Page 233 - harryDEC12_clean.iba

We met next morning at 10.00 am at the offices of Corron & Black, where Douglas let me in into the secrets of Residual Value Insurance on Aircraft.
"You see, every aircraft has a predetermined life span for service - usually 30 years by the manufacturers specifications - but some go much longer - they get sold to Africa. But the general idea is: The lifespan of an aircraft is a curve, which with age goes flatter on the Y-Axis of a diagram. At any given time, depending on the aircraft, there is a value point, calculated by algorithms of a massive S&P database. So if you want to lend money to the operator over five years, you want to know the value of the aircraft at the end of the cycle — or better have a guaranteed value - that is RVI Insurance. The effect is:
' Increase financial leverage to the borrower by reducing the loan debt service
Eliminate lender / investor balloon refinance risk
Guaranty equity investors a minimum return
Achieve operating / capital lease accounting treatment for the lessee and/or lessor'
"This is all Spanish to me."
I said to Doug.
"Ok - Let me give you an example:
"The client is setting up a company to lease and operate a number of Embraer jets. In order to provide collateral to the financier, a residual value policy is effected to protect the future value of the aircraft from a serious decline in value.
The aircraft is afforded a lease term of five years, with a possible extension of one year. If the extension were to be invoked, the attachment point for the Residual Value insurance would decrease by each quarter. All the aircraft are cross- collateralised, and the residual value analysis is based on a high percentage of the future assessed value, based on a forced sale in a potential economic downturn."
"Got it?"
"Yes"
I answered hesitantly - the idea had grown on me. What a smart Marine I thought by myself.
"But is this really insurance?
I asked.
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