The economic crisis is still too fresh and the various bailout solutions (which seem to change by the hour) are still untested, so it is difficult to provide a firm perspective on exactly what is going to happen with the frozen lending markets. However, while long term projections are suspect, we can take a look at the state of the lending market today for industry marketers and retailers and what types of companies are the most favorable in the current environment.
As it stands now, if you have a good relationship with your local or regional lender, you are likely going to find it a bit harder to get as much money as you want on the terms that you've enjoyed in the past. But access to capital should still be there for a range of purposes from acquisitions to equipment upgrades. For companies that are in between lending/banking relationships it's critical for them to start establishing those relationships immediately, and it's helpful to establish relationships with more than one lender.
“Any existing relationships that people have our golden today,” said Thomas Kelso, managing director and principal of Matrix Capital Market Group Inc., located in Richmond, Va. Matrix is a financial advisory firm that conducts considerable business in the petroleum c-store space. The company does not lend directly, but helps raise the capital from a variety of sources. “A lender, assuming that they are still lending, is far more apt to deal with an existing client and keep that existing relationship going than they are to extend that same type of relationship to a new barrower. The biggest challenge people have today is that if they don't have a strong, existing relationship, then they really need to scramble in order to find some type of replacement relationship.”
Attaining a loan
Attaining a loan is far from impossible. Most marketers and retailers rely on regional banks that were insulated from the current mortgage lending crisis and do not own or own very few of the risky mortgage securities behind the national crisis. Kelso noted that they are still making loans, and that they are making nice loans.
In fact, in general, industry companies should have some advantages over those in other industries in the current crisis. The mortgage-backed security crisis occurring nationally is something that the industry went through in an eerily similar set of circumstances back in 2001 and 2002 with securitizers like FMAC, EMAC and FFC. They originated loans, some on shaky circumstances, and converted them into mortgage-backed securities. When that bubble burst in a string of defaults, capital to the petroleum industry almost completely dried up. As a result, the industry has relied upon much more solid lending relationships since the rebound in 2003 and 2004.
“The number of defaults and companies that are forced to go to bankruptcy that you find elsewhere are not happening in the petroleum marketing industry like we saw five years ago,” said Kelso. “It's a strange dichotomy right now. In the last four months (with the drop in fuel prices) the industry has enjoyed solid margins and petroleum marketing firms as a whole are reasonably healthy and the industry as a whole is reasonably healthy at a time when the economy is going in the other direction and lenders are pulling back. I'm not positive of this happening, but I certainly think that lenders may have a more favorable view of lending to petroleum marketers in our current environment versus other industries because companies in the industry are performing rather well right now.”
Where qualifying for specific loans is concerned, stronger companies with stronger balance sheet will do better in attracting capital than weaker companies with weaker balance sheets. Established relationships will make attaining these loans even easier. For marketers and retailers in between such relationships, companies with longer track records of performance in both good markets and bad markets will carry a lot of weight with lenders.
“They're going to want to see how long they've been in business, how successful they been, how they've weathered challenging times in the past,” said Kelso. “Companies without a lot of history had better have a lot of equity on their balance sheets.”
However, opportunities still exist even for much smaller operations without a pristine record.
“As a lending institution we'll entertain scenarios where a borrower has FICO as low as 500, but there are many other institutions out there who are not willing to find affordable financing for that type of borrower,” said Daniel Murphy, vice president of Ocean Capital, based in Warwick, R.I., a direct lender that specializes in petroleum finance and works with small business owners nationally. “But we know there has to be a reason behind (that low score). Let's see what the character is of the barrower and the experience. What loan to value do they have, and where did the estimated market value come from? We have some flexibility and we want to find out what the story is. We are looking for responsible borrowers who cannot only afford our financing, but we want to make sure there is a tangible benefit to us providing financing for them.”
Terms of the loan
Companies may be able to get loans in the near future, but the terms have certainly changed.
“We're looking at interest rates that are significantly higher than they were one year ago or even six or eight months ago,” Kelso said. “Whether you're talking a LIBOR-based or prime rate based type of a quote, you're probably still looking at something 250 to 400 basis points over the benchmark. Where advanced rates are concerned – how much will they give you based upon the value of the collateral – a year ago we might've seen advanced rates north of 80 percent and in some cases 90 percent of appraised value. Today we're seeing those numbers camping out at a high of about probably 70 percent and in some cases as low as 50 or 55 percent.”
Murphy reinforces those parameters. “Companies with a higher loan to value ratio than, say, 75 percent will have a tough time today. In the past, even in the past 12 months, you might have seen a ratio as high as 85 percent or even 90 percent approved.”
Another factor that has changed is the type of covenants – primarily fixed charge coverage ratios – the lenders are quoting. “We're not seeing them become impossible to achieve,” Kelso said. “But while we were seeing FCCRs a year ago of 1.25 to 1.4 times cash flow, today we’re seeing them at 1.5 to 1.8. So again, that means that somebody has to be capitalized and less leveraged in order to meet those types of coverage ratios.”
Another consideration for borrowers is to make sure, more than ever, that they have a wealth of reliable information and credible sources to provide lenders. These details will be highly scrutinized and any attempt to massage the numbers will more likely be detected in today’s environment. Similarly, borrowers should not wait until the last minute to work on attaining a needed loan, such as to meet the looming PCI requirements.
"Try to give your bank a call in advance,” said Murphy. “Don't call up at the last minute and say, ‘Hey, I need $150,000, and I need it for this or that reason, and I have to have it in three weeks.’ We want to help our borrowers with issues like regulation mandated equipment upgrades, but don't put us in a position where we have to potentially act irresponsibly. You've known about this likely for quite some time, so why wait until now? What took you so long? Have you been denied by every other lender already?”