EPI Pre-Feasibility Study: Leveraged Leasing Financing Facility

The purpose of this report is to present and analyze potential options and structures for an Investment Facility that will be dedicated to financing leasing companies in Georgia and that can attract international financiers to participate. The Facility will serve as a mechanism to provide access to capital for leasing firms in Georgia to facilitate their expansion, with a focus on the use of leveraged leasing, an innovative financing structure that can be attractive to international financiers and that achieves tax efficiencies for leasing companies. In addition to presenting the potential options and structures for the Facility, the report also presents the pros and cons of the various options and the next steps and fact finding that would need to be taken to further advance the initiative.

DISCLAIMER: This report is presented for informational purposes and includes analysis and suggestions based on initial research. The information in the report is presented for the purposes of deciding whether or not to further develop the concepts presented. A full feasibility study and/or due diligence should be conducted by the recipient of the report and any other readers of the report before pursuing or entering into the structures and transactions discussed here or structures and transactions of the like.

BACKGROUND

Leasing can play an important role in facilitating capital investment, as it offers an alternative form of financing that addresses some of the common constraints to expansion. Companies can obtain equipment needed for expansion without straining their balance sheet and with fewer upfront costs. At the same time, it is a form of asset-based lending as opposed to balance sheet lending, serving as an alternative, tax efficient risk structure to build up the availability of capital in a country

Though there are 15 registered leasing companies in Georgia, there are reportedly only three that are operating, and only two with significant market share. The total leasing asset value in Georgia is approximately $30 million (contracted from $40 million in 2010), in comparison with a total asset value of the banking sector in Georgia of approximately $7.6 billion.

The prevalence of lease financing in relation to the amount of investment, the size of the banking sector, and GDP is relatively low in Georgia in comparison to Western countries and other developing countries, suggesting significant room for leasing industry growth in Georgia. Additionally, initial case assessments of the development of leasing on their emerging markets demonstrate that rapid growth in the leasing sector is possible.

Leasing laws in Georgia (policies and tax treatment), with a role by EPI and as reported in EPI’s “Developing Leasing in Georgia” reports, has recently been improved to make leasing businesses more viable and attractive in Georgia.

Several factors indicate that there are opportunities for attracting financing to the leasing sector and thereby expand the use of leasing. These include the relatively undeveloped and small size of the leasing sector in Georgia together with the recent regulatory improvements and several other emerging market case examples. An expanded leasing market will increase availability and benefits of this alternative form of financing to Georgian enterprises.

WHAT IS LEVERAGED LEASING?

Overview: Rather than funding the entire lease transaction for a client, the leasing company only has to contribute a portion (for example, 10-30%) of the total cost of the equipment, whereby a lender finances the remainder. The lease receivables and the equipment behind the leases secure the loan. The loan is a non-recourse loan, which means the leasing company itself is not responsible to pay the loan even in case of default. The loan is tied to and paid from the specific lease or set of leases and lease cash flows that secure the loan only. Since the leasing company finances a portion of the lease itself, the loan achieves collateralization greater than 100%.

Tax Benefit: Leveraged leasing is usually structured so that the leasing company benefits from what becomes an efficient tax structure. Though the leasing company is directly financing only a portion of the lease, the leasing company can still depreciate the full value of the leased equipment, and can deduct the interest payments to the lender from its net income tax base. This tax efficiency makes leasing companies more financially competitive, thus in theory making them able to offer more attractive rates to its lessees. (Note: this tax benefit normally only occurs for operating leases, not financing leases, since it is the lessee who books the depreciation in financing leases. The majority, or 90%, of leases in Georgia are financing leases; however, for taxation purposes under Georgian law, financing leases are treated as operating leases. Thus, leasing companies in Georgia will have significant potential to benefit from the tax efficiency of leveraged leasing.)

PROPOSED LEVERAGED LEASING FACILITY

Overview: A Facility (fund, special purpose vehicle or trust) into which a set of international investors can invest and that are interested in a means for investing into the leasing sector in Georgia. The Facility would then engage in leveraged leasing transactions with leasing companies in Georgia.

NEXT STEPS

The next steps, outlined in detail in Appendix F (Recommended Next Steps), include the following:

  • Feasibility Study (estimated 2-4 months)
  • Launch of Fundraising/Start-Up (estimated 4-8 months)
  • Launching of Operations