Mining the Balance Sheet

That reliability is the reason Lone Star Technologies Inc. believes that an asset-based loan is the best way to go, in good times and bad. The company's major subsidiary, Lone Star Steel Co., which makes steel tubing for the oil industry, switched from a bank to CIT for a $100 million loan facility at the bottom of the oil cycle in March 1999. "Banks are a little more squeamish during the downturns," says Lone Star Technologies CFO Charles J. Keszler, pointing out that it's at the bottom of a cycle that cyclical companies have some of the best acquisition opportunities and need reliable financing. In early 2000, CIT came through when Lone Star wanted to make two acquisitions. Asset-based lenders "don't get scared," he says. "They understand the cycle, and they understand the assets."

These are the kinds of customers that will stay with asset-based lenders even in better economic times. Says Keszler: "I think there's a recognition from treasury management at many corporations of the legitimate role in a company's capitalization that asset-based lending plays."

Hilary Rosenberg is a contributing editor of CFO.

Cash Without Debt?

When considering real estate as a source of liquidity, a company can, of course, take out a loan backed by the property. Alternatively, it can do a sale-leaseback, and real estate professionals say that these transactions have also been on the rise. Dallas-based Staubach Co., for instance, expects to do nearly $1 billion worth of sales in sale-leaseback transactions in 2001, compared with about $800 million in 2000 and $500 million in 1999.

One key advantage of a sale-leaseback is that it does not burden a company's balance sheet with debt, and at this point in the business cycle, many companies have about as much debt as they can handle. "A company has more borrowing capacity if it has completed a sale-leaseback," says Brant Bryan, president of financial services at Staubach. "You've put cash on your balance sheet."

Historically, retailers have been the most common users of sale-leasebacks, but starting about a year ago, a growing number of other types of corporations have plied the technique as well. "Corporate treasurers are seeking asset-based financing methods that are accretive to earnings and [enlarge] credit capacity," says Bryan, noting that more of them are also viewing real estate as an unproductive asset. He cites a 1999 study conducted by the Wharton School's Zell/Lurie Real Estate Center that confirms the long-held suspicion that companies with greater real-estate assets than their peers produce lower shareholder returns.

But companies have also turned to sale-leasebacks as an alternative to the equity and debt markets, which have been unreliable sources of financing in the past year at the same time as real estate has maintained high values. What's more, Bryan says, companies have been attracted by new debt-financing structures that have helped lower the cost of doing sale-leasebacks.

In December, for instance, Staubach helped the oil-exploration company Phillips Petroleum Co. sell its Anchorage headquarters building for $104 million and lease it back for 20 years. With that transaction, plus others, the company could by year's end pay down debt taken on last summer to acquire Arco's 50 percent interest in Alaska's giant North Slope oil field. —H.R.

From Assets to Liabilities

Amount of asset-based loans outstanding (in $ millions)

Source: The Commercial Finance Association

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