This document discusses asset value protection (AVP), which protects the future residual value of an asset to underpin its predicted future value. AVP delivers benefits like reduced debt costs and improved returns. It also discusses asset finance mechanisms like leasing. Residual value insurance (RVI) can be used to structure deals by guaranteeing an asset's future value, thus reducing payments and risks for lenders and lessees. The document provides examples of how AVP and RVI can be incorporated into various financing structures.

1. Asset Price Protection
Residual Value
JARDINE LLOYD THOMPSON LIMITED ‐ FINANCIAL RISKS

2. Asset Value Protection
Asset Value Protection is used to protect the Insured against the risk of an unforeseen decline in the
market value of a properly maintained asset. Protecting the future residual value of an asset underpins
a proportion of the predicted future value of that asset at a specified future date or dates with
investment rated (usually A‐, or better) paper.
Advantages
Amongst others, Asset Value Protection delivers the following added value in asset finance:
reduced debt servicing costs;
increased gearing / leverage for transactions;
increased flexibility for operating lease structures;
improved investor returns; and
favourable accounting treatment for lease portfolios (under current legislation).
Asset Finance
Asset finance is the provision of finance to businesses. The main mechanisms are hire purchase and
leasing. Leasing is one way of reducing capital outlay and improving cashflow, and is therefore often
seen as an attractive option. Asset finance is an excellent budgeting tool, as payments are usually fixed,
allowing improved cashflow management. This is never more important than in an uncertain economic
climate.
There are two main types of lease: Finance Leases and Operating Leases.
Under a finance lease, the finance agreement covers the full economic life of the asset. An operating
lease runs for less than the full economic life of the asset, and the lessee is not liable for repaying the
financing of its full value. The lessor retains the risk associated with the residual value of the asset at
the end of the lease. This type of lease is frequently used when the asset is likely to have a resale value,
as is the case with, for example, aircraft and construction equipment.
For the lessee, asset finance is less risky than outright purchase, as the lender takes the risks of
ownership. This is particularly true of operating leases where the lessee is not exposed to changes in
the value of the asset.
One further value of an operating lease is that the asset does not (under current regulations) have to be
shown as an asset on the balance sheet, and therefore the key Return on Capital Employed (ROCE)
indicator is improved.
RV as part of Structured Financing
There’s universal agreement that economic conditions in 2011 and beyond are going to be treacherous.
Consumers will continue to tighten their belts. The volatility, which makes it so hard for businesses and
investors to plan, is unlikely to dissipate. Banks are likely to be risk averse, hoarding liquidity and
rebuilding capital bases, while funding costs remain high. What is key is that financial institutions want
to ensure that they do not replace the subprime risks that have been offloaded to governments and

3. taxpayers with other toxic risks. Capital is still flowing and loans can be provided, although the bar has
been set a lot higher.
With lenders looking to manage asset risk, one positive step is to consider Asset Value Protection (AVP).
AVP provides the asset owner and their financiers with asset value certainty at a pre‐determined time in
the future, and is therefore an invaluable means of balancing exposures in volatile markets, and
removing asset risk from the balance sheet, thereby reducing the need for economic capital reserving
under the Basle III regulations.
Any transaction where the payment stream does not amortise the full principal amount can benefit. For
example, a manufacturer may guarantee the future value of an asset to differentiate against the
competition. The guarantee may result in the transaction being accounted for as a lease. However,
with residual value insurance, the manufacturer can still recognise the transaction as a sale for
accounting purposes.
In the current financial environment, AVP is valuable to help secure finance or enhance financial
arrangements. By being included in financing deals AVP can provide leverage to help improve overall
finance terms.
AVP is an excellent tool to manage and control this residual value risk, and when introduced early in the
structuring of a financing deal it can expand sources of funding.
Asset Value Protection is of benefit to:
Any transaction where the payment stream does not repay the full principal amount.
Securitisations that include residual value insurance (third‐party guarantee).
Organisations with significant capital assets.
Financiers will benefit from the insurance as it removes asset risk from the transaction and their
balance sheet.
Increase the final ("balloon") payment to be made at the end of a finance period, thus reducing
cost, increasing cash flow, and supporting higher debt to equity ratios.
Many financial structures would benefit from a reduction in asset risk: operating leases, sale and
lease‐back and credit tenant leases are often supported by this insurance product.
JLT has a team of specialists who focus exclusively on these types of transactions. AVP is a natural
complement to our credit and political risk insurance services.
Asset Classes
The most common asset classes in AVP structures are those where there is an established secondary
market, with good liquidity, these include:
Aircraft
Capital Plant and Equipment
Marine assets and Shipping
Healthcare

4. Commercial property
Rolling Stock
Structuring
RVI guarantees the future residual value of machinery and equipment, and is therefore attractive to
banks and leasing companies. Residual Value guarantees are available for a wide range of capital
equipment which has a relatively long life and a healthy resale market.
The benefit of RVI is to reduce the regular payments due under the term of a lease. The value of the
guarantee will relate to the expected market conditions for the sale or re‐use of the equipment at the
end of the agreed lease period.
Leasing is an additional line of credit for businesses; allowing payments to be spread over a fixed term
related to the life of the equipment. Terms are often negotiable and can be tailored to meet the
expected cash flow of the lessee.
Additionally, unlike overdraft facilities, lease facilities are not generally repayable on demand or subject
to annual reviews. You can be sure that as long as payments are made and the terms and conditions of
the contract honoured, the lease facility is secure.
RVI is available to businesses of all sizes who can demonstrate strong market demand for their product
or service, particularly those incorporating the newest and most advanced technology.
Residual Value based insurances are usually structured to cover the difference between the projected
residual value established at lease origination and the actual sales proceeds received at lease maturity.
Benefits and USP's
JLT are the only major Lloyds broker to invest in RVI as a specific product stream, which means that:
We understand the market issues and dynamics
We actively work in and with the markets on a day‐to‐day basis
We are actively creating markets to meet new demands
We are therefore able to match opportunities to the best available markets to obtain optimal
combination of cover, price and security.
Over the period of an RVI security is vitally important, both of your broker and your insurer: we only use
A rated insurer or better, unless agreed with our clients.
Should the worst happen, you would be covered by JLT's E&O policy which, as you would expect, is
significantly better than that of a smaller Lloyds broker.
With the team located in Financial Risks, we are able to draw on the skills and experience of the credit
and political risk professionals in this area. The synergy for our clients of benefiting from this
association with the premier broker in these areas is significant.

5.
The 10 Golden Rules, or what makes an opportunity more marketable
A long, useful life with low likelihood of technological obsolescence is a key acceptance
qualification. For this reason computers and mobile phones are not good asset classes, but the
machines which make them would be.
New or nearly‐new assets are far more attractive to underwriters. This obviously depends on
the asset class; property is less sensitive to this aspect than, say, aviation or marine.
A well‐developed secondary market is helpful. Assets must have at least one exit route, e.g., an
aircraft can be leased to generate income whilst it is put up for sale. Preferably, more than one
exit route can be identified.
The opportunity must fall within defined risk parameters, which include per deal limits,
aggregation limits and term limitations. As these may change from time to time, check our
intranet site for the latest information.
Condition of the returned asset is important. If there is a verifiable maintenance regime, which
helps guarantee the asset quality, that will improves market appetite.
The Client should be willing to take a proportion of the pain should the asset fall below the
target value. This is an incentive to decrease moral hazard.
The opportunity should be uncorrelated with the existing portfolio of the underwriter to help
spread the risk.
Regular, smaller transactions are preferred to one large transaction. This helps with the
underwriters' income flow, and reduces correlation.
Developed partnerships are more likely to succeed. JLT's RVI group will be working with key
underwriters to exploit target markets and generate flow of business.
Talk to us: we understand the current market ‐ let us help.

6. Case Study: Equipment Leasing
RVI guarantees the future residual value of machinery and equipment, and is therefore attractive to
banks and leasing companies. Residual Value guarantees are available for a wide range of capital
equipment which has a relatively long life and a healthy resale market.
The benefit of RVI is to reduce the regular payments due under the term of a lease. The value of the
guarantee will relate to the expected market conditions for the sale or re‐use of the equipment at the
end of the agreed lease period.
Leasing is an additional line of credit for businesses; allowing payments to be spread over a fixed term
related to the life of the equipment. Terms are often negotiable and can be tailored to meet the
expected cash flow of the lessee.
Additionally, unlike overdraft facilities, lease facilities are not generally repayable on demand or subject
to annual reviews. You can be sure that as long as payments are made and the terms and conditions of
the contract honoured, the lease facility is secure.
RVI is available to businesses of all sizes who can demonstrate strong market demand for their product
or service, particularly those incorporating the newest and most advanced technology.
Once a policy is set up, it may be possible to create a "facility", where further lease deals can be made
using the benefit of RVI without requiring recourse to creating a new policy.

7.
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Direct +44 (0)20 7528 0000
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incorporated with liability by shares. Authorised and regulated by the Financial
Services Authority. Registered: 6 Crutched Friars, London EC3N 2PH England.
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CONTACTS
Stephen M Allum
Jardine Lloyd Thompson Limited
Tel: +44 (0) 207 528 4458
Email: steve_allum@jltgroup.com