Sale and Leaseback: Creative Window for Asset Financing

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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