Lloyds offers a product where the lessee (the person or company using the aircraft) can benefit if the value of the aircraft at the end of the lease term (the residual value) is higher than originally forecast. The bank takes all of the risk if the value falls, whilst allowing the lessee to access some of the equity built up in the aircraft if the market is buoyant.

For example: A buyer is looking for financing for a corporate aircraft and is funding $10 million.

Lloyds and the lessee agree to structure the deal as a four year lease. Lloyds funds $10 million to the buyer by way of a sale and leaseback agreement, or settles the final balance of the sales agreement if acquiring via a manufacturer or broker.  Like all operating leases the lessee also agrees to re-deliver the aircraft within pre-agreed return conditions at the end of the lease and as such is responsible for all maintenance etc during the term of the lease. The buyer and Lloyds agree to share any upside available once the banks residual value position has been settled; typically, the lessee gains in excess of 50% of the distributable upside or profit.

At the end of four years the lessee has the option to extend the lease or return the aircraft (the user would typically need to notify the bank that it plans to do this 18 months before the lease is terminated).

If market values are poor the lessee simply elects to return the aircraft to the bank which would then chose to sell or re-lease the aircraft. However, if demand for the aircraft is strong the user could chose to sell it or acquire it from the bank at market value. If a third party sale achieved an upside profit of $2 million after the residual value had been settled, the lessee would stand to benefit in a majority share of that profit.

This product is extremely attractive to high net worth individuals who typically replace aircraft more regularly than their corporate counterparts.  Corporates can achieve the value in the same structure but may have the added benefit of treating the aircraft as off-balance sheet.

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Alasdair Whyte
By Alasdair Whyte April 6, 2010 20:54

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