Asset Management Master Class

Presentation by McMillan Shakespeare Limited

Abe Tomas Group Executive Fleet and Novated November 2011 Strictly Private and Confidential

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Agenda
Outcome The Market Customer Requirements Solutions Income Streams Accounting for Leases Risk Management Conclusions

The Market Customer Requirements

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Outcomes
Maturity of the Australian Market Understand the life cycle Diversity of Income streams Income levers can be managed Multiple products for different business segments Risk management takes a lead role Cashflows of a lease explained

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The Market

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The Market
The Australian Fleet Lessors Association (AFLA) members represent the major share of the leasing and fleet management market in Australia

Members of AFLA:
Alphabet Fleet (BMW) GE Custom Fleet Fleetcare FleetPartners FleetPlus Interleasing / Holden Leasing LeasePlan et Management NLC ORIX Q Fleet SG Fleet NSW State Fleet Summit Auto Lease Toyota Fleet Management

*Includes units funded but does not include fleet managed

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The Market Funded Vehicles

Table 1: Units Held*
As at End 2010 July August Sept Oct Nov Dec 2011 Jan Feb Mar April May June July August Sept Total Cost $ Million $12,828 $12,913 $13,011 $13,058 $13,268 $13,353 $13,415 $13,426 $13,546 $13,549 $13,573 $13,653 $13,692 $13,794 $13,839 Total Number 343,629 345,412 346,289 346,619 351,001 353,403 354,282 353,872 354,247 353,679 353,774 354,865 354,673 355,255 355,641 Average Cost ($) $37,331 $37,384 $37,573 $37,672 $37,800 $37,784 $37,865 $37,940 $38,239 $38,309 $38,366 $38,474 $38,605 $38,828 $38,913

$13.8 billion of funded assets 7.9% growth in 15 months

*Includes units funded but does not include fleet managed

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The Market - Units

Table 3: Total Portfolio By Type of Facility-Number of Units
As at End Operating Leases Funding only (1) Operating Leases Other (2) Finance Leases (3) Novated Leases (4) Other Funding (5) Total Funded (1)+(2)+(3)+( 4)+(5) Fleet Managed (6) Total Portfolio (1)+(2)+(3) +(4)+(5)+(6 ) 'Fleet Managed' Funded by other AFLA Members

2010 July August Sept Oct Nov Dec 2011 Jan Feb Mar April May June July August Sept % to total

40,867 40,690 41,807 41,895 41,665 41,473 41,329 41,166 40,472 39,863 39,445 39,558 39,121 39,042 38,780 11%

184,773 185,654 184,413 184,470 184,901 185,739 185,411 185,107 186,200 185,194 186,067 185,593 186,398 186,444 186,453 52%

29,326 30,217 30,857 31,021 35,144 36,051 37,512 37,219 37,666 37,874 38,130 38,496 39,013 39,076 39,301 11%

75,855 75,864 75,842 75,822 75,786 76,191 75,859 76,204 75,754 76,140 75,313 76,143 74,645 74,782 74,827 21%

12,808 12,987 13,347 13,411 13,505 13,949 14,171 14,176 14,155 14,608 14,819 15,075 15,496 15,911 16,280 5%

343,629 345,412 346,266 346,619 351,001 353,403 354,282 353,872 354,247 353,679 353,774 354,865 354,673 355,255 355,641 100%

149,484 148,091 150,932 157,446 158,475 155,260 155,640 153,681 154,133 155,396 155,654 156,253 159,792 160,375 162,390

493,113 493,503 497,198 504,065 509,476 508,663 509,922 507,553 508,380 509,075 509,428 511,118 514,465 515,630 518,031

4,615 4,600 4,574 4,760 4,754 4,892 4,935 5,108 5,077 5,110 5,065 4,897 5,465 5,511 5,455

Other Funding is hire purchase, chattel mortgage/other

Managed units 5.0% growth in 15 months

Source: Australian Fleet Lessors Association

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The Market New Business

Table 5: New Business Volume During Period: $Million
Finance Leases Operating Leases 250 231 222 703 207 216 236 659 150 210 230 590 187 204 216 607 210 240 228 678 NovatedFinance Leases 113 103 94 310 89 86 103 278 64 84 101 249 87 82 84 253 86 98 93 277 NovatedOperating Leases 5 2 2 9 3 2 2 7 4 2 5 11 4 2 3 9 2 3 2 7 Total Novated Leases 118 105 96 92 88 105 68 86 106 91 84 87 88 101 95 Hire Purchase 26 23 33 82 17 23 39 79 17 43 32 92 43 36 41 120 45 49 43 137 Chattel Mortgage/ Other 2 1 2 5 1 1 4 6 2 2 3 7 1 1 1 3 0 0 0 0 TOTAL

2010 July August Sept

SEPT 10 QTR

Oct Nov Dec DEC 10 QTR 2011 Jan Feb Mar MAR 11 QTR April May June JUNE 11 QTR July August Sept SEPT 11 QTR

45 45 45 135 46 185 57 288 55 41 48 144 42 47 55 144 58 49 51 158

441 405 398 1244 363 513 441 1317 292 382 419 1093 364 372 400 1136 401 439 417 1257

March & June 2011 Qtr impacted by Tsunami in Japan

N.B. Some AFLA estimates have been made in completing this table

Source: Australian Fleet Lessors Association

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The Market Net Receivables

Table 6: Net Receivables at Month End: $Million
Finance Leases Operating Leases NovatedFinance Leases NovatedOperating Leases Total Novated Leases Hire Purchase Chattel Mortgage/ Other TOTAL

2010 July August Sept Oct Nov Dec 2011 Jan Feb Mar April May June July August Sept

751 761 779 789 877 901 924 925 935 948 958 964 978 976 989

5,306 5,269 5,277 5,275 5,358 5,342 5,297 5,297 5,314 5,307 5,311 5,317 5,331 5,355 5,369

1,735 1,711 1,709 1,708 1,711 1,708 1,699 1,692 1,694 1,700 1,683 1,676 1,672 1,675 1,674

78 72 70 65 73 69 72 58 59 57 57 57 54 56 55

1,813 1,783 1,779 1,773 1,784 1,777 1,771 1,750 1,753 1,757 1,740 1,733 1,726 1,731 1,729

460 469 488 488 491 515 516 534 547 572 586 604 629 655 676

37 37 38 38 38 40 41 41 41 40 39 38 37 35 33

8,367 8,319 8,361 8,363 8,548 8,575 8,549 8,547 8,590 8,624 8,634 8,656 8,701 8,752 8,796

N.B. Some AFLA estimates have been made in completing this table

CHP 46.95% growth in 15 months

Source: Australian Fleet Lessors Association

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The Market Total Fleet Units

As at End Operating Leases Funded only (1) 46,830 47,637 46,710 51,470 34,125 35,704 33,325 38,718 40,456 44,919 44,367 48,554 45,303 47,693 39,839 50,000 46,966 52,225 53,002 54,684 46,623 42,003 40,593 41,473 39,558 Operating Leases Other (2) Total Operating Leases (1)+(2) 148,714 147,804 149,762 158,671 156,597 168,551 164,311 174,993 174,355 179,412 172,352 177,861 178,786 185,895 176,911 207,888 206,757 205,840 210,606 221,524 230,073 224,772 225,466 227,212 225,151 Finance Leases / Other (3) Novated Leases (4) Total Funded (1)+(2)+( 3)+(4) 167,159 186,098 189,477 203,596 191,012 205,740 203,246 219,057 227,019 236,716 235,457 247,092 245,589 256,328 247,951 283,441 301,596 305,747 312,028 337,621 344,054 340,241 342,702 353,403 354,865 Fleet Managed (5) Total Portfolio (1)+(2)+(3) +(4)+(5) 194,129 219,392 219,502 242,485 240,531 263,136 261,879 280,877 301,873 334,697 330,251 342,106 336,225 348,170 342,980 387,420 407,277 415,536 418,564 479,038 483,822 482,891 486,711 508,663 511,118 Dec-98 Dec-99 Jun-00 Dec-00 Jun-01 Dec-01 Jun-02 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 101,884 100,167 103,052 107,201 122,472 132,847 130,986 136,275 133,899 134,493 127,985 129,307 133,483 138,202 137,072 157,888 159,791 153,615 157,604 166,840 183,450 182,769 184,873 185,739 185,593 8,186 20,384 19,815 21,671 10,860 11,209 10,488 10,957 10,539 13,261 14,396 16,751 15,626 16,221 16,430 18,305 30,805 25,619 27,238 36,779 37,277 39,677 41,958 50,000 53,571 10,259 17,910 19,900 23,254 23,555 25,980 28,447 33,107 42,125 44,043 48,709 52,480 51,177 54,212 54,610 57,248 64,034 74,288 74,184 79,318 76,704 75,792 75,278 76,191 76,143 26,970 33,294 30,025 38,889 49,519 57,396 58,633 61,820 74,854 97,981 94,794 95,014 90,636 91,842 95,029 103,979 105,681 109,789 106,536 141,417 139,768 142,650 144,009 155,260 156,253 'Fleet Managed' Funded by other AFLA Members 15,638 4,101 2,189 13,059 13,138 5,637 5,491 19,581 6,814 6,045 5,353 5,001 4,590 2,902 2,624 3,363 4,302 3,290 2,578 2,813 4,186 5,619 5,056 4,892 4,897

Increase due partly to NLC joining AFLA

Growth of 5% over past year

Source: Australian Fleet Lessors Association

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Customer Requirements

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Customer Requirements
The AFLA statistics clearly show that customers have requirements that their bank cannot fulfill A financier can provide funding but this ignores the management of the asset during its life Fleet Management Organisations (FMOs) bring funding and management together; from purchasing an asset, managing it operationally and finally disposal FMOs also deliver to the customer:
Knowledge via its experienced staff Systems to manage and report Buying power

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The Asset Life Cycle

Procurement Finance In-Life Services Disposal

Purchase the vehicle / asset preferred supplier network

Owned, Operating lease, finance lease, CHP, chattel mortgage, novated lease

Fuel, insurance, maintenance, tyres, registration / CTP, infringements, e-tags, roadside assistance, accident management, driver training

Sale of the asset auction, dealers, employees

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Procurement and Finance

Procurement:
Experienced staff assist in vehicle selection, options and accessories National network of preferred suppliers Preferred pricing in excess of national fleet including reduced dealer delivery fees Buying Power can be passed on in full or part Finance: Customer may self fund by acquiring for cash FMO facilitated: Finance lease, operating lease or novated lease CHP & chattel mortgage preferred SME financing option
As of 1/7/2012 changes to CHP will mean that Chattel Mortgage will reduce significantly as a form of finance

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Operational Events Need Expert Managing

In-Life Services:
Fuel cards and discounts Insurance comprehensive, gap, redundancy protection (novated) Maintenance scheduled servicing and preventative Tyres Registration / CTP Infringements speeding, tolls, etc E-tags national coverage Roadside assistance and accident management 24/7 support Driver training
FMOs have stronger buying power for operational services than an organisation does in their own right

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Disposal of Assets is Complex

Disposal (also known as Remarketing)
Core activity of an FMO staff experienced in used vehicles Channels: Driver direct discount to retail for the Driver vehicle history known Dealer direct at wholesale eliminates disposal costs Fixed price above wholesale Auction wholesale spot market (most liquid) Remarketing: Operating lease FMOs responsibility Finance, CHP, Chattel mortgage or managed asset service to the customer
Knowing the best place to sell a particular type of asset is a managers area of expertise and achieves the best price

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Solutions

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Typical Fleet Costs Need Management

Large passenger vehicle

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Solutions - Lifecycle Management

FMOs adopt a holistic approach to cost management of the fleet lifecycle: Environmental strategies Full fleet audit and consultation Benchmarking and analysis Purchase negotiations Fuel management and negotiation Insurance management and negotiation Accident management and prevention Driver level reporting and benchmarking

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Solutions - Whole of Life Costing

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Income Streams

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Income Streams
Incom S e tream s
M agem t an en fees & D isposal 33% Fin ce an 34%

Income streams more than interest margin! Finance brokerage / interest margin Management fees & disposal income

Procu en & rem t In -Life Serv ices 33%

Procurement & In-life services commissions, rebates, maintenance & tyre margins

Asset management earns income across diverse areas, reducing reliance on one primary income source. Targeting a one-third split in each category group is a general aim of Asset Managers.

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Income Streams
Finance spread or brokerage
o Banks have exited the operating lease market o A limited number of financiers provide novated leases (no services) Management (including disposal) o Customers need the fleet on the road to produce income o Customers do not have reporting systems capable of end to end management Procurement & In-Life Services o Scale delivers financial benefits which are shared between the customer and FMO o Management of the supply chain delivers volume rebates to the FMO

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Risk Management
Interest Rate Risk (refer Appendix) Credit Risk (refer Appendix) Residual Value Risk Managing In Life Service Risks

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Residual Value Risk

The risk that the estimated future value used to calculate the monthly rental is higher than the actual sales proceeds received on disposal of the asset
Approach used highly professional People assessing and monitoring are car people with car knowledge Monitoring of resale prices on a month to month basis at auction centres Reviewing future values of current leases on a quarterly basis Monthly rental can be re-priced during term via reviewing actual versus estimated usage of the asset, as determined at inception. Legal contract allows for adjustment to rentals in event of imposition of taxes (ie: GST, potential environmental taxes)

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Risks Operating Lease Residual Values

Under an operating lease the risk / reward between the book value of the vehicle at lease end and market value is an FMOs loss or profit The desired objective is to have a balanced portfolio marque, customer type, industry exposure, etc If the average residual value per lease is overstated compared with the market value at lease end >>>>> 100 vehicles * $500 loss / vehicle = $50K Loss If the average residual value per lease is understated compared with the market value at lease end >>>>> 100 vehicles * $500 profit / vehicle = $50K Profit Accurately forecasting residual values is THE most important process

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30.00%

40.00%

50.00%

60.00%

10.00%

20.00%

0.00%
Jun-99 Sep-99 Dec-99 Mar-00 Jun-00 Sep-00 Dec-00 Mar-01 Jun-01 Sep-01 Dec-01 Mar-02 Jun-02 Sep-02 Dec-02 Mar-03 Jun-03 Sep-03 Dec-03 Mar-04 Jun-04 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11

36/90000 Market Results % of RRP

10 Year Residual Values The Commodore

Sale Date VZ VY VE VYII VXII

VT

VX

VSII

VTII

Despite the rising RRP and new models the trend is clearly in one direction (i.e. predictable)

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Managing Residual Values

Managing the Risks
Residual Values are set for term and kilometres by a Residual Value Committee The Committee typically comprises: Heads of Finance, Operations, Pricing, Remarketing and specialist Analyst(s) The Committee reviews high volume vehicles every three months and half yearly for lower volume vehicles (e.g. light commercial vehicles) All analysis is conducted in light of performance of vehicles in the used vehicle market and independent sources such as Glasss, Red Book, auction data Proactive contract re-writes are undertaken to mark-to-market residual values where parameters vary to that at inception A portfolio revaluation is performed to assess the future value of operating leases in the light of macro / micro economic conditions taxes, fuel, employment, GDP, new vehicle volumes, model changes

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Managing Residual Values during the lease term

Contract Re-Writes
Invariably the initial contract term and kilometres will differ to the actual operating performance Fuel data and service intervals provide evidence of the actual operating kilometres during the term of each lease Such kilometre readings identify if a vehicle is operating above or below its pro-rata kilometres during the lease If a vehicle is operating below its pro-rata kilometres then the customer is paying too much for their lease, at lease end they may not utilise the original contract kilometres (including maintenance and tyre allocations) If a vehicle is operating above its pro-rata kilometres then the customer is likely to incur an excess kilometre charge at lease end

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Managing Residual Values during the lease term

Contract Re-Writes (continued)
FMOs offer contract re-writes if under / over pro-rata kilometres drift say 10% +/from the original contract Re-writes provide the opportunity to reset: Residual values In-life services components Interest rates Management fees

Ultimately a contract re-write provides the FMO an opportunity to improve its risk (residual position and in-life components) and pricing of the contract

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Example: contract re-write increase in kms

Increase of 50,000kms and RV reduced by $5,386

Pull forward of excess km charge avoid surprise to customer at end of lease + cash flow benefits to FMO

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Example: contract re-write reduction in kms

25% reduction in contract kilometres 4.1% increase in residual value

1% reduction in whole of life lease rentals

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Portfolio Revaluation Process

Periodically an exercise is undertaken to value the operating lease portfolio known as a Portfolio Revaluation Process adopted: Apply current outlook of the used car market to determine at a contract level if likely disposal proceeds, net of costs, is above or below the residual value of each lease The impacts on the used market are forecasted based upon the outlook for economic factors and market demand / supply Where available forecasts from Glasss are used determining the future depreciation of the used vehicle market

To determine A-IFRS treatment the output of the Portfolio Revaluation is used to calculate at contract level the NPV of contract cash flows, future rentals and RV proceeds, to determine if an impairment provision is required.

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Managing In Life Service Risks

FMOs take risk in respect of maintenance, tyres, registration (inc CTP) on fully maintained operating leases FMOs target to make profit in all these services on a portfolio basis In respect of maintenance risk some vehicle types or customer usage can cause losses on a per vehicle basis Example: Vans weight bearing loads have an impact Tyres are generally low risk as usage can be worked out very accurately Registration & CTP compulsory third party insurance has increased by up to 15% per annum in some states in the last three years. Other registration components are generally predictable Other: roadside assistance, accident management, e-tags costs are fixed for periods of up to 3 years

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Managing In Life Service Risks

Managing the Risks
The most significant risk is Maintenance scheduled servicing and variable costs (outside of warranty) Maintenance Pricing is one key to controlling the risk Normally a Maintenance Committee comprising experts with relevant motor experience sit periodically to review future pricing over all terms and kilometres (passenger & LCV: 1 to 5 years, maximum of 200,000 kms) Maintenance Control Team Pre-authorise servicing and repairs normally qualified motor mechanics

Labour and parts discounts are negotiated with largest suppliers

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Risks Other
Early Terminations
Customers early terminate vehicles for many reasons (e.g. restructuring) In the event of an early termination the lease contract allows a fee to be levied to cover any residual value exposure, loss of future interest margin and other costs

Total Loss
Comprehensive insurance is a requirement of all lease contracts. Self-insured subject to credit assessment

Excess Kilometres
If a vehicle travels beyond its contracted kilometres then an excess kilometre fee is payable by the lessee. Excess kilometre rates are disclosed on each contract and cover components of depreciation and in-life services

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Accounting for Leases

Accounting for Operating Leases

Governed by International Financial Reporting Standards (IFRS) Rental, comprising principal and interest, management fees and all charges for services such as maintenance, tyres, automobile association membership, registration renewal, insurance, fuel and road toll management are recorded as REVENUE (Lease Rental Services) Proceeds on assets sold at termination are included in REVENUE (Proceeds from sale of leased assets) Income earned through supply chain management is included as REVENUE (Lease Rental Services ) Depreciation of the fleet is straight-line. Accordingly each month the depreciation charge is evenly spread. It equals the principal component included in the Rental. Interest expense is recorded as a cost of operation so is included in EBIT Vehicle Expenses include all payments made to suppliers of services to the asset management operation including payments for fuel, maintenance, tyres, registration, insurances, automobile association membership and includes the Written Down Value of all assets disposed of, at disposal date Lessor is owner (Non-Current asset Property Plan and Equipment on Lessor balance sheet) and Lessee is the user (notes to accounts shows remaining rental commitments)

Accounting for Operating Leases

Impairment
Impairment of Residual Values tested annually. Impairment loss brought to profit and loss as part of Depreciation and Amortisation and Impairment Expenses Impairment amount reduces the cost of the Asset Each lease contract tested. Loss contracts only brought to account Impairment provisions are brought to account over the life of the lease term and are, thereafter, upwardly or downwardly revised, as the case may be. Accordingly the effects are recognised progressively rather than actual losses being brought to account, only when they are realised. If a loss reduces in quantum, then impairment provision is reduced accordingly.

Operating Lease Example

Cost of Asset $25,000 Residual Value $14,200 Term 36 months Monthly Rental $700 per month Includes maintenance; tyres, registration, insurance, automobile association, management fee for services provided 100% debt finance average year over the 3 years PROFIT AND LOSS

Revenue

($700*12)

$8,400 ($3,600) ($1,560) ($2,000) $ 1,240

Less: Depreciation ([$25,000 - $14,200]/36) Less: Interest Less: Vehicle Expenses paid Profit before Income Tax

BALANCE SHEET
Assets under operating Leases At Cost Less Accumulated depreciation $25,000 ($3,600)

$21,400

3 Year Lease Returned in Good Condition

Assumptions (as per presentation) plus: 20% equity 5% disposal profit
Yr 1 $ 0 5,000 (25,000) 8,400 (1,656) (1,250) 0 (14,506) Yr 2 $ (14,506) 0 0 8,400 (1,160) (1,750) 0 (9,016) Yr 3 $ (9,016) 0 0 8,400 (721) (3,000) 14,910 10,572

Utilisation of in-life services as planned

Cash Flow Statement Open - Cash / (Debt) Position Capital - 20% Acquire Vehicle Rental Income Interest Expense Vehicle Expenses Disposal Proceeds Close - Cash / (Debt) Position

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3 Year Lease Lower Disposal Result

Assumptions (as per presentation) plus: 20% equity 1% disposal profit
Cash Flow Statement Open - Cash / (Debt) Position Capital - 20% Acquire Vehicle Rental Income Interest Expense Vehicle Expenses Disposal Proceeds Close - Cash / (Debt) Position Yr 1 $ 0 5,000 (25,000) 8,400 (1,656) (1,250) 0 (14,506) Yr 2 $ (14,506) 0 0 8,400 (1,160) (1,750) 0 (9,016) Yr 3 $ (9,016) 0 0 8,400 (721) (3,000) 14,342 10,004

Utilisation of in-life services as planned

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3 Year Lease Under spend on Tyres

Assumptions (as per presentation) plus: 20% equity 5% disposal profit
Yr 1 $ 0 5,000 (25,000) 8,400 (1,656) (1,250) 0 (14,506) Yr 2 $ (14,506) 0 0 8,400 (1,160) (1,750) 0 (9,016) Yr 3 $ (9,016) 0 0 8,400 (721) (2,200) 14,910 11,372

Cash Flow Statement Open - Cash / (Debt) Position Capital - 20% Acquire Vehicle Rental Income Interest Expense Vehicle Expenses Disposal Proceeds Close - Cash / (Debt) Position

Under utilisation of 1 set of tyres $800 in year 3

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Funding an Asset Book

Funding Types

Traditional Bank Lending Securitisation Principal and Agency Receivables Discounting

Securitisation
Form of funding but assets on balance sheet from accounting perspective Motor vehicles are a highly desirable class to invest given strong liquidity (ie: turn into cash fast) Novated leases, Finance lease and CHP the most easily securitised MMS Invest in lesser credit rated classes

Principal and Agency

Act as Agent for a principal (bank) Credit risk of customer is taken by principal Agent originates and manages settlement, collections and termination Off Balance Sheet to Agent Asset Management Risk is the Agents risk and earns income for managing that risk

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Conclusions

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Conclusions
Income streams are diverse and adjustable Fleet management is an outsourced activity which is growing Leasing is one form of finance and addresses part of the customer landscape. Risks are well managed and can be addressed during the lease term Fleet management and financing combined provide a variety of predictable and sustainable cashflows

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Appendicies
- Products and Services Risk Management (interest rate and credit risk) Accounting for Finance Leases

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Products and Services

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Products & Services

Need Solutions
Operating Lease

Benefits
Off balance sheet (removal of RV & in life service (operational cost) risks)

Finance Lease Short Term Hire

Efficient tool of trade fleet

Tax effective/ fixed monthly costs No fixed contract / flexible terms Immediate cash injection / known future monthly lease costs Benefit from FMOs buying power Cost effective, leverage FMO systems and knowledge plus pre-agreed discount structures

Sale & Leaseback Fleet Management Services (All in life costs associated with running motor vehicles)

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Products & Services

Operating Leases Non-maintained generally operating costs are recharged to the customer Maintained (removes most in-life services risks) may include all operating costs but generally fuel is recharged each month 100% tax deductible & off balance sheet Removes residual value risk for Lessee

Finance Leases Non-maintained generally operating costs are recharged to the customer Maintained may include all operating costs but generally fuel is recharged each month 100% tax deductible (subject to Luxury Car Tax) On balance sheet for the lessee RV risk to Lessee normally FMO sells

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Products & Services

Commercial Hire Purchase Non-maintained and maintained generally operating costs are recharged to the customer On balance sheet for tax and accounting Attractive to and understood by SMEs

Chattel Mortgage Non-maintained & maintained generally operating costs are recharged to the customer On balance sheet for tax and accounting (a Loan) Very little market penetration and will reduce significantly once CHP input tax credit rules change on 1/7/2012

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Products & Services

Fleet Management bundled with or without finance
Fuel cards and discounts Insurance comprehensive Maintenance scheduled servicing and preventative Tyres Registration / CTP Infringements speeding, tolls, etc E-tags national coverage Roadside assistance & accident management 24/7 support Driver training

Reporting online and analysis by account manager

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Risk Management
- Interest Rate Risk - Credit Risk

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Interest Rate Risk

The risk that as interest rates move up or down, the net profit of the business moves likewise
Leases with customers are for fixed terms at fixed interest rates Revenue side locked in by virtue of the fixed monthly rental Lessors match the profile of how borrowing amortise as close as possible to how the underlying leases amortise Derivatives can be used for this (ie: Interest Rate Swaps; Forward Rate Agreements) or funds can be borrowed for varying terms direct from lenders (ie: bullet terms to 5 years at a fixed rate)

ACCORDINGLY: Negligible interest rate risk results Monthly interest margin in the lease is protected

How interest rate SWAPS assist to match the term of monies borrowed to the term of the asset?
SWAPS are derivative instruments which have the effect of changing previously agreed payment terms on debt Used where monies are borrowed under a floating rate facility - interest rate locked in for short term (generally up to 90 days) Short term money is used to fund leases for contracts with customers locked in for longer terms (ie: 3 years). Hence an initial mismatch in the timing of interest rates being locked in Accordingly if there is little tolerance to this mismatch, the floating-rate obligation must be transformed or Swapped into a fixed-rate obligation. An interest SWAP means the borrower promises to pay a counterparty(generally a Bank) a fixed rate of interest for a given period, in exchange for the Bank promising to pay a floating rate for the same period. This has the net effect of now changing the floating rate exposure into a fixed rate commitment. Risks associated with SWAPS are that the Borrower is now exposed to a counterpartys ability to repay the floating rate of interest. If the counterparty defaults, the SWAP falls over. Hence contracting with AA + rated banks is the minimum standard

How a Interest Rate SWAP Works (1)

Pay Floating Rate Rate Interest

Bank Bank

Borrower

Borrower has loan agreements which are based on floating interest rates. However, the finance contract with their customer is based on fixed monthly installments, meaning, interest rate in the lease is fixed. As floating rates change so does the profit margin to the Lessor. If bank interest rates increase, the Lessor profit margin drops and vice versa if bank interest rates decrease.

How a Interest Rate SWAP Works (2)

Pay Floating Rate Rate Interest

Bank Bank

Borrower
Step 1

Pay Fixed Rate Interest

Step 1 is to enter into a SWAP agreement with a bank who agrees to receive a fixed payment of interest

SWAP Counterparty

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How a Interest Rate SWAP Works (3)

Pay Floating Rate Rate Interest

Step 2

Borrower

Bank

Receive Floating Rate Interest

Pay Fixed Rate Interest

SWAP Counterparty

Step 2 exchanges the payment of a fixed rate for receiving a floating interest stream which matches the floating interest stream owed to the bank on the floating rate debt

Credit Risk
The risk that customers can not pay their lease installments or do not pay on time, resulting in losses on collecting monies owed
Review all new business proposals prior to credit advanced, in accordance with proven credit techniques Undertake annual reviews of all credit line facilities and more often if a customers requirements expand OR if there is negative news on the customer or the industry in which they operate Monitor closely credit default experience Obtain appropriate securities such as guarantees, security deposits where required Utilise Direct bank Credit to as high degree as possible, increasing surety of payment Active Credit Committee monitoring risks and establishing guidelines for maximum concentration risks to a customer, an industry, an asset class etc Defaults mitigated by fact that assets can be sold in liquid resale markets Use 3rd party agencies to validate credit worthiness (eg: VEDA; Dun and Bradstreet)

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Accounting for Finance Leases

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Accounting for Finance Leases

Governed by International Financial Reporting Standards (IFRS) The monthly rental includes Interest and Principal repayments. Included in Lease Rental Services is the applicable monthly allocation of interest. Management fees for providing relevant fleet services plus the actual monthly fee for services such as maintenance, tyres, automobile association membership, registration renewal, comprehensive insurance, fuel, road toll management are recorded as REVENUE (Lease Rental
Services)

Proceeds on assets sold at termination are included in REVENUE (Proceeds from sale of Leased Assets) Income earned through supply chain management is included in REVENUE (Lease Rental Services) An asset FINANCE LEASE RECEIVABLES is recorded at inception of the Finance Lease and comprises a current (amounts due from customers in the next 12 months) and an non-current receivable.

Finance Lease Example

Cost of Asset $25,000 Residual Value $14,200 Term 36 months Monthly Rental $700 per month Interest rate in lease 10% Includes maintenance; tyres, registration, insurance, automobile association, management fee for services provided PROFIT AND LOSS Revenue
Interest Management Services $2,356 $2,844 $ 5,200 ($1,560) ($2,000) $ 1,640

Less: Interest Less: Vehicle Expenses paid Profit before Income Tax

BALANCE SHEET (end year 1)

Current Finance Lease Receivables Non-Current Finance Lease Receivables * Includes Residual Value Due $18,110 * $3,540