Unit 3 - Topic 7 Flashcards
What is the margin of safety in relation to residual value and why is it important?
When the lessor sets the residual value at slightly less than expected realisation value.
It protects profitability of the transaction as it takes into account the lessors interest costs as well
What is the residual value?
The lessors estimate of how much an asset will realise at the end of the lease
Why does the lessor take risk based on the residual value?
With operating lease, lessee places the risk of the asset obsolescence with the lessor (lessee avoids depreciation risk)
- Value of the asset unknown bu experience in asset and recovery and prudent approach to setting residual value
- Lessor expects to sell the asset
Assets suitable for residual value risk?
DIMS test similar to asset suitability but for the residual value it is the emphasis on saleability and amount it expects to realise when disposing of the asset.
What are the influencing factors for classifying the following assets (machine tools, heavy goods vehicles and trailers)
Machine tools = Influenced by level of growth in manufacturing sector globally and domestically. Also by resellers and accurate benchmarking for resale
Heavy goods vehicles and trailers = Wide network of resellers
Changes in emissions rules might force customers to changing and updating vehicles
Spike demand has led to fewer newer models available and a secondary market with high demand for newer second hand model = higher residual value
What are the influencing factors for classifying the following assets (cars, print equipment)
Cars = They have the most mature asset class due to increased popularity of PCH and PCP, meaning higher residual value and large volume.
Disposal profit opportunity for the lessors in a growing economy
Risk of residual value losses in the event of an economic downturn
Market depends on buying patterns and demand - Cyclical, economic confidence.
Print equipment
Declining market due to technology and digital media
Residual values difficult due to technology becoming obsolete
Generally good asset security due to resale value
Pre press - plates cylinders (low resale value)
Press - long life offering moderate to good resale value
Post press - binding and finishing operations (moderate resale)
Highly processed competitive industry
Sold through online online auctions (more operating leases due to matching to duration of usage)
What are the influencing factors for classifying the following assets (Aviation)
Largest specialist area of funding
For large passenger airlines and small corporate
Jets - (20 years old at end of lease)
Helicopter and General aviation aircraft (30 years old)
Used independent valuers and specialist market knowledge
What are the key areas of risk in aviation classification and how to mitigate?
Credit Risk and Asset Risk
Asset risk mitigated by aircraft investors purchasing readily financeable ad saleable (can be transferred in any market whether it is liquid, global or active)
Credit Risk mitigate by making sure residual value is accurate and doesn’t have to be changed
What are the different asset valuation types?
Open market value - asset being sold in the open market
Open market value ex-situ - where the valuation assumes the asset is removed from the lessee premises and delivered to the lessor in the condition ready for disposal and sale (most common)
Equitable value - Assets to be sold to a identified party for an agreed sale price at the end of the lease
Fair value - Applying IFRS and UK GAAP accounting standards, a lessor expresses holding value of an asset on its balance sheet
What is asset secure point?
Where the value of the asset exceeds the outstanding lessee balance. Covers the lessor in the event of early termination.
What are the influences on future value/residual value?
Period of the lease
Size of the rental required from the lessee
Specific lease provisions to keep price (maintenance, mileage, etc)
What is Asset exposure and various examples of good to bad asset security?
The difference between the value of an asset and the amount owed to a lessor at ay one point in time
Good asset security - Bus or coach
Medium - Machine tools or print equipment
Bad - IT/furniture/restaurant/fitout
Good assets are due to be asset secure quite early when forecasting
Medium is midway through the term
Bad is near the end of the lease
Asset managers responsibilities?
AA SEAMER
Equipment inspections
Asset conditions report in-life and at the end of the lease
Annual reassessment of asset residual values
Risk assessment of emerging legislation and regulation in terms of impact on asset values
Management of portfolio concentration risks (asset, industry, etc)
End of lease recharges for excess wear and tear
Asset re-marketing
Secondary lease negotiations
Who sets the global standards on valuation practices and what three key areas do they consider?
The International Valuations Standard Council (not for profit organisation)
- Asset related
Assets technical spec, condition, maintenance history and useful life
- Environment related
Location, environmental legislation that restricts utilisation or additional operating or decommissioning costs
- Economic related
Actual or potential profitability of the asset, comparing running costs and demand for the product
Shifts in demand for the product depending on buying patterns and domestic/global markets
What client could negotiate their own return conditions and how?
Lessee with low credit risk or good asset security
Lessee will draft own return conditions sometimes in a tender situation
Lessor can be at risk if it is far away from normal standard return conditions
