$31,500+ in annual savings and four lending relationships consolidated into one for an Okanagan tire group

Location: Okanagan

Industry: Tire retail, automotive service and tire recycling

Annual revenue: $4,000,000+

Loan products: Commercial mortgage, capital expenditure facilities, operating lines of credit, corporate credit cards

Total credit facilities: $5,145,000

Amortization: 22 years

LTV: 58%

Lender: Chartered bank (incumbent)

Primary goals achieved: Additional leverage, Greater flexibility, Lower costs

An owner-operated tire services group in the Okanagan was referred to Lakepoint Capital by their external accountant. The group runs two businesses: a tire recycling collection operation working under a provincially regulated stewardship programme, which also retails used and new tires, and a franchised tire and mechanical service shop. Two holding companies sit above the operating companies and own three commercial properties. The group employs about twenty people and generates over $4,000,000 in combined annual revenue.

Over a number of years, the owner had deliberately arranged for every one of his commercial and personal credit facilities to mature in the same month, so that the entire structure could be refinanced at once with a single lender rather than one facility at a time. He engaged us about a year ahead of that date.

This was not a simple engagement to package. There were four corporate entities with four different fiscal year ends, three commercial properties plus two personal ones, and existing debt spread across a crown lender, two chartered banks and an equipment leasing company. We combined the financial statements across the group so that lenders could assess it as a single credit, commissioned appraisals on the three commercial properties, and delivered a comprehensive financing request to our group of commercial lenders. Four lenders came back with offers within two weeks.

Our client accepted the incumbent bank's offer in May. Underwriting then took considerably longer than expected, for reasons unrelated to the quality of the credit. Rather than wait, we went back to the runner-up and asked them to formally document their offer. By mid-August our client held a signed competing credit agreement with a lower fixed rate, a 25-year amortization rather than 22, and monthly payments approximately $2,700 lower.

We then ran the numbers on both options. Over three years the competing offer looked about $50,000 cheaper, but almost all of that difference was principal that would not yet have been repaid, rather than real interest and fee savings, and on a floating rate basis the two were nearly identical. Switching would also have required a new Phase 1 environmental assessment on one property, at $20,000 to $40,000 and a minimum of two weeks, taking our client past a personal mortgage renewal he had to meet. We recommended he stay with the incumbent, and we used the competing agreement to negotiate the terms that still needed work.

Here's how it came together:

Lower costs: We had the upfront fee reduced from $13,250 as originally quoted to nil, and the annual review fee reduced from $2,500 to $1,500. We reduced the floating rate spread on the $4,300,000 real estate facility from prime plus 1.00% to prime plus 0.50%, worth approximately $21,500 per year at current balances. An equipment lease carrying a 12.3% effective interest rate was retired and refinanced into a facility priced near 5%.

Additional leverage: The real estate facility closed at $4,300,000, which was $300,000 more than three of the four lenders were willing to advance, at 58% loan to value. We increased the combined operating line limits across the two operating companies by $125,000, and secured $350,000 in new capital expenditure facilities the group did not previously have.

Greater flexibility: Four separate lending relationships were consolidated into one. We negotiated a carve-out excluding the one-time shareholder loan repayment funded at closing from the 1.25x debt service coverage covenant, which our client would otherwise have been offside on as soon as the facilities funded. We also had annual reporting set at a compilation engagement level, saving the group the ongoing cost of review engagement financial statements.

The facilities funded five days ahead of our client's personal mortgage renewal date. The recurring improvements are worth roughly $31,500 per year at current balances, which covers our engagement fee within the first year, before accounting for the reduced upfront fees.

If you are a business owner with a renewal coming up and you are not certain your incumbent lender has given you its best offer, let's start with a 15-minute commercial debt review. We'll benchmark your pricing, covenants, guarantees, collateral and available leverage against what we are currently seeing in the market.