Interest in sale and leaseback transactions is on the rise in South African private M&A transactions, driven by the tight capital market environment for corporate borrowers. Both private equity sponsors and corporate owners are increasingly recognizing the attractiveness of this solution, turning to sale and leaseback transactions to help finance corporate acquisitions.
In a sale and leaseback transaction, one party (the seller/lessee) sells an asset it owns to another party (the purchaser/lessor) and simultaneously leases back all or a portion of the same asset for a fixed period. The seller/lessee transfers legal ownership of the asset to the purchaser/lessor in exchange for consideration and then makes periodic rental payments to retain the use of the asset. If the purchaser/lessor has funded the acquisition of the asset through debt financing and still owes money on it, the asset may also serve as collateral for the debt financing.
Sale and leaseback transactions offer several economic advantages for sellers/lessees. They can unlock value in existing assets, generate cash flows, allow for continued access/use of the sold asset, offer flexible conditions in the lease agreement and often involve no financial covenants typically found in traditional bank financing, amongst others.
Traditionally, assets suitable for sale and leaseback transactions include immovable property, airplanes, ships, and machinery.
Sale and leaseback transactions provide an alternative to traditional bank financing, especially in times when a company's debt capacity does not allow for additional bank loans.