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Latin America: Independents Drive Growth With Leadership and Innovation

December 04, 2013, 07:00 AM

The Latin American Region’s (LAR) leasing industry is on the edge of innovation and leadership with opportunities unfolding in a number of markets, however Brazil is an outlier.  Here’s why…

Private equity investors are funding independents that are innovative and have strong leaders, including the most profitable leasing company in LAR, AB&C Leasing, an independent based in Mexico with an ROE of 41.94%. Two other independents this year -- one in Chile and another in Colombia -- also received private equity investments to grow their leasing businesses in those markets. We’re urging interested clients to look beyond Brazil at some of the growth markets in LAR.

There is a myth that to enter this region, one starts in Brazil, but this myth needs to be debunked. In fact, by measures we use to determine where the innovation and leadership is strong, we favor Colombia, Peru, Chile and Mexico where there is less reliance on full pay-out commodity type financing. See the accompanying graph showing upward trends for Leasing Bancolombia, Banco Santander Chile and Banco Credito del Peru.  See charts on Leadership in Profitability and Measuring Existing Innovation and Leadership.

Brazil’s leasing portfolio decline in the past year was due to failures in leadership and lack of innovation. This country enjoyed a favorable legal and tax environment for a number of years and, as a result, many companies here heavily relied on consumer motor vehicle financing. This leasing industry sector did not have enough motivation to innovate and diversify portfolios. The Brazilian market, which represents two-fifths of the Latin American leasing market, fell 39% in terms of portfolio value.  If taken out of the overall regional portfolio value, then the region would show an increase of 9.8%.

The successful companies in LAR today are offering operating leases, and they are managing portfolios with more technology and a variety of asset types, with far less concentration in consumer motor vehicles. Independents that have proven to be resilient here are CSI Leasing, Rentandes, and Tanner Servicios Fiancieros.

The leasing industry has also succeeded in lobbying for better regulatory frameworks. The most recent example is in Bolivia, where the Congress passed a new leasing law that overall is business friendly. There are three players in this country. We expect more to come.

In the beginning of the year leasing portfolio volumes overall for Latin America were estimated at $67.5 billion, which was 12% lower than the year before. However, when you look at growth trends based on International Monetary Fund (IMF) data, which we converted for the GDP Growth Trends chart, there are plenty of indications that Latin American economies will grow faster than the rest of the world, and certainly faster than the United States.

A CFO magazine article in September also reported on positive growth projections as well, noting that capital spending would increase by nearly 6% and tech spending by 8%. Employment was forecasted to increase by 6.6% and revenues to rise 8%. CFO said the top worries in Latin America include consumer demand, government policies, currency risk, difficulty in maintaining profit margins, challenges in attracting and retaining qualified employees and balance sheet weakness.

Our consultancy’s research suggests that equipment demand will be stimulated by investment in infrastructure. Assets used in construction, telecommunications, energy and transportation will drive financing opportunities.

Established captives are also doing well and multinationals still drive most of the leasing business; however, there are fewer U.S. multinationals this year in the Latin American region, and banks have some hesitation about entering due to anticipated Basel or Dodd Frank rules.  See chart on Most Active Players.

CIT downsized its operations in LAR by mid-2013, but it was not due to poor business performance, but rather to a change in strategic direction. Captives, such as CAT and HP, are doing well, but captives not already established have entry concerns due to potential impact on their parents’ exposure to country risks and revenue recognition concerns.

The Alta Group Latin American Region offers a free executive summary of the Alta LAR 100 just published. A deeper dive into economic data about this region is available to our clients and will be available on December 15, 2013.

Rafael Castillo-Triana
CEO, Latin America Region | The Alta Group
Rafael Castillo-Triana is CEO of The Alta Group Latin American Region, LLC, global consultants to the equipment leasing and finance industry. Based in Fort Lauderdale, FL, he is an international attorney with more than 30 years in the leasing industry. A former executive for a leasing company in South America, he later founded two leasing companies in Colombia. Castillo-Triana is an expert in international leasing law who represented the Colombian government in the drafting of the national convention for international financial leasing developed through the UNIDROIT convention. His contribution has been a determining factor in the drafting and adoption of leasing laws in countries such as Tanzania, Kenya and Georgia. He has published two books on leasing, written numerous papers including the annual Alta LAR100 ranking of the top leasing companies in Latin America, and spoken at universities, law schools and equipment finance conferences in many countries.
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