As any lease finance professional will attest, there are numerous factors to consider when establishing lease terms, rates, and residual values for potential customers. Many of these factors are specific to the customer and their business, whereas some factors pertain directly to the equipment under consideration. Although not all-encompassing, there are four key elements to evaluate as it relates to the equipment itself:
- Product characteristics
- Asset characteristics
- Market liquidity
- Economic cycles
Asset managers often struggle to find ways to solve for these efficiently. A clear understanding and a full view of information is a critical component of risk assessment and sound decision making.
In this update, Rouse addresses these needs with a self-service solution for the lease finance community.
Product Characteristics
As obvious as it may seem, a clear understanding of key product characteristics will go a long way in establishing a view on residual risk. Lessors should be sure to evaluate the manufacturer, the specific model, the year of manufacture (model year), and the geography of lease. Each one of these will serve as the foundation to the underlying value of the asset in question.
For example, a good understanding of the brand recognition of the manufacturer can drive the acceptance of their products in the market and, in turn, the marketability and recoverability of the asset at end of lease term. Likewise, the model range (product class) will provide an indication for the popularity of the specific product versus any edge case / specialty nature to the product.
Asset Characteristics
As one might expect, not all models are created equal. Within any product line, models can be configured quite differently. Highly configured assets can drive material differences in value versus those with only the “base” options.
Allowable usage (meter reading) during the lease term is another critical factor that effects residual value. Similarly, lessors should assess the application for which the equipment will be used and their experience with the particular customer in order to determine the condition of the asset they might receive at the end of the lease. Heavily used and worn assets (cosmetically and mechanically) will oftentimes yield a meaningfully lower value at resale.
A good understanding of asset characteristics can minimize any unwelcome surprises during the asset recovery stages of the lease life.
Liquidity
At the end of the lease term the asset must be remarketed if not purchased by the customer. The channel of sale can yield differing sales results: how regularly does the product trade in the open market across retail and auction channels? It is critical to have a solid view of total market liquidity across all key channels of sale in order to develop an appropriate risk assessment and residual value.
Economic Cycles
Perhaps the most elusive characteristic for most lessors is a good handle on economic cycles and peak-to-trough movements in equipment values. Knowing current economic conditions will be helpful but limiting in terms of establishing a view on residual values several years into the future as markets move.
However, visibility into peak conditions as well as recessionary conditions – in comparison to the current environment – can help lessors develop a clear view on where to peg residual values for new leases.
Only Rouse’s Residual Value toolkit unlocks the potential to holistically study the market from these critical angles. Bringing reliable information together in one place empowers lessors to efficiently make accurate and educated decisions on residuals.
Contact Rouse today to learn more: residuals@rouseservices.com
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