By Corey Henriksen
Lenders often approach me greatly agitated about nonperforming gas station and convenience store loans. Talk about a motivated seller—the thought of a retail petroleum loan becoming nonperforming makes a banker very nervous, but the possibility of an operator turning in the keys and having the site(s) go dark causes the banker apoplexy.
Hence, the opportunity…
My Perspective
Please note. My business focus is not on Buy-Sell brokerage. My focus is on financing. Only financing. And, only downstream petroleum financing. I do not represent banks. I spend my days helping petroleum wholesalers and convenience store retailers secure financing, which does mean that I spend a great deal of time talking with lenders and educating them on the virtues of lending to downstream petroleum operators. I have been doing this for over 20 years, so many lenders will call me when they have troubled convenience and gas assets that they want to restructure. Therefore, I also help my borrowers finance their purchase of restructured convenience and gas assets from lenders.
The purpose of this article is to give you a basic understanding of the lender process of managing nonperforming assets and a basic plan of attack in taking advantage of the opportunity.
Understanding the Opportunity—the General Lender Process
As a general statement, lenders make loans to borrowers and either hold the loans in their own portfolio or participate them out to other lenders. In addition, they usually retain the servicing and receive a fee. As long as the loan is performing, the loan is in general servicing. Once the borrower goes into default, which is not immediately cured, the loan then goes into a special servicing group, which deals with nonperforming loans. The loan is assigned to a special servicing asset manager who then puts together an Asset Management and Disposition Plan (AMDP). The AMDP details the strengths and weaknesses of the asset and a plan of action for the lender in managing and, if necessary, disposing of the asset. The AMDP is then approved by a higher signing authority or credit committee as the guideline for managing the asset.
The asset manager can recommend, among other things, to: (a) sell the non-performing loan, (b) foreclose and attempt to sell the underlying asset at a foreclosure sale to obtain proceeds to pay off the loan and its attendant costs, or (c) take the underlying asset back as a bank real estate owned (REO) if the foreclosure sale is unsuccessful and then attempt to sell the bank REO to pay off the loan and its attendant costs.
The asset manager can also recommend for the lender to enter into a pre-foreclosure negotiation to have a third party buy the underlying asset from the borrower and either: (a) step into the shoes of the borrower and assume the loan, or (b) pay off the loan with cash or from proceeds of financing with a different lender.
Each alternative has strengths and weaknesses for the lender, the borrower and the potential purchaser. Also the texture of each opportunity is as varied as each participant’s unique desires and pressure points, which unfolds through negotiation and discovery. Again, the opportunity…
A Basic Plan of Attack
1. Before looking for an opportunity, have your team in place and your books in order on your existing business.
Have your team in place. Your lawyer, CPA, financial advisor, broker, operations advisor, environmental advisor, etc., all fulfill a distinct niche in giving you reasoned advice about an opportunity. A word about advisors: you can’t be the smartest person in the room on all topics. Instead, hone your skills in finding and utilizing competent advisors for your decision-making in all facets of an opportunity; they will save you money and costly mistakes with their experienced guidance.
Have your books in order on your existing business. Have your financials together and everything up to date and ready to submit. Have a package in place with your basic materials prepared, just as if you were doing a submission for a refinance. When you find an opportunity, you will have to move quickly. The sale does not always go to the highest price, but rather to the best-positioned operator.
2. Once you find the opportunity, then you need to understand fully the site(s) and the pressure points of the participants, and then plan your strategy accordingly.
Understand the site(s). Will you need to obtain additional funds from the lender to do certain upgrades (or even deferred maintenance)? What will it take to season up the sites? You will need to quantify the opportunity by putting together a pro forma-best case scenario/worst-case scenario. Environmental issues? Supply contract issues? Not only does this investigation include everything in your checklist for the acquisition of any site from a third-party, but also how these sites will affect your existing business.
Understand the pressure points of the participants. Where are you in the lender process? Are you purchasing a nonperforming loan? The underlying asset at a foreclosure sale? The underlying asset as a bank REO? Or are you going to negotiate a pre-foreclosure purchase with the current borrower with the approval of the lender? If you need extra funds for upgrades, from where will they come? The current lender? A new lender? Will you refinance some of your other sites and pull equity, or negotiate better terms because of diversity of collateral? What about the lender? Are they willing to provide you financing? Are they interested in taking a short sale? If you’re doing a pre-foreclosure purchase, how motivated is the borrower/seller? The questions that you ask will be dictated by where you are in the lender process and the nuances of the particular transaction.
Finally, set up your strategy. With the reasoned guidance of your team and the continually updated information in your negotiations, the path will become clear. Is this a transaction that makes sense for your operational strengths? Negotiate hard—based on the pressure points that you discern—but also have a personal go/no go term sheet in mind so that you know at what point you will walk away from negotiations with peace of mind.
Throughout the United States, there are always lenders looking to move convenience and gas loans off their books. The reasons for loans becoming nonperforming are as many and varied as the individual borrowers and lenders. There is no “one-size-fits-all” strategy for obtaining these assets. However, being prepared with your team in place, your books in order, and a method for planning and executing your strategy enables you to address the issues of an opportunity quickly and decisively, and come away with a great acquisition from a lender.
Hence, be prepared if you want to take advantage of the opportunity.
Corey Henriksen is Managing Director of Acquisition and Refinance Capital, Inc., a firm founded for the sole purpose of obtaining numerous capital alternatives for wholesale and retail owners and operators in the petroleum industry. Corey is a member of NACS, SIGMA, CIOMA and WPMA and is a regular speaker on financing for petroleum retailers and wholesalers. Corey can be reached at 949.481.8500 or www.AcqRefCap.com.
