Carrying out mergers, acquisitions and capital raises reached a new degree of difficulty last month following one of the largest bank failures in U.S. history.
Even before state regulators closed Silicon Valley Bank on March 10 and Signature Bank on March 12, businesses faced an increasingly steep slope to obtain debt financing. Borrowing costs had been climbing for more than a year, due largely to the Federal Reserve’s systematic increases in base interest rates to slow the economy and fight inflation.
Interest rates told only part of the story, however. Underwriters, concerned that tightening by the Fed and other central banks would push economies into recession, had been tightening parameters on borrowers to mitigate perceived risks. Conservative debt coverage ratios increasingly limited the amount of debt financing a borrower could hope to receive. Balance sheets drew added scrutiny.
The banking industry has grown even more jittery in the weeks since the Federal Deposit Insurance Corp. began calling the shots for the second- and third-largest banks ever placed in its receivership. This is not the most appealing time to seek a bank loan.
Sale Leasebacks Offer Alternative
Many businesses that own real estate have the ability to access capital through a sale leaseback transaction, often at a lower cost than the debt markets can offer. Perhaps more importantly for some businesses, the seller in a sale leaseback typically leaves the table free of personal recourse, such as the personal guarantees that lenders frequently demand on loans.
Of course, like lenders, the investors that specialize in sale leaseback acquisitions are aware and concerned about macroeconomic conditions, such as elevated recession risk. In underwriting a sale leaseback, investors will scour the prospective tenant’s balance sheet, gage its solvency, assess the local market and other factors.
Prospective buyers must satisfy themselves that the business committing to the lease in a sale leaseback will meet its obligations as a tenant. That commitment may or may not extend to the seller, however.
Unlike a bank loan, where personal recourse requirements are common, a sale leaseback is unlikely to involve a personal guaranty from the seller. In fact, many owners use sale leasebacks as an exit strategy by selling both the property and the business, or perhaps turning over the company’s helm to a successor.
For sellers with a robust balance sheet, a good strategy and a healthy outlook, buyer demand remains strong in the sale leaseback market. Business owners who use the strategy will likely find the process easier and more advantageous than attempting to obtain a similar volume of debt financing.
Don’t let the banking sector’s jitters derail the pursuit of your business goals. If you own commercial property, contact me to discuss how we can turn that real estate into your ticket to affordable capital at reasonable and attractive terms.