Business NOTES

October 19 1998

Business NOTES

October 19 1998

The inside story at Newcourt Credit

On the day it was rumored that the company had lost Lucent as a client, the partners toasted a renewed five-year deal

Peter C. Newman

The Nation’s Business

Earlier this month, when the shares of Toronto’s Newcourt Credit Group Inc., the world’s second largest non-bank financial institute, were in free fall, hourly rumors swept the boards. None were more disturbing than a story out of New Jersey, its American headquarters, that Steve Hudson, the firm’s founder and CEO, had just been fired. Chuckling, Hudson recalls that as soon as he heard that particular rumor, he immediately phoned Newcourt board chairman David Banks, and jokingly asked: “David, is there something going on I didn’t know?” Then Hudson adds, still laughing: “Though there was one moment when losing my job didn’t seem like such a bad idea.”

Banks, an American establishment type and an international finance expert formerly with the Chase Manhattan Bank, was chairman of AT&T Capital when Newcourt took it over a year ago. He entertains no doubts about Hudson’s or Newcourt’s future. “The tall poppy theory certainly applies to Newcourt,” Banks says.

“Despite its success, people keep asking me, can Newcourt really be that good? Is Steve Hudson really that good? And I tell them, yes they are. This is a very disciplined, harddriving company that thrives on putting intelligence and integrity as close to the market and its customers as it can. It’s a formula that I’m impressed with. And it will prevail.

Our results will calm people down.”

That has so far not been the message of the stock markets. Having been up to $77 in mid-March of this year, which was the equivalent of an unrealistic 30 times earnings,

Newcourt’s shares were due for some correction. And they got it. At week’s end, they were trading at $33.80. “At that high level, the stock price was reflective of the company’s growth,” Hudson says, “but this volatile market doesn’t recognize or want to pay for growth—or the fact that we’ve met or exceeded expectations in each of the past 12 years.”

Another rumor claimed that Newcourt had lost its profitable leasing arrangement with Lucent Technologies, one of the largest of the American high-tech firms. (Newcourt, among other things, provides Lucent—and Newcourt’s other clients—with the financial backing needed to facilitate purchases by Lucent’s customers.) Ironically, the very same day that rumor went public, Lucent and Newcourt executives were in Lucent’s New Jersey offices, celebrating more than $1.5 billion in business and a new five-year agreement to celebrate the renewal of their contract.

On Oct. 7, as if to underline Lucent’s optimism, Intel, the world’s largest chip maker, signed up with Newcourt to establish Intel Linancial Services, which will finance future purchases by its vendors.

To counter the short-sellers’ rumormongering, which had mercilessly battered not only the firm’s stock but the value of its com-

mercial paper, Hudson last week tapped $500 million from his line of credit. “We told investors that if they have any concerns, we would be happy to buy back their paper,” he says, “but out of the $1 billion we have outstanding, only $105 million came back.”

Despite the stock market’s negative assessment, Newcourt is having a good year—second-quarter earnings were up 70 per cent from 1997, partly because of higher European sales. “Global markets are down but not out,” says Hudson. “China, for instance, remains one of the world’s largest growth potentials, you just have to make sure you risk-adjust the capital you put into that market.”

Credit and risk assessment are at the heart of Newcourt’s business. Hudson has successfully invaded the traditional territory of the chartered banks, competing toe-to-toe with most of the ser___________ vices they offer, but without being hampered

by the expensive bricks and mortar of a branch system. In contrast to a traditional bank where a customer walks in and gets a loan to renovate his home or buy a car, in Newcourt’s case, no office visits are involved. Instead, Newcourt agents visit the customer and arrange the financing on the spot. This formula has helped Newcourt become the provider for more than 300 vendor-financing programs with blue-chip companies around the world. Simply put, they arrange financing to help companies and consumers buy everything from information technology and telecommunications equipment to Dell computers and Yamaha motorbikes.

Newcourt’s use of secured, amortizing loans is the safest category of borrowing, because it avoids revolving lines of credit, which often cause problems. Newcourt’s progress has been not so much rapid as instant. The company was founded in 1984, went public 10 years later, and in that same year completed its first major deal, becoming the preferred financing source of John Deere industrial and farm equipment, an arrangement worth an initial $400 million. Business has expanded so fast that Newcourt now has lines of credit worth over $4.5 billion secured by more than 35 leading financial institutions in Canada, the United States and Europe.

“I don’t think it’s over,” says Banks. “This is a very skittish market and not all of the bad news is out of the woodwork. But there, are also new opportunities. Spreads are widening and that will give us higher returns on investment, there are going to be undervalued situations that we can buy into, and most of all, this is when your customers really need you. Our greatest advantage is in the kind of customers we’ve picked.”

Amid the hype and hysteria that has swept world stock markets, Steve Hudson and David Banks have an important message: that fundamentals are, well, fundamental. And that’s good news. Eventually, sanity will prevail.