By Janice Sutton
David Dahm is Chief Financial Officer at LeasePlan USA. A 35-year veteran of the automotive fleet management industry, 29 of those years with LeasePlan USA, he is clearly an expert on financial matters affecting our industry. We were happy to have had the opportunity to talk with Dahm about the newest Financial Accounting Standards Board (FASB) lease accounting rule changes and what fleet managers need to know in 2017.
We also asked him to consult his crystal ball and give us his thoughts on where interest rates may be headed. The short answer? Up. So, what do we do now?
David, could you please give us an update on the upcoming accounting rule changes?
Changes in lease accounting rules have been 12, maybe even 15 years in the making, and it’s all about the convergence of the standards so the investment community, globally, could have one set of accounting standards. The new standards came out early in 2016; first the international standards in January, and then the US standards in February
The standards didn’t achieve their objective of having convergence, but they did achieve more transparency in terms of the leases now going back onto the balance sheet of the companies that report publically. These standards will come into effect in 2019, which as we sit here in mid- 2017 seems kind of far out there, but it really is not.
From a U.S. perspective, you have to be ready sometime in 2017, because when you do publish these statements in the new format, and the leases are on the balance sheet in 2019 and you do your comparable reporting from prior years, they must be in the new standard format. So, that is why companies have to get ready today to begin understanding how to report their leases on the balance sheet.
While the financial executives will be aware of the new accounting rules, what do fleet managers need to know?
Fleet management companies have worked to be very proactive with fleet managers across the whole spectrum of the United States, to make sure they have awareness because they are not really going to understand the full impact of what that means for their company. They really have to rely on their finance teams within the companies to reach out to them to say, I understand we have leases on our books from a corporate fleet management prospective. What is the impact on the balance sheets?
I am expecting, as we move through the rest of 2017, that there will be more awareness. There will be folks on our clients’ side calling us and saying: what do we need? What information can you provide? What we will do is ask them to engage their finance folks, and even perhaps their outside auditing firms to have a dialogue with us, or with any of the fleet management companies, so we can understand how their auditing firms are interpreting the open end TRAC lease. Then we can provide the information they are going to need if they are going to put that back on the balance sheet.
Would you give us your thoughts on where you believe interest rates are heading and how they would impact the fleet management industry and on your clients in terms of the total cost of ownership?
Interest rates have been at historical lows since the financial crisis of 2008/2009. We have seen on the short end of the yield curve, LIBOR, which is the predominate product in our industry, go down to 19 basis points, maybe 15 basis points – almost free money, alright? That follows the US Fed and the Treasury when they set rates.
If the change in leadership in Washington can see their way to lower tax rates to spur the economy, and the economy in the US gets much healthier, naturally the interest rates are going to rise. And that is kind of a good sign; a healthy economy can sustain and support higher interest rates.
So, everything that we read today says we will probably have two more increases at a quarter of a basis point between now and the rest of this year and probably a gradual increase in 2018 and 2019. You will see the natural rise in two-year, three-year or four-year Treasuries. For clients that fix, we will benchmark off of Treasuries. I think the industry normally benchmarks off of Treasuries, plus a swap. You will see the longer end of the yield curve kind of rising at the same pace as the short end of the yield curve.
Now, what does that mean for the total cost of ownership? Well, we are talking to a lot of our clients now to expect the interest side of their lease installment to go up, especially if they are on a variable rate product. If their treasury people feel that the short end of the yield curve is going to go up and rates are going to continue to rise, they may want to look at fixing their portfolio and their interest rates today to avoid that. Fixing today will cause a slight increase in their interest rates today versus a LIBOR rate, but they are protecting themselves against that LIBOR rate continuing to go up and eventually flipping.
So, it is a discussion we encourage our fleet managers to have with their treasury people, as they are very close to rates and how they move and how they fund their company.