Funding: Break clauses abound as companies try to hedge their debts

John Lewis finds that as companies try to hedge their debts, break clauses are abound. 

Greater flexibility is sought as firms want their contract hire agreements to have less painful penalties should the markets decline

Brexit, the seemingly-endless negotiations and the climate of economic uncertainty created by the whole scenario has not resulted in any slowdown in fleet activity, according to funders. 

MAN Financial Services director Peter Collins says: “The customers we come across don’t appear to be worried about any of it. So far as they’re concerned, it seems to be a bit of a red herring.”

His views are supported by Lex Autolease head of commercial vehicles Richard Tilden, who says: “People are obviously being cautious and have got half an eye on the way the economy is going, but we are not seeing any slowing up in activity.” 

Tilden is responsible for around 100,000 vans and light trucks grossing at up to 7.2 tonnes. 

Collins’ clients are looking for flexibility in the contract hire agreements they sign, but that has been the case since before the Brexit referendum, he says.

“They want break clauses and they want to be able to get rid of a certain percentage of their vehicles if they have to without facing any penalties,” he comments.

David Potter, commercial development director at Asset Alliance, has also seen a growing demand for flexibility.

“Some customers want a five-year deal, but with a break clause every 12 months,” he says.

Enterprise Flex-E-Rent vice-president and general manager Danny Glynn adds: “Customers are looking for more flexibility and in some cases that may mean extending existing leases on an informal basis.” 

Flexibility comes at a price; or at least, it should, Collins says: “It ought to attract a premium but market forces and the level of competition mean that there is always somebody prepared to offer a cheaper package.” 

He adds: “What we sometimes find is that we will almost have got the agreement signed when the operator turns round and says ‘you can have the deal, but I want a two-year break clause’.” 

Colin Melvin, sales director at Fraikin, which has 10,000 vehicles, says: “Rates are static. It’s a tough environment.”

Enterprise’s Glynn agrees, but adds: “I’ve never known a time when it wasn’t.” His company encompasses 21,000 vans and 3,000 trucks.

Customers are well aware that operations such as MAN Financial Services are there to help manufacturers shift metal, and, as a consequence, they are likely to accede to the request.

“We’ve been broadsided like that on several occasions and I’m sure other manufacturers have too,” Collins observes ruefully.

Potter remarks: “Customers like contract hire and want increased flexibility but that doesn’t mean they’re prepared to pay more for it.” 

Hire-and-reward fleets are looking for a shorter and more flexible deal because that is the sort of contract they are offered by their own customers these days – a trend Collins recognises.

“As a consequence we try to match the contract we offer with the contract they’ve got to work with if we possibly can,” he says.

It is an approach that is meeting with some success.

“We fund 69.5% of the vehicles we supply on average and that rose to 85% during one month recently,” Collins adds. 

The line-up now includes the TGE van, a rebadged version of the latest Volkswagen Crafter.

While many customers who want tractor units are certainly after short-term arrangements – and truck makers have up until recently been obliging them with a stream of energetically-promoted two-year deals – businesses in search of rigids usually want to keep them longer, according to Potter.

That is especially the case if they are own-account operators who need vehicles equipped with specialised bodywork tailored-made for a particular type of job.

“In those circumstances five-year deals are often the norm,” he says.

Melvin adds: “So far as rigids are concerned we’ve seen contract hire terms extended from four to five years to from five to six years. We can go to seven or eight years.”

Own-account operators, too, can sometimes want shorter contract hire deals.

Earlier this year, Fraikin supplied a fleet of 19 new commercial vehicles to water cooler specialist Waterlogic, strengthening a 13-year relationship with the company.

This latest full-service agreement is structured over four years rather than the six years favoured previously with an eye to enhancing vehicle reliability and uptime for a fleet that is worked hard and runs fully-laden for most of the day.

Fraikin also recommended a switch to Iveco Daily 7.2-tonners which replace the 7.5-tonners from another manufacturer employed previously.

Although they gross at a lower weight, the Ivecos offer a more-generous payload capacity.

Complete with eight-speed automatic boxes, the 7.2-tonne chassis cabs are fitted with bespoke curtainsider bodies built by Transload.

The deal includes servicing, maintenance and repair, replacement tyres, routine safety inspections and 24/7 breakdown support.

Last spring, Fraikin supplied five new trucks to meat wholesaler Deliserve under a five-year contract hire agreement; the first deal the companies have done.

The line-up consists of two Mercedes-Benz Atego 15-tonners, two DAF LF 12-tonners and a 7.5-tonne Atego.

A key reason why Deliserve opted to do business with Fraikin is the availability of the FraikinView app, which enables defects to be reported online, provides users with up-to-the-minute progress of breakdowns and stores important vehicle-related documents.

“FraikinView puts a lot of vital information at our fingertips,” says Deliserve transport manager, Tom Coburn.

“Being able to see at a glance which vehicles require maintenance means we can schedule servicing in advance and plan our workloads accordingly.”

Fleets still seem happy to take vans on contract hire for four or five years, says Tilden, and, if anything, are keeping them for slightly longer than they were thanks in part to greater reliability and durability.

“Nor do we get many requests for break clauses,” he adds.

What customers are certainly asking for, however, is advice on alternative fuels given many urban authorities may seek to ban anything that is not low- or zero-emission from their roads.

Fortunately the wholelife cost of an electric 2.0-tonne-gross van is now comparable to that of its diesel equivalent, claims Tilden.

He explains: “Before, it was all about fleets making a statement about how green they were.” 

Now they are realising they may have no choice but to use zero-emission vehicles on certain types of work, he says, and want to know what they should use and how much it will cost. 

Glynn adds:“Over the past 12 months customers have started to look at this whole area a lot more seriously.” 

There are other conversations being had about power sources.

“We’re also advising operators to consider petrol vans in circumstances where using a diesel van may result in issues with the particulate filter,” Tilden says.

If a vehicle has to be returned mid-way through a contract and a break clause does not apply then the lessor will look carefully at the reason for the breach before imposing any penalty.

Melvin says: “Maybe the customer wants to move out of a 7.5-tonner to a 12-tonner he’s going to take from us instead. If we can re-deploy the 7.5-tonner to another customer then everything should be fine.”

If it is a straightforward severing of the agreement then the leasing company will seek to recover any loss made on the disposal of the vehicle concerned or possibly a percentage of the outstanding rentals for the rest of the agreement.

“That could be as much as 25% to 50%,” says a senior industry executive.

If the customer looks likely to generate more business in the near future  and the leasing company wants to compete for it then that is sure to affect the size of any charges levied.

The intense level of competition is prompting Renault Trucks commercial director Nigel Butler to wonder if the current way in which vehicles are supplied on contract hire is sustainable.

“I’m starting to question the economic model,” he says.

A key difficulty is that trucks have got more expensive thanks to the extra costs imposed by Euro 6 plus the fall in the value of sterling in the wake of the Brexit vote.

Competition makes it difficult to recover the higher asset price and residual values offer little relief because the used market is over-supplied.

Exporting used trucks – the traditional escape valve if domestic demand is lacklustre – is proving problematic because many developing nations are struggling to cope with Euro 6, says Butler.

“The cost of maintenance is rising too,” he adds.

Customers cannot expect to be insulated from price rises forever, says Potter, because there is a limit to how far providers can absorb them.

“I think we’ll start to feel the full effect of price increases next year and the industry will have to pass them on,” he comments.

“We’ll definitely see prices go up in 2018 although I still have a pretty positive view of the market.”

When contract hire rates ultimately increase, customers may decide to consider other modes of acquisition, Butler suggests. This could include opting for a finance lease, HP or outright purchase.

Such alternatives are subject to some of the same pressures as contract hire.

The latter’s appeal may start to decline because public sector organisations and major groups will be obliged to show such agreements on their balance sheet from January 1, 2019 thanks to the introduction of a new lease accounting standard.

Meanwhile, contract hire – albeit with break clauses – remains a popular option among commercial vehicle operators. “It’s what 95% of our customers are asking for,” says Potter.

Dawsonrentals managing director John Fletcher, who is responsible for an 11,000-strong fleet, points out that contract hire means fleets are not tying up capital – key when times are uncertain and the business needs cash.

“In a climate of uncertainty contract hire has the further advantage that the rate you pay is fixed, and that’s good news, too,” he adds.

Also, the figures were being fixed at a time when interest rates have been at historically meagre levels. 

“We had got used to 10 years of low interest rates but that changed a week ago,” says Fletcher. 

The bank rate doubled from 0.25% to a still modest 0.5%. “That should make little real difference,” says Butler of Renault Trucks.

However it signals that the days of stagnant interest rates are at an end and customers will, of course, be paying slightly more.  

Predictability in unpredictable times was one of the main reasons steel piping supplier Shawston acquired two DAF LF 7.5-tonners and a Ford Transit from Asset Alliance last year on a five-year full-service contract hire agree-ment. 

“The fixed-price monthly pay-ments make it easier for us to manage a vehicle’s lifetime costs and effectively provide us with a warranty for the full five-year term,” says Shawston group operations manager Steve Wilson.

Operating out of Shawston’s site in High Wycombe, Buckinghamshire, the three vehicles deliver a range of piping and related products to building sites across London, occasionally venturing as far afield as the West Midlands and Dorset. 

The DAFs cover up to 28,000 miles annually and work a five-and-a-half-day week.

Return conditions can still be a bone of contention with some operators worrying they will be invoiced for every minor dent and scratch.

To ensure fairness, Asset Alliance adheres to the conditions recommended by the British Vehicle Rental and Leasing Association (BVRLA). “We do not treat damage as a profit source,” says Potter.

However, customers can sometimes be their own worst enemies, he contends.

Before they send any asset back to a leasing company they should check it carefully and photograph it, he advises.

If they fail to do so and the lessor sends them a bill four or five weeks later for damage that has supposedly been done, then they will not know whether it is right or wrong.

Long-term rental arrangements remain popular with some businesses. 

Last year saw Asset Alliance launch its Flexi-Hire division, which it says offers flexible medium- to long-term rental deals, with a £20m investment.

However, the increased prevalence of short-term contract hire deals means the difference between the two types of arrangement is blurring.

That said, long-term rental still allows vehicles to be returned more rapidly to the hire company than most short-term contract hire deals do. 

Once again such flexibility has to be paid for, although competition for business can give the customer some scope for negotiation.

Vans and trucks out on long-term rental tend to be built to standard specifications and not overly tailored to bespoke requirements. 

That is because the hire company will want to rent them out again as quickly as possible if they are returned at short notice and so the vehicles need to appeal to as many people as possible.

Fleets are not noticeably keen on obtaining an operating lease from one provider and a SMR agreement from another, Fletcher says.

“What they want is an entire contract hire package from a single source that will take care of everything – every nut, bolt and wiper blade – guarantee the uptime of their vehicles and ensure compliance,” he contends. 

“That is important for O-licence holders,” Fletcher adds. “If they lose their O-licence, they can’t operate their trucks.”

Comprehensive maintenance records are vital if an O-licence holder is required to demonstrate compliance to representatives from the Driver and Vehicle Standards Agency (DVSA) and will be essential for the achievement of Earned Recognition.

Tilden says: “In effect you become the fleet manager’s filing cabinet; and one that needs to be instantly accessible.”

Sponsor's comment 

Andy Hill
By Andy Hill, commercial vehicle manager, Lex Autolease

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