Residual value agreements—uses and types
Produced in partnership with Norton Rose Fulbright
Residual value agreements—uses and types

The following Banking & Finance guidance note Produced in partnership with Norton Rose Fulbright provides comprehensive and up to date legal information covering:

  • Residual value agreements—uses and types
  • What is a residual value agreement?
  • Why are residual value agreements used in an aviation finance transaction?
  • Types of residual value agreements
  • Residual value guarantees and asset value guarantees
  • Put options
  • Residual value insurance policies
  • First loss deficiency guarantees

Residual value agreements are a tool for allocating the residual value risk in an aircraft.

The key reasons for using residual value agreements are:

  1. to provide additional security for the financing parties in the context of an aviation finance transaction

  2. in operating leases, to minimise the exposure of a lessor to residual value risk

  3. to provide an airline with comfort as to the value of its investment in a fleet of aircraft

There are different types of residual value agreements. They allocate risk in different ways and to different parties.

See also Practice Note: Residual value agreements—common features and mechanics.

What is a residual value agreement?

Residual value agreements are used in the context of aviation finance transactions to allocate the residual value risk in an aircraft among different parties, or to transfer that risk to a third party such as an insurer.

In the context of an aircraft which has been purchased by a lessor:

  1. the residual value of the aircraft would be the value of an aircraft that cannot be recovered by the lessor under the lease of that aircraft by means of rentals, and

  2. the residual value risk would be the risk to the lessor that, upon a termination of the lease of the aircraft, the realisable proceeds from the disposal of that aircraft will not be sufficient to fully cover