Appendix I, Interview stage I: Interview with two asset specialists on buses xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
Appendix II. Stage II: questionnaire and interview Questionnaire ‘Residual Value and Risk’
The aim of this questionnaire is to find out more about residual value risk and remarketing.
The final objective is to find out if and how ING can make lease a more distinguishing product by the use of RV to enhance the product.
Please feel free to add comments and think ‘outside the box’! Thank you for your response!
1. Should ING take open residual values more often? Why?
2. What are the most important organizational requirements that are to be met if you wish to manage residual values?
13. Do you see business opportunities for ING in remarketing?
a. Should ING:
i. Do remarketing itself? (E.g. in the form of a remarketing desk) ii. Make use of a third party for remarketing? (remarketing co-operation) iii. Take insurance on residual values? (RVI)
b. please motivate your choice (if your choice was not listed above, please feel free to indicate and motivate it here)
4. Is it possible for ING to add value to its lease product by managing residual values?
a. In terms of:
i. Higher returns (in terms of: higher margins, higher volume, etc) ii. Lower costs
iii. Added value for client
iv. Added value for ING (e.g. increase in knowledge)
v. Possibilities for cross the border remarketing (European network)
vi. Easiness of implementation (e.g. under current rules, commitment within the organisation, fitting in the current policy, etc)
5. If ING will alter its policy of residual value
2, do you think it is also necessary for ING to:
a. Change its current lease products?
i. What will be the impact on existing lease products?
b. Develop new products?
6. One of the possibilities with managing residual values is to introduce an alternative way of leasing that could co-exist with currently available leasing products.
The idea behind this is to keep the two current products in their current setting as to keep current customers satisfied and to develop a new product aimed at new customers.
This product could be designed as operational lease without a call option, or OL with a call option at fair market value.
a. Do you see possibilities for this? Please motivate your choice b. What should the product look like?
i. Which ‘features’ are essential?
Remarketing
7. With consideration to remarketing, what are the key performance indicators?
8. For which of these KPI’s is it necessary that they are done by ING Lease?
a. Which could be outsourced?
b. Is it advisable to outsource KPI’s for remarketing?
9. For remarketing, knowledge of the market and the asset is required. Are there any other forms of knowledge which are required when doing remarketing?
International
10. How can (and should) ING’s international network be used for managing residual values?
a. What could be the benefits?
b. What could be the pitfalls?
11. Are there any legal/ fiscal/ accounting/ commercial barriers in the lease market in your country that could limit higher (open) residual values?
Other questions:
12. Is there anything you would like to add concerning RV and subjects covered in this questionnaire?
13. Does this questionnaire fulfil its goals as stated above? Are there any topics that should be added?
14. Do you have any suggestions for people I should talk to concerning residual value risk and
remarketing?
Interview stage II, interview with remarketing expert (public transport buses, trucks and trailers)
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Appendix III: Overviews interviews
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Appendix IV Residual Value Insurance
When can RVI be used (P.Hunt 2004)?
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It can be used in deals where lessors are uncomfortable with a high level of risk either associated with a single transaction or sitting on their balance sheet.
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RVI often plays a role when the asset is quite specialized, and the lessor has limited remarketing expertise in the particular asset class, even if the equipment is unlikely to be returned at the end of the term.
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Risk transfer, for smaller assets, RVI can be used to protect against unexpected loss at a portfolio level. This is suitable for assets such as cars, commercial vehicles, etc.
In these cases, the insured party normally has well-developed remarketing capabilities but in a transparent second user market, is vulnerable t o a downturn in equipment prices.
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Balance sheet management, where RVI is used for balance sheet management, there is often very limited real risk associated with the transaction, with the insured party taking a significant first loss position. A lessor can for instance pass a bottom slice of risk to the RVI provider, thus reducing its balance sheet risk and ensuring its ongoing funding.
Costs of RVI
Since RVI is concerned with alleviating risk for the lessor, the pricing of the RVI depends on the level of risk involved. A first loss involved, or one with a high likelihood of loss, will obviously be more expensive than a less risky position. Also the organization that is insured, the lessee, determines the level of risk. Other aspect that can influence the height of the premium are the availability of reinsurance cover, to syndicate the risk and in many cases also the amount of remarketing information available at the side of the lessor (P. Hunt, 2004)
Pricing
Prices of RVI vary per application, it be up to 10% of the covered RV exposure plus insurance premium tax for big ticket deals. For a ‘no real risk’ balance sheet management it is for example lower.
As a general rule it can be said that, due to legal and administrative costs involved with RVI, deals of less than €3-4.5 million are not sustainable for RVI. To achieve adequate scale, smaller transactions need to be aggregated into a portfolio transaction (P. Hunt 2004).
RVI is not the only insurance ‘flavour’ offered in the market. It can be combined with other forms of
insurance, such as gap insurance, asset insurance and return conditions insurance (Lease and Loan
At the moment ING makes use of Residual Value Insurance (RVI) in cases of structured finance in for instance France. One of the major benefits of RVI is that it indeed allows financial structures that would otherwise not have been possible. RVI removes risks from business activities (P. Hunt 2004).
Under Basel II residual values will be 100% risk weighted, regardless of the credit risk approach taken by the bank. Using RVI to take a low risk, say, the bottom 40% of a major portfolio may reduce the capital requirements of the bank sufficiently to profitably absorb the insurance costs (P. Hunt 2004).
This means that the risk weighted assets are reduced and that the organization has lower capital requirements.
In these cases RVI may very well be a viable option. Structured finance usually concerns more specific deals, deals set up to satisfy a specific customer need, deals which have a complicated structure and usually involve more parties. The deal sizes are usually large and therefore worth the legal and administrative costs. ING can function as a head lessor in these deals.
One of the major benefits in these cases is that ING Lease is more flexible towards the customer due to the residual value guarantee it receives from an insurer. The RVI hereby takes away (a portion of) the residual value risk involved in the agreement.
In other deals however RVI can be of little to know use. One of the downsides of RVI is that the first part of the risk (that is money loss) is on the account of the organization. Take for example a deal with 50% contract residual value at the end.
As can be seen in figure 7 (source: Lease and Loan insurance services ltd) there is still a portion of own risk involved. The question now is whether it is worth it to pay the insurance fees and also pay for a portion of the residual risk. Is this more beneficial for the organization than not to use insurance?
Lessor
Insurer
50 %
40.1 %
0 %
Lessor retains first portion of risk equal to 9.9. % (or equivalent IFRS) of equipment cost.
The remainder is passed to the insurer
Figure 8. RVI example
Contract residual value