A quiet swell has been building for more than a decade, and it is breaking sharply on the reef of the COVID-19 pandemic and response.
There is now a mountain of assets on corporate balance sheets in the mobility economy and with cash-flows set to return only progressively, some iconic businesses are left seriously exposed -- witness the bankruptcy of the 102-year-old Hertz Global Holdings company.
New Mobility start-ups alone have activated an additional $56 billion in investments since 2010 for “e-hailing,” much of it presumably for mobility assets, to fuel their aggressive search for mobility share, growth and revenue in the recent years. This was reported by McKinsey in 2019.
Ten years ago mobility assets, cars mostly, were on private balance sheets. Today we estimate that more than 20 percent are now on corporate balance sheets. That amounts to approximately 120 million cars or 2.5 trillion euros.
That is a huge sum resting on a relatively small number of corporate shoulders, and this centralization of capital is only accelerating as private consumers move toward use-based mobility, such as leasing, subscription, renting or sharing.
Often touted as a solution, the asset backed securities (ABS) market is both marginal and expensive. According to a study from the University of Darmstadt, fewer than 15 issuers in both the U.S. and Europe are active, and according to trade group SIFMA, 2019 lease and financing contracts packaged up, represented only 130 billion euros of corporate mobility assets in both regions, of which Europe was a paltry 24.5 billion euros. That is less than 6 percent of the outstanding assets.
In addition, with single transactions normally between 1 billion to 1.4 billion euros, the ABS market is not useful for medium-sized mobility players, start-ups or dealer groups.
So what? Depreciation and interest as reported by Deloitte in its 2018 analysis of fleet management in Europe accounts for 53 percent of the cost of mobility, but the capital market that sets the price of depreciation is volatile, illiquid and slow. And at times like these it is frozen.
In other industries such as airline travel, energy or agriculture, financial derivatives are used, namely futures contracts and options, to hedge the key prices or costs and protect their operational business from volatility. It's typical for airlines to hedge the price of jet fuel to secure their profitability, so why not -- if you are a mobility company -- hedge your depreciation and secure the basis of your mobility pricing? At a time when industry disruption is the new normal, this would allow mobility businesses to focus on operational excellence.
For example: Trade the 36-month vintage of a BMW 3 Series diesel. A mainstay of corporate mobility in the UK, its value has been volatile and it is a desirable asset at the right price. After a long decline, values are recovering despite the headlines.