Russian leasing 2007: buy for growing, sell for re-financing

Roman Romanovsky, Pavel Samiev

In the near future bank or investment-fund affiliated leasing companies will actively buy other companies or their deal portfolios. The most attractive segments are markets with high share of “retail” and high liquidity of leasing items.

The capital concentration trend seems to be prevailing at the financial leasing market. To be involved in leasing operations a company needs to be a reliable borrower with positive credit history, a diversified leasing portfolio and clear-cut development strategy. Small companies always have problems with financing, therefore the market consolidation would minimize a number of such companies due to acquisitions – or make them serve very narrow and un-attractive segments.

“Altogether demand for financing remains consistent. At the same time, the supply structure moves towards financially stable leasing operators. Therefore small players would gradually stay by the wayside”, – says Andreas Lange, FB-Leasing financial director. Increased demands to financial stability of lessors are expressed by stronger market competition, increased “participation cost” of a leasing company in a financial lease deal (a lessee pays less in advance), increased risks of leasing projects (deals with more complicated types of equipment, conditions of delivery, installation and servicing of a leasing item).

“Successful mergers and acquisitions permit to consolidate resources of companies, not only materially, but by sharing new experience, accumulated by each company. As a result you may make your business more efficient and cover new segments of the market. We think that 2008 will see the continuation of the trend”, – said Iskander Maslakhutdinov, Leasing-Trade general director.

Inevitable consolidation

Diagram 1. Who owns Russian leasing?

Leasing may be characterized by high dependency of flows’ stability and structure on financial sources. In 2007 own funds of leasing companies averaged 5% of companies’ balance (without Rosagroleasing). The leasing business financial leverage seems to be quite strong; cheap and powerful source of financing is the key growth factor (and survival at the market, too). In time of crisis lessors have limited “financial maneuverability”, therefore in 2008 some companies with poorly balanced portfolios would be interested in selling them to re-finance their deals.

Even in time of liquidity crunch the Russian leasing market remains attractive, and may become the most investment-attractive one among financial companies when the crisis is over. “Companies of two types may consolidate the sector: direct market players, or financial institutions (banks or investment funds). Leasing consolidators (the first case) would obviously require a financial partner – either an affiliated (mother) bank or a financial institute from the group two, – to function as a financial investor and be involved in the process indirectly. In the second case a big independent leasing company centers the consolidation, but ideological, strategic and financial functions would be performed by a new majority shareholder – an investment fund or a bank”, – says Igor Beliasov, Otkrytie investment manager.

Current leasing companies attached to banks or owned by investment funds will have obvious advantage in purchasing other market players or portfolios of their interest.

Penetration through purchase

Purchasing leasing companies to enter the new market segment or expand distribution channels has gained popularity. Deals in segments with serious retail and mass client share together with highly liquid equipment (construction machinery, cargo transport and motor cars) seem to be most possible.

Equipment liquidity and highly demanded aforementioned leasing items attract many leasing companies – orders and ability to sell the equipment in case of a client’s default are guaranteed. On the other hand, many companies in the segments build up competition and make the market participants develop new ways of dealing with clients and operate more efficiently. We based our study of demand and competition on expert opinions of the market participants themselves (17 experts including general directors of leading companies – see diagram 2). Demand is still high in railroad and aviation machinery, energy equipment, but competition in the sectors is limited by administrative barriers to new players.

Diagram 2. Segments of the most liquid and relatively cheap equipment feature the highest demand and competition

What are the drivers of increased costs and investment attractiveness of leasing companies? Diversification, “retail” component of portfolios, size and “depth” of clientele, credible suppliers, business-process quality and automation. “Information system secures proper business-processes and guarantees financial transparency, which is positively viewed by investors, – says Dmitry Kurdomonov, Homnet Leasing director, leasing automation developer. – Besides, information system is a chief control instrument for a consolidating company over an acquired company”.

It is difficult for new players to enter a highly competitive segment, and the use of the existing brand and accumulated experience may be an effective way to penetrate the market.

“Mergers and acquisitions may be especially effective for leasing motor and commercial transport, like a status M&A deal – Rolf-Leasing and Europlan merger. The both companies were well-positioned at the market and had a clear strategy – therefore the merger produced good synergetic results. Strong competitive sides of each (buyer and seller) were augmented to bring good results: presently Europlan is in the lead at the motor and commercial transport market, Rolf is the first at the market of selling and servicing motor cars. Main M&A deals in 2008-2009 would relate to mergers and acquisitions of leasing companies, featuring mono-product business-model”, – says Dmitry Kozhevnikov, Alfa-Leasing general director.

Future of segments: infrastructure will bring volumes

Liquidity deficit and reduced bank financing may easily bring about the leasing market deceleration. Lessors themselves plan to increase their turnover in 2008 by mere 48.7% (3 times below 2007 and 2 times below 2006).

Road and railway transport, aviation mechanisms, construction and road-construction equipment will be the fastest growing segments. Energy objects and housing machinery will be presumably attractive, too. Leasing companies and housing enterprises in Russia are presently at the inception stages of their cooperation. Since communications and other housing economy elements are dramatically outdated, leasing deals in the area may have good future.

At the same time we have to note in relation to railroad machinery and energy equipment: it is hard to forecast potential demand when you deal with natural monopolies (like RZhD, RAO UES etc., orders from which augmented the 2007 market). The segments feature low level of competition and high administrative barriers to new players (diagram 3). The issue of barriers was also discussed with experts representing active market participants. According to expert assessments, construction machinery and motor transport segments are most open for new activity. The segments lack large and imposing monopolists, as distinct from railway and energy equipment segments.

Diagram 3. Segments with natural monopolies have higher entrance barriers

Big lessors with established ties will continue to operate in aviation and railway transport and energy equipment sectors. At the same time “mass” segments (motor transport and construction machinery) may see new players and tougher competition.

The real estate leasing segment has good growth potential, hindered by a number of limitations, like legal discrepancies and insufficient amount of “long” money in the economy. Presently real estate deals are pretty rare at the Russian market, since they put forward a plethora of individual questions to be resolved by the sides. In times of credit crunch you have to be very considerate of legal and book-keeping nuances, and try to attract finances in the most favorable way for your leasing proposal. “Real estate leasing periods usually exceed 10 years, because such projects are obviously more complicated comparing with other objects of leasing. That is why the real estate leasing would not become something massive in mid-term perspective. For instance, our company follows a selective principle providing for higher credibility of a lessee and object liquidity. It may be commercial and office immovable property with transparent history – attractive objects that would be demanded even under difficult market circumstances”, – says Irina Golovchenko, RTK-LEASING general director.

Dmitry Shchukin, director of Yugorsk Leasing companies, agrees: “All temporary complications and labor costs for immovable property leasing result in yield comparable with motor transport leasing, which is quicker and cheaper. You also have to consider secondary appraisal of immovable property, – since the object history and its technical state are not always clear, – a big difference between market and balance values, land property issues etc. Immovable property leasing deals are limited due to absence of simplicity and logics of technical registration procedures”.

“Leasing in 2008 would also grow through participation in national projects and state programs, aimed at development of industrial branches, particularly, programs like “Accessible housing”, Vladivostok development, “Olympic construction”, construction of pipeline to China, construction of federal motor roads, – it would require gigantic resources, both human and technological. We expect leasing to play one of the most important roles in the process”, – says Dmitry Kozhevnikov.

Biggest leasing companies by year 2007 results
Top-ten companies in a segment of railroad machinery
Top-ten companies in a segment of motor cars
Top-ten companies in a segment of cargo transport
Top-ten companies in a segment of construction machinery
Top-ten companies in a segment of energy equipment