Sale and leaseback under a continuation plan: unlocking the value of your assets

A company emerging from the observation period with an approved plan often faces the same problem: its liabilities are organised, but it lacks the cash to implement the plan. Its historical banks have reduced their exposure, and new lenders look first at the ratios, which remain weak.

In this context, the assets the company already owns become a point of leverage. Sale and leaseback is one of them: the company sells an asset it uses, then continues to operate it by leasing it back from the financier.

The principle: unlocking the value of an asset without ceasing to use it

The transaction turns a fixed asset into cash. The financier buys the asset at market value, usually at a discount, then leases it to the company for a set term, often with a buy-back option at the end of the contract.

It can cover three main families of assets:

• production machinery and equipment;

• vehicle fleets, plant and rolling stock;

• operating real estate: factories, warehouses, logistics platforms and shops.

For the company, the benefit is twofold: it immediately receives an amount linked to the value of the asset, and it replaces a fixed asset with a predictable rent that fits the plan’s repayment schedule.

Why this option remains open during a plan

A sale and leaseback financier relies first on the asset, which it comes to own. Its main question is not “does the company have good ratios?” but “what is this asset worth, and can I resell it if necessary?”.

This is what makes the transaction feasible for a company under a continuation plan, provided it can demonstrate three things:

• the asset has a real market value, independent of the company;

• it can be resold: a secondary market exists and the asset is not too specific;

• the rents are sustainable within the cash-flow trajectory, on top of the payments due under the plan.

Points of attention specific to the plan

The legal framework of the proceedings

While a plan is being implemented, selling a significant asset is not a trivial act. The judgment approving the plan may have declared certain assets essential to the continuation of the business inalienable for a period it sets, and any substantial change to the means of the plan is a matter for the court. During the observation period, acts outside the ordinary course of business require the authorisation of the supervisory judge (juge-commissaire).

The transaction must therefore be prepared with the plan implementation officer (commissaire à l’exécution du plan) and the company’s legal advisers, before any discussion with a financier.

Existing security interests

An asset that is already pledged or mortgaged can only be sold by dealing with the security that encumbers it. The creditors concerned, the amount still owed and the way the sale proceeds will be allocated must be identified precisely.

The value that can actually be mobilised

Book value is not financing value. A fully depreciated machine may be worth more on the market, while recent but highly specific equipment may be worth much less. An independent valuation is almost always needed to set a credible basis for discussion.

The cost over time

Sale and leaseback has a cost: the rent includes the financier’s return. It must be compared with the other options, and the rent must remain affordable even in a less favourable business scenario.

How to prepare the file

A specialist financier will quickly want:

• the list of assets under consideration, with title documents, original invoices and age;

• a schedule of existing security interests and financing;

• a value estimate, ideally a recent independent valuation;

• the judgment approving the plan and its repayment schedule;

• a cash-flow forecast that includes the future rent and the payments due under the plan.

The earlier these elements are gathered, the larger the number of financiers able to step in, and the better the terms.

Further reading: our page Sale and leaseback and our page Financing a continuation plan.

In summary

Sale and leaseback does not suit every situation. But for a company under a continuation plan that owns valuable equipment or premises, it can provide liquidity that conventional financing no longer offers, provided it is prepared methodically and fitted to the constraints of the plan.