Leasing Opportunities in Mexico

Mexico's large and growing economy represents an important emerging market for companies involved in international equipment financing. The country's gross domestic product of US$2.06 trillion (purchasing power parity) is the eleventh largest in the world, as estimated by the Report for Selected Countries and Subjects (PPP valuation of country GDP) published by the IMF in October 2014.

Additionally, Mexico is the third largest trading partner of the United States and the largest of the “MINT” countries, an acronym referring to the economies of Mexico, Indonesia, Nigeria and Turkey. Many economic analysts consider the MINT countries to be the next generation of growing giants in emerging markets. The term was originally coined by Fidelity Investments, a Boston-based asset management firm, and was popularized by Jim O'Neill of Goldman Sachs, who had created the term “BRIC” (Britain, Russia, India and China). The term MINT is primarily used in economic and financial spheres and in academia. Its usage has grown, especially in the investment sector, where it often refers to the bonds issued by these governments. Mexico is also considered the largest of the “N-11″ (also known as the “Next-11,” or next biggest emerging markets) after the BRICs.

Evolution of the Mexican Leasing Market

Over the last 50 years, the Mexican leasing market has grown dramatically. By the end of 2013, the total equipment financing portfolio in Mexico was estimated to be between US$10.3 and US$15.0 billion, the second largest in Latin America. Motor vehicles are the predominant assets financed, with IT and industrial equipment also strong asset sectors.

Equipment financing law and regulations followed this growth, utilizing the same rules applicable to financial institutions. However, in 2006 a deregulation of leasing companies took place, allowing lessors to choose between remaining regulated or changing their organizational structures to “SOFOMs” (acronym for Sociedad Financieras de Objeto M'ltiple, or Multiple Purpose Financial Institutions), which are non-regulated entities. Not surprisingly, most lessors chose to become SOFOMs.

Growing Equipment Financing Opportunities

Investment in equipment has been growing in Mexico over the last few years and it is expected to keep growing for at least the next three to five years. The current Mexican government is committed to a very ambitious infrastructure development plan with investment of over Mx$7.5 trillion (approx. US$600 billion) in the next five years. The key sectors are transportation, telecommunications and IT, energy (oil and renewables), water and sanitation, healthcare and tourism. Several megaprojects are incorporated in the Mexico National Infrastructure Plan, which is described in detail at http://1.usa.gov/1BC24k6.

Major Lessors

As noted previously, many lessors changed to non-regulated entities under new legislation enacted in 2006. In turn, this change has resulted in limited access to the financial information of lessors organized as SOFOMs. Only those that volunteered their information, and those that chose to be regulated or to issue securities in the capital markets, could be included in the Alta LAR 100 2013 report. Table 1'below lists the most important lessors for which financial is available, with their corresponding place in the Latin American ranking.

We recognize that there are major leasing players in Mexico that were not included in the Alta LAR 2013 report. Should information become available, the following lessors will be included in the Alta LAR 2014 report: GE Capital, Volkswagen Leasing, GM Financial Services, Nissan Renault Financial Services, Cisco Capital, Dell Financial Services and Arrendadora Invex, among others.

It must also be noted that the Mexican car leasing and rental industry is one of the largest in the world. Car leasing represents an important part of the total leasing portfolio, fed by an annual production of more than 3 million cars, along with domestic sales of 1.1 million vehicles. In the car leasing market there are solid players from captive multinationals (such as Volkswagen, Nissan Renault, General Motors, Chrysler, Toyota and BMW), bank affiliated lessors (dominated by BBVA Bancomer, Banorte and Banregio), independent lessors (such as Unifin, AB&C Leasing, Mega, Value and others), and full service lessors such as ALD Automotive, LeasePlan and Ariza.

As shown in Table 1, there are captive companies that are well established in Mexico, and also bank controlled leasing companies with good market share. One of the key findings of the Alta LAR 100 for 2013 year-end, is the interesting progress made by independent lessors, that is, the companies that are neither controlled by a bank nor an equipment manufacturer. In the Top 15 Alta LAR Mexico ranking there are five independent leasing companies. This indicates that the market is evolving beyond the control of the banking sector, and that private investors are deploying resources for the growth of the leasing industry there.

Unifin is an interesting outlier in the ranking. The Mexican company experienced outstanding growth in 2013, and we have preliminary information indicating that it achieved a similar pace of growth in 2014. In the Alta LAR ranking, Unifin managed to jump from the No. 43 position to No. 26, showing a very strong origination power that performed better than several bank-affiliated lessors, and that certainly was the most notable among independent lessors. This company also has exhibited great innovation in products as well as in funding.

Independent companies are proving the resiliency of the leasing industry in Latin America. Their sustainability and role in enhancing private investment in capital goods is a good indication about the role that the leasing industry plays in economic development.

Conclusions: Opportunities and Risks for New Entrants

While the market has a number of players, strong opportunity also exists for prospective market entrants. Although there certainly are clouds on the economic horizon related to the global reduction of oil prices (which affects Mexico's oil exports) and the eventual rise in interest rates, Mexico is in a strong position to face such challenges because it has a diversified economy and a handsome cushion of international reserves. Mexico has been rated as investment grade by the credit rating agencies since January 2002. All major credit rating agencies rate Mexico in the top notch of BBB+ (S&P and Fitch Ratings), while Moody's rates Mexico A3.

Any lessor seeking to establish a presence outside its domestic market must carefully consider the unique risks inherent in that jurisdiction. Although the analysis may not be much different than one performs in entering a new market in a local country, it is important to remember that the differences in culture, economy, time, and distance magnify the risks, concerns, and operating issues.

One example of these differences is Mexico's Value Added Tax (Impuesto al Valor Agregado (“IVA”)) treatment for leases, where in the case of operating leases (arrendamientos puros) the lessor is treated as the purchaser of the equipment for tax purposes and needs to pay 16% tax on the entire cost of the equipment and only collects 16% tax of the monthly or periodic rental from the lessee. The lessor can claim a tax credit but it demands additional operational expenses.

Another important decision is about legal incorporation of the new leasing company. Although any company or corporation may act as a lessor in Mexico, a lessor may choose to operate as a SOFOM, in which case it will enjoy the tax benefits of being considered as a financial institution, but would be subject to regulations from The National Banking and Exchange Commission in Mexico (Comisi'n Nacional Bancaria y de Valores (“CNBV”)) and the National Commision for the Defense of Users of Financial Services (Comisi'n Nacional de Defensa de los Usuarios de Servicios Financieros (“CONDUSEF”)). In the last few years some lessors have adopted alternative legal corporate structures, the most common being the Sociedad de Responsabilidad Limitada de Capital Variable (S.R.L. de C.V.) The S.R.L. de C.V. corporate structure has been used by multinational lessors recently established in Mexico because: 1) this is an option that is less cumbersome than creating a SOFOM; and 2) because lessors intending to offer operating leases in the market are not comfortable with the 30% ceiling set forth for SOFOMs. However, S.R.L. de C.V. does not enjoy the tax benefits of a SOFOM.

These are only two of the many factors that must be examined before establishing operations in Mexico. A company that is considering entering the Mexican equipment leasing market should do so only after consulting with sources that have a deep knowledge of the industry and the ability to evaluate opportunities while managing risks.

[IMGCAP(1)]

Rafael Castillo-Triana is CEO of The Alta Group Latin American Region, LLC, based in Fort Lauderdale, FL. He is an international attorney and a former executive for a leasing company in South America. He can be reached at [email protected]. Ulises Quezada is Managing Director, Mexico, for the firm. He is the former commercial director of CIT Vendor Finance in Mexico, where he worked closely with global companies in the IT, graphic arts, and material handling industries. He can be reached at [email protected].

In the last two years, Mexico has emerged as the economic star of Latin America. While Brazil's slowing economic growth decelerated to recession, Mexico rebounded with solid prospects. This relative prosperity makes Mexico an attractive emerging market for companies involved in international equipment financing. In fact, the country's equipment financing market is already well-developed by regional standards, and is the second largest in Latin America. The predominant assets financed in Mexico include motor vehicles, information technology (IT) and industrial equipment.

We believe that the most comprehensive source of information about the Mexican equipment leasing industry comes from our company, The Alta Group Latin American Region (www.theAltagroup.com/latin-america/), which has been compiling data about the leasing industry in Latin America for over a decade. This data is posted under the Alta LAR 100 series of publications (http://bit.ly/1yMKzhg) and has been used in preparation of this article.

Mexico's Robust Economy

Mexico's large and growing economy represents an important emerging market for companies involved in international equipment financing. The country's gross domestic product of US$2.06 trillion (purchasing power parity) is the eleventh largest in the world, as estimated by the Report for Selected Countries and Subjects (PPP valuation of country GDP) published by the IMF in October 2014.

Additionally, Mexico is the third largest trading partner of the United States and the largest of the “MINT” countries, an acronym referring to the economies of Mexico, Indonesia, Nigeria and Turkey. Many economic analysts consider the MINT countries to be the next generation of growing giants in emerging markets. The term was originally coined by Fidelity Investments, a Boston-based asset management firm, and was popularized by Jim O'Neill of Goldman Sachs, who had created the term “BRIC” (Britain, Russia, India and China). The term MINT is primarily used in economic and financial spheres and in academia. Its usage has grown, especially in the investment sector, where it often refers to the bonds issued by these governments. Mexico is also considered the largest of the “N-11″ (also known as the “Next-11,” or next biggest emerging markets) after the BRICs.

Evolution of the Mexican Leasing Market

Over the last 50 years, the Mexican leasing market has grown dramatically. By the end of 2013, the total equipment financing portfolio in Mexico was estimated to be between US$10.3 and US$15.0 billion, the second largest in Latin America. Motor vehicles are the predominant assets financed, with IT and industrial equipment also strong asset sectors.

Equipment financing law and regulations followed this growth, utilizing the same rules applicable to financial institutions. However, in 2006 a deregulation of leasing companies took place, allowing lessors to choose between remaining regulated or changing their organizational structures to “SOFOMs” (acronym for Sociedad Financieras de Objeto M'ltiple, or Multiple Purpose Financial Institutions), which are non-regulated entities. Not surprisingly, most lessors chose to become SOFOMs.

Growing Equipment Financing Opportunities

Investment in equipment has been growing in Mexico over the last few years and it is expected to keep growing for at least the next three to five years. The current Mexican government is committed to a very ambitious infrastructure development plan with investment of over Mx$7.5 trillion (approx. US$600 billion) in the next five years. The key sectors are transportation, telecommunications and IT, energy (oil and renewables), water and sanitation, healthcare and tourism. Several megaprojects are incorporated in the Mexico National Infrastructure Plan, which is described in detail at http://1.usa.gov/1BC24k6.

Major Lessors

As noted previously, many lessors changed to non-regulated entities under new legislation enacted in 2006. In turn, this change has resulted in limited access to the financial information of lessors organized as SOFOMs. Only those that volunteered their information, and those that chose to be regulated or to issue securities in the capital markets, could be included in the Alta LAR 100 2013 report. Table 1'below lists the most important lessors for which financial is available, with their corresponding place in the Latin American ranking.

We recognize that there are major leasing players in Mexico that were not included in the Alta LAR 2013 report. Should information become available, the following lessors will be included in the Alta LAR 2014 report: GE Capital, Volkswagen Leasing, GM Financial Services, Nissan Renault Financial Services, Cisco Capital, Dell Financial Services and Arrendadora Invex, among others.

It must also be noted that the Mexican car leasing and rental industry is one of the largest in the world. Car leasing represents an important part of the total leasing portfolio, fed by an annual production of more than 3 million cars, along with domestic sales of 1.1 million vehicles. In the car leasing market there are solid players from captive multinationals (such as Volkswagen, Nissan Renault, General Motors, Chrysler, Toyota and BMW), bank affiliated lessors (dominated by BBVA Bancomer, Banorte and Banregio), independent lessors (such as Unifin, AB&C Leasing, Mega, Value and others), and full service lessors such as ALD Automotive, LeasePlan and Ariza.

As shown in Table 1, there are captive companies that are well established in Mexico, and also bank controlled leasing companies with good market share. One of the key findings of the Alta LAR 100 for 2013 year-end, is the interesting progress made by independent lessors, that is, the companies that are neither controlled by a bank nor an equipment manufacturer. In the Top 15 Alta LAR Mexico ranking there are five independent leasing companies. This indicates that the market is evolving beyond the control of the banking sector, and that private investors are deploying resources for the growth of the leasing industry there.

Unifin is an interesting outlier in the ranking. The Mexican company experienced outstanding growth in 2013, and we have preliminary information indicating that it achieved a similar pace of growth in 2014. In the Alta LAR ranking, Unifin managed to jump from the No. 43 position to No. 26, showing a very strong origination power that performed better than several bank-affiliated lessors, and that certainly was the most notable among independent lessors. This company also has exhibited great innovation in products as well as in funding.

Independent companies are proving the resiliency of the leasing industry in Latin America. Their sustainability and role in enhancing private investment in capital goods is a good indication about the role that the leasing industry plays in economic development.

Conclusions: Opportunities and Risks for New Entrants

While the market has a number of players, strong opportunity also exists for prospective market entrants. Although there certainly are clouds on the economic horizon related to the global reduction of oil prices (which affects Mexico's oil exports) and the eventual rise in interest rates, Mexico is in a strong position to face such challenges because it has a diversified economy and a handsome cushion of international reserves. Mexico has been rated as investment grade by the credit rating agencies since January 2002. All major credit rating agencies rate Mexico in the top notch of BBB+ (S&P and Fitch Ratings), while Moody's rates Mexico A3.

Any lessor seeking to establish a presence outside its domestic market must carefully consider the unique risks inherent in that jurisdiction. Although the analysis may not be much different than one performs in entering a new market in a local country, it is important to remember that the differences in culture, economy, time, and distance magnify the risks, concerns, and operating issues.

One example of these differences is Mexico's Value Added Tax (Impuesto al Valor Agregado (“IVA”)) treatment for leases, where in the case of operating leases (arrendamientos puros) the lessor is treated as the purchaser of the equipment for tax purposes and needs to pay 16% tax on the entire cost of the equipment and only collects 16% tax of the monthly or periodic rental from the lessee. The lessor can claim a tax credit but it demands additional operational expenses.

Another important decision is about legal incorporation of the new leasing company. Although any company or corporation may act as a lessor in Mexico, a lessor may choose to operate as a SOFOM, in which case it will enjoy the tax benefits of being considered as a financial institution, but would be subject to regulations from The National Banking and Exchange Commission in Mexico (Comisi'n Nacional Bancaria y de Valores (“CNBV”)) and the National Commision for the Defense of Users of Financial Services (Comisi'n Nacional de Defensa de los Usuarios de Servicios Financieros (“CONDUSEF”)). In the last few years some lessors have adopted alternative legal corporate structures, the most common being the Sociedad de Responsabilidad Limitada de Capital Variable (S.R.L. de C.V.) The S.R.L. de C.V. corporate structure has been used by multinational lessors recently established in Mexico because: 1) this is an option that is less cumbersome than creating a SOFOM; and 2) because lessors intending to offer operating leases in the market are not comfortable with the 30% ceiling set forth for SOFOMs. However, S.R.L. de C.V. does not enjoy the tax benefits of a SOFOM.

These are only two of the many factors that must be examined before establishing operations in Mexico. A company that is considering entering the Mexican equipment leasing market should do so only after consulting with sources that have a deep knowledge of the industry and the ability to evaluate opportunities while managing risks.

[IMGCAP(1)]

Rafael Castillo-Triana is CEO of The Alta Group Latin American Region, LLC, based in Fort Lauderdale, FL. He is an international attorney and a former executive for a leasing company in South America. He can be reached at [email protected]. Ulises Quezada is Managing Director, Mexico, for the firm. He is the former commercial director of CIT Vendor Finance in Mexico, where he worked closely with global companies in the IT, graphic arts, and material handling industries. He can be reached at [email protected].