Brazil: The Carnival of Equipment Financing
Preface
US equipment financiers have exhibited an ever increasing interest in the international expansion of their business. Although the established links and business interconnection between the US and Europe naturally represented the US equipment leasing and financing industry's first foray into international expansion, the rapidly growing economies of Brazil, Russia, India, and Brazil (the BRICs) recently have caught the attention of the US industry.
Given this interest, the Equipment Leasing & Finance Foundation has identified the need for significantly better information about the equipment financing industry and practices in Brazil. Leveraging on the success of its White Paper on China, the Equipment Leasing & Finance Foundation has commissioned a White Paper on the Brazilian equipment leasing market. Armed with data regarding the environment, regulatory framework, unique risks, and how others have entered the market, lessors can make more informed decisions as to how, or if, they should pursue this opportunity.
Principals of The Alta Group, from our offices throughout the world, particularly the Latin American Region, participated in the research and analysis for this White Paper. Lessors with experience in Brazil also provided valuable assistance. It is hoped that this information will assist lessors in gaining an important "first-mover" advantage into this rapidly developing market.
John C. Deane
Managing Principal
The Alta Group
Executive Summary
Brazil is a large, growing, attractive market for those in the equipment financing industry. Brazil is home to the world's 11th largest economy, with a 2007 GDP of $1.3 trillion, and it has a vibrant, established leasing and financing industry dating to the mid-1960s. Company equipment financing portfolios totaled US$27.6 billion as of September 2007.
Motor vehicles are, by far, the most commonly leased assets in Brazil, and they account for over 82% of lessors' portfolios. Machinery, equipment and I/T assets comprise most of the rest. Residual value leases are well-established in the motor vehicle leasing market, but are relatively new for most other types of assets. Non-vehicle used equipment markets are not yet well-developed.
Unlike most North American and European countries, equipment financing is highly-regulated in Brazil. The creation of both major types of leasing entities – SAMs (Sociedades de Arrendamento Mercantil) and Banco Multiplos – require approval from the Central Bank. There are a number of important tax and funding regulations that pertain to lessors; for example, minimum paid-in capital is R$7 million (approximately US$4.1 million) for leasing portfolios and R$17.5 million (approximately US$10.3 million) for commercial bank portfolios, but can be much higher depending on variables such as number of branch offices or percent of risk-weighted assets.
Effective risk management for equipment financing activities in Brazil is critical for success. The availability of reliable credit information is a concern, despite the development of a large, private credit agency (Serasa) and the existence of a public credit bureau managed by the Central Bank. That notwithstanding, credit loss experience has been good among existing lessors in Brazil, most of which cite the importance of local knowledge in making informed credit decisions. New market entrants should consider the viability of using local lessors with extensive credit expertise and knowledge of local markets as partners for that purpose. Other risk parameters in Brazil requiring particular attention include currency and interest rate volatility (hedges are available for Banco Multiplos), recourse risk (the court system is inefficient), and regulatory compliance with the Central Bank.
Brazil's work force is highly-educated, but finding employees with meaningful financing experience can be difficult. English skills are reasonably common among top management at larger companies (though less-so among others). Keys to success in the Brazilian equipment financing market are similar to those in most countries: a strong focus on risk management, careful adherence to Central Bank regulations, and effective employee recruitment and retention.
Table of Contents:
-
Introduction
- 10 Establishing financing operations outside the US
- 11 Key differences
- 11 Regulatory guidance
- 12 Risk management
- 13 Equipment leasing in Brazil
- 14 Market size
- 15 Lease taxation
- 19 Lease accounting
- 20 Leasing associations
- 21 Current developments
- 22 Presidential decree
- 22 Branch license granted by the Central Bank
- 24 Minimum capital
- 24 Approvals and time required
- 25 Partnership considerations
- 26 Funding and currency considerations
- 27 Staffing
- 28 Systems and service providers
- 28 Geographical considerations
- 31 Market entry risk
- 35 Operational risk
- 42 Financial risk
- 46 Exit strategy risk
- 47 Case Studies
- 54 Conclusion
- 55 Appendix One - Domestic Leasing Guidelines
- 57 Appendix Two - Scope of FINAME