Till Debt Do Us Part

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

Angel Abcede, Senior Editor/Tobacco, CSP

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Historically, it’s been especially difficult for independent operators to obtain the necessary credit to fund growth. The current level of borrowing success is significantly lower for small businesses than it was in the mid-2000s when up to 90% had their credit requests approved, according to the National Federation of Independent Business (NFIB), Washington, D.C. In comparison, a meager 40% of small-business owners attempting to borrow in 2009 had all of their credit needs met, NFIB research shows, while 23% had none of their credit needs met.

This lack of funds, paired with unkind competitive forces, means operators unable to spread mounting costs among multiple units are likely to go under.

“For the under-70,000-gallons-amonth dealer, the end may be in sight,” says Paul Tomaszewski, president of Pacer Fuels, an Austell, Ga.-based operator of seven stores that also supplies Chevron, Marathon, Texaco and unbranded motor fuels to 90 dealers in the greater Atlanta area. “It’s not going to be this year, and probably not next. But five years from now, we’ll have a lot fewer smaller dealers.”

The pruning has already begun; the number of U.S. c-stores fell 0.2% in 2009, to 144,541 stores, according to NACS’ year-end estimates. It was only the fourth time in the past 15 years and, perhaps more telling, the second straight year the store count has slimmed down. Industry experts suggest many of those who have departed are single-store owners who relied too heavily on categories with thinning margins, namely gas and tobacco, and couldn’t devote space to more profitable items such as foodservice.

Also, Tomaszewski believes, the continual escalation of marketing and operations costs, such as credit-card fees and expenses tied to payment-card industry compliance [CSP—May ’10, p. 40], has saddled cash-poor dealers with an insurmountably heavy burden.

Mistretta, whose jobbership does business in the Midwest, agrees: “In speaking with jobbers in the Chicago market and on up into Wisconsin, we’re experiencing the same problems. Many dealers are struggling to pay the bills and suppliers are chasing them for money. As creditors go, we’re probably the biggest one [for a dealer], considering a load of fuel costs $20,000 to $25,000.

“Unfortunately,” he continues, “a lot of operators don’t know how to promote, only discount. To generate sales they lower prices to move the product and then their competitors discount to match them. Soon all competitors have lowered their pricing and have done nothing more than give away margin. Then success becomes a function of the quality of your real estate and how well you manage your expenses. … For a long time, when it was a good industry, it didn’t matter.”

Being small in itself, however, isn’t necessarily a disadvantage. Growth is often dictated by one’s persistence in following through on opportunities— guts, plain and simple.

“I can think of one dealer who purchased one of our sites and has bought two more since then, and that was all since November [2009],” Mistretta says. “Buyers right now are looking for blood, and I don’t blame them.”


Large chains rely on the availability of growth capital just as much as their smaller peers do. But the deals structured for larger, seemingly better-positioned companies also have become more difficult to align.

“You might need to put eight to 12 lenders on a deal because lenders want smaller exposures and nobody wants more than $10 million or $20 million loaned to one credit,” says Ruben of NRC. “For a $150-million deal, you’d need 10 or 12 lenders to put that together, particularly for new assets.”

There are exceptions to the rule. In May, three allied private-investment firms negotiated the rights to purchase a 74,000-barrel-per-day refinery in St. Paul, Minn., 166 SuperAmerica stores and other refining/retail assets from Houston- based Marathon Oil Corp. The price tag: in the neighborhood of $800 million, according to published reports.

“We’re seeing a lot of people jump back into the fray,” says Cleeman. “The market has thawed, and I think there’s a better realization between buyers and sellers of what can and cannot be done. … Lenders just want to make sure their capital is safe, and conservative underwriting is what’s getting this done.”

“Clearly there is another wave of financial investors who want to consolidate the industry,” says Ruben. “People who are big probably need to get bigger. … In the 25- to 75-store range, you have situations like a second- generation business, where the son inherited it from his father but doesn’t have the same passion, or maybe you see someone getting beat up by the bigger guys.

 “In that situation,” he continues, “you either buy somebody or you sell; there’s no standing still. A lot of people … are growing out of cash flow at a pace of one to two stores per year, but it’s hard to compete with the big guys who are growing by 100 to 200. That gap is only going to get wider.”


Independent business owner Harinder Singh has had past success getting traditional banks to back his growth projects, yet he recently tapped into the private-equity market to fund the addition of a seventh store. Although he couldn’t share a precise dollar amount, he is now scouting additional sites to feed “the next phase of expansion,” also funded solely through private equity.

“You can get five investors together, but I haven’t heard of anyone getting a traditional loan,” says Singh, president of St. Louis-based Gateway Petrol Inc., whose portfolio also includes an upscale Indian restaurant and a food-manufacturing plant. “The banks are really not interested anymore, but private money is a great idea. There is a glut of property people need, and it can be bought at a discounted price today.”

Regardless of the equity source, industry experts suggest a renewed period of expansion and consolidation is on the horizon, if not already under way. Major sales recently have involved assets from stalwarts Speedway SuperAmerica and ExxonMobil, as well as the planned sale of more than 70 sites by Southeast consolidator The Pantry Inc. Finally, underscoring the point in dramatic fashion, there’s the ongoing tug-of-war between Alimentation Couche-Tard and Casey’s General Stores, in which the price and value of assets are a prime concern (see story, p. 12).

“Whether it’s private equity or a larger high-yield bond, or even something a little more unusual like a term B loan, so many options are available to retailers and downstream management teams,” says Cleeman. “For anyone with 50 sites or more, the amount of capital available to them is almost silly.

 “I don’t know what the gap is between the people who need capital and those who can provide it,” he continues. “[Retailers’] frustration is that they can’t reach these lenders. Maybe they’re looking for a certain size transaction that doesn’t exist. … I think there is going to be a lot more deals going on, because the money’s out there.”    

Numbers Game

$16 billion Amount of national and regional banks’ commercial real-estate assets in default for the first quarter of 2009

70% Percentage of those assets that remain in default one year later

23% Percentage of small-business owners attempting to borrow money in 2009 who had none of their credit needs met, compared to 40% who had all their credit needs met

65% Approximate percentage of the purchase price most lenders are willing to fund, compared with 80% prior to the credit crisis, meaning borrowers now have to contribute more equity when making acquisitions 


Amid a return to industry growth, there remains an undercurrent of distress caused by retailers who overbought at the wrong time or failed to live up to loan requirements. From the mid-2000s to mid-2008, lenders became more and more aggressive with lending terms, resulting in higher advance rates and less onerous covenants, according to William Trefethen, managing director of Trefethen Advisors LLC.

“The economy has impacted volumes and margins and the resulting profitability, which in turn can trigger covenants related to debt-service coverage and funded debt ratios,” he says. “Declining real-estate values have also impacted loan-to-value covenants. … The current conservative lending environment has left very few options available to borrowers wishing to refinance maturing debt that was originally funded in the more aggressive lending environment [prior to 2008].”

As a result, some banks are trying to make up for lost time. “Say a dealer financed $800,000 of a $1-million purchase,” says Rick Mistretta, operating partner for Midwest jobbership Prairie State Energy. “The five-year balloon comes up and the bank-required appraisal comes through at only $800,000. Most banks are no longer financing 80%; instead, we typically see 70%. The dealer now must come up with $240,000 cash to keep his location or put it up for sale.

“At that point, if you don’t have the money, what are you going to do?” 


The next wave of industry consolidation will likely involve some unexpected new market entrants: first-time owner/operators who have a white-collar pedigree. The gutted U.S. jobs market has left many workers—among them, onetime executives with ample nest eggs and inflated salaries—suddenly jobless and in need of something to do. In the process, they turn to the c-store industry and, essentially, buy themselves a job.

“Six to eight months ago we noticed this shift,” says Terry Monroe, president and COO of American Business Brokers. “[These people] have got some capital, or they’ve got access to capital, so it’s easier to get these deals financed. A guy can buy himself a job, maybe making $50,000 to $100,000 a year.

“For the higher-ticket [assets], meaning anything over $1 million, those will have a tough time selling,” he continues. “Where we do see an explosion is stores of $700,000 and under, especially $500,000 and less.”

These assets might have been better served by their owners taking them out of circulation, according to Jim Fisher, CEO of IMST Corp. “For an operating company of c-stores with fuel, they can say, ‘This store no longer fits my model,’ ” he says. “Rather than flipping it to the next generation of operators, take it out of the industry. If it’s a bad site and it doesn’t work for you, it doesn’t work for anyone else.”

Buy Low, Sell Now

It’s an “interesting” time for retailers wrestling with the idea of selling their stores, according to Dennis Ruben, managing director of NRC Realty & Capital Advisors.

“Some people want to sit on the sidelines, but it’s not bad enough to not go forward if you’re really interested in selling,” he says. “I’m not sure things are going to be that much better down the line.”

Similarly, Terry Monroe thinks sellers will remember this period as “the good ol’ days.”

“The values are not going to be reset to where they were three years ago, no more than residential real estate popping back to what it was three years ago,” says Monroe, president and COO of American Business Brokers. “The multiples are reduced and more in line with where they should be: an average of 5 times EBITDA (earnings before income tax, depreciation and amortization) whereas it used to be in the 6-times range.”

Some two-year-old deals, experts suggest, were done at 7 to 9 times EBITDA.

“Even if we see a strong rebound in the economy, it would take a long time to get back to where we were three to five years ago,” Monroe says. “If you procrastinate, you’ll get less. 


DIVERSIFY. “The problem is putting all your eggs in one basket,” says Roger Woodman, managing director of Morgan Keegan & Co. “Incumbent lending relationships are getting nervous and want to force a refinance. We advise multiple lending relationships.”

RETAIN YOUR OPTIMISM. “The past two years have been a great time of selfreflecting and self-evaluation of sites,” says Jim Fisher, CEO of IMST Corp. “It’s time to stay positive.”

TAKE INITIATIVE. “Be more proactive in getting out in front of any potential problem coming from your bank,” says Scott Garfinkel, managing director of Morgan Keegan & Co. “Proactive thinking can allow you take advantage of opportunities in any capital market.”  


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