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Carol Busch, AM, of HeliValue$, Inc., has been elected Secretary of the Wisconsin Chapter of the American Society of Appraisers. This announcement comes just two months after the announcement of HeliValue$' President Sharon Desfor's elected position of International Secretary/Treasurer.

 

Sharon Desfor, HeliValue$' President and ASA's International Secretary/Treasurer, chuckled as she added, "I didn't even know that Carol was running for office, and now we have two ASA Secretaries in one company. I sincerely applaud Carol for her volunteerism and for putting her efforts into such a valuable organization as ASA."

 

Carol Busch, AM, has been with HeliValue$ for twenty-eight years holding several important positions. Most notable may have been her term as editor of The Official Helicopter Blue Book® from 1993 to 2014. Over the years, Carol has also served as HeliValue$ website manager, public relations manager, events manager, client services, and AR/AP. She now holds the position of Associate Appraiser with over 700 helicopter appraisals completed since April 2013. Carol obtained her American Society of Appraisers accreditation in June 2013 and is on track to receive her senior accreditation status in June 2016. She will be a fourth addition to the HeliValue$ ASA senior accrediated staff.  Carol also recently spoke at the 2015 NAFA conference presenting "Will Oil Prices Really Affect the Helicopter Market?"

 

Carol flashed her trademark grin when she heard the news, and told us, "I'm excited to be a part of the Wisconsin Chapter and promoting ASA's high standards."

 

About American Society of Appraisers

The American Society of Appraisers is a world renowned and respected international organization devoted to the appraisal profession. ASA is the oldest and only major appraisal organization designating members in all appraisal specialties. www.appraiser.org

 

HeliValue$ will hold its second quarter Blue Book resale pricing review on July 20.  Resale pricing adjustments are based on actual sales transactions and current market conditions such as overall trends in asking prices and increase or decreases in supply, demand, and sales volume. We obtain sales pricing data from owners and operators, lenders and lessors, brokers and equipment manufacturers worldwide. With the information gathered from many different resources, we review each model covered in The Official Helicopter Blue Book®. While we do review all models each quarter, frequently traded models are updated as soon as they begin to show variation from the previously published page. Stay up-to-date on resale pricing changes by subscribing to The Official Helicopter Blue Book® www.helivalues.com.

 

The Official Helicopter Blue Book®. Sales transactions can be reported by emailing Lindsay Moore or via our online form here.  All information received is held in the strictest confidence and is only used for our internal review.

 


 

Congratulations! Sharon Desfor ASA International Secretary/Treasurer - Elect

 

Sharon moves from MTS Governor to her newly elected position of International Secretary/Treasurer. Sharon will focus on promoting communication and transparency between members and leadership, members' needs whether those are direct benefits or government lobbying, and making ASA relevant on a global basis.

 

"Sharon has a strong commitment to the education of all appraisal professionals.  We are excited that she will have the opportunity to make the ASA even better." - Jason Kmiecik, VP of Operations, HeliValue$, Inc.

www.appaiser.org

Appraising the Appraiser

As originally appeared in Business Aviation Advisor, May/June 2015 (www.bizavadvisor.com)

Finding the Right Appraiser is as Easy as ASA

After the savings and loan crisis in the 1980s, and again in 2008, the banking industry responded with new rules and additional safeguards for better risk management.

 

One of the most significant changes involves aircraft appraisals.

 

Prior to 2008, a simple market evaluation by a resale broker, often with just a quick look at the current edition of the Aircraft Blue Book, was sufficient to secure as much as a 90% loan-to-value ratio for a preowned aircraft. That is no longer so.

 

Today, most banks, leasing companies, and insurance underwriters require that all loan collateral, including business jets, be valued by a qualified, certified appraiser before financing is approved. Those appraisers must comply with the Uniform Standards of Professional Appraisal Practice (USPAP), which was created in 1989 by the Appraisal Foundation, and is the generally accepted standard in Canada and Mexico as well as the U.S.

 

Two organizations provide such appraiser certification: the International Society of Transport Aircraft Trading (ISTAT), which focuses primarily on commercial airliners; and the American Society of Appraisers (ASA), which teaches, tests, and confers credentials to its members, who conduct professional appraisals for business and personal property valuation. The ASA's Machinery and Technical Specialties division offers the only program to train and certify business aircraft appraisers.

 

Appraisers earn that Aircraft Specialty accreditation by completing a rigorous curriculum and peer evaluation. ASA-accredited appraisers must adhere to the professional standards set forth by ASA's Code of Ethics and Principles of Appraisal Practice, and well as USPAP (in North America), or the International Valuation Standard elsewhere in the world. The two levels of ASA certification, Accredited Member and Accredited Senior Appraiser, are based on the number of years of appraisal experience, with continuing education courses required to hold either accreditation.

 

The recent rebound in business jet transaction activity has increased the demand for certified appraisals. To meet that need, two established aviation organizations, Jet Support Services, Inc. (JSSI) (www.jetsupport.com) and Embry-Riddle Aeronautical University (ERAU) (www.erau.edu) co-sponsored and co-hosted two ASA accreditation courses earlier this year, one at ERAU's campus in Daytona Beach, FL, and the other at JSSI's European headquarters in Farnborough, UK, with more courses planned for this fall.

 

What does this mean for you, the aircraft owner?

 

If you are interested in monitoring the value of your aircraft, whether for financing, refinancing, or sale; or to verify hull value for insurance coverage, you will need to have your aircraft appraised by an ASA-certified appraiser. This will ensure that you have the most accurate and lender-acceptable data.

 

On average, expect the appraisal to take about one week, with the physical inspection process usually one full day onsite, and the rest reviewing records. The appraiser will conduct a systematic inspection of the interior and the exterior of the aircraft, including: engine, airframe, avionics, instrumentation, and other systems; as well as provide a methodical review of your aircraft's flight and maintenance log books, FAA registration, title, and owner's documentation. Most business jet appraisers avoid "desktop only" appraisals because the inspection and review of the records is extremely important.

 

In 2015, the average cost for a full appraisal and inspection – required by most lenders – is about $5,000, perhaps up to $7,500, plus expenses. Be aware, however, that a standard appraisal is not the same as a pre-buy inspection for purchase, which can run between $10,000-$50,000 depending on the size and scope of the work.

 

Rules for lending have changed dramatically in the past six years. If you have not been in the market recently, know that a proper appraisal will ensure that you secure the right equipment at the right price, while meeting your lender's requirements.

 

For more information about and to find an accredited Appraiser go to www.appraisers.org or call 800-272-8258. BAA


HeliValue$, Inc. held its first quarter 2015 Blue Book resale pricing review on April 1. Resale pricing adjustments were made on the following models on April 2, 2015. To view the adjustments, please log into your account and visit the resale trends page for each model.

 

Results of April 1, 2015 resale pricing review of The Official Helicopter Blue Book®

 

Agusta AW109SP

Airbus EC155B

Airbus AS350B

Airbus EC155B1

Airbus AS350B1

Sikorsky S-76B

Airbus EC145

Sikorsky S-76C+

Airbus EC135P1/T1

 

 

General Market Comments

There has been little change since our last review in January of 2015. As seen in the last two market updates, light single-turbine helicopters continue to flood the world market. At the time of this review, there were over 700 light singles on the market. The Airbus AS350B (H125) series makes up 35% of those 700 plus, followed by the Bell 206B series at 20%. We are also starting to see slight growth in the used light twin inventory. There are roughly 250 light twins on the market. Of those, 66% are listed as corporate/VIP configured, 77% are ten years or older and the A109 series makes up 45% of all light twin listings. There isn’t a strong secondary market for these machines, with the exception of the BK117, which has found some new life in the utility and oil & gas/mineral exploration markets. There is a softening in the heavy market mostly due to the replacement of older models like the S76A, B, C and AS332 series that are now coming onto the market.  We continue to see discounted resale values for most VIP configured machines across all categories.

 

Resale pricing adjustments are based on actual sales transactions and current market conditions such as overall trends in asking prices and increase or decreases in supply, demand, and sales volume. We obtain sales pricing data from owners and operators, lenders and lessors, brokers and equipment manufacturers worldwide.  With the information gathered from many different resources, we review each model covered in The Official Helicopter Blue Book®.  While we do review all models each quarter, frequently traded models are updated as soon as they begin to show variation from the previously published page.  Stay up-to-date on resale pricing changes by subscribing to The Official Helicopter Blue Book® www.helivalues.com

 

As usual, we are interested in any recent sales transactions you would like to report. Every time you buy, sell, lease, finance, or trade a helicopter, and report this information to us, you help update The Official Helicopter Blue Book®. Sales transactions can be reported by emailing [email protected] All information received is held in the strictest confidence and is only used for our internal review.  The next pricing review is scheduled for July 20, 2015.


Please feel free to email with any questions or comments. 

Lindsay Higgins, HeliValue$, Inc.


Unions: UK North Sea Workers Give 'Overwhelming' Support For Strike

LONDON, March 27 (Reuters) - Trade unions Unite and GMB said members working offshore in Britain's oil and gas industry had shown overwhelming support for industrial action over proposed changes to their terms and conditions in a consultative ballot which closed on Friday.

 

Unite's members covered by the Offshore Contractors' Agreement delivered a 93.5 percent vote in favour of proceeding to a strike ballot, increasing the likelihood of North Sea strike action for the first time in a generation, the union said.

 

GMB's members also voted "overwhelmingly" in favour of an official ballot for strike action over proposals from clients and contractors to change their conditions of employment, GMB said.

 

The vote came after talks between GMB and Unite and the Offshore Contractors' Association in February and March failed to make progress on rota changes, rates of pay, sick pay and holiday patterns, GMB said.

 

"The vote quite clearly demonstrates the anger and frustration of our members employed in the offshore industry," said Dave Hulse, GMB National Officer. "Members are prepared to strongly oppose the changes from clients and contractors."

 

It was not immediately clear how many workers any eventual strike action would involve. The unions now face the task of putting together an electoral register that is robust enough to withstand any potential legal challenges, a process which could take some time, a spokesman for GMB said.

 

Some operators want to move to a three weeks on, three weeks off shift pattern, as opposed to the more traditional two weeks on, two or three weeks off.

 

Companies are also cutting headcount in their North Sea operations to trim costs, with hundreds of job losses announced at Royal Dutch Shell, BP, Talisman Sinopec, Chevron, ConocoPhillips and Taqa since oil prices plunged in 2014.

 

Unite Scottish Secretary Pat Rafferty said the "massive support" for industrial action should come as no surprise to offshore employers. "The industry agenda is clear in that it wants to impose a reduced number of employees to work longer and for much less -- it's a 'race to the bottom' disease that is unsustainable and unacceptable."

 

(Reporting by Claire Milhench; Editing by Janet Lawrence)

Pick a letter: U or V

You could get a barrel of West Texas Intermediate oil on Wednesday for just $44.66 (although what anyone would do with one barrel – or enough to fill 3.5 ten-gallon hats – is a mystery). This is the lowest price for six years and shows a fall of about 60 per cent from last summer.

 



In their analyst calls, Bristow, CHC and Era Group have all talked about whether it will be a U-shaped recovery or a V-shaped one. Of course no one knows. So sensibly, they are preparing for a U and hoping for a V (hopefully we will get a square root √).

 


While exploration accounts for less than 25 percent of their business, oil companies are also looking to cut production costs by asking operators to find savings and negotiate contracts.

 


There is little sign of a rebound in oil prices yet. US oil production has not yet fallen and the amount of oil stored in the US continues to rise. Yesterday, Ali al-Omair, Kuwait’s oil minister, told Reuters: “Within OPEC we don't have any other choice than keeping the ceiling of production as it is because we don't want to lose our share in the market."

 


Every downturn is different – and OEMs and operators are clearly in it together – but it will be interesting to see if leasing companies can give smaller operators more flexibility.

 


West Texas Intermediate futures for April are at $43.9 a barrel. The August future is now at $50.

 


CHC cutting costs

Continuing on oil, CHC’s third quarter call was far more depressing than Clark McGinn’s (its former head of asset finance’s, now gardening before moving to Waypoint) presentation at Helicopter Investor London 2015 last month. The operator is cutting costs and looking to boost its capital efficiency.

 


Karl Fessenden, CEO of CHC, said there have been lots of delays and cancellations on the exploration side. Although he stressed that 80 per cent of CHC’s flights are supporting production rather than exploration.

 


CHC Group had revenue of $415 million and a net loss of $465 million for its fiscal 2015 third quarter, which ended January 31, 2015.

 


Sales fell by 2 per cent in real terms (or 9 percent including currency changes). CHC had an adjusted loss of $30 million, when special items of $442 million (which includes $404 million of goodwill).  Adjusted EBITDAR – which includes lease rentals - was $115 million and was up in real terms when currency changes are excluded.

 


Joan Hooper, CFO of CHC, said they are expecting to take seven new helicopters in their 2016 fiscal year (which starts on 1 May this year) out of their firm orders for 19 helicopters.

 


Hooper discussed helicopter finance several times. CHC has recently had its fleet valued at about $3 billion. Some 80-85 per cent of these helicopters are leased. This many, however, may change said Hooper: “We’re just in throes of doing that in terms of what is the right mix of owned versus leased over the next several years.

 


“How do we refinance aircraft from a lease cost? Is there other ways to finance aircraft other than the same, so are there other debt related searches that might be cheaper than leasing. We are going to look at all those options to lower overall cost of capital and lower our fixed charges.”

 


CHC has bought back debt and estimates that this will save it $20 million a year in interest costs. Hooper also thinks they can get lease rates down.

 


“Lease is probably okay other than I mentioned, we are going to really look to find ways to actually lower the lease costs,” says Hooper. “We believe there is excess capacity in the lease financing market and so we're going to be talking to the lessors about coming up with a book of business that’s attractive to them and if we can refinance that at attractive rates we will be looking to do that.”

 


A great year(a) for Era

Chris Bradshaw, CEO of Era Group, was slightly more bullish (as was Jonathan Baliff at Bristow last month). Era had a record year in 2014 when special items for 2013 are removed.

 


ERA Group had net income for its fourth quarter, ending December 31, 2014 of $3.2 million on operating revenues of $74.7 million. It reported net income for its 2014 of $17.1 million, on operating revenues of $331.2 million compared to net income of $18.7 million on operating revenues of $299.0 million in the prior fiscal year.

 


Its 2014 EBITDA was $85.9 million compared to EBITDA of $93.1 million in the prior fiscal year – but 2013 included gains on asset dispositions and special items. Adjusted 2014 EBITDA was $84.7 million compared to $77 million in the prior year.

 


Era made a $6.1 million gain selling helicopters in 2014 compared to $18.3 million in the prior year.

 


Bradshaw estimates that 75 per cent of its business comes from production support, pipeline operations, transporting US Government inspectors and dry-leasing.

 


Era is waiting for its first four AW189s (it is the North American launch customer) and its first S92 comes in August. It says it has already placed all of these and two more S92s. In total, it has firm orders for 19 helicopters: 10 AW189s, four S92s and five AW169s.

 


He said: “The biggest driver of Era’s record profit was demand in the Gulf of Mexico” and Bradshaw is still bullish. “I would certainly note that relative to a lot of the other oil and gas markets around the world the Gulf of Mexico is a relative bright spot. The current floating rig count in the Gulf of Mexico today is about 43, which has held-up pretty well, it's actually up from about 38 at mid-year 2014 and about 36 at the end of September 2014.”

 


Bradshaw is also upbeat about Brazil…

 


Petrobras petrodollars

While everyone is being depressed about oil prices, operators are eagerly awaiting news from Petrobras. The latest bidding round closed at the end of January.

 


In its latest analyst call, Bradshaw said Era Group was the lowest bidder for four AW139 helicopters with contracts scheduled to start in the first quarter of 2016. It also said it won a bid for four heavy aircraft (three of these are renewals). Unusually for Era – which likes owning aircraft – it is considering sale and leasebacks.

 


CHC was more circumspect. With Fessenden saying: “I would just say that it's too early to comment on this. It’s a public tender. It also had public challenges, which are in the public domain and so we won’t make any comments on anything until the tender has closed and those challenges have been addressed. And there have been numerous challenges frankly.”

 


KKR really, really like helicopters

KKR these week firmly established itself as serial helicopter investor by buying Air Medical Group.

 


It now owns Air Medical, has a stake in Malaysia’s Westar and a joint venture with Lease Corporation International. Air Medical Group replaces its stake in Avincis which it sold out to Babcock (now the – genuinely – catchy Babcock Mission Critical Services).

 


Bain Capital bought its stake in Air Medical in 2010. At the time a source told Reuters it was valued at $1 billion. Another source has told Reuters that Bain is paying $2 billion now. This sounds like a good return, although Air Medical has grown significantly since then buying at least five operators and moving into ground transportation.

 


At Helicopter Investor Miami 2014, Dave Hinton, senior vice president of finance and controller of Air Medical, had a great motto: “We want to be the best thing that happens to you on the worst day of your life,” he said.

 


Singapore slings

We are still working on Helicopter Investor Asia 2015, which takes place for the first time in Singapore on 8 June. If you would be interested in speaking, sponsoring or attending (operators attend for free) please email [email protected].

 


Have a great weekend,

 


Alasdair Whyte
Editor
Helicopter Investor

As a result of our fourth quarter pricing review of The Official Helicopter Blue Book®, resale pricing adjustments were made to the following models.  To view the adjustments made, please log into your account and visit the resale trends page for each model.

 

Results of January 6, 2015 resale pricing review

Agusta AW109SP

Bell 407

Agusta 119K

Airbus AS350B2

Agusta AW139

Airbus AS350B3

Bell 205A

Airbus BK117A4

Bell 230

Airbus EC155B1

 

Listed below are models that had a pricing adjustment since the review on January 6, 2015.

Sikorsky 330J

Sikorsky S61N

Airbus 332L1

Airbus 332L2

Resale pricing adjustments are based on actual sales transactions and current market conditions such as overall trends in asking prices and increase or decreases in supply, demand, and sales volume. We obtain sales pricing data from owners and operators, lenders and lessors, brokers and equipment manufacturers worldwide.  With the information gathered from many different resources, we review each model covered in The Official Helicopter Blue Book®.  While we do review all models each quarter, frequently traded models are updated as soon as they begin to show variation from the previously published page.  Stay up-to-date on resale pricing changes by subscribing to The Official Helicopter Blue Book® www.helivalues.com.  

 

As usual, we are interested in any recent sales transactions you would like to report. Every time you buy, sell, lease, finance, or trade a helicopter, and report this information to us, you help update The Official Helicopter Blue Book®. Sales transactions can be reported by emailing [email protected].  All information received is held in the strictest confidence and is only used for our internal review.  The next pricing review is scheduled for April 1, 2015.

 

To view the most recent changes to the resale pricing for these models, login to your account, choose a model and then the Resale Trends tab. 

 

General Market Comments

Comp 59880230

HeliValue$ continues to see an increasing inventory of light single engine helicopters on the world market, especially the AS350 series. With the decline in corporate and VIP markets and the introduction of more efficient light twins, there has been a steady increase of older light twins like the AW109 into the used marketplace. Despite recent panic over declining oil prices, there continues to be strong demand for medium and heavy offshore machines. Due to the low supply of offshore configured machines and the steady decline of the VIP/Corporate market overall, we continue to see discounted prices for the used medium and heavy VIP/Corporate configured aircraft.

 

There has been an increasing number of inquiries about the oil price decline and its effect on the helicopter industry. Recently one of our appraisers Ben Moore, addressed these concerns in an article emailed to our subscriber and client base on February 17, 2015. If you're interested, you can find a copy of his article here.

 

Please feel free to email with any questions or comments.

Lindsay Higgins, HeliValue$, Inc.

HeliValue$ held its third quarter review of the Blue Book resale pricing data on October 28, 2014. Models updated after our review are listed below.  Resale pricing adjustments are based on actual sales transactions and current market conditions. We obtain sales pricing data from owners and operators, lenders and lessors, brokers and equipment manufacturers worldwide.  With the information gathered from many different resources, we review each model covered in The Official Helicopter Blue Book®.  While we do review all models each quarter, frequently traded models are updated as soon as they begin to show variation from the previously published page.  Stay up-to-date on resale pricing changes by subscribing to The Official Helicopter Blue Book® www.helivalues.com.  

 

We are interested in any recent sales transactions you would like to report. Every time you buy, sell, lease, finance, or trade a helicopter, and report this information to us, you help update The Official Helicopter Blue Book®. Sales transactions can be reported via our website at Report a Sale or by emailing [email protected].  received is held in the strictest confidence and is only used for our internal review.

Agusta A109C

Agusta A109E

Agusta A109S

Agusta AW109SP

 

Airbus AS350BA

Airbus AS350B

Airbus AS350B1

Airbus AS350D

Airbus AS350B2

Airbus AS350B3

Airbus AS350B3e

Airbus AS355F2

Airbus BK117B2

Airbus BK117C1

Airbus EC120B

Airbus EC130B4

Airbus SA330J

Bell 206B3

Bell 206B2

Bell 206L1

Bell 206L3

Bell 206L4

Bell 214ST

Bell 407

Bell 407GX

 

Sikorsky S61N

Sikorsky S76A

Sikorsky S76C+

 

General Market Comments

Dollarphotoclub 19211810This year HeliValue$ has seen a considerable increase of light single engine helicopters on the market. This is mostly due to the sharp decline in the mining and seismic explorations sectors. Aiding in the flooded light singles market is a shift to replace the popular electronic news gathering machine, the Airbus AS350 series, with the lighter, lower-cost to maintain, Robinson R44 and R66 models. The medium and heavy helicopter markets continue to be very strong with an increasing demand for offshore machines. We expect to see demands at this level continue for at least the next five years. The VIP/Corporate resale market is in a decline in all categories but especially in the medium and large helicopter categories. We still see new deliveries of VIP/Corporate machines, like the Agusta AW139, Bell 429 and Airbus EC145s. However, because there is a low supply of the more desirable offshore configured machines we see discounted prices for VIP/Corporate configured machines in the used market.

 

If you would like to receive a copy of our Newsletters, please email [email protected]

Increased Scrutiny on Residual Reviews

Expanded regulation and concern over past problems have increased the scrutiny auditors are applying to residual reviews, particularly for banks. Shawn Halladay and Carl Chrappa of The Alta Group discuss the impacts additional scrutiny has, including amplified levels of detailed information and external appraisals that auditors are requiring. The authors say lessors can use this increased scrutiny to create opportunities to better manage portfolios and maximize the value of existing residuals.

 

The accounting rules require lessors to assess their residuals and operating lease assets for impairment at least annually. Although the impairment review is a regulatory requirement, it also can be used as an opportunity to increase the bottom line. This article will examine the residual review process and how it may be expanded beyond a regulatory exercise into a risk management and marketing tool.

 

Background

There has been a decline in fair market value (FMV) leasing activity and leasing products have become commoditized, yet equipment values still remain an important component of the industry. These values come in several forms including residual positions, collateral protection and loss given default (LGD) curves.

A critical aspect of residuals from a financial reporting perspective is how the booked residual drives the income from the lease, as it affects not only the amount of income recognized over the life of the deal but also when that income is recognized. Consider, for example, a four-year lease with a market-based payment of $240,000 per year. As can be seen in Table One, the residual that is booked directly impacts the income to be recognized.

 

This is true whether the lease is classified as operating or direct financing. For this reason, Topics 840 and 360 (Leases and Property, Plant and Equipment, respectively) of the Financial Accounting Standards Board (FASB) Codification require that residuals and operating lease assets be assessed for impairment on an annual basis. This assessment sometimes is referred to as the residual review or, from the asset manager’s perspective, the FASB audit.

 

The objectives of the residual value review are to verify the future economic benefit of the asset and make any necessary adjustments so that the associated income is reflected in the proper period (upward adjustments are not allowed, however). This residual review, although accounting-driven, is an integrated exercise that directly involves asset management and IT, along with the outside auditors and external asset specialists. Portfolio management, sales and tax, among others, also may become part of the process.

 

Accounting Role

The accounting department, of course, has the primary responsibility for the annual residual review as it is a key element of the annual audit. At a high level, this process consists of determining the latest end-of-lease market values, comparing those fair market values to the booked residual values, and then making any necessary adjustments to the asset values.

 

In the past, many companies identified potential impairments by asset group, such as forklifts, trucks, or office equipment. They would look for indicators of asset impairment such as a significant decrease in market value, a dramatic change in asset use, an adverse change in legal or regulatory factors, or costs in excess of original expectations. The Alta Group’s experience, however, indicates that this practice is shifting towards a more granular approach, which will require better documentation, rationale, systems and stronger asset management resources (either internal or external).

 

If there is any “other than temporary” decline in residual value prior to lease end, an impairment must be recognized. As a case in point, after a new generation of disk drives entered the market, the transactional data showed a large decline in the value of the older drives. Several third-party asset managers, without the daily transactional pressures of internal asset managers, correctly predicted that the decline was only temporary as the manufacturing capacity was insufficient to meet demand, which not only drove prices back up on the older drives, but eliminated the need for an accounting write-down.

 

Asset Management Role

While it is the accountants who collect the data, perform the comparisons and book any adjustments, the most critical aspect of this process involves establishing the fair values of the equipment so these values can be evaluated against the booked residuals and operating lease assets. Strong internal or external asset management resources, therefore, are a necessity in residual reviews.

 

Given the important role they have in the residual review process, what essential skills must asset managers bring to the residual value review? The answer will depend on whether residual values are being evaluated internally, by an outside party, or a combination of the two. An outside asset manager, for example, should have broad experience with the equipment types, proper appraisal industry credentials, independence, and a large data base of asset value performance.

 

The choice of using an internal or external resource is up to the individual lessor, although it is the internal asset managers who primarily will interface with the auditors. Trends in the equipment leasing industry, regulatory requirements, and audit practices, however, point to an increasing role for third-party asset management support. This increasing role is based on several factors, one of which is headcount, as some lessors are outsourcing their asset management function. Other factors include auditor and regulator behavior, and the resources available to obtain data.

 

Opportunities

Residual value reviews are not just an accounting exercise and, hence, a cost. They also are a valuable management tool, so savvy lessors are using these reviews to also create economic benefit. The key is to recognize what these benefits are and tweak the processes so that both the audit requirement and economic goals may be met.

Some lessors derive so much benefit from doing so that they conduct residual reviews on a quarterly basis. While this exercise relieves some of the audit pressure at year-end, the real purpose is to identify market opportunities and threats. Whether conducted annually or on a more frequent basis, the residual review allows management to identify factors affecting asset values that might not have been on the horizon at the time the residual was set.

 

By forcing asset managers to look ahead at business trends and potential regulatory changes, the residual review can identify opportunities to introduce programs that either accelerate returns or incentivize lessees to extend their leases. These actions can be taken to enhance residual profits or mitigate portfolio risk, depending on how the identified factors affect residual values.

 

Residual reviews also can be used to map out projected collateral protection, manage capital allocation, or calculate LGD factors. Alta recently completed a comprehensive residual review for a major bank lessor that went well beyond FMV lease residuals to cover almost its entire portfolio. In this engagement, we addressed all the client’s leasing products, including full payout and TRAC leases (both full and split). This bank lessor used the required residual review process to complement its asset management efforts, gain supplementary, outside opinions on their internal views of asset values, and identify collateral gaps.

 

Conclusion

Expanded regulation and concern over past problems have increased the scrutiny auditors are applying to residual reviews, particularly for banks. This additional scrutiny has amplified the level of detailed information and external appraisals/opinions that auditors are requiring. On the positive side, lessors can use this increased scrutiny to create opportunities to better manage the portfolio and maximize the value of their existing residuals.

 

Shawn Halladay ([email protected]) brings 30 years of experience as a lessor, trainer, consultant and auditor to his position as managing director and leader of The Alta Group’s Professional Development practice.

 

Carl Chrappa ([email protected]) brings 30 years of expertise in equipment management and appraisals to his role as senior managing director and leader of The Alta Group’s Asset Management Services practice. For more information visit www.thealtagroup.com.