How Sale Leasebacks Are a Solution to the Upcoming Debt Maturity Wall

With a significant wave of commercial real estate debt maturities approaching in the coming year, companies are seeking ways to address these looming obligations effectively. Given the current environment of tighter credit conditions, traditional refinancing options may be costly or less accessible. In this challenging landscape, sale and leasebacks (SLBs) are a strategic tool to help companies unlock capital, maintain operational continuity, and manage their debt obligations.

The Ascension team has successfully guided both private equity-owned companies and owner-operators through SLB transactions, helping them de-lever and improve their balance sheets. This expertise has enabled businesses to address upcoming debt maturities by strategically utilizing SLBs as a powerful financial solution to bolster balance sheets.

The Debt Maturity Wall: A Growing Challenge in Commercial Real Estate

A "debt maturity wall" refers to a high concentration of loan maturities within a short period, creating potential cash flow and refinancing challenges for companies. According to S&P Global, 60% of the $2.17 trillion in global financial and nonfinancial corporate debt set to mature over the next 12 months (from July 1, 2024, through June 30, 2025) comes due in the first half of 2025 out of which, a significant portion of commercial real estate loans are set to mature, affecting companies across all industries. Several factors are making this maturity wall particularly daunting:

1. Higher Interest Rates: The low-interest environment that many companies enjoyed when issuing debt has shifted, and refinancing at current rates could lead to substantially higher interest costs.
   
   
2. Tighter Credit Conditions: With banks and financial institutions implementing stricter lending standards, some companies may find it difficult to secure favorable refinancing terms.
   
   
3. Pressure on Cash Flow: Companies with low liquidity or high leverage may face added strain in generating sufficient cash to meet debt obligations, increasing the risk of default.

These conditions underscore the need for innovative financing solutions, and sale and leasebacks offer a compelling approach to address the debt maturity wall.

What is a Sale and Leaseback (SLB)?

A sale and leaseback is a financial transaction in which a company sells an asset it owns—often commercial real estate, such as manufacturing facilities, warehouses, retail assets, healthcare facilities, or other operational real estate properties —to a real estate investor, , and then immediately leases it back. This arrangement allows the company to retain operational control of the asset while unlocking the capital tied up on their balance sheet.

The lease terms are typically structured to provide long-term occupancy and operational stability, with the company agreeing to lease the asset back for a specified period, often with options to renew at the end of the initial lease term. In return, the real estate buyer gains a steady income stream from the lease payments and can also benefit from any property appreciation over time.

How Sale and Leasebacks Can Address the Commercial Real Estate Debt Maturity Wall

1. Unlocking Capital for Debt Repayment: The primary advantage of an SLB transaction is the immediate cash infusion it provides. Companies can use the proceeds from the sale to pay down upcoming debt maturities, reducing their overall debt burden without needing to raise new expensive debt or issue equity.
   
   
2. Avoiding High-Interest Refinancing: With interest rates still at elevated levels, refinancing existing debt can be costly. By pursuing an SLB, companies can sidestep traditional refinancing and gain liquidity without incurring new debt, thereby avoiding higher interest costs.
   
   
3. Preserving Operational Continuity: SLBs allow companies to retain the use of essential assets, such as manufacturing spaces or warehouses, ensuring that operations continue uninterrupted. This arrangement can be particularly beneficial for companies heavily reliant on specific assets to generate revenues for the business.
   
   
4. Strengthening the Balance Sheet: An SLB transaction can improve a company's balance sheet by reducing debt and increasing liquidity. This may enhance financial metrics, such as debt-to-equity ratios, potentially improving credit ratings and lowering the cost of future financing. The Ascension team has successfully helped private equity-owned companies and owner-operators achieve these benefits, enabling them to strategically reduce leverage and improve their financial profiles and balance sheets.
   
   
5. Enhancing Financial Flexibility: By reducing debt obligations, companies gain financial flexibility, allowing them to reinvest in growth initiatives or other strategic priorities. SLBs can provide a more manageable way to handle debt without constraining a company's resources or strategic objectives.

Conclusion

As companies prepare for the approaching commercial real estate debt maturity wall, sale and leasebacks are emerging as an ideal tool to manage these obligations. By unlocking capital tied up in real estate assets, companies can address upcoming debt maturities without incurring new, expensive financing, preserving operational continuity and enhancing balance sheet strength. The Ascension team’s success in helping both private equity-owned and owner-operator businesses utilize SLBs to de-lever and optimize their financial health underscores the power of this strategy in a challenging financial environment. With careful planning and strategic execution, sale and leasebacks can provide companies with the flexibility needed to navigate debt maturities and position themselves for long-term stability and growth. Reach out to the team for a complimentary assessment to see if a sale and leaseback may be the ideal solution for your company.