Do corporate sale and leaseback transactions expand debt capacity - Evidence from Europe

OBJECTIVES OF THE STUDY The purpose of this study is to observe whether the companies conducting real estate sale and leaseback transactions in Europe show complementary or substitutionary relation between debt and leases. In other words, I am observing whether the companies increase or decrease their total debt following the transaction. Furthermore, I am aiming to find factors explaining the companies' relation between debt and leases. DATA AND METHODOLOGY My sample consists of 312 observations of real estate sale and leaseback transactions comprising in total of 180 listed and non-listed European companies representing in total 12 different European countries. The data contains observations from the period of 1999-2014. After the real estate sale and leaseback transactions were collected, the financial statement information for the respective companies was gathered for the period of 1998-2014 by using Thomson One banker database, Orbis database and Financial Statements available on the companies' website. The sample is divided into two subgroups based on the change in total debt after the sale and leaseback transaction. In my analysis, I use basic OLS regression to estimate the changes in debt and explaining the effects with control variables. The regression is first run to the whole sample and after that separately to the complement and substitute subgroups. FINDINGS OF THE STUDY The findings of the study indicate that 52% of the companies show substitutionary relation between debt and leases. On the other hand, the regression analysis suggests that the companies have complementary relation as their total debt liabilities increase by €0.57 against one euro increase in leases. Also, the companies tend to increase their long-term debt obligations after the sale and leaseback arrangements. The results indicate that the sale and leaseback transactions expand debt capacity for European companies. Substitute subgroup displays positive relation between capex and sale and leaseback transactions which indicates that the subgroup uses proceeds from the transaction to their future investments