Oct

Babcock goes it alone on financing DAF customers

2014-10-27 11:16
The first big deal for Babcock Financial Services – and the biggest in DAF’s history in South Africa - was recently concluded with Ngululu Bulk Carriers where 134 DAF trucks were financed to the tune of R180-million - a great kick-off for this new division.

Imagine if the manager of your financial institution walked into your office and said: “We take on more risk than the traditional banks because we know your industry better than they do – and we’ll give a quick approval – and we also sell trucks”. Yeah sure – dream on writes Patrick O’Leary!

But no, this has now become a reality for DAF customers with the formation of a dedicated finance company, Babcock Financial Services, formed to provide finance for the purchase of DAF trucks.

Babcock, sole importer and distributor of DAF trucks in the southern African market since 2010, has announced that it has established a dedicated finance company, Babcock Financial Services thus joining other companies like Mercedes-Benz South Africa and Scania in offering their customers in-house finance solutions.

Wilna Steyn, CEO of Babcock Africa’s Transport Solutions Division, says this development has been long in the planning and she believes the offer of financing will significantly boost sales of DAF trucks in the South African market.

“This development will give us the competitive advantage of a full product offering against certain brands in this market and allow us to compete on the same level with others,” she says, adding that this milestone development also serves to demonstrate Babcock’s commitment to servicing and growing the DAF brand in this country.

Wilna Steyn, CEO of Babcock Africa’s Transport Solutions Division, says Babcock Financial Services has already enjoyed a huge take-up from customers from all parts of South Africa and predicts this will grow rapidly over the next 12 months.

Wilna Steyn, CEO of Babcock Africa’s Transport Solutions Division, says Babcock Financial Services has already enjoyed a huge take-up from customers from all parts of South Africa and predicts this will grow rapidly over the next 12 months.

Explaining the rationale behind this new move, Steyn says that when Babcock took on the DAF brand four years ago, they became aware of the importance finance plays in the extra heavy truck market.

“To address this issue, we initially entered into various joint ventures and partnerships with local banks to offer a solution to our customer base. However, these solutions did not fully meet all the requirements of our customers, who were really looking for an in-house finance solution. The establishment of Babcock Financial Services will now meet this need.”

FleetWatch finds this comment an interesting one. Some years back, the trend was for truck suppliers to enter into joint venture agreements with banks to better service the needs of the truck suppliers, the banks and the truck operators. The idea was for the banks to throw in their financial expertise while the suppliers would throw in their knowledge of the trucking and operational side of the industry. It was a sort of linking of hands and minds to ensure the best outcome for all.

This followed some really bad deals such as BOE’s financing of Cape Transport when only a few months after doing the deal, BOA called in the loan – and it wasn’t a small amount. These types of ‘sour’ financing deals were quite frequent and the banks were being burnt resulting in the trucking industry as a whole being placed on a high risk level by financial institutions.

I recall phoning BOE at the time and speaking to someone who was involved in that deal. I asked if, as a result of the bad debt, that the trucking industry would be placed on a higher risk assessment level. I was told: “Yes, it is now probably the highest risk sector on our books.” I replied: “May I put it to you that you are party to making this sector high risk through you financing the wrong type of deals as a result of you not have an understanding of this industry.” We didn’t talk long after that.

This graphic shows the offerings available from Babcock Financial Services. All DAF trucks financed via this in-house finance division will be sold with a repair and maintenance contract from Babcock Transport Solutions.

This graphic shows the offerings available from Babcock Financial Services. All DAF trucks financed via this in-house finance division will be sold with a repair and maintenance contract from Babcock Transport Solutions.

The point is that deals like this proved that the banks needed the ‘trucking’ expertise in the decision making process and thus the move to joint ventures. I recall the likeable Peter Mageza who, after leaving Autonet as CEO, joined Nedbank and then later moved to ABSA Vehicle and Asset Finance where he pushed hard for the joint venture concept. His experience of the industry as CEO of Autonet gave him the insight and wisdom into going this route.

It all seemed to be going well until 2008/9 after Lehmann Brothers, the fourth largest US investment bank at the time, filed for bankruptcy and in doing so, opened a can of worms on a cauldron of banking shenanigans that had been going on for some time under what became widely known as the ‘subprime mortgage crisis’.

This threw the entire world into a financial crisis the likes of which had not been seen since the Great Wall Street Crash of 1929. It hit South Africa towards the end of 2008 and set in firmly at the beginning 2009. The global ramifications were catastrophic.

By the time it hit South Africa, America had already entered into a severe recession with nearly 9-million jobs lost in 2008 and 2009. In South Africa, the impact was equally severe where, in our industry, truck sales dropped by 50% in 2009 and over 1-million people were retrenched across all sectors.

With everyone running round like chickens without heads, some of the banks panicked and came out with new rules for truck financing. I recall reading one of them at the time – 20% deposit and only for existing customers whose companies had a minimum of R100-million turnover a year. Yikes! That cut out the vast majority of the truck market. The SMMEs were certainly taken totally out of the picture.

The previously successful ‘joint ventures’ between banks and truck suppliers went up in smoke with one CEO of a major manufacturer saying he had to read in the media about the cancellation of the ‘joint venture’ agreement between his company and a major bank. The bank hadn’t even bothered to call him. I am not mentioning the names as that was a while back and we have all moved on from that horror period.

While the banks ran from the trucking industry, truck suppliers like Mercedes-Benz and Scania got closer to the financing needs of their customers and filled the gap with their own in-house finance offerings. Certainly there are still some joint ventures around but since then, I haven’t heard much of any new such ventures between the traditional banks and truck suppliers. I thus find it interesting that Babcock actually tried this route back in 2010 but also found it did not meet all their requirements.

One has to wonder how much ‘good’ business has been lost over the ensuring years by the traditional banks to these in-house operations. Just recently, the biggest order in DAF’s history in South Africa was signed with Ngululu Bulk Carriers where 134 DAF trucks were financed to the tune of R180-million. Who financed it? The newly formed Babcock Financial Services.

According to Steyn, apart from this order, Babcock finance has already enjoyed a huge take-up from customers from all parts of South Africa and she predicts that this will grow rapidly over the next 12 months. She adds that Babcock Financial Services currently has sufficient finance to cover more than a year’s sales and this will be steadily increased.

On the legality side of things, Babcock Financial Service is an independent legal entity fully owned by Babcock Africa (Pty) Ltd and has been registered with all the legal authorities to trade as a finance provider of capital equipment. The division sources its funding from Babcock Africa as well as from the local market. This probably includes a bank or two who still want a slice of the action but without any risk.

Important to note is that although the administration function has been outsourced to a reputable third party service provider, credit decisions remain with the management of Babcock Financial Services. This is in line with what Steyn says in the accompanying video clip that Babcock has a better understanding of the industry and therefore will make more qualified decisions than traditional banks.

The finance offering for the purchase of DAF trucks by qualified customers includes a wide range of structures to suit the customer’s business model. These include legal structures, payment-free periods, terms, interest rates, balloon payments/residual values and as mentioned, quick decisions for credit approvals. All trucks financed via Babcock Financial Services will be sold with a repair and maintenance contract from Babcock Transport Solutions.

So there it is. With Babcock being the latest company to offer its trucking customers an in-house finance solution, the move towards truck suppliers becoming a ‘one-stop shop’ is gaining momentum – and by all accounts, the customers love it?

Listen to Wilna Steyn, CEO of Babcock Africa’s Transport Solutions Division, explain to FleetWatch editor Patrick O’Leary, the rationale behind the creation of an in-house financing arm for DAF customers.

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