“When the recession hit, banks viewed security as specialty financing or linked to construction,” explains Jennifer Holloway, director of financial services for Irving, Texas-based lender CMS Capital Advantage. “They viewed it as increased risk. Suddenly alarm companies got a call from their bank saying their credit limit was reduced by the amount outstanding on their loan.”
Fortunately for dealers in that situation, lenders such as CMS Capital Advantage that specialize in security are still making loans. “We fill the void,” Holloway says. “For a new lender to come in and provide a line of credit, they have to pay off the old lender. We have done that for some dealers.”
Some potential sources of funding have essentially vanished, however. Between 1993 and 2008, about 80 percent of all U.S. loans were made by what Bill Polk, managing director for Chevy Chase, Md.-based Capital Source, calls “shadow bankers,” which he defines as organizations that relied on raising capital in capital markets, rather than on deposits. Those were the kinds of organizations that operated hedge funds and invested in sub-prime mortgages and as Polk explains, “That’s all gone now â€” only 20 percent of the sources of capital that were available previously are still operating in a fully functional way.”
“Generally speaking, we have learned that risk was ‘titanically’ underpriced,” Polk says. “We had too much liquidity chasing too much low-quality business at prices that didn’t reflect the risk being assumed. Lenders now are doing a more rigorous job of understanding risk.”
The upshot is that interest rates have increased to reflect what lenders perceive as increased risk â€” and lenders may not be willing to loan as much to an individual company as they would have in the past.
One lender to the security industry says loan requirements haven’t changed, but borrowers may not qualify for the recurring monthly revenue (RMR) advance rates that they would have in the past simply because the economic downturn has impacted the company’s performance. “Company financial performance determines both valuations and the amount of debt that lenders are willing to provide,” explains David Stang, Chicago-based senior vice president for Bank of America.
“The amount lenders were willing to lend on RMR was a multiple of 26 to 28,” notes Jeff Kessler, the New York-based managing director for Imperial Capital. “Now it’s 20 to 22.”
Some lenders also are attaching stricter terms to their loan agreements. For example, Kessler explains that even though interest rates have decreased overall, some lenders have put what he calls “LIBOR floors” on loan agreements. The LIBOR, or London Interbank Offered Rate, is the interest rate at which banks are willing to lend money to each other; it fluctuates based on market conditions. A LIBOR floor essentially sets a minimum rate to which the interest rate on a specific loan can fall.
Since the downturn, loans also are likely to have stricter covenants attached to them. One example might be to require the borrower to maintain a certain ratio of RMR or earnings before interest, taxes, depreciation and amortization (EBITDA) to debt. “The covenant-light loan is a thing of the past,” Kessler says. He adds, however, that “covenants that were incredibly heavy have begun to lighten a bit and we’re seeing the beginning of the elimination of LIBOR floors.”
Because of the costs involved for the lender in making an individual loan, smaller alarm dealers have always had more difficulty getting loans and getting good terms than larger players â€” and that trend may have become more pronounced since the downturn. “It’s easier to find $10 million than $250,000,” Polk comments. “Many commercial lenders specializing in small businesses have pulled in their horns.”
While dealer programs typically are set up on an ongoing basis, with the dealer getting money for new accounts as they are added, some organizations, including San Ramon, Calif.-based SAFE Security, will buy a block of accounts from a dealer on a one-time basis.
“We’re seeing more people wanting to sell,” comments Paul Sargenti, president and CEO of SAFE Security. He adds, however, that accounts may not be worth as much as they would have been before the economic downturn â€” and not every dealer has accepted that reality.
Alarm Funding Associates of West Chester, Pa., another company that buys blocks of accounts from dealers, has a bit different take. “Valuations have maintained pretty well in this economy,” comments Joe Monachino, Alarm Funding’s chief marketing officer. “We value accounts based on the length of service of the customer base. We deal with traditional alarm companies that have been in business for 10 to 20 years.” Dealers selling accounts to Alarm Funding Associates continue to service those accounts and, Monachino says, the accounts have a high likelihood of retaining service, which means they may be just as valuable as they were prior to the downturn.
“Over the last several decades, no lender has suffered major losses in security, so there’s no real reason for lenders to pull back,” Sargenti relates.
Polk adds that, although interest rates are higher than they were prior to the pullback in the financial markets, those rates are still lower than they have been in the past.
The Franchise Route
“There were a lot of accounts that I garnered this year that I had very little to do with,” Montalvo comments. With 19 franchisees nationwide focusing strictly on the commercial market, Security 101 functions for end user organizations as if it were a single nationwide company. A franchisee in one part of the country may sell a job to a customer with multiple locations who also needs work in other parts of the country, and other Security 101 franchisees can pick up that work. Because all franchisees operate based on the same standards and with the same processes, the customer obtains a high level of consistency from one area to another.