Problem:
A leading retailer finds itself in a financial bind. It doesn't have sufficient cash flow from operations to finance its growth, and it is close to violating the maximum debt-to-assets 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-to-assets 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?