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Asset Management Master ClassPresentation by McMillan Shakespeare Limited

Abe Tomas – Group Executive Fleet and Novated

November 2011

Strictly Private and Confidential



Agenda

Outcome

The Market

Customer Requirements

P 2

Income Streams

Accounting for Leases

Risk Management

Conclusions

The Market




The Market

P 4



The Market

The Australian Fleet Lessors Association (AFLA) members represent the

major share of the leasing and fleet management market in Australia Members of AFLA:

Alphabet Fleet (BMW) NLC

P 5

us om ee

Fleetcare Q Fleet

FleetPartners SG Fleet

FleetPlus NSW State Fleet

Interleasing / Holden Leasing Summit Auto Lease

LeasePlan Toyota Fleet Management

et Management



The Market – Funded Vehicles

• $13.8 billion of

funded assets• 7.9% growth in15 months

P 6

Table 1: Units Held*As at End Total Cost $

MillionTotal Number Average Cost

($)

2010 July $12,828 343,629 $37,331August $12,913 345,412 $37,384Sept $13,011 346,289 $37,573Oct $13,058 346,619 $37,672Nov $13,268 351,001 $37,800

*Includes units funded but does not include fleet managed

, , ,

2011 Jan $13,415 354,282 $37,865Feb $13,426 353,872 $37,940Mar $13,546 354,247 $38,239April $13,549 353,679 $38,309May $13,573 353,774 $38,366June $13,653 354,865 $38,474July $13,692 354,673 $38,605August $13,794 355,255 $38,828Sept $13,839 355,641 $38,913*Includes units funded but does not include fleet managed



The Market - UnitsP 7

Table 3: Total Portfolio – By Type of Facility-Number of Units

As at End

OperatingLeases -Funding

only (1)

OperatingLeases -

Other (2)

FinanceLeases (3)

NovatedLeases (4)

OtherFunding

(5)

Total Funded(1)+(2)+(3)+(

4)+(5)

FleetManaged

(6)

TotalPortfolio

(1)+(2)+(3)

+(4)+(5)+(6)

'FleetManaged'Funded by

other AFLAMembers

2010 July 40,867 184,773 29,326 75,855 12,808 343,629 149,484 493,113 4,615

August 40,690 185,654 30,217 75,864 12,987 345,412 148,091 493,503 4,600

Sept 41,807 184,413 30,857 75,842 13,347 346,266 150,932 497,198 4,574

Oct 41,895 184,470 31,021 75,822 13,411 346,619 157,446 504,065 4,760

Nov 41,665 184,901 35,144 75,786 13,505 351,001 158,475 509,476 4,754

Source:Australian Fleet Lessors Association

Dec 41,473 185,739 36,051 76,191 13,949 353,403 155,260 508,663 4,892

2011 Jan 41,329 185,411 37,512 75,859 14,171 354,282 155,640 509,922 4,935

Feb 41,166 185,107 37,219 76,204 14,176 353,872 153,681 507,553 5,108

Mar 40,472 186,200 37,666 75,754 14,155 354,247 154,133 508,380 5,077

April 39,863 185,194 37,874 76,140 14,608 353,679 155,396 509,075 5,110

May 39,445 186,067 38,130 75,313 14,819 353,774 155,654 509,428 5,065

June 39,558 185,593 38,496 76,143 15,075 354,865 156,253 511,118 4,897

July 39,121 186,398 39,013 74,645 15,496 354,673 159,792 514,465 5,465

August 39,042 186,444 39,076 74,782 15,911 355,255 160,375 515,630 5,511

Sept 38,780 186,453 39,301 74,827 16,280 355,641 162,390 518,031 5,455

% to total 11% 52% 11% 21% 5% 100%

‘Other Funding’ is hire purchase, chattel mortgage/other Managed units – 5.0% growth in 15 months



The Market – New Business

P 8

Table 5: New Business Volume During Period: $MillionFinanceLeases

OperatingLeases

Novated-FinanceLeases

Novated-Operating

Leases

TotalNovatedLeases

HirePurchase

ChattelMortgage/

Other

TOTAL

2010 July45 250 113 5 118 26 2 441

August 45 231 103 2 105 23 1 405

Sept 45 222 94 2 96 33 2 398

SEPT 10 QTR 135 703 310 9 82 5 1244

Oct 46 207 89 3 92 17 1 363

Nov 185 216 86 2 88 23 1 513

Dec 57 236 103 2 105 39 4 441

DEC 10 QTR 288 659 278 7 79 6 1317


2011 Jan 55 150 64 4 68 17 2 292

Feb 41 210 84 2 86 43 2 382

Mar 48 230 101 5 106 32 3 419

MAR 11 QTR 144 590 249 11 92 7 1093

April 42 187 87 4 91 43 1 364

May 47 204 82 2 84 36 1 372

June 55 216 84 3 87 41 1 400

JUNE 11 QTR 144 607 253 9 120 3 1136

July 58 210 86 2 88 45 0 401

August 49 240 98 3 101 49 0 439

Sept 51 228 93 2 95 43 0 417

SEPT 11 QTR 158 678 277 7 137 0 1257

N.B. Some AFLA estimates have been made in completing this table

March &June 2011Qtr impactedby Tsunamiin Japan



The Market – Net ReceivablesP 9

Table 6: Net Receivables at Month End: $Million

FinanceLeases

OperatingLeases

Novated-FinanceLeases

Novated-Operating

Leases

TotalNovatedLeases

HirePurchase

ChattelMortgage/

Other

TOTAL

2010 July 751 5,306 1,735 78 1,813 460 37 8,367

August 761 5,269 1,711 72 1,783 469 37 8,319

Sept 779 5,277 1,709 70 1,779 488 38 8,361

Oct 789 5,275 1,708 65 1,773 488 38 8,363

Nov 877 5,358 1,711 73 1,784 491 38 8,548


CHP – 46.95% growth in 15 months

, , , ,

2011 Jan 924 5,297 1,699 72 1,771 516 41 8,549Feb 925 5,297 1,692 58 1,750 534 41 8,547

Mar 935 5,314 1,694 59 1,753 547 41 8,590

April 948 5,307 1,700 57 1,757 572 40 8,624

May 958 5,311 1,683 57 1,740 586 39 8,634

June 964 5,317 1,676 57 1,733 604 38 8,656

July 978 5,331 1,672 54 1,726 629 37 8,701

August 976 5,355 1,675 56 1,731 655 35 8,752Sept 989 5,369 1,674 55 1,729 676 33 8,796N.B. Some AFLA estimates have been made in completing this table



The Market – Total Fleet UnitsP 10

As atEnd

OperatingLeases -Fundedonly (1)

OperatingLeases -Other (2)

TotalOperatingLeases(1)+(2)

FinanceLeases /Other (3)

NovatedLeases(4)

TotalFunded(1)+(2)+(3)+(4)

FleetManaged(5)

TotalPortfolio(1)+(2)+(3)+(4)+(5)

'FleetManaged'Funded byother AFLAMembers

Dec-98 46,830 101,884 148,714 8,186 10,259 167,159 26,970 194,129 15,638

Dec-99 47,637 100,167 147,804 20,384 17,910 186,098 33,294 219,392 4,101Jun-00 46,710 103,052 149,762 19,815 19,900 189,477 30,025 219,502 2,189

Dec-00 51,470 107,201 158,671 21,671 23,254 203,596 38,889 242,485 13,059

Jun-01 34,125 122,472 156,597 10,860 23,555 191,012 49,519 240,531 13,138

Dec-01 35,704 132,847 168,551 11,209 25,980 205,740 57,396 263,136 5,637

Jun-02 33,325 130,986 164,311 10,488 28,447 203,246 58,633 261,879 5,491

Dec-02 38,718 136,275 174,993 10,957 33,107 219,057 61,820 280,877 19,581

Jun-03 40,456 133,899 174,355 10,539 42,125 227,019 74,854 301,873 6,814

Dec-03 44,919 134,493 179,412 13,261 44,043 236,716 97,981 334,697 6,045

-


Growth of 5% over past year

- , , , , , , , , ,

Dec-04 48,554 129,307 177,861 16,751 52,480 247,092 95,014 342,106 5,001

Jun-05 45,303 133,483 178,786 15,626 51,177 245,589 90,636 336,225 4,590Dec-05 47,693 138,202 185,895 16,221 54,212 256,328 91,842 348,170 2,902

Jun-06 39,839 137,072 176,911 16,430 54,610 247,951 95,029 342,980 2,624

Dec-06 50,000 157,888 207,888 18,305 57,248 283,441 103,979 387,420 3,363

Jun-07 46,966 159,791 206,757 30,805 64,034 301,596 105,681 407,277 4,302

Dec-07 52,225 153,615 205,840 25,619 74,288 305,747 109,789 415,536 3,290

Jun-08 53,002 157,604 210,606 27,238 74,184 312,028 106,536 418,564 2,578

Dec-08 54,684 166,840 221,524 36,779 79,318 337,621 141,417 479,038 2,813

Jun-09 46,623 183,450 230,073 37,277 76,704 344,054 139,768 483,822 4,186

Dec-09 42,003 182,769 224,772 39,677 75,792 340,241 142,650 482,891 5,619

Jun-10 40,593 184,873 225,466 41,958 75,278 342,702 144,009 486,711 5,056

Dec-10 41,473 185,739 227,212 50,000 76,191 353,403 155,260 508,663 4,892

Jun-11 39,558 185,593 225,151 53,571 76,143 354,865 156,253 511,118 4,897

Increase due partly to NLC joining AFLA




P 11




The AFLA statistics clearly show that customers have requirements that theirbank cannot fulfill

A financier can provide funding but this ignores the management of the assetduring its life

Fleet Management Organisations (FMOs) bring funding and management

P 12

oge er; rom purc as ng an asse , manag ng opera ona y an na ydisposal

FMOs also deliver to the customer:

Knowledge via its experienced staff

Systems to manage and report Buying power



The Asset Life Cycle

Procurement Finance In-LifeServices

Disposal

P 13

Purchase thevehicle / asset – preferred

suppliernetwork

Owned, Operatinglease, finance

lease, CHP, chattelmortgage, novated

lease

Fuel, insurance,maintenance, tyres,registration / CTP,

infringements, e-tags,roadside assistance,

accidentmanagement, driver

training

Sale of the asset – auction, dealers,

employees



Procurement and Finance

Procurement:

Experienced staff – assist in vehicle selection, options and accessories

National network of preferred suppliers

Preferred pricing in excess of national fleet – including reduced dealerdelivery fees

P 14

uy ng ower can e passe on n u or par

Finance:

Customer may self fund by acquiring for cash

FMO facilitated:

Finance lease, operating lease or novated lease CHP & chattel mortgage – preferred SME financing option

As of 1/7/2012 changes to CHP will mean that Chattel Mortgage will reduce significantly as a form of finance



Operational Events Need Expert Managing

In-Life Services:

Fuel – cards and discounts

Insurance – comprehensive, gap, redundancy protection (novated)

Maintenance – scheduled servicing and preventative

T res

P 15

Registration / CTP

Infringements – speeding, tolls, etc

E-tags – national coverage

Roadside assistance and accident management – 24/7 support

Driver training

FMO’s have stronger buying power for operational services than an organisation does in their own right



Disposal of Assets is Complex

Disposal (also known as Remarketing)

Core activity of an FMO – staff experienced in used vehicles

Channels:

Driver direct – discount to retail for the Driver – vehicle history known

– –

P 16

Fixed price – above wholesale

Auction – wholesale spot market (most liquid)

Remarketing:

Operating lease – FMOs responsibility

Finance, CHP, Chattel mortgage or managed asset – service to the customer

Knowing the best place to sell a particular type of asset is a managers area of expertise and achieves the best price



Typical Fleet Costs – Need Management

Largepassenger

vehicle

P 18



Solutions - Lifecycle Management

FMO’s adopt a holistic approach to cost management of the fleet lifecycle:

• Environmental strategies

• Full fleet audit and consultation

• Benchmarking and analysis

P 19

• Purchase negotiations

• Fuel management and negotiation

• Insurance management and negotiation

• Accident management and prevention

• Driver level reporting and benchmarking



Solutions - Whole of Life CostingP 20



Income Streams

P 21



Income Streams

Income Streams

Finance

34%

Managementfees & Disposal

33%

Income streams – morethan interest margin!

• Finance – brokerage / interest margin

• Management fees &disposal income

P 22

Procurement &In-Life Services

33%

• Procurement & In-lifeservices – commissions,rebates, maintenance &tyre margins

Asset management earns income across diverse areas, reducing reliance on one primary income source.Targeting a one-third split in each category group is a general aim of Asset Managers.



Income Streams

• Finance – spread or brokerage

o

Banks have exited the operating lease marketo A limited number of financiers provide novated leases (no services)

• Management (including disposal)

P 23

o Customers do not have reporting systems capable of end to end

management

• Procurement & In-Life Services

o Scale delivers financial benefits which are shared between the customer and

FMO

o Management of the supply chain delivers volume rebates to the FMO



Risk Management

Interest Rate Risk (refer Appendix)

P 24

Credit Risk (refer Appendix)

Residual Value Risk

Managing In Life Service Risks



Residual Value Risk

Approach used – highly professional

People assessing and monitoring are car people with car knowledge

Monitoring of resale prices on a month to month basis at auction

The risk that the estimated future value used to calculate the monthly rentalis higher than the actual sales proceeds received on disposal of the asset

P 25

centres

Reviewing future values of current leases on a quarterly basis

Monthly rental can be re-priced during term via reviewing actual versus

estimated usage of the asset, as determined at inception.

Legal contract allows for adjustment to rentals in event of imposition of

taxes (ie: GST, potential environmental taxes)



Risks – Operating Lease Residual Values Under an operating lease the risk / reward between the book value of the

vehicle at lease end and market value is an FMO’s loss or profit

The desired objective is to have a balanced portfolio – marque, customer

type, industry exposure, etc

If the average residual value per lease is overstated compared with the

P 26

market value at lease end

>>>>> 100 vehicles * $500 loss / vehicle = $50K Loss

If the average residual value per lease is understated compared with the

market value at lease end

>>>>> 100 vehicles * $500 profit / vehicle = $50K Profit

Accurately forecasting residual values is THE most important process



10 Year Residual Values – The Commodore

P 27

Despite therising RRP and

new models thetrend is clearly inone direction(i.e. predictable)

40.00%

50.00%

60.00%

36/90000 Market Results % of RRP

VSII

VT

VTII

0.00%

10.00%

20.00%

30.00%

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Sale Date

VX

VXII

VY

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Managing Residual ValuesManaging the Risks

Residual Values are set for term and kilometres by a Residual Value Committee

The Committee typically comprises: Heads of Finance, Operations, Pricing, Remarketing and

specialist Analyst(s)

The Committee reviews high volume vehicles every three months and half yearly for lower

volume vehicles (e.g. light commercial vehicles)

P 28

All analysis is conducted in light of performance of vehicles in the used vehicle market andindependent sources such as Glass’s, Red Book, auction data

Proactive contract re-writes are undertaken to mark-to-market residual values where

parameters vary to that at inception

A portfolio revaluation is performed to assess the future value of operating leases in the light

of macro / micro economic conditions – taxes, fuel, employment, GDP, new vehicle volumes,model changes



Managing Residual Values during the lease term

Contract Re-Writes

Invariably the initial contract term and kilometres will differ to the actual operating

performance

Fuel data and service intervals provide evidence of the actual operating kilometres

during the term of each lease

P 29

Such kilometre readings identify if a vehicle is operating above or below its pro-rata

kilometres during the lease

If a vehicle is operating below its pro-rata kilometres then the customer is paying

too much for their lease, at lease end they may not utilise the original contract

kilometres (including maintenance and tyre allocations)

If a vehicle is operating above its pro-rata kilometres then the customer is likely to

incur an excess kilometre charge at lease end



Managing Residual Values during the lease term

Contract Re-Writes (continued)

FMO’s offer contract re-writes if under / over pro-rata kilometres drift say 10% +/-from the original contract

Re-writes provide the opportunity to reset:

P 30

-

- In-life services components

- Interest rates

- Management fees

Ultimately a contract re-write provides the FMO an opportunity to improve its risk(residual position and in-life components) and pricing of the contract



Example: contract re-write – increase in kms

Increase of 50,000kms and RV reduced by $5,386

P 31

km charge – avoid

surprise to customer atend of lease + cashflow benefits to FMO



Example: contract re-write – reduction in kms

25% reduction incontract kilometres

4.1% increase in residualvalue

P 32

1% reduction in whole of life lease rentals



Portfolio Revaluation Process Periodically an exercise is undertaken to value the operating lease portfolio known as

a Portfolio Revaluation

Process adopted:

- Apply current outlook of the used car market to determine at a contract level if

likely disposal proceeds, net of costs, is above or below the residual value of

each lease

P 33

- The impacts on the used market are forecasted based upon the outlook foreconomic factors and market demand / supply

- Where available forecasts from Glass’s are used determining the future

depreciation of the used vehicle market

To determine A-IFRS treatment the output of the Portfolio Revaluation is used tocalculate at contract level the NPV of contract cash flows, future rentals and RV

proceeds, to determine if an impairment provision is required.



Managing In Life Service Risks FMO’s take risk in respect of maintenance, tyres, registration (inc CTP) on fully

maintained operating leases

FMO’s target to make profit in all these services on a portfolio basis

In respect of maintenance risk some vehicle types or customer usage can cause

losses on a per vehicle basis

P 34

Example: Vans – weight bearing loads have an impact

Tyres are generally low risk as usage can be worked out very accurately

Registration & CTP – compulsory third party insurance has increased by up to 15%

per annum in some states in the last three years. Other registration components are

generally predictable

Other: roadside assistance, accident management, e-tags – costs are fixed for

periods of up to 3 years



Managing In Life Service Risks

Managing the Risks

The most significant risk is Maintenance – scheduled servicing and variable costs

(outside of warranty)

Maintenance Pricing is one key to controlling the risk

P 35

- Normally a Maintenance Committee comprising experts with relevant motor

experience sit periodically to review future pricing over all terms and

kilometres (passenger & LCV: 1 to 5 years, maximum of 200,000 kms)

Maintenance Control Team

- Pre-authorise servicing and repairs – normally qualified motor mechanics

Labour and parts discounts are negotiated with largest suppliers



Risks – Other

Early Terminations

Customers early terminate vehicles for many reasons (e.g. restructuring)

In the event of an early termination the lease contract allows a fee to be levied to cover any

residual value exposure, loss of future interest margin and other costs

P 36

Comprehensive insurance is a requirement of all lease contracts. Self-insured subject to credit

assessment

Excess Kilometres

If a vehicle travels beyond its contracted kilometres then an excess kilometre fee is payable by

the lessee. Excess kilometre rates are disclosed on each contract and cover components of

depreciation and in-life services



Accountin for Leases

P 37



Accounting for Operating Leases

• Governed by International Financial Reporting Standards (IFRS)

• Rental, comprising principal and interest, management fees and all charges for services such as maintenance,tyres, automobile association membership, registration renewal, insurance, fuel and road toll management are

recorded as REVENUE (Lease Rental Services)

• Proceeds on assets sold at termination are included in REVENUE (Proceeds from sale of leased assets)

• Income earned through supply chain management is included as REVENUE (Lease Rental Services )

• Depreciation of the fleet is straight-line. Accordingly each month the depreciation charge is evenly spread. It

equals the “principal” component included in the Rental.

• Interest expense is recorded as a cost of operation so is included in EBIT

• Vehicle Expenses include all payments made to suppliers of services to the asset management operation

including payments for fuel, maintenance, tyres, registration, insurances, automobile association membership

and includes the Written Down Value of all assets disposed of, at disposal date

• Lessor is owner (Non-Current asset “Property Plan and Equipment” on Lessor balance sheet) and Lessee is

the user (notes to accounts shows remaining rental commitments)



Accounting for Operating Leases

Impairment

• Impairment of Residual Values tested annually. Impairment loss brought to profit and

loss as part of Depreciation and Amortisation and Impairment Expenses

• Impairment amount reduces the “cost” of the Asset

• Each lease contract tested. Loss contracts only brought to account

Impairment provisions are brought to account over the life of the lease term and are,thereafter, upwardly or downwardly revised, as the case may be. Accordingly theeffects are recognised progressively rather than actual losses being brought to

account, only when they are realised. If a loss reduces in quantum, then impairmentprovision is reduced accordingly.



Operating Lease Example

• Cost of Asset $25,000

• Residual Value $14,200

• Term 36 months

• Monthly Rental $700 per month

PROFIT AND LOSS

Revenue ($700*12) $8,400

Less: Depreciation ([$25,000 - $14,200]/36) ($3,600)

Less: Interest ($1,560)

• Includes maintenance; tyres,

registration, insurance,

automobile association,

management fee for services

provided

• 100% debt finance – average

year over the 3 years

,

Profit before Income Tax $ 1,240

BALANCE SHEET

Assets under operating Leases

At Cost $25,000

Less Accumulated depreciation ($3,600)

$21,400



3 Year Lease – Returned in Good Condition

• Assumptions (asper presentation)plus:

• 20% equity

• 5% disposal profit

• Utilisation of in-life

P 41

services as plannedYr 1 Yr 2 Yr 3

Cash Flow Statement $ $ $

Open - Cash / (Debt) Position 0 (14,506) (9,016)

Capital - 20% 5,000 0 0

Acquire Vehicle (25,000) 0 0

Rental Income 8,400 8,400 8,400

Interest Expense (1,656) (1,160) (721)

Vehicle Expenses (1,250) (1,750) (3,000)

Disposal Proceeds 0 0 14,910

Close - Cash / (Debt) Position (14,506) (9,016) 10,572



3 Year Lease – Lower Disposal Result

• Assumptions (as

per presentation)plus:

• 20% equity


P 42

• Utilisation of in-lifeservices as planned

Yr 1 Yr 2 Yr 3

Cash Flow Statement $ $ $


Capital - 20% 5,000 0 0


Rental Income 8,400 8,400 8,400


Vehicle Expenses (1,250) (1,750) (3,000)Disposal Proceeds 0 0 14,342




3 Year Lease – Under spend on Tyres

• Assumptions (asper presentation)

plus:

• 20% equity


P 43

• Under utilisation

of 1 set of tyres -$800 in year 3

Yr 1 Yr 2 Yr 3Cash Flow Statement $ $ $


Capital - 20% 5,000 0 0


Rental Income 8,400 8,400 8,400


Vehicle Expenses (1,250) (1,750) (2,200)Disposal Proceeds 0 0 14,910




Funding an Asset Book



Funding Types

• Traditional Bank Lending

• Securitisation

• Principal and Agency

• Receivables Discounting



Securitisation

• Form of funding but assets on balance sheet from

accounting perspective

• Motor vehicles are a highly desirable class to invest

given strong liquidity (ie: turn into cash fast)

• Novated leases, Finance lease and CHP the most easily

securitised

• MMS Invest in lesser credit rated classes



Principal and Agency

• Act as Agent for a principal (bank)

• Credit risk of customer is taken by principal

• Agent originates and manages settlement, collections

and termination

• Off Balance Sheet to Agent

• Asset Management Risk is the Agents risk and earns

income for managing that risk



Conclusions

P 48



Conclusions

Income streams are diverse and adjustable

Fleet management is an outsourced activity which is growing

Leasing is one form of finance and addresses part of the customerlandsca e.

P 49

Risks are well managed and can be addressed during the lease term

Fleet management and financing combined provide a variety ofpredictable and sustainable cashflows



Appendicies- Products and Services

P 50

- Risk Management (interest rate and credit risk)

- Accounting for Finance Leases



Products and Services

P 51



Products & Services

Need Solutions Benefits

Operating Lease

• Finance Lease

• Short Term Hire

Off balance sheet (removal of RV &

in life service (operational cost)risks)

• Tax effective/ fixed monthly costs

• No fixed contract / flexible terms

P 52

Efficient tool

of trade fleet

• Sale & Leaseback

• Fleet Management

• Services(All in life costs associated

with running motor vehicles)

• Immediate cash injection / known

future monthly lease costs

• Benefit from FMO’s buying

power

• Cost effective, leverage FMO

systems and knowledge plus

pre-agreed discount structures



Products & Services• Operating Leases

• Non-maintained – generally operating costs are recharged to the customer

• Maintained (removes most in-life services risks) – may include all operatingcosts but generally fuel is recharged each month

• 100% tax deductible & off balance sheet

• Removes residual value risk for Lessee

P 53

• Finance Leases• Non-maintained – generally operating costs are recharged to the customer

• Maintained – may include all operating costs but generally fuel is recharged

each month

• 100% tax deductible (subject to Luxury Car Tax)• On balance sheet for the lessee – RV risk to Lessee – normally FMO sells



Products & Services• Commercial Hire Purchase

• Non-maintained and maintained – generally operating costs are recharged to

the customer

• On balance sheet for tax and accounting

• Attractive to and understood b SME’s

P 54

• Chattel Mortgage

• Non-maintained & maintained – generally operating costs are recharged to the

customer

• On balance sheet for tax and accounting (a Loan)

• Very little market penetration and will reduce significantly once CHP input tax

credit rules change on 1/7/2012



Products & Services• Fleet Management – bundled with or without finance

• Fuel – cards and discounts

• Insurance – comprehensive

• Maintenance – scheduled servicing and preventative

• Tyres

P 55

• Registration / CTP

• Infringements – speeding, tolls, etc

• E-tags – national coverage

• Roadside assistance & accident management – 24/7 support

• Driver training

• Reporting – online and analysis by account manager



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Risk Management

- Interest Rate Risk- Credit Risk



Interest Rate Risk

• Leases with customers are for fixed terms at fixed interest rates

• Revenue side locked in by virtue of the fixed monthly rental

• Lessor’s match the profile of how borrowing amortise as close as possible to how

the underlying leases amortise

The risk that as interest rates move up or down, the net profit of thebusiness moves likewise

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• Derivatives can be used for this (ie: Interest Rate Swaps; Forward Rate

Agreements) or funds can be borrowed for varying terms direct from lenders (ie:

bullet terms to 5 years at a fixed rate)

ACCORDINGLY:

• Negligible interest rate risk results

• Monthly interest margin in the lease is protected



SWAPS are derivative instruments which have the effect of changing previously agreedpayment terms on debt

Used where monies are borrowed under a floating rate facility - interest rate locked in forshort term (generally up to 90 days)

Short term money is used to fund leases for contracts with customers locked in for longerterms (ie: 3 years). Hence an initial mismatch in the timing of interest rates being locked in

How interest rate SWAPS assist to match the term of moniesborrowed to the term of the asset?

Accordingly if there is little tolerance to this mismatch, the floating-rate obligation must be

transformed or Swapped into a fixed-rate obligation.

An interest SWAP means the borrower promises to pay a counterparty(generally a Bank) afixed rate of interest for a given period, in exchange for the Bank promising to pay a floatingrate for the same period. This has the net effect of now changing the floating rate exposureinto a fixed rate commitment.

Risks associated with SWAPS are that the Borrower is now exposed to a counterparty’sability to repay the floating rate of interest. If the counterparty defaults, the SWAP falls over.Hence contracting with AA + rated banks is the minimum standard



How a Interest Rate SWAP Works (1)

BankPay Floating Rate

Rate Interest

Borrower Bank

Borrower has loan agreements which are based on floating interest rates.

However, the finance contract with their customer is based on fixed monthlyinstallments, meaning, interest rate in the lease is fixed.

As floating rates change so does the profit margin to the Lessor. If bankinterest rates increase, the Lessor profit margin drops and vice versa if bankinterest rates decrease.




BankPay Floating Rate

Rate Interest

Borrower Bank

Step 1

Pay Fixed Rate

Interest

SWAP

Counterparty

Step 1 is to enter into a SWAPagreement with a

bank who agrees to receive a fixedpayment of interest




Borrower Bank

Pay Floating Rate

Rate Interest

Step 2

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SWAP

Counterparty

Pay Fixed Rate

Interest

Receive Floating

Rate Interest

Step 2 exchanges the payment of a fixedrate for receiving a floating interest streamwhich matches the floating interest streamowed to the bank on the floating rate debt



Credit Risk

• Review all new business proposals prior to credit advanced, in accordance with proven credittechniques

• Undertake annual reviews of all credit line facilities and more often if a customer’s requirements

expand OR if there is negative news on the customer or the industry in which they operate

The risk that customers can not pay their lease installments or do notpay on time, resulting in losses on collecting monies owed

• Monitor closely credit default experience

• Obtain appropriate securities such as guarantees, security deposits where required

• Utilise Direct bank Credit to as high degree as possible, increasing surety of payment

• Active Credit Committee monitoring risks and establishing guidelines for maximum

concentration risks to a customer, an industry, an asset class etc

• Defaults mitigated by fact that assets can be sold in liquid resale markets

• Use 3rd party agencies to validate credit worthiness (eg: VEDA; Dun and Bradstreet)



Accounting for Finance Leases

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Accounting for Finance Leases

• Governed by International Financial Reporting Standards (IFRS)

• The monthly rental includes Interest and Principal repayments. Included in Lease Rental Services

is the applicable monthly allocation of interest.

• Management fees for providing relevant fleet services plus the actual monthly fee for services

such as maintenance, tyres, automobile association membership, registration renewal,

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compre ens ve nsurance, ue , roa o managemen are recor e as (Lease Rental

Services)

• Proceeds on assets sold at termination are included in REVENUE (Proceeds from sale of Leased Assets)

• Income earned through supply chain management is included in REVENUE (Lease Rental Services)

• An asset FINANCE LEASE RECEIVABLES is recorded at inception of the Finance Lease and

comprises a “current” (amounts due from customers in the next 12 months) and an “non-current”

receivable.



Finance Lease Example

• Cost of Asset $25,000

• Residual Value $14,200

• Term 36 months

• Monthly Rental $700 per month

PROFIT AND LOSS

Revenue

- Interest $2,356

- Management Services $2,844

$ 5,200

Less: Interest ($1,560)

• Interest rate in lease 10%

• Includes maintenance; tyres,

registration, insurance,

automobile association,

management fee for services

provided

Less: Vehicle Expenses paid ($2,000)

Profit before Income Tax $ 1,640

BALANCE SHEET (end year 1)

Current

Finance Lease Receivables $3,540

Non-Current

Finance Lease Receivables $18,110 *

* Includes Residual Value Due

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