Sales and leaseback deals way to go for firms in era of cash crunch

A sales and leaseback transaction may be an alternative for businesses in this economic season where credit has become an expensive financing option for companies.

A lot of businesses are facing liquidity issues despite having a lot of assets. This is especially so for firms that have embarked on aggressive expansion strategies where a lot of fixed assets like land and machinery have been acquired.

In the manufacturing sector, for example, a lot of industries are modernising their plants at this time. This may involve heavy acquisition of machinery and other fixed assets. Many times these rapid expansions do affect the businesses’ liquidity and cash flows. Most of Kenyan State corporations are facing this hurdle.

Rapid expansion is a double edged sword. It gives companies access to new markets and frontiers but at the same time creates cash flow problems which in turn affect daily operations.

There are many restructuring options available to such entities including sourcing for equity partners. However, in my view a sales and leaseback arrangement could be a better financing option for such a company.

The following is my own opinion on Kenya Airways restructuring. While I may not be privy to a lot of facts and what the management is currently doing to turn around the company, I believe a sales and leaseback option should be looked into for non-core assets.

It has been reported in the media that a lot of KQ woes have been caused by cash flow problems arising from a rapid expansion plan.

Ten years ago the carrier had only 19 aircraft and this has increased to about 52. From the carrier’s website, the Dreamliners were bought through a sales and leaseback arrangement which involved an Irish company.

In the aviation industry, a this is a popular way of achieving modernisation. Given its financial status, it would prudent for the carrier to sell some of its non-key assets and lease them back to make it easy to solve its cash woes.

Leaving KQ woes behind — I am sure they will restructure well — a sales and leaseback agreement enables your business to reduce its investment in non-core assets such as land and free up money to rent the same property. Simply, you sell the non-core asset to a third party and lease back the same property from the same person.

The lease terms are fixed as you sell off the asset. One of the major benefits of a sales and leaseback is that it enables immediate release of funds without loss of the utility of the asset as a tenant.

I personally feel that a lot of the country’s cash woes can be solved by undertaking sales and leaseback agreements for non-core assets.

Vast parcels of land owned by parastatals lie idle. Again, there are factories owned by the State firms with heavy machinery that seem not to be in use. If the government undertook a proper audit of its assets and decided on the utility value of each in order to dispose of non-core assets on sales and leaseback arrangements a lot of cash would be injected into the economy.

For example, in my neighbourhood, there is a large tract of land owned by a parastatal and an abandoned building almost three stories high. The building is currently not occupied and other than the security guard there is no one else on site.

Yet according to media reports this is a State corporation that cannot even afford to pay its managing directors salary. I thought to myself why could the State corporation in question not sell off this asset and lease it back, or at the very least why could it not renovate the abandoned building and have tenants in?

It is possible to get capital injection from non-core assets. Just take an audit of what you really need and what you do not need and do the needful.

Ms Mputhia is the founder of C Mputhia Advocates. Email: [email protected].