General Director of Financial Leasing Company still remains unhappy with Russian legal and tax environment(780 words)

Published: 8/9/2000

After considerable debate a private leasing company has emerged to provide a structure. According to Evgeny Zarizky, General Director of Financial Leasing Company (FLC), who have signed an agreement in June to provide a financial lease structure for the acquisition of two Tu-214s from Kazan based producer KAPO for state owned Dalavia. Zarizky does not appear to be particularly concerned about the possible development of the expected government aircraft leasing structure, commenting that the government has considerable funds, which the industry needs, but there will be niches for the smaller players. He has however, expressed some concerns that if the industry is to develop, any government activity in the area should be on a commercial basis. Having the state effectively undercut the private sector would not serve the development of the fledgling leasing industry well. The FLC vehicle will attract the funding and acquire the aircraft from KAPO and then lease the aircraft to Dalavia. The sources of the funding and the terms of the deal however, remain undisclosed by Zarizky, who says that they are reluctant to be named. The terms of the funding also remain undisclosed, but recent reports have suggested that lending from the banks for this type of venture has been expensive with rates of 15-20%. Despite Zarisky claim of the deal being privately financed, the fingerprints of the various regional administrations involved are fairly evident. Earlier reports have suggested that at least $10m of the funding for the structure will be provided by the Tatarstan Government at the highly attractive rate of 5%. There are also reports that Dalavia received $6m from the Kharbarovsk region, reported to have been paid in two lots in June and July of this year. The lease agreement covers a period of 8 years, which by Russian standards is generous, with the aircraft becoming the property of Dalavia at the end of the lease. The terms contrast with those offered by Sberbank to Siberian carrier Sibir earlier in July for the purchase of a Tu-204, which has a 4.5-year maturity and from the comments of Sibir General Director Filev, was regarded as being less than generous. While reluctant to discuss the exact price of the aircraft, Zarizky did infer that the cost of two Tu-214s was $30m excluding the engines, but gave little guidance on what FLC saw as the aircraft's residual values. Zarisky has however, been quoted as saying LFC considers the aircraft meets international standards, which has reduced its risk both in terms of resale in the event of default, but more importantly its improved efficiency will allow operators to generate the cash flow to service the debt. The plant is reported to be in the process of producing six additional aircraft (with six further airframes available) and LFC says that is actively engaged in negotiations with potential Russian buyers, some of which deals are close to completion. The possible buyers remain unnamed, but it seems likely that Aeroflot and Vladivostok would be among the names, although the former has been negotiating since 1997. Despite breaking new ground with this structure Zarizky made it clear that he is unhappy with the current legal situation regarding leasing in Russia, believing that the law as it is currently constituted makes leasing both difficult and risky for the lessor and those providing the funding for the structures. Effectively eliminating the possibility of attracting non-Russian financing. The tax structure particularly lumps the leasing sector, which is making long-term commitments, in with trading companies and Zarizky believes that tax concessions should be made to the sector reflecting this fact. Despite the legal/tax environment FLC believes that the major risk for the deal remains country risk, given that they believe they can cover for other possible risks during the period of the lease. For FLC leasing capital goods is a business that they have some experience of having been formed in 1997 to provide leasing for the oil industry keeping its head above water, according to Zarizky, though the financial crisis of 1998 despite having substantial exposure to hard currency debt from non-Russian banks. The reason for entering the aircraft market was explained as being seen as an attractive opportunity and what leasing activity that there is focused on the Tu-204.The company's heavy involvement in the Tatarstan market however, must have provide a substantial incentive to become involved, given the government's eagerness to make sure the aircraft received financing, a task which it failed to achieve under its own steam and something that it would be very grateful to the provider, particularly one owned by the state owned oil company Tatneft and the company's bank Zenit.

Article ID: 1981