Equipment Leasing Versatile financing instrument Bucharest 19 October

Equipment Leasing Versatile financing instrument Bucharest, 19 October 2005

Equipment Leasing Market evolution Evolution of Equipment Leasing in Romania • Traditionally the investments were financed by banks which even today play an important role in asset finance • Equipment leasing started as being considered asset financing product in 1995 together with the appearance of the leasing companies in the market (first leasing agreements were concluded in 1995) • Few Lessors have the technical capability to asses investment projects, equipment leasing being developed as a niche segment until recently. • The non existence of S/H market for equipments slow-down the development of equipment leasing products, which consists mainly of full pay-out leases, the operational leasing for equipments being rare and mostly developed by captive leasing companies (as sales aid products). The captive companies are ready to repossess due to commercial reasons, while bank affiliated companies are not ready or do not prefer to reposes the equipments regardless the potential gain from repossession. 2

Equipment leasing market players Bank Affiliated Leasing Companies purchase the equipments from various manufacturer with the purpose of lease to the lessee (they are independent from manufacturers) Independent Leasing Companies Captive Leasing Companies Lease Brokers a lessor created when a manufacturer (or dealer) decide to establish an equipment leasing company to finance its products and eventually to increase its sales find the interested lessee, present the deal to lessors (further services provided can include insurance, acquisition arrangements with the manufacturer) 3

Equipment Leasing Market segments • Small Ticket - concentrates leasing lower-priced equipment (copiers, fax machines, PC) with values below 25, 000 EUR (can go up to 100, 000 EUR) - the lessee is mostly interested in convenience of acquisition, maintenance and disposal - the main competitor: own funds • Middle Market - fill the gap between small ticket and large ticket - the lessee decision is concentrated on convenience and price - competitor: own funds and bank loans • Large Ticket - focused on higher priced equipment (values above 1 million EUR) - the lessee is very price sensitive - the documentation of the lease is more evolved due to the size and complexity of the transaction - competitor: bank loan/financial partner 4

What is equipment leasing? Equipment Leasing is an usage agreement between an equipment owner (lessor) and a user of the property (lessee). The lessee remits to the lessor a periodical rental fee as compensation for the usage of the property Type of leasing: • Financial Leasing - risk and benefits are transferred to the end user - the lessee purchase the asset at the end of the lease term - the period of the lease is more than 75% of the economic life of the asset • Operational Leasing - other leases which do not fit into the above category 5

Operational flow of a leasing transaction Agreement between the Lessee and Lessor on the asset and its characteristics Application to a leasing company Analyze of the project by the leasing company and issuance of the financial proposal Proposal acceptance Leasing contract – Purchase contract preparation and signature Payment/delivery/insurance of assets 6

Lessee Reasons to Lease (1) Flexibility and Convenience • Convenience to the Lessee - acquiring an equipment through leasing can involve less bureaucracy and time than a conventional form of finance - leasing can provide “one-stop shopping” - when acquiring an equipment a Company has the possibility to choose the equipment as well as various type of financing • Flexibility in lease structuring - the leasing Company asses, beside the creditworthiness of the client, the asset (the leasing company is an expert in equipments) and thus have a wider range of possibilities in structuring the leasing transaction (payments, maturity, collateral) • Bundled services - the subject of the lease can be not only the asset but also additional services and acquisition costs such as: insurance, maintenance, property taxes, installation costs 7

Lessee Reasons to Lease (2) Economic • Diversification of financial sources - through leasing, the companies can finance their investments and can keep free some other financing lines from banks to be used for working capital and other purposes • Additional source of finance - some company’s can be too leveraged for the banks (or they remain without any collateral), in this situations leasing is a solution, the leasing companies, by assessing the asset object of lease, being in the position to grant additional funds for investments • Capability of using the asset as a base for financing a diverse type of financial needs for client: through sale and lease back are financed the working capital needs Less restrictive form of finance • Leasing agreements vs loan agreements contains a limited number of covenants (loan agreements have many financial covenants to ensure the repayment capability of the borrower – debt to equity ratio; financial expense coverage ratio; liquidity ratios etc. ) • Lease agreement does not oblige the client for channeling any Lessee’s business through the Company (as opposed to banks) 8

Lessee Reasons to Lease (3) Tax incentives • custom duties and VAT payable at the end of leasing term, the tax base being the residual value, minimum 20% of the entry value • full deductibility of the leasing rentals in case of operational leasing (from income tax point of view) Lower cost • in assessing the total cost of the leasing transaction, the tax incentives are quantified and, their positive effect makes leasing cheaper than other type of asset finance • in case of green-field investments, VAT is a problem, the companies not being in the position to recover the VAT directly; in these conditions, leasing has the advantage that the VAT is payable at the end of the leasing contract • comparatively with the bank loans, the leasing companies does not include in the financed value the VAT, making the leasing product cheaper than the bank loan 9

Lessee Reasons to Lease (4) Financial Reporting • Off Balance Sheet financing • Balance Sheet: In case of operational leasing no liability recorded in the Balance Sheet which reduce significantly the Company’s leverage and improve the borrowing capability • Increased return on assets (ROA) • The asset is not recorded in the Balance Sheet (operational leasing) and lowering the asset base the indicator is improved • Circumventing the capital budgets constraints - if a Company used entirely the Capital Budget for a year established by the Group still can have the desired equipments through operational leasing, the leasing rentals being expensed through the operating expenses, avoiding the painful process of CAPEX budget extension 10

Lessee Reasons to Lease (5) Cash Management • Improved cash forecasting - the monthly rentals are in many cased fixed, while the bank loans have a floating component which gives to the lessee a good cash planning possibility Technological (Operational leasing) A natural obsolescence hedge - the lessee can return the asset at the end of the leasing period and can lease new equipment which has newer technology embedded and thus, keeping-up with the latest technological developments 11