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Retail Finance: Making the Switch From Mainstream to Alternative Lenders

Date: Nov 13, 2013 @ 06:55 AM
Filed Under: Retail

Retailers took a hard hit during the Great Recession, and five years later, the sector is still facing some unique challenges. While other industries have rebounded and Wall Street is once again bustling, the current lending environment and access to capital for many retailers have made the road to recovery a longer one. Lack of wage growth, unemployment and skittish consumer confidence have put a strain on retailers regardless of their push for improved performance. Certain categories at the high end have fared better –- luxury and certain fashion retailers, for example –- as have value-oriented retailers on the lower end of the market. But for the players in the middle, those representing the broader majority of the industry, many are lost in a sea of sameness –- in other words, the inability to differentiate themselves from the rest of the pack contributes to the widening gap between the winners and the losers. Even as consumer spending levels return, those spending dollars are likely going elsewhere and the fight for the consumers’ discretionary dollar ever increases.

The retail industry, by its seasonal nature and shifting consumer spending patterns, is in a constant state of change and the pace of change is faster than ever. But despite this, before 2008, retailers tended to relegate difficult management issues, or any form of change, to a side project to work on in their spare time. The repercussions of the financial crisis forced many retailers to learn tough management lessons and the result has been a broad-based shift to a more defensive way of thinking. Today’s retailers manage for change all the time. Across the board –- from mom-and-pop stores to big box retailers –- they are focused now more than ever on managing inventories, controlling costs and instilling fiscal discipline.

But while their increased emphasis on discipline has led to healthier balance sheets, retailers are finding themselves often shut out of mainstream lending. It’s a catch-22 as retailers find difficulty acquiring the capital needed to manage through change or to move efficiently in different directions. Whether they are pursuing growth or strategic opportunities, or are in the midst of refinancing, securing the proper financing to execute their business objectives is imperative to survival for many today. But with the dislocation of capital that has occurred across the market, many smaller and mid-sized companies continue to find access to capital challenging and the cost and structure of these loans (if attainable) often less than favorable.

Prior to the 1990’s, retail executives had been somewhat wary of asset-based lending, once viewed by many as the “kiss of death.” Despite this sentiment, retailers have long relied on ABL facilities, as their asset-rich structure is particularly well suited to ABL financing. Now, in today’s volatile economy, ABL is quickly becoming the logical solution and preferred choice for many retailers, that as an industry represent more than one-third of the more than $100 billion asset-based loan market. From a cash-flow perspective, retailers that are generally larger or very profitable may try to parlay traditional ABL into more of a cash flow or hybrid product, but those types of companies are few and far between in the current environment and typically would be at the larger end of the market. Many retail executives find that ABL can actually breed discipline, given the way the borrowing base is determined and the necessary ongoing reporting that is often required by the lender.

Traditional or “mainstream” bank lenders often have their hands tied when it comes to the retail borrower in today’s environment. Today’s regulatory environment has not only limited mainstream banks from taking on a certain degree of risk, but has also limited how they evaluate risk and moreover emphasizes assurance of repayment through cash flow rather than assets. In response, many lenders have been taking a one-size-fits-all approach to asset-based loans, benchmarking everything solely on historical financial performance. If a company doesn’t fit into a formulaic equation or set of financial ratios, they likely won’t be considered for a loan that cannot provide assurance of repayment. In effect, retail borrowers in need of capital are at the mercy of the regulatory environment. Small and midsize retailers that have had any instability or financial distress in the few years following the recession are increasingly finding themselves shut out of consideration for credit by many traditional lenders.

That said, regulation is here to stay –- in many cases for good reason –- and as such, should be embraced.  A more recent trend is a good deal of sponsored asset-based lending business gravitating to nonbanks and alternative lenders. Unregulated lenders have much more flexibility in how they determine creditworthiness and often may consider a great many factors beyond just recent financial performance alone. Instead of taking a purely historical look at a company, they can evaluate other, forward-looking criteria such as asset value, the strength of the management team and its ability to execute and navigate a business plan. This decision to lend money is not based solely on a backward-looking analysis of where the company has been, but is predicated predominately on its future potential. Alternative lenders can also take a much more innovative approach to designing the structure of a loan – they may allow dividend recaps, permit distributions or dividends in the right structure framework, and can be more creative working through growth or unique challenges and turnarounds.

As asset-based lending has become more of a commodity over the last twenty years, perhaps the biggest differentiator between traditional banks and alternative lenders is the ability to evaluate transactions on a case-by-case basis. Today, for many reasons, it appears that too many banks view all deals through the same underwriting or appraisal lens, whereas alternative lenders can tailor each deal on an individual basis. This enables them to create and unlock liquidity and to offer much greater flexibility, access to decision makers and most importantly, to execute when needed most. They can help retail borrowers create the point of differentiation that they ultimately need to succeed and with the capital necessary to do so.

With an economic environment that is unlikely to stabilize much in the next few months and a presidential election on the not-too-distant horizon, retailers’ capital needs are unlikely to change significantly in 2014. Continued tightening of the regulatory environment and ongoing bank consolidation make access to relevant capital solutions a challenge for many. Without a major shift in financial performance, access to capital through traditional channels will remain challenging for many small and midsize borrowers.

The shift we have started to see away from mainstream banks to alternative lenders will increase over the next few years. As the pressures and pace of change ramp up – driven by instability and a difficult financial environment as well as more dramatic changes in consumer behavior – there will be increased emphasis on execution for lenders. Execution and access to “real decision makers” presents a real challenge for many traditional banks, which will further drive retail borrowers to alterative lenders that can better serve these customers. Further out, many anticipate an ever-increasing demand of ABL loans to be satisfied by non-traditional lenders. Ultimately, in the go forward “new world,” nonbanks are in the best position to meet a retailer’s financing needs whether in times of instability or prosperity.

Andrew H. Moser
President & CEO | Salus Capital Partners
Andrew H. Moser is a commercial finance and retail industry veteran, recognized by many, as well as his industry peers, for his contributions and creativity in asset-based lending over the last twenty years. At Salus Capital Partners, Moser serves as President/CEO and is responsible for the overall development and execution of; corporate strategy, business development, leadership and team building. He is charged foremost with creating a unique point of differentiation for Salus in competing across the marketplace, providing guidance and perspective in structuring transactions and above all, for the safety and soundness of the Salus loan portfolio.

Moser has held numerous senior executive positions at leading financial institutions, and was most recently senior vice president and head of Asset-Based Lending for First Niagara Bank and co-founder of the group as part of NewAlliance Bank in 2009. Prior to First Niagara, Moser held similar executive positions at GMAC Commercial Finance, Capital Source Retail Finance, Wells Fargo Retail Finance where he held the position of Co-COO, president of Paragon Capital and a co-founder of the Asset-Based Lending Business at GBFC, Inc. (a division of the Gordon Brothers Companies) and recognized by many as one of the first and premier asset-based lenders to the retail industry. Moser is also an active member of multiple professional organizations and is a director of the Commercial Finance Association.
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