The use of residual value agreements in aviation finance
Produced in partnership with Norton Rose Fulbright

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

  • The use of residual value agreements in aviation finance
  • What is a residual value agreement?
  • Why are residual value agreements used in an aviation finance transaction?
  • Additional security for the financing parties
  • Minimising exposure of a lessor
  • Comfort for an airline as to the value of its investment in a fleet of aircraft
  • Types of residual value agreements
  • Residual value guarantees and asset value guarantees
  • Put options
  • Residual value insurance policies
  • More...

The use of residual value agreements in aviation finance

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.

A good understanding of the sequence of events that will typically lead to a claim under a residual value agreement is necessary both for negotiations and for making a successful claim.

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

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