Equipment Leasing Insider

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1 Equipment Leasing Insider Q Welcome to our newsletter Welcome to First Equilease's Q edition of the Equipment Leasing Insider has been an exciting year so far. Oil prices have forced the countries in the GCC region to revisit their spending plans and increase austerity measures. Infrastructure investment have too been reduced and is expected to reach previous levels only by In light of reduced government spending countries have tried to bring in foreign investment to cover their investment shortfall through PPP projects. In this issue of the newsletter, we discuss Saudi Arabia s transport infrastructure. We discuss Saudi Arabia s plans to connect its planned economic cities through a series of rail network to reduce congestion and pollution on the road. In addition we also briefly discuss the flagship projects currently going on the economy. 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, Mohammad Al-Qahtany Chairman & CEO, First Equilease

2 Table of Contents Foreword 1 Transport Infrastructure in KSA 3 Equipment Leasing and Finance Association Monthly Confidence Index 7 Latest from Global Equipment Leasing News 8 New FASB standard - Implications 10 2

3 Equipment Leasing Insider Q Market Analysis Transport Infrastructure market in KSA Saudi Arabia is expected to spend $29.9 Bn on construction projects during 2016 and it is expected to spend a similar amount in Lower oil prices have had a huge impact on the region especially on the country s balance sheets. Net foreign assets at the central bank, which acts as the kingdom's reserve buffer, totaled $584 Bn in February 2016 declining by 17% YoY. As a result of the large scale decline, Saudi Arabia s construction spending is expected to come down by 20% compared to last year s figures 2. While the spending cuts, subsidy reforms and introduction of taxes have been made to improve the country s finances, Saudi Arabia has simultaneously mooted efforts to develop different funding models for funding such as PPP (Public Private Partnerships). PPP was previously used in the funding of Medina airport and it is expected to use a similar model to build the Taif airport. Figure 1: KSA Transport Infrastructure - Top 10 Ongoing Projects (Total - $88 Bn) KFCA - King Hamad Causeway, 5.67% GACA - King Khaled International Airport Expansion, 4.99% SRO - Dammam to Riyadh Main Freight Route 2 Renewal - Phase 2, 4.85% SRO - Railway Expansion Program, 7.94% SRO - Haramain High- Speed Rail (HHR) - Phase 1, 23.94% SRO - Haramain High- Speed Rail (HHR), 7.94% SAR - Dammam Qatif Transport System, 15.73% GACA - King Abdulaziz International Airport Development Project - Phase 1, 8.28% SRO - Haramain High- Speed Rail (HHR) - Phase 2, 9.32% PIF - Saudi Landbridge, 11.34% Source: Zawya, Marmore Research, As of March 2016 Expansion of New cities in Saudi Arabia 1 The National Faith and Gould Estimate 2 Ibid 3

4 As part of the country s development plan for , Saudi Arabia has planned economic cities across the country to diversify away from oil. It plans to build four new economic cities by 2020 with anticipated population of 40,000, 80,000, 200,000 and 250,000 at Rabigh, Hail, Medina and Jazan, respectively. In addition to this Saudi Arabia is also expanding Jubail on its East Coast and Yanbu on its West coast. Saudi Arabia has planned to use railways as the preferred method of transportation among these cities. Some of the key projects include Saudi Landbridge, Haramain High Speed rail, North South line and Saudi Railway Organization (SRO) expansion. Figure 2: Railway projects in Saudi Arabia Source: By Maximilian Dörrbecker (Chumwa) - Self-made, using this file, CC BY-SA 2.5, Wikimedia 4

5 Equipment Leasing Insider Q Haramain High Speed Railways (Multiple Phases) The Al Haramain project is arguably one of the largest infrastructure projects in the Middle East region. It forms part of the large scale expansion that the SRO is taking across the country. This project is expected to reduce the congestion on the roads between Makkah and Madinah, in addition to Jeddah governorate. The project would roll out in multiple phases and the total length of the railway tracks laid would amount to 450Km. In the 1 st phase, construction of overpasses, bridges, underpasses, water channels and other necessary infrastructure including the stations would be completed. A total of 140 overpasses and 860 water channels to discharge rainwater would be constructed during this phase. Developing of tracks, and trains would be completed in the 2 nd phase. The project connects Makkah, Jeddah, King Abdullah Economic City, Madinah and King Abdulaziz International Airport. Expansion of the airport would be linked to the railway station for ease of access to passengers. Table 1: High Speed railway stations in Saudi Arabia Station Cost ($ Bn) Makkah station 0.8 Sulaimanyah 0.8 station King Abdullah 0.5 Economic City Madinah station 0.4 Source: Zawya Seven trains will run within one hour from and to Jeddah, two trains will run between Makkah and Madinah, and four trains will run between Makkah and Rabigh. Each of these trains have the capacity to transport 19,600 passengers. Dammam-Qatif integrated public transport The planned integrated public transport system for Saudi Arabia's Dammam and Qatif cities will cost around $16 Bn. The project will integrate light rail, buses, rapid transport and shuttle buses. The project will have two main lines, including one linking Dareen island in the north of the province to Qatif, passing by Dammam and Dhahran until the King Fahd Causeway, which links Saudi Arabia with Bahrain. The second line will connect King Fahd Road in Dammam and head down to King Fahd International Airport in the West. 5

6 Saudi land bridge The Land bridge requires the construction of around 945 km of new railway between Jeddah and Riyadh, additionally it would increase capacity on the existing 450 km Riyadh - Dammam line, as well as a 115 km link between Dammam and the North-South line at Jubail. This project is expected to cost $10 Bn and is currently being undertaken as a state project. Container traffic is expected to be the major traffic along this line and is expected to have a running speed of 120 Km/h. Passenger trains on this line is expected to run up to 220 km/h which would cut the Riyadh- Jeddah journey from 10 hours (by bus) to under 6 hours. King Abdulaziz International Airport Development Project - Phase 1 The first phase of the three-stage development will raise the airport s capacity from 17mppa* 3 to 30mppa and allow all airlines to be handled under the same premises. Upon completion the airport is expected to have 720,000 Sqm terminal housing 46 gates, 28,000sqm of retail/f&b space, 120-room, four-star hotel for transit passengers; new ground transportation centre and railway station; and short and long-term car parking facilities for 23,600 vehicles. Table 2: Top ongoing transport infrastructure projects in KSA (By Project Value) Project Name Primary Sub- Sector Project Value ($ Mn) Completion Date SRO - Haramain High-Speed Rail (HHR) - Phase 1 Infrastructure 21,100 Q SAR - Dammam Qatif Transport System Infrastructure 13, PIF - Saudi Landbridge Infrastructure 10,000 Q SRO - Haramain High-Speed Rail (HHR) - Phase 2 Infrastructure 8,215 Q GACA - King Abdulaziz International Airport Development Project - Phase 1 Infrastructure 7, SRO - Haramain High-Speed Rail (HHR) Infrastructure 7,000 Q SRO - Railway Expansion Program Infrastructure 7, KFCA - King Hamad Causeway Infrastructure 5, GACA - King Khaled International Airport Expansion Infrastructure 4, SRO - Dammam to Riyadh Main Freight Route 2 Renewal - Phase 2 Infrastructure 4,271 Q Source: Zawya 3 *- Million Passengers per Annum 6

7 Equipment Leasing Insider Q 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 index has fallen by 15% since the beginning of the year due to less than ideal economic growth globally and in the US economy. While the low energy prices and growing economic conditions remain positive for the US economy the policy surrounding the presidential election serves as a damper to the economy for 2016 leading to a decline. When asked to assess their business conditions over the next four months, 3.2% of executives responding said they believe business conditions will improve over the next four months, unchanged from February, while 77.4% of respondents believe business conditions will remain the same over the next four months, an increase from 71.0% in February. 7

8 Latest from Global Equipment Leasing News ALAFCO Aviation Lease and Finance Company signs sale and leaseback agreement with Aegean Airlines for 2 A aircraft ALAFCO Aviation Lease and Finance Company announced it signed an agreement with Aegean Airlines for the lease of two new Airbus A aircraft. The aircraft will be leased under a sale and leaseback agreement for a period of eight years. The agreement signed in February 2016 will increase the number of aircraft leased by ALAFCO to Aegean Airlines to four aircraft. Aegean Airlines is the flagship carrier of Greece and the largest airline in the country, currently operating a fleet of 45 aircraft comprising of Airbus A and A In 2013, Aegean Airlines acquired its domestic rival Olympic Air, making Olympic a subsidiary of Aegean. ALAFCO Aviation Lease and Finance Company also announced the signing of a sale agreement with Britain's Jet2.com airline for the sale of two Boeing B aircraft, previously leased to Russia's Transaero Airlines. ALAFCO had invested in the two aircraft since 2004, and had generated a return of 14.7%. The recent transactions are in line with ALAFCO 's strategy to invest in new aircraft, while reducing the amount of aging aircraft in its fleet - enhancing ALAFCO 's operating performance. Dubai Aerospace sees aircraft deals in 2016, mostly from Iran Dubai Aerospace Enterprise (DAE), one of the few Gulf aircraft leasing firms, expects to add planes to its current portfolio of 97 with significant demand seen coming from Iran, the company's chief executive said. Iran, which has emerged from years of sanctions that prevented it from legitimately buying aircraft, agreed with European manufacturers last month to purchase up to 158 aircraft but these could take a few years to be delivered. Iranian airlines will be looking to lease aircraft that are immediately available while they await the European deliveries, DAE chief executive Firoz Tarapore said in an interview with Reuters. New era for Saudi Arabia's aviation sector SaudiGulf Airlines was doing more than just showing off its new Airbus A320 aircraft at the Bahrain International Airshow. The new carrier s presence was the surest sign yet that Saudi Arabia s domestic aviation market is finally about to take off. The privately-owned airline and soon-to-be rival Al Maha Airways, a subsidiary of Qatar Airways, have been awaiting final approval and their operating licenses from the kingdom s regulator, General Authority of Civil Aviation (GACA) under a historic decision to open up the domestic market. After several delays, both airlines are expected to launch imminently. 8

9 Equipment Leasing Insider Q Egypt's B2B Company makes 900 sales and leasing transactions in 2015 Egypt-based Business to Business for Investment and Real Estate Marketing -B2B has made sales on behalf for 450 residential, administrative and commercial units in addition to recording 450 leasing transactions by end of 2016, its CEO Nehad Adel said. B2B seeks to increase the sales and leasing transactions 35% by the end of the current year, Adel noted. Adel told Amwal Al Ghad that his company is planning to expand in of the gulf countries to promote the Egyptian properties in these countries. Drillers shrug at once-coveted oil leases as US revenue drops Cheap oil may be a boon to US motorists who are paying less at the pump, but it s costing the federal government hundreds of millions of dollars in revenue. Just 30 companies showed up for a government auction of offshore oil and gas leases in March 2016, plunking down $156 Mn in high bids for once-coveted territory in the central Gulf of Mexico. When the same auction was held three years ago against the backdrop of $92-per-barrel oil, the government s take was nearly eight times larger: $1.2 Bn. The money oil and gas companies paid in bids, rental payments and royalties for work on federal land and in US waters about $8.7 Bn in the fiscal year ending October 1, 2015, according to the Interior Department ultimately flows into the general fund of the treasury, and then is spent on other programmes. Leases for tourism projects granted extensions Leasing terms for tourism projects have been granted extensions in order to provide high quality tourism services, create more jobs for citizens and improve the preservation of the environment. Minister of Municipal and Rural Affairs (MoMRA) Abdul Lateef Al-Sheikh recently issued a circular to municipalities across the Kingdom ordering them to implement this decision with immediate effect, it added. Moreover, a royal decree was issued to grant tourism locations additional leasing terms of up to 25 years, and for projects whose volume of investment reaches over SR20 Mn, leasing terms may reach up to 50 years, maximum, in accordance with specific criteria. Latin American Equipment Leasing Industry Expands The equipment leasing and asset finance industry in Latin America grew 18.7% in US dollars, or 38% in local currencies, in 2014, according to the latest Alta LAR 100 report. Growth was significant given the negative forces affecting economies in many Latin American countries, said Rafael Castillo-Triana, CEO of The Alta Group Latin American Region (Alta LAR), which has produced the report annually since

10 Foundation Study by The Alta Group Spotlights Thriving Lender Finance Market, Impact on Equipment Leasing Industry A new study by the Equipment Leasing & Finance Foundation in Washington, D.C. reveals that the lender finance marketplace in the U.S. is thriving eight years after the 2008 financial crisis began, led by an interesting mix of traditional banks and newer, non-traditional lenders including financial technology (FinTech) venture capital companies, private equity firms, and insurers. The study, which was researched and written by The Alta Group, examines today s lender finance market and identifies key players, regulatory considerations, and implications for borrowers such as independent equipment lessors, said Valerie L. Gerard, managing director of The Alta Group. The Alta Group Forms Asia Pacific Consultancy The Alta Group announces the expansion of its worldwide consulting and advisory business with the creation of The Alta Group Asia Pacific Region (Alta AP). Alta AP is based in Hong Kong but serves the broader Asia Pacific equipment leasing and asset finance market including Australia, China, Indonesia, Japan, Malaysia, Taiwan and Vietnam. Alta AP joins existing Alta units in Canada, Europe, the Middle East and Africa (EMEA), Latin America and the US. The Alta group is an U.S based equipment leasing and finance compnay founded in 1992 founded by John C. Deane and John H. Giddens. Currently their services include - Systems integration advisory services, Asset management services, Legal services, Strategic alliance partners, Management Consulting, Mergers and Acqusitions etc.,alta Leasing is a member of the three major leasing and equipment bodies in the US ELFA, National Association of Manufacturers (NAM) and NEFA (National Equipment Finance Association). The group has a long list of client which feature some of the well-known global brands inlcuding Citi, Dell, HP, Goldman Sachs etc. 10

11 Equipment Leasing Insider Q Educational New Standards for leasing set by FASB Implications New Standard The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) each issued a new lease accounting standard. Both the FASB s and the IASB s new standard will require lessees to recognize most leases on their balance sheets as lease liabilities with corresponding right-of-use assets. Table 3 : Effective date for leasing standards Companies Effective Date Public business housess Annual and interim periods beginning after 15 Certain not-for profit entities December 2018 Employee benefit plans Other entities Annual and interim periods beginning after 15 December 2019 Source: E&Y Impact on the Financial statements and metrics For most lessees, the new standard will result in a gross-up of the balance sheet. This could cause a deterioration of debt ratios and return on assets as compared to current lease accounting. For example, regulatory capital of lessees that are financial institutions also may be impacted. In addition, companies should identify whether debt and compensation arrangements (e.g., employee bonuses) should change in light of the new standard. However, renegotiating these arrangements may not be straightforward. For instance, companies may need to evaluate their existing debt arrangements and, if necessary, negotiate with their creditors either to allow for more headroom in covenants or to allow for the continued use of current lease accounting in the covenant calculations. While continued use of current lease accounting may seem like a good idea, it would require the ongoing burden of maintaining a separate set of books for covenant calculation purposes. Similar considerations should be evaluated if key metrics underlying compensation arrangements are impacted 4. 4 E&Y 11

12 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. P.O.Box 23444, Safat 13095, Kuwait Tel. : (965) Fax : (965) info@firstequilease.com Url : FirstEquilease Copyright FIRST EQUILEASE 2016 All rights Reserved 12