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With U-Haul, A New Group of Lenders Finds Its Way to the Table

Date: Jan 07, 2014 @ 07:00 AM
Filed Under: Industry Trends

Hill’s question was direct: Who in the distribution was ready to go out and borrow some senior term loan credit, with good collateral and cash flow, strong underwriting potential and would benefit from the concept of borrowing from institutions situated in the communities it serves?

“Josh answered without hesitation: ‘U-Haul.’ AMERCO and U-Haul had a long history of investing in local communities and saw this as an opportunity to reinvest into those markets. Also, U-Haul’s treasurer Gary Horton was interested in expanding the company’s options for available lending sources – both large and small – because of how these local institutions impact U-Haul, which is after all a community-centric business.

“We were excited to have this first opportunity; we negotiated a term sheet last summer and closed in early October on the first $100 million of a total of a $150 million package. We are working on closing a second $50 million term loan in short order. All in all, we’re very pleased.”

In terms of the actual structure of the deal, Hill notes, “It’s interesting, because this deal is a hybrid because structurally, it is secured by a number of unencumbered properties that are move-in storage centers. These properties are cash-flow producing and the first tranche of our collateral is the cash-flow stream flowing from those multiple locations.”

In addition, Hill notes, the deal also carries a guarantee from U-Haul’s parent AMERCO. He continues: “That guarantee lies behind the cash-flow and the hybrid nature comes into play because we took mortgages on the properties. But in truth, those mortgages were put in place as an abundance of caution as opposed to be taken as the primary collateral. In most cases, we’ve seen most of the institutions booking this as an unsecured, cash-flow based loan. The hybrid nature comes from the fact that we have a high quality collateral base that’s basically providing an enhancement to the structure.

“As I said, we’ve been pleased with the reception and it did take some time to sell it to the community financial institutions because it’s not quite a standard asset-backed or cash flow structure.”

To bring things full circle, Hill explains it was Green in his days at Merrill Lynch who originally conceived this structure in 2003 while working in conjunction with Horton at U-Haul. He says, “This structure that Josh created pulls the best aspects of both asset-backed and cash-flow structures together. A decade later we were given the opportunity to step in and recap that same facility and we offered to do so under the terms and conditions as did Bank of America, which had acquired the asset through the Merrill Lynch acquisition.

“Bank of America kept a significant piece and we took our portion out as a new credit facility for our distribution of 23 community institutions. It’s gratifying to witness these institutions step into a spot previously occupied by Merrill Lynch and Bank of America,” he says.

As for the brass tacks of the deal, MidFirst took a significant piece with the other institutions participating in varying amounts and as low as $500,000. He notes, “There were many of these smaller institutions that were very excited to have U-Haul on their balance sheets and took the time and energy to underwrite the credit properly. The underwriting was a bit more cumbersome than with other more straight forward deals, but in the end, the group pulled together and it worked out nicely.”

Shafer adds, “There were some of the larger banks who were dumbfounded that we wanted no fewer than 20 institutions in the deal. We were trying to make this a way to bring the common man to the ‘table of kings’ so to speak. Why? Because 29 years ago there were 35,000 community banks and credit unions in this country and we’re now down to 14,000 and that’s not a good trend. What many people don’t understand is that the U.S. economy roared because there is no other country that has a financial system with 14,000 banks and credit unions. No other financial system offers the access to capital these institutions provide.”

While all is well, one might wonder if this U-Haul transaction is a sign of things to come or a one-off deal. Understandably, Hill anticipates U-Haul only scratches the surface when one considers the potential. As for BancAssets’ unique capabilities, Hill asserts, “No one else has a distribution of 700 community banks and credit unions that they are in active conversations with, a partner that knows their call reports and understands their needs. You would be hard pressed to find another firm that can quote their loan to deposit ratios to them and can in turn, bring solutions to them and walk them through the underwriting process as easily as we can. That’s really a key point since these opportunities need to be understandable as well as underwritable.

“The other thing is that under the Financial Reform Act, participants in a syndicated deal are required to have the same knowledge of their borrower as if they originated the loan. We are putting some fail safes in place that include a high quality data room to drive all of the diligence and warehouse it in a thoughtful way as well as the ability to draft a credit memo that walks our clients through the deal.”

One might also wonder: can the corporate borrower community get comfortable with a lesser known group of lenders?

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