KN71013

KEY NOTE EQUIPMENT LEASING : December 2003

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This report covers: equipment leasing, plant & machinery, computers & office equipment, cars & trucks, buses & coaches, trains, ships, aircraft, commercial vehicles, property, key trade associations, british Vehicle Rental and Leasing Association Ltd., Finance & Leasing Association, Leasureurope,

Companies covered include: Abbey National Treasury Services, Bank of Scotland Structured Asset Finance, Barclays Asset Finance, DaimlerChrysler Services, FCE Bank, Five Arrows Leasing Group, GE Capital Equipment Finance, HSBC Equipment Finance, Key Equipment Finance, Lloyds TSB Asset Finance Division, Lombards North Central, Rolling-Stock Leasing Companies, Angel Trains, Porterbrook Leasing Company,

EXECUTIVE SUMMARY

Expenditure on equipment leasing in the UK increased by an estimated 4.9 percent in 2002, to £27.44bn. Since 1998, the market has grown in value by 13.3 percent. Over the same period, total gross domestic fixed capital formation (GDFCF) increased by an estimated 10.6 percent and business investment by an estimated 10.1 percent.

Despite the many advantages that leasing offers to the wide range of industries and institutions that make use of this service, growth rates could be improved by more positive tax benefits for lessees, which would make leasing more attractive to potential customers. In recent years, the Inland Revenue has reduced the tax benefits to lessors and lessees, and this has depressed the value of business obtained.

Most UK lessors are subsidiaries of domestic and foreign banks, but also operating in the leasing market are the financial subsidiaries of large manufacturers, e.g. General Electric Co. (US), which are funded by the parent companies, and the financial subsidiaries of motor manufacturers that are dedicated to providing finance for fleet buyers of their cars and trucks. In addition, there are independent operators, which obtain their funds from the money markets. These organisations both arrange and provide the finance for small-ticket, middle-ticket and big-ticket transactions, which range from computers to ships, aircraft and railway rolling stock.

Manufacturing investment has been the poorest-performing sector in the leasing market, reflecting the growing trend among companies in the textile, engineering, chemical and other industries to close factories and plants in the UK and/or relocate their businesses in other countries, such as China. The number of big-ticket deals in the UK is declining, and lessors that were once content to operate mainly in the UK market are now keen to cross borders and arrange international deals, despite the potential extra risks to their investments. Asset finance in the service sector has been fairly buoyant because of the strength of consumer expenditure, but there is now doubt that the high rate of expenditure can be maintained at its current level.

Prospects for leasing companies are directly linked to their clients' own business expectations and how these affect their need to make short-, medium- and long-term investments in new equipment. Lessors have become more cautious about acquiring long-term assets - which tie up large amounts of capital - and leasing them to companies in businesses that have proved to be vulnerable to recession or politics, e.g. ships, aircraft and trains. Leasing to central government and local authorities tends to carry the fewest risks for lessors and these customers are making greater use of leasing for the modernisation of their services and as part of their commitment to private finance initiatives (PFIs) and public/private partnerships (PPPs).

Key Note's forecasts for the leasing industry take into account the high value of such schemes, which are expected to sustain expenditure on equipment. At the same time, expenditure on more conventional developments is forecast to grow more slowly, in parallel with slow growth in gross domestic product (GDP). Between 2003 and 2007, the total value of asset finance is forecast to rise by 15.7 percent.

TABLE OF CONTENTS

Text © 2004 Key Note

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Last updated by Amanda Porteous February 2004