Like virtually all companies, waste collection and disposal firms see their business shrink during recessions. The construction and demolition (C&D) segment weakens as the construction industry declines. Roll-off business falters, thanks to declining retail sales. The same happens to restaurants — fewer patrons means less food waste.
Still, people and businesses always have trash to get rid of. After the inevitable decline, waste companies usually plateau at survivable levels. Those that have diversified their businesses well beyond the C&D and roll-off sectors and shrewdly manage their finances can be confident of survival.
But, the current recession has plunged deeper and will likely last longer than any downturn since the Great Depression. What does that mean to capital intensive waste companies that, recession or not, must constantly replenish fleets and maintain large complements of heavy equipment? Depending on their size, haulers use a variety of means to finance themselves in an economic downturn.
Investment Grade Strength
Fifteen months into the recession, the performance of Phoenix-based Republic Services illustrates the strength of an investment grade company. Unlike most firms, the $9 billion company doesn't bother with leasing plans or loans that use assets, such as trucks and heavy equipment, as collateral. Instead, Republic uses lines of credit, which for giant financial powerhouses cost less than other forms of financing.
Republic also got lucky. The company put together $2.75 billion in revolving bank lines of credit during the summer of 2008 to prepare for its merger with Allied Waste Industries. “We closed the line of credit in August (2008), and the banking system shut down in mid-September,” says Edward Lang, senior vice president and treasurer for the company.
' current line of credit will last until mid-2013, when it must be renewed — hopefully long after the end of the recession. Five years is a typical term for an investment grade line of credit.
Relatively low interest rates also characterize lines of credit. Rates are set as a percentage over the London Inter-Bank Offering Rate (LIBOR), a floating rate that banks charge each other for money. According to Lang, the percentage over LIBOR depends on how Moody's Investors Service and Standard & Poor's rate a company. Republic Services' investment grade rating entitles it to use its credit line for LIBOR plus 1.3 percent.
Suppose that the LIBOR interest rate, which resets every day, is a half of a percent for a one-month term. Republic Services could tap its line of credit at an interest rate of 1.8 percent — and use the money for a month. The three-month LIBOR rate might be 1.4 percent, in which case Republic would pay 2.7 percent for money used over that period of time.
Smaller firms have less flexibility than the giants. For example, the $45 million E. L. Harvey and Sons, Inc., a full-service regional waste management and recycling company based in Westborough, Mass., is using a mix of 12-month bank lines of credit and manufacturer financing to get through the recession. “In decent years, we finance out of cash flow,” says Ben Harvey, the firm's executive vice president. “Lately, we have been using traditional bank financing.”
E. L. Harvey maintains two kinds of lines of credit, both with one-year terms. One line funds equipment, while the other covers operations. Both carry interest rates of .25 of a percentage point above prime. As of press time, the Federal Reserve Bank prime interest rate is 3.25 percent.
Harvey says the firm considers using manufacturer financing and its equipment line of credit for all equipment acquisitions. The choice usually, but not always, depends on which one offers the best interest rate. “When we use manufacturer financing, it is strictly for a single piece of equipment,” Harvey says. “But the bank doesn't like it when we do that because it reduces the amount we borrow against our equipment line of credit.”
In a nod to the slumping and uncertain economy, Harvey says that the company has disciplined its use of credit. For instance, the firm has plans for a large material recovery facility on the drawing board. “We have a timeline for the project but we've been extending it out as far as possible,” he says. “We believe we could finance it today, but the business climate just isn't right.”
The company also has taken pains to keep several banks it deals with informed about the status of business. “We meet with our bankers every year and go over our plan for next year,” Harvey says. “We also keep them informed on potential needs. For example, if we are bidding on a municipal contract that will require us to buy five trucks, we let the banks know that we will need, say, $1 million.”
Over the years, E. L. Harvey has taught its banks about the waste business. “Our relationship with our primary bank goes back many years,” Harvey says. “If our loan officer moves on, we meet with the next person right away to talk about how the waste business works. We bring new loan officers to WasteExpo to help them understand what the equipment we buy looks like and what it costs.”
Where the Going Gets Tough
The smaller the company, the tougher it is to deal with today's financing challenges. A third company, which asked to remain anonymous, is a full-service firm that provides commercial, residential and industrial collections, and has about 150 employees.
This company has one bank line of credit, which funds its operations. It finances equipment purchases through manufacturers. When the company buys John Deer equipment, for example, the manufacturer's financial arm holds the paper.
The operating line of credit from the bank plays a critical role in the company's ability to pay its monthly bills for salaries, rent and equipment. “Our customers are stretching out their payments,” one executive with the company says. “We're getting paid now in about 45 days, while our operational costs have to be paid every 30 days.”
“In addition, our bank bases the size of our line of credit on our receivables, which have gone down as construction and demolition, industrial, and retail customers have reduced the volumes of trash they generate,” he says. “Those categories of business have declined by 40 to 50 percent. So far, the bank hasn't reduced our line of credit, but we're being very careful to keep the bank apprised of how our other business sectors are going.”
It's Not Your Fault
“Unfortunately, many entrepreneurial companies today qualify as good credit companies, but banks just aren't lending” Lang says. Banks have capital compliance standards, he adds. They can only lend a certain percentage of their total capital. Banks that are not lending can't lend because they have reached their limits, and banks that can lend today may not be able to lend tomorrow if they have to write off too many bad loans.
As a result, all banks are conserving capital. “Entrepreneurs in our business and in other businesses are caught in the trap,” Lang says. Advising firms to fund capital expenses to the extent possible from cash flow, he goes on to say that it is important for waste companies of all sizes to nurse relationships with their banks.
When will this be over? No one knows, but the first signs that the economic decline may be bottoming out will likely include stabilized real estate valuations and an unemployment rate that has stopped rising. Until then, be careful.
Michael Fickes is a Westminster, Md.-based contributing writer.
How to Borrow During a Credit Crunch
As lending standards continue to tighten, small businesses in virtually all industries have begun to feel locked out of the credit markets. But that shouldn't necessarily be the case, says an official with the American Banking Association (ABA).
“Commercial bank loans are still available for small business owners who know how to position themselves before applying,” says Bob Seiwert, a senior vice president and director of the ABA Center for Commercial Lending & Business Banking.
Seiwert says that small businesses can maximize the opportunities of getting a bank loan approved by taking five steps:
- Develop relationships with a number of financial institutions
Don't go to just any bank. Chances are a couple of financial institutions in your market make loans to companies in the waste collection and disposal industry. Check out those institutions. While you're checking, find out which of those banks loan to companies at your point in the business-life cycle. Some banks, for instance, don't deal with start-ups. Prepare a package for each institution you select. Include a current balance sheet with supporting schedules and inventories; three years of earnings; projected cash flows; short- and long-range goals and plans for achieving them; and details about income from other sources and personal debt.
- Explain your company's value proposition
A banker will not look favorably on a loan application from a company whose leaders cannot clearly define the company's target market and articulate why that market will want to do business with this company instead of others.
- Think like a banker
Study the risks of operating in your industry and develop a plan to mitigate them. Share the plan with your banker. It may provide a perspective your banker hasn't considered while conducting his or her own risk analysis.
- Develop two ways to repay the loan
Bankers always look for primary and secondary loan repayment sources. The first source might be your business itself. The second might be personal assets owned by you and your partners.
- Don't ask for loans when you may need more equity
Bankers are paid to make loans that will be repaid on time with interest. If your company is undercapitalized, you may need to find an equity investor before applying for a loan.