State of the US Leasing market
Research and Development, Odessa Technologies, Inc.
Research and Development, Odessa Technologies, Inc.
Research and Development, Odessa Technologies, Inc.
The US market is in the "maturity" stage of the leasing process. Over the past few years, the market has been fine tuning this stage though increasing competition where lessor survival is far from assured. Hence lessors find themselves adapting to the reality of an increasingly dynamic industry. Of course, since the leasing industry in not regulated in the US, lessors have had to adapt to changes in tax laws, regulations and economic impacts.
To hedge against the risks and uncertainties of a competitive market, lessors have turned to diversifying their portfolios in different ways. Companies are finding ways to diversify the types of asset they finance and hence target new niches or needs. As an outcome of this or as a directly intended business strategy, they are also expanding their businesses geographically. While some firms try to achieve this diversification through internal means, most are resorting to the quicker means of mergers and acquisitions. Parent companies, involved in other businesses, are selling their leasing component to either focus on their core business, or simply because of a decreasing trend in the earnings in leasing markets. Increasing competition is not the only factor behind the current consolidation trend. The Alternative Minimum Tax (AMT), revised in 1986 has significantly impacted the market, forcing lessors to diversify their portfolios and alter pricing strategies. For some lessors, whose level of involvement in leasing is directly linked to their capacity or whose tax rates under AMT exceeded the maximum corporate rate of 35%, the AMT's impact has been severe enough to cause them to leave the industry or sell their leasing portfolios. It is predicted that future changes to the AMT will only increase the tax burden on lessors. Other major leasing related regulations, such as the FASB 13, MACRS or the reinstatement of the ITC will likely remain fundamentally the same.
The volume of leasing in the US is predicted to increase in the coming years for the following reasons.
The growth of the leasing software market is inevitably tied to the growth of leasing. As economies grow, leasing industries begin to evolve through various stages of growth on their way to maturity. Correlated with this growth is the need for software to manage the leasing process. Of course, the growth of an economy is mutually complemented by the growth of technology. So, the related dimensions of technological and industrial growth determine the software needs of leasing markets. While the need for automation systems can be established through the evolutionary stage of a leasing industry, the level and scope of automation is primarily dictated by an economy's overall state of technological advancement. The analysis of the leasing software market, therefore, hinges on the two related entities of a leasing market's evolutionary stage and the technological status/potential of its operating environment, both in relation to the macro economy.
Regulatory factors
The regulatory environment has a direct influence on the leasing industry. Laws, both tax and fiscal, shape leasing operations and consequently determine their levels of viability and popularity; the governmental role in the growth of leasing in the US over the last three decades stands as evident testimony. While leasing is practiced in many countries, its scope is influenced by the respective regulatory environment. Through laws and regulations, countries reflect not only the stage of their leasing industry but also its potential.
Lease-educated public
The other side of the coin of "regulatory influence" is the mindset of a population towards the concept of leasing. The state of laws and regulations in a particular country also compliments the outlook of its public. The evolution of the FASB-13, for example, was largely driven by stretching legal definitions consequently enough to encourage revision and change. Trends in developed leasing economies reflect the obvious correlation between attitudes toward leasing and its popularity. As awareness of leasing as a viable financing method grows, so does the leasing industry; the increasingly competitive nature and growth of the US leasing market, for example, is in large part owed to an increasingly lease-educated public.
Economic health
The health of an economy inevitably affects its leasing industry. Interest rates and alternative means of financing indirectly influence the viability of the leasing option; higher borrowing rates can make leasing more attractive to both the lessee and lessor. So, not surprisingly, leasing trends can sometimes be on the rise even during economic downturns. In general, however, global trends have shown leasing activity to be in direct correlation to the state of an economy. Increasing capital spending invariably leads to increases in leasing volume; leasing in industrializing countries, therefore, is likely to grow as a financing option. Growing economies in South America, for instance, show corresponding growth patterns in their leasing industry. In this regard, the roles of developmental agencies such as the IFC (International Finance Corporation) and the EIB (European Investment Bank) in supporting leasing, in both industrialized and industrializing regions continues to positively influence leasing markets. Current global trends indicate increasing spending in capital investment; given that leasing provides the financing for a portion of this, the industry is expected to grow.
Leasing is the most widely used method of financing in the US today, accounting for about one third of external financing of all capital investment and generating around $140 billion in new volume each year; the global market is estimated to generate around $500 billion of new volume annually. Almost all types of equipment, from credit card machines to satellites, get leased today. The market, therefore, is generally categorized by transaction sizes (which can also be seen as equipment type and their price ranges) into three core segments -- the small, middle and large ticket markets.
The small ticket market is comprised of lessors who lease lower-priced equipment such as fax machines, computers, copiers etc. Generally this market has transaction sizes that are less than 25,000-50,000; leasing in this market is driven more by the convenience of acquisition, maintenance and disposal than with the size of transaction and the tax benefits of the lease. While tax-oriented leasing is still a smaller part of this market, conditional sales contracts and money-over-money leases are the more common types of transactions.
The middle ticket market, which comprises of transaction sizes ranging from $50,000 to less than $1,000,000, is a bridge between the high and low end markets. This segment of the market caters to the specific needs of the lessee; both tax-oriented leases and money-over-money-oriented leases are accommodated, even though these two orientations comprise of conflicting factors. Leases negotiated in this market, therefore, are driven by the same reasons both small and large ticket lease transactions are driven by -- convenience of acquisition or tax benefits.
The large ticket market comprises of lease transactions that exceed $1,000,000 and focuses on higher-priced equipment such as aircraft, mainframe computers, ships and satellites. This market tends to be extremely competitive, given the relatively larger number of players going after a smaller number of transactions; it is also price-sensitive because of the high cost of the equipment leased. The majority of leases in this market are large tax-oriented transactions that tend to be complex in their documentation.
Leasing companies can be broken down into three other categories based on their business models: independent leasing companies, captive finance organizations and lease brokers or packagers. Each category is distinguished by its relationship to manufacturers and vendors, the ultimate lessees, and even to other lessors. Leasing companies today, regardless of the category they belong to, typically offer a wide array of services that complement the lease it self. While this is prevalent, however, it is important to note that increasing competition is giving rise to a trend toward specialization; lessor are finding market niches by dealing with one type of customer or equipment.
Independent companies, as their name suggests, do business independent of an exclusive manufacturer and form the largest segment of the leasing market divided by company type; any company that leases equipment from different manufacturers would fall under this category. In the independent lessor's business model, there are three parties involved: the lessor, the manufacturer and the lessee. The role of the manufacturer is, of course, unrelated to the business itself; the lessor simply purchases equipment from any given manufacturer and leases it to the lessee. Financial institutions such as banks and insurance companies also fall into this category, except these institutions may also act to fund the equipment purchase not only for lessees but for other lessors as well. Lessors in this category may also provide lease financing plans or vendor programs directly to manufacturers.
The second category called "captive lessors" comprises of manufacturing companies that establish leasing entities to finance its own products. In this model, there are two parties involved -- the lessee and the lessor who represents the manufacturing company. Captive leasing is generally done as a means to boost sales by making another financing option available to customers. The manufacturing company also aims to provide services in-house, that would otherwise be provided by another lessor, and thereby takes advantage of lessor benefits. By acting as the lessor, the manufacturer retains control over the disposal and therefore the possible replacement of the product. It can also gain priority over others for providing accessories and services that complement the leased asset. Lease brokers or packagers make up the third category of lessors. Brokers typically act as middlemen in the leasing process by finding the lessee, the manufacturer, a funding source or lessor and bringing them all together. They confine themselves to simply facilitating the process and do not own the equipment or the lease transaction.