference in unit production costs. Products with a long life cycle benefit from low production and transportation costs, while products with a short life cycle benefit from short time-to-market and  production is usually moved near consumer markets.

Stevedoring capacity demand can be expressed as a multiple of GDP; producing countries 1.2 times GDP and consumer markets like Europe and North America respectively 3.7 and 2.4 times GDP. These are robust figures.

Equipment Finance is needed from the embellishment phase onwards, thereafter Equipment Finance is needed for expansion, replacement or simply refinancing needs. The 24 recorded M&A transactions in Global Ports during 2005-2006 show a trend. Transaction volume of US$ 17.2 b indicates financial visibility. Intrinsic value, forecasted volumes and perceived efficiency improvements motivate goodwill payments and values have moved from five times EBITDA to 10-15 times EBITDA.

What are the main drivers for consolidation? These are: strong global networks, expertise, stable relationships, being reliable partners for the Major Lines, and open and integrated systems with the Logistic Service Providers.

Flexibility and Scalability are the drivers for growth and a sustainable product offering.

Asset conversion

Financial partners analyse size and speed with which the cash is moved. Starting with cash obtained from equity and or debt, the money is being used for assets to run the operation. Once the invoice is paid, cash is again available for the next cycle. Financial rewards in the form of interest or dividend payments reflect the risk that the source of funding is requiring from the operation.

Finance mechanisms

Each product has its own profile in risk, reward, tenor, flexibility, documentation, ownership, tax and scalability. If financing the asset is seen as a necessary evil, the  outcome could become an obstacle for g rowth. The product offer ing becomes less competitive because the financing structure prohibits management to adapt to changes. A standard rule of thumb is that the source of financing matches adequately the depreciation of the asset.

For Equipment Finance we identify the following sources:

Equity, Corporate Loans and Lease. Leasing is being provided by the Financial Services community and Vendors. The difference between Financial and Vendor Lease is the source. Operational Lease includes a Financial Lease and has additional components like maintenance, remarketing and a different ownership  structure.
 


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Edition 34

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