Monday, March 23, 2009

residual value risk (2)

All these things have to be predicted in advance along with specific issues relating to the individual asset. A conservative approach that looks at an absolutely worst-case evaluation may lose the deal ,but getting the residual value wrong could cause a capital loss of significant proportions and cause a less on a deal for an entirely creditworthy customer.
The best type of residual value setter is someone steeped in the second hand market for assets ;someone who will have a good idea of who will be in the market for such an asset and how much they are likely to pay .such a person is not a traditional lender or credit risk assessor .IT is interesting to note that some of the world is most successful operating lessors have a background in manufacturing or dealing in assets rather than originally being financial institutions . this is a business where understanding the assets is the difficult part and assessing the credit risk the easy part.
Just as portfolio control is an important element of taking credit risk,it is also a key element of taking residual value risk.The operating lessor will not want to be over-exposed to taking residual value risk . The operating lessor will not want to be over-exposed to a particular type of asset and will want a balanced portfolio to avoid being caught out if something happens to effect the value of an asset category. There is also a "sanity check " inherent in achieving a well spread portfolio - if you are consistently winning deals by having the lowest rentals for a specific type of asset ,maybe your residual values are too generous;certainly the rest of the market seems to think so.

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