28 Sep 18

Crisis in Turkey: Residual values in a collapsing market

The rollercoaster that is the Turkish leasing market today, suffers badly from exchange rate related risks. The essence of trouble is the fact that leasing companies purchase cars in foreign currency, but sell them in Turkish Lira. After years of balancing risk and opportunity, the good days are over.

Operational chain

In order to purchase vehicles in Euro or USD, the Turkish leasing company needs to have sufficient funding in each of the currencies. Let’s have a look at “business as usual” as it was about a decade ago.

Money was borrowed wherever possible, sometimes at excessive rates. In order to compensate for the need for Euro and USD to pay interest and reimburse capital, leasing contracts are offered to clients in TRY, Euro or USD. This explains partially the exponential growth of the Turkish leasing market during this period: when the Lira was strong, portfolios grew in size and allowed for further borrowing.

Residual values were fixed in foreign currency but paid in Turkish Lira. Supported by a strong Lira, it was perfectly acceptable to take some risks on RVs. High residuals imply low lease rates and higher sales.

Leasing bubble

A business model that is based both on the front and at the end on the hope that the Lira will become stronger or at least stay as strong as when the money was borrowed, is not without risk. Similar to the Dubai real estate bubble, the inevitable just happened. The bubble burst.

Residual values

Long story short, a vehicle at EUR 7500 residual value after 3 years needs to be sold on the second hand market at TRY 55,000. Three years ago, the sales price would have been TRY 22,500. It’s no surprise that each unit today is sold off at loss for the leasing supplier.

In addition, clients have stopped ordering in USD or Euro and have decided to terminate contracts, even if penalties need to be paid. These penalties don’t cover for the loss and increase the financial pressure on the leasing companies. In addition, less USD or Euro entering the bank account, means trouble paying for interests.

Survival of the fittest

Some leasing companies will not survive the exchange rate crisis and the first victim, FleetCorp, has come to a dramatic end. The impact of the crisis however will extend from the market’s borrowing power all the way down to RV setting and vehicle remarketing.

Leasing contracts, on short term, will become much more expensive as new customers will have to compensate for higher cost of funding and lower residual values. As long as the Turkish Lira stays weak, leasing companies will accumulate losses on vehicle resale values. In other words, it will require solid funding, low borrowing cost, good cash flow and a portfolio of loyal customers to survive the bubble.

Authored by: Yves Helven