While the extreme capital intensity of the big-ticket market has seen it become a less attractive sector for lessors in post-crisis Europe, Grant Collinson finds different opportunities are emerging around the globe in rail, aviation and shipping finance
Although US bank CIT runs its big-ticket business under the umbrella of CIT Transportation Finance, Jeff Knittel, president of the division, says you need to look at the three main segments individually to understand the opportunities around.
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"The big-ticket finance market has grown to the point where you need to look at it by segment," he says.
"When big-ticket finance really became en vogue in the early eighties, when I began my career, it was more homogenous. Now, it’s very specific and there is a lot of expertise in the various industries."
Knittel splits CIT’s business into rail, ship and aviation – and, within aviation, commercial aviation and the corporate jet business – and says there is opportunity in each segment if you know where to look.
Emerging market growth
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By GlobalDataCIT Transportation has an aircraft order book, which Knittel says gives the firm the advantage of predictable growth in the aviation market, but nonetheless he identifies specific opportunities for air in Russia, South-East Asia and South America.
"Latin America has been a positive surprise," he says. "The data in Latin America has been pretty high historically but to date, over the last several years, I would say [we have been] positively surprised by the activity levels in Latin America."
This growth, says Knittel, is based largely on a replacement cycle, but also helped by the generally buoyant economies in South America although the Brazilian economy has slowed "fairly dramatically" over the past year.
Underlying economic growth has also given a boost to aviation on the other side of the world, where Asian development has opened up big-ticket demand, especially, from CIT’s perspective, for corporate jets.
Knittel says CIT Transportation has experienced its largest business growth in South-East Asia, but has also grown business in China and India.
"When you look at certain countries such as Indonesia, Thailand, the Philippines; the underlying economic growth has been strong which leads to a demand for finance and leasing capacity," he says.
The corporate jet sector is a driver for growth in the region as it is with many emerging markets, says Knittel, with around 50% of global orders now coming from outside the US which was previously the significantly dominant jet market.
"The corporate jet sector is a growth business for us globally," he says.
"We tend to focus on mid- to large-cabin airplanes. I think that has been good from our perspective. The small cabin aircraft to date has been a difficult environment although we would anticipate some upturn; we are seeing growth in that business also.
"There are pockets of growth around the world, specifically in emerging markets where people see the value in having a corporate jet.
Asia is a great example of that; the distances are large and having the ability to move around with a corporate jet is very helpful for some of these businesses," he adds.
In Europe, Russia is proving strong for aviation, says Knittel, and is an country CIT has long concentrated on. More generally, he describes Central and Eastern Europe as a growth region for big-ticket finance, driven by the needs of the commodities industries, especially oil.
Alexander Tsakoev, a Moscow-based partner with law firm Norton Rose Fulbright, says the Russian big-ticket market was experiencing growth across all sectors and is expected to keep growing.
"We are seeing a great deal of activity in the leasing market in Russia, across all sectors," he says.
"The market has grown from almost nothing over the past 5 to 10 years and there is a great deal of potential for it to continue to grow."
Quiet Europe
In wider continental Europe the story is not so positive.
"In Europe, specifically because of its economic woes, the activity levels are lower," says Knittel, "and we anticipate that to stay that way for a while."
Reflecting the economic pattern, big-ticket leasing tends to be strong the farther north you go, he adds.
In contrast with the market positivity in Russia, Christine Ezcutari, a Norton Rose Fulbright partner based in Paris, says the French leasing market is "quiet" across the aircraft, rail and shipping sectors.
"Since the loss of French lease financing incentives in 2008, the market for shipping remains steady with still some "single investor lease" transactions in accordance with general provisions of the French tax code but certainly not on a massive scale," she says.
Knittel describes the European rail leasing market as "limited" for CIT, which conducts the vast majority of its rolling stock leasing business in North America. Tom Johnson, head of rail at Norton Rose Fulbright’s London office, says the European Union drive to "open up" the European rail market should benefit the leasing industry.
The EU has pursued a programme to "liberalise" the rail network in all 27 member states and the fourth and final stage, announced in early 2013, proposes the rail network and all related service provision be completely opened up to the private sector by 2019.
An effect of this is that private operators from one country can more easily compete against state-owned operators in another country (although the reverse is also true).
Johnson adds the UK is "slightly ahead of the game" given the franchising system through which rolling stock lessors finance the UK rail fleets.
Historically, the UK rolling stock market has remained separate from the wider European market partly because of the logistical difficulty with crossing the channel and also because the majority of the assets built for the UK network cannot immediately operate on the main continental lines due to differing technical specifications.
"As part of opening national markets to competition from other member states, the EU regime requires interoperability such that rolling stock from one country meets the technical specifications for operating in other member states, and is recognised as capable of doing so," Johnson says.
"This will be positive for the UK rolling stock market, particularly locomotives used for freight. There is only a handfull of rolling stock that is allowed to go through the Channel Tunnel itself. This means that most rolling stock deployed in the UK will tend to stay there."
Norton Rose Fulbright has been working with a number of rolling stock lessors, however, which have opted to get engines modified or upgraded to work in different parts of Europe to improve the options for re-leasing stock at the end of the current leases.
"Because the rail leasing market is largely an operating lease market it is a decision the lessor has to take – particularly if you are not in the regulated passenger market," says Johnson.
"In the passenger market you might take the view that the rolling stock designed to operate on a particular line will still be needed on the line even at the end of the franchise period.
"In the freight market, where there isn’t the same franchising system, you might say, ‘well at the end of this lease is anyone going to need these in the UK – for whatever reason?’ That is where lessors are taking decisions about whether to upgrade to run in continental Europe."
Canny airlines
Elsewhere in the UK big-ticket market, Matthew Hodkin, partner at Norton Rose Fulbright, says business is slow and many firms have taken the strategic decision to withdraw from the sector with lessors only making exceptions for ‘top-tier’ clients.
Outside the UK, Hodkin says the aviation finance market is in a much better position than the shipping segment because of residual value opportunities.
"Aviation has an advantage over shipping in that there is more sense in taking a residual value position on an aircraft than on, say, a ship, so you can do an operating lease with a residual value," Hodkin says. "For instance, you might take the view that an A380 in 12 years’ time will have a certain value."
Hodkin says this is particularly true of smaller, narrow body aircraft and says a number of operating lessors have emerged in Ireland, initially because of lower tax rates, but now because this is where much of the industry expertise is based.
"Airlines are being a bit more canny about asset risk and about the risk of being exposed to a particular asset type all at once," he says. "This means that the airlines are happier to take an operating lease and the operating lessors are equally happy to take that operating lease risk because they can take a view of the market.
"Whereas, you don’t tend to see that in shipping because ships are less obviously interchangeable between operators in the same way as aircraft," he says.
Hodkin also highlights an alternative business model which is financing aircraft leasing through private equity funds. Two Doric Nimrod funds, which are listed on the London Special Funds Market and administered by Doric Asset Finance, are being used to raise finance to buy, and then lease, aircraft.
CIT’s Knittel agrees the ship finance industry has taken a "dramatic downturn" since 2008. Nonetheless, there are opportunities but CIT is "very, very judicious" in the transactions it will look at.
"We are very happy with the flow of [shipping] business globally, but shipping has a lot of European roots and we are seeing opportunities," Knittel says.
These opportunities vary from each sector within shipping, says Knittel, with some business pick-up in the liquid natural gas industry in particular, but the market is still slow across Europe.
"When you look at shipping you look at the things that caused the downturn and, in my humble opinion, it’s a combination of economic woes and dramatic over-building; it’s going to take time to work off the supply/demand imbalance," he adds.
While Knittel decline to offer a forecast for CIT Transportation Finance’s growth in 2013 he did say he anticipated a profitable year.
The division reported $2.2bn (1.7bn) in new business in 2012, down 12% on 2011, and a loss of $112m compared to a $190.2m profit the year before, as a result of the CIT Group’s increased debt repayment.
For the big-ticket sector in general, Knittel doesn’t see much changing to help reinvigorated those parts of the industry which are at historic lows without the reintroduction of a tax incentive.
Knittel says the tax market for big-ticket leasing has disappeared in most jurisdictions and says such an incentive could "change the dynamic" of the industry, although he admits it’s unlikely.
Knittel says: "I don’t see any signs of this happening in the mature economies, and some of that is driven, frankly, by large deficits, and historically tax leasing has been a way to help grow economies, but it’s through sheltering taxes. In the near term I don’t see a great deal of increase in the tax-lease business.
"I think that is a dynamic that can change. Twenty years ago who would have thought that the operating lease would have been such a major force in the leasing world?"
