As the U.S. recycling industry responds to changing trade regulations in China as well as in some Southeast Asian countries, scrap recyclers are looking to invest in additional processing and sorting technology to produce furnace-ready scrap grades that can be consumed domestically as well as abroad. Sometimes, finding financing for these investments can be challenging.
B. Riley Financial Inc.’s Great American Group, headquartered in Los Angeles, works with lenders, private equity, corporate executives, corporate advisors and attorneys. B. Riley Financial and its subsidiaries provide collaborative financial services and solutions tailored to the capital raising and financial advisory needs of public and private companies and high net worth individuals.
Michael Petruski serves as managing director of Great American Group. He specializes in metals and manufacturing and has expertise on complex, syndicated asset-based lender (ABL) credit facilities and the type and scope of valuations necessary to expedite such transactions from a lender’s perspective. Prior to Great American Group, he spent many years at American Can Co. in manufacturing, procurement and international machinery sales. Petruski also has held positions at several financial institutions, including Wachovia Capital Finance and Citigroup.
He is a member of the Secured Finance Network (formerly the Commercial Finance Association) and the Turnaround Management Association.
He describes Great American Group as a generalist appraisal company. “We provide asset values primarily for inventory, machinery and equipment for industrial companies, manufacturers, wholesalers [and] retailers.”
Great American Group’s services include appraisals of inventory and machinery at scrap yards.
Petruski says he has an “appreciation” for what lenders are looking for. “Most of the work that we do is directly for asset-based lending.”
The company works with lenders that include Bank of America, Wells Fargo, PNC and SunTrust to perform appraisals of assets that are going to be used as collateral for loans that are typically set up as revolving credit facilities. “The machines and equipment when we do an appraisal are typically set up as an amortizing term loan—no different than your mortgage,” Petruski says, adding that the terms generally range from five-to-seven years depending upon the asset type and credit policy of the lender.
“If your past performance indicates that you have inconsistent earnings, you may want to have a shorter term loan.” – Michael Petruski, managing director, Great American Group
In the following interview, Petruski shares some of the insights he’s gained working with scrap yards and lenders over the years.
Recycling Today (RT): Have you seen inquiries for financing from scrap processors increase since access to the Chinese market has been restricted? If so, have you noticed any trends in the types of investments they have been inquiring about?
Michael Petruski (MP): I would say that that would have to be a no. Over the last few years, with the volatility in scrap prices and steel prices, we’ve actually seen most ferrous and nonferrous recyclers kind of sit on the sidelines. If anything, we’ve seen more—this is probably more like three years ago, four years ago—many of the smaller yards go into bankruptcy and more [used] equipment was put on the market and available. There was kind of a resetting of who the players were. The bigger players tended to be the survivors and those smaller one-yard, two-yard processors either went out of business, filed for bankruptcy and/or liquidated, so the bigger guys had the opportunity to be able to buy equipment if they needed it to upgrade existing processing equipment. They had the capital available and the cash available to wait through downturn.
What we did see, I would say, is those people were looking to invest more in eddy current systems where they could sort scrap at a higher efficiency. And some invested in large shredders. These large shredders would be anything over 5,000 horsepower to 7,000 horsepower. These units could easily be in the $5-to-$7 million range for an investment. But typically those types of companies are not looking for financing. They already have some sort of a large commercial loan with a large bank, so they’re not playing in the asset-based side.
RT: What are the various types of financing available to scrap metal recyclers looking to add capital equipment to their operations?
MP: I would say there are two. One is the asset-based loan [which is secured with collateral]. The other would be equipment finance leasing.
Most of the major center banks and nonbank lenders have a group called equipment finance and leasing, which is off balance sheet. That is the ability to lease equipment from a lender, be it a bank or nonbank. It tends to be a little bit more expensive, but it’s a way to keep the asset and the expenses off the balance sheet. That’s something that a particular lender will focus typically on brand new equipment and not used equipment.
A manufacturer of a baler or a shredder has a relationship with Regions Bank or Wells Fargo or Bank of America, and [the buyer] can finance it over five-to-seven years or seven-to-10 years—most are in that five-to-seven year time frame. The borrower is making payments up until there’s a balloon payment due at the end, and the lessee makes a decision on whether or not they want to buy the equipment outright or the lessor or the lender then takes that equipment and tries to remarket it to another buyer.
RT: What information can help recyclers best make their case to a lender?
MP: If we’re talking just about equipment itself, it is the need for it. How is it going to improve the company’s profitability? Why do you need it? Why do you think this will make you a better company?
RT: What questions should recyclers ask of potential lenders so no surprises arise over time?
MP: How is the interest rate tied to the loan?
Most term loans for asset-based lending are based on Libor (the rate that international banks charge for short-term loans to each other), and it’s a Libor rate plus. With a term loan, the interest rate is going to be higher than on a revolver that’s being secured by inventory and accounts receivable.
A term loan could be Libor plus—depending upon the credit quality of the borrower—300 basis points up to 600 basis points.
The second is: Are there any covenants in the loan agreement that would trigger a higher interest rate, like nonperformance?
If there’s a change in the debt-to-equity ratio of the company or in the financial performance of the company, that could trigger a covenant.
If your past performance indicates that you have inconsistent earnings, you may want to have a shorter term loan. That usually is a negotiation, and it’s based on the lender looking back on historical financial performance.