Analyses
21 sep 18

Crisis in Turkey: leasing in crisis

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:

In a few months’ time, the Turkish lira has depreciated from 3 to 6.5 to the dollar and interest rates went up from 15 to 40%, following a long period of stability. For the last 10 years, the leasing market has been dominated by local players (Intercity – 35,000 cars, DRD– 30,000 and FleetCorp – 20,000). 

They used to fund Turkish contracts in euros. In the recent past, they started to offer euro contracts to their customers to transfer currency risks when the lira started to depreciate. That situation has created important risks. When funding TL with euros, they could be squeezed because of the TL depreciation (not enough TL to pay back euro loans). They could also be unable to recover their rents when customers were trapped by increasing costs, in particular when dealing with small local entities with no revenues in dollars.

This is what has happened to FleetCorp (insolvent) and DRD (Chapter 11). In the meantime, Mitsubishi has cut its investment in Intercity, retiring from the Turkish market.

ALD and Arval, being subsidiaries of international banks, have edged all their contracts and were apparently covered on financial risks. They both have contract in euros but only with large international customers. This cautious policy led them to lose market shares in the recent past. In its official information, LeasePlan indicated a 20 million provision during Q1 2018 to provide future losses on residual values, suggesting that residual values were funded in euros. 

Last week the Turkish government announced that within 30 days, all leasing contracts have to be denominated in TL. This decision opens uncertainty for all entities offering euros contracts as they will have to replace their euro funding with TL funding. They will face breaking cost and higher interest rates without clear indications about the conditions to fix new rents in TL for the moment.

Analysis by Pascal Serres, Fleet Europe Expert (pictured)