Capacity for Economic Recovery

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Funding

• What our industry needs for a sustainable
  recovery

2
Optimism and Liquidity are not the same thing!
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CFLA Thanks the Following

• CIBC World Markets
• Royal Bank of Canada
• GE Capital
• CIT
• MCAP
• National Leasing Group
• Foss National Leasing
• Leasemaster (JPLM)
• ADD Capital
• Blue Chip Leasing
• TAO

• Honda Finance Canada
• GMACFS
• Ford Credit
• Somerville National
• Centre For Spatial Economics
• DBRS
• SP
• Clubb Finance
• PayNet

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Today's Agenda

• Consequences of a weakened Commercial Finance
  Industry for Canadian Business and for the
  Canadian Economy
• The Canadian Credit Crisis and the impact on the
  Vehicle and Equipment Finance Industry
• What is needed to maintain the health of the
  industry
• Status of Available Sources of Funding
• Long Term Supply Stability Market Must
  Stabilize

5
Canadian Business CreditSource 2008 Federal
Budget- Minister of Finance

• Business Credit Outstandingin 2007

• Cumulative Change in Business Credit Since August
  2008

Billions of dollars
Billions of dollars
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Effective Flow of Capital to Canadian Business is
critical to the economic recovery

• Independent and Captive Finance Companies are
  effective at push strategies for deploying
  capital to SMEs
• Bank Lessors traditionally use a Pull strategy
• The combination of both strategies optimizes the
  amount of funding provided to main street Canada
• Without all channels the economic recovery will
  likely stall

7
Industry Canada Small Business Quarterly, August
2009

• Small businesses accounted for 97.8 percent of
  employer establishments (in Canada)
• Small businesses are defined as having fewer than
  100 employees, medium-sized businesses having 100
  to 499 employees and large businesses having 500
  or more employees
• There are 2,314,563 businesses that fit this
  category

8
Multiple Distribution ChannelsCritical to
optimizing amount of available capital

• Domestic Bank Lessors
• Foreign Bank Lessor
• Wells Fargo, B of A
• Key
• International Lease and Finance Co.s
• GE Capital, DLL, CIT
• CSI, ARI, PHH
• Domestic Independents
• NLG, MCAP, Equirex
• Foss, JPLM, Jim Pattison, TransportAction

• Captive Vehicle Finance
• Ford, GMACFS
• Honda, Toyota, Nissan, VW, Mercedes, BMW
• Captive Equipment
• Dell, Cisco, Pitney Bowes, IBM
• CAT, John Deere, CNH
• Floor Planning
• Clubb Finance

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Canadian Bankers Association August 2009, Pre
Budget Consultations Submission to the House
of Commons Standing Committee on Finance

• In the fall of 2008, just as the global
  financing market were at their most fragile,
  Canadian bank lending to businesses accelerated
  as other sources of financing contracted. Despite
  the fact that banks were increasing their share
  of the business financing market, they were not
  able to fill the credit gap completely.

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Interviews

• Finance Companies
• Small/Medium Independent Equipment
• Small/Medium Independent Vehicle
• Large Non Bank
• Consumer Vehicle Retail
• Fleet Vehicles

• Funding Sources
• Bank Sponsored Conduits
• Life Insurance Companies
• Non-Bank Conduits
• Export Development Canada (EDC)

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Why funding is still constrained!

• The Paradigm Shift is still in process

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Current OpinionTEC (Canadian CEO Organization)
Anderson Economic Report August 2009.

• A major concern with sustained recovery forecasts
  is whether they adequately incorporate the
  collapse in securitized credit flows and the
  longer-term implications of a U.S. balance sheet
  recession. Econometric forecasting models using
  time series data over the last 60 years do not
  know how to deal with these issues. In these
  models, if you keep interest rates low enough for
  long enough, you will get a V-shaped economic
  recovery.
• It (the Bank of Canada) finds that the level of
  its FCI is now above its 10-year average,
  implying that credit conditions have returned to
  normal. We find this hard to believe and are
  worried that the Bank of Canada is
  underestimating the problems in financial markets.

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Current Sentiment

• Wholesale funding and debt securitization is
  still basically shut-down on both sides of the
  border. Toxic collateralized debt obligations
  (CDOs) are still toxic. The financial system
  still has serious design flaws left over from
  creative financing. The shadow banking system is
  not working and it supplied over half of the
  credit growth in the U.S. (and a large part in
  Canada) over the past decade. Large corporations
  can access the debt markets but small and
  medium-sized businesses are finding their access
  to credit reduced. Commercial real estate
  borrowers facing debt repayments are unable to
  roll-over debt. Households and firms will
  continue to emphasize debt minimization. The next
  decade will not see a return of leveraged growth.
  It will take years for credit flows to return to
  normal.
• TEC (Canadian CEO Organization) Anderson Economic
  Report August 2009.

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Outstanding Commercial Paper CanadaPermission
to reprint or distribute any content from this
presentation requires the prior written approval
of Standard Poors.
Prior to Dec. 2007, Canadian ABCP not rated by
Standard Poors
ABCP
Bil. C
Non-ABCP
Note Data for 2009 as of June 30th. Source Bank
of Canada
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General Status of Funding
Type of Financing Terms Pricing
Portfolio Sales Loss Reserves Discount to Book
Warehouse Line Tighter Rate Lower Spread Higher
Bank Term Debt Tighter Rate Lower Spread Higher
Private Securitization Tighter Higher
ABS Tighter-If Available Higher
ABCP Tighter If Available Higher
Secured Credit Facility Positive Revisions 150bps over GoC Bond
EDC Undefined Undetermined
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Lost Funding Capacity
General Policy Change
Bank Lines Reduced Operating Credit Lines reviewed and reduced to average historical usage
Bank Term Debt Facilities Reduced Historical Available Credit Reduced or cancelled.
Multiple Ratings from agencies Need for two or more ratings eliminates access for many small finance corporations with excellent historical performance
Securitization Advance Rate Reduced Amount advanced per funding reduced requiring higher equity participation from Lessor
Change to Debt Equity Ratios Change in ratios requires equity to increase capacity at a time when equity is expensive.
Concentration by Lessee, Vendor and SIC Maximum Exposure per customer has decreased
Eligible Assets Restrictions on Vehicle Make, Model and Brand, Restriction on types of equipment
Minimum Credit Standards Higher Credit Scores required to qualify for funding
Documentation Requirements Higher level of due diligence and therefore greater administrative costs.
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General Status of Funding

• Portfolio Sales Buyers are looking for deep
  discounts. Sellers are those in need of cash
• Warehouse Lines Independent Commercial Finance
  is still nervous about bank commitment to
  maintaining or increasing warehouse facilities
  without a demonstrated growth in take out
  capacity (ABCP/ABS)
• Bank Term Debt Available to existing clients
  often with strong pricing but restrictive terms

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Private Securitization

• Small and Medium sized vehicle and equipment
  lessors have utilized the leverage and pricing of
  this product to build significant market share.
• The insurance companies funding this program have
  continued to support existing clients but the
  insurance industry is under significant strain
  and it has impacted terms and supply.

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Spread Changes
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Private Securitization

• Fewer Players Expecting Greater Performance
• Credit Box has Tightened
• Greater monitoring
• Pricing beginning to Stabilize
• Support for Existing Clients

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ABCP and ABS Market

• New Realities
• Global Liquidity Standard-A Limited Resource
• More Bond Ratings
• Greater Transparency
• Much Greater Fees and Administration Expense
• Higher Pricing
• Term more Popular than CP

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2007 ABCP Market

• Largest Funding Component of the Canadian
  Commercial Paper Market
• 50 of the non-government short-term debt market
• 21 Conduit Sponsors 65 multi-seller ABCP
  Programs
• No Rating Downgrades

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Current OpinionStandard and Poors Ratings
Digest August 17, 2009Canadian Finance
Companies are Tapping Foreign ABCP Conduits

• Domestic funding for Canadian ABCP has become
  more difficult to obtain. The decline which began
  in Mid 2007, is evident in the Bank of Canadas
  monthly data. The decline continued even after
  the completion of the nonbank ABCP restructuring
  in January 2009.

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Current Supply vs. Future Demand

• Access to supply now favors banks as a result of
  government support
• ABCP and ABS markets remain inadequate
• Loss of Non Bank Sponsored ABCP and ABS appears
  permanent.
• Diversity of Distribution is at risk

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Secured Credit Facility

• Intention and Commitment Strong
• September 17th Revisions Show Potential
• Success Needs to Be Measured by Flow of Funds
• Most Domestic Commercial Finance Companies are
  still ineligible and are now at a greater
  disadvantage.
• Curious Hidden Message

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Why Ignatieff on the Cover?
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Revisions to Secured Credit Facility Program

• Risk of Refinancing at Bullet Eliminated (True
  Match Financing of Cash Flows).
• Ability to customize documentation.
• Eligible Assets Expanded
• Standby Servicer
• Pricing and Allocation Process Amended.

32
Multiple Distribution ChannelsCritical to
optimizing amount of available capital

• Domestic Bank Lessors
• Foreign Bank Lessor
• Wells Fargo, B of A
• Key
• International Lease and Finance Co.s
• GE Capital, DLL, CIT
• CSI, ARI, PHH
• Domestic Independents
• NLG, MCAP, Equirex
• Foss, JPLM, Jim Pattison, TransportAction

• Captive Vehicle Finance
• Ford, GMACFS
• Honda, Toyota, Nissan, VW, Mercedes, BMW
• Captive Equipment
• Dell, Cisco, Pitney Bowes, IBM
• CAT, John Deere, CNH
• Floor Planning
• Clubb Finance

Capacity for Economic Recovery CFLA 2009 Annual
Conference - Ottawa
33
Domestic Finance Companies Insulate From Risk of
Global Exits

• ABN AMRO
• IRWIN Commercial Finance
• KEY Equipment Finance
• GE Capital

• National City Capital
• CITI Leasing Canada
• CIT
• GMAC
• Chrysler
• CoActiv

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Issues Remain

• Domestic Canadian Finance Companies are now at a
  major disadvantage.
• Available business credit and the disparity of
  terms need to be closely monitored.
• No clear replacement for non-bank sponsored ABS
  and ABCP sales exists.

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Export Development Canada

• Mandate has been expanded to flow to greater
  number of companies
• Finance Companies need to justify an Export
  related Financing Need
• Existing Relationship with Chartered Banks has
  enabled flow of funds
• No Structure to flow funding to Non-Banks

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The Bottom Line

• Domestic Independent Finance Companies Are At an
  Artificially Steep Disadvantage
• Diverse Distribution Channels are critical to
  getting funding to Main Street
• Vehicle and Equipment ABS and ABCP are
  fundamentally sound but buyers remain scarce.
• Fear is still driving the market. Secured Credit
  Facility will help restore ABCP and ABS supply
  and terms.