March 2012

Amalgamated Capital Cultivates Relationship in Closing Financing for Klochko Equipment Rental

In any business, the quality of relationships forged can be the determining factor in getting a job done, and the asset-based financing industry is no exception. This was the case of Amalgamated Capital and Klochko Equipment Rental, where an open and honest relationship cultivated between the two companies proved key to originating the right financing to meet the Midwest-based company’s needs.

In late summer 2011, Frank Marsicano, first vice president and business development officer at Amalgamated Capital was made aware of a potential deal with a family-owned business based in Melvindale, MI, a suburb of Detroit.

Klochko Equipment Rental Company Inc. provides rental equipment to commercial, industrial, mining, shipping and construction companies. The company was founded in 1951 by Steve Klochko Jr., who previously had worked in the concrete business with his father Steve Klochko Sr. In its infancy, Steve Jr. offered rental equipment to clients when “the post war boom of labor and time saving new equipment was coming into the construction market,” according to Robert Klochko, president.

Now, 60 years later, Steve’s two sons Robert and Thomas, equipment control specialist, manage the business with Steve as chairman. Both sons have more than 30 years of experience in the company. Klochko’s fleet includes a variety of equipment from aerial lifts and air compressors, to backhoes, compactors, cranes, demolition hammers, loaders, dozers and dumpers to excavators, forklifts, generators and light towers.

Before meeting up with Amalgamated Capital, Klochko had a line of credit with a local bank consisting of a one-year revolver and a straight-line amortizing term loan. As the company’s growth has continued over the years, especially in 2011, when it experienced “record breaking volume,” it was looking for additional financing options to be able to expand not only its equipment fleet but also geographically.

Finding the Right Partner

In light of the economic struggles of the past few years, accessing more flexible financing has been difficult for any company, but especially for one in the equipment rental industry. According to Robert, “The most glaring challenge [in finding adequate financing] is to overcome the past few years’ historical performance, which was driven by the economic downturn. Most lending institutions are very focused on financial statement driven measurements and finding a potential lender that will consider the ‘whole’ story is very difficult.”

In looking at its options from multiple bidders including Amalgamated Capital, the company was able to make a determination based on what has become a good working relationship between the two companies. “Amalgamated was willing to listen to the ‘whole’ story as referenced above. They recognized the strengths of the company that were being hidden in the financial reports. Also, they were willing to work with us and to learn the specific business intricacies that were crucial to how we operate,” he explains.

After hearing about the potential transaction, Marsicano began not only researching the company but also the industry, and soon with Robert Love, director of Amalgamated Capital, met with Klochko and began discussing a transaction that would benefit the company. “We were going over the financials … we were seeing how we could structure it to add value more than they were getting from a strict bank line and apply the ABL process to it. By doing that, we were able to create a three-year facility for the company that would meet their immediate needs and also give them a three-year period to grow,” Marsicano says.

The ABL itself was solely funded by Amalgamated, acting as lead arranger and administrative agent. “We did a term loan with a delayed draw and all in,” Love says, “it’s about 75% term loan after the delayed draw and about 25% revolver. So it’s a little different than your typical asset-based facility where you’re more into a revolver with a smaller portion into the term loan side.” The smaller term loan with a delayed draw allowed Klochko to purchase additional equipment and grow its business, Love says,

The structure and the term, Marsicano says, gave the company not only flexibility but comfort, “knowing that every year they don’t have to go back for renewal. Since we’ve closed, they’ve received favorable vendor rates, it’s been very helpful for them…”

Offering Flexibility, Security

The differentiating factor in Klochko choosing Amalgamated was, Marsicano believes, the lender’s ability to provide that flexibility. “It was our ability to give them a multi-year platform and let them do their business. I think the one thing we were impressed with in our multiple visits to the company was that they knew their business. This is a family-run company. They know the area, they survived many a downturn and I think Bob, myself and the Amalgamated Capital group were just impressed on how they were able to remain profitable during the downturn.”

As Marsicano notes, since 2008, revenue growth in the equipment rental business had declined significantly, and that drop continued to increase in 2009 and 2010. Adding to it was the landscape in Michigan itself, which was suffering because of the issues and restructuring facing the major car manufacturers. “I think it’s a testament to the company’s ability to survive that was most impressive. They are a small, regional player going up against the national rental companies. I think now, the company is in the perfect position, they have a new line of credit, they can grow as a company. You see what’s happening in Michigan — GM just released their largest profit ever this past year, so I think it’s bright times ahead for them,” Marsicano says.

Love adds, “We did do our homework on the equipment rental side, and we felt this was a good time to lend to equipment rental companies. Frank spent a lot of time analyzing the industry.”

For his part, Marsicano says, “Going from the peak in 2007 as far as the liquidation value of rental equipment, the valuations had been hit hard over the past couple of years and they started rebounding over the past three quarters, and I think it was the perfect company in size for us to take advantage of that. We got the appraisals that were able to back our line and give the company the growth. It was definitely a great time to enter into the equipment rental industry and I think construction in general.”

It took about three months for the transaction between Amalgamated and Klochko to be completed, and in that time both parties were able to get to know the other and discover what options were available. The first hurdle that was easily solved was the geographic distance between the borrower in the Midwest and the lender in New York. According to Love, “I think it took a lot of trust on their part. We were the guys from New York; we weren’t the local guys. For what it’s worth, they’re good people. They took the time to get to know us a little bit and understand who we were.”

Klochko was able to get the bigger picture of its potential new lender by getting to know the decision makers. “We spent a lot of time with the company not just to understand their financials but to understand their philosophy, Marsicano says. Love adds, “We went out there twice to talk to them and then we were constantly talking to them every step of the process. We brought our people out there.” Along with Marsicano and Love, the company’s team leader in underwriting and chief risk officer also made the trip to Michigan, Love says, “so they knew when we sat down with them exactly who they were dealing with… They knew we were serious and that we were the team that could make decisions.”

Marsicano adds, “I think it started from day one. I think we set the expectations right up front. We told them what we could do and what we weren’t able to do, and as the process went on … the company gained a lot of comfort in that. With today’s technology, as much as you want to be a bank locally, Amalgamated Capital has the technology available to them to do deposits, scan their checks. They don’t necessarily have to visit a brick and mortar to conduct their banking business.” Along with the ABL, Amalgamated is also doing Klochko’s checking and operating accounts and is utilizing cash management services as well.

For ABLs, Appraisals are Key

For any asset-based lender financing to an equipment rental company, the appraisal is one of the most important factors. “No matter what you do when looking at equipment especially in an equipment rental company, obviously the most important thing that you’re going to have done is the appraisal,” Love says. The appraiser that was used, he adds, was one that had been out to the company, and had experience liquidating this type of equipment and machinery. “It’s important to have the appraisal company know what they’re doing because everything that you’re doing in terms of lending money is relying on their expert opinion on it.”

Financing Provides Growth

The financing has now allowed the company to reach its future goals and plans. In the press release announcing the deal, Robert Klochko said, “This financing provides the liquidity needed to support the continued expansion of our business. With the additional resources provided by Amalgamated Capital’s financing, we were able to go out and obtain a very favorable discount on an equipment purchase we had been targeting for some time.” He adds, “The financing helps us attain our goals of adding to the fleet numbers and being able to replace older equipment at the optimum time. We have one less burden in place when we need to react to the market’s constantly changing environment. We were able to receive a cash discount because the borrowing facility was in place.”

The company also plans to branch out to Grand Rapids in the next 18 months. Robert notes, that the expansion “will effectively afford coverage of the two largest centers of commerce in the state of Michigan.”

This expansion in both areas is necessary for the company to remain competitive with the mostly larger, national players. “They have the ability to adjust pricing to lure customers who are looking for low cost. This presents us with a challenge of ensuring our value is higher than the competition as there may be times when our ability to adjust pricing will be limited. We make this up by emphasizing the service side of our rental industry, consistently making sure our customers are completely satisfied with the equipment, price, availability, servicing and general overall experience when working with Klochko Equipment Rental,” Robert says.

Lending to Those You Trust

This attention to service and customer-focused philosophy fits right in with Amalgamated’s approach in lending to its clients, especially family-owned and privately held companies. As Love explains, “With a family-owned company, there’s less chefs in the kitchen so to speak so you really have to trust the people that you’re dealing with and you have to know the individuals… We were very comfortable with this family-owned business because we felt as if the individuals that were running the company, mostly the two brothers, knew this industry inside and out.”

Marsicano concurs, “The company has been around for 60 years. The current principals literally grew up in the company. They know the region, they know the players. This is their business, this is their livelihood. This is what they do best, and we became very comfortable. I can’t stress enough that the systems that the company has in place would rival any major corporation. They know each piece of equipment inside and out, from utilization and so forth, so it was quite impressive.”

Love adds, “One of my past mentors one told me: ‘You don’t necessarily lend money to a company, you lend money to the people.’ Robert and Tom Klochko … have an impeccable character… They are extremely knowledgeable of the company and the industry and again it falls back on you lend money to the people, people that you trust, and we were very comfortable lending it to this family.”

Amanda L. Gutshall is an associate editor of ABF Journal.