2006 State of the Industry Report

Executive Summary
Total Domestic Business Fixed Investment and
Estimated Lease Financing Volume
New Business Volume by Equipment Type
Table of Contents
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Executive Summary
The most recent full year numbers for the leasing industry were highly positive with higher volumes expected to carry over into 2006 and beyond. However, a number of fundamental challenges exist as the industry continues its transition to providing more complete equipment finance solutions rather than lease product sales and the competitive environment further intensifies.

New business volume improved significantly in 2005. New business volume improved across all lessor types and transaction segments. Survey respondents reported a 10.3 percent increase in new business volume in 2005. Our interviews with leasing executives as well as our review of available quarterly data indicate that volume continued to improve through the second quarter of 2006. Further, most economists anticipate continued growth in capital expenditures through 2007.

The industry is continuing its transition from leasing to equipment finance. In this year's Survey, respondents reported booking nearly two-thirds of new volume through non-lease financial products. This is a continuation of a paradigm shift away from leasing as a standalone product and toward the reality that lessors can reposition themselves as full-service equipment finance providers.

Capital appears plentiful. As we saw last year, the industry benefits from an abundance of low-cost capital resulting from financing by venture and private equity firms, combined with a renewed expansion of the capital markets and an increase in banks' willingness to lend to the industry. However, many lessors now believe that too much capital is chasing too few deals. In turn, this excess of capital is contributing to the industry's pricing pressures.

Margin compression worsened. Due to intense competition and an overabundance of capital in the market, lessors have been unable to increase pricing enough to compensate for their increased cost of funds. As a result, pre-tax spreads declined sharply and, although both net income and ROE improved, 2005's increase in net profit was significantly less than in previous years.

Niche focus emphasized. Some lessors continue to occupy niche markets that allow them to increase pricing and improve profitability. While the types of niches vary (equipment type, end-user industry segment, customer credit grade, etc.), the message from these players was similar: employ a targeted approach, develop an expertise, and be ready to move if the market changes.

Banks command a competitive advantage. Despite losing their cost of funds advantage, largely due to Basel II requirements, Banks commanded the largest share of the market again this year. As we discuss throughout this Report, Banks are in an excellent position to take advantage of the industry's transition from leasing to equipment finance. In addition, Banks are increasingly leveraging internal referrals from their commercial banking divisions.

In the coming year, economic growth and the expansion of the industry's focus to include all types of equipment finance will present lessors with tremendous opportunities for profitable growth. That said, individual companies will continue to face challenges as they strive to improve margins and differentiate themselves from the competition. Increasingly, across financial services, competitors must institutionalize their ability to identify and adapt to market shifts. Virtually all industry analysts and observers expect the pace of change to intensify in the next few years. The best performers will exploit their ability to anticipate and adapt to these changes quickly.

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