Leasing in Ukraine

1
Kiev, February 21, 2006
Financing Sources for Lessors International vs.
Ukrainian Practice
Access to Credit Initiative
Presented by Richard Caproni
Sponsored by USAID
2
Agenda

• Ukrainian Banking Sector
• Need for Capital Market Development
• The Tide Is Coming
• Preparing Ukraines Infrastructure and
  Institutions (ATCI)
• What this Means for Leasing in Ukraine
• Typical Funding Sources for Lessors

3
Today, Ukraines Banking Sector Cannot Meet the
Capital Finance Needs of Ukraines Enterprises

• There Are Approximately 163 Banks Operating in
  Ukraine with Total Assets of about 223 Billion
  UAH
• Cumulative Capital of Ukrainian Banks is over 26
  Billion UAH
• Banks represent over 90 of Overall Financial
  Market (2005)
• Lack of long-term capital is available to
  commercial banks and non-bank financial
  institutions
• Ukraine needs USD tens of billion in investment
  just to renew existing depleted fixed assets

4
Capital Markets Direct a Countrys Resources to
the Most Productive Areas of the Economy by

• Providing a reliable place for individuals and
  institutions to invest their money based on term
  and risk appetite

• Personal Savings
• Corporate Funds

• Pension Savings
• Investment Capital

• Creating appropriate financial products that
  match the needs of savers and borrowers

• Stocks
• Bonds
• Mutual Funds

• Asset-backed securities
• Derivatives

• Creating a liquid market for securities to
  provide financial institutions enterprises
  access to the capital they need

5
Important Investment Institutions Are Developing
and Will Bring Billions of Dollars into Ukraines
Financial Markets

• Pension Funds
• Insurance Companies
• Institutional Investors / Mutual Funds
• Investment Banks

6
To Keep Institutional Capital in Ukraine, the
Financial Market Infrastructure Needs to Be
Strengthened

• Securities Markets Infrastructure
• Legislation and Regulation
• Supporting Services
• Judicial System
• Capacity of Financial Institutions
• Commercial Banks
• Leasing Companies
• Credit Companies
• Asset Management Firms

• Investment Banks
• Insurance Companies
• Pension Fund Managers

7
ATCI Works with Lessors to Access Capital from
Different Types of Funding Mechanisms such as

• Internal
• Equity
• Subordinated Debt (from parent company)

• External
• Recourse
• Term Debt
• Wholesale Lines of Credit (LOC)
• Warehouse LOC
• Non-Recourse
• LOC / Term Debt
• Portfolio Sales
• Brokering / Discounting
• Lease-backed Securities

8
There Are Very Different Funding Strategies for
Different Types of Lessors

• Type of Owner
• Independent Lessors
• Small vs. Large
• Bank-owned Lessors
• Captive Lessors

• Business Strategy
• Universal Lessors
• Specialized
• Vendor-Based
• Small-, Medium-,
• Large-Ticket

9
Internal Sources Provide More Flexibility but
Limit Growth Potential

• Sources
• From Owners
• From Outside Investors
• Pools
• Single transaction
• Limited investment
• Limited liability

• Advantages
• Control of capital
• Make own decisions
• Flexible structuring / pricing
• Disadvantages
• Limited Growth
• Lower ROE

10
In Determining which Funding Sources Are to
Independent Lessors, SIZE MATTERS

• Small
• Owner / Manager contributes equity
• Typically a small group of outside investors
• Maximizes leverage with external debt
• Typically broker transactions to funders

• Large
• Multiple stockholders providing a high level of
  investment
• Higher level of management and staffing
• Receive better pricing from recourse lenders
• Qualify for recourse lines of credit

11
The Nature of Recourse Debt Is Different in
Ukraine than in the US

• Types of Recourse Debt
• Warehouse Lines of Credit
• Short-term
• Provides instant funding
• Term Debt
• Long-term / permanent funding
• Matches term of lease

• Advantages for Lessor
• Largely available and immediate funds (for strong
  lessors)
• Partial/full control over credit decisions
• Lessor uses own documents and remains owner of
  asset
• Lessor maintain image and relationship with
  client
• Bills, collects, monitors

12
Main Qualifications for Recourse Debt

• Adequate Capital
• Experienced management and operational
  capabilities
• Strong operating and credit history
• Portfolio performance and credit quality

13
Non-Recourse Debt Is Very Different in Ukraine
than in the US

• Non-recourse debt focuses on the transaction or
  pool of transactions being funded and takes
  assignment of lease payments and leased asset(s)
  as collateral.

• Advantages
• No liability, does not restrict additional
  borrowing
• Available for all lessors

• Disadvantages
• No control over credit decision
• Higher cost than recourse debt
• Funds not immediately available
• Loss of image due to bank taking control of
  relationship
• Use lender documents
• Lender bills and collects

14
Large Independent Lessors Have Additional Options
for Funding

• External
• Commercial Paper
• Public Debt (Commercial Bonds)
• Syndication (includes discounting)
• Securitization

• Internal
• Equity
• From Existing Owners
• Stock Issuance (Public Company)
• Retained Earnings

15
Banks that Establish Their Own Leasing Company
Adopt Different Business Strategies

• Division
• Usually exclusively internal funded
• Funding provided at banks cost of funds (pooled
  rate )

• Subsidiary
• Some internal funds
• External funds
• Debt and equity
• Recourse and non-recourse
• Brokering and Discounting

16
Brokering is the preferred method of small
lessors with weak balance sheets

• Advantages
• Lowers Liability
• Off balance sheet
• Lowers cost of funds
• Provides Access to more capital and greater
  transaction volume
• Receive PV of profits right away.

• Disadvantages
• One-off funding
• No control over credit decision or documentation
• Funder bills, collects, uses own documents, and
  owns asset

17
Portfolio Sales May Serve as a Source of Funding
as Well as an Instrument for Portfolio Management

• Advantages
• Raises cash and frees availability for better
  customers
• Method to reduce debt and lower cost of funds for
  new deals

• Disadvantages
• Negotiated discount rate may reduce portfolio
  profits
• Limited availability or number of buyers
• Often includes some level of recourse

18
Securitization of a Lease Portfolio is Only
Beneficial or Accessible for Large Lessors

• Advantages
• Provides cash and availability for new deals (off
  balance sheet)
• Method to reduce debt and lower cost of funds for
  new deals

• Disadvantages
• High transaction costs
• Need for standardization of transactions and
  strong credit quality (LTV)
• Limited number of buyers
• Some level of recourse
• Only accessible to large lessors

19
THANK YOU
Access to Credit Initiative 72 V. Vasylkivska,
5th floor 03150, Kyiv, Ukraine Tel (044)
537-0966 Fax [phone] David Lucterhand,
Chief of Party Richard Caproni, Senior Advisor