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US corporates have spent the last decade lightening their balance sheets and only recently have their European counterparts followed suit. Telecom operators, retailers and banks are leading the charge towards leasing, rather than owning property.
Deutsche Telekom recently announced a $19 billion property disposal programme. Enel, the Italian utility, is in the process of a $2.8 billion sale. And IBM has been quietly placing its European headquarter buildings off balance sheet.
But Ian Livingstone, managing director of London & Regional Properties, says that, "corporates do not want plain vanilla 25-year saleleasebacks any more".
While many of the deals will be straightforward sale-leasebacks with property investors, a good portion of corporates will be looking for more innovative financing solutions.
Two deals within the last few months demonstrate the range of options currently available. In December Shell closed a 300 million ($480 million) lease-leaseback of service stations CSFB was the arranged with Shell Capital acting as lessee adviser.
More recently in March the UK retailer j Sainsbury closed a 335 million sale-leaseback of supermarkets, funded by a lease receivables securitization. Morgan Stanley Dean Witter and Assettrust co-arranged the deal, with Parkes & Co, the merchant bank, acting as lessee adviser.
In the Shell transaction, the balance sheet was a main driver - the service stations are off balance sheet according to US GAAP, UK and Dutch accounting regulations.
Shell Capital examines business areas within Shell making a return on capital employed lower than 14 %, working out how to improve the return. The 18-year lease-leaseback was ideal.
One of the main features of the deal was complete flexibility -- Shell can substitute assets or even remove assets completely from the portfolio. At the end of the term, it is feasible that Shell will not be a lessee at all in the deal.
On the surface the Shell deal appears similar to the Sainsbury's securitization, which was a sale-leaseback structured to give the lessee some flexibility over the supermarkets in the portfolio. An innovative structure avoids the tax that is normally payable on the principal repayment. This makes the deal over 2 % cheaper than a typical property saleleaseback.
Richard Chadwick, director of corporate finance at Sainsbury, explains the main aspects to the deal. "We obtained a...