Swiss Leasing Market Facts and Trends

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Swiss Issues Economic Policy February 2013

Swiss Leasing Market

Facts and Trends

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Publishing Details

Publisher

Giles Keating

Head of Research for Private Banking and Wealth Management +41 44 332 22 33

giles.keating@credit-suisse.com Oliver Adler

Head of Economic Research +41 44 333 09 61 oliver.adler@credit-suisse.com

Copy Deadline

January 21, 2013

Visit our website at

www.credit-suisse.com/research

Copyright

The publication may be quoted providing the source is indicated.

Author

Niklaus Vontobel +41 44 332 09 73

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Summary

Leasing is a distinct type of financing where the lessor allows the contracting partner to use movable goods such as company cars, machinery, or office equipment, or real estate such as office blocks or hotels. This particular approach enables the lessee to finance investment on an entirely external basis. With leasing, the emphasis is on the utilization aspect rather than ownership of the assets. In return for the use of the asset, the lessee makes lease payments; as well as interest and administrative cost components, these also include a repayment element (amortization). Leasing offers a range of advantages over traditional forms of internal and external financing.

The most significant advantage of leasing lies in the fact that it preserves and safeguards liquidity. The desired asset can be obtained without using a company's own funds or additional borrowing, because the leasing company takes care of all the financing. This frees up cash for other operating processes and business projects. This is especially useful in relation to expansion investment, for example in production facilities or business premises. When leasing is used for asset-related capacity expansion projects, the liquid assets that remain available can be used to fund investments that are not asset-related but instead impact on earnings at a later date – such as the development of new products or marketing measures.

Thanks to the individualized structuring of contracts, leasing provides more entrepreneurial room for maneuver in comparison with the purchase of an asset. With the purchase option, businesses can merely decide between buying (and later selling) and not buying; leasing, however, enables a business to take account of its own operating requirements through suitable structuring of the contract – term, residual value, payment schedule, etc. Leasing also provides a predictable basis for costing as well as reduces the obsolescence risk for production equipment. In addition, it can aid efficiency and innovation by repeatedly prompting the company to revise its investment and production plans. However, leasing's advantages over the alternatives of internal and external financing always depend on a firm's individual operating circumstances as well capital market and asset-related conditions.

Over the course of the financial crisis, leasing has tended to lose ground in Switzerland versus other forms of financing (debt and equity financing). An international comparison nevertheless shows that the leasing of capital goods has already acquired far greater significance in other countries – which bodes well for the growth of this form of financing in Switzerland too. Given increasingly globalized, stiff competition, all firms additionally face the challenge of tapping alternative sources to complement traditional means of financing (equity and debt); this enables them to exploit the available opportunities for business and growth through a balanced financing mix, while safeguarding their financial room for maneuver. A flexible, individually adaptable financing mix is essential, and the addition of leasing is often a viable alternative. The "Swiss Leasing Market" study, which was first published in 2006 and has now been updated, looks at the basic features of equipment leasing and at the ways in which it can be used to finance a business, as well as providing an overview of the leasing market and its development.

Many Advantages over Traditional Financing

Frees up Resources for Other Processes and Plans

Depends on Individual Firm's Circumstances

Growing Need for Flexible Financing

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1 Challenge of Business Financing

Many businesses confine themselves to only a few instruments when it comes to financing their investments. They normally retain their own profits or take out loans, usually in the form of bank or supplier credit, customers' prepayments, or shareholder loans.1_{In many cases, the firms}

have either limited access or no access whatsoever to capital markets or other sources of finance. Lenders require a high internal financing capability, or alternatively transparency or capital-related conditions that the businesses cannot or will not offer. However, it is also sometimes the case that after careful consideration of all the advantages and disadvantages they have no wish to approach the capital market. The fact is that loan financing does actually have some advantages to offer over other forms of financing, such as attractive interest rates, tax benefits, and less stringent transparency rules. Not least, the strong preference for retained profits and loans is in some cases simply the result of a lack of information about the alternative forms of financing that are available.

Figure 1

Business Financing Alternatives

Source: Credit Suisse Economic Research

This one-sided financing strategy is coming under increasing pressure. Globalized and increasingly competitive markets, coupled with ever faster technological progress, are increasingly forcing companies to compete with one another across all strategic and operating parameters. Companies are coming under growing competitive pressure to capture new markets in order to boost sales and lower their unit costs (scale effects). To open up new distribution channels, they need to acquire other firms or enter into cooperation deals. New technologies are forcing them to adapt their business models to new possibilities. New, competitive products require costly investment in new in-house developments. Amidst this more intense competition, factors such as a more flexible financing strategy are key to a business's

1 Cf. European Commission (2011) Fairly Non-Diversified Financing Strategy Is Common

Dynamic Markets Require Flexible Financing Financing Types Debt Equity Mezzanine Financing  Subordinated loan  Silent holding  Participating loan  Profit participation  Convertible bonds/warrants

Provider of capital expect rising yields

Equity financing Internal financing

Retained profits

Amortization

Reversal of provisions

Sale of assets (divestiture) External financing

Shareholder contribution

Private equity

Public equity (IPO, capital Increase) Debt financing Bank  Operating loan  Investment loan  Mortgage Alternatives  Leasing  Factoring  Supplier credit  Customer prepayment

Money/ capital m arket instrum ents

 Money market instruments

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success or failure. Strategic measures – such as new business models, cooperation deals, opening up new distribution channels – generally necessitate substantial amounts of capital with increased risk; therefore, equity (additional contributions, cash flow, retained profits) alone is often not enough.2_{Bank loans are the ideal instrument for many – though not all – financing}

requirements. When a plan is wrongly financed, opportunity costs will be incurred. Should financing not actually come to fruition, growth opportunities will be lost.

A financing strategy comprises a large number of influencing factors. The nature and scope of financing are just as crucial business factors as the right combination of all available instruments

(Figure 1). Size of firm, legal status, stage of life, and sector determine the possible financing mix. The optimum relationship between equity and debt capital, as well as the importance of the individual financing alternatives, varies depending on the extent, purpose, and time horizon of the financing. Modern entrepreneurial financial management therefore embraces many more tasks than the traditional planning, directing, and controlling of liquidity flows. It looks at the internal and external drivers of a company's value, the opportunities and risks of business strategies and models, as well as possible alternative scenarios. The aim of modern financial management, with a view to a long-term increase in corporate value, is firstly to minimize the cost of capital, secondly to manage the financing risks, and thirdly to secure the resources necessary for implementing the corporate strategy. The resulting conflicts between earnings, liquidity, investment, and financing targets must be resolved through clear prioritization.

2_{Credit Suisse (2006).}

Modern Financing Extends Beyond Management of Liquidity Flows

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2 Basics of Leasing

2.1 Concept and History of Leasing

In legal and business terms, leasing is the surrender of an asset for a fixed period for a particular use in return for payment. It is founded upon the notion that the possible economic uses of an asset are more important than owning it. Unlike in the case of purchasing, the user of a leased asset is not the legal owner – merely the possessor. During the term the leased asset is owned by the lessor, who also takes care of the financing. In return for the use of the asset, the lessee makes lease payments; besides interest, these payments include a principal repayment element (amortization). At the end of the lease term, the lessee then has the following options. It can return the leased asset to the lessor (normal in the case of an operating lease), acquire it (purchase, normal in the case of a finance lease) or, based on the residual value, renew the lease agreement.3_{The leasing industry is not subject to any explicit statutory}

regulations in Switzerland.4_{There are merely a number of conventions in practice. This}

framework allows a variety of structuring options, making leasing a flexible and versatile financing tool.

As well as a number of similarities, leasing has a series of significant differences in relation to "traditional" renting. First, the lessee usually accepts responsibilities in relation to the asset and its use – responsibilities that would normally be discharged by the owner. They include maintenance and insuring the asset against risk. With renting, on the other hand, maintenance, insurance, and administration are normally up to the owner (in other words the landlord). Second, with leasing the lease payment and period of use are fixed from the outset for the entire duration of the agreement. With a rental arrangement, on the other hand, the rent level as well as the duration of the tenancy may be subject to changes that cannot be foreseen, depending on how the agreement is structured and the market situation. Third, with rental it is the landlord alone who normally decides the time of purchase, the specification, the producer/builder, as well as the supplier of the asset. With leasing, on the other hand, the lessee defines – in coordination with the leasing company – the requirements profile for the asset in accordance with its specific needs and also determines the time of acquisition. Fourth, many leasing models provide for a subsequent purchase of the asset by the lessee, in which case the lease payments – or a predetermined portion of them – are taken into account in the event of a subsequent acquisition. The main differences and similarities of leasing compared with related types of contract are shown in the table below (Figure 2).

The origins of leasing as a usage-based means of financing assets dates back to 1877, when the Bell Telephone Company in the US decided to rent out its telephones rather than sell them.5

Other firms followed suit; they included IBM, which began distributing its punchcard machines on a leased basis. The overall volume remained minimal for many decades, however, with only a handful of manufacturers using leasing as a tool for distribution. Leasing received a crucial boost when the first pure leasing company, the United States Leasing Corporation, was established in San Francisco in 1953. Other, similar manufacturer-dependent leasing companies then appeared in the US. As a result, leasing developed from its origins as a pure commercial tool for manufacturers to become a financing product in its own right – thereby significantly increasing its prevalence. Leasing went on to gain a foothold in Europe, initially in the UK in 1960 and two years later in Germany. With the founding of Industrieleasing AG by the then Swiss Bank Corporation, leasing also got off the ground in Switzerland in 1964.6_Following

this initial introductory phase, the leasing business began to expand in Europe from the 1970s onward, although its importance as a business financing tool developed differently in the

3 In the case of real estate leasing, the lessee can either return the property following expiration of the contract or extend the contract.

4 Consumer goods leasing is the only area that is regulated; for consumer protection reasons, it is covered by the Consumer Credit Act. Consumer goods leasing involves leasing to private individuals. The bulk of consumer goods leasing comprises auto leasing. Other goods leased by private individuals include refrigerators, washing machines, and television sets.

5 See Marek (2001), Spittler (2002) and Feinen (2002) for a detailed history of leasing. 6 Cf. Boemle/Stolz (2002), p. 457.

Framework That Allows a Variety of Structures

Significant Differences versus Traditional Form of Renting

Leasing in Switzerland Began in 1964

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individual European economies. Leasing became a significant financing tool above all in those countries where it was able to benefit from advantageous tax conditions and rules – especially with regard to the balance-sheet treatment of leased assets and depreciation practices. That was the case in the UK and Germany, for example.7

Figure 2

Leasing Compared with Related Types of Contract

Leasing Rental Purchase Installment purchase

Purpose Transfer of rights to use an asset for a specified period

Payment for use of an asset for a specified period

Purchase Purchase through payment of

installments

Investment nature Yes (in the case of capital goods)

No (exception: lease-purchase agreements)

Yes Yes

Needs orientation Asset and usage-oriented contract structuring

Restrictions on choice of asset and contract structuring in some cases

Ownership more important than use

Immediate usage with ownership in installments

Ownership Asset remains owned by leasing company throughout term of agreement (legal control). Lessee is possessor (de-facto current control, and may have option to purchase at end of term.)

Tenant does not acquire ownership, merely possession. (exception in case of lease-purchase agreements: The tenant acquires an option to purchase the rented asset, whereby a predetermined portion of the rent is set off against the previously agreed purchase price.)

Intention to transfer ownership upon signing agreement. Results in ownership upon surrender and payment of asset.

Intention to transfer ownership upon signing agreement. Results in ownership upon surrender of asset or reservation of title following payment of full purchase price. (Parallels with lease-purchase)

Statutory regulations No specific statutory regulations (known as innominate contract). With the exception of consumer goods leasing under the Consumer Credit Act.

SCO 253 et seq. (lease-purchase: initially tenancy law, thereafter sale of goods law)

SCO 184 et seq. No explicit statutory regulations

Term Generally fixed, non-terminable Generally unspecified, terminable

– –

Payment Fixed lease payments Rent adjustment possible – Fixed installments

Subsequent purchase Possible, as leasing also contains financing components

Tends to be the exception (lease-purchase agreements)

– –

Maintenance and repair costs

Generally borne by lessee Generally borne by landlord Borne by purchaser Borne by purchaser

Material and price risk Generally borne by lessee Generally borne by landlord Borne by purchaser Borne by purchaser

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2.2 Types of Leasing

Leasing can be structured in many different ways, making them difficult to classify and categorize in financial as well as legal terms. From an entrepreneur's perspective, the leased item and type of contract are the most important criteria.8_{In terms of sub-division by asset type,}

a basic distinction is drawn between movables (capital goods), real estate, fleet, and consumer goods leasing. The categories can be further sub-divided depending on the required degree of detail. By type of leased asset, movables leasing can usually be subdivided into the following segments:

 Vehicles, including the sub-categories of cars, trucks, buses, fork-lift trucks, etc., as well as specialist vehicles such as ships, aircraft, and railway rolling stock

 Equipment and devices (PCs and servers, copiers, medical and measuring equipment, etc.)

 Production machinery and industrial plant

 Equipment and systems (telephone equipment, access systems, etc.) Real estate leasing can be used to finance the following, for example:

 Business premises (office and administrative buildings)

 Production sites (industrial and commercial properties)

 Warehousing and logistics centers

 Hotels

In Switzerland, a number of institutions currently offer real estate leasing for single-digit millions upward. In the case of movables, there are lower limits in value terms owing to the relationship between the administrative costs of a lease agreement and the cost of purchasing the asset. In Swiss practice, lease agreements on movable capital goods – with the exception of a few individual cases – are therefore concluded for sums upward of around CHF 30,000.

With regard to the balance-sheet impact of leasing, the distinction between operating leases and finance leases is important for businesses (Figure 3).

 Operating leases are characterized by easily terminable agreements, or a contractual term that is significantly less than the amortization period. Generally speaking, agreements contain a fixed, non-terminable basic lease term and subsequent cancellation rights. A high residual value is usually calculated for the asset at the end of the contract (partial amortization). Provided the lessee has met its service and maintenance obligations, the residual value risk lies with the lessor.9

 Finance leases, on the other hand, are types of contract with a multi-year, fixed term. The term is normally determined on the basis of the asset's useful life. The tenant has no option to withdraw from the agreement during the term. The asset continues to be owned by the leasing company during the term, and is almost completely amortized during the term of the agreement (full amortization). On account of the low residual value, the lessee often acquires the asset following expiration of the agreement. In economic (but not legal) terms, a finance lease is therefore similar to a credit-financed purchase. In Europe, the finance lease is of significantly greater economic importance than the operating lease.

Alongside operating and finance leases, there are also a number of leasing models based on the type of contract; for example, "full and partial amortization agreements," "sale and leaseback," "buy and lease," "cross-border leasing", "(full-)service leasing" and "communal leasing."10

8 The leasing business can also be classified by repayment extent (full vs. partial amortization) or lessor (direct vs. indirect leasing). More information about types of leasing can be found in the glossary.

9 With real estate leasing, the residual value risk always lies with the lessor.

10 We do not go into them in any more detail here; please see glossary for more information. Four Categories, Differing

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Figure 3

Operating versus Finance Leases

Operating leases Finance leases

Leased assets Movables and real estate Movables and real estate

Contractual period Limited by useful life Limited by useful life

Investment nature No Yes

Economic classification Rent, use Financing an investment

Amortization of the asset Partial amortization by lessee. The lessor can amortize the asset in full through subsequent sale of the asset.

Full amortization11

Risks from investment Residual value risk lies with lessor Residual value risk lies with lessee Accounting Under Swiss law (Code of Obligations), the lessee has no

accounting obligations. However, the total amount of all future, unrecognized lease obligations must be shown in the notes to the financial statements. In accordance with accounting standards (ARR, IFRS, US-GAAP), the leased item is not recorded in the balance sheet. However, the outstanding lease obligations must be shown in the notes to the financial statements.

Under Swiss law (Code of Obligations), the lessee has no accounting obligation. However, the total amount of future, unrecognized lease obligations must be given in the notes to the financial statements.

In accordance with accounting standards (ARR, IFRS, US-GAAP), the leased item is not recorded in the balance sheet.

Lessor Financial services companies, as well as producers and suppliers with their own leasing departments.

Financial services companies, as well as producers and suppliers with their own leasing departments.

2.3 Accounting for Leased Assets

A key characteristic of leasing is the gap between legal ownership and economic possession. Although in legal terms the leased item continues to be owned by the leasing company, its use and also the ownership risks are transferred to the lessee for a specified period. From an accounting perspective, this raises the important question of where to assign the leased item. Accounting is therefore a major challenge for this type of financing.

From a Swiss perspective, the Code of Obligations (SCO) and company law constitute the basis for the accounting treatment of an operating lease. Under these guidelines, which provide a minimal solution for the accounting treatment of leasing, operating leases are considered akin to a rental or tenancy agreement in accounting terms. There is no fundamental accounting obligation. This means that under Swiss practice the lessee is not required to carry obligations as a liability, or to capitalize usage rights under lease agreements. Under Art. 663b SCO, lease liabilities need only be shown in the notes to the financial statements, while lease payments can be entered as an expense in the income statement and thus fully deducted against tax. This provision applies to virtually all Swiss companies.12

Finance leases have become markedly more significant in recent years. In tandem with this development, greater attention is being paid to the question of how lease agreements should be treated in accounting terms by the lessee. In contrast with general accounting rules, the

11 Except in the case of real estate where full amortization would not make economic sense.

12 Although the fact that a lease obligation need only be shown in the notes to the financial statements is irrelevant in relation to the checks made on a lessee by stakeholders (in particular banks). Accordingly, it has no effect on borrowing either in normal situations.

Accounting Is a Major Challenge

In Accounting Terms, an Operating Lease Is Akin to a Rental Agreement

Finance Leases: Question of Accounting Is More Important

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standards relating to the treatment of lease transactions are more stringent and detailed.13_They

include the "Swiss Accounting and Reporting Recommendations (ARR)," "International Financial Reporting Standards (IFRS)," and the "United States Generally Accepted Accounting Principles (US-GAAP)." These accounting standards impose special accounting and disclosure requirements on the lessee. Accordingly, finance leases must be recognized in the consolidated balance sheet and disclosed separately. The leased asset is capitalized at the cost of acquisition and the outstanding lease payments shown as a debt to the lessor. Unlike an operating lease, therefore, a financial lease is not balance-sheet neutral; instead, it results in an extended balance sheet. With a finance lease, a business therefore exhibits a lower capital ratio compared with an operating lease. As with operating leases, companies record future lease payments as operating expense in the income statement in the case of finance leases too.

New Accounting Standard in the Pipeline

In August 2010, the International Accounting Standards Board (IASB) and US Financial Accounting Standards Board (FASB) published their joint proposals (exposure draft) for a new accounting standard for leasing.14_{The backdrop to these attempts at reform is first of}

all the growing economic significance of leasing as a financing tool. This development makes it all the more urgent for lease accounting to paint a full and accurate picture of a business's leasing activities. Second, critics argue that under existing accounting rules businesses and other private organizations are likely to record operating and finance leases in different ways in their balance sheet. As mentioned above, operating leases do not have be recognized in the balance sheet – giving information in the notes to the financial statements will suffice. With finance leases, on the other hand, each transaction needs to be entered in the balance sheet and disclosed separately. Critics believe the existing rules do not provide a true picture of the financial rights and obligations arising from lease transactions. In particular, the rules fail to recognize some rights and obligations that would actually correspond to the definition of assets or liabilities under the FASB's conceptual framework. Furthermore, the sharp distinction between operating and finance leases results in poor balance-sheet comparability and unnecessary complexity. Accordingly, the IASB and FASB are now collaborating on a new approach for the accounting treatment of leases. This aims to ensure that financial rights and obligations arising from lease transactions are also recognized as assets and liabilities in the balance sheet. The objective of the FASB, a private-sector body for accounting and reporting standards, is the development of generally recognized accounting principles for US firms and private organizations (United States Generally Accepted Accounting Principles; US-GAAP). The IASB, an internationally staffed independent body of accounting experts, is responsible for developing International Financial Reporting Standards (IFRS) and promoting their use at international level. IFRS are used by the EU, Hong Kong, Singapore, Russia, and India, among others. For lessees, the centerpiece of the proposed reform is the disappearance of the distinction between operating and finance leases. Lessees would therefore no longer classify lease agreements as either operating or finance leases and treat them accordingly in their accounts. All lease obligations will instead be accounted for using the right-of-use approach, where the leased assets are reported in the balance sheet as usage rights with the corresponding lease obligation.15

Leases with a term of less than one year would be exempt, however.

Differentiation between operating and finance leases is not easy in practice owing to the myriad ways in which lease agreements can be structured. The criteria established by the existing standards were not set out clearly, and leave considerable freedom of maneuver for accounting policy. In practice, therefore, there is a risk that this freedom will be exploited and that lease agreements will be structured so as to avoid accounting for them. In some circumstances, company financial statements will not be comparable and will therefore conflict with the

13 Cf. Boemle/Stolz (2002), p. 463 and Spittler (2002), pp. 190-203.

14 Financial Accounting Standards Board (2012): Project Update. Leases – Joint Project of the FASB and the IASB. 15 Cf. Boemle/Stolz (2012), p. 458.

Difficult to Separate Operating and Finance Leases

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objective of decision usefulness.16_{Therefore, the IASB and FASB are currently involved in}

efforts to eliminate the distinction between the two types of leasing (see textbox above). Under the existing accounting principles of ARR, IFRS, and US-GAAP, criteria have already been specified for the classification of each lease transaction to one of the two categories. Under ARR17_{, the lessee must treat leased assets as a finance lease if:}

 ownership of the leased asset passes to the lessee at the end of the lease period, or

 any residual payment at the end of the lease period, with which the lessee can purchase the asset, is significantly less than the market value at that time, or

 the expected lease period does not differ significantly from the useful life of the leased asset, or

 the present value of the lease payments upon signing the agreement more or less matches the cost of acquisition or net market value of the leased asset.

If none of the criteria is met, the lease is an operating lease by default. Companies must recognize finance lease transactions if they are required to report Swiss GAAP-ARR or IFRS-compliant financial statements. (The leased asset must be capitalized, and the corresponding obligation reported on the liabilities side.) The information shows that the accounting treatment of leases varies depending on type and applicable accounting standard. It is therefore important for businesses to address this in order to assess the resulting impact on their balance sheet.

2.4 Leasing As a Business Technique

Equipment leasing generally involves three parties: the manufacturer or supplier of goods, the lessee, and the lessor (Figure 4). Lessors are either manufacturers or vendors of leasable items, or may be independent financial institutions. Vendors or manufacturers lease the items via special departments or via their own finance companies (direct leasing). This form of leasing is used for sales of their own products, and is accordingly termed manufacturer or vendor leasing (see textbox). However, lessors may also be independent financial institutions that offer products from various manufacturers on a leased basis and accordingly are not identical to producers or suppliers (indirect leasing).

Figure 4

Possible Basic Model for Processing a Lease Transaction

Lessor

Manufacturer/

supplier

Asset

Lessee

16 Decision usefulness is defined as the primary objective of financial statements in the IFRS Framework for the Preparation and Presentation of Financial Statements. 17 Cf. Boemle/Stolz (2012).

Leasing Directly by the Manufacturer or Indirectly by an Independent Financial Institution

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There are various options for concluding a lease agreement. Either the lessee itself can select the required asset directly from the manufacturer or supplier; here the lessor acquires and then passes the required asset on to the lessee for its agreed use in return for payment of normally a monthly lease payment as well as a one-off up-front fee that in Switzerland is normally between 0.5 and 1.0% of the purchase price. Alternatively, the lessee can approach the lessor and call upon its expertise – whether in relation to the procurement of the asset or on technical matters, etc. Compared with renting, leasing is therefore more closely tied to the lessee's usage requirements. The lessee can select the asset itself in accordance with its needs, or can even have it assembled. Tenants, on the other hand, have to compromise to some extent and do not get everything they require.18

The lease payment is composed of the following: Interest for the provision of capital by the leasing company; a repayment amount; a surcharge to cover the risk of default; a portion of the lessor's administrative costs; a profit margin. The lease payment is negotiated individually, and is mainly dependent on the term, the necessary amortization, as well as the risk borne by the lessor (customer/sector, leased asset). The ability of the leased asset to retain its value is a particularly important factor in determining the level of lease payment. The lower the estimated disposal value of the asset at the time of sale, the higher the lease payment. Conditions in the leasing business are similar to those in the traditional credit business, and in practice correspond to the interest rate for comparable medium to long-term secured bank loans. Lease payments are essentially agreed on a fixed basis for the entire duration of the agreement. Payments usually follow a straight-line pattern and are made in advance. Thanks to the flexible ways in which leases can be structured, degressive, progressive, or seasonal lease payments are possible depending on the specific company situation.

Spotlight on Vendor Leasing

Vendor leasing describes a situation in which the vendor or manufacturer works together with a financing partner on sales financing. The lease is offered by the vendor or manufacturer together with the asset, hence the term vendor lease. Potential lease transactions are then brokered by the financing company. Typical items financed as part of a vendor leasing model include cars, commercial vehicles, and standard industrial goods such as construction machinery, machine tools, and fork-lift trucks.

Advantages for the supplier: - Sales promotion tool

- No default risk, because financing company pays immediately - Knowledge about customers' replacement investment needs - Long-term client retention

Advantages for the financing company:

- Supplier acts as alternative distribution channel - Rise in sales of "leasing" products

18 The lessee can also sub-let the leased asset, although it must obtain the lessor's prior consent. Closely Tied to the Firm's

Needs

Flexible Payments Possible Depending on Situation

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2.5 Model Calculations

The following model calculations are intended to illustrate the factors that should be considered when financing an investment through leasing or purchase using debt and equity, and the liquidity effects that arise as a result of the respective financing option. The leasing calculations are based on the method of paying interest in arrears. This is more transparent than the interest in advance that normally applies in practice.

2.5.1 Background

To expand its production capacity, a company wants to invest (e.g. in a machine) worth CHF 100,000. It is assumed that the investment will generate gross income of CHF 50,000 and be used for five years. As source of financing, it can choose between leasing or credit.

2.5.2 Model Calculation: Leasing

In practice, the lease payment is usually calculated in accordance with the annuity method, i.e. the monthly contributions are the same over the entire term and comprise interest and amortization components. To calculate these monthly contributions, the net investment amount (K0) is calculated first of all using formula (1): in other words, the acquisition cost (I0) less the

present value of the residual value (RWt) at the end of the lease term. Then, using formula (2),

the constant lease payment is calculated using the annuity method:

(1)





t m t

i

RW

I

K







1

0 0 by t = 60

(2) Lease paymentt, in arrears =



  



1 

1

0











_t m m t m

i

K

With the annuity, the monthly overall cost to the lessee from interest and repayment of principal stays the same (Figure 5). The amount of interest owed declines by a constant monthly amount, while the repayment of principal (amortization) rises by this amount. The residual debt is progressively reduced as a result. In the chart, the broken line representing the residual debt runs in a straight line. This is due to the model calculation using the relatively small increase in the monthly amortization of the same amount in each case. With a larger monthly surcharge on the amortization amount, the line would visibly bend upward – that is, its progressive development would become clear to see. The amortization amounts are in each case calculated on the basis of interest being due in arrears. With a contractual amount of CHF 100,000, a constant interest rate of 5% p.a., and a term of five years or 60 months, this results in accordance with formulas (1) and (2) in thepayment flows shown in the chart:

Interest Payment in Arrears Method Is Basis

Lease Payments Calculated Based on Annuity Method

Residual Debt Is Reduced Progressively

Legend:

K0 = Net investment amount

I0 = Acquisition cost of the asset

RVt = Residual value of the asset

im = Monthly contractual interest

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Figure 5

Model Calculation: Leasing

Leasing calculations based on method of interest payment in arrears, in CHF

Assumptions

Lease amount 100,000

Term 60 months or 5 years

Interest rate 5% p.a.

Residual value 10,000

Net investment amount (K0) 92,208

Monthly lease payment (LRt) 1,740

Calculation of Interest and Amortization Month Interest -1 (4) x interest rate -2 Amortization (3)-(1) -3

Lease payment Residual debt -4

(4)-(2) 0 - - - 100000 1 417 1323 1740 98677 2 411 1329 1740 97348 3 406 1334 1740 96013 4 400 1340 1740 94673 30 247 1493 1740 39393 60 49 1691 1740 10000

2.5.3 Model Calculation: Purchase

The following assumptions are made in relation to the purchase model: The purchase of the equipment is 80% financed by borrowing, which is amortized annually. The remaining 20% is financed using equity capital. With a credit amount of CHF 80,000 at 5% p.a., equity invested of CHF 20,000 at 10% p.a.19_{, and an assumed residual value for the equipment of CHF}

10,000 following a five-year useful life, this results in the costs shown below (Figure 6). When amortizing the funds used, the capital is repaid or depreciated in equal annual amounts. The total cost from interest payments on the debt and equity, as well as from redemption of the loan or amortization of the equity in each case decreases by the same amount. At the same time, the residual debt falls continuously by the same amount in each case.

19_{The assumed return on capital employed represents the forgone income that could have been achieved with a comparable alternative investment.}

Residual Debt Falls Continuously by Same Amount 0 20'000 40'000 60'000 80'000 100'000 0 400 800 1'200 1'600 2'000 0 1 2 3 4 5 Jahre Principal repayment/amortization Interest Residual debt (RHS) Overall cost (lease payment)

(16)

Figure 6

Model Calculation: Purchase

in CHF

Assumptions

Acquisition cost of equipment 100,000

Debt capital 80,000

Interest on

borrowings 5 % p.a.

Equity 20,000

Expected return on equity 10 % p.a.

Useful life 5 years

Depreciation/amortization 18,000 p.a.

Calculation of Interest, Redemption, and Depreciation

Year Cost of credit Equity cost (7) Total cost (8) Residual debt

(1) Interest _Redemption(2) (3) Credit amount (4) Interest (5) Depreciation (6) Equity (3) - (2) (6) - (5) (1) + (2) + (4) + (5) (8) - (2) - (5) 0 4,000 16,000 80,000 2,000 2,000 20,000 100,000 1 4,000 16,000 64,000 2,000 2,000 18,000 24,000 82,000 2 3,200 16,000 48,000 1,800 2,000 16,000 23,000 64,000 3 2,400 16,000 32,000 1,600 2,000 14,000 22,000 46,000 4 1,600 16,000 16,000 1,400 2,000 12,000 21,000 28,000 5 800 16,000 0 1,200 2,000 10,000 20,000 10,000

2.5.4 Liquidity Comparison: Leasing and Purchase

Comparison of the liquidity effect of the two financing options of leasing and purchase shows one advantage of leasing (Figure 7). With leasing, no capital is tied up in investment year zero. The annual capital released corresponds to the annual net income.20_{With purchase, however,}

liquidity is affected immediately i.e. capital equal to the acquisition cost of the equipment is tied up (CHF 100,000 in the model). Unlike in the case of the leasing option, it would not be possible to use these resources for other activities. Over time, the capital tied up (debt and equity capital employed) is released. The resources freed up annually stem from the redemption or depreciation of debt and equity capital, as well as the net income in each case. In year 5, the sale of the equipment (residual value: CHF 10,000) results in additional liquidity; in the final year, the resources released therefore comprise depreciation, net income, and the proceeds from the sale. Where a straight-line payment structure is agreed, lease payments in the initial periods are often lower than the comparable amortization and redemption amount plus interest in the case of purchase, which is accordingly reflected in higher net income at the outset in the case of leasing. Nevertheless, owing to the declining overall cost in the case of the purchase model, net income increases continuously over the term (Figure 6).21

20 The net income corresponds to the annual gross income (model: CHF 50,000) from the investment less leasing expense (model: CHF 20,880 annually). In the case of purchase, the expense deductible from gross income is composed of interest on debt and equity, credit repayment, as well as amortization of equity capital.

21 Leasing and purchase also differ from one another in terms of their tax effect on liquidity. The leasing term is usually shorter than the useful life; that is why leasing charges are generally higher than the costs in the case of credit. This means that with leasing profits tend to be lower in the initial years compared with purchase, and higher in subsequent years. This in turn means that the tax burden in the initial years is lower than it is in the subsequent years (tax deferral effect).

No Capital Tied up at Time of Investment 0 20'000 40'000 60'000 80'000 100'000 0 5'000 10'000 15'000 20'000 25'000 0 1 2 3 4 5 Residual value (RHS) Return on equity Borrowing costs Amortization of equity Repayment of loan Years

(17)

Figure 7

Comparison of Leasing and Purchase: Effect on Liquidity

in CHF

Assumptions

Acquisition cost of equipment _100,000

Expected annual gross income from investment 50,000

Useful life (in years) 5

Liquidity Comparison Calculation

Year Gross income Leasing Purchase

Net income = gross income - lease payment

Net income

(cumulative) capital released Cumulative

Net income = gross income - total cost

Net income

(cumulative) capital released Cumulative

0 - - - -100000 1 50,000 29,119 29,119 29,119 26,000 26,000 -56,000 2 50,000 29,119 58,238 58,238 27,000 53,000 -11,000 3 50,000 29,119 87,357 87,357 28,000 81,000 35,000 4 50,000 29,119 116,476 116,476 29,000 110,000 82,000 5 50,000 29,119 145,595 145,595 30,000 140,000 140,000 145,595 140,000

-100'000 -50'000 0 50'000 100'000 150'000 0 7'000 14'000 21'000 28'000 35'000 0 1 2 3 4 5

Lease: net income p.a. Purchase: net income p.a.

Lease: Cumulative capital released (RHS) Purchase: Cumulative capital released (RHS)

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3 Advantages and Disadvantages of Leasing for Companies

3.1 What Are the Arguments in Favor of Leasing?

Leasing is a viable alternative method of financing for several reasons. For comparison purposes, the advantages and disadvantages can essentially be divided into the three following aspects: First, liquidity and balance-sheet effects; second, planning and calculation effects; third, efficiency and innovation effects (Figure 8).

1. Liquidity and Balance Sheet Effects

The most significant advantage of leasing compared with traditional forms of internal and external financing lies in the way it conserves and protects liquidity. A leased asset can in principle be procured without using a company's own funds or additional borrowing because the leasing company takes care of all the financing (as mentioned in section 2.5.4). The effect of leasing, however, is comparable to that of debt-only financing. In this way, equity is not tied up in the operating process and is available for other business projects. If structured appropriately, leasing does not affect the equity ratio and results in a shortening of the balance sheet compared with purchasing the equipment (off-balance-sheet effect). Depending on how it is viewed by the credit analyst, this may impact positively on creditworthiness and the customer rating.22_{This advantage of leasing comes into play in the case of expansion investment in}

particular. When leasing is used for asset-related capacity expansion projects, the liquid assets that remain available can be used to fund investments that are not asset-related but instead impact on earnings at a later date – such as the development of new products or marketing measures. Besides securing liquidity, leasing can also have a liquidity-building effect. With a sale-and-leaseback structure, capital that is already tied up can be released again and liquidity created. This involves a company selling equipment that it already owns, and that is normally already in use, to a leasing company. The latter in turn immediately passes the asset on to the company on a leased basis. This enables the company to access the capital previously tied up in fixed assets without having to surrender the equipment in question. For reasons of proprietary rights, however, sale-and-leaseback is not very widespread in Switzerland; as a rule, it is only used in real estate leasing.23_{Lease payments can be made from current investment income throughout}

the life of the agreement. This is termed the "pay-as-you-earn" effect of leasing. With leasing, unlike purchasing, an outflow of equity and/or debt financing at a time that is often prior to initial utilization – in the case of operating facilities and office buildings, for example – is avoided. Second, it enables the use of business assets without having the initial capital that would have been necessary in the case of ownership.

The pay-as-you-earn principle is also favored by the fact that leasing costs can be aligned with the company's earnings position on a dynamic basis. This constitutes a significant advantage for this financing tool over the traditional loan. With leasing, for example, payments can be set at a low level in the normally capital-intensive growth period of a company when earnings are often low and then steadily increased (progressive lease payments). As a result, the lessee can reduce the impact on liquidity in the initial period. Seasonal or degressive payment schedules are also possible. In the case of seasonal schedules, payments are made when the asset is in use. Examples include the leasing of snow pisting vehicles or agricultural machinery. Degressive payment schedules – that is, repayments are high at the start but begin to fall over time – are suitable for leased assets that fall in value rapidly or have high earnings in the initial stages. This enables the tax burden to be optimized. In contrast with the relatively rigid redemption rules for loans, this allows the cost of business assets to be incurred in accordance with use. It therefore takes account of specific operating and asset-related circumstances.

22 Although a full credit check also includes obligations that are only stated in the notes to the annual statements and not in the balance sheet.

23 The biggest obstacle is the fact that the lessor cannot assert ownership in relation to the lessee's creditors of the leased asset derived from the sale-and-leaseback. Effect Comparable to Debt

Financing

Capital Already Tied up Is Released Again

Dynamic Adjustment to Earnings Situation Possible

(19)

Figure 8

Advantages and Disadvantages of Leasing from a Lessee's Perspective

Advantages Disadvantages

Liquidity and balance-sheet effects

initially

compared with acquiring ownership

o be made in event of loss, deterioration in quality, or non-use of the item

received

Planning and costing effects

basis for costing and budgeting

without notice

falling. rate remains fixed even when market interest rates are rising.

Efficiency and innovation effects

Other aspects

-deductible as operating expense (condition: lease payments are greater than amortization and financing costs combined in the case of a purchase that is at least partly self-financed)

-service leasing relieves businesses of tasks that are not part of its core business (e.g. fleet management)

2. Planning and Costing Effects

In addition to the liquidity benefits described above, leasing offers businesses a clear calculation basis for the entire period of the agreement: The interest rate is fixed at the outset, and is unaffected by developments on the capital markets throughout the term (this is particularly beneficial for the lessee at a time of rising market interest rates). The lessees therefore knows the exact cost, thereby simplifying the costing process and increasing planning certainty. Even when interest rates are rising, the lessee can continue to calculate on the basis of a constant interest rate. Leasing also simplifies internal calculation. With purchasing, the imputed capital costs, any credit interest, as well as depreciation requirements, must be taken into account in addition to the acquisition cost; with leasing, however, only the sum of the individual payments is incurred.

Simplified Internal Calculation

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3. Efficiency and Innovation Effects

Investing on the basis of time and usage, and not financing a purchase, reduces the risk of the asset becoming obsolescent. First, the shorter useful life of leased assets compared with purchased production equipment generally reduces the risk of technical obsolescence. Second, with leasing a business can adapt its production equipment to technological change more successfully and more quickly thanks to flexible structuring of the lease period – which can be an advantage in view of increasingly intense competition. At the same time, investing for a limited period spurs the lessee to review its investment and production plans on a frequent basis. This is beneficial to operating efficiency. The efficiency and innovation effects are nevertheless mitigated by the declining residual value, for instance due to the equipment becoming technically outdated.

Thanks to the individualized structuring of agreements, leasing provides more entrepreneurial room for maneuver in comparison with the purchase of an asset. With the purchase option, businesses can merely decide between buying (and later perhaps selling) and not buying; leasing, however, enables a business to take its own operating requirements into account through suitable structuring of the agreement: the term, residual value, payment schedule, etc. Through use of a leasing company, leased equipment can in some cases be obtained at lower cost by than would be possible with a purchase. The reasons for the lower cost of acquisition are, firstly, the leasing company's superior market overview of suppliers and equipment; second, the lessor's stronger negotiating position as a major customer in relation to the structuring of prices, delivery and payment terms; third, the leasing company's more attractive refinancing terms. These factors can impact positively on the level of lease payments.

3.2 What Are the Arguments Against Leasing?

1. Liquidity and Balance-Sheet Effects

Compared with traditional forms of internal and external financing, leasing has disadvantages that are particularly evident in the case of an economic downturn. In periods of sluggish economic growth, the purchasing of equipment provides greater flexibility that can impact positively on the balance sheet and liquidity. Leasing, however, offers only limited flexibility. One disadvantage of a long-term lease agreement (finance lease) is that it cannot usually be terminated early by the lessee.24_{Lease payments therefore constitute a pool of fixed costs that}

first have to be generated. This financial obligation can be a burden in particular during an economic downturn, as the lease payments have to be paid in full regardless. Lease payments also have to be made when a company is no longer able to use the leased asset due to a slump in sales – for instance, a weather-induced fall in sales in the case of a hotel or leisure facility. The owner of an asset, on the other hand, can waive depreciation or imputed capital cost and temporarily accept a position where its costs are not fully covered.25_{Lessees would therefore be}

wise to calculate exactly when and what level of income is derived from use of the leased asset in order to tailor the payment schedule accordingly.

Economic fluctuations are another disadvantage of leasing. A company that is bound by a lease agreement cannot benefit from a reduction in interest rates in the event of an economic slowdown, whereas a business that takes out a bank loan does usually have such an opportunity. Other disadvantages include the fact that insurance, service, and maintenance costs for the lessee can turn out higher than in the case of ownership. The lease payment must also be made in the event of loss, a deterioration in the quality or non-use of the asset, although in some instances the lessee can insure against these risks. Also, there is no right of disposal over the leased item should an attractive purchase offer materialize.

24 Early cancelation of a lease agreement is possible in principle, but requires the lessor's consent and usually entails a penalty. 25 Cf. Boemle/Stolz (2012), p. 458.

More Rapid Adjustment to Technological Change

Possibility of Taking Individual Operational Requirements into Account

Lease Payments Are a Fixed-Cost Pool

No Possibility of Benefiting from Lower Interest Rates

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2. Planning and Costing Effects

In some circumstances, leasing can also be a factor of uncertainty for business planning and costing. This is because if a lessee falls into arrears the lessor has the right to terminate the contract without notice and recover the leased item. On the other hand, if a business goes into arrears with its payments it is not so easy for a bank to liquidate an asset that has been purchased on credit.

3.3 Summary

According to a representative, Europe-wide survey26_{conducted in 2011, the cost of leasing}

compared with other forms of financing favors the use of leasing from the perspective of small and medium-sized enterprises. Among the most important reasons cited by the companies were tax benefits and the possibility of being able to finance up to 100% of the investment without additional collateral. Factors of medium importance included more efficient cash-flow management, greater flexibility, as well as the benefits of a fixed basis for calculation. On the other hand, the possibility of being able to renew or replace physical capital on a frequent basis, or being able to outsource related services (such as the maintenance of machines or vehicles, etc.), played a secondary role in the leasing decision.

In the same Europe-wide survey of businesses, one of the main arguments against the use of leasing was that firms in principle prefer to own their own means of production. Another counterargument cited by the companies was the ability to acquire these business assets at a better price than if they were to buy it themselves. Finally, in their view, tax disadvantages are another argument against the increased use of leasing. The authors of the study had the following explanation for the fact that tax aspects were listed both as advantages and as disadvantages: The attractions of leasing from a tax perspective can vary depending on the type of investment asset and an SME's specific tax situation. Alternatively, leasing may be treated differently in taxation terms depending on the country.

In light of the arguments put forward for and against leasing, there can be no general rule of thumb when assessing the benefits of leasing. The decision for or against leasing always depends on individual internal business circumstances, as well as conditions specific to the situation, asset, and country.

3.4 Leasing in Practice

The optimum risk-compatible way in which to finance business activity depends on the development phase in which a firm finds itself. In principle, the need for capital increases in line with the degree of entrepreneurial risks taken. Setbacks can be expected in relation to start-ups, relaunches, business expansion projects, and serious production failures, for example, and, where there is no other form of insurance, these can hit a firm's finances and ultimately have to be financed or absorbed using capital. Because leasing calls for a sufficient, stable flow of income from the use of a particular asset, it tends to be suitable for the latter stages of a company's development. From that point of view, it is similar to traditional loan financing (Figure 9). Leasing and loan financing are also similar when it comes to creditworthiness requirements. Just like banks, leasing companies focus on a borrower's ability and willingness to meet its payment obligations (leasing/credit worthiness). Unlike credit, however, the "collateral" offered by the borrower in the case of leasing plays a more minor role given that the lessor is ultimately owner of the leased asset. Therefore, the credit checks performed by leasing companies place a greater emphasis on the asset and income, as well as taking greater account of future development.27

26 Oxford Economics (2011): The Use of Leasing Amongst European SMEs. A Report Prepared for Leaseurope. 27_{Cf. Spittler (2002).}

Risk of Delayed Payment

Survey: Low Costs Are Argument for Leasing

Preference for Ownership

No Rule of Thumb for Decision on Leasing

Development Phase Is Key to Optimum Type of Financing

(22)

Figure 9

Financing Depends on a Company's Stage of Life

Stage of Life

Early-stage phase Later-stage phase

Seed Start-up Development Expansion Maturity Turnaround Change of _Shareholder

Stage of Development

Product idea Formation Start of

production markets Capturing new Expanding production

Optimization Restructuring MBO/MBI Examining

technical and financial feasibility

Preparing

market debut Market entry Stabilization Spin-off

Development of sales Sales Debt Mezzanine capital Equity

Explanation of terms: Private equity is the umbrella term used to describe the overall market for private investment capital (venture capital). Seed or venture capital are the terms for private equity capital for the seed or start-up phase of a business. Seed is the phase prior to a company's start-up, in which a marketable concept of an idea is developed. Seed financing is normally used for product development and market research. A start-up is a company that is just beginning to develop its structures and market its range of services. With an MBO or MBI, the business or part of it is sold to the existing management (MBO) or a new one (MBI). Typical buy-out/buy-in situations are a change of shareholder (e.g. succession) and spin-offs in the case of a group. Mezzanine financing is a hybrid type of financing that combines debt and equity financing on an advantageous basis. 28

An important prerequisite for the use of leasing is therefore a sound business in terms of market strength, along with sustainable, positive prospects for development. Positive, stable, and highly predictable cash flows are an essential criterion. The business must be able to demonstrate that the leased asset can be financed from future inflows of cash from operations. Past and future expected income streams are factored into the calculation when assessing leasing potential. In terms of the development phase, leasing is therefore primarily suited to firms at the expansion, growth, or maturity phase, whether for asset-related expansion or replacement investment, or for optimizing the financing mix in less dynamic periods (maturity phase). At these stages in the life of a business, leasing constitutes a sensible complement or alternative to loan financing. Nevertheless, given similar credit rating requirements, leasing should not be seen as a substitute for loans – for instance, for a loan application rejected owing to an inadequate credit rating. Against this backdrop, leasing is also a less suitable source of financing for businesses in the restructuring phase.

For start-ups and early-stage companies, equipment leasing is not an option in principle despite the fact that generally speaking no physical collateral is necessary. With these companies, cash flows are often unpredictable. Apart from the lack of track record, cash flows frequently fluctuate sharply or sometimes dry up completely. There is also a risk that start-up firms will not be able to establish their products or services on the market. The probability of not being able to make lease payments is therefore relatively high, and the financing risk significant. At these stages in a firm's development, therefore, leasing does not offer an alternative to traditional equity.29 28 Cf. Credit Suisse (2006).

29 "Venture leasing" is practised in the US: This is where some of the basic equipment of young, fast-growing companies is financed by leasing companies without using equity and without the creditworthiness normally required for leasing. In return for the risk entered into, the leasing company acquires an option to purchase shares in the business at a later date.

A Sound Business Is Required

Leasing Not an Option in Start-up Phase

Private equity (including seed and venture capital) Equipment leasing

Mezzanine financing

(including subordinated loans, silent partnerships, profit participation rights) Loan financing

(operating and investment loan)

Family/business angels Capital market financing (equities) Factoring

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4 The Swiss Leasing Market

Leasing began to acquire a foothold in Switzerland in the 1960s. Prior to the end of the 1970s, the use of leasing was basically confined to the purchase of new vehicles by private households. In the 1980s, however, leasing began to penetrate new markets; since then, it has often been used to finance capital goods. Businesses are increasingly turning to leasing for machinery and industrial equipment, computers and office equipment, as well as ships, aircraft, and railways. At the end of 2011, leasing reached a total volume of CHF 23.2 billion of leased movable and immovable property according to figures from the Association of Swiss Leasing Companies

(Figure 10).30_{Of this total, private car leasing accounted for 36% and the leasing of capital}

goods for 64%. Unlike in the early days of Swiss leasing, capital goods are now a far more important segment than private car leasing.

The financing of ships, aircraft, and railways, together with commercially used vehicles – in particular cars – was the biggest segment of the equipment leasing market in 2011. The advent of fleet management by the leasing companies also contributed to the large share of commercially used vehicles. Besides the financing function, this also includes total fleet management including the associated technical services and risks. In contrast with the vehicle segment, the leasing of machinery and industrial equipment, real estate (production and logistics buildings, office buildings), and computers and office equipment is of minimal importance within the equipment leasing segment. In relation to the overall business lending market, the leasing of capital goods is still comparatively unimportant. The total figure of CHF 14.5 billion at the end of 2011 compares with outstanding loans from banks to domestic firms totaling CHF 434 billion.

Figure 10

Swiss Leasing Market by Asset Group

Outstanding leasing volume (total) 2011: CHF 22.7 billion in total; CHF 14.5 billion capital goods.

Source: Association of Swiss Leasing Companies (ASLC), Credit Suisse Economic Research

Divided by sector, the service sector – in line with its economic significance as the largest sector – is the most important customer segment in the leasing industry with a 36% share of the total leasing market. This is followed by industry with a 25% share. The public sector accounted for 2% (Figure 11), and agriculture for 1%.

30 The members of the Association of Swiss Leasing Companies cover approximately 90% of the overall Swiss leasing market. Move into New Markets

Began in 1980s

Fleet Management an Important Offer for Commercially Used Vehicles 36% 18% 18% 10% 6% 5% 2% 2% 3% 64%

Private auto leasing Ships/aircraft/railways Cars – commercial

Commercial vehicles Machinery, ind. equipment Real estate

Computers/Office machinery Construction machinery Other

Equipement leasing Private

(24)

Figure 11

Swiss Leasing Market by Customer Group

Outstanding leasing volume (total) 2011: CHF 22.7 billion in total; CHF 14.5 billion capital goods.

Owing to the financial crisis, the development of the equipment leasing market since 2000 is divided into two periods. Prior to the outbreak of the crisis, the development of annual new business volume (Figure 12) and rise in the share of leasing (Figure 13) indicate that, in line with the international trend, leasing became significantly more important for Swiss firms. The leasing share represents the share of lease-financed monetary flows into capital goods in macroeconomic investment in plant and equipment and is a value that is often used in the leasing sector to gauge the market penetration of this financing instrument. The annual volume of new business for lease-financed equipment showed average annual growth of 7.5% between 2000 and 2008, causing it to rise from CHF 4.5 billion to CHF 8 billion.

Figure 12

Development of Equipment Leasing Business: New Business

Volume of new business in CHF billion

In the same period, the share of leasing rose from 8% to 12% thanks to the rapid growth in lease-financed investment. This level is even more impressive considering that leasing had a Steady Rise in Importance

Prior to Outbreak of Crisis

Growth Thanks to Offering of Additional Services 36% 36% 25% 2% 1% 64%

Consumers Services Industry Public sector Agriculture Equipment Consumers 0 2 4 6 8 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Cars (commercial) Trucks

Ships/aircraft/railways Machinery, ind. equipment

Computers and office machinery Real estate

Construction machinery Medical technology

Swiss Leasing Market Facts and Trends