who exactly are the key European players doing such deals? Also,
are they simply too risky? Brendan
Malkin reports on the current situation.
For State Securities, a deal which recently came
its way was an opportunity that could not be missed. First, it
involved a mixture of financial products – a sale and hire purchase
back worth £76 million and a £150 million small firm loan guarantee
– the structuring of which State had lots of experience doing.
Second, the reason for the deal was to not just help the client
through the bad times, but also to keep it afloat.
In the words of State’s sales director, Andrew
Bullard, this refinancing was part of a “clean sweep” of the
lessee’s business, which also included a company name change. Such
deals, while potentially risky, can be a lucrative business.
As the bad times come rolling in, turnaround
finance deals of this kind are becoming ever more popular – and
often sale and leaseback lie at the heart of them.
Commenting on why this is so, Alun Richards, a
principal at The Alta Group, said: “There will certainly be a
material increase in demand for sale and leaseback as the credit
crunch tightens further over the coming months and companies become
increasingly imaginative about raising capital to maintain
Lessors are muscling in on the new opportunities.
Lombard Vehicle Management (LVM) reported earlier this year that
its volume of sale and leaseback deals grew by 50 percent in 2008
compared with the previous year, as customers increasingly turned
to the strategy in order to release the cash value of their wheeled
Lloyds TSB Autolease, meanwhile, reported a
“two-fold surge in businesses looking to improve cash flow from
sale and leaseback agreements”.
It is not just for turnaround finance that sale
and leasebacks are being used.
They are also acting as replacements for bank
loans, a point made clear by Neil Hutton of UK-based SME
Eurofinance, which acts as a broker and a lender: “Asset refinance
can either be standalone or part of restructuring, but I think
quite a lot of the time includes partial replacement of bank
“Companies now look for leasing on equipment and
factoring on debtors. A bank can’t compete with this with all the
security they want,” Hutton added.
Another typical structure in sale and leaseback
deals is where a building, usually a factory, is remortgaged, a
factoring provision is made available – often with the lessor
acting as a broker – and plant and machinery is refinanced.
The use of sale and leaseback as a means of
funding capital expenditure, replacing loans and overdraft
facilities – which are less available today as banks rein in
lending – is potentially a good thing for the customer as well as
the lender, as Jeremy Hartill, managing director of Capitas Finance
Ltd, a UK leasing broker, made clear.
“The asset finance industry has long warned about
the perils of short term funding for long term investment,” he
While most demand, unsurprisingly, is reportedly
coming from small and medium-sized businesses, banks are targeting
blue chip companies as they are “deemed to be less risky in a
recession”, said Hartill.
One senior asset finance lawyer said he has seen
a large increase in sale and leasebacks from large customers. It is
believed Tesco recently did such a deal on its vehicle fleet,
although the supermarket chain did not confirm this.
Jesper Steen Christensen, sales manager at Danske
Leasing, reported that lessees most likely to do sale and
leasebacks are “industrial customers with equipment machines”.
It is hard to tie down any particular assets most
often involved in sale and leasebacks from large customers. Alun
Richards said “demand has traditionally arisen most frequently in
the manufacturing, production and printing industries where
companies want to release cash from their main production assets”,
although he added that it “can however arise anywhere and is
sometimes driven by vendors”.
Interestingly, Hutton said he has done sale and
leasebacks on intangible equipment, as well as in his company’s
core areas of transport, manufacturing and television
Two sides to a story
For all their current popularity, sale and
leasebacks are not for everybody. Norman Carson, head of HBOS
Equipment Finance, for example, said his business has never signed
sale and leasebacks.
Some interviewed point to the dangers in buying
second hand equipment which will be worthless a short time
afterwards. Operating leases, however, are extremely rare in these
Gary Lawson, international commercial director at
Pitney Bowes Global Financing, who said he has done one sale and
leaseback a year for the past seven years, remarked he is wary
about sale and leasebacks for three reasons.
“We are not a bank and this may be a regulated
activity in some countries; in some jurisdictions you can’t get
clear title to the asset and stand as an unsecured creditor; and
there is a fraud potential,” he explains.
However, as the recession looks likely to stay,
the current enthusiasm for sale and leaseback is unlikely to fade
away anytime soon.