Element Avoids ‘Market Heroin’ for Leasing Business

Element Financial Corp. Chief Executive Officer Steven Hudson says selling repackaged leases to life insurance companies helped his Canadian firm avoid the “financial market heroin” that almost ruined his first leasing venture 14 years ago.

Hudson, who in 1984 parlayed a mortgage on his C$190,000 ($187,000) Toronto home into a firm that became North America’s second-biggest business lender, said he has “zero” interest in tapping public markets again to sell repackaged leases.

“That’s financial market heroin, I was there,” said Hudson, whose misstep with commercial paper clipped C$2 billion off Newcourt Credit Group Inc.’s market value before it was sold to CIT Group Inc. in 1999. “That’s commercial paper and mid-term notes, it’s very seductive.”

Hudson’s strategy at Element Financial, whose management team includes former colleagues from Newcourt, is winning over investors. The stock has almost doubled since the company listed on the Toronto Stock Exchange in December 2011.

Element Financial’s units provide financing to companies for car and truck fleets, helicopters, construction equipment -- known as “yellow iron” -- and health-care equipment.

“You’ve got the best minds,” said Martin Ferguson, who helps manage about C$1.9 billion for Mawer Investment Management Inc. in Calgary and owns Element. “Steve Hudson is re-accumulating all of the people who had been involved in the equipment leasing business prior, all the gurus, all the people that had scattered once the financial crisis hit.”

Hair Club

Hudson, who spent a decade in the U.S. reviving businesses including Hair Club for Men and BeautyFirst, also recruited from competitors such as General Electric Co.’s GE Capital to build Element Financial into a Toronto-based firm with a focus on North America.

“In many respects, what we’re doing now is what we did 15 years ago,” Hudson, 54, said in an interview at Bloomberg’s Toronto office. “There’s no new credit markets, we’re not creating anything.”

Element Financial has surged 56 percent in the past 12 months, outpacing the 5 percent gain of Canada’s benchmark Standard & Poor’s/TSX Composite Index. The stock jumped 25 percent this year, for a market value of C$1.12 billion. The stock rose 0.3 percent to C$8.88 at 10:09 a.m. in Toronto.

“There’s a lot of expectation and so far it’s being fulfilled,” Michael Smedley, who helps manage C$1 billion at Morgan Meighen & Associates in Toronto. “They’re not exactly sitting back on their heels.”

Assets Soared

Element Financial’s assets have soared to about C$1.5 billion from C$47 million two years ago, as the company raised about C$620 million of capital by selling securities to private investors and last month’s share sale, and pursued four acquisitions in Canada and the U.S.

The firm bought TLS Fleet Management from Bank of Nova Scotia in July for C$146.7 million plus debt, to gain vehicle fleet leasing and management. Element Financial entered the U.S. in November with its C$300 million takeover of CoActiv Capital Partners, a Horsham, Pennsylvania-based commercial equipment leasing finance company owned by Marubeni Corp. Hudson said he’s looking for more takeovers in the U.S. to expand the CoActiv business.

“I think the company and the stock will continue to roll forward,” said Smedley, whose Toronto-based firm has been an investor in the stock from the start. “People like to see some growth going on, and we’ve got quite a lot of financials that are not so much growth-oriented.”

Great Business

Element Financial, with a price-to-book ratio of 1.74, is trading at a 70 percent premium to CIT Group and a 60 percent premium to Boston-based Newstar Financial Inc., according to data compiled by Bloomberg. The company trades at a 16 percent discount to Ryder System Inc., the largest publicly traded truck lessor, and at a 11 percent discount to Chicago-based rail-car lessor GATX Corp.

“The equipment leasing business is a great business and there’s a void in Canada for it,” Andrew Hamlin, who helps manage C$6.7 billion for Aston Hill Financial Inc. in Toronto, said in an interview. “If you believe the North American economy is recovering, one of the first areas where you’re going to see job growth is the small- to mid-market sector, and this is exactly what these equipment companies cater to.”

Familiar Path

This is a familiar path for Hudson, who transformed Newcourt over 15 years before its sale to New York-based CIT, the No. 4 commercial financing company.

Newcourt in the late 1990s had been seeking a partner with a strong balance sheet to help pare its borrowing costs. Newcourt was paying a third more than its rivals after investors snubbed all but the safest bonds amid market turmoil following Russia’s default on part of its debt.

CIT bought Newcourt in November 1999 for $2.4 billion in stock, down from an initial offer of $4.1 billion, because Newcourt’s earnings missed estimates when the firm’s main funding source -- selling repackaged loans as securities --dried up.

Ten years later, CIT filed for bankruptcy after losses tied to subprime lending soared and the firm was unable to gain funding from the commercial paper market.

Hudson, who agreed to step aside after CIT’s takeover of Newcourt, left Canada to work in the U.S., where “they welcome people who have stumbled,” he said. He spent the next decade “fixing broken private-equity plays.”

Remake Yourself

“You cannot remake yourself in Toronto,” Hudson said. “Toronto is a city of four million plus people, and a village of 5,000, and you cannot remake yourself here.”

Hudson established a track record in the U.S. that helped ease his return. He and Toronto-based Edgestone Capital Partners bought Hair Club for Men for $30 million in 2002 and sold it 26 months later for $210 million to Regis Corp., then the world’s largest operator of hair salons. Later that decade, Hudson reorganized brands PureBeauty and BeautyFirst into a chain of U.S. beauty salons, and by 2009 became CEO of Herbal Magic Inc., a Toronto-based operator of weight-loss centers.

Hudson said he was in Wichita, Kansas, combining 600 hair salons into brands under BeautyFirst, PureBeauty and Trade Secret when he received a call from Stanley Hartt, who was heading an advisory committee on financing for Canada’s minister of finance. Hartt urged him to revisit Canada’s leasing industry.

Old Team

“I reached out to the old team and said ‘the environment’s better now than it was in the mid-80s and we should do this, if nothing else just to rewrite that last chapter,” Hudson said. “I was pleasantly surprised that my partners re-formed and we had the lifeco backing.”

Hartt, a lawyer with Norton Rose LLP in Toronto and a consultant for Macquarie Group Ltd., said he recalls talking to Hudson several times during that period, and is encouraged to see Element Financial emerge in Canada.

“The guy is a business genius, whatever he touches turns out well,” Hartt said in an interview. “I’m very pleased that it has been a success and it does, still today, fill a hole.”

Element Financial is benefiting from a leasing void after former competitors scaled back or left Canada. The lender is getting funding from life insurers including Manulife Financial Corp. and Sun Life Financial Inc. by selling them repackaged leases as alternatives to bonds and commercial mortgages.

“Lifecos have a permanent need for our paper,” Hudson said. “We have lifecos with billions, maybe trillions of dollars of liquidity and lifecos have had to look for alternative fixed-income private placements, which is us.”

Investors such as Barry Schwartz at Baskin Financial Services remain unconvinced.

Nervous Business

“It’s a nervous business for me if interest rates go up, that’s high risk,” said Schwartz, whose Toronto-based firm invests in financial stocks but hasn’t considered Element Financial. “It’s a great business to be in in a low-rate environment. In a high-rate environment, it’s a whole different operation.”

Element Financial is also creating a C$500 million fund to complement the firm’s existing securitization and syndication arrangements. The fund, which Hudson said will close in the first two weeks of May, will focus on secured equipment financing transactions in the C$1.5 million to C$25 million range.