That was the consensus of those who joined The Alta Group, a global equipment leasing and asset finance consulting firm, when it hosted its first Latin American Leasing Leadership Summit in Rio de Janeiro, Brazil, in April to explore ways to initiate the adoption of leasing and financing best practices for emerging Latin American companies.

The summit brought together Latin American-based senior executives of such multinational corporations as IBM, CIT, EMC, Cisco Systems Capital, CSI Leasing and Terex Financial Services. These executives were joined by representatives of some of the leading financial and leasing institutions in the region, including Bladex (Banco Latinoamericano de Exportaciones), a supranational bank, headquartered in Panama and specializing in foreign trade in LAR; Leasing de Occidente, the second-largest Colombian leasing company; and CGM Leasing S.A., a two-year-old and rapidly growing leasing company, based in Argentina.

What emerged from the summit was an intriguing and challenging blueprint for sustaining Latin America’s growth in the worldwide leasing and financial services industry by adapting, adopting and applying the proven best practices, which have propelled emerging economies in the global finance marketplace elsewhere.

Envisioning Success
First, summit participants learned that any impediments to continued Latin American growth in the world market are purely psychological. Many of the same best practices industry executives apply successfully in North America and Europe can be utilized equally well in Latin America, according to industry experts at the summit. The prevailing focus in Latin America is identical to the focus employed in any other emerging regional economy: managing a variety of risks, understanding local business expectations and applying best practices for balancing sales, profitability and credit decisions.

Summit participants started with the obvious question: How does Latin America fit into the global leasing industry? It was noted that this is the fastest growing region of the world. Recent statistics compiled for The Alta Group’s LAR 100, a ranking of the leading Latin American leasing companies, showed Latin American volume represents 10% of European leasing industry volume and close to 12% of North American volume. Alta experts discussed worldwide trends in the leasing and asset management industries, such as increasing consolidation and the influence of banks, which are developing leasing platforms for cross-selling a wide variety of financial services. Similar banking trends are evident in Chile, but Alta principals reported they are seeing more independents and captives that focus on niche markets.

Derek Soper, The Alta Group’s European chairman, noted that the world of leasing is changing. He pointed to the growth of commoditization and leasing practices that are less personality-driven. He said many products that we used to know as leases now come under such labels as “structured finance” and consequently have been moved into the banking infrastructures.

“A lot of things are changing in the world of banking,” Soper said, adding the real power base for leasing in the future will be captives as banks look at the implications of the new Basel II regulations.

“Even in the vendor market, the business models are changing and companies are starting to consider ‘revolving credit receivables’ as a much simpler form of offering than leasing, particularly when looking at global expansion,” Soper said.

Different Countries, Common Challenges
The 20 countries comprising Central and South America are attractive as potential business partners to North America and, outside of the Western Hemisphere, to Spain, according to Ary Naim, of the World Bank Group’s International Finance Corporation (IFC). French banking groups are also expanding their operations in the region.

It was reported that the industry focus worldwide continues to be on cost reduction, which leads to more mergers and acquisitions, a centralization of processes and enhanced efficiency through technology applications. Speakers at the summit suggested that Latin American executives will need to stay attuned to such global trends in order to sustain their own improving conditions for leasing. These leaders are realizing their social and macroeconomic role in capital investment for much-needed infrastructure and job creation in their region — one that is noted for its rich natural resources, a large population of nearly 550 million, and $4.5 trillion in purchasing power.

Banking practices have significant influence in Latin America, just as they do around the world, and perhaps more so because of the high percentage of banks that are state owned. In fact, Naim, who leads the leasing and non-bank financial institutions business line of the IFC, said recently that banking groups are taking a larger and larger share of the leasing market in Latin America, as in other emerging markets — and he sees this both in Peru and Brazil.

He said every country in the region is in very different stages of development for leasing and equipment finance. Brazil and Mexico are well developed; Argentina is gaining aggressively and, according to the World Leasing Year Book, is now in the top five for volume growth. But in some other countries, the leasing industry has not yet taken off. In some cases, the development of the leasing industry is hindered by inappropriate legal and/or regulatory frameworks. This is why the IFC, in addition to providing financing to support the development of leasing companies and other private-sector financial institutions, also assists governments in addressing such constraints. “We consider a favorable environment for leasing to be one that puts the lease on a level playing field with other financing options,” Naim said.

In most emerging markets Naim also notes that leases are designed as simple full payout financial leasing transactions, and that these markets need to develop more sophisticated products such as operating leases.

Split Personalities Can Dilute Opportunities
Latin America presents two faces to the world: Some of its countries promote intense nationalism and long-standing socialist policies, which are becoming increasingly hostile to foreign investment and global financing. As such, these traits tend to deprive their leasing industry of the “oxygen” required to grow. Ecuador, Venezuela and Bolivia are on such a “watch list,” with potential new investors reluctant to move forward without signs of a more business-friendly, free-market climate.

However, no such problems exist in other countries, such as Brazil, Chile, Mexico and Colombia, where economic stability and a commitment to global trade are enabling new opportunities for local companies as well as multinationals from Europe and North America. A recent issue of The McKinsey Quarterly — published from McKinsey and Company’s Sao Paulo’s offices — noted Brazil’s economy would reach investment-grade status by 2009. In fact, Brazil’s credit rating was raised to BB+ by Fitch Ratings in May 2007, leaving the South American country on the cusp of an investment-grade rating as it uses surging dollar inflows to pay down foreign debt. Brazil is expanding its manufacturing base, and it is the world’s largest exporter of ethanol. The strategic importance of ethanol in the world economy will be an important factor in Brazil’s increasing economic power.

Mexico, which boasted the largest Latin American economy in 2004, is today an investment-grade economy, growing at a very sustainable pace. While Mexico is the largest recipient of foreign investment in Latin America (with US$18.7 billion in 2006), overall investment in the economy is flourishing. In the equipment leasing arena, Mexico is testing deregulation of the financial leasing market, a step that may become an important milestone for all other Latin American countries. The Alta Group is currently advising several leasing companies and equipment manufacturers to expand operations in Mexico, and an increasing market for securitization of leasing deals is being developed with underlying Mexican investments.

Colombia is currently one of the top three countries for leasing in Alta’s LAR 100. The leasing industry has supported economic development in Colombia since 2003, and The Alta Group had conducted a study that was used to help make the case for a more favorable tax environment that ultimately encouraged leasing development here.

The IFC, whose mission is to support pioneering companies in early-stage markets, is actively working right now with officials in Bolivia and Nicaragua to help establish leasing laws. The IFC takes the lead in going into regions others may determine to be far too risky.

High Marks for Brazil on the Latin American Risk Scorecard
In addressing the subject of risk management, Joe Boland, Alta principal said a comprehensive country-by-country analysis is needed. He shared an evaluation model used for determining and comparing the financial risk associated with countries based on the following factors:

Using a proprietary analysis program developed for clients of The Alta Group wishing to expand business into other countries or needing to assess and measure current exposures in different countries, Boland was able to determine that Brazil shows a comparatively reduced risk for investment.

Competition in the markets, high liquidity and economic growth bring an appearance of healthy portfolios, but new mandatory standards stemming from the Basel II Accord and corporate governance statutes, such as the Sarbanes-Oxley Act of the United States, demand full assessment, evaluation, mitigation and management of risks, including credit residual and country risks.

While Brazil is enjoying improved economic conditions, new opportunity in biofuels, and the status of being among what Goldman Sachs has called “BRIC” (Brazil, Russia, India and China) — future economic powerhouses — Boland said the country can also be bureaucratic in its business approach. Executives from Brazil agreed, noting there is generally some frustration in the private sector with the layers of red tape choking some investment initiatives. Boland advised, however, that Latin American markets are attractive to those companies, which can sustain profitability during economic downturns.

What About Leasing?
The asset-based finance and leasing markets in many Latin American countries have experienced double-digit growth; however, a significant portion of that growth is consumer automobile leasing. Carlos Olmo, director of Argentina’s CGM Leasing S.A., said his company benefits from a favorable tax structure for leasing. Brazil also operates within a favorable tax environment for lease financing. One regulatory development on the horizon for large companies is the need for more accounting disclosure, a movement being promoted by the Instituto dos Auditores Independentes do Brasil (IBRACON), a local accounting principles board.

Boland reported the three most common mistakes lessors make with regard to risk are: 1.) not having a well-defined and documented set of risk policies and practices, including country risk management; 2.) not following current events both surrounding and within a company and 3.) not asking deep enough questions when underwriting the deal and drafting lease terms. He advised captive lessors to run their captive credit processes like a bank. He introduced the idea of a “differentiating credit process,” which will enable the practice of pricing to the risk, saying, “Credit is not about avoiding a deal, but enabling it.”

Boland said, “Outsourcing some components of credit is in play,” but he advised against outsourcing the final decision.

Besides risk management, the summit dialog included discussion about customer financing for software and services. Representatives from Cisco, IBM, Hitachi, EMC and Terex participated in a panel discussion moderated by Jonathan Fales, principal of The Alta Group, addressing the many challenges customer financing presents and the role that must be assumed by captives, vendors and lessors to deliver their value proposition to a growing population in a global environment. Fales, who had just been in Beijing before coming to Rio, reported there is more optimism in Latin America right now.

“China has not seen the rapid volume growth that some lessors in Latin America have experienced over the last year or two,” he said, also noting that the leasing law has not yet passed in China due to the government’s time constraints, and there are tax and recourse issues to resolve as well.

IBM’s Joel Formiga, a director and superintendent of Banco IBM S.A., in Sao Paulo, Brazil, said he sees a trend on the demand side in which more and more asset-management services are being added to financing products and nearly one-third of financing ends up being structured as loans rather than leases.

Fales pointed out that integrating sales and financial credit decisions is an important practice that needs more scrutiny and innovation in all leasing markets. Having just arrived at the summit from a conference in Beijing and a meeting in Singapore, Fales said he was pleased to see the level of optimism represented by LAR executives at the summit. According to Fales, market entry is a concept that generates a lot of enthusiasm today, primarily due to the fact that countries such as Argentina are coming back to the attention of global equipment vendors and lessors, and Peru is emerging as a future investment-grade country. John Deane, founding principal of The Alta Group and chairman of the summit, said, “The secret to success is to spend equal time on the entry strategy as on an exit strategy and have a sustainable operation.”

Flavio Vaisman, regional director for Cisco Systems Capital, of Sao Paulo, said his company is not only sustaining business in Latin America but also has entered into Africa and other emerging markets. While focused only on financing Cisco products, the company is gaining ground through partnerships in Mexico, Argentina, Chile and Peru.

There was such tremendous interest in the subject of funding and syndications led by Paul Bent, Alta principal, this topic is already on the agenda for the next LAR conference, to be held in November 2007.

The summit was wide-ranging and clearly just an initial effort to understand and appreciate the opportunities that abound in the region. Despite its geographic proximity with the United States, Latin America has been widely ignored in the past by the U.S. leasing industry. But, as the summit participants learned, with some 550 million inhabitants, vast natural resources, healthier investment environments, and new local government and corporate standards for doing business, Latin America is already well on its way to providing tremendous opportunities for leasing and asset-based financing.

Rafael Castillo-Triana, managing principal of The Alta Group Latin American Region, is a U.S. citizen with native roots in Colombia. He is the author of the book, Legal Aspects of Equipment Leasing in Latin America, published by Kluwer Law International, The Hague, Netherlands. The Alta Group is a global consultancy serving equipment leasing and finance companies, investment professionals, manufacturers, banks, government organizations and legal advisors since 1992.

Additional information from the summit and about the LAR is available online at www.thealtagroup.com