Finding Your Perfect Lender

10/25/2015

Have you been thinking that your bank might not be the perfect fit for you?

For example, have you turned to your bank for a loan only to find their lending capacity has hit its limit or they can’t fund that new-to-industry location or the acquisition of a local competitor? Do you like your bank representative, but he/she doesn’t seem to be able to get their bank to understand your business? Do you sometimes feel that you can’t get your bank’s attention?

If so, then this might be the time to right-size your perfect lender.

THE LENDING/FINANCING MARKET

The lending/financing market is quite diverse, with lenders offering a broad package of financing options or opting instead to specialize in just a few.

To help highlight many of the available options, we have provided a brief list (see Table 1) that covers a broad spectrum associated with the types of lending available and the sources of capital that focus on lending these types of instruments (see Table 2).

EVERYTHING IN BALANCE

There are many sources of capital in the marketplace, but there is one thing they all have in common besides money — risk. All of these lenders provide loans that are priced based on the risk of the borrower.

From the Fortune 500 publicly traded companies to the self-employed standalone gas station owner, each creditor has its own risk profile. Not only do capital providers price loans based on the credit profile of the borrower, but risk actually lines up quite nicely with the balance sheet of your company as demonstrated in Table 3.

As you can see in the table, as you move down the balance sheet both on the Assets side and the Liabilities and Equity side, the cost of capital typically increases. Rates and terms become more costly, restrictive and sometimes punitive. Lenders typically specialize in certain areas of the balance sheet and better understand how to price in the associated risks related to those areas.

Over the past few years, our firm has placed a significant amount of “Non-Traditional” financing, such as mezzanine, preferred equity, collateralized loan obligations and bridge financing, to finance a number of major oil company divestitures and to help our clients deal with the increasing purchase multiples for assets in our industry.

Although there are many types of lenders that specialize in certain areas of the balance sheet, the majority of the transactions in the convenience and gas station industry are still funded by senior lenders or banks.

MORE ABOUT BANKS

“Banks” is a very broad term because “banks” can be classed into several different types and typically fall into the following four categories: Community/Local, Regional, Super Regional and Bulge Bracket/Mega Center/“Wall Street” banks.

The characteristics of these four categories of “banks” include:

Community/Local Bank: Operates below the state level and is typically locally owned and operated. Focuses on the needs of small business and families. Aggregate assets of less than $1 billion. Approximately 90 percent of all banks.
Regional: Covers a couple of states or a large part of one state.
Super Regional: A mid-sized bank that has a significant presence in a geographical region across multiple states. Examples are U.S. Bancorp, Bank of New York Mellon, PNC, BB&T, Capital One, Comerica, Fifth Third, SunTrust and Wells Fargo.
Bulge Bracket/Mega Center/“Wall Street” Banks: Examples include Bank of America, Citibank, JP Morgan, Goldman Sachs, Morgan Stanley and UBS.

The banking industry has experienced significant changes over the past few years with the number of U.S. commercial banks declining from more than 8,000 in 2001 to less than 6,000 in 2013. There are approximately 6,320 banks in the United States and 1,065 savings banks and thrifts as of 2012, according to the Federal Deposit Insurance Corp. (FDIC).

As a result of this consolidation, the majority of the assets — $5.989 billion — are held by the four largest banks, while the 6,524 community banks hold only $1.944 billion in assets (see Table 4 and Table 5).

LENDING CHARACTERISTICS

How do you find your perfect lender from all of the information provided? Well, we need a few more items that detail ways in which the four bank categories may look at providing loans.

The following lending characteristics are applicable and many times overlap from one bank to another:

Interest Rates

Based on fixed rates, prime, LIBOR-based rates, spreads over LIBOR

Lending Limits

Community — Approximately $5 million lending limits; fixed rates, based on prime
Regional — Approximately $15 million sweet spot
Super Regional — Approximately $25 million-plus sweet spot
Bulge Bracket — As big as possible

Amortizations

Years, mortgage style, straight line

Lender Covenants

Leverage (senior debt to EBITDA); lease adjusted leverage
Real estate/asset values (LTV)
Available cash flow (FCCR-DSC); cash flow sweeps
Inventory
Hedging options (interest rate swaps, floor, ceiling, collar, etc.)
Club deals & syndication
Financial reporting requirements

As you can see, there are many ways in which a bank can price in the credit worthiness of a borrower, but each banking category seems to have their own personal perspective on how to best meet your financial needs. As a result, it is important to size your business/balance sheet up with the best bank/partner to meet your needs now and in the future.

A PERFECT MATCH

Generally speaking, the best lenders mirror the size of your business and its aspirations for growth. If you plan to operate just a few locations, then a community/local bank will most likely provide you with the most proceeds on a typical real estate-based loan. On the other hand, if your company is already large and still growing, the super regional to mega center banks are going to be your best match.

Based on the senior lending requests needed for your company, the outline below provides a generalization of what might be your perfect bank:

Total loans in aggregate under $15 million — Site-by-site lending based on real estate LTV with fixed rates; 20-year mortgage style amortizations; longer terms and low debt service coverage ratios. Partner with community/local banks.
Total loans in aggregate greater than $15 million — Senior debt-to-EBITDA multiples; secondary reliance on real estate LTV; 15- to 20-year mortgage style and straight line amortizations; five- to 10-year terms; debt service coverage ratios based on capital structure. Partner with regional/super regional banks.
Total loans in aggregate greater than $100 million (more in the billions) — Senior debt-to-EBITDA multiples; cash flow sweeps; straight line amortizations; alternative financing; ancillary income. Partner with bulge bracket/mega center/“Wall Street” banks.

In summary, if your bank is not matching your needs, it may just be because they aren’t the correct match for your business. All of our clients that started out with just a few stores and have grown to control many locations have had to change their banking categories and relationships along the way.

As you grow and/or change, your bank/lenders can become an asset to your business by bringing specialized knowledge gained from working with other clients within the same industry.

Finding the perfect lender will improve the chances of reaching your strategic objectives.