"FUNDING IN TODAY'S INCREASINGLY DIFFICULT CREDIT MARKET"
CALIFORNIA PETROLEUM CONFERENCE
HILTON SAN DIEGO RESORT & SPA, SAN DIEGO, CALIFORNIA, JUNE 24, 2009

We have the perfect storm in finance. It is not just the petroleum industry. It is every industry. We have increased supply costs. We have credit costs increasing. And we have less credit available right when we need more money because customers are paying slower.

Customers are short paying and extending their terms unilaterally.

Retail margins are declining due to increasing prices. Credit cards are being used increasingly because of high prices. Yet the fees on credit cards are taking customer margin and for service stations are really hurting them.

We have found as much as 130% increase in short-term cash required for some borrowers to operate at their existing volume.

What we have is a scarce market. Banks are getting out of the lending business. Banks have losses and they need profits. How can we deal with it to make sure we get our loans?

In last last year, we are at 3-4 points over Libor. It was 1-2 points 13 months ago.

All of the lenders are trying to reduce the size of their portfolio.

If you have a bad history, more and more banks are going to need cash collateral. A letter of credit is not going to be enough. A cash flow story is not enough. You need assets and cash flow. You have to have both.

We've found that both the ratios and covenants are changing at renewal. You have to watch in your tangible net worth definition. This is killing software companies and others who value intellectual property. Banks are excluding intellectual property valuation from their tangible net worth proposition. If this happens, you might not be eligible for a renewal.

The debut/net worth ratio has always been 2:1. We've just had two renewals come in from Bank of the West who have changed this ratio to 2.53/1. This doesn't sound like much. But in a tough economy when you've had to burn some cash, this is significant.

If I'm smart enough to go get my bank line as a 2 year line or a 3 year line as a long-term liability. I pay a little more but it's a strategic decision. I don't have to pay it off every month. Now the bank is saying that you're line borrowing, even if it's long-term, and it's added into your current liabilities. You've got to watch. These are being changed and added into definitions.

Cash flow coverage has historically been 1.25 to 1. This went to 1.3 to 1. Just a few ticks can really hurt you.

Credit lines are being reduced by the definition of eligible accounts. They may not cover government accounts because they can't get security. A/R over 90 days or 120 days they may not count. Any account receivable that has any portion over 90 days — they're going to exclude the entire account. Once they do that, that really reduces what's available for your bottom line.

As the government takes over more and more of the economy, the more it's going to be a strain on your cash flow because most banks won't let you borrow to fund those accounts.

The stock lending market — if you have A class stocks — is still the best play. You can get 3-5 year terms, interest rates in the 5% range, there are no margin calls. If you can't pay, there is no recourse. They seize your stock, of course. Fees are in the 5% range.

Hard money is a non-commercial lender, a private lender, usually a financial group. They are charging interest rates considerably above the norm and their fees and interest are increasing. They typically have large points, large interest rates, and they tie you up every which way from Sunday. Their average used to 10% and now their average is 12.5%. I have one on my desk with 16% interest. You have to be really in need to go to them.

Most people only go to hard lenders when they can't get money from traditional lenders. What we're finding, ironically, is many of the hard money lenders are having the same difficulty finding money and releasing it as the traditional lenders. They are having the same troubles buying money as the banks.

A proactive borrower is a protected borrower. Watch out.

Wells has a new thing called Level 11 Analysis. It doesn't just analyze your credit history. It analyzes the history of the businesses you're doing business with. If you have a customer with a bad credit record, they can deny your credit. If you have a customer you know has a bad history, find a way to move that account. We had a company we did that with because we knew if we didn't Wells would deny the loan.

You need to understand all your potential collateral for lines of credit. Asset-based businesses are fairing better. You can step up the value of real estate holdings by claiming fair market value on holdings you may have had for awhile.

How do you avoid having. Use your credit line, even if only temporarily. If you're not using your credit line, banks think you're not growing. Periodic pay downs are critical. Banks don't fund losses. They fund growth.

If you have assets you can liquidate to get cash, cash is king right now.

Have relationships. Treat your banker the way you treat your fuel supplier. Constant communication is required.

One of the things I see is folks putting what should be long-term assets in their short term line. It was easy, they had room on the line, and they got it done. You've got to put long-term assets on your long-term lines. I can't encourage you enough to have a different lender on terms to take care of improvements at your dealers. Dealer contracts are not enough. You have to have third party dealer finance programs. It's not using your line wisely. And bankers can choose not to renew you just because you're misusing your credit line.

Food is doing well in this economy, food and health care. I had a customer who was in the food business and doing very well. He didn't use his credit line for 12 months and the bank took it away. Try not to do that. Work with your accountant and your attorney and make sure this doesn't happen to you.

Get rid of balance sheet busters. Airplanes, condos, yachts, other things that can be cash eaters can hurt your balance sheet instead of helping it.

Bankers tend to be bureaucratic. Loan officers are marketing guys. They want to get things through credit committee.

Any lender is going to want two things if you have a retail site: cash flow to cover the specific site. It could be a tar paper site that throws off great cash. On the other side, he wants value. That could be a marble Taj Mahal that no feet ever cross the doorstep but it's a great loan to value. Then they're going to look at your other sites and make sure they're not hemmoraging and their money is really going to go there. Then they look at your company overall and make sure it's a good operation.

With this economy, some of the values of equipment have totally plummeted in terms of refinancing and using it as an asset.