A leading retailer finds itself in a financial bind. It doesnt have sufficient cash flow from operations

Question:

A leading retailer finds itself in a financial bind. It doesn’t have sufficient cash flow from operations to finance its growth, and is close to violating the maximum debt-toassets ratio allowed by its covenants. The Vice-President for Marketing suggests:

“We can raise cash for our growth by selling the existing stores and leasing them back. This source of financing is cheap, since it avoids violating either the debt-toassets or interest coverage ratios in our covenants.” Do you agree with his analysis?

Why or why not? As the firm’s banker, how would you view this arrangement?

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