Residual value guarantees play a vital role in asset securitization and balance sheet protection. Not only can this type of coverage protect you against negative asset valuation, but more importantly, it will facilitate favourable accounting treatment. It is a powerful tool for managing asset and finance-based risks by providing protection against an unforeseen decline in the market value of an asset by helping to ensure its future value.

It can be used to structure operating leases, balloon note financing, asset securitization programs and improve credit and enhance transaction yields.

Typical Residual Value Applications

Automobile

Residual value insurance is used extensively in automobile transactions by:

• Leasing companies
• Credit unions
• Banks
• Trust companies
• Automobile manufacturers

Commercial Equipment

Commercial equipment can also be insured. Residual value insurance guarantees that your assets retain a pre-established future value, based on their utilization. The industries using this insurance coverage include, but are not limited to:

• Construction
• Manufacturing
• Distribution
• Farming
• Mining

Transportation Assets

Residual value insurance can be useful to transportation and finance companies to insure:

• Trailers
• Containers
• Aircraft
• Trucks
• Rail

Real Estate

For a lender, there is considerable risk to finance a single-tenanted building if the mortgage maturity corresponds to the lease termination date. The result is that the mortgage lender is either reluctant to provide the financing or does so for a smaller loan amount or for an amortization period which is considerably shorter than the economic life of the building.

For an owner, the difficulty is in meeting debt service requirements which absorb most of a building’s cashflow.

Residual value insurance guarantees the market value of the real estate at mortgage maturity. It also allows building owners to extend amortization periods, reduce their debt service requirements, and hence, increase their monthly cashflow.