Sale and Leaseback

Manufacturing is a key industry for development in China, enjoying an investment increase by the state year by year. Located in an industrial and economic development zone of a city, the lessee is closely connected with the supporting enterprises in the surrounding thanks to the favorable geographical location. The lessee urgently needs working capital to purchase land and build new workshops for the expansion of production, but it does not fit in the criteria for financing from a bank. In this consideration, the lessee turns to the leasing company, seeking for a sale and leaseback of RMB 10 million. Such a transaction can greatly alleviate the working capital pressure, improve the internal financial structure of lessee, and enable it to expand production and accelerate development.

I. Enterprise overview: Established in 1986, A Machinery Factory is located in the industrial and economic development zone of a city, with an existing paid-in capital of RMB 16.7 million and a footprint of 12,000 m2 (including more than 6,000 m2 owned by itself). It has 60 intermediate and senior managers and professional technicians, over 80 intermediate and senior technical workers, and 30 junior technical workers. Its main business is processing materials supplied by customers. In recent years, it has been processing key products including bearing seats of various specifications and models, upper hammers, cross shafts, supports, rolling mill bases, fan shafts, working rolls, guide beam components of rolling mills, front of steam turbine cylinders, boxes, and experimental devices of wind tunnels. Its major customers are all large state-owned enterprises, including a gear company in Chongqing (accounting for 65% of business revenue), a steam turbine plant (accounting for 20% of business revenue), a state-owned key enterprise (accounting for 10% of business revenue), and other sporadic businesses (5%). It owns a number of equipment with a value totaling nearly RMB 20 million, including large-scale CNC horizontal boring and milling machines, vertical and horizontal digital display boring machines and vertical lathes, gantry milling machines, and horizontal lathes, and has fairly strong processing capacity.

II. Enterprise advantages: Thanks to the country's vigorous support for manufacturing in recent years and the increasing investment in infrastructure and large-scale equipment in the manufacturing industry, customers’ business scales are constantly increasing. As the supplier of these three leading enterprises, A Machinery Factory receives increasing and stable orders from existing customers. During the past years, it has established good partnership with these enterprises and enjoys a good reputation, has been awarded "Qualified Supplier" and "Valued Supplier”, which in turn assures a relatively stable demand and powerful competitiveness in the market.

III. Issues in financing: With a short-term loan of RMB 7.4 million, the lessee’s overall debt ratio is not high. The bank cannot provide the loan amount required by the lessee because no land or property can be used as a pledge. However, the lessee has a possession of general-purpose equipment such as lathes and milling machines, which can be easily turned into cash. The leasing company can directly take such equipment as a pledge and provide a loan similar to the bank does. Compared to the bank, the leasing company offers a higher rebate for the equipment, and provides more working capital to the lessee, with no need for additional counter-guarantee measures, greatly solving the issue of no pledge can be provided by the lessee. Therefore, the lessee starts to cooperate with the leasing company.

IV. Design of the lease plan: Equipment amount: RM 16.94 million; security deposit: RMB 1 million; leaseback amount: RMB 10 million; term: 3 years; repayment method: equal principal, quarterly payment of rent; total rent for three years is RMB 11.77 million, service fee is RMB 620,000; source for repayment: main business income of the lessee.

V. Guarantee method: Pledge or registration transfer of the lessee's equipment valuing RMB 16.94 million. Representative of the legal person provides a personal unlimited joint liability guarantee.

VI. Conclusion: The lessee needed a huge amount of working capital to purchase land and build a new factory for production expansion, but could not provide land for mortgage to finance from a bank. However, it had general-purpose equipment, which could be easily turned into cash and considered the most suitable subject for finance lease with minor risks to the leasing company. For this reason, the leasing company provided sale and leaseback of RMB 10 million to rapidly supplement the working capital required by the lessee. After getting money from financing, the lessee purchased land to build a new factory for production expansion. It accelerated the development of the enterprise, greatly speeded up the pace for expansion and strength, and truly solved the difficulties of corporate financing.

Direct Lease

The finance lease business model for tourism facilities (especially large-scale amusement facilities) is quite established overseas. The problems of insufficient funds are often solved by finance lease to purchase facilities and equipment for playgrounds and scenic spots. In China, especially in some under-developed regions, however, finance lease is just started for purchasing amusement facilities.As an international tourist city, a large city in western China has witnessed large playgrounds over the past years. Company B has got insight into this hot spot and combined real estate with the tourism industry. It has developed real estate, and invested in phases a series of theme amusement parks next to the real estate projects. Unexpectedly, the amusement park invested for the purpose of real estate enhancement has brought more returns to investors. After the successful program, Company B has developed more theme parks later.

In the early stage of constructing an amusement park, as a local real estate developer in the city, Company B's concept of financing was still limited to the framework of applying for project loans from banks. However, the amusement park was constructed in the leased land, which could not be registered for mortgage. Bank loans for the project had been frustrated repeatedly. The investors had to spend a large amount of funds originally planned for real estate to start the project.

During the construction of the amusement park in phase 2, the entire real estate market had entered a trough, and the capital chain of real estate companies had generally tightened due to the influence of national regulation and control policies. If Company B still adopted the investment model for phase 1, the funds would be obviously unable to meet the needs for the amusement park in phase 2. Considering the large proportion of facility and equipment investment in the entire project, most fund gaps would be resolved if sufficient funds were available for facilities and equipment. With this idea in mind, Company B consulted many financial institutions, and finally decided to adopt a popular model in foreign countries – purchasing amusement facilities through finance lease.

After investigation, Company B chose a leasing company to settle the financing amount. Based on the good operation of Company B’s amusement park in phase I in recent years, the leasing company calculated the cash flow to be generated in the next three years after investing new facilities for phase 2. The overall assessment showed that the future cash flow was sufficient, and the amusement park was a typical quality project for finance lease.

The leasing company proposed the following financing plan: Company B chooses amusement facilities manufacturers at its discretion, and purchases facilities and equipment with a total amount of RMB 47.59 million. Company B pays 30% of the down payment to the manufacturers, and the remaining 70% will be provided by the leasing company. During the lease period, ownership of the equipment belongs to the leasing company. The leasing company leases the amusement equipment to Company B. Company B pays rent to the leasing company. When the three-year term elapses, the ownership of the equipment will be transferred from the leasing company to Company B. In this way, Company B obtained sufficient fund and started the project smoothly. It had also obtained the ownership of the equipment.

After the financing fund was in place, the Phase 2 amusement park invested by Company B was quickly constructed, installed, and operated. After being opened, the park attracted great attention from the public and appreciation from tourists in the city and surrounding areas, earning a lot of profits for Company B. At the same time, Company B's real estate projects also progressed smoothly. In May, nationwide real estate market developed in rise. With the support of the tourism industry, Company B's real estate projects were highly acknowledged by buyers thanks to the quality and distinctive features. With the timely supporting fund from finance lease, Company B had seized the opportunities in the tourism and real estate markets and achieved great performance.