FINANCING SOURCES FOR LESSORS

Access To Credit Initiative

Kiev, February 21, 2006

Presented by: Richard Caproni Sponsored by USAID

Access to Credit Initiative

Financing Sources for Lessors International vs. Ukrainian Practice

FINANCING SOURCES FOR LESSORS

Access To Credit Initiative

Agenda:

Ukrainian Banking Sector Need for Capital Market Development The Tide Is Coming Preparing Ukraine’s Infrastructure and

Institutions (ATCI) What this Means for Leasing in Ukraine Typical Funding Sources for Lessors

FINANCING SOURCES FOR LESSORS

Access To Credit Initiative

Today, Ukraine’s Banking Sector Cannot Meet the Capital Finance Needs of Ukraine’s 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

FINANCING SOURCES FOR LESSORS

Access To Credit Initiative

Capital Markets Direct a Country’s 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

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

Pension Savings Investment Capital

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

Stocks Bonds Mutual Funds

Asset-backed securities Derivatives

FINANCING SOURCES FOR LESSORS

Access To Credit Initiative

Important Investment Institutions Are Developing and Will Bring Billions of Dollars into Ukraine’s Financial Markets

Pension Funds

Insurance Companies

Institutional Investors / Mutual Funds

Investment Banks

FINANCING SOURCES FOR LESSORS

Access To Credit Initiative

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

FINANCING SOURCES FOR LESSORS

Access To Credit Initiative

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

Internal Equity Subordinated Debt

(from parent company)

ExternalRecourse Term Debt Wholesale Lines of Credit (LOC) Warehouse LOC

Non-Recourse LOC / Term Debt Portfolio Sales Brokering / Discounting Lease-backed Securities

FINANCING SOURCES FOR LESSORS

Access To Credit Initiative

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

FINANCING SOURCES FOR LESSORS

Access To Credit Initiative

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

Internal Sources Provide More Flexibility but Limit Growth Potential

FINANCING SOURCES FOR LESSORS

Access To Credit Initiative

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

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

FINANCING SOURCES FOR LESSORS

Access To Credit Initiative

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

FINANCING SOURCES FOR LESSORS

Access To Credit Initiative

Main Qualifications for Recourse Debt

Adequate Capital Experienced management and operational

capabilities Strong operating and credit history Portfolio performance and credit quality

FINANCING SOURCES FOR LESSORS

Access To Credit Initiative

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

FINANCING SOURCES FOR LESSORS

Access To Credit Initiative

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

FINANCING SOURCES FOR LESSORS

Access To Credit Initiative

Banks that Establish Their Own Leasing Company Adopt Different Business Strategies

Division Usually exclusively

internal funded Funding provided at

bank’s cost of funds (pooled rate )

Subsidiary Some internal funds External funds

Debt and equity Recourse and non-recourse

Brokering and Discounting

FINANCING SOURCES FOR LESSORS

Access To Credit Initiative

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

FINANCING SOURCES FOR LESSORS

Access To Credit Initiative

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

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

FINANCING SOURCES FOR LESSORS

Access To Credit Initiative

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

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

Access To Credit Initiative

FINANCING SOURCES FOR LESSORS

THANK YOUAccess to Credit Initiative

72 V. Vasylkivska, 5th floor

03150, Kyiv, Ukraine

Tel: (044) 537-0966

Fax: (044)537-0967

David Lucterhand, Chief of Party

Richard Caproni, Senior Advisor