PDF Ukrainian Lease Market Survey 2008 - Survey
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Ukrainian Lease Market Survey 2008
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Data and conclusions below are the summary of the 2008 Ukrainian leasing market survey against the previous year performance, carried out by the Ukrainian Union of Lessors association jointly with the Ukrainian Commission for Regulation of Financial Services Market (CRFSM). The survey was performed in the format of the analysis of 2008 official statistical reporting provided by the Ukrainian leasing companies.
The key results of the survey are represented by the following data:
the current year is seeing an increase in the share of short-term (up to 5 years incl.) financial lease agreements, which is caused by political and economical turmoil in the country (this placed long-term investments to the high-risk level);
among financial lease agreements, deals in the industries like transport, agriculture, construction, prevail. This is explained by rapid development of the said industries in 2007 and early 2008. Presently, these sectors are considered risky as far as investment is concerned, which is caused by lower demand and prices for their products;
the highest demand among lease items was posted by transport, agricultural machinery, construction and printing equipment (which effectively echoes the key industries, where lease agreements prevail).
the main sources of funding for lease deals in the current year are bank loans (47,1%), own funds of leasing companies (21,75%) with the latter's share demonstrating a rapid growth compared to the previous year. The share of funding through borrowings from legal entities significantly reduced (-41,93 bps). Such developments to a certain extent are explained by the liquidity crisis in spring this year, lack of internal and external funding at the end of the contemplated period.
the number of financial lease agreements signed in 2008 increased year-on-year against 2007 and reached 9,766. The price of agreements in value terms totaled UAH9,98 b (-UAH6,9 b primarily due to the financial crisis, sizeable reduction in external and internal funding);
the total value of concluded financial lease agreements as at the end of 2008 was UAH28,5 b - UAH8,3 b up versus 2007, 17 586 deals in quantitative terms. Such trends are explained by increasing awareness about leasing among the public and state officials, rapid development of the Ukrainian financial markets, and improved access to credit resources in the recent times. It is important that the value of existing lease agreements for three quarters of 2008 reached UAH29,5 b, the dramatic fall of funding in the 4th quarter caused this figure to decline by approx. UAH 1 b.
the biggest shares in the leasing payments structure belong to the repayment of the cost of leased property - 68,78%, and the lessor's fee - 24,32%. Crisis developments in both the financial markets and the economy, political instability, worsened access to lending (which is the main source of funding for lease transactions), lowering creditworthiness of firms, suspension of investment projects may cause lease lending volumes to significantly decline in the nearest term and the growth of the lease market seen in the recent years to slow down. However, as regards the capital investment structure, the share of leasing may increase at the cost of limited amounts of bank lending.
Some short-term lease market forecasts are provided below:
lease companies increase their requirements to the financial state of potential clients; focus on the existing client base with positive credit history; 10-15% increase in lessees' down payments; interest rates go up (by 2-3%); shorter terms of financing (down to three years); average value of the lease agreement go down, higher demand for cheaper machinery articles; focus switches to more liquid lease items; shares of the construction sector and agriculture in the structure of financial lease contracts, shrink; due to predictions of a significant rise in non-performing loans (according to some analysts - up to 5060%) lease companies this year will focus more on strengthening control over non-performing loans and troubled assets, corresponding strategy development and taking out of leased property; development of second-hand machinery market; higher demand for car leasing from private individuals caused by significant constraints and worsened terms of banks' car lending; increasing demand for local currency financing, caused by significant devaluation of the Ukrainian currency and its instability; small lease companies shut down due to worsening payment discipline, lack of funding, inability to fulfill their obligations before creditors; reduction in lease lending volumes in 2009, caused by lack of external and internal funding, and lowering internal credit solvent demand; as regards vehicles leasing, additional reasons for declining of finance volumes are an increased vehicle ownership charge while registering an imported vehicle, temporary increase in customs duties, return of tax benefits to the Ukrainian car manufacturers.
Following are the key 2008 indicators obtained from the Ukrainian lease market survey.
Volumes of financial lease agreements concluded in 2008.
Concluded agreements are understood to be the agreements signed during the reporting period regardless of the
Association's Code of Ethics
Partnership Memorandum
actual developments related to them (advance payment, transfer of property, etc.). These include the cost of leased equipment subject to commission payments. The number of agreements signed in the current period increased by 491 and reached 9 766. In value terms their volume reduced to UAH9,98 b (by UAH6,9 b). This is explained by lowering access to credit resources, increasing interest on bank loans year-on-year, as well as crisis development throughout the economy. The average value of a lease agreement in 2008 went down by UAH0.8 m compared to 2007 (to UAH1,02 m). Chart 1. Total value and number of leasing agreements signed in 2008 year-on-year
Chart 2. Number and value of leasing agreements signed during a quarter in 2007 - 2008, UAH m
The Chart shows the trend towards the declining value of lease agreements signed during the quarter. Also, a sharp decline in 2008 should be noted, which was caused by the liquidity crisis in spring 2008 (additionally, an insignificant volume of leasing agreements in the quarter discussed was to some extent caused by the market standstill during this period - winter holidays, etc.), the current financial and economic crisis. Chart 3. Total value of lease agreements signed during the quarter, in 2006 - 2008, UAH m
Chart 4. Lease equipment purchased for financial lease deals during the reporting period, UAH m
The cost of purchased assets is understood to be the total cost of property transferred for leasing under the signed financial leasing agreements during the reporting period (excl. lessor's award, loan interest, etc.).
The value and the number of the current financial lease agreements. Current financial lease agreements are understood to be lease agreements with outstanding obligations as at the end of the reporting period. These include obligations of repayment of the cost of lease objects including fees. The value and the number of financial lease agreements outstanding as at the end of the 4th quarter of 2008 was UAH28,5 b, which is UAH 8,3 b more compared to the same period of 2007. The number of outstanding agreements is also on the growing path: the total increase in the number of lease agreements was 2 484 (17 586 agreements as at the end of the 4th quarter of this year) versus late 2007. Such trends are explained by increasing leasing awareness among the general public and state officials, rapid development of the Ukrainian financial markets, and improved access to credit resources recently in 2007 - early 2008. It should be mentioned however that compared to the end the 3rd quarter of 2008 the value of outstanding agreements as of the end of the year posted a UAH1 b decline (from UAH29,5 b), caused by actual funding interruption as a result of the crisis in the economy and the financial market. QoQ dynamics of current leasing agreements is displayed in Charts 6 and 7. Chart 5. The value and number of outstanding agreements as at the end of 2008 compared to the previous year
Chart 6. Quarterly breakdown of leasing agreements with outstanding obligations as at the end of the reporting period, 2007 - 2008
Chart 7. The value of leasing agreement outstanding as at the end of the quarter, 2006 - 2008, UAH b
Value breakdown of the outstanding financial lease agreements by equipment and economy sectors. The key share in the lease portfolio structure belongs to vehicles - its size in the current period is 54,56%, (-9,2 bp reduction). Among other popular leasing items are technics, agricultural units and machinery (8,06% in 2008), as well as computer appliances and telecommunication equipment (5,58% in 2008). Although the share of construction equipment is not displayed in the Chart (it is included in the Other), it has significant percentage in the leasing deals structure. Chart 8. Structure of financial lease agreements by type of equipment as at the end of 2008 versus the previous period
The structure of lease agreements by industries shows the dominance of transport, services, construction, agriculture, in both periods discussed. Significant price growth for agricultural products, stable demand for such products, and forecasts of high yield resulted in an increase of the share of agriculture (+2 bp). However, record high yield this year pushed the prices for agricultural products significantly down (with some cultures below their costs), which accordingly resulted in the fall of agricultural producers' creditworthiness. This allows to forecast further reduction of the share of agriculture in the overall agreement structure, as this sector is highly risky in terms of investment. Due to skyrocketing real estate prices, higher demand for properties, the share of construction almost doubled in 2008 (+7,2 bp). However, the situation changed dramatically in the second half of the period - crisis hit the construction sector, real estate demand and prices go down, lack of funding. This allows to forecast future reduction of their share at the leasing market. Declining share of transport in 2008 against the previous year (-12,8 bp), caused by rapid development of construction and agriculture in early 2008, resulted in their active funding.
Chart 9. Value breakdown of outstanding financial lease agreements by industries as at the end of 2008 versus 2007
Financial lease agreements by duration as at the end of 2008 Chart 10. Average term of lease agreements as at the end of 2008 (share of companies with appropriate terms of lease agreements in the total quantity) versus the previous year
Chart 10 above breaks down lease agreements by their duration. The average duration of financial lease agreements was 2 to 5 years inclusive, with the share of agreements with such duration increased in 2008 (+1,93 bp). Increasing share of short-term agreements in 2008 is explained by higher risk level of long-term projects due to economic and political instability, and crisis developments this year. Chart 11. Value breakdown of financial lease agreements by terms of funding as at the end of 2007, 2008
Value breakdown of financial lease agreements is somewhat different in 2008 and 2007. Thus, the biggest share in the current period belongs to short-term leasing agreements (up to 5 years inclusive), whereas in earlier periods it was that of agreements with 5 through 10-year duration. As was said above, this was caused by instability of the economic and political environment in the period discussed.
Sources of funding of leasing transactions in 2008. Chart 10 shows the structure of sources of funding of lease transactions in 2008 against 2007. The key source of funding during the contemplated period was bank loans (47,1%), whereas in the previous period bank loans accounted for one-third only. There is a tendency towards an increase in the share of funding at the expense of lessor's capital (+11,02 bp). Funding through borrowed funds dropped significantly compared to the previous period (-41,93 bp). Such developments are to some extent caused by the liquidity crisis in spring, no or lack of internal and external funding.
Note, that in the current year the amount of lease prepayments has significantly increased due to crisis developments at the financial markets, and increasing investment risk exposure. Chart 12. Structure of funding of lease transactions in 2008 compared to the previous period
Background Lease equipment purchased for financial leasing transactions in the reporting period, broken down by key
asset groups. The most popular are equipment of key asset groups 2 and 3 (in 2008.: 96,3%; in value terms UAH 8897,8 m) during the periods analyzed. These include transport, equipment, technics, machinery, appliances. Given there are almost no leasing real estate transactions (which is further escalated by the construction market crisis, lowering demand for properties and, accordingly, by price reduction, as well as lack of solvent consumers to date), share of group 1 is the smallest. Chart 13. Value breakdown of purchased lease objects by key asset groups, in 2008 versus the previous period
Structure of lease payments. In the structure of lease payments the biggest share belongs to repayments of the cost of leased property 68,78%, as well as lessor's fee - 24,32%. Due to the increasing risk level of investment lending in the current year, the share of fees (+4,8 bp) and compensation of interest payments under the loans (+3,37 bp), has grown. Apart from that, another factor that drives the increase of fees is hryvnia devaluation, exchange difference of which is included in the client's fee payments. Chart 14. Structure of lease payments in 2008 against the previous year
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