The Siberian leasing market is recovering, step-by-step, to its pre-crisis state. What will be its key growth points and most important vectors of development in 2011? ELENA DERGACH, Deputy General Director of DeltaLeasing for Western Siberia gives her expert assessment of the situation to “CS” correspondent Yulia DANILOVA.

- Elena Vladimirovna, what is your forecast for growth of the Siberian leasing market this year?

According to our estimates, the region’s market will expand by at least 30% compared with 2010. It is possible that actual results will be even better. Leasing activity in the Siberian region gained considerable momentum at the end of 2010 and 1st quarter of this year indicates that the upward trend continues. According to our observations, the most active development of leasing activity is in Kemerovo and Altai region. Activity of those enterprises forming the core of economic operations in the Kuznetsk Basin - mining and metallurgy - have recovered. Lessees in this region are most interested in mining machinery and equipment for the service industry, food processing and freight transport. The leasing market in the Altay region has been in stagnation for a long time and began to rapidly develop only in last two years. New companies are opening in Barnaul and lessees are clients exhibit a high demand for food processing equipment, freight transport and agricultural equipment.

- What programs and products will be demanded by the lessees this year? Why?

We observe growth in demand for all kinds of leasing products. In this case, a lot depends on the financial condition and needs of the client. For example, lessees are showing great interest in express products, which provide for rapid processing in a period of up to three days. Express-products can be used for the leasing of the freight vehicles, special-use machinery and more expensive equipment. This option is available for the companies with sufficient official turnover in bank accounts, as this is the core parameter for a positive decision by DeltaLeasing’s credit committee. In this manner, financial transparency enables companies to benefit from more rapid decision-making and a reduced volume of required documents.

Incidentally, there are a lot of such companies in our region. In my opinion, this is due to the evolutionary development of the market.  More and more contractors refuse to work “off the books”, which has also become absolutely impossible for certain types of business. As a result, lessees modify their internal policies and prefer legal forms of business development. This process is inevitable and normal.

- What changes do you expect in the lease financing terms?

Tenors and amounts will continue to grow - this is stable trend. Four and five-year contracts have already appeared in the region’s leasing market and we can say that, in terms of this trend, the market has reached its pre-crisis level of development. Also, average deal amounts are also recovering, step-by-step. For example and for several years prior to 2008, an average deal amounted to $ 150,000. During the crisis, companies preferred to buy inexpensive equipment or to reduce the volume of acquired machinery. That seriously impacted average deal size, which decreased almost by half. Currently, we see continuing growth of this indicator – during the first several months of 2011 our average deal size exceeded $ 100,000.

The cost of lease financing is also decreasing.  Market average flat rates - depending on the product and advance - are at the level of 9-10% per annum. However, the market can provide more beneficial offers. In particular, we see many products and special offers presented jointly by lessors and suppliers. In this case, flat rates may range from 2% to 7%. It is important to note that the payment schedule affects the cost of lease deals. We offer seven different payment schedules, which allow clients to choose the best option with the respect to cost.

In addition, down-payment terms have become more attractive. It is now possible to lease vehicles and equipment with advances beginning at 10%.

- Do you expect appearance of new companies among lessees?

Yes. More and more SMEs involved in freight transportation and services are interesting in lease financing. In the case of trucks, some clients are changing from Chinese trucks to European trucks, others are updating their truck fleet, while other are simply entering this market segment, which did not lose ground during the crisis.

Medical companies are a new type of client for us. This market segment is growing rapidly and such growth leads to intensification of competition in the medical services market.  Success of the companies depends not only on the professionalism of personnel, but also on the quality and diversity of services offered. Meanwhile, medical equipment is mainly imported and capital-intensive.  As such, it is difficult to develop without external financing. In this case, leasing is an effective instrument to increase competitiveness.

We are still waiting for recovery of demand for industrial equipment - from the processing and food industries and PVC manufacturers - and for new clients from such industries. We are seeing an upward trend of demand for leasing services in these segments, but one that is less significant than among service and freight transportation companies.

- What is the reason of rising interest for lease financing from SMEs?

SMEs must find collateral to secure a bank loan. Lease financing does not require additional collateral and represents the best solution for their acquisition or replacement of equipment, machinery and fixed assets. SMEs also demand lease products based on a scoring methodology for approval since only their internal management accounts reflect actual financial activity.

- According to your estimates, how is the competitive environment of the region changing this year?

In 2010, state-owned companies became more active in the Siberian leasing market. Their clear direction of business development – the implementation of state programs – has not yet led to changes in the competitive environment. We see that the regional companies are leaving the market – only about 10 companies are acting in a more-or-less stable manner. When financing is available, we note some optimism among the regional companies, but they often work only with repeat clients and do not attract new lessees. So, the main players in the Siberian leasing market are the federal (pan-Russian) level companies.

- Is there a background for the M&A deals in the leasing market of the region?

An analysis of publicly available information, shows that many federal companies openly declared their are willingness to acquire regional companies. At the moment, M&A activity is mainly evident in central Russia, but lessors are interested in the Siberian region, which means that acquisitions of regional companies are possible in our region. However, such deals likely require not a month or even a year since the crisis will drive purchasers to conduct more careful audits of regional companies.

The M & A deals are natural and normal process for the current stage of the leasing market development in Russia: a regional company either grows into a federal company, or sooner or later becomes the object of the merger. There are no risks for the client, if the deal is made according to the rules, as the new owner is interested in preservation of the existing client base.

- Representatives of the state companies entered to the market of the Siberian region, declare that they will intensify their activity in Siberia. How will the private/market companies compete with such powerful players?

I think, first of all, due to freedom in decision making. Market-driven companies usually have no clear orientation or directive regarding the financing of specific sectors or equipment types. They are free to set priorities and choose objects for financing. Their goal is profit and not implementation of government projects and tasks. This means that they are more flexible in decision making and can quickly adapt to the market and its needs.

- What will allow the leasing companies to compete with each other taking into account progressive unification of the leasing programs terms?

When rates are similar, seemingly immaterial differences become important.  Mainly, this involves quality of service and the provision of additional services.  For example, joint programs with suppliers, which reduce costs for the client. An example in the automobile market are “trade-in” programs. The development of electronic services is highly perspective – client access to deal information on the financing company's website, on-line applications, etc.  Corporate reputation is also very important as clients consider whether a company stands for successful market experience, fulfillment of obligations, a constructive approach to solving of problems or, conversely, may represent risks over the course of a contract that will last for several years.

- Do you expect any difficulties with respect to the fund raising in the leasing sector?

If no radical changes occur in the market, then difficulties will not arise. Banks and proprietors are currently willing to invest money in leasing.

                                                                                                                                                            (с) Continent Sibir