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Newcourt lessons learned, a wiser Hudson back in the leasing game Add to ...

Steve Hudson, the man who built one of the world's biggest leasing companies, is back in the business.

Mr. Hudson, who founded Toronto-based Newcourt Credit Group with $400,000 and sold it in 1999 for more than $2-billion (U.S.), spent the post-Newcourt years branching out. Way out. His ventures included investing in hair repair, through Hair Club for Men, and weight loss, through Herbal Magic.

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Now, he's back to his roots in asset-backed financing, setting up leases for everything from earth-moving equipment to golf carts to woodworking gear as the new chief executive officer of Element Financial Corp.

Riding out to Toronto's west end last week to have a look at one of the trucks that Element finances, Mr. Hudson is so animated he seems to float above the car seat. It's because he thinks he's got a shot at a market niche worth as much as $20-billion a year in Canada. Other financial players have either ignored the mid-market leasing business, in the case of the big banks who have largely considered it too much trouble, or abandoned it, in the case of some of the big financial companies that have had to retrench in the wake of the financial crisis.

"This opportunity is massive," he says. "Everyone's gone. There's an opportunity here for 12 to 24 months to create Canada's leading independent finance company."

The key word there is Canada's leading, not the world's leading. That's a big departure from the Newcourt days. Then, Mr. Hudson was trying to create the world's biggest non-bank financing company, and he came close, growing Newcourt to No. 2.

Then came the Russian debt crisis of 1998. Newcourt started having trouble borrowing the money it needed to fund its leases at good prices. Newcourt shares started to fall.

Mr. Hudson appeared to save the day in early 1999, agreeing to sell the company to CIT Group for about $4.1-billion (U.S.), a deal that would create the world's largest publicly traded finance company. But after Newcourt reported lower-than-expected earnings, the price on the deal was sharply cut. Mr. Hudson, who was to remain in an executive role, retired instead. The value of the deal ended up being $2.4-billion.

Mr. Hudson says he has learned his lessons from Newcourt. Don't expand too fast with acquisitions. Use the most conservative accounting. And perhaps most crucially, don't borrow short-term and lend long-term.

Newcourt funded itself in the commercial paper market, borrowing for a few days or weeks at a time, while lending money for months or years. As a result, the company constantly had to roll over its financing. When markets shut down because of a financial crisis in Russia and Asia, Newcourt was on thin ice.

It's ironic then that the reason he's back in business is because of another financial crisis that did much the same to the remaining players in the market. Some of the biggest players, CIT included, hit big trouble and largely disappeared from the Canadian market. At the other end of the spectrum, the smaller independent players had trouble financing. That left a gaping hole in the leasing business in Canada. The government tried to fill it by introducing programs to spur financing, but those were largely busts.

Enter Mr. Hudson. Some former partners of his from Newcourt were setting up Element and looking for $1-million in financing from him. When he heard about the situation, he wanted more.

"It feels again like the early to mid-1980s when there was a big, big opportunity. So I said I don't want to give you $1-million. I want to be a partner."

Investors aren't holding Newcourt's problems against Mr. Hudson. The proof is that Element has raised another $75-million via a private placement of stock managed by Barclays Capital and GMP Securities that closed April 5. Element set out to raise $50-million but got orders for $150-million of stock.

"What doesn't kill you makes you better and stronger," Mr. Hudson said. "The capital markets know Newcourt's story and have been very receptive. I've been very open and candid about what worked and what didn't."

The next step is an initial public offering, which will happen in the next nine months.

"He's a legendary Canadian entrepreneur," said Bruce Rothney, the Canadian head of Barclays. "This is going to be the start of a big new business in Canada."

But big has a different meaning now. Element will be originating $300-million to $400-million a year in financing business in the next couple of years, he says. Newcourt used to reel off single transactions that big, financing things like highways and jets.

"I'm 52 years of age," said Mr. Hudson. "Trees no longer grow to the sky. Our ambition is not to build the world's largest independent equipment finance company. Our ambition is to build a Canadian-centric equipment finance company fitting a strategic need in the marketplace. You won't see Element over in Europe leasing commercial aircraft or financing the cross-Israel highway. That just won't be our marketplace."



Eds Note: The story has been corrected to show that the private placement by Element closed on April 5.



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