Editor’s note: The following narrative, prepared exclusively for the ABF Journal by Salus Capital, provides insights into the circumstances under which Salus originated and closed its inaugural ABL transaction with Canadian retailer of women’s apparel, Northern Reflections, a portfolio company of New York-based private equity firm York Management Services.

When Northern Reflections completed its C$6 million financing in February, the transaction gave the Canadian women’s apparel retailer additional working capital availability, but it also marked a new milestone for Boston middle-market asset-based lender Salus Capital Partners: the deal was its inaugural ABL transaction in Canada. In a country dominated by the Big Five and where few U.S. banks compete in asset-based lending, the deal was all the more remarkable in that it closed just five weeks after its origination.

Mark Sturrock, senior managing director, Canadian head of Originations & Corporate Strategy for Salus Capital Canada, had barely settled into his downtown Toronto office a month earlier when his phone rang one morning in December. Bruce Kesse, vice president at New York private equity firm York Management Services and long-time acquaintance, was on the other end of the line. York’s Northern Reflections unit was seeking a new source of working capital to replace its bank revolving credit line, and Canadian bank asset-based lenders were too restrictive in terms of meeting seasonal highpoint financing needs. In Kesse’s words, the Canadian banks seemed to be “acting more like cash-flow lenders than asset-based lenders.”

Founded in 1985 in Guelph, Ontario, Northern Reflections has evolved into a well-known women’s apparel retailer with 160 largely mall-based stores throughout Canada, employing approximately 1,200 employees. The company, which designs and sells its own merchandise, also manages its own 330,000 square-foot distribution center in Milton, Ontario.

Northern Reflections, formerly a division of Woolworth & Co., was acquired in 2001 from Footlocker. The athletic shoe company sold the company as part of a strategic move to focus on its core shoe business. Today, Northern Reflections continues its strong strategic relationship with Footlocker, serving as its third-party logistics provider for 170 Canadian Footlocker and Champs brand stores.

Refocusing Operations

In the ensuing years after completing the acquisition in 2001, Northern Reflections improved the fashion level of its merchandise, brand awareness among consumers and optimized its merchandising strategy. At the same time the company shifted its business model from one focused on providing an ‘assisted self-serve’ consumer business model to one offering store associates who were highly trained and focused on improving the customer experience at the store level. Led by president Lalonnie Biggar and managing director Bill Booth, Northern Reflections further embarked on a campaign to make the company more profitable by divesting underperforming divisions, rationalizing its real estate portfolio and improving its IT and point-of-sale infrastructure.

As a result, Northern Reflections has been able to progressively and better manage its expenses. While the company was working hard to trim the fat from its operations in the years that followed 2001, the fragmented Canadian apparel retail industry remained buoyant even as consumer spending in the U.S. and Europe stalled because of the U.S. housing market crash in the 2007 to 2008 period.

In more recent years, the retail sector in Canada has continued to experience steady growth. Data indicates that despite a modest slowdown anticipated for 2013, the industry is expected to remain resilient through 2016. The women’s wear segment — the apparel segment that Northern Reflections fits within — was the industry’s most lucrative in 2011, with total revenue of $13 billion or equivalent to 53.2% of the industry’s overall value, according to data research firm MarketLine. The overall retail market in Canada is expected to slow slightly in the coming years, though, with its compounded annual growth rate expected to total 3.1% for the fiscal-year period ending in 2016 and total $30 billion.

Opportunity Knocks

When Sturrock and Kesse connected in December, the call couldn’t have been more auspicious. One month earlier the investment banking veteran, who had previously held senior lending roles at CIBC and Wells Fargo Financial Canada, had joined Salus Capital to spearhead its Canadian platform. Supported by a near 30-person strong staff from the firm’s Boston parent, Sturrock was tasked with originating and structure financing commitments ranging from C$3 million to C$50 million with ability to agent up to $100 million for Canadian businesses that operate across a wide range of industries, including manufacturing, wholesale, retail, transportation and distribution.

The culmination of the Northern Reflections deal was no small testament to the connections Sturrock had cultivated throughout his finance career with private equity executives in the U.S. and Canada. More importantly, Northern Reflections’ unique financial requirements couldn’t have been a better fit for Salus. For one, Canada’s major banks have largely moved away from offering pure asset-based financing to hybrid products comprised of a combination of ABL and amortizing cash-flow loans. Because Northern Reflections operates in the retail sector — an industry that Salus Capital CEO Andrew H. Moser and senior vice president Marc S. Price have considerable experience in financing — and its business was subject to seasonal cyclicality, the company was well positioned to benefit from the firm’s core ABL offering. Additionally, as one of Canada’s largest privately held apparel retailers targeting women in the 45-65 age demographic, the popularity of Northern Reflections’ trendy casual apparel among Canadian women has resulted in consistent, stable revenues.

“We look for something that is unique to the credit story that encourages a Canadian borrower to seek a capital structure that they can’t normally obtain from commercial banks,” Sturrock says. “The types of companies that we are looking to finance are seeking increased access to working capital, whether it is to support strategic growth objectives or provide liquidity in connection with seasonal cyclicality, and particularly those that are not able to obtain new sources of credit from the traditional lenders.”

Moser agrees, “In today’s market, access to capital increasingly comes from non-traditional or alternative sources. Salus is able to differentiate itself in the Canadian market by providing timely solutions designed specifically to fit the borrower’s needs and to keep pace with today’s rapidly changing environment.”

A New Marketplace

The opportunity to obtain an ABL in Canada was around for a long time, but there’s little doubt the country’s loan market has changed in a big way since the late 1990s. That’s when a number of major U.S. banks, enticed by the strong demand for ABL and opportunity to expand their geographic footprint in the northern nation, sought to take market share from the country’s domestic banks. The new entrants dominated the ABL business for a few years, but the Canadian banks punched back and began offering ABL as a defensive measure to avoid further encroachment from American banks.

As the mid-2000 new millennium took hold, competition from Canadian banks got stiff, private equity investing took and cash-flow lending market grew, U.S. banks started winding down their ABL business in Canada as they found the number of viable asset loan opportunities weren’t that great. Canada’s large banking houses such as the Royal Bank of Canada, Bank of Montreal, TD Bank, CIBC and the National Bank of Canada grew to dominate the ABL landscape. But the Big Five, too, began to turn their attention away from ABL and towards syndicating large cash-flow loans for mega billion dollar buyouts that could command rich fees and follow on business from financial sponsors. In time, the country’s larger banks drifted away from financing small-to mid-sized companies, leaving a vacuum for pure ABL financing.

Sturrock says the ABL market today totals $7 billion to $9 billion in aggregate outstanding ABL commitments and offers an annual compound growth of 10% to 12%. Interestingly enough, today’s ABL market is relatively new and underdeveloped in the small-to middle-market segment as compared with the U.S. marketplace for asset-based loans. Canada’s ABL providers are primarily focused on larger businesses and do not offer the same range of alternative capital options such as mezzanine debt. That, in turn, has created new opportunities for secondary market lenders that are able to structure flexible financing packages with attractive pricing like Salus, Sturrock says. “The Canadian ABL bank lenders have become extended credit stores, but the problem is that many don’t offer pure ABL solutions at competitive prices that are advantageous for their clients.”

As Salus Capital’s point person on the transaction, Sturrock is keen to point out that the company’s existing bank did not want to renew with Northern Reflections wasn’t indicative of anything being wrong with the retailer. Rather, he notes, what was at issue was its inventory-only business model that didn’t let its lender finance against its receivables.

The negotiation of Northern Reflections’ new credit facility with Salus went very smoothly. “The fact that we provided a superior structure to any of the financing packages offered by the Canadian lenders made the choice for Northern a very easy one,” Sturrock said.

If recent deal activity by Salus Capital Canada offers any indication, the opportunity to provide middle market ABL in the Great White North isn’t going away any time soon. Two months after completing the Northern Reflections transaction, Salus Capital Canada financed another women’s retail clothing company in April, Laura’s Shoppe (P.V.), with a C$35 million senior secured credit facility. To date, the Massachusetts firm will have successfully closed on four financings in Canada.

Considering that Sturrock initially took a very conservative view of financing opportunities in Canada, the firm is off to a very strong start.

For a full listing of complete transactions, please see