The Sale Leaseback Transaction - From The Lessor.. and Lessee's Perspective

We're a frequent contributor to CANADIAN EQUIPMENT FINANCE MAGAZINE . Here's our published article from the JULY / AUG 2014 issue - To check out this great magazine for borrowers and lenders and other finance professionals see: http://canadianequipmentfinance.com/
Our article is on Page 16 of this issue : Here it is


SALE LEASEBACK TRANSACTIONS IN CANADA

The Sale Leaseback transaction in Canada. How can this unique aspect of asset financing in Canada be utilized for maximum benefit. Some might say that it depends on which side of the transaction you are on - borrower, or lender. From our perspective it's a two way street. Properly executed for the right reasons it becomes... excuse the sometimes over rated term... a win / win.


Let's examine some key aspects of leaseback transactions for 2 major asset classes - Equipment and real estate. From the lessee's perspective it’s all about access to alternative capital without giving up use and long term ownership of key assets. In recent years many companies and even financial institutions have focused on shedding ' non core ' assets as a method of employing capital for maximum ROI. A good example? Witness Canadian banks employing the lease back on prestigious bank office towers.

Fundamentally the transaction is simple - Sell and asset to a third party, leasing it back with the option or ability to repurchase it at the end of the lease term.

What then is achieved from the borrower’s perspective? As we have noted it's a redeployment of capital into other areas of the business. Depending on the value and original structure of the transaction this method of financing can affect key operating and capital ratios - they include debt / worth, current asset ratios, etc.


Borrowers consider leasebacks for working capital, technology upgrades; in certain cases it might be prudent to structure a transaction as a term or bridge loan based on specific issue surrounding the deal.

Financing rates play a key role in the overall background to any transaction of this king. Taken into effect must be any original financing remaining on the asset, current rates, and any tax effects related to the deal.

Many owners and financial managers in any company considering a lease transaction are often confronted with ' pride of ownership ' issues which must be properly rationalized. And looking at it from the lessors perspective it is clearly important to ensure the transaction is not viewed as the proverbial ' cash grab '. Simply speaking it is prudent for the lender to satisfy itself around proper use of the proceeds of the deal.

We note that not all lessors, banks, etc offer leaseback financing. In some cases their charter prohibits any financing of this type. In other cases owner/management at a lending institution has simply decided they don't the expertise or risk appetite revolving around a lease back. Charters of many organizations often specifically prohibit this method of refinancing. Niche players in the industry often include firms that have both financing and asset expertise - with many firms have key personnel with in depth liquidation expertise in all categories of assets.

Rates vary on this method of financing, and it should be no secret that the ever present issues of ' credit quality ' and ' asset quality ' are ever present in any transaction of this type.

Some other considerations for borrowers might include the ability to return capital to owners and shareholders. Management that typically might be incented by key ROI and ROI metrics often look to sale leaseback of assets as a method of ensuring attainment of corporate objectives. When refinancing interest rates align with corporate capital conditions for a sale leaseback are viewed as favorable.

Lessors have the potential ability to offer both capital and operating leases as part of their financial offering in this segment of asset finance. Technology lessors make maximum use of the operating lease vehicle - allowing clients to maximize operating expense deductions, balance sheet enhancement, etc.

We've focused mainly in key benefits and consideration of the borrower. From the asset lenders perspective lease back finance offerings necessitate marketing, legal, and due diligence expertise. Lease contracts must be specifically designed to reflect the essence of the lease back. Key issues such as corporate searches and PPSA issues must be tabled and addressed at the start of any negotiation. In essence the leaseback must be properly ' papered ' to reflect the asset and the financial obligations of the lessee.

As noted asset valuation for purpose of refinancing is key. It becomes prudent, almost mandatory, to engage asset appraisal expertise as the cornerstone of any successful transaction. Different asset categories have different intricacies

The proliferation of information via the internet has greatly assisted owners and lenders in determining true asset value for the purposes of refinancing. Market data on almost any asset can be extremely valuable in initial negotiations around deal value and risk pricing... and these days that data is literally up to the minute. Solid appraisals can significantly benefit key issues such as book value, fair market value, impairment, etc


Key aspects of any appraisal include opinion, value, methodology, assumptions and pictures or videos.

We've observed over the years that many lenders rely solely on relationships they have built with specific appraisers. This is much to the chagrin of the lessee who has recognized the needed for a third party valuation, only to find that the appraisal firm they used is not recognized by a commercial lessor or bank. Bottom line? Money spent... unwisely!

By the way, safe to say also that we have never run into a situation where owners of assets have undervalue an asset in their own mind! That comment specifically relates to a key technical issue in asset valuation - i.e. the type of appraisal that is utilized or required by the lessor. Key categories in this area are fair market value, orderly liquidation, and forced value liquidation. By the way, lessors typically lend against a per centage of forced value, thereby highlighting the difference in owners perception of true asset value



The real secret to proper refinancing via a sale leaseback strategy is due diligence as the lender and an informed borrower / lessee around the leaseback process. That final decision, whether you're a lender or borrower will become a much easier one, and absent of surprises.



Stan Prokop - 7 Park Avenue Financial :

http://www.7parkavenuefinancial.com

Business financing for Canadian Firms , specializing in working capital, cash flow, asset based financing , Equipment Leasing , franchise finance and Cdn. Tax Credit Finance . Founded 2004 - Completed in excess of 90 Million $ of financing for Canadian corporations . Info /Contact :



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