SALE & LEASEBACK
Sale and leaseback is a financial transaction in which the seller (new airline) of the lease aircraft sells the product to the lessor. The new aircraft will be leased back from the lessor to the lessee (seller) and the new aircraft will no longer be owned by the seller. Although these type transactions are structured as operating leases, the prospective lessee’s purpose and implicit benefit is often to raise capital by refinancing owned assets.
The lease arrangement is made immediately after the sale of the asset with the amount of the payments and the time period specified. Essentially, the seller of the asset becomes the lessee and the purchaser becomes the lessor in this arrangement. A leaseback arrangement is useful when companies need to untie the cash invested in an asset for other investments, but the asset is still needed in order to operate. Leaseback deals can also provide the seller with additional tax deductions. The lessor benefits in that they will receive stable payments for a specified period of time.
For example, imagine a company owns an asset but is having difficulty freeing up cash for current liabilities and short-term debt payments. The company has poor credit, and a bank loan would be very expensive. The company could instead choose to sell one of its long-term assets to an insurance company, and immediately arrange to lease that asset back for a specific period of time. If the insurance agrees to lease the asset for a rate less than the interest rate the bank wanted to charge the company for a loan, then the sale-and-leaseback arrangement with the insurance company would be the superior alternative.This way the company is relieved of its cash shortage, it uses the proceeds from the sale to payoff short-term debts and liabilities in order to continue operations, and in continues to benefit from the utilization of its asset.