LEASING IN MEXICO

CATCHING THE NEXT WAVE

Companies in Mexico
Are being dramatically underserved by commercial banks. Mexico lags behind Chile, Brazil and
Colombia in terms of total credit as a % of GDP. Annual leasing origination as a % of GDP in Mexico is
.4, when in Colombia is 1.09. This demonstrates the inefficiency of the leasing market in Mexico

Federico Benavides
Federico.benavides@beamonte.com

Table of Contents
Mexico Overview ............................................................................................................................... 1
Geography................................................................................................................................................. 1
Currency .................................................................................................................................................... 1
Reasons for Devalued Peso ...................................................................................................................... 1
Benefits of a Devalued Currency .............................................................................................................. 2
American Benefits of a Devalued Currency .............................................................................................. 2
Mexican Economy .............................................................................................................................. 3
Sector Growth ........................................................................................................................................... 3
Mexican Economy Outlook ....................................................................................................................... 4
Financial Sector.................................................................................................................................. 5
Four Pillars of the Financial Reform .......................................................................................................... 5
Banking Sector ........................................................................................................................................... 6
Banking Sector Forecast............................................................................................................................ 7
Small and Medium Sized Enterprises (SME) ............................................................................................. 7
Credit Market ........................................................................................................................................... 8
Insurance Market ...................................................................................................................................... 9
Real Estate Market ................................................................................................................................... 9
Specialized Financial Market .................................................................................................................. 11
Pension Market ...................................................................................................................................... 11
Competition ........................................................................................................................................... 12
Unifin ..................................................................................................................................................... 13
Factoring ......................................................................................................................................... 14
What is Factoring? .................................................................................................................................. 14
Reverse Factoring.................................................................................................................................... 14
The Nafin Factoring Program .................................................................................................................. 14
Pros and Cons of Factoring in Emerging Markets ................................................................................... 14
Leasing ............................................................................................................................................ 15
What is Leasing? ..................................................................................................................................... 15
Finance Leasing ....................................................................................................................................... 15
Operating Leasing ................................................................................................................................... 16
Benefits to Leasing (Lessees Point of View) ........................................................................................... 16
Benefits to Leasing (Lessors Point of View) ........................................................................................... 16
Leasing in Mexico .................................................................................................................................... 17
Opportunities .................................................................................................................................. 17
KCMX Capital ................................................................................................................................... 18

Mexico Overview
Geography
Mexico is located in North America and is neighbors with the United States in the north
and Belize and Guatemala in the southeast. Its bounded by the Pacific Ocean in the west and
the south and by the Gulf of Mexico in the east. The capital is Mexico City, which represents one
of the most important financial centers in both North and South America. Its Coastlines are 9,330
km (5,800 mi) in length, and its land is 1,923,040 km2 (742,490 sq. mi) wide. Mexicos population
is 128.58 million people as of 2016. Its climate varies from tropical in the south to dry in the north.
Mexico's official language is Spanish which counts for 95% of the country and the 5% left is made
up of over 60 indigenous languages including Maya, Mixtec, Zapotec, etc. Mexico has many
natural resources including crude oil, silver, gold, lead, zinc, copper, natural gas, and timber
among others.
Currency
The official currency in Mexico is the Mexican peso. As of 1994, the Central Bank of
Mexico authorized the peso to float so that the value of the currency depends only on the market
trend. As compared with the US Dollar, 1 Mexican peso on July 6 is worth 0.053 dollars and 1
dollar is worth 18.85 Mexican pesos. Represented below is the chart from July 2015 to July 2016
(Source: Yahoo! Finance) of the Mexican peso vs. US Dollar. During this time, the Mexican
currency devalued vs the U.S. dollar, meaning the dollar is getting stronger relative to the Mexican
peso. 1
The graph below shows the US dollar increasing in value in relation to the Mexican peso
by depicting the line fluctuating but ultimately increasing as the year goes on. There are various
reasons why the Mexican peso is dropping in value.

Ernst & Young,. Doing Business in Mexico 2015. EYGM Limited, 2015. Print.

Reasons for a Devaluing Mexican Peso:

Mexico, as a producer and exporter of oil, relies heavily on the price of oil for revenue.
There was a drop in the price of oil that was unfavorable to the Mexican economy and its currency.
In 2015 Mexico tailored its budget around the expectation that oil was going to average about $79
a barrel for the year. For three quarters of 2015, barrels were going for under $50 per barrel. This
pricing is significantly lower than what the government had estimated for the year. As a result in
2016, Mexico has to reduce its growth forecast to accommodate these lower prices.
In general, the strength of an economy is positively correlated with its currency. This
means a stronger economy typically leads to a stronger currency and a weaker economy
usually results in a decline in the value of its currency. The fall in oil prices directly and
negatively affected the Mexican peso.
The strength of the Mexican economy has also been affected by other factors including
Chinas economic slowdown. Chinas decreasing demand for commodities has hurt economies
of major commodity exporters such as Mexico. This in turn has weakened Mexicos currency.
Mexico has been working to increase its trading with China in order to attract
investments to many of its industries. China is the third largest consumer of Mexican goods after
the United States and Canada. Due to the lack of strength in Chinas economy, there are
concerns that Mexico will not realize the full benefits of trading with China. This would be a
potential blow to Mexicos economy and may furtherly negatively impact the Mexican peso. 2
Benefits of a Devalued Currency:
There are advantages with having a devalued currency. One benefit is a smaller trade
deficit. A devalued currency makes a countrys exports more competitive because its relatively
cheaper goods are more attractive to customers in countries with stronger currencies. In
general, an increase in export reduces the trade deficit and helps the economy.
At the same time, a devalued currency, such as the Mexican peso, makes buying foreign
goods more expensive. As a result, the price of foreign goods increases making them less
attractive thereby increasing the demand for domestic goods. In this case more domestic
workers are needed in order to increase production domestically. So a devalued currency
should ultimately result in increased employment in certain sectors. 3
American Benefits for Devalued Peso:
2

Toovey, Michelle. "Why Greece, Oil and China Affect the Mexican Peso." Investopedia. 2 Mar 2016.
http://www.investopedia.com/articles/forex/030216/why-greece-oil-and-china-affect-mexican-peso.asp
3

Blokhin, Andriy. "What Are Key Benefits to a Country That Has Engaged in a Policy of Currency Depreciation?" Investopedia. June 23, 2015.
http://www.investopedia.com/ask/answers/062315/what-are-key-benefits-country-has-engaged-policy-currency-depreciation.asp.

The devaluation of the Mexican peso relative to the US dollar might be a boon to American
investors. The US dollar now buys more Mexican Pesos than it did in the past so Americans can
invest more capital in Mexico for the same amount of US dollars. With the US dollar going a longer
way in Mexico, this might also be a favorable opportunity for Americans to invest in Mexican
property.
Mexican Economy
Economic growth of Mexico is expected to be 4.5% a year. In the late 1960s, in order to
help the growth of the country, the Mexican government established policies that help foreign
companies establish businesses in Mexico. According to the World Bank it only takes six days to
open and start a business in Mexico, which is far less time than it would take to open a business
in other emerging markets like Brazil or other Latin American countries4.
Due to the Countrys consistent growth, Mexico is viewed as an attractive emerging market
internationally. As part of a series of major reforms and initiatives, the Mexican government
created the National Infrastructure Program (PNI) that outlines major programs and projects
intended for execution through 2018. The Mexican government anticipates about 600 billion
dollars to be invested in infrastructure including telecommunications, transportation, urban and
rural development, energy, water, health, and tourism from local, federal, and private sources.
This in-depth project and investment should ensure that Mexico is going to continue to advance
and develop as a nation.5

Source: Mexico Infrastructure Projects Forum

Sector Growth:
4

Deloitte,. Competitiveness: Catching The Next Wave Mexico. Oxford Economics, 2015. Print.

"Mexico Infrastructure Projects Forum 2015 Energy Transport Water". 2016. Mexico Infrastructure Projects Forum 2015 Energy Transport Water.
http://www.mexicoinfrastructure.com/.

No sector of the Mexican economy has benefited more from the North American Free
Trade Agreement (NAFTA) than the manufacturing industry, which attracted a significant amount
of foreign direct investments (FDI) to help expand their production capacity and increase exports.
The manufacturing sector accounts for roughly 50% of total FDI in Mexico and 80% of total trade.
Presently, manufacturing accounts for 32% of the nations economic output. The passing of
NAFTA helped the Mexican economy by opening up doors for trading with other countries in North
America especially the United States, which is the largest economy in the world.
Countries from around the world are now investing in Mexico. In 2014, for example,
General Motors announced plans to invest $5 billion in Mexico to double the amount of production.
Nissan will invest $1.5 billion in partnership with Daimler to produce 300,000 Infiniti and Mercedes
Benz luxury vehicles beginning in 2017. At the same time, Honda and Mazda have begun
production at factories in Guanajuato, aiming to produce more than 400,000 cars each year. Kia
Motors is building a factory in Monterrey that expects to produce about 300,000 vehicles annually,
while Audi is planning a new plant in San Jose Chiapa, Puebla that will produce luxury SUVs with
the ability to build 150,000 vehicles. Volkswagen's Puebla-based production site is the companys
second largest worldwide, exporting vehicles all around the world. A number of Japanese parts
suppliers also are investing in the area as the entire auto parts sector expands to support the
wide range of manufacturers.
The relationship between the U.S. and Mexico has helped the electronic and aerospace
industry in Mexico immensely. This will help continue to grow the large-scale electronics
manufacturing in Mexico established by foreign-owned factories close to the U.S. border. The
electronics sector is concentrated in 10 central clusters focusing on a wide range set of products.
In Ciudad Juarez, big international firms employ 35% of the areas 360,000 manufacturing
workers.
The aerospace manufacturing sector has also emerged as a growth area for high-value
production. 300 manufacturers operate across five Mexican states, and critical economies of
scale have been established that should allow the sector to keep growing. A large cluster of
factories producing engine components for aviation has been constructed around Guaymas.
Large U.S. companies are now setting up factories in Mexico such as General Electric, Textron,
and Honeywell.
Mexican Economy Outlook:
Even if Mexicos trade with the rest of Latin America is relatively small compared with trade
with the United States, a significant opportunity exists for this trade to increase over the next two
decades.
Across Latin America, the growth in households with incomes of $35,000 or more is
expected to expand significantly through 2030. This would create new sources of demand for

some of the higher cost manufactured goods in which Mexico has an advantage, such as with
automobiles.
Mexico can expand its access to international markets as the Trans-Pacific Partnership
(TPP) goes into effect. This treaty, which was signed on February 4th, 2016, links 12 Pacific
economies, including Mexico, Australia, Japan, Peru, and the United States. It is subject to
ratification in 2018 by the countries that are members. If the agreement goes through, the deal
would likely provide Mexican companies cheaper access to capital goods from Japan and South
Korea, which could facilitate greater foreign investment, and could raise Mexicos longer-term
growth rate by close to 1 percentage point and foreign trading by 11%. Also, jobs that are created
by the potential of extensive exports, pay 18% more than the average job would, which will add
value to the Mexican economy.
The ability to reduce crime, and trust that systems will work fairly for all of Mexicos citizens
will be crucial in helping Mexico take off on a faster growth trajectory. Higher salaries for
inspectors and police officials can offset the influence of bribery and corruption and raise the
prospects that polluters or those who violate workers rights will be prosecuted. A more unyielding
collection of taxes will also help give Mexicos government the additional resources to invest in
the infrastructure the country needs to help further growth.
The arrival of structural reforms has led to key progress across a wide array of areas.
Progress has already been made to open energy and telecoms to competition. These and future
improvements should raise private-sector investment, improve efficiency and innovation, and
promote the skills of low-educated and low-skilled workers. Measures to strengthen education,
skills, and financial inclusion will offer all Mexicans, especially women, greater opportunities to
contribute to society. 6
FINANCIAL SECTOR
Several reforms in various sectors of the economy such as telecommunication, education, and
oil, were passed since President Enrique Pea Nieto took office in order to achieve economic
growth. Mexicos credit penetration by firms not in the financial or private sector is 15% of GDP,
which is a lot lower than the US or other countries in Latin America. By making it easier for small
and medium sized enterprises (SMEs) and low income families to get a hold of credit, Mexico
could boost the economy sooner rather than later.
Four Pillars of Financial Reform Underway in Mexico:
1. New Laws and Regulations for Development Banking
This sector of the Mexican banking industry will be given more financial and regulatory freedom
in order to provide more loans, especially in areas that are a priority to national development. The
financial reform in Mexico will affect the retail banking system as it will give wider access to credit
6

Deloitte,. Competitiveness: Catching The Next Wave Mexico. Oxford Economics, 2015. Print.

and financing to families, small businesses and other sectors of the population that traditionally
have not had access to the system. 70% of employed Mexicans work for SMEs, so providing both
wider access to credit should have the effect of boosting the economy.

2. Banks Will Not Be Allowed to Offer Tied Sales

Tied Sales, which are sales conditioned on the acquisition of an additional product, will be
outlawed. In addition, the process of obtaining credit will become simpler and more straight
forward. This pillar of reform will affect the retail banking system because users will have an easier
time accessing capital and they wont need to have all their requirements met by any one bank.
This will lead to increased competition in the sector, which in turn will lead to better incentives for
clients in the form of lower interest rates and easier processes.
3. Financial Laws Will Be Strengthened
Several laws, impacting financial institutions will be changed to make it easier and more likely for
banks to collect money from its customer who hasnt paid their fees. Jail time is now a possibility
for those customers refusing to comply. Further, banks will be granted more affective guarantees
and collateral when executing lending contracts. Lowering the risk for the financial institutions
should translate to lower interest rates, thus increasing the amount of loans provided to
customers.
4. Lowering the Risks to Participants
Norms relating to capital quality requirements will be converted into laws. The savings of
customers of financial institutions will be protected in the event of a banks bankruptcy or even in
the event of a financial crisis. The risk of a financial crisis or a banks bankruptcy will be lower as
a result of the financial reform in this sector.7

Banking Sector:
Over the past decade, lending to the private sector has been increasing. The rate of growth
for lending on average has been faster than the rate of expansion of Mexicos GDP. The reason
for the growth in lending has been due to a high portfolio quality as a result of a low past-due
loans ratio. The low past-due loans ratio means that the bank has been acting responsibly in
lending money to entities and people who have paid back their loans on a timely basis. This has
the effect of increasing a banks credibility.
Even though lending to the private sector has been increasing, participation in terms of
the number of financial institutions continues to be low compared to similar countries in the similar
economic situation. Other factors causing low bank penetration are the relatively small numbers
of savings accounts per person which remains the case despite the sizeable increase in branches,
7 PwC,. Retail Banking in Mexico-An Industry Outlook. PwC Mexico, 2015. Print.

ATMs, and point-of-sale terminals over the last couple of decades. The low rate of bank
participation indicates that not all demographics are becoming customers in the formal banking
services. On top of that providing credit and banking services to an even a wider demographic in
Mexico could result in an even bigger boost to both the banking sector and the Mexicos economy.
8

Banking Sector Forecast:

Mexico Banking Sector Predictions

in Millions MNX
6,000,000
5,000,000
4,000,000
3,000,000
2,000,000
1,000,000
0
2013

2014

2015

Client Loans

2016

2017

Client Deposits

Mexicos banking sector has a bright future ahead of it. Stronger growth will increase both
corporate and consumer credit being loaned out, while an improved macroeconomic environment
should result in a continued decrease of bad loans.
Even if the loan to deposit ratio has risen as depicted in the graph above, it still remains
at a solid 95%. Indicating that the loans are getting paid back. Strict regulations on commissions
and fees, as well as increased competition are likely to benefit consumers and increase overall
loan growth, but might negatively influence any one banks profitability. Mexico has the lowest
client loans per capita of any Latin American country which indicates room for growth in the sector.
This in turn suggests there might be considerable profits for years to come. 9

Credit Market:
8

Sanchez, Manuel. "Mexicos banking

http://www.bis.org/review/r140305b.pdf

system

opportunities

from

reform."

Bank

for

International

Settlements.

9 PwC,. KC Industry Focus Banking in Mexico. PwC Mexico, 2014. Print.

Mexicos commercial credit market is the smallest in Latin America. Mexican banks are
hesitant to lend due to high risks and expensive collateral. This stems from the collapse of the
Mexican banking system in 1995. Banks have focused on making their profits from high interest
rates so they partner with the larger enterprises, which ends up hurting the SMEs.
The average annual growth rate of bank lending from January to September 2013 slowed
down to 7% compared to 10.4% for the same timetable in 2012. The largest slowdown was seen
for consumer lending, which fell from 18.4% to 11.5% for the first nine months of 2012 and 2013,
respectively. With improvements in lending rates, the government expects to see growth in the
credit market and increase Mexicos GDP. 10
The banking systems biggest flaw is that small and medium-sized businesses have a lot
of difficulty obtaining credit. Only 32% of all established businesses in Mexico have arranged
financing through either a loan or line of credit. For small and medium-sized businesses, the
situation is worse: just 18% of formal businesses with fewer than 20 employees have access to
regular financial channels in Mexico.
Improvements in banking laws made by President Enrique Pea Nieto is aimed at
increasing credit to SMEs. By making it easier for SMEs to access credit, President Pea Nietos
goal is for growth in the short run and to foster economic development in the long run. The passing
of the new law Ley para Regular las Agrupaciones Financieras has the potential to increase the

10

PwC,. KC Industry Focus Banking in Mexico. PwC Mexico, 2014. Print.

productivity of small and medium-sized businesses and help workers borrow against their future
income thus improving social mobility and income distribution. 11
Small and Medium Sized Enterprises (SME):
Although SMEs account for most of the employment in Mexico (74% of employment and
52% of the GDP), about 28% of the Mexican workers are employed by small businesses off the
books in order for businesses to avoid/reduce tax obligations. These people are unable to open
bank accounts because they cant provide proof of their employment, which leads Mexico to be
under-banked compared to other countries in Latin America. Statistically speaking, the countrys
credit extended to its private sector counts as 31.4% of GDP (according the World Bank in
2014), one of the lowest rates in South America. For purposes of comparison, the rate in Brazil
is 69.1%, and in Colombia is 52.7%. To remedy this situation, the government has offered small
businesses certain benefits so that they would follow the laws more consistently and to help to
grow the Mexican economy. These advantages include tax exemptions and preferential
electricity rates.

Competition for Financing SMEs:

As stated earlier, small and medium sized businesses are underserved and underfinanced
in Mexico. This means that there isnt a lot of financing competition in this industry yet, since most
banks have not yet providing SMEs access to credit. As a consequence, SMEs must reach out to
non-financial, private institutions to get access to financing. The main source of financing flowing
to the SMEs is from their suppliers and from some commercial banks. Both of those streams
account for over 80% of their financing. That means that few independent leasing firms are taking
advantage of the opportunity to finance these businesses. Taking advantage of this opportunity
will have the further benefit of helping to create jobs, provide sources of income to its citizens,
and overall help the Mexican economy.

11

Skelton, Edward C. "Mexicos New Banking Measures Aim to Increase Credit, Transparency." Vallartadaily.com. September 8, 2014.
http://www.vallartadaily.com/news/business/mexicos-new-banking-measures-aim-increase-credit-transparency/.

Only 16% of the Mexican Leasing Market is from independent firms, which are the main
players that serve SMEs. Therefore, it is a good opportunity for KCMX to enter the leasing market
and help to provide SMEs with the funding they need.

The biggest firm in the private sector is Unifin, the largest independent leasing firm in Latin
America and a worthy competitor. But it is a market with room for many winners.
Unifin:
Unifin Financiera was founded in 1993 and is headquartered in Mexico City, Mexico.
Unifin, as previously mentioned, is the leading independent leasing company in Latin America
that targets SMEs and specializes in operating leasing, factoring, auto and other lending. The

Company offers operating leases for all types of equipment and machinery, transportation
vehicles, and other assets in a variety of industries. Unifin has been a fast growing company over
the years. It also has its factoring business to provide financial and liquidity solutions. Unifins auto
loans consist primarily of loans for the purchase of a new or used vehicle. 12
Recently Unifin became a public company, carrying a 3.1 billion pesos IPO. Shares were
first priced at 28 pesos, valuing the company at about 9.4 billion pesos. This was the first IPO
issued in 6 months for the Latin American region. 13
Alternatives to Financing SMEs: Factoring
Factoring is the process where a supplier sells its account receivables to a third entity at
a discounted value to that of the receivables in order to receive immediate cash. Thereby, the
supplier transfers its credit risk to the buyer. Factoring is more common in developing countries .
In the case of Mexico, SMEs have difficulty accessing financing and therefore they cant
afford to finance their production cycle since it takes buyers 30 to 90 days to pay them once their
goods are delivered. The risks of factoring are based on the risk of the account receivables;
therefore, if the account receivables are to be paid by a large or foreign firm the risk and therefore
the discount is smaller.
In non-recourse factoring, the lender becomes entitled to the accounts, and therefore
exposed to the default risk from the buyer. In recourse factoring, the lender can collect the money
lent from the seller in case of a payment deficiency from the buyer, unless the seller cannot
provide for this deficiency.
In reverse factoring, the lender buys accounts receivables only from high-quality buyers
in order to minimize the risks related to these receivables. Therefore, the credit risk is the default
risk of the buyer and not of the SME itself. This is very common in emerging countries because it
provides low-risk financing from the lender point of view to the high-risk SME.
Factoring in Mexico is very successful to the point where Nafin, a development bank in
Mexico, created a program that facilitates online factoring by connecting big buyers and small
suppliers. The role of Nafin is to coordinate factoring and not to actually factor. Nafin has provided
companies with 190 large buyers and more than 70,000 SMEs. Factoring is done on a nonrecourse basis, allowing SMEs to increase their cash holdings and improve their balance sheets.
To participate in this factoring program, SMEs must be registered with Nafin, and have an account
in the bank that has a relationship with a big buyer in order to facilitate the process and reduce
the risks of default. The use of this electronic platform makes the transactions quicker (3 hours)

12

UNIFIN,. 2015 Annual Report. UNIFIN, 2015. Print.

13

Bain, Ben, and Jonathan Levin. "Unifin Said to Raise $206 Million, Ending IPO Drought in Mexico." Bloomberg.com. May 21, 2015.
http://www.bloomberg.com/news/articles/2015-05-21/unifin-said-to-raise-206-million-ending-ipo-drought-in-mexico.

10

and cheaper. Also with this program, banks can keep track of the performance of the SMEs
accounts and therefore there is no lack of information in this reverse factoring process.

For Mexico, factoring is the form of financing that is the cheapest for SMEs. As a result of
the Nafin program, SMEs can access to financing which they wouldnt have otherwise.
Commercial lending is usually not available for SMEs of emerging economies because it requires
good secured lending laws, electronic collateral registries, and efficient judicial systems. Factoring
on the other hand doesnt depend on the economy or laws in the countries but more on how
reliable the account receivables of the seller are. Therefore, factoring makes it easier for SMEs
to get access to financing which they wouldnt otherwise be able to attain. Factoring is linked to
the value of the account receivables. If the firms that need to pay these suppliers are reliable, it
makes it less risky for factoring firms to buy these account receivables.
A downside to factoring rather than commercial lending is that the interest of commercial
loans in some countries are tax deductible, but factoring is not. This makes factoring more
expensive. Another disadvantage is that, factoring firms do not always get access to the
information of the sellers account receivables past performance (default history) and therefore it
makes factoring riskier for them. 14
Leasing
Leasing is a way of financing the purchases of fixed assets that normally have a high cost.
In a lease contract, the lessor gives the right to the lessee to use a particular asset for a period of
time. The lessee will usually pay a fixed amount regularly. There are two main types of leases:
finance and operating leases.
A Finance lease is usually used to finance equipment for the major part of its useful life.
All the risks are transferred to the lessee. At the end of the term lease, there is an ownership
transfer option where the lessee decides whether or not to purchase the machinery/equipment at
fair market value. These leases are treated like a loan and therefore appear on the balance sheet.
An operating lease is used to finance the equipment for less than its useful life. All the
risks involved with the lease (example: obsolescence) remain with the lessor and so does the
ownership of that particular asset. The lessee pays monthly fixed payments to the lessor; this
lease is treated like a rental expense, so the payments are considered operational expenses and
the asset leased is off the balance sheet, which can improve the lessee's financial ratios.
The benefits are favorable for the lessee. Companies that cant or dont want to buy assets
at full price can choose to lease from leasing companies. Doing so is very beneficial to the
company. Companies save cash (lower down payments, lower monthly payments), and

14

Klapper, Leora,. The Role of Factoring for Financing Small and Medium Enterprises. The World Bank,. Print.

11

companies pay the difference between the current price of an asset and the expected value of
the asset at the end of the leasing term. Saving that cash allows those companies to pay for other
crucial expenses such as employee salaries and expansion of the business. The lease is fully
deductible on taxes making it cheaper to pay those taxes. Once the short term lease is up it can
be renewed using up to date machines and technologies. Leasing is viewed as an expense as
opposed to debt (liability), which is also called off-balance sheet financing. Upgrading its balance
sheet is convenient because the lessee looks more reliable when seeking future business funding.
15

The benefits that leasing provides to the companies leasing out the equipment are also
very favorable. First, the lessor is guaranteed regular income on the equipment. The lessor gets
lease rental by leasing an asset during the period of the lease which is a form of dependable flow
of income coming into the business. Even though it is leasing out the equipment for another
companys use and benefit, the lessor still retains the ownership of the asset. Not only does the
equipment still belong to the lessor, these companies are transferring all the risk to the entity
leasing the product.
An important benefit that comes with leasing out assets is the tax benefit it presents. Since
the lessor still retains ownership, the tax benefit is realized by the lessor by way of depreciation
with respect to the leased asset. The overall profitability makes leasing, in the lessors point of
view, very attractive. Since the rate of return based on lease rental is much higher than the interest
payable on financing, the asset presents an opportunity for the lessor to make money. A benefit
to leasing products is that it has high growth potential. Economic growth in the leasing industry
can still be maintained even during a period of economic challenges. Thus, the growth potential
of leasing is higher than other many other forms of business. As a result of the rental fee that
comes with leasing an asset, the lessor earns a solid return on their investment. The capital used
to buy the assets is made back through the capital earned by leasing the equipment. 16
The graph below represents the portfolio of leasing outstanding (vigente) versus leasing
that was defaulted (vencida). In 2013 there was roughly 110 billion of Mexican pesos outstanding
in the leasing market and less than 2% defaulted, making the leasing market in Mexico safe and
attractive to invest in.

15

Balboa Capital. "Advantages of Equipment Leasing." Balboacapital.com. http://www.balboacapital.com/equipment-leasing/advantages/.

16

Trisha. "Lease Financing: Types and Advantages, Disadvantages." Yourarticlelibrary.com. http://www.yourarticlelibrary.com/financialmanagement/lease-financing-types-advantages-and-disadvantages/43833/.

12

OPPORTUNITIES
Corporations in Mexico are underserved in terms of access to financial services because
of the lack of attention from the banking sector. This creates excellent opportunities for leasing
companies such as KCMX to pounce and partner with those SMEs. Only 2.5% of Mexicos SMEs
receive financing from institutional investors which forces lending rates to increase. 74% of
Mexicos employment is with SMEs and account for 52% of the countrys GDP. Despite their
contribution SMEs only get 15% of the outstanding financing vs 85% financing for larger
enterprises. This demonstrates that there is an untapped market and a large opportunity to
finance small businesses.

13

Source: Mexican Ministry of Finance

Mexico has a very fast growing fleet market with the majority of vehicles either bought or
leased. Car leasing represents an important part of the entire leasing market. Mexican growth in
tourism also affects the growth in car leasing, creating investment opportunities in the leasing
market.
As mentioned earlier Mexico is recognized as a worldwide producer (more than 80% of
the vehicles manufactured locally are exported internationally) among the largest exporter in the
automotive sector, therefore it is recognized as a leader. The majority of Mexicos automotive
business is done with the United States and Canada. This is a result of the United States signing
NAFTA (North American Free Trade Agreement) on December 8th, 1993, that strengthens
Mexicos exports. The partnership with the United States creates more advantageous
opportunities to invest in Mexico.

Contributors from Beamonte Investments

Federico Benavides
Associate
federico.benavides@beamonte.com
Avi Peretz
Analyst
avi.peretz@beamonte.com

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