Vol. 2 No. 2
April-June 2000
Export Finance Letter
A Quarterly Report on Government & Private Resources
In Export and Project Finance and Development
LEASING:
Growing Export Tool - U.S., Europe Lead Leasing Growth - Agencies Support Leasing
The use of leasing to finance U.S.
equipment exports is growing rapidly
through two strategies.
The major one is a dramatic, steady
expansion in the operations of U.S.
leasing companies overseas
subsidiaries. That includes both the
captive finance companies of major
manufacturers and independent
commercial finance groups, including
leasing specialty units, and banks.
The other, less expansive, approach is
where the leasing company or bank
operates through its U.S. base to support
an export transaction. This is used
mostly for transport equipment,
especially aircraft, but also rail
locomotives and cars, and containers.
Some Smaller Exporters
Not all of the exporters that use leasing
as a tool are the big corporate
manufacturers. Some middle market
firms are finding it fits in well in several
of the European markets.
Take the case of Windsor Industries, a
maker of industrial cleaning equipment
located in Englewood, Colorado.
Windsor operates globally, markets its
equipment to contractors that typically
land a three year agreement to clean 1015 units in a supermarket chains
operations.
The contractor acquires the cleaning
equipment as soon as it lands the
business, and tends to prefer a leasing
structure. In this case, the U.S. exporter,
working with NaviTrade Structured
Finance in Boulder, CO, a specialty
broker and financial arranger, has put
together an insurance package to cover
the credit.
construction machinery.
Windsor discovered it couldnt find a
leasing firm to support the business, thus
developed its own leasing operations. It
began to explore its own captive leasing
company, but then acquired another U.S.
manufacturer that already had a
domestic leasing unit.
For high tech, a critical factor is
obsolescence, reflecting the hectic pace
of product innovation. Users want some
flexibility in how long they employ a
piece of equipment before moving on to
its successor. Lease operations give
them more control for that.
It expects to establish overseas
subsidiaries to take on the business at
some point down the road.
And for captives, leasing is usually just
one tool in an array of financing
programs. The captive can thus offer
customers a choice in handling cash
flow, total financing costs, and dealing
with obsolescence.
Overseas subsidiaries
Growth in the use of leasing to finance
equipment sales abroad is hard to
document. Leasing is expanding U.S.
exports, but its mostly the overseas
subsidiaries of U.S. leasing firms that
are building the business.
The expanded operations of these
companies, on the other hand, are easy
to document, show up in their annual
reports. Among them, the most dramatic
growth can be found in the role of the
captives, which are now much bigger
than most banks as financial institutions
in some cases.
And more captives are being established,
more are moving into foreign operations.
According to John Sales, a principal
with Alta Group, a leasing consultant,
more manufacturers are now putting
together leasing units to service their
clients at home and abroad. Alta has
advised several major manufacturers in
structuring these activities.
The big growth sectors for leasing
abroad are currently high tech (which
includes office equipment) and
Some Examples
The growing presence of captives is
especially conspicuous among high tech
sectors.
IBM, for example, has established its
finance captive in 41 countries. Compaq
has set up a captive and is expanding its
operations overseas. Hewlett-Packard
has done the same.
Among the largest captives, whose
financing programs extend beyond just
leasing, are Case, Deere, and Caterpillar
in the construction and farm sectors.
Capterpillar financial Services, a leader
in the field, has been steadily expanding
its overseas leasing activity to the point
where its foreign portfolio is now about
40 percent of its leasing business. The
portfolio was up to $4.5 billion in 1999.
John Deere Credit now has major
operations in the United Kingdom,
Germany, Australia, Canada, and
Mexico.
Vol. 2 No. 2 - Export Finance Letter April-June 2000
In Germany, it has had a joint venture
with the UKs National Westminster
Independent finance companies are
growing abroad in the same fashion. A
good example is The CIT Group, with
$53 billion in managed assets.
CIT Group was not big internationally
until 1999 when it acquired Newcourt
Credit Group, which had an overseas
presence. It now operates in 26
countries in Europe, Latin America, and
the Pacific Rim.
A helpful information resource: the
Equipment Leasing Association of
America in Arlington, VA. Contact
Mike Fleming, President, on 703-5278655.
US., EUROPE LEASING SHOW
FAST GROWTH
The United States and Europe generate
the largest global volume of new leasing
business, with Asia not far behind
Europe, according to 1999 figures
offered by the Equipment Leasing
Association of America at a recent
World Bank conference.
The U.S. had a growth rate of nearly 20
percent in 1999, higher than the normal
growth trend, due to a burst of activity in
technology and telecom equipment, and
an increase in small business operations.
The United Kingdom has traditionally
led the European markets, but regulatory
changes, especially in tax depreciation
provisions, have reduced benefits to
leasing there.
Estimates of New Equipment Leased
Region
$ Volume of
Annual
Leasing as
New
Growth Rate % Of Equip.
Leasing
Europe
$125 bil.
12%
18%
N. America
$240 bil
13%
26%
S. America
$20 bil
8%
19%
Asia
$100 bil
NA
8%
Bank. It finances non-Deere equipment
as well as used machinery sold by its
dealer network.
Region
$ Volume of
Annual
Leasing as
New
Growth Rate % Of Equip.
Leasing
Australia
$8 bil.
9%
25%
Africa
$7 bil.
NA
NA
Why Lease?
A different combination of benefits can
be found for each industry sector that uses
leasing services, the Equipment Leasing
Association notes. Some benefits, such as
tax treatment and off-balance sheet status,
are traditional pluses, but handling
technical obsolescence, reflecting the
recent speed-up in the tempo of
innovation, is a newer advantage.
Transportation (aircraft and rail) enjoys a
combination of tax, balance sheet, and
flexibility.
Vehicles take advantage of tax, balance
sheet, and cash management benefits.
Information Technology equipment two
key leasing benefits - technological
obsolescence and growth.
Medical equipment leasing receives tax,
balance sheet, and cash management
benefits.
Telecom equipment enjoys the twin
advantages of technological obsolescence
and growth flexibility.
Office equipment enjoys the benefits of
cash management and convenience.
OFFICIAL AGENCIES NOW
SUPPORT LEASE OPERATIONS
Several U.S. government agencies as well
as multilateral institutions now support the
use of leases as a financing tool.
The Export-Import Bank made its
medium-term insurance program more
helpful for leasing last year, but only a
modest amount of business has been done
since. The Bank hasnt yet begun to
promote it much.
Most ExIm-backed aircraft deals involve
leasing structures, but that just reflects the
larger aircraft finance strategy.
The Bank improved the insurance
program in four ways last year. These
were: (1) cover on the financed portion
was increased to 100 percent, (2) the 15
percent down payment can now be
financed, and (3) the lessee was permitted
to make level payments, plus (4) the earlier
interest rate cap was removed.
Overseas Private Investment
Corporation has done some leasing
business over the years. Provided its
political risk insurance.
Trade and Development Agency has
financed some feasibility studies aimed at
setting up leasing operations in target
countries.
For example, it funded a study aimed at a
leasing business in Russia to support
construction equipment, particularly for
road building.
The U.S. exporter was Hoffman
International, a heavy equipment
distributor-exporter in New Jersey.
The Commerce Department encourages
the use of leasing as an export finance tool,
but doesnt make it a priority activity.
In the past, the Department has published
some analysis of leasing as a domestic and
export finance tool. The work is currently
done in the Office of Finance in the
International Trade Administration.
The World Bank held a seminar in
January 2000 to examine how leasing
works, can contribute to Third World
countries. The Equipment Leasing
Association participated, along with
several major U.S. leasing companies.
The International Finance Corporation
has now funded several hundred leasing
companies in its target countries, providing
equity and debt capital for these projects
over many years. It published a study of
guidelines for a successful leasing
Vol. 3 No. 2 - Export Finance Letter April-June 2000
business.
Multilateral Investment Guarantee
Agency has provided political risk
insurance for some leasing projects. For
example: a Citibank unit in Turkey.
Reprinted with permission from the Export
Finance Letter.