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SYNTHETIC LEASES

SBLF Cuts Commercial-Paper Deal

CFO (The Magazine for Senior Financial Executives) February 1998 -- Add Imation Corp. to the growing list of companies that have caught on to the emerging trend of synthetic real estate leases (see "Virtual Ownership," CFO, September, 1997). Imation, a high-tech firm with sales of $2.3 billion in 1996, and Sumitomo Bank Leasing and Finance Inc. (SBLF), in New York, however are adding a new twist: Their deal, funded through a Sumitomo Bank conduit, uses commercial paper to finance a $70 million lease of a new research facility at Imation's Oakdale, Minn., headquarters.

This was SBLF's first use of commercial paper for a synthetic lease, which provides a publicly traded company the benefits of both ownership and an operating lease. For tax purposes, Imation will own the building and take depreciation. However, the company will have an operating lease for book purposes, thereby freeing earnings from the burden of depreciation. According to SBLF vice president John Gallagher, commercial paper opens up synthetic leases to a huge, liquid source of capital at very competitive rates. "Anyone who is providing a commercial paper-based, synthetic lease is always going to beat the standard credit line," he says.

EYEING OF LEASES Who Should Tap the Market? CRAIG LUND OF LUND FINANCIAL SAYS SYNTHETIC LEASES ARE COMPLICATED, BUT, "ANY PUBLIC COMPANY WITH SALES OF $200 MILLION OR MORE IS AN IDEAL CANDIDATE."

Imation secured a rate 16 basis points below its usual cost of borrowing, according to Gallagher. Just as important, says Roger Maulik, Imation's manager for cash operations. "this [lease] freed up the full original line of credit to invest in R&D activities. We didn't have to divert $70 million for bricks and mortar."

A synthetic lease with commercial paper involves substantial legal work. Firms that are facile with this type of deal command a premium. Gallagher estimates that a commercial-paper lease doesn't become cost-effective until it totals more than $50 million. "The bigger the deal, the better, because you can spread the cost over a larger amount of money," he says.

"It's a complicated deal, but any public company with sales of $200 million or more is an ideal candidate," says Craig Lund, president of Lund Financial Corp., in San Jose, Calif., which has arranged for more than $1 billion in synthetic leases over the past four years. "I don't understand why everybody isn't doing it."

--Thomas Slear

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