Q4 2014
Equipment Leasing
Insider
Welcome to our newsletter
Welcome to First Equilease's Q4 2014 edition of the “Equipment Leasing Insider”.
In this issue of the newsletter, we focus on Kuwait’s infrastructure sector which has
been given a much needed boost following the Kuwait parliament’s approval for the
2nd phase of the Kuwait National Development Plan (2015-20). This plan takes a two
pronged approach to the development of the Kuwait economy – engagement of the
private sector in the economic development of the country through reforms and
implementation of mega-projects. Higher private sector participation would bring in
diversification to the economy which is largely dependent on oil for its revenues and
would also boost the local employment.
The ELFA monthly confidence index dipped slightly in December 2014, thereby signifying lower confidence exhibited
by the business owners.
We are eager to hear your suggestions and feedbacks. If you would like to know more about any of the topics covered
in the Newsletter, please feel free to get in touch with us.
Best wishes,
Mohammed Al-Qahtany
Chairman & MD, First Equilease
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Table of Contents
Foreword Featured Interview
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3
Kuwait Infrastructure Sector 5
Equipment Leasing and Finance Association Monthly Confidence Index
9
Latest from Global Equipment Leasing News 10
Lease Contract with an Option to Buy 14
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Featured Interview
First Equilease held an exclusive interview with Mr. Ziad Tarek Makki, General
Manager, Saba Group International General Trading & Contracting Co.
1. Your company has been in the logistics and freight forwarding business for more than two decades, could
you please elaborate on how the logistics and freight forwarding business has evolved in this region over
this period?
As the world evolves with time, technology plays a major factor in all industries. In the logistics sector, the
digital world has allowed us to incorporate technological aspects to monitor, control and maintain our fleet of
equipment as well as our client’s commodities.
2. What are some of the methods used by logistics companies in this region to reduce their business risk?
As we are the keepers and transporters of other party’s commodities, our main goal is to deliver in a timely and
secure manner. In order to reduce the risk of Murphy’s Law, we have implemented an IVMS system which tracks
all our clients’ shipments. We also hold a haulier’s liability insurance policy which protects all of our clients’
cargo while in transit.
Furthermore, as well as 3 ISO certifications, all of our Drivers are trained in a periodic manner to the highest
HSE standard policies.
3. Which sectors are your major clientele?
With our vast fleet of equipment, we cater all logistical needs to the major sectors including but not limited to;
construction, oil & gas industry, Government and Military sectors.
SABA Group specializes in the handling and transportation of Heavy lift and over dimension cargo.
4. We understand that you have a whole fleet of trailers. Do you own all of them or do you lease a significant
portion of the fleet?
SABA prides itself with ownership of 95% of its variety of equipment. The other 5% of equipment are lease to
own. Our vast fleet of equipment includes but not limited to Multi-Axel Low Bed trailers, Flat Bed trailers, Fuel
& Water tankers, dump trailers which are all operated with late model Tractor Heads.
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5. What are some of the areas which you would look into when entering into a fleet leasing agreement with a
leasing company?
We look for the long term relationship and the option of lease to own.
6. Could you please comment on the type of equipment that is used in managing your warehouses?
In managing our warehouses and maintenance facilities, we use equipment ranging from forklifts, cranes, wheel
loaders and half lorries.
7. What type of equipment lease is generally preferred by the sector you operate in?
The operational services provided in the logistic sector have no limit. All equipment in classified as operational
in the logistic industry is considered.
8. Could you please provide a brief introduction about your organization and its purpose?
In 1992 SABA International General Trading & Contracting Company was established. The express purpose of the
founding partnership was to provide a professional freight forwarding service to the global business community.
The prime factor in the SABA business modus was and is; cost effective logistic solutions for both National and
International customers in the Commercial and Government sectors.
The SABA ethos is to provide its’ clients with a service that leaves nothing to chance. Planning being 95% of any
logistic challenge, you can rest assured that your business will receive the highest attention to detail.
SABA’s chain of Freight Forwarding alternatives and Logistic Solutions are available to you conveniently, at cost
effective prices. Being one of the leading organizations in the business, SABA is not limited to one particular
region. SABA has developed a global network of professional Freight Forwarding and Logistic agents who are
committed to offer complete supply chain solutions to facilitate worldwide Door-to-Door Services.
SABA owns a multi-faceted and diverse fleet of vehicles enabling customers to move their products economically
from one country to another. SABA’s fleet has the capability of delivering wide load and oversized shipments of
up to 300 tons. Clients with a need to deliver products or equipment to Iraq are able to minimize their risk by
contracting SABA, whose in-house licensed security force will undertake to guard and deliver to multi
destinations.
Our use of local intelligence ensures your cargo moves when it is safe to do so. Our unique methods give SABA
the positive edge to confidently offer a total END to END Service that once experienced; you will wonder how
you coped without us.
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Market Analysis
Kuwait Infrastructure Sector
Kuwait is one of the largest oil producers in the world having one of the lowest fiscal breakeven oil prices at
$52.3/barrel. The lower breakeven price, along with the large fiscal reserves, allows Kuwait to sustain a longer than
expected lower oil price. Spending on infrastructure becomes all the more important at this time when the oil price
outlook remains subdued and the global outlook has been giving out mixed signals. The Kuwait government has also
stressed that lower oil prices would not cut the infrastructure spending and has urged that investing in infrastructure
projects has got multiple benefits - it stimulates the spending in the economy and increases employment
opportunities for Kuwaiti nationals. Economic diversification is considered as an extremely vital step to ensure a
healthy economy in the future.
The Kuwait government announced recently that they plan spend close to $155 Bn on projects over the next 5 years.
A total of 523 key projects are expected to be covered under the plan and is expected to begin on 1st April of 2015.
Currently there are closer to $ 51.6 Bn worth of infrastructure projects and $10 Bn worth of power and water projects
that are ongoing and are expected to be completed over the next few years. In addition to that, the Kuwait
government has announced their plans to spend close to $100 Bn in oil projects over the next five years to improve
and modernize the most vital sector of the economy. Kuwait plans to increase its crude production capacity to 4.0
million barrels per day by 2020 and maintain it until 2030 from the current level of about 3.2 million bpd.
Figure 1: Infrastructure and Power & Water projects (Ongoing, in USD Mn)
Source: Zawya
51,690.68
10,015.92
Infrastructure Total
Power and Water Total
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Kuwait is at the cusp of change with two major amendments to its laws which would shape the future of infrastructure
investments in Kuwait. Foreign Direct Investment law is expected to allow 100% ownership by foreign companies
while another law governing the PPP (Public Private Partnerships) is expected to streamline the tendering, bidding
and other activities surrounding the infrastructure projects.
Kuwait has been experimenting with the PPP model and it has been quite successful following the final close of Az
Sour North independent water and power project (IWPP). The IWPP had started in January 2014 and is the 1st project
that has been executed under the new PPP law. In August 2014, the executive regulations to the new PPP law was
published, and the comprehensive PPP law is expected to be ready by February 2015 which is expected to give a
much needed fillip to Kuwait’s Infrastructure sector given the need for Kuwait to have mega infrastructure projects
and advanced technology transfers.
Few projects which have been put on hold pending the publication of executive regulation are expected to start
once that has been published. Projects such as the 1500 MW and 100 MIGD Az Sour North IWPP Phase 2, the 2500 MW
and 125 MIGD Al Khairan IWPP and the 280 MW Al Abdaliyah Integrated Solar Combined Cycle Project are examples
of projects that have been put on hold.
Infrastructure Projects
Sheikh Jaber Al Ahmed Al Sabah Bridge
In 2012, Kuwait's Ministry of Public Works awarded Cowi the development contract for the $2.6Bn, 36km-long
causeway that will run across the northern coast of Kuwait Bay. The firm’s full scope of work involves traffic
assessments, alignment studies, design of bridges and embankments, as well as economic and financial studies. The
construction of the bridge is being handled by Abdullah Al Hamad Al Sagar & Brothers Company /Hyundai Engineering
& Construction Company. In April, Hyundai’s CEO Soo Hyun Jung stated that the project was on track to complete as
planned in 2018. Named after late Amir Sheikh Jaber Al-Ahmad al-Sabah, the causeway will link the capital Kuwait
City with the northern Subiyah area, where the proposed $94 Bn Silk City project will be based.
KOC - Small Boats Harbour
Small Boat Harbours project consists of capacity extension of the Al Ahmedi Harbour and a new construction of a
service harbour at Abu Halifa. The project is aimed to be completed within 38 months.The project covers marine
works (dredging, breakwaters, quaywalls, pontoons, ship lift system), buildings, electrical works, mechanical works,
ICT systems (marine and building management systems, telecommunication systems). The project is split between
two main locations, being the North and South projects, 7km apart from each other.
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A 4km breakwater will be constructed to protect the harbours by using quarried rock material of 2.5mn tons and
26,000 special protective concrete units called Accropode II. A 2.5km quay wall will be constructed by using 12,000
concrete block units in the sea and the quay walls will accommodate all the needs of future marine fleet of KOC. In
order to serve the bigger marine assets of KOC, both harbours will be dredged down seven meters CD, and the landfill
attained during this dredging will be used as for the filling materials in the North and South harbours.
Kuwait University City - Package B5 and A5
The Kuwait University City (KU) plans to build Package B5 and A5 of Kuwait University in Shadidiyah, Kuwait.
The project will consist of infrastructure works including 35 Km roads, secondary power stations and 11,472 car
parkings as well as 5 rest areas and related works. The Consortium of WZMH Architects, Moriyama and Teshima
Architects and Du Toit Allsop Hillier is the master plan consultant. The project would also include extension of sewage
and rain drainage networks, supply water, firefighting, electricity grids and fuel pipeline, central service stations
pipeline network of treated water, as well as the establishment of garden irrigation networks and the reservoirs of
cold water lines.
Top Infrastructure Projects in Kuwait to be completed in 2015
Project Name Primary Sub-Sector
Region Project Value ($ Mn)
Completion Date
Kuwait MPW - Sheikh Jaber Al Ahmed Al Sabah Bridge - Phase 1
Bridges Jaber Al Ahmad
2,600 2015
KOC - Small Boats Harbour Ports Al Ahmadi 483 Q2 2015
KU - Kuwait University City - Package B5 and A5 Education Al Farwaniyah
350 Q2 2015
KNG - Al Raqae Kuwait National Guards Headquarters
Public Building
Al Farwaniyah
290 Q3 2015
KNPC - Mina Al Ahmadi/Mina Abdullah Clean Fuel Project - Civil Works
Refinery Al Ahmadi 136 Jan 2015
Kuwait MPW - Western Jamal Abdul Nasser Street Roads Al Assimah 124 Q4 2015
KU - Kuwait University City - Package 4B Education Mubarak Al Kabeer
97 Jan 2015
KU - Kuwait University City - Package 4A Education Unknown 84 Feb 2015
Kuwait MPW - Nuwaiseeb Highway Temporary Return Openings
Roads Al Ahmadi 45 Q3 2015
Kuwait DGCA - Kuwait International Airport Pavement
Airports Unknown 44 Q4 2015
KNG - Al Raqae Kuwait National Guards Headquarters - Phase 2
Public Building
Al Farwaniyah
19 Q3 2015
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Project Name Primary Sub-Sector
Region Project Value ($ Mn)
Completion Date
KOC - KOC Gate 3 to Subiyah Main Road Roads Al Ahmadi 13 Q1 2015
Kuwait PAHW - Jaber Al Ahmad Residential City Roads
Roads Jaber Al Ahmad
9 Q2 2015
Kuwait PAHW - Jaber Al Ahmad Residential City Roads - Area B
Roads Jaber Al Ahmad
7 Q2 2015
Kuwait MPW - Southern Agricultural Roads Rehabilitation
Roads Unknown 6 Q1 2015
Kuwait MPW - Northern Agricultural Roads Rehabilitation
Roads Unknown 3 Q2 2015
Kuwait PAHW - Jaber Al Ahmad Residential City Roads - Area A5
Roads Jaber Al Ahmad
2 Q2 2015
Source: Zawya
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Trends
Equipment Leasing and Finance Association Monthly Confidence Index
The Equipment Leasing and Finance Association (ELFA) Monthly Confidence Index
is one of the most widely known index which is used by industry leaders
worldwide to gauge the business confidence. The Equipment Leasing and Finance
Association is the trade association representing financial services companies and
manufacturers in the $827 Bn U.S. equipment finance sector.
Figure 2: ELFA Monthly Confidence Index
Source – ELFA
The ELFA monthly confidence index which fell throughout the first two months of the 3rd quarter started to rise in
September and has continued its rise in the till November. The ELFA index ended the year at 63.4 which was slightly
lower than November vale of 64.2. The index has risen throughout the year and 2015 is expected to be positive again
but the credit losses stemming from increased labour and wages could play spoilsport. The unemployment levels in
the US are at 5.6%, its lowest level since July 2008 signaling a higher probability of a wage increase. While the past
three years have seen explosive growth in sales and investments, the magnitude of the growth might be more normal
59.059.6
61.762.1
59.2
48.5
51.5
50.2
53.053.3
49.9
48.5
54.2
58.758.0
54.0
56.757.3
59.4
61.061.3
54.0
56.955.8
64.9
63.3
65.165.1
65.4
61.461.4
58.9
60.260.4
64.263.4
45.0
50.0
55.0
60.0
65.0
70.0
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this year1. The survey indicated that 72% of the executives expected their business prospects to remain the same
over the next 4 months, while 28% expected their business prospects to improve. None of the surveyed respondents
expected business prospects to worsen over the next 3 months. Around 38% of the respondents indicated that they
expected business development activities to increase while 63% expected no change in their business development
activities.
Latest from Global Equipment Leasing News GCC-run Islamic leasing fund signs deal for 9 Airbus planes
A sharia-compliant aircraft leasing fund, run by Dubai-based International Airfinance Corporation (IAFC), has signed a
deal to purchase five A330-300 planes, with an option for four more, Reuters reported on Jan 22nd 2015. The total
value of the nine planes is US$2 Bn at list prices. IAFC has already placed the five planes on long-term leases with
undisclosed Middle East carriers. "We are already in negotiations for placing more than 20 aircraft over the next few
months," Idriss Ghodbane, managing partner and board member at IAFC, was quoted as saying by Reuters. The
formation of the fund was publically announced last June with Airbus and Jeddah-based Islamic Development Bank
the anchor investors.
ELFA Announces Top 10 Equipment Acquisition Trends for 2015
The Equipment Leasing and Finance Association (ELFA) which represents the $903 Bn equipment finance sector,
revealed its Top 10 Equipment Acquisition Trends for 2015.
1. Investment in equipment and software will reach an all-time high in 2015. As the U.S. economy continues to
improve, business investment is forecast to reach a record $1.484 trillion in 2015. As business investment grows,
demand for equipment financing will increase.
2. Businesses will invest in equipment not just to replace aging assets, but also to aid in expansion. The pent-up
replacement demand that has driven equipment investment in previous years may be supplemented by long-awaited
expansion investment as capacity utilization rates in some industries reach or surpass levels historically known to
1 David Schaefer, CEO, Mintaka Financial, LLC
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spur business investment. Industries poised for investment growth include oil and gas extraction and transportation
equipment manufacturing.
3. While some equipment types will see strong growth, others will moderate. In 2014, equipment and software
investment increased 9.6% in Q2 and 9.3% in Q3. Looking ahead, growth in equipment and software investment is
expected to moderate somewhat, as it is unlikely to keep up the strong pace seen in Q2 and Q3. A still healthy growth
rate of 6% is forecast for 2015. Aircraft, trucks and other industrial equipment are projected to be among the higher
growth types, while agriculture, computers and software are expected to see slower growth.
4. Improving market conditions will continue to increase credit supply and demand for equipment acquisitions. As
the economy steadily improves and business confidence continues to increase, credit standards should modestly
loosen. The propensity to finance decreased in the wake of the financial crisis as businesses deleveraged and
refrained from new business investment. Since bottoming out in 2010, the rate at which businesses finance their
capital spending has grown consistently and will continue to increase in 2015 with steady economic recovery and
shifts in Federal Reserve policy.
5. Eyes will be on short-term interest rate increases. Expectations for the Federal Reserve to raise short-term
interest rates in 2015 should spur equipment investment as businesses seek to lock in equipment financing at lower
rates. Despite rate increases, businesses will find that a highly competitive “buyer’s market” will continue to make
financing an attractive option for acquiring equipment.
6. Businesses will use financing for a majority of their plant, equipment and software expenditures. In 2015, 62
percent or $922 Bn of investment in plant, equipment and software in the United States is expected to be financed
through loans, leases and lines of credit. A majority of businesses—seven out of 10—will use at least one form of
financing to acquire equipment.
7. Advances in the use of technology will drive innovative financing options. Equipment finance providers are
streamlining their business processes and improving customer self-service capabilities using digital technologies. At
the same time, some end-users are moving away from traditional equipment consumption models and toward hosted
or managed services based on usage rather than total ownership. To meet customer demand and address evolving
technology equipment requirements, equipment finance companies will tailor innovative financial offerings.
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8. Several “wild cards” could impact equipment acquisition decisions. In what could be a breakout year for the U.S.
economy, positive and negative external risks could affect equipment investment. Potential political gridlock, global
economic weakness and geopolitical risks could be a drag on investment decisions, but GDP growth from low oil
prices, a potential surge in the housing sector and sufficient capacity utilization could have firms ramping up capital
expenditures.
9. Nontraditional financing will continue to grow and play a larger role in the equipment finance industry. As
regulatory scrutiny increases and some banks’ lending standards tighten for certain credits, nontraditional financing
sources, such as investment bankers, venture capitalists, insurance companies, crowd funders and others, are
exploring opportunities in the equipment finance sector.
10. A final lease accounting standard will be released. The Financial Accounting Standards Board and the
International Accounting Standards Board continue to work on the lease accounting project, which will change how
leases are accounted for on corporate balance sheets. A final standard is anticipated in 2015, with a possible effective
date of 2018 or later. The good news is that the benefits of leasing equipment will remain intact despite the lease
accounting proposal.
Despite Pessimistic Economic Growth Estimates Equipment Leasing Marketplace LeaseQ Announces An Optimistic Outlook For 2015
As 2015 arrives, the equipment leasing and financing industry sets its sights on an optimistic new year. With strong
growth in 2014, lease and finance marketplace LeaseQ weighs in on economic conditions and the state of the industry
for the coming year. There are multiple positives looming on the horizon in 2015. Employee hiring is on the rise, job
openings are at near-record levels, and corporate layoffs are scarce. Unemployment also remains extremely low with
very low rates of initial unemployment claims since May. Spending on consumer services like recreation and
entertainments is likely to strengthen as incomes rise. Despite the predictions of the pundits, health care spending
also will pick up as consumers and health care providers acclimate to the new health care rules.
Macquarie Said to Seek About $350 Million for Lending Division
Macquarie Group Ltd. (MQG), Australia’s largest investment bank, is seeking about $350 million for Macquarie
Equipment Finance, a unit that lends to hospitals and semiconductor makers, people with knowledge of the matter
said.
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Initial offers for the business, which has roughly $950 million of assets, are due in about two weeks, said the people,
who asked not to be identified because the matter is private. Macquarie has reached out to U.S. banks including
EverBank Financial Corp., City National Corp. and Huntington Bancshares Inc. as it seeks buyers, the people said.
Macquarie is asking about twice book value for Macquarie Equipment Finance, which it bought in 2008 from CIT Group
Inc., the people said. It also has approached U.S. Bancorp, Fifth Third Bancorp and KeyCorp about the sale, they
said.
Motor finance continues to grow
The Finance and Leasing Association (FLA) has announced continued growth across car finance, consumer finance
and asset finance. There was a 7% growth in consumer new car finance volumes during November 2014, compared
with the same month the previous year. The percentage of private new car sales financed through dealerships by
FLA members held steady at 75.9% over the same period. Geraldine Kilkelly, head of research and chief economist
at the FLA, said: “Personal Contract Purchase (PCP) has become a popular choice for many consumers, reflecting a
change in attitudes to car ownership. But many customers still want to own their car outright and as a result we have
also seen growth in hire purchase over the last year.” Consumer finance new business grew by 3% in November 2014,
compared with the same month the previous year and increased by 10% in the twelve months to November.
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Educational
Lease Contract with an Option to Buy
An option is a contract that gives the buyer the right to
buy/sell the underlying asset at an agreed upon price during
a certain period of time, or on a specific date. Options can
be classified as call or put options. The holder of a call option
purchases the right to buy the asset at a specific price, while
the holder of a put option has the right to sell the asset at
the agreed upon price.
Combining the lease agreement with an option to purchase the asset, within a specified period of time and at pre-
determined price, results in a lease with option to buy. A very good example of such an option is the $1 purchase
option. A $1 Purchase Option Lease is one of the two most common leases that businesses use to acquire equipment
today. Each type of lease is useful, depending on the type of equipment and the type of anticipated use. A $1
Purchase Option Lease is often used by businesses when they know they will still be using the equipment for an
extended period after the end of the lease term.
Advantages
Provides businesses the ability to purchase the equipment for at the end of the lease term.
Provides additional financial benefits that may include depreciation and interest expense benefits for tax
purposes.
Disadvantages
Since there is an option to purchase, the monthly payments are usually higher.
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About First Equilease
We were established in 2005 as a Kuwaiti closed shareholding company.
We aspire to be the market's first choice in equipment leasing in the Middle East, recognized for the
innovative trend-setting solutions, Client-centric approach, ethical standards, and dedicated towards
the sustainability of our community and the environment.
CopyRight© FIRST EQUILEASE 2015 All rights Reserved
@FirstEquilease FirstEquilease
P.O.Box 23444, Safat 13095, Kuwait Tel. : (965) 2224 8558 Fax : (965) 2224 8559 Email : [email protected]
Url : www.firstequilease.com