It has been more than two years since the U.S. economy took a turn for the worst and credit markets worldwide almost came to a dead standstill. Although the Troubled Asset Relief Program, one of the names given to the Wall Street bailout, remains to ultimately prove its effectiveness, the lending environment is no longer frozen like it was in October of 2008.
Time keeps marching on, though, and businesses, especially ones in the petroleum retailing realm, always need more money put in them, whether it be for equipment repairs and upgrades or investments in new revenue streams. The need to have access to credit is important, and that has been recently recognized by legislators. In September, President Obama signed the Small Business Lending Fund Act, which is designed to incentivize more small business lending by community banks. It also provides $12 billion in tax breaks for small businesses.
While there is more being done for the federal government to encourage lending, petroleum retailers seem to have fared a bit better than those in other industries.
“The convenience and gas industry, while not recession-proof, is primarily recession-resistant,” said Corey Henriksen, managing director of Acquisition and Refinance Capital, Inc. in San Clemente, Calif. “There are lenders in each lender class that have strong balance sheets and a tremendous amount of money to lend; and they are increasing their market share by cherry-picking clients from poorly capitalized competitor lenders.”
“The current lending market for larger/healthier companies is good,” said Thomas Kelso, managing director and principal of Matrix Capital Market Group, Inc., located in Richmond, Va. “By larger I am thinking (larger than) 50 million gallons annually of motor fuels and/or 20 stores or larger.”
Chris Santy, president of Patriot Capital Corporation based in Atlanta, Ga., also agreed that the lending environment is on the right track. Patriot offers equipment financing to the retail and commercial petroleum industry.
“December 2008/January 2009 the capital market became very difficult for us,” he said. “But since March 2010, reasonable and good deals are getting done again.” Quality transactions are happening, with the emphasis on quality.
“(The lending market) is way more conservative now compared to the heyday of ‘06/’07,” Santy said. Much like the retraction of loose consumer lending standards that led the country into the housing bubble, practices have tightened for petroleum marketers and retailers as well.
“The biggest challenge is that while credit is available, the advance rates are lower than they were three years ago,” said Kelso. “By that I mean that lenders will typically only finance 60-70 percent of the lower of No. 1 acquisition price or No. 2 the appraised value. This requires marketers to have stronger balance sheets with lower levels of leverage. For companies without strong balance sheets or equity in existing assets the lending market is more challenging.”
Patriot offers 100 percent financing because they deal in smaller transactions with good and reasonable companies.
“In order to qualify for credit, you need to have cash flow, good net worth, be reasonably leveraged and have clear financial reporting,” Santy said. Many privately held, smaller mom-and-pop businesses have traditionally reported their financials to limit their tax liability, but he said the days of declaring your operation as “a cash business” and not being able to show statements and tax returns are over. However, for those with the financial reports to prove their business’ worth, now is as good a time as any to expand.
“Interest rates are great,” said Santy. “Lowest in a decade.”
Because Patriot offers 100 percent financing at a fixed rate and customers can use their equipment as collateral, some jobbers have taken advantage of this opportunity to grow their business. Santy offered this example: a two-site operator might need some kind of equipment, like a new POS system to be PCI compliant or new gas pumps, but can’t finance it. In some instances, the dealer’s old method for financing upgrades, such as using a home equity loan, is gone. A jobber with good financials can offer this operator the equipment he/she needs in exchange for either an extension or a new supplier contract. This marketer can then borrow from Patriot using the equipment as collateral and can retain equity in his/her property.
Mergers and Acquisitions
Matrix provides transactional advisory services to companies in the downstream energy and multi-site retail sectors, such as convenience store chains’ and petroleum marketers’ performing sophisticated merger and acquisition (M&A) transactions.
“We are seeing a very strong M & A market with a number of companies looking to grow,” said Kelso. “The levels of competition for we see for the assets being sold by Exxon as well as the various sales we are conducting (we are selling seven companies and/or groups of assets this year) are very strong and competitive.”
This consolidation is nothing new, he said, but there are three distinct groups they are seeing do this.
“No. 1 consolidators (long term players); No. 2 companies where the shareholders are looking for liquidity and plan to exit; and No. 3 the shrinking middle, which are companies where shareholders do not want to take the risks to grow but are not yet ready to exit,” Kelso said.
As far as petroleum retailers’ and marketers’ access to credit, “Loans are definitely available,” Kelso said.
“Quality companies have great rates that they can borrow at,” Santy said. “And this is at a time when lenders are looking to put quality companies on the books.”
“The biggest problem we have in obtaining financing for the petroleum industry is not lack of access to capital, but rather that lenders do not understand the downstream petroleum business,” said Henriksen. “When they do not understand, they will not lend."
Henriksen represents petroleum industry borrowers in increasing working capital and accounts receivable/ inventory lines of credit; as well as working out loans that were either securitized in pools or held in portfolio, and then obtaining acquisition, construction, and refinance funding. He strongly encourages retailers and markets to educate each specific lender about the unique aspects of the borrower's downstream petroleum business.
“First, determine the borrower's requirements; then, research and understand each specific lender's requirements,” he said and explained that lenders have different costs of funds and different parameters for their ratios, among other varying things.
“Then, choose the specific lenders to approach. Give each lender specifically what they want in an easily manageable form. Do not give them a stack of disorganized papers and expect them to take the time and effort to figure it out,” he advised. “Give them a presentation of the business that stands out as quality in the stack of loan requests on their desk.”
Henriksen explained that businesses must provide accurate books and records “that show you know your business and where it stands.” Also, marketers and retailers must understand the issues and ratios important to each lender. “Work through them before it gets to their desk,” he said. “Do the sensitivity analyses. Blemishes are not a problem; as long as you point them out and explain how you will remedy them.”
Flexibility is also important for borrowers to have, Henriksen added. Patriot’s Santy echoed this point while addressing other changes to the lending process, particularly, the smaller amounts of credit available.
“Smaller companies have to be reasonable in their expectations,” he said. Additionally, riskier companies who do not have their financials in order might have to settle for more expensive credit. But for the most part, the lending environment seems to be headed in the right direction.
“Loans are out there, deals are getting done, and rates are great,” Santy said.