barriers to the financing of leasing in ukraine a personal view of martin j. elling 21 february 2006

Barriers to the Financing ofLeasing in Ukraine

A personal view of

Martin J. Elling

21 February 2006

Barriers to the Financing of Leasing in Ukraine: a personal view of Martin J. Elling

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Background

My first attempt to start leasing in Ukraine was in 1995 while working for the EBRD

On several occasions large sponsors backed off because of worries of legal and fiscal nature

In 1999, the law changed, but big corporates could still not be persuaded to invest in Ukraine.

Notwithstanding their reluctance, I saw an opportunity and decided to start a lease business with some “friends and family”.

The result was First Lease, the first dedicated car fleet leasing company in Ukraine.


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Today, 6 years later, First Lease: Is the undisputed market leader in Ukraine with

45% of the corporate car fleet leasing market Has leased over 3000 cars, i.e. >$ 45 M

financed Its portfolio consists of:

75% large corporates, but 80% are SME’s

65% are Ukrainian companies

35% of the clients are outside Kyiv

60% of our cars are based outside Kyiv, thereby supporting regional development


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And First Lease also has: An excellent client payment record (based on a

thorough client acceptance policy). No bad debt Shown that repossession of cars is possible and That the residual risk for vehicles is minimal. Hence, First Lease:

Has successfully developed the lease product and proven that car fleet leasing is viable in Ukraine

Is a commercial success, AND

Contributes positively to the economic development of Ukraine through financing SME’s, creating employment and paying taxes


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Financing Constraints

Although First Lease is a success, the financing of its business has been a continuing struggle

Already at the start in 1999, it proved impossible to find any financing and 100% of the initial cars were financed by the shareholders

Slowly, some financing was obtained, but only for multi-national companies. Hence, banks were not willing to financing Ukrainian SME’s

Although the situation has improved somewhat, the basic situation remains unaltered


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Main issue 1. Lack of local financing. Banks: Do not have sufficient financing with the required

duration Still do not understand the product, its

technicalities or the underlying risks Refuse to take the risk of the leasing company

and concentrate on large corporate clients Insist on costly and elaborate monitoring and

security arrangements


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Main issue 2. High Cost

High borrowing cost, partly reflecting the high perceived country risk

However, the main issue is NOT simply the high interest rates, but banks also charge:High up front fees

Notary pledges and Pension Fund charges

Demand monthly repayment in hard currency, ie high monthly transaction costs (banking and pension fund)

The result: excessively high borrowing costs


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Example of total borrowing costs


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Main issue 2. High Secondary and Tertiary Costs First Lease at one stage had loan agreements

with 16 banks and anything up to 35 credit lines. Each bank insists that all monies pass through

their account, i.e. High organizational costs to manage the accountsImpossible to optimize cash flowAdditional staff to manage disbursements and repaymentsIn First Lease we had a principal repayment virtually every day, while in Europe this is perhaps once a month or once a quarter.


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Main issue 2. High Secondary and Tertiary Costs (ii) Banks also insist that each lease agreement is

submitted to the bank for approval. This leads to:

The need to hire additional staff to prepare and follow up each fileExcessive response time to clients. This is commercially not acceptable


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Main issue 3. Inadequate Terms (i) Almost without exception Banks finance only 80% of the

lease object value. Hence, leasing companies are obliged to demand a

down payment which is a constraint to business. Banks refuse to look at the overall lease portfolio as

security. The result is that

most lease contracts in Ukraine are financed at only around 70% because of additional costs

Loans become over-secured and additional assets cannot be used to attract additional funds


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Main issue 3. Inadequate Terms (ii) Most loans have a tenor that equals the lease

contract duration. i.e. the financing does not take into account the

rest value of the asset. The monthly repayment is therefore too high and

it leads to a negative cashflow on most contracts.

This means that leasing companies in Ukraine need to be capitalised higher than in Western Europe


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Main issue 3. Inadequate Terms

Loan repayment, Car value and Security

$0

$2'000

$4'000

$6'000

$8'000

$10'000

$12'000

$14'000

$16'000

1 2 3 4 5 6 7 8 9 1011 1213141516 17181920 2122232425 26272829 3031323334 3536

0%

100%

200%

300%

400%

500%

600%

700%

800%

Security

Outstanding loan amount

Rest value car


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Main issue 3. Inadequate Terms: cashflow implications

Impact of tenor of loan on monthly CF

-$3'000

-$2'000

-$1'000

$0

$1'000

$2'000

$3'000

1

3

5

7

9

11

13

15

17

19

21

23

25

27

29

31

33

35

Cumulative CF 36m


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Main issue 4. Other conditions (i) Each contract has to be approved by the bank Banks are double-guessing the credit risk

analysis of the leasing company Hence banks in Ukraine

First assess the risk of the leasing companyThen the risk of the ultimate client.

Take the asset AND the lease contract as security. Hence Banks have a triple or quadruple

security on each lease contract. In this context the margins are excessive


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Conclusion

The lack of sufficient and—more importantly—adequate financing:

Means that many potential clients, especially SME’s, are not or inadequately served, thereby holding back Ukraine economic growth

Doesn’t allow the product to be fully developed Creates excessive financial and organisational

costs for leasing companies and hence higher prices for clients

Forced the shareholders of First Lease to sell its business to a major international player with access to competitive financing.


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Conclusion (ii)

Unless these issues are addressed, leasing will remain small in Ukraine, even with further improvements in the legal and tax environment

The much needed financing that leasing provides for SME’s will not be forthcoming, thereby holding back economic growth.

It also means that foreign banks will rapidly impose themselves in this market.


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Contact

More information can be obtained from:Martin J. Elling

[email protected]

+41 79 590 85 91

barriers to the financing of leasing in ukraine a personal view of martin j. elling 21 february 2006

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