2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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) External Recourse  Term Debt  Wholesale Lines of Credit (LOC)  Warehouse LOC Non-Recourse  LOC / Term Debt  Portfolio Sales  Brokering / Discounting  Lease-backed Securities

9. 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

10. 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

11. 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”

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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

20. Access To Credit Initiative FINANCING SOURCES FOR LESSORS THANK YOU Access to Credit Initiative 72 V. Vasylkivska, 5 th floor 03150, Kyiv, Ukraine Tel: (044) 537-0966 Fax: (044)537-0967 David Lucterhand, Chief of Party Richard Caproni, Senior Advisor