'The asset finance market should see a swing back,' says Aldermore 

The UK’s Aldermore Bank is used to operating in difficult market conditions, but after a year of Covid, the SME finance provider is hoping for a swing back to more favourable conditions. Alejandro Gonzalez talks to Lee Rhodes, Aldermore’s commercial director of asset finance, to find out why he feels upbeat about coming out of UK lockdown 3.0.

It’s been 12 years since Aldermore Bank was born out of the ashes of the 2007/8 financial crisis with a plan to “redefine the role of banking and open up the world of finance” for their customers. Aldermore states that their successful formula, founded in tough economic conditions, gives them an edge in our current redefined financial landscape, with their mission of “turning problems into opportunities”.

Lee Rhodes, Aldermore’s commercial director of asset finance, is the man tasked with finding those opportunities for the bank’s SME customers now that Covid restrictions are being lifted across the UK allowing businesses to make investment plans.

Aldermore’s finance offering for SMEs is wide-ranging, as Rhodes explains: “Our appetite is broad, our pricing is fair, and we operate in a broad ticket space,” financing equipment from £10,000 up to £25m, with terms of between three months and six years.

“Our heritage is as a supporter of UK SMEs through brokers and intermediaries, with an offering that’s heavy in traditional asset finance markets such as construction, vehicles and agriculture, but we also support corporate clients,” says Rhodes.

Lee Rhodes, Commercial Director of Asset Finance, Aldermore Bank

Covid recovery

Rhodes says his optimism about the role that asset finance will play in the recovery of the UK economy is based on several factors, the first of which is the success of the government’s emergency SME support schemes, which the Chancellor is currently unwinding.

“In terms of government support, CBILS and the attractiveness of the BIP feature behind CBILS, are gone, replaced by RLS,” says Rhodes.

Unlike CBILS, the government will not provide Business Interruption Payments (BIPs) to cover interest payments (or interest equivalent for invoice finance and asset finance) as part of the Recovery Loan Scheme (RLS).

“To me, that says the asset finance market should see a swing back, a return to the fore of what has been to date, understandably, a loan and working capital market facility,” says Rhodes.

The other big driver behind future investment decisions is the Government’s recently announced Super Deduction, says Rhodes.

For expenditure incurred from April 2021 until the end of March 2023, the Super-deduction will allow businesses to claim 130% capital allowances in the first year on qualifying plant, machinery and equipment investments (and a 50% first-year allowance for qualifying ‘special rate assets’).

However, the UK’s major equipment and vehicle leasing trade bodies have raised reservations about the limits placed on this policy.

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The UK’s Finance & Leasing Association (FLA) has been critical of the Government’s Super-deduction policy. The FLA says that as only businesses subject to corporation tax, (such as limited companies), can claim the relief through hire purchase (HP) arrangements that transfer ownership of the asset at the end of the lease to the lessee, it means that short-term lease (and hire) arrangements are exempted.

“The idea that businesses grow and become more productive by buying plant and machinery outright is outdated. Leasing and hire make far more sense. It preserves cash in the business and can avoid having expensive equipment that stands idle," according to Stephen Haddrill, the director general of the FLA.

British Vehicle Rental and Leasing Association (BVRLA) have joined the FLA in urging the Government to widen the scope of the Super Deduction.

Gerry Keaney, chief executive of the BVRLA, said: “The Government understands the important role that the vehicle leasing sector plays in delivering the UK’s road transport decarbonisation goals. This makes it all the more disappointing that leased vehicles have been omitted from the eligibility criteria of Super-deduction.

“This is a huge oversight and is an example of where the Government has failed to align its fiscal and environmental policies,” said Keaney.

2020: Year of Covid

“The demand for asset finance in the UK over the last year has been suppressed as other forms of debt have come to the fore and business owners now want to address previously deferred investment decisions that have become acute as they see an end in sight of Covid restrictions,” says Rhodes.

In March 2020, following the Government’s advice to stay at home, 99% of Aldermore’s workforce moved to remote working within two weeks of lockdown and no staff were furloughed or made redundant, according to Aldermore’s financial statement for the year ending June 2020.

At the height of the crisis, customer-facing workers dealt with thousands of more customer queries than usual, MotoNovo, Aldermore’s auto financing sector, was reported to have handled around 30,000 calls, more than triple the normal amount.

March also saw Aldermore become an accredited lender of the government-backed asset finance variant of the Coronavirus Business Interruption Loan Scheme (CBILS) and in June this accreditation was extended to cover invoice finance.

Aldermore’s performance

Aldermore Bank is the UK’s fourth-biggest asset finance provider, behind Lombard, HSBC and BNP Paribas, according to a top 50 listing published in May 2021 by the Asset Finance Policy.

Aldermore’s ‘neobank’ competitors appear much further down the list: Clydesdale Bank (21st), Metro Bank (33rd), Hampshire Trust Bank (37th), United Trust Bank (42nd) and Shawbrook Bank (45th).

Rhodes makes the point that in a UK league table made up of only broker-introduced asset finance providers, Aldermore’s position would be even closer to the top spot.

In its latest financial statement, Aldermore’s total lending stood at £12.4bn for the year ending 30 June 2020, of that figure, approximately £1.86bn was in asset finance (representing an 8% decline on £2.02bn in 2019).

For the year ending June 2020, Aldermore reported net lending in asset finance was down 5% to £1.9bn (from £2bn in 2019) due to both Covid-19 and a transfer of the dealer channel to MotoNovo in June 2019.

By comparison, the Finance & Leasing Association (FLA) reported that for the 12 months to June 2020, its members reported a decline in asset finance new business of 15%.

Aldermore’s PE beginnings

Aldermore’s short history has spanned some turbulent economic times. The company was founded in 2009 when two private equity (PE) companies – Morgan Stanley AIP in the US and AnaCap in the UK – saw an opening in the wake of the 2007/2008 financial crisis.

The big banks, ailing from loan impairments and heavily dependent on government bailouts or improvements in the national economic health for their own recovery, had largely withdrawn from business lending and financing.

By way of comparison, in the six months to February 2009, net lending to businesses by foreign and domestic banks had fallen to £8.6bn from £53.5bn in the same period a year earlier, a House of Commons Treasury Committee reported in May 2009 citing the Bank of England.

UK policymakers encouraged new competition to the big established banks – Lloyds, RBS, Barclays and HSBC – which prompted a number of “challengers” or “neobanks” to seek banking licences.

One new bank that sought a licence came out of a cross-Atlantic private equity proposal: Morgan Stanley AIP and AnaCap agreed on a deal that saw AnaCap buy Ruffler Bank, later renamed Aldermore Bank plc, while Morgan Stanley AIP committed to a £45m equity injection to support the “specialist” provider for UK SMEs. The deal also made history, with Ruffler becoming the first UK deposit-taking institution to be bought by private equity, with a management buy-in team headed by Philip Monks, a former Barclays executive.

The prolonged period of low interest rates that followed and sluggish economic growth had squeezed earning, while the pound’s fall from 2015 made UK corporates cheaper for foreign buyers. The effect was that UK banks were ripe for takeovers, bank pundits noted.

In late 2017, AnaCap executed its exit strategy and sold its interest in Aldermore for £1.1bn to FirstRand Group, a South African financial services provider. In buying out Aldermore, FirstRand said the purchase offered a good fit for MotoNovo, a Welsh-based vehicle financing business, it acquired in 2006, and so in May 2019, Aldermore announced that its incorporation of MotoNovo was complete, just when Aldermore could, on its 10th anniversary, boast that it had chalked up 10 years of consecutive growth.

Despite the Aldermore Bank success story, the UK’s challenger bank experiment had not proven universally successful, far from it. Metro Bank and CYBG-owned Virgin Money – both providers of asset finance – have variously struggled with profits, bad loans and accounting errors.

In 2017, a consortium of private equity buyers acquired Shawbrook Group plc in a public-to-private transaction valued at £868m. Meanwhile, Santander, announced in 2019 that it would begin winding down its asset finance UK operations, valued at £800m.

Available evidence suggests SMEs have not benefited greatly from challenger bank lending during the pandemic. As the Government relied on the incumbent banks to help design and implement its emergency Covid schemes, the share of total gross lending to SMEs by challenger and specialist banks slipped to 31 per cent in 2020 from 48 per cent in 2019, according to a report from May 2021 by the Social Market Foundation, a cross-party think-tank.

In March 2021, Aldermore's South African parent, FirstRand Group, reported a 20% decline in normalised earnings due to bad debt provisions but said it would offer a dividend to shareholders after the company recovered faster than expected from the pandemic.

Today, 12 years after Aldermore Bank’s birth, Monks has handed over the CEO’s reins to (another) ex-Barclays executive, Steven Cooper, as he seeks a new horizon – his retirement.

Rhodes’ own history with Aldermore dates back to 2014 when he joined as head of its wholesale and structured finance division. His background in asset finance includes a three-year spell at investment bank Kleinwort Benson and 10 years with the UK branch of ING, covering the period that saw the Dutch bank exit the UK market in 2012.

In July 2020, he took up his current role – overseeing the wholesale as well as the asset finance broker side of Aldermore – just as Covid briefly went into recess for the summer.

SME borrowing and CBILS

Forty-three per cent of SMEs in the UK sought financial support in 2020, more than three times the level in 2019, according to an annual report by the British Business Bank (BBB), published in March 2021.

The BBB reported that gross bank lending was up 82 per cent year-on-year to £104bn in 2020. Almost 70 per cent of this lending was from the two main government-backed coronavirus lending schemes (CBILS and BBLS). Approximately 92,500 SMEs borrowed £22bn through CBILS.

Post-pandemic underwriting

In the last year, due to the huge uptake in Covid lending schemes, questions have been raised about the creditworthiness of SMEs at a sector and subsector level, the degree of digital disruption they are experiencing and their demand expectations coming out of the pandemic.

Equally, sources of data typically used to form credit-risk evaluations have become obsolete. The six or 12-month-old metrics on which lenders conventionally relied in the past are no longer as useful in evaluating borrower creditworthiness.

“Providers can’t deny or avoid the fact that debt has been taken on by businesses through government schemes, only now the analysis of how business meet their obligations and investment goals will be different,” says Rhodes.

“The way Aldermore, and the business finance industry more generally, looks to underwrite SME transactions in the future will need to evolve and become more forward-looking.

“In this context, sector analysis will become important while the benefits of Open Banking will allow for greater understanding of SME finances through access to live financial information,” says Rhodes.

But the best evidence that SMEs are feeling upbeat about summer is anecdotal, says Rhodes. “Among our clients, we’re seeing a desire to take advantage of wider opportunities in the market and so the predicted bounce in the economy is allowing businesses an opportunity to plan for growth.

“We’re seeing resilience in the market from our SME customers in our back book and also in the quality of the funding proposals coming in,” Rhodes adds.