2006 leasing companies rating

Sail on

Roman Pimanovsky, Pavel Samiev

The leasing market has achieved a stage of turbulent development: new business increment in 2006 has amounted to 83%. Speedy development together with great potential for increase bring about new opportunities and new challenges — among the latter tougher competition and reduced margin.

The leasing market breaks records: in 2006 main indicators have reached the best results within the last 5 years. New business turnover constituted 14.7 bln dollars (8 bln dollars in 2005), and aggregated portfolio of leasing companies — 19.5 bln dollars. The leasing share in GDP came to 1.5% (in 2005 — 0.99%). The share of leasing in investments to main assets amounted to 8.7% (in 2005 — 5.7%). Payments to leasing lessors in 2006 exceeded 5 bln dollars (see diagram 1).

The leasing market key indices

In 2006 the market showed the growth rate peak

To a large extent the market growth was accounted for by excessive liquidity among banks and their need to place their own free funds. And that implies increased crediting of investment projects, including leasing, which is quite reliable area for investments. Second, at present potential clients know a lot about leasing. Numerous enterprises properly assessed advantages of leasing as convenient and profitable financial instrument — and sent their applications to leasing companies in geometrical progression. Leasing lessors claimed that they easily found common ground with their clients, and the both sides profited — clients managed to re-equip their production capacities, and leasing companies implemented large investment projects and enlarged their range of services.

According to our forecasts, new phase of the market growth and development was to start in 2006. That is exactly what has happened. Volumes of financed funds in 2005 for the first time grew faster than volumes of leasing payments. Moreover, in absolute figures the increase was 1.6 times: 3.9 bln dollars in 2006 comparing with 2.4 bln dollars in 2005. In 2006 leasing payments and financed funds almost doubled comparing with 2005 (increase — 78% and 90% accordingly, see diagram 2). What does it really mean ? 2006 saw maximum amount of new deals in all the history of the Russian leasing market . The first stage of the portfolio accumulation, started after the default against the background of economic development and booming investments into main assets, has finally ended. Deals, signed in 1999-2001, were completed with rare exceptions, bringing about a new wave, which would only show new growth in future. Therefore incremental rates may break new records in the near future.

Against the wind

The banking market has the Central Bank. The stock market has FSFI. The insurance market has FSIS. But leasing companies can not boast a regulating body, interested in the market development. The only structure with special attention to leasing companies is Federal Service of Collections and Taxes, whose purpose is to collect maximum amount of money for the treasury. Tax authorities pay special attention to the leasing and consider it as sphere of activity aimed at evading taxes — such approach makes the market development pretty complicated. "The main problem in the way of the leasing development is imperfection of our legislative base and law administration, although some positive changes in the area are in sight", — says Vladimir Lelekov, Brunswick Rail Lea sing general director.

Uncompensated VAT has remained to be a chief problem for leasing companies and, following our assessments, by 01.01.2007 reached about 25 bln rubles without taking into consideration a Hansa Leasing well-known story. Leasing lessors are of the opinion, that if tax authorities are too strict about VAT, leasing companies may lose 10-15% of their business annually. Altogether, according to our assessments, market losses due to legislative gaps amounted to approximately 9 bln dollars in 2006.

The leasing market may reach USD 33 billion by 2008 provided the main legal problems are tackled* * forecast Source: "Expert RA" The new business volume provided: А — the current market situation continues В — problems concerning redemption value of the leasing object are solved С — leaseback problems are tackled D — VAT return problems are solved Е — real estate leasing problems are tackled

Significant share of market losses comes to the segment of real estate leasing, which is only groping its way around. The share of real estate leasing in 2006 was as little as 2.29% — 10 times smaller than in the countries with the developed leasing market. Meanwhile the demand for services in this segment regularly goes up, as more and more companies have become involved in leasing of commercial real estate. Sometimes remuneration of leasing companies is equal to the rate of their bank financing. Leasing lessors agree to it in order to test a new instrument. But so far they arte incapable of satisfying growing demand due to administrative and legislative hurdles, as well as to a simple unwillingness of vendors to mention in contracts the market value of offices and buildings.

Resolution of the above problems together with filling legal and tax gaps in leasing area may push forward the speedily growing market (see diagram 3).

In 2006 there were two notable changes in the leasing companies legislation: an article "Profitable investments into material values" was included in the main composition of funds for book-keeping, which resulted in property taxing leasing objects and, consequently, influenced total cost of leasing contracts; in the RF tax code changes related to determination of the VAT tax base: as of January 1 — only by the time of shipping.

Locomotive directly and indirectly

The main share of the new business in 2006 came to leasing of railway driving and rolling stock and leasing of trucks and cars. The above segments almost doubled their market share comparing with 2005 and totaled to over 50% of the market (see diagram 4). Such ratio is quite characteristic for many countries with developed leasing market.

Railway transport leasing remains to be a leading segment of the market. Against the background of positive expectations and predictability of the market for enterprises-owners of rolling stock many companies took to financial leasing of rolling stock. Leasing lessors had to be ready for big deals with minimum advance payments and ability to control movement of the leasing object throughout the country. We expect the railroad transport leasing segment to increase twice in absolute figures by 2010.

Diagram 4. Types of equipment that formed more than 2% of the new business volume in 2006

"Leasing of rolling stock and automotive transport actively expanded in 1996, — says Anton Borisevich, VTB-Leasing general director. — We have made very important deals with RZhD and Mostransavto. VTB-Leasing development of automotive transport leasing operations was connected with our active involvement in joint projects with executive bodies of the RF regions. Automotive transportation fleet for transporting passengers was substituted and enlarged within the framework of such projects. The situation in the market segment remains favorable for leasing companies, since the passenger fleet in many regions is too old, and the regional authorities are ready to make a serious contribution to the process of its renovation, being interested in higher quality of services to the population. VTB-Leasing has plans to develop automotive and railway leasing activity on the basis of the new experience of successful deals in 2006".

In 2006 the volume of new business in automotive transport leasing amounted to 95 bln rubles, or 3.5 bln dollars — absolute increment per year was about 1.7 bln dollars (over 50%).

Energy equipment leasing in 2006 grew up sufficiently, too. It may be attributed to growing demand of enterprises for independent generation of power, and to developing private-state partnership programs. An example of such a partnership — a large deal was signed in 2006 with participation of Otkrytie to supply hydraulic units and other equipment for Bureisk hydro power station.

Next to leading segments — automotive, energy equipment and railway transport, — segments of real estate and agricultural equipment and products also look very promising. In case of the latter lifting of VAT in 2007-2008 for certain types of imported agricultural products should be very stimulating; for the real estate segment certain registration difficulties are to be removed (for instance, it is possible now to register a leasing deal and a contract at the same time).

Who will take the upper hand?

While the market gets more mature, leasing deals change their nature, projects get more complicated and deals become longer. In 2006, according to many companies, leasing deals margin went down. "Competition between leasing companies has grown stronger within the year, hence the tendency to reduce advanced payments and to reduce leasing rates, — says Vladimir Lelekov, Brunswick Rail Leasing general director. — The highest rates of development in 2006 were demonstrated by segments of rolling stock, agricultural machinery and equipment, road construction machinery, cars and trucks. Altogether you can easily say: the market of leasing services will continue to gain momentum in all segments, both in quality and quantity. We also expect enlargement of leasing companies, partly due to mergers and acquisitions".

Increased competition makes leasing companies offer to clients new programs and optimize business-processes. Speedy credit decision , reduced expenditures to serve a deal and regional presence are very important advantages of leasing companies and directly connected with the use of IT technologies and comprehensive automation management systems. "When an implementation project starts, it is very important to set priorities right and be extremely attentive with the choice of your supplier, — says Dmitry Kurdomonov, IC:Homenet director of leasing department industrial solutions, Homenet:Leasing solution developer. — It is advisable to start automation of a leasing company from the back office, since it is the most resource-intensive and, probably, the most tedious part of the job, requiring precise financial calculation. The next stage — depending on the company business-strategy — may be automation of the front office, management of finances and budgeting or introduction of international accounting standards". Presently over 70 leasing companies use Homenet:Leasing solution; it has been carrying the industry methodology of accounting and the basis to develop single information space to manage a leasing company, covering accounting, financing and other business-processes".

Another important competitive element for a leasing company is its ability to diversify its sources of financing and search for cheaper sources of "longer" money. To attract long-term funds you have to use foreign financing and issue bills and bonds. So far the market volume of financing with bonds is a bit over 4%, but we predict the figure to be doubled in 2007. Bond issue is quite convenient alternative to bank financing of leasing deals. Attracting funds from the stock market is usually a long-term and cheaper way to finance the company's activity, allowing the company to remain independent of creditors and improving the operations' liquidity.

Bond issue is a strong step for any company and requires thorough preparation. In the process of placement investors assess the instrument profitability and the issuer credibility. It is very important to have a clear idea of leasing companies' specifics. First of all, it is a long business-cycle: as distinct from banks, insurance companies and other financial institutions with one-year cycle, the leasing companies' business-cycle is equal to 3-5 and more years. Therefore while assessing credibility you have to base your judgment on indicators of mid-term financial stability — balanced cash flows, quality risk-management, diversification of business and competitive status of a company. At the same time classic financial analysis indicators (capital adequacy, liquidity and profitability) are less informative.

Independent rating assessment of the company reliability presents adapted desirable information for broad range of users. Single rating scale permits to compare the assessed company with other issuing leasing companies, and with enterprises from other spheres of activity, also attracting funds at the stock market and having an individual rating. Several companies have already received the Expert-RA individual reliability rating — ОАО GLAVLEASING (В ++), ZАО Client's Leasing Company (В) and ОАО Municipal Investment Company (В ++). These companies use the rating to deal with partners, creditors and while placing bond credits. They position themselves as transparent and open for working with broad range of partners. Moreover, such companies, in the basis of a thorough rating report, get the possibility to assess their own risks in a comprehensive way. As a result, they will develop faster and more energetically, than their competitors.

ТОР -100 leasing companies in Russia in 2006

109 leasing companies were involved in the research, with aggregated turnover about 75% of the market. The companies were ranged following the new business volume indicator, in line with the international practice — the indicator, to our point of view, quite properly describes a leasing company's status at the market. The new business volume means the volume of deals, in which the earliest out of the two events: (1) purchase of equipment for handing over for leasing in accordance with a leasing agreement, (2) advanced payment by a leasing lessee (if the advance exceeds zero) — happened in the interval between the first day of the studies' period and the last day.

Volumes of leasing payments and current portfolios of companies, characterizing efficiency of the company activity in pre-studied period, are also shown for reference. Volume of leasing payments is a sum total of payments in line with leasing contracts, remitted to the organization's account during the period in question. The current company portfolio (volume of leasing receivables) is the volume of the lessee debts to leasing lessors for current deals minus 2 months' outstanding debts.

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