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Sale-and-Leaseback Agreements and Enterprise Valuation
Author(s): E. Han Kim, Wilbur G. Lewellen and John J. McConnell
Source: The Journal of Financial and Quantitative Analysis, Vol. 13, No. 5 (Dec., 1978), pp.
871-883
Published by: Cambridge University Press on behalf of the University of Washington School of Business
Administration
Stable URL: http://www.jstor.org/stable/2330632 .
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JOURNAL OF FINANCIAL AND QUANTITATIVE ANALYSIS
December 1978
SALE-AND-LEASEBACK AGREEMENTS
AND ENTERPRISE VALUATION
Han Kim, Wilbur G. Lewellen,
E.
on leasing
The literature
ment with a selection
a variety
years,
and
that
and
([11]
in lessee
of investors
of the cash
asset
purchase
has been
to the latter
result
and attendant
tax
these
tual
are
Systematic
thereupon
in practice
These
again
institutional
is
assumed,
drive
necessarily
lessors?
the present
to parity
arrangements
with direct
with the lease-or-buy
matters,
Ohio State
on the other
University,
of corporate
and asset
the tax rates
that
identical.
the borrowing
by the lessee
The key
power?
firm, when
matched by the augmented borrowing
just
In a competitive
enterprise.
that
the asset's
the present
value
for expecting
material
transactions
gains
leasing
of the contrac?
purchase
(tax-adjusted)
and differential
power
firm in the form
through to the asset-user
imperfections,
the only basis
provide
as
firms are
relinquished
be passed
equal
long
of the fact
with the result
will
as
and lessor
for the lessor
payments,
obligations
[12])
a recognition
will
savings
lease
and
of lessee
is
created
simultaneously
of lower
to
activities
trading
even in the presence
to hold
savings?implicitly
obligations
market,
[16],
inevitably
among potential
competition
with lease
seen
([11]
possibilities
depreciation
lease
associated
[8],
firms indifferent
of securities-price-equilibrating
and income taxes
leverage
market will
capital
firms?will
[6],
the
over
prices.
conclusion
This
[3],
manage?
the terms of leasing
of value-maximizing
Simply put,
and lessor
flows
decision;
([1],
shown that
competitive
[12]).
with the mandates
together
advanced
have
however,
papers,
the stockholders
to render
decision
values
have been
of recommendations
in a transaction-costless
contracts
be such as
on providing
concentrated
generally
for the lease-versus-purchase
criterion
More recent
[18]).
has
and John J. McConnell*
price.
costs,
to be associated
choice.
hand,
Purdue
have been
University,
examined
and Purdue
thus far entirely
University,
in
respec?
tively.
and lessee
on the part of lessor
firms,
Including
unequal opportunities
of the cor?
in the carry-forward
and carry-back
due to deficiencies
provisions
of tax shields
[14].
porate tax law, to take advantage
871
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the context
of the acquisition
the decision
is
indeed
instead
the situation
and are
currently
levered
issue
whether
into
of those
existing
assets.
stances
certain
positive
shareholder
of any market imperfections
thy bondholder"
"beggar
contractual
the legal
another
firm at an agreed-upon
will
the assets
prearranged
alter
user
the underlying
real
the parties
to the agreement.
second-hand
market value
simply
be viewed
as
funds in exchange
independent
lies
in the
a form of
essentially
a variety
is
to the advance
subject
back
for continued
As such,
and production
of its
any residual
to
that
in return
the transaction
for a
not
does
of the asset-
situation
value
of
enterprise
stipulation
use,
future
of supple-
the transfer
from the user
cash
earn?
operating
of the leased
regard,
on terms,
package
for a contract
the lessor
that
an automatic
assets.
assets
be only partially
is
open to negotiation
promising
are
includes
priority
whereby the lessor
firm advances
a series
value
Thus,
in arriving
be characterized
of promised,
to the uncertain
involved,
therefore,
at
may
In
flows.
depend
exchanged.
extension
cash
on the collateral
capital
as
properly
of future
may well
of the lessee
claim
to the prevailing
agreement
to supply
a schedule
between
The sale-and-leaseback
arrangement
firm should
The credit
be sold
assets.
willingness
whose titles
of claims
ments plus
a financing
creditworthiness
assets
specific
will
It may or may not correspond
of those
the lessor's
on the general
leased
at
in such circum?
origin
of the arrangement
payments.
investment
at which the assets
The price
gain
choice
to the lessor.
acrues
that
firm has a
to be exploited,
may contain
or group of assets
of the lease,
Upon termination
are
Their
instrument
price,
of rental
been acquired
of the Arrangement
firm, nor the distribution
(now lessee)
ings.
effects
manipulation.
be leased
immediately
schedule
to consider
for a particular
agreement
be shown, there
represents
of an asset
ownership
is
and where the managerial
structure
the core
provisions,
here
where the asset-user
wealth
Nature
firm, wherein
have previously
arrangement
capital
I.
mental
in question
As will
the sale-and-leaseback
Although
Our intent
or tax considerations.
a sale-and-leaseback
that
by the lessee
a sale-and-leaseback
subset
fact
or buy.
in place,
already
to enter
assets
in production,
used
being
whether
to lease
where the assets
structure
capital
is
of additional
as much
of the
the final
bar?
as buying a
but uncertain,
lease
terminal
of the
value
pay?
may in many instances
"secured."
872
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II.
We shall
examine
ments in the standard
adjust
situation
debt and lease
decide
ting
gregate
market value
bution
of prospective
of a firm will
manner in which those
ants
total
cash
flows
are
divided
such default
and may then
In a market set?
and the ag?
[17],
apply
of the distri?
of the
regardless
operations,
among the various
two classes
a firm with just
of securities
command in the market a total
common stock?will
of claim-
categories
and
outstanding?bonds
of
value
V = B + S
(1)
where B is
bankruptcy
costs,
which happens
If,
then,
to a lessor
lease
back
those
proceeds
a price
V
is
intact,
should
of the like?
assessments
in the absence
of any dead-weight
of the particular
from their
unaffected.
their
of course,
which underlie
payments
to sell
decide
financial
a portion
A, under an arrangement
total
A become available
In return,
attributes.
2
same assets
posture
the sale
of lease
but,
be independent
the corporation
prospects
quence
V will
be investors'
of common shares.
structure
to have been adopted.
remain
flows
will
of bankruptcy
firm for the price
and production
holders.
prices
respective
and consequences
lihood
and S the value
of the debt,
the market value
in these
Imbedded
prior
Should
only on the character
from its
flows
a
in
assets?i.e.,
operations.
will
as
includ?
thereto.
Thus,
cash
its
defined
obligations,
position.
Principle
depend
is
of its
no
are
with either
of the enterprise
or to continue
it
the Value-Additivity
fixed
the value
ownership
prices
initially?there
Bankruptcy
equity
arrange?
wherein
associated
maturing
negative
assume
creditors
sort,
least
no costs
exceeds
commitments,
to liquidate
either
of this
are
of the firm's
have a nominal
the firm's
occur,
where?at
markets
of the firm or bankruptcy.
liquidation
in which the value
which stockholders
of sale-and-leaseback
securities
and where there
voluntary
ing its
of perfect
context
income taxes,
Effects
consequences
to new information,
immediately
corporate
Valuation
the valuation
V is
new owner,
a new category
introduced.
obligations
its
market worth will
for immediate
whereby it
the user
In consequence,
cash
asset
those
earnings
to be V, and
distribution
In the market,
to
investment
operating
(the
assets
agrees
firm's
continue
of claimant
and a terminal
of its
to securityto the
lessor)
claims?a
value?will
se?
command
of their risk
market appraisals
determined by prevailing
capital
2
the cash flows involved
Whatever that assessment,
represent
factors
include
The relevant
to the maturity of the lease,
firm bankruptcy
of asset-user
the possibility
in
assets
the marketability
of the leased
873
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a corresponding
firm's
from the original
diversion
and stockholders.
bondholders
the new aggregate
where S'
and B'
however,
Since,
the revised
denote
A, their
becomes
sale-and-leaseback
be harmed by the transaction,
it
S'
(3)
which,
from (2),
S'
or,
that
simply,
will
therefore,
+ B'
asset-sale
price
cash
of the firm which are
at
least
of the transaction,
offsets
of course,
more than V without subjecting
L
its decision
rule
Accordingly,
+ B'
its
will
the present
committed
for them not to
+ V
L
terms will
be driven
the lessee
firm's
to this
stockholders
point,
(market)
lessee
firm,
unless
the asso?
value
to the lessor.
the lessor
of the
On the oppo?
firm cannot
afford
to a reduction
securityholders
to pay
in wealth.
be that A ? V , and thereby only one execuL
In a competitive
simultaneously.
tion price,
A = V , can satisfy
both parties
L
market
of
capital
comprised
value-maximizing
and-leaseback
in order
A ? V . The management of a value-maximizing
L
not accede to a sale-and-leaseback
arrangement
flows
to the
pursuant
position
that
+ A ? V = V* + V_ = S'
L
future
side
wealth
the asset-sale
+ A ? S + B
ciated
site
receive
will
that
requires
(4)
+ B'
and debt valuations.
Obviously,
must occur
principle,
be
equity
total
+ B' + A).
of the lessee
+ B'
constituent
collective
(S'
will
and shareholders
bondholders
distribution
proceeds
claims
= V = S'
VT
L
V
(2)
flow prospects
by the value-additivity
Hence,
of their
market value
cash
enterprises,
and in equilibrium
and bondholders
will
sale-and-leaseback
the aggregate
be unchanged
wealth
of
by the sale-
agreement.
both the second-hand
asset
and secondary leasing
markets, and any distinctive
renewal options?which
are attached
including
supplementary provisions?perhaps
to the lease
contract.
A similar
conclusion
for new-asset
leases
is
documented
874
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in detail
in
[11].
III.
Within
that
to the stockholders
tirely
payment or through
outstanding
of
of the asset
from (2),
V, we have
S'
(5)
if V = A under the press
L
and,
stand
shareholders
Thus,
to the extent
of values.
In
distributed
en?
cash
of the corporation*s
previously-
wealth
position
will
stockholders
+ A) exceeds
(S'
dividend
benefit
S.
the original
that
+B'+V=S+B
L
of market competition,
+ A) - S = B - B'
(S'
(6)
by a "special"
Consequently,
if the quantity
V' + VL
are
end up with a revised
with B'.
from the sale-and-leaseback
Since,
to the lessor
of a portion
common shares?stockholders
+ A) and bondholders
(S'
sale
of the lessee?either
the repurchase
Effects
can be a reallocation
there
however,
aggregate,
if the proceeds
particular,
of the Valuation
Allocation
to gain
from the transaction
suffer
that?bondholders
.
whenever?and
precisely
in the market value
a diminution
of their
holdings.
As it
lessee-firm
the lessor
ginally
are
happens,
bankruptcy.
a priority
belonged
The reason
claim
of the bonds
flows
than B, due to market reaction
can only decline
a finite
long
is
that
the sale-and-leaseback
Because
and there
will
is
as
in which the cash
than before,
which those
involved
there
as
to a segment of the cash
to bondholders.
no circumstances
the transaction
ruptcy?in
the market value
of the sale-and-leaseback,
a result
of this
flows
will
be smaller.
to the altered
diverts
which ori-
of claims,
there
after
be some circumstances?notably
bondholder
to
can be greater
restructuring
Inevitably,
of
probability
flow prospects
to bondholders
as
then,
B' will
bank?
be less
position.
4
when the asset-sale
While equation
(6) is perhaps most easily
interpreted
in the form of a cash dividend
to stockholders
are disbursed
payment,
proceeds
In the latter
of share repurchase.
as well to the situation
it obviously
applies
can also be identified.
the per-share
Thus, if the
case,
price implications
at a market price P per
firir initially
has N common shares outstanding
lessee
A will be AN=A/P',
with the sale proceeds
share, the number which can be retired
as soon as the
where P' is the revised
per-share
price which will be attained
and repurchase
sale-and-leaseback
Hence, shareplans are announced by the firm.
as
holder wealth can be expressed
+ A = NP? .
S? + A = P'(N-AN)
into (6) and rearranging
yields
Substituting
pt - p = (B - B')/N
remain constant,
that the market price of the shares will increase,
indicating
firm's bonds
or decrease
depending upon whether the market price of the lessee
or increases.
remains constant,
decreases,
875
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This
phenomenon can be demonstrated
flow distributions
confronted
in a one-period
leaseback,
by bondholders
contract,
to bondholder
Prior
period
claims.
the lessor's
claims
are
in which,
rendered
by
senior
fully
the distribution
random variable
of end-of-
Y?is
if X ? Y*
if X < Y*
'7)
where X denotes
and Y* is
the
(random)
the stipulated
amount of bondholder
X < Y*.
here
lessor
be owed a prescribed
will
value
terminal
the events
before
of bondholder
tribution
distribution
and this
where max(Y*,L+R)
strictly
and the intent
nounced
Were that
returns
of
That is,
(7).
min(Y*,L+R)
if max(Y*,L+R)
X
if X < min(Y*,L+R)
subtract?
each
array.
element
perhaps
the case,
of
(9)
is
either
flow prospects
The associated
the asset-sale
by the lessee
payments
cash
B in the market as
to distribute
> X ? min(Y*,L+R)
of Y* and L+R, and min(Y*,L+R)
the larger
Since
below
to investors
lease
to that
inferior
if Y*+L+R > X ? max(Y*,L+R)
denotes
A milder?and
promised
dis?
if X > Y* + L + R
if Y* + L + R > X >, L + R
if X < L + R
of pre-sale-and-leaseback
be priced
sarily
claims
becomes
Y*-[X-(L+R)]
the post-transaction
nates
to the random
the revised
Accordingly,
the
however,
both these
seniority,
if X ? Y* + L + R
of the two quantities.
the array
(L+R)
claim
0
/
Y-Y'
(9)
is
Having
of bondholders.
returns
"Bankruptcy,"
sale-and-leaseback,
firm,
of course,
we find that
from (7),
(8)
Y*
X 0
J
Y'
(8)
cash
of the lessee
value
payment L and hold
assets.
those
cash
claims.
Following
lease
R of the leased
must be satisfied
total
end-of-period
encompasses
ing
the sale-and-
the situation
to sale-and-leaseback,
to bondholders?a
returns
first
the cash
by examining
and after
before
Consider
setting.
the terms of the lease
cash
most readily
claim
soon as
zero
the smaller
or positive,
for bondholders
B'
therefore
domi?
will
the sale-and-leaseback
proceeds
A to shareholders,
neces?
plan,
is
an-
firm.
more common?circumstance
to the lessor
had equal
the post-sale-and-leaseback
would be one in which the
standing
with bondholder
distribution
would be
if X ? Y* + L + R
Y*
(10)
if X < Y* + L + R
[Y*/(Y*+L)](x-R)
876
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of bondholder
claims.
cash
that
given
the leased-asset
owner o'f" the assets
be shared
their
gate
in any event,
by the lessor
value
R will
and all
other
and the bondholders
stated
respective
claims.
residual
from (7),
(10)
Subtracting
to the lessor
cash
end-of-period
in proportion
if the total
claims,
accrue
are
flows
as
flows
legal
will
to the magnitudes
less
than those
of
aggre?
we have
if X > Y*+L+R
if Y*+L+R > X ^ Y*
[Y*/(Y*+L)](Y*+L+R-X)
if X < Y*
{0 (LX+RY*)/(Y*+L)
which establishes
holders
are
R portion
assets
themselves
firm's
would
render
cash
to the
(now) pro-rata
but the asset
cash
terminal
flows.
payment commitments were completely
clear
of the leased
ownership
worse off than before.
bondholders
the post-sale-and-leaseback
context,
of all
the lessor's
claim,
still
lease
for bond?
prospects
pursuant
end-of-period
the contractual
to bondholder
subordinate
ones,
to the two claimants,
of the lessee
even if
Finally,
the post-sale-and-leaseback
by the preagreement
in bankruptcy,
allocation
value
that
again
dominated
flow distribution
In that
for bondholders
would be just
if X :> Y* + R
{Y*
is
which circumstance
also
inferior
the difference
ment, since
if X < Y* + R
X-R
before
to that prevailing
the lease
arrange?
in the two distributions
if X :> Y* + R
if Y* + R > X > Y*
Y*-(X-R)
if X < Y*
{0 R
as
consists,
in the two situations
values
possible
bondholders
preexisting
in their
diminution
firm bankruptcy.
and,
holders
That
therefore
claims
must be manifest
B - B',
loss,
holders,
As long
fixed
additional
as
as
should
whose objective
there
in the event
any possibility
the latter
of the lessor?the
in a reduction
wealth
may occur?
of their
for the lessee
and sale-and-leaseback
in to the fullest
shareholder
gain
of lessee-
of the
extent
of bond?
position
poorer
in the market price
(6),
involved,
to a
by the introduction
consequent
a corresponding
in equation
payments
opportunities
can only be increased
be engaged
is
of the lease
flow X.
by the sale-and-leaseback
be subjected
is
cash
end-of-period
standing
priority
will
generates
established
uncertain
flow recovery
cash
the likelihood
indeed,
firm's
of the relative
Regardless
then,
of the lessee
for all
elements
only of nonnegative
above,
possible
maximization.
877
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securities.
firm's
stock?
transactions
by a management
While
the analysis
case
to the multiperiod
available
is
parisons
emerge.
The lessor's
residual
on the part
elect
to buy out the lessor's
of recovering
obligations
their
would be based
losses
ket does
on their
to the assets
claims
the overall
incurred
of bondholders
position
to the lessor's
prior
The corporate
cern:
(1)
to be neutral
vide
of corporate
the role
(2)
cations;
income tax?which
asset
depreciation
in its
an additional
impact
source
developed
in sufficient
and
[14])
as
set
of fixed-charge
an unfavorable
ruptcy
An analogous
contained
in [2].
Two such
should
be the decision,
for the latter's
represents
a burden
influences
Accordingly,
are
are
unchanged.
also
the first
of these
benefits,
the second
here.
under a lease
other
lowers
tax-subsidy
price
literature
contract
borrowing
will
may pro?
has been
[12],
by a firm of a
unquestionably
opportunities,
the margin of protection
of the prerogatives
impli?
can be seen
([11],
The assumption
con?
gains.
it
simple?and
leasing
affect
of potential
While
share
that
which prevailed
far ignored?may
quite
might
and resurrect,
leverage
is
mar?
capital
schedules.
in the recent
interpretation
the going-concern
associated
on the firm's
it
presumably,
and its
only a synopsis
because
they chose?
bondholders
to that
to realize
de?
the firm in hopes
conclusions
we have thus
to leverage
obligations
effect
can occur,
inferior
of possibilities
detail
to require
outflow
on sale-and-leaseback
The argument with regard
firm in fact
of sale-and-leaseback.
remains
of the transaction.
the desirability
cash
and our valuation
presence,
market,
to pay the lessor
this
an "option"
a perfect
Even if this
in the absence
is
between
to reorganize
company.
bondholder
decision,
Since
of
seniority
could?if
Their
real-goods
be required
will
dimension
to operate
value.
advantageous
a bankrupt
thereby
the lessee
periods.
of com?
must inevitably
the original
of the relationship
it
a series
analysis
bondholders
and continue
of the firm?and
would not have been
Should
then-liquidation
find
circumstances
the bondholders
however,
claims
imply a perfect
than dismember,
rather
The one added
some point,
appraisal
not necessarily
in certain
undermine
in subsequent
of the firm, and its
value
at
need only be
issue,
assets?and
of the bondholders.
on its
fixed
R?will
throughout.
fault
at
pattern
of the leased
flows
in the manner of equations
periods
of the one-period
value
of cash
sale-and-leaseback,
of the relevant
ownership
framework, extension
The distribution
and after
before
distribution
possibility
in a single-period
straightforward.
the counterparts
to the asset
return
Considerations
Given the claim-priority
(13).
which are
cash
above
for each
identified
through
claim
Further
was east
to bondholders,
formally
(7)
IV.
878
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All use subject to JSTOR Terms and Conditions
when bank?
for other
of equity
have
creditors.
ownership
is
any lease
Thus,
commitments will
for the lessee,
doctrine
ceived
of the same set
cipient
of unchanged
the lessor
from accommodating
fits
will
its
quoted
tion?and
its
leaseback
taxable
bined
will
the basic
un?
Indeed,
from the transac?
tax
Debt capacity
[11].
effects
the
compensates
incurs.
of the sale-and-
character
the associated
they should
them to respond
will
are
for
symmetrical
total
cash
tax
flows
lease
savings,
to the commensurate
argument above
amortization
deductions
of lessor
for debt
tax benefits
capacity
tax
will
can again
be
also
firm
the
among lessors
they acquire.
impacts
without
lessee
do not recapture
and competition
com?
and lessee
would have prevailed
to securityholders
the
by the
claimable
originally
terms that
firm
then-Jboafc value,
A value-maximizing
values.
security
not accept
that
poten?
the lessee
match those
from the levels
may not be so
to a lessor,
at their
sold
are
charges
to augment the profit
and tax payments,
income,
depreciation
sold
assets'
If the assets
will
act
are
obtains?the
aggregate
depreciation
if anything
When assets
Because
worth of the lost
of asset
implications
reported
so will
the "transfer"
exactly
suffer
to the terms
not accede
thus be unchanged
management thereupon
induce
will
of the lessee
by the lessor
acquired
sale-and-leaseback.
unchanged,
bene?
(tax)
leverage
the latter
penalty
do not alter
earnings.
The total
lessee.
where it
the point
valuation
the lessor
relinquishes?but
deductions
to refrain
reach
of sale-and-leaseback.
against
the relevant
to accommodate
led
they are
that
market
capital
be encouraged
thereupon
the re-
from the same set
emanating
In a competitive
flows.
is
involved.
neutral,
conveniently
equivalent
enterprise
will
simply because
the tax
Although
that
to the lessor,
that firm to reduce
enabling
6
If
is strenuterms.
competition
among lessors
therefore,
the two parties
re?
intact
management will
bargain,
since
Consequently,
the securityholders
considerations,
by a precisely
offset
to the same degree
firm for the leverage
does,
tial
cash
will
the lessee.
the reduction
to all
in an environment
leverage
promises,
lenders
sale-and-leaseback
it
is
operating
loans
be transferred
then,
lessee
less
sacrifice
of fixed-charge
costs,
with higher
capacity
for the firm,
plan
which?according
attend
[13])?will
power for the lessor,
lessee-firm
of transaction
benefits
debt
tax-deductible.
this
hand,
of borrowing
enhancement
ous,
are
payments
On the other
and
[7],
in subsequent
and investment
production
of the valuation
([5],
where interest
free
an unchanged
given
a sacrifice
and thereby
imply a reduction
will
In short,
be applied;
and lessor
confront the same marginal corporate
Assuming that both lessee
for
are fully tax-deductible
The lease payments, of course,
income tax rate.
identical
to the lessor,
and taxable
the lessee
rendering their tax influences
as well.
879
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All use subject to JSTOR Terms and Conditions
transaction
equilibrium
terms should
There may, on the other
a purchase
the transaction?at
from book value?so
ferent
no mandate
that
Consequently,
It
discussion.
present
third-party
participant
conceivably
offer
so,
whenever
and lessor
lessee
Whatever
distinctly
secondary
identified
the "me-first"
Those
is
are
senior
by re8
source
an implicit
imperfectly-protected
to shareholders.
of such claims
option
to engage
to sell
(the
original
senior
all
promises
advantage
precisely
claimants,
standpoint,
of
to other
that
transactions
it
of)
out
and distributing
pre-
creditors,
oversight.
(the value
at least
[9]).
securityholders
provisions
of that
by selling
and
([5],
in sale-and-leaseback
off a portion
lessor),
From the latter's
via
of
class
inadequacy?of
arrangements
not contain
of sale-
or any insti?
a general
within
more accurately,
of owners?do
they are
benefits
upon taxes
creditors?i.e.,
existing
to those
fail
borrowing
for management to take
to a new claimant
prise
in corporate
the opportunity
may play,
valuation
sharesholder
in fact,
benefits,
weakening
an opening
at hand,
resents
situation.
that
a
may
two parties,
exploit
which in no way depend
made to a firm's
a subsequent
there
will
of the
at issue
of the no-tax
tax peculiarities
these
above,
covenants
the promises
case
to frequent
Commentary
to do with the adequacy?or,
phenomena having
clude
which are
of the IRS as
flows
to the other
managements
to the fundamental
rigidities.
whose claims
role
supplemental
and-leaseback
If
the presence
cash
properties
second-
they can.
V.
tutional
that
of gain
source
zero-sum
rules
and subject
seems beyond the needs
exploration
the
with the assets'
both complex
dif?
which is
as we have noted,
is,
The tax
in the depreciation-related
an additional
enlightened
are
to recognize
suffices
for them the inherently
laxmg
If
book value.
of
design
or accelerate
There
be aligned
price
however,
a detailed
involved
the size,
tax deductions.
with their
in such circumstances,
imposed
revision.
to increase
acquisition
much less
hand market value,
A, for the assets
price,
aggregate
the lessor
for the clever
be possibilities
either
as
of the available
ciming,
hand,
be unaffected.
In the
rep?
the enterfrom under the
the proceeds
in a transaction-costless
7
To the extent that the lessor
is better able to claim those deductions
tax-loss
taxable
income?due
carryagainst
perhaps to less than fully effective
for example?additional
net
over provisions
for lessee
firms in loss positions,
tax savings may arise
[14].
o
tax rates,
would constiand lessor
between lessee
Differences
obviously,
for tax-reducing
transactions
tute a ready basis
[11].
880
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All use subject to JSTOR Terms and Conditions
that
environment,
to sale-and-leaseback
lease
should
option
in this
regard,
payment commitments involved
over bondholder
priority
the leased
assets
Bondholder
to that
extent,
reap
The logical
which seeks
complementary
to maximize
to issue
attempt
bonds
to exploit
eventually
that
those
From the lender's
tive.
firm may in the future
element
of risk
holders
can be expected
loan
through a higher
they should
weak "me-first"
interest
be no better
in response,
and
is
deliberately
covenants,
protective
that
market,
capital
for bearing
a latent
hoping
not necessarily
affirma?
the debtor
adds
agreement
shareholders
to obtain
price
suffer
whether a management
a sale-and-leaseback
Accordingly,
rate
of
residual
must therefore
the possibility
In a competitive
bargain.
to their
a strategy,
The answer
to demand compensation
ex ante
(fair)
is
as
should,
perspective,
into
to the loan.
of the original
appropriate
enter
to be accorded
must fail
of course,
deficiencies.
ex ante
even though the
gain.
wealth
contain
The key
of the ownership
of claim
securities
question,
shareholder
be able
in bankruptcy
of their
a corresponding
that
to the lessor
seniority
prospects
the market price
the fact
may not by contract
conveys
cash-recovery
will
shareholders
claims,
whenever possible.
is
clearly,
the transfer
automatically
value.
be exercised
simply
an extra
bond?
prospective
that
risk,
as part
should
have
to pay an
sale-and-leaseback
on bonds with weak covenants,
option?
for example?and
off in the long run than with borrowings
that are
well
protected.
Such an "indifference"
indenture
features
these
the borrower
costs,
and those
will
companies
and some will
tracts
strong
of sale-and-leaseback
hibited
in that
as part
of the price
would be remiss
pensating
debt
are
costs
may well
is
undertakings.
At the time of
of indenture
the combination
addresses
Since
least.
vary across
firms,
in their
covenants
of the initial
question
when such arrangements
served
We conclude
by making full
to do so is
likely
for equity
the option.
At least
are
that
use
some
loan
con?
of the im?
not proshareholder
of leaseback
to have been
with bondholders,
bargain
up to obtain
by exercising
the ex post
instruments.
best
the option
not to follow
benefits,
some expense.
restraining
on shareholders
circumstance
In effect,
possibilities.
costless
Conclusions
hand,
by the terms of existing
interests
are
that
not.
VI.
pact
on the assumption
of transaction
value
on the other
Our analysis,
select
of sale-and-leaseback,
to include
choose
without
firm should
for which the present
rest
agreements
can be accomplished
neither
a bond issue,
does
and sale-and-leaseback
provisions
In practice,
however,
view,
imbedded
and management
securityholders
the com?
in a perfectly-competitive
881
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All use subject to JSTOR Terms and Conditions
market,
capital
Whatever
fits.
taxes
and bankruptcy
central
valuation
costs,
their
point
may actually
of departure
augment?those
of market imperfections,
effects
phenomenon identified
the proper
sale-and-leaseback
not diminish?and
then may be the influence
actions
menon as
will
here.
will
We therefore
for further,
richer
and trans?
be overlaid
necessarily
regard
bene?
on the
that pheno9
of the
treatments
transaction.
9
of the optimal timing of sale-andAmong which would be consideration
tech?
in a multiperiod
the backward optimization
leaseback
framework, utilizing
Solutions
to the analogous
problem of optimal
niques of dynamic programming.
bond refunding timing have been formulated by Elton and Gruber [4], Kraus [10],
and Pye [15].
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Journal
`