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Legal Resources

Covenant Tip
26 June 2019 9:39 am Sabrina Fox

SALE AND LEASEBACKS, DEBT INCURRENCE, ASSET SALES

Did you know that Sale and Leaseback covenants used to be fairly common? In general, it required that sale and leaseback transactions complied with the Asset Sale and Debt covenants. Now Sale and Leasebacks are often carved out from both covenants altogether.

Sale and leasebacks are analogous to providing a secured claim over assets, as funds are received in return for title to the property, periodic payments are made for the right to use the assets, and typically the assets may be repurchased. Upon sale, investors’ claim to the assets is released.

Carving out sale and leasebacks from the Asset Sale definition essentially provides issuers with carte blanche to asset finance its business, and investors should be wary of giving any asset-heavy issuer (i.e., real estate, TMT) this flexibility. In Europe’s precedent heavy market, it is wise to check.

To find it, look for a carveout in the Asset Sale definition for sale and leasebacks. Sometimes the carveout requires proceeds received to be applied per the Asset Sale covenant waterfall, or for the value of transaction to be capped. In the Debt covenant, check the Permitted Debt baskets for a sale and leasebacks transactions basket.

Bonus points: Check that the Fixed Charges definition includes the rental payments relating to the sale and leasebacks transaction.

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