Sale and Leaseback has remained a creative window for asset financing despite being as underutilized leasing product in Nigeria’s market place. This attraction stems from the current high cost of funds and low industrial capacity utilization in the country .
Essentially, a sale and leaseback transaction involves the user (initial asset owner and title holder ) raising capital by selling the asset and transferring the title/ownership to a financial or leasing company ( the lessor or new owner ) and simultaneously executing a lease agreement to retain the use of the asset and pay periodic rental in return over the lease period .
Business world Intelligence notes that under this financing option, transfer of title of the asset is done without physical movement of the equipment from the premises of the seller (asset owner).
How it Works
According to Mr. Akinde Obatuyi, assistant executive secretary , Equipment Leasing Association of Nigeria (Elan ), a sale and lease back can be structured as either operating or finance lease. Though this consists of various transactions , the two major ones are the equipment user sale lease back and the lessor sale leasedback .
Under equipment user lease back, there are two transactions, where the owner user sells the asset to a leasing company after which, the new owner in turn leases back the same equipment to the first owner for use. Such an asset is automatically transferred to the new owner even as the physical control of the asset remains with the original owner at a cost .
Equally, the lessor saleback transaction has two variants where an owner lessor sells the leased asset to an investor or other lessor and the investor ( the lease back lessor0) leases the asset back to the previous owner (the non- user lessee) who in turn subleases the same asset to the original lessee (the sublease) .
Beyond the foregoing, in some cases, a lessor may sell asset it has on lease to another lessor through a lessor sale back
Why Lease and Leaseback
Business world intelligence notes that a company can enter into a sale and leaseback for various reasons which include need to free up needed cash to improve financial statement ratios.
Mr Bode Dinyo , managing director, Mint Seal Services Limited, a Lagos-based leasing firm, said that sale and leaseback is not too popular today in spite of the cash crunch in the Nigeria economy .
It is only the manufacturing companies that tend to explore the finance option.
For instance , an asset owner may opt to embark on this creative financing window to sell its ownership interest in order to get funds to invest in other profitable transaction . This serves as a better alternative way to raise funds instead of going for bank loans that are not easier to come by, he further explained .
Mr Ojo Akinyogbon, head of operations, Sovereign Assets and Leasing Limited, explained that the unpopularity of sale and lease back in the Nigeria leasing market is as a result of lack of exposure on the part of lessees .
According to him, most times the lessees are used to simple and straight leasing transactions which they embrace to satisfy their equipment needs . This type calls for normal computation unlike sale and lease back which is relatively more rigorous and in some cases complex , he added.
However, any lessor who enters into sale and lease back should be ready to re-asses the asset on lease to determine the current fair market value vis-a vis the original value ass at the time of purchase. This calls for expert’s job to determine the asset depreciation and the fair current value of the asset on lease.
According to him, this form of asset financing is quite good as its proper utilization would help to restructure debt funding as well as help companies to secure more debt in the future.
Therefore, reasons for entering into sale and leaseback include financial reporting, economic, liquidity and risk minimization considerations. Under financial reporting reason, it helps a firm which is at an advantage with off-balance sheet financing as existing asset and related obligations are taken off the balance sheet if the leaseback positive qualities as an operating lease.
This transaction, also, boosts reported earnings through an immediate recognition of a gain created from the sale of the asset to the leasing company and still retains the working control of the sold asset. In the case of economic motivation is that the firm’s Return on Assets (ROA) is enhanced by entering into an operating leaseback transaction.
Its reported earnings are enhanced while the asset base is reduced, development that would help the firm on the long run to mobilize allocation of corporate overhead.
This form of financing helps companies to have access to cheaper funds as well as improve their cash flow. Under risk minimization, fear of obsolescence on any of its equipment would be taken care of with sale and leaseback. If the need for the asset changes from long term to sheet term, it becomes wise for the company to embrace leaseback option in order to lease the same item on short-term basis. Above all, companies with excess tax benefits ( that is one, experiencing low tax bill and low effective tax rate.) go for this option as it enables it to create taxable income to help it utilize additional tax benefits.
In all , sale and leaseback , if well utilized, can create opportunities for companies to innovate, generate more profit for the lessor as well as meet the needs of the lessee , thereby engendering a win-win situation to the benefit of the overall economic development.
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