Till Debt Do Us Part

Lenders run hot and cold in prolonged recovery, forcing retailers to extremes.

Angel Abcede, Senior Editor/Tobacco, CSP

Article Preview: 

A 10-year relationship between “Harry” and a particular lender— a large national bank that, like Harry, shall remain anonymous— recently soured over a difference of opinion that could ultimately cost him a cherished store.  When a loan on one of Harry’s gas stations recently came due for renewal, the bank demanded a property reappraisal, whose results implied the site had lost half its worth. In Harry’s eyes, despite a hiccup in volume caused by a temporary highway closing, the property has only increased in value.

“This is not a raw piece of land,” says Harry, the owner of a small chain with fewer than 10 stores in the Midwest, who spoke on condition that his real name not be used. “I bought it for $1.2 million and, with the improvements I’ve done, have invested a total of $1.6 million in it. I have debt of $900,000, and with the reappraisal they’re saying the site is worth $625,000 based on gallon sales. They want more equity [from me].”

The financial rabbit hole where Harry finds himself is more common than not. In this investigative study, CSP has examined the c-store industry’s health amid the nation’s prolonged economic recessions and snail’s-pace recovery. The report has uncovered a range of retailer fates—everything from foreclosure to expansion, litigation to takeover bids—with the common thread being the banking crisis’ effect on current lending relationships.

Among Harry’s options: Put up more of his own money to qualify for a renegotiated loan or part ways with a site in which he still sees tremendous potential.

“The banks are looking for new ways to make money,” he says. “They have written off a lot of these debts in the past and are now trying to call in these loans as cash money. … We’re good operators. If they think they can do better, be my guest.”

Whereas stories such as Harry’s suggest peril, the banks’ rekindled desire to make money has also meant signs of a revived lending climate but with a notable caveat to borrowers: The rules and expectations have changed.


  • Borrowers today are working harder to qualify for loans. Those who do, in many cases, must put up 10% to 15% more of their own equity than just a few years ago.
  • Overleveraged retailers may hold a false sense of security; banks struggling to shore up their own assets have shown restraint in putting the screws to troubled borrowers. But as the economy mends and banks rediscover their health, instead of good news for borrowers, scrutiny and foreclosures are expected to accelerate.
  • Private investors with deep pockets have shaken up the lending business, having acquired a taste for the industry’s strengths: resiliency, “good dirt” and solid cash flow—all traits that transcend the nation’s economic shifts.
  • Inertia has bred anxiousness. After two years of stagnation, retailers and banks once again seem eager to grow, creating new levels of competition on both sides of the table.

“Companies can only stay so long without looking to the future,” says Jim Fisher, CEO of Houston-based IMST Corp., which specializes in site and sales analysis for all sectors of specialty retail. “When you start not doing anything for one to two years, and you’re extending the non-growth of the company, it leads to stagnation and that leads to market erosion. … The best way and fastest way to increase the bottom line is to improve what you’ve got.”


The altered lending climate has its share of horror stories. By the close of 2009’s first quarter, default of commercial realestate assets at national and regional banks had soared to $16 billion, according to research from New York-based Real Capital Analytics Inc. One year later, approximately 70% of those assets remained in default, either operating under short-term forbearance or at some stage in the foreclosure process.

With summer’s approach, foreclosure activity had already begun to simmer in the c-store channel. Financial difficulties compelled Worcester, Mass.- based fuels distributor C.K. Smith & Co. Inc. to auction off 16 c-store locations in Massachusetts and New Hampshire, while Frankfort, Ill.-based Gas City Ltd. was contending with a foreclosure lawsuit regarding four of its southwest Chicago sites, in which its lending bank is trying to collect $16.8 million. Fundamentally, what has damned some retailers is the very structure in which they have long operated: salesand- profitability assumptions. As Tom Kelso, managing director of Richmond, Va.-based Matrix Capital Markets Group, suggests, “You may be running [a store] as well as you can, but you borrowed based on projections.”

Retailers base such projections not just on the value of the property but also on the promise of the business. Anderson, Ind.-based Ricker Oil Co. made public a grievance with London-based BP Plc, from which it purchased several ampm franchises in the fall of 2008. Ricker bought into the promise of the franchise and, in a lawsuit dated October 2009, said franchisees were “paying … fees on an untested business model that is failing and costing BP’s franchisees thousands of dollars per week.”

BP and Ricker Oil settled the suit earlier this year, but such actions underscore the importance of aligning cash flow with looming debt obligations.

For retailers who either purchased in the vulnerable period when the financial markets began to sink or simply overestimated their profits on an acquisition, banks have—so far—given borrowers a little bit of leash. “In most cases lenders are trying to ‘kick the can’ down the road to see if real estate corrects itself and if cash flow can catch up to service debt,” says Kelso. “Banks are not pushing as hard to get people to that point because banks don’t want to recognize loan losses,” he continues. “So, really, banks today are partners to a certain degree in keeping some companies afloat in a sense that it’s not in the bank’s interest to have a company fall apart.”

Sometimes, however, falling apart cannot be helped. Terry Monroe, president and COO of St. Louis-based American Business Brokers, has fielded numerous requests from banks that have foreclosed on c-store assets, asking him to broker fresh deals. A recent case of his concerned a six-store Midwest chain purchased three years ago by eager buyers, now mired in the foreclosure process.

“It wasn’t worth what they paid for it,” he says. “Those stores are soon going to be listed as ‘debtor in possession,’ and it’s not the first one I’ve worked on. In fact, we’re seeing that trend accelerate. They’ll probably sell for 25% to 30% less than what [the original buyer] paid for it, so the buyer is taking a haircut and the lender is taking a haircut.”

The six-store chain’s unraveling came about, rather familiarly, as a result of poor sales in a down economy and the inability to maintain the facilities, combined with excessive debt. Of the half-dozen stores, Monroe believes at least one should have been shuttered sooner due to underwhelming sales; had the owners done so, the store might not have such a toxic effect on total cash flow.

“It’s sad but true,” he says, “and there will be more to come.”


Operator bankruptcies, on the other hand, could be a likelier byproduct of current lender-borrower discord, according to William Trefethen, managing director of Trefethen Advisors LLC, Scottsdale, Ariz.: “With bad fuel margins and maturing debt, when you combine those two it gets pretty ugly. It might come down to working out some sort of deal with the existing lender; the key is to start the dialogue early and get help.”

The nature of the problem has shifted dramatically and could afflict more than those who “bit off more than they could chew,” according to Michael Lederman, managing director and head of the “special situations” group for Memphis, Tenn.-based Morgan Keegan & Co. Inc.

“In the last decade the problem came from being overleveraged alone,” he says. “Today you have some that are overleveraged, but you’ve also got hits to cash flow due to the economy. Simultaneously, with the real-estate collapse, lenders are concerned and saying, ‘If things go bad, are we covered?’ ”

 If the first half of the year is any indication, banks have reason to worry. By early June, 78 banks had closed—double the number that had closed this time last year, according to the Associated Press. Florida had the most closures at 14, followed by Illinois’ 10. Georgia, California and Minnesota rounded out the top five most-affected states.

Ironically, if the banking industry succeeds in pulling itself up off the mat, figuratively speaking, defaulting retailers could find themselves on even more tenuous footing.

“As banks get healthier, they will revert to treating weaker customers as they have in the past; they’re going to start recognizing losses,” says Kelso. “Today lenders are not forcing people to file [for bankruptcy]. But as banks become healthier ... watch out.”

In other words, be the ant rather than the grasshopper.

“[Retailers should] communicate with the bank and know where they stand, and not just with the relationship officer but with the credit and underwriting [departments],” says Scott Garfinkel, managing director of Morgan Keegan. “When you have relief periods that help fuel extra profit, that’s the time to think about being proactive about discussions with other lenders and where you’re going with the business.”

Others suggest joining share groups or similar business affiliations, which can help navigate the lending climate, especially during periods of choppiness.

“If you don’t know who the good banks are, shame on you, especially if you have your business there,” says Mike Zielinski, president and CEO of Royal Buying Group, Lisle, Ill. “The best thing is to be engaged with whomever you do business with, not only with bankers but also other people who are knowledgeable about banks.”


Proving the maxim that opportunities often arise in times of hardship, or perhaps because of it, seemingly countless good assets in multiple markets are now ripe for the plucking, according to Rick Mistretta, operating partner for Prairie State Energy, a Lake Geneva, Wis.-based operator of two stores and fuel supplier to 40 dealers in Illinois and Wisconsin.

“Mismanaged sites—that’s an opportunity,” he says. “Not all of these sites are shut down; some are still hanging on by a thread. … You have old Clarks out there that have very small stores and sell nothing but gas and cigarettes. Five years ago, when gas margins were 10 or 12 cents per gallon and credit-card fees averaged 2 cents, you could maybe make run of it with a site like that. The climate has changed for the worse.

“The good news is that you can buy [such sites] for significantly less, and you don’t have to pay for the profits it’s going to deliver,” he continues. “Before, you paid a premium for something like that, but today you pay on the P&L.”

Even if some traditional lenders— i.e., national and regional banks—have been scared off by a business they cannot or simply don’t want to understand, buyers now have more options in trying to scoop up these assets, according to Roger Woodman, managing director of Morgan Keegan. Earlier this year, for example, when Springfield, Va.-based Capital Petroleum Group purchased 29 ExxonMobil locations in northern Virginia, the company worked with Washington, D.C.-based Petroleum Capital & Real Estate LLC and financed the deal in an arrangement with a large private-equity real estate investment trust.

“With quality real estate and good operators, there’s an increased number of lenders looking to fund transactions,” Woodman says. “Banks were sidelined in 2009, but they have to make money, so there has to be an increased competition on divestitures. A year ago we’d have a problem getting a lender, but today three or four lenders are looking at the transactions and competing.”

Ed Holmes, president and CEO of Holmes Oil Co., a 42-store chain based in Chapel Hill, N.C., says he has two banks competing for a large loan of his that will mature in August 2011. Earlier this year, he contacted the original lender, which told him conditions were no better than they were six to eight months ago. Then a second bank took a look at the loan and offered him a more attractive deal, giving Holmes reason to check back with the original lender. He believes the industry has proven itself during tough economic times, so “when [banks] do have money to loan, they’ve seen that our industry has been profitable.”

Another source of potential capital: tapping funds from the divestment of sluggish assets. Put another way, as part of their growth strategy, some operators are realizing they simply cannot afford to hang onto underperforming stores.

“If you have someone with 25 stores, the old rule of thumb is that a third are cash cows, a third are good stores, and a third need a fire,” says Monroe, a former retailer who over time has divested himself of all his stores. “All too often you have operators who spend too much time trying to get that bottom third up off the floor. … Those that didn’t cull the herd are in trouble now.”

Although c-stores have drawn renewed investment interest, lenders are much stingier in helping borrowers meet their capital needs, according to Dennis Ruben, managing director of NRC Realty & Capital Advisors LLC, Chicago. “Before the credit problem you could get a mortgage for 80% of the purchase price,” he says. “Now it’s probably 65%, so there’s more equity that needs to be put into the deal. It’s a longer and harder deal to put together.” Furthermore, the “rules” for accessing this well-guarded treasure trove of capital have changed, and retailers need to work within the new confines.

“We see so many guys who say, ‘My cash flow is X,’ [but] until you can sit down and prove that your cash flow really is X, it’s kind of tough to qualify,” says Ray Cleeman, managing director of New York-based PrinceRidge Group LLC. “I think it’s about making sure your financials and the historical financials are all in order, and if you’ve done an acquisition in the recent past, show the improvements you’ve made and be able to identify how you’ve made them.

 “Be prepared, because you don’t want to go there and get a homework assignment.”


Click here to download full article