The economy and the OOH industry has had a strong run over the last ten years. Cash flows are strong, profits are up and our values have been at all time highs.
It has been good times for banks too, especially in the last two years. Their profits have been strong, loans have grown, interest margins have been solid, and problem loans have been low. Owner,Operators in the OOH industry have seen unprecedented interest from local and regional banks and the bankers realization that OOH is a solid business model.
The big question now is, what happens when market conditions change? The immediacy of the Covid 19 outbreak has all of us on edge. Insider went to the source for a roundtable discussion with Rickard Strom, SVP-Outdoor Media Lending of Metro Phoenix Bank and Craig Berry, VP of Stark Capital Solutions.
What would you describe as your target size for a deal in the OOH industry?
Craig – From a senior lending standpoint, our ideal deal loan size would be in the $1,000,000-$5,000,000 range. This would translate to companies with approximately $200,000-$1,000,000 in Operating Cash Flow. However, we have the capability to do transactions between $250,000-$10,000,000.
Rickard – Our current target loan size is between $1MM and $10MM.
With the new reality brought on by the Coronavirus outbreak, have you seen any immediate impact on how you or your bank are evaluating or working with existing borrowers?
Rickard – We are currently trying to assess the economic impact to our customers. Metro Phoenix Bank will work with its customers that have been impacted negatively by the Coronavirus outbreak. We are staying in contact with our customers to give them support, if needed. In regards to the OOH industry, it appears the independent operators have seen minimal financial impact so far. They generally operate with high cash flow margins and should be able to withstand a significant decrease in revenue over the short term. The industry is still well positioned for the long term.
Craig – The immediate impact we’ve noticed so far has primarily been in the stock market (LMR, OUT, COO all recording 5-yr. lows), resulting in the Fed’s slashing rates in an attempt to increase spending. However, our internal process for evaluating new opportunities, as well as working with existing borrowers, is remaining the same. We expect the industry, and our borrowers, will perform in the resilient way they have in the past. We feel sticking with the underwriting that has worked in the past will allow us to continue providing capital for smart projects, even if the economy slows.
This has been a very vibrant lending market. Has the outbreak impacted the banks desire to generate new lending customers?
Craig – We are actually in the process of approving 4 new OOH loans this week alone, and witnessing quick approval/response times from our bank partners. Although the future is somewhat unknown, we feel confident funding will continue to be available to the OOH Industry. Our lenders and investors appreciate the significant market value of OOH assets over and above our lending limits. Even with some potential softening in market value, there is still meaningful equity over and above leverage levels.
Rickard – Metro Phoenix Bank is still lending and we are taking on new customers. We will remain engaged in underwriting new loan requests in the industry, however, until additional clarity is obtained on the COVID-19 impact on operator cash flow, we will maintain a prudent and extremely cautious approach to new opportunities. Our primary focus at this stage of the COVID-19 crisis is to ensure existing clients are positioned to weather this challenge. We remain bullish on the industry, but patience will be invoked until we can identify more certainty on the crisis impact.
What advice would you give owner/operators as they manage their lending relationships through the crisis?
Rickard – Stay in close contact with your Bank and let them know early if there is any potential cash flow shortage in the future. Metro Phoenix Bank is committed to help its customers to get through this pandemic.
Craig – Keep an open line of communication. Lenders always appreciate transparency and open communication. Show your lender your pipeline of booked business. If they deal with a variety of industries, they will appreciate the stable nature of long-term ad contracts, versus some of the other businesses they might have exposure with. In addition, most OOH operators run at profit margins that can tolerate some revenue drops. Perhaps run some cash flow scenarios that illustrate your ability to cover loan payments even with a drop in revenue. Lenders like knowing that their borrowers are paying attention, and planning for downturns.
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