Understand the Operating Lease Model

• Residual Values ( RV’s) - Establishing future value of your collateral

• Lease extensions v Lease returns - The “stick” rate

  • Extensions 80% x sale as a % of RV 120% = 96%

  • Returns 20% x sale as a % of RV 60% = 12%

  • The expected portfolio return on RV book is 108%

RV setting

• RV’s can only be successfully set after understanding the propensity of lessee’s to extend at the end of term. This will mitigate the following operational risk:

  • RV risk - The asset is worth less than expected as the lease ends

  • Asset obsolescence - due to technology, regulation or customer preferences

  • Credit/lessee default - the customer stops paying, the asset is returned early

  • Asset damage, condition risk - the asset is returned, damaged, poorly maintained, or outside agreed usage limits

  • Remarketing Risk -it takes longer or costs more to dispose of the asset

  • Concentration risk -A large proportion of assets are exposed to one customer, industry, manufacturer or asset type

  • Maintenance risk - maintenance is inadequate or more expensive than anticipated

  • Fraud / documentation risk - Ownership, asset existence,, valuation or lease documentation is inaccurate, disputed and fraudulent

  • Legal or Regulatory risk - changes to accounting, tax environment or asset specific regulation affect the transaction

  • Insurance risk - the asset is inadequately insured or a claim is disputed

Develop a monthly and rolling 12 month dashboard to summarise :

• New Business Volumes

• Portfolio developments

• Size of RV book

• Stick rate per, month and on a rolling 12 month basis, in £’s and deal numbers

• Financial performance - RV income and extension rental income.

• Clearly identify the End of Lease protocols to negotiate Lease extensions