Crisis in Turkey: How does it affect the leasing industry?
After a long period of prosperity and stability, the Turkish economy is suffering from high inflation, rising borrowing costs and rising loan defaults. Leasing companies feel the backlash, too, but that didn't stop Alphabet from starting operations in the country.
Read our full coverage on the crisis in Turkey:
- FleetCorp files for bankruptcy
- Every cloud has a silver lining
- What's going on
- How does it affect leasing companies?
- Analysis - leasing in crisis
The main players in the Turkish leasing sector were set up around two decades ago. Together, they manage a growing fleet of around 360,000 vehicles. No Turkish leasing company appears to escape the current financial difficulties.
A leasing company that orders a car from a European manufacturer, pays that car in euros but leases it to a Turkish client in lira. If the lira goes down in value against the euro, those leasing companies get in trouble and may have difficulty to pay the euro loans they took to order cars. Increasingly, Turkish leasing companies had started offering customers euro contracts but as the lira depreciation started getting out of hand, this didn't protect them from customers with insufficient funds to pay their dues.
"Funding is probably the most important element in the operational leasing business," said Inan Ekici, president of Tokkder, the Turkish operational leasing association. "Since more than 70% of operational lease contracts are over 30 months long, leasing companies are obliged to provide appropriate medium and long-term funding to run their business operation. Besides, delayed customer payments in times of economic difficulties or sharp changes in the interest and exchange rates are putting pressure on the cash flow of operational leasing companies."
"In recent months," continued Mr Ekici, "interest and exchange rates have risen simultaneously and some leasing companies have started facing problems securing funding and debt repayment. Banks are currently reluctant to open long-term loan channels, which is reducing the investment ability of the sector actors. Even though there is still a strong appetite for leasing, the industry cannot respond to this demand at the desired level."
Tokkder believes the collateral structure of operational leasing companies is stronger than that of many other companies as it has an asset: automobiles. "The value of this asset is big enough to meet the credit debt of the operational leasing companies. Banks need to be constructive and solution-oriented in this period. Our sector still has a remarkable growth potential in Turkey."
International players are taking the blows, too. If a company has loans in euro that are included in its accounts in another currency like the Turkish lira, international accounting standards require that company to reflect changes in interest rates in its accounts. So if the lira is devalued, the euro debts that are listed in lira need to be re-evaluated. The company will need to reimburse more Turkish lira which will impact its revenue.
This impact is a one-shot, even if the corresponding debts are spread out over several years.
Tips for leasing customers
- If you don't have euro revenue, don't sign euro leases.
- Opt for a stable leasing company that can provide what it promises.
Image: Building of the Turkish central bank in the Galata district, Istanbul.