Leasing market leaping

by Simon Pirani

Cross-border ECA-backed deals by Russian banks are helping drive a rapid expansion of the leasing market. Its volume shot up from 49.7 billion rubles in 2001 to 75.8 billion rubles in 2002, and is on target to hit 100 billion rubles this year.

Subsidiaries of Russian banks such as Avangard-Lizing (Bank Avangard), Alfa-Lizing (Alfa Bank), Lizingpromkhold (MDM Bank) and Promsviazlizing (Promsviazbank) are using leasing contracts as a form of project finance, to enable industrial customers to undertake plant construction and modernisation. They buy foreign industrial equipment for leasing with ECA-backed loans.

Bank Avangard is regarded as a pioneer of large-scale leasing deals. Valery Shuvatov, vice president (international business), says: “Leasing, mainly three- and four-year deals, comprises 40% of our credit portfolio. For us, and for all Russian banks, the name of the game is attracting long-term resources to finance deals such as these.”

Avangard’s strategy is to increase its borrowings from foreign banks: in June this year these totalled $87 million, and it hopes to push that up to $100-$120 million by next year. Guarantee limits from Eximbank ($30m), Hermes $30m), SACE ($10m), Coface ($5m) and other ECAs will help.

A shop-window deal is a $70 million financing to Russky Solod for construction of two malt plants, at Voronovo in Moscow region and at Voronezh. In January this year Avangard-Lizing took a euro 7.52 million five-year export finance deal from Dresdner Bank, guaranteed by Hermes, to purchase equipment from Buehler of Germany for the plants.

Two deals signed at the end of last year followed a similar pattern: a $3.83 million five-year loan from First International Bank of the USA, guaranteed by Eximbank, for equipment from Petrofac for lease to Yakutgazprom, which is building a gas condensate processing plant; and a $1.23 three-year deal from Ceskoslovenska Obhodni bank, guaranteed by the Czech ECA EGAP for grain elevator equipment from Omnipol.

In October last year Delta Leasing also received a credit line from First International, guaranteed by Eximbank: $4 million for imports of US-made equipment, initially for the agricultural sector.

In June Alfa-Lizing, Alfa Bank’s subsidiary, announced a leasing deal that brought Gerling NCM, the Dutch ECA, back to the Russian market for the first time since 1998: a euro 2.1 million three-year loan from Commerzbank, guaranteed by Gerling, to finance purchase of equipment from CFS Bakel for Ravioli, a St Petersburg processed meat factory. Maksim Topper, head of international banking and financial institutions at Alfa Bank, says: “To facilitate industrial growth in Russia, we need longer-term money. We have raised some longer-term funds from the domestic bond market, but for five-to-seven year deals we need ECAs. So this deal is an important step in the right direction.”

Transport is fertile territory for leasers – and in particular railway wagons. The transport ministry’s fleet is aging and there is a serious shortage of some types. Rather than pay for new ones, the ministry last year introduced discounted railway tariffs for users who supply their own wagons. Demand for leased wagons is stimulated both by big customers attracted by tax advantages (oil producers anxious to overcome the constraints of Russia’s full-to-capacity pipeline network, chemicals manufacturers and steel mills) and smaller ones who could not afford their own wagons in any event.

Konstanze Thym, head of corporate banking at Raiffeisen Bank in Moscow, says: “Potentially this is a large business. The transport companies can either come directly to the bank for finance of 1-3 years to build the wagons, or to a leasing company for 5-6 year deals.” Raiffeisen-Lizing, the Austrian bank’s Russian leasing subsidiary, is understood to be financing wagons for Severstaltrans, the fast-growing transport company in the Severstal group; the leasing subsidiaries of other foreign-owned banks, including Citigroup and International Moscow Bank, are also offering rates that Russian banks struggle to compete with at the top end of this market.

Bank Avangard, which has 1500 wagons on its books, also finances shipping with a forfaiting-type programme, through its subsidiary Alcor Holding Group of Switzerland, which owns four vessels (two dry cargo vessels, a tanker and a RoRo ferry) and plans to buy six more in the coming year. Payments from customers who charter the boats are made to an escrow account in Switzerland in Alcor’s name, and used to cover promissory notes issued by Alcor and guaranteed by Bank Avangard. Shuvalov says: “There is no settlement risk and no payment risk in Russia. Our hope is to develop an integrated programme of transport financing, and this is part of it.”

The leasing boom is also fuelled by demand from the telecoms, aircraft manufacture and agricultural sectors. RTK-Lizing, a subsidiary of the long-distance telecoms monopoly Rostelecom, is the second largest leaser by volume (see table) and came first in an all-round “top fifty” compiled by the Expert rating agency. RTK, which began with deals almost exclusively with Rostelecom and its subsidiaries, now works across the sector: in June the Russian Far East’s telecoms operator, Dalsviaz, signed two leasing deals for systems upgrades, for 845 million rubles with RTK and 323 million rubles with Promsviazlizing.

The pace in agriculture and aircraft manufacture depends on state support. The government has committed 7 billion rubles annually to agricultural leasing, and in its first eight months, starting in January 2002, the largest state-owned agricultural leaser, Rosagrolizing, leased 4500 combines and tractors to producers. General director Elena Skrypnik announced that the total volume of contracts was 8.5 billion rubles.

In aircraft construction, two companies, Ilyushin Finance and Finansovaya Lizingovaya Kompaniya, have been selected to manage a state-subsidised scheme (see also Trade Finance February 2002 pp26-29). Years of negotiations resulted in February this year in a $240 million contract being signed between Ilyushin finance and the aircraft factory at Voronezh to build three wide-fuselage Il-96-300s for Aeroflot, and three for Atlant-Soiuz, a freight carrier linked to the Moscow city government.

Industry sources say that talks are still continuing about interest rates on the deal: Aeroflot, which eventually plans to buy a further seven of the planes under the scheme, is trying to push them down from around 10-12%.

MiG, which is moving into commercial aviation, last month agreed to build ten Tu-334 regional liners, and lease five to Atlant-Soiuz and five to Aerofrakht on ten-year deals.

Elena Sakhnova, analyst at United Financial Group, said: “Things are definitely moving forward from general discussions to contracts such as that signed with the Voronezh factory. But progress remains slow, and the government is not free of blame, since it sends out mixed messages about the degree of state support the industry can expect.”

The good news for the Russian economy is that leasing is booming fastest among small and medium-sized businesses. James Gorham at KMB Lizing, which focuses on smaller customers, says: “Leasing companies will feel the pressure from banks: long-term ruble loans are in current conditions competitive with a long-term dollar lease. But we are doing 40 deals a month, including large numbers of sub-$25,000 vehicle leases to companies. Since the new tax code came into effect, small companies have significantly improved their financial reporting and it has opened up new possibilities.”

Ten largest leasing companies (by volume of contracts in the first nine months of 2002)

    Total volume ($m)
1 Rosagrolizing 145.5
2 RTK-Lizing 94
3 Ilyushin Finance 90
4 Avangard-Lizing 41.1
5 Lizingpromkhold 38.2
6 Promsviazlizing 32.1
7 Globus-lizing 21.1
8 Raiffeisen-Lizing 17.7
9 Aviatsionnaya lizingovaya
kompaniya “Tupolev”
17.1
10 Delta-Lizing 14.6
     

 
Growth of the leasing market

Year Total volume (billions of rubles)
1997 14.4
1998 14.4
1999 10.6
2000 35.2
2001 49.7
2002 75.8
2003 (projected) 100.1

 

Source: Expert magazine/Expert rating agency

A version of this article first appeared in Trade Finance magazine.
Posted December 2003; © 2003 Simon Pirani

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