TSL January 2017

THE SECURED LENDER

Look closely and see the world’s preeminent authority on maximizing asset value.

Representing the Asset-Based Financing, Factoring & Supply Chain Finance Industries Worldwide Jan/Feb. 17

JANUARY/FEBRUARY 17

IN THIS ISSUE PREDICTIONS FOR A MATURE MARKET P12

THE CAPITAL MARKETS ISSUE

CLUBBED AND SOLE LENDER FINANCINGS GAIN MOMENTUM IN ABL SPACE; SYNDICATED ISSUANCE DIPS IN 2016 P16 DEBT MARKET OUTLOOK FOR 2017 P20 THE ACA’S IMPACT ON HEALTHCARE LENDERS P26 BORROWERS SPEAK OUT P30

DEPARTMENTS COLLATERAL // THE CFA BRIEF PROFILE // WHAT WOULD YOU DO? REVOLVER // LEGAL NOTES

ACCOUNTS RECEIVABLE INVENTORY DISPOSITION

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APPRAISAL

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M&E

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BRAND ADVISORY

RETAIL CONSULTING

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EQUITY INVESTMENTS REAL ESTATE

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SECURITY

An examination of Hilco Global today illuminates the unparalleled depth and breadth of our integrated services. Our team has a unique understanding of tangible and intangible assets built upon decades of experience in providing both healthy and distressed companies with creative solutions. We often support our recommendations with capital, sharing both risk and reward. As principal or agent, we have completed billions of dollars of transactions, and are truly vested in your success. Please contact Gary Epstein at +1 847 418 2712 or gepstein@hilcoglobal.com.

www.hilcoglobal.com North America / South America / Europe / Asia / Australia

Yearly Review

THE

CAPITAL MARKETS ISSUE

underperforming At Gordon Brothers, we have the experience, expertise and capital to help companies respond to changing conditions. But just as important, we move quickly to develop custom solutions for each client’s unique situation.

Because underperforming assets need an overperforming partner.

HPD Software helps banks and finance providers deliver better working capital finance solutions, create a superior experience for their clients and grow their business anywhere in the world.

ABLE as a Service VALUATIONS

DISPOSITIONS

OPERATIONS

The new cloud based ABL solution from HPD Software

INVESTMENTS

Call +1 (805) 544 5821 www.hpdsoftware.com/able GORDONBROTHERS.COM

Portfolio management software for asset-based and corporate finance lenders

“They executed our deal with the kind of precision we need in the middle-market lending space.”

WELLS FARGO CAPITAL FINANCE Our Lender Finance team serves: Asset-based lenders Factors Equipment leasing and finance companies Other specialty finance companies

Howard Widra, Partner, Apollo Capital Management, L.P., and David Moore, CFO, MidCap Financial Services LLC

MidCap Financial Services LLC, in alliance with Apollo Capital Management, L.P., provides debt solutions to middle-market companies. When its experienced and successful management team joined with equity sponsors to establish the company in 2008, the leadership team called on the lending experience and syndication capabilities of the Lender Finance team at Wells Fargo Capital Finance to support their new venture. And when MidCap was ready to expand further, we arranged additional financing to keep the company’s momentum going.

We help specialty finance companies like MidCap achieve their financial goals, offering facilities starting at $15 million. To learn how our Lender Finance team can work with you, start a conversation today by calling 1-877-770-1222, or visit wellsfargocapitalfinance.com/midcap.

© 2016 Wells Fargo Capital Finance. All rights reserved. Wells Fargo Capital Finance is the trade name for certain asset-based lending services, senior secured lending services, accounts receivable and purchase order finance services, and channel finance services of Wells Fargo & Company and its subsidiaries. WCS-2228314

WCS-2228314-WFCF-Midcap-9x10.875.indd 1

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Representing the Asset-Based Financing, Factoring & Supply Chain Finance Industries Worldwide

Volume 73, Issue 1

January/ February 17

FEATURES 12 Predictions for a Mature Market Key players in the capital markets provide readers with an overview of the past year as well as a look ahead to 2017. By Myra Thomas

16 Clubbed and Sole Lender Financings Gain Momentum in ABL Space; Syndicated Issuance Dips in 2016

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16

20 Debt Market Outlook for 2017

Maria Dikeos of Thomson Reuters LPC provides readers with an update on the capital markets.

By Maria Dikeos

Two Skadden attorneys reveal what lenders should look out for in 2017.

By Seth Jacobson and Darrin Halcomb

26 The ACA’s Impact on Healthcare Lenders

The ACA has changed how healthcare providers must manage their working capital to be successful. In this article we learn what has had the greatest impact on them, as well as the need for lenders to continue to adapt to upcoming ACA changes under the incoming administration.

By Jennifer Sheasgreen and Zachary Reed

26 30 Borrowers Speak Out

Ever wonder what advice borrowers would give to lenders?

Or why they chose the lenders they did? In this interview, The Secured Lender’s editor-in-chief discusses those questions, and more, with Rick Lonson, CFO of Factory Motor Parts (FMP), and Joe Vaccarello, CFO of Maxim Crane Works L.P.

By Michele Ocejo

DEPARTMENTS 6

Letter From Bob Trojan, CEO of the Commercial Finance Association, discusses how CFA can help you meet your 2017 goals.

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Collateral The latest issues affecting the ABL and factoring industries, including company news and personnel announcements.

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TSL Profi le Yvonne Kizner, senior vice president at Blue Hills Bank Asset-Based Lending Group, and Keith Broyles, senior vice president, head of Asset-Based Lending, discuss starting up Blue Hills Bank’s first ABL group. By Eileen Wubbe

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What Would You Do? In this edition of What Would You Do?, the Chief Credit Officer of Overadvance Bank learns that one of the Bank’s borrowers has several hundred thousand dollars in state tax liens filed against it in various states for past due sales taxes, and owes another $2 million in sales taxes for which a lien has not yet been filed. The borrower is tight on availability and tries to persuade the Bank not to implement reserves for the unpaid sales taxes. By Dan Fiorillo and Jim Cretella

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The CFA Brief 36 44 46

Among CFA Members CFA Chapter News CFA Calendar

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Advertisers Index

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Legal Notes The past year produced a number of important legislative and judicial developments affecting secured lending. In this issue, CFA’s co-general counsel have selected and summarized certain of the most interesting legislation and cases previously reported on in The Secured Lender.

By Jonathan Helfat and Richard Kohn, CFA Co-General Counsel

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Revolver Joe Accardi of Santander discusses the future of professional jobs and the importance of lifelong learning and adaptability.

STAFF & OFFICES Michele Ocejo Editor-in-Chief Eileen Wubbe Senior Editor Aydan Savaser Art Director

Editorial Offices 370 Seventh Avenue Suite 1801 New York, NY 10001 (212) 792 -9390 Fax: (212) 564-6053 Email: tsl@cfa.com Website: www.cfa.com

Advertising Contact: James Kravitz Business Development Director T: 646-839-6080 jkravitz@cfa.com

The Commercial Finance Association is the trade group for the asset-based lending arms of domestic and foreign commercial banks, small and large independent finance companies, floor plan financing organizations, factoring organizations and financing subsidiaries of major industrial corporations.

The objectives of the Association are to provide, through discussion and publication, a forum for the consideration of inter- and intra-industry ideas and opportunities; to make available current information on legislation and court decisions relating to asset-based financial services; to improve legal and operational procedures employed by the industry; to furnish to the general public information on the function and significance of the industry in the credit structure of the country; to encourage the Association’s members, and their personnel, in the performance of their social and community responsibilities; and to promote, through education, the sound development of asset-based financial services.

The opinions and views expressed by The Secured Lender’s contributing editors and authors are their own and do not necessarily express the magazine’s viewpoint or position. Reprinting of any material is prohibited without the express written permission of The Secured Lender.

The Secured Lender, magazine of the assetbased financial services industry (ISSN 0888255X), is published 8 times per year (Jan/Feb, March, April, May, July, September, October and November) $65 per year non-member rate, and $100 for two years non-member rate, CFA members are complimentary, by Commercial Finance Association, 370 Seventh Avenue, New York, NY 10001. Periodicals postage paid at New York, NY, and at additional mailing offices. Postmaster, send address changes to The Secured Lender, c/o Commercial Finance Association, 370 Seventh Avenue, New York, NY 10001.

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letter from THOUGHTS FROM CFA AND TSL STAFF

new year signifies a fresh start.

Do your resolutions include finding ways to respond to increased competition?

Learning more about FinTech/ Bank partnerships? Preparing the next generation? The list of challenges and opportunities in our industry is always growing.

And this is where CFA comes in. The ideas and solutions you need in 2017 are at CFA’s events, in our classes, within the pages of this magazine and embedded in the CFA Community.

The good news: The results of CFA’s Q3 ABL Index show growth and increased activity on multiple fronts. For larger lenders, commitments and asset-based loans outstanding were up. Utilization improved. Gross new commitments were higher than in the same quarter of 2015. Regarding portfolio performance, non-accruals improved while gross write-offs stabilized in Q3. The new credit commitments and higher total credit commitments reflect an economy that’s growing nicely. This is good for our industry as it indicates companies are building up inventories and adding working capital. It looks promising.

What are we planning for 2017? We’ll kick off the year with CFA’s Asset-Based Capital Conference, January 31-February 1 in Las Vegas. This is a must-attend event for key players in middle-market leveraged finance and where you can find your next deal.

With sessions examining the latest market update, threats from geopolitical risk and a lunch session featuring several CFA 40 Under 40 winners and the people who nominated them, this promises to be an amazing Conference.

Last year, CFA launched its 40 Under 40 Awards to celebrate the up-and-coming leaders in the industry and deepen the engagement of young professionals in the CFA Community. CFA’s 2nd Annual 40 Under 40 Awards will be open for nominations at the end of January with the Awards Celebration scheduled for September 28, 2017 in New York City. As the perfect complement to the Celebration, CFA’s Women in Commercial Finance Committee will be hosting the first women’s conference beginning on September 27 with a networking event and continuing the next day with educational workshops.

In March, we’ll be offering the Supply Chain and Working Capital Finance Forum on March 2 as well as a one-day conference focusing on specialty finance later in the month. Both will take place in New York City.

These are the places to be for truly senior executive networking.

Also new in 2017, our Education Department will be debuting our Foundations of Account Management Class, March 28 - 29, 2017. This dynamic two-day course will give new relationship managers a solid foundation of skills to effectively manage secured credit facilities of all sizes.

And in June, due to its overwhelming success in 2016, we are once again offering the CFA Leadership Program, in Atlanta.

In early 2017, our media properties department will unveil the new look for our TSL Express daily e-newsletter. It will be more mobile-friendly and streamlined, offering a faster read of the news you need now. Check out our 2017 media kit featuring our editorial calendar and new opportunities at www.cfa.com and plan ahead.

Many of you will be reading this issue at CFA’s Asset-Based Capital Conference and we’ve created the issue with that theme in mind. On page 12, key players in the capital markets offer their perspective on the current landscape.

Turn to page 16 for an update on the capital markets by Maria Dikeos of Thomson Reuters LPC. On page 20, Seth Jacobson and Darrin Halcomb of Skadden reveal what lenders should look out for this year in Debt Market Outlook for 2017.

The ACA has changed how healthcare providers must manage their working capital to be successful. In The ACAs Impact on Healthcare Lender on page 26, Jennifer Sheasgreen and Zachary Reed of Triumph Healthcare Finance discuss what is affecting providers the most.

Ever wonder what advice borrowers would give to lenders? Or why they chose the lenders they did? The Secured Lender’s editor-in-chief discusses those questions, and more, with Rick Lonson, CFO, Factory Motor Parts and Joe Vaccarello, CFO, of Maxim Crane Works L.P., on page 30.

I look forward to connecting with you, the members of our CFA Community, in the New Year!

“The results of CFA’s Q3 ABL Index show growth and increased activity on multiple fronts. For larger lenders, commitments and asset-based loans outstanding were up. Utilization improved. Gross new commitments were higher than in the same quarter of 2015. ”

6

REGISTRATION IS NOW OPEN FOR CFA’S SUPPLY CHAIN & WORKING CAPITAL FINANCE FORUM! WWW.CFA.COM

Bob Trojan CEO Commercial Finance Association

SAVE THE DATE!

Supply Chain & Working Capital Finance Forum March 2, 2017 | Mayer Brown Offices, NYC

CFA's Factoring World has changed its name...and zip code!

Register Now! Date: March 2, 2017 Time: 8:30 AM - 7:00 PM Location: Mayer Brown NYC, 1221 Ave. of the Americas

Our popular Miami event is now taking place in NYC. This one-day forum concentrates on supply chain and working capital issues and how you can not only navigate but dominate this market. Topics to be covered include U.S. export and global receivables financing, U.S. and International buyer-led payables financing, funding and risk distribution, technology solutions, origination and more. Brand-new name

Sending 5 or more people?

Contact Jeff Walsh at (646) 839-6084

and location, same great content. Mark your calendars!

Price: Members - $295; Non-Members - $395 370 7th Ave. Ste. 1801 • New York, NY, 10001 • Phone (212) 792-9390 • Fax (212) 564-6053

collateral INDUSTRY NEWS

THE INDUSTRY IN BRIEF

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David J. Turco to Lead AloStar’s New England Business Development Efforts David J. Turco, a veteran corporate finance and business development specialist, has been named Business Development Director of AloStar Capital Finance with responsibility for the sixstate New England area. Turco will focus on raising the visibility of AloStar Capital Finance by building relationships with intermediary partners and increasing opportunities for clients in the region.

Turco is a graduate of Bowdoin College in Brunswick, Maine, and earned an MBA from the Darden School of Business at the University of Virginia.

“I am very excited about the opportunity to help grow AloStar in the New England region,” Turco said. “Our focus on middle-market opportunities and emphasis on an entrepreneurial outlook gives me the opportunity to build new product lines to serve our customers.”

Turco most recently served as Assistant Vice President with GE Capital Corporate Finance in Chicago, where he was responsible for sourcing and analyzing new business opportunities in the 19-state Midwest region after completing GE’s Experienced Commercial Leadership Program for sales and marketing. Prior to his role at GE, he was Director of Marketing for TM Capital Corp. and began his career as a paralegal with Goodwin Procter, LLP. “We are extremely pleased to bring on someone of David’s talent and experience,” said David Phillips, Managing Director and National Organizations Director for AloStar. “We are confident that he will be successful in building the AloStar brand in the important New England market by assisting new and existing clients with their business goals.”

Turco brings to AloStar significant experience in business development, commercial strategy, analytics and product management. Additionally, he has expertise in financial modeling, company and industry analysis, and marketing.

About AloStar Capital Finance AloStar Capital Finance offers needed capital and counsel to business leaders across America who are creating their own success stories. Dedicated teams within AloStar Capital Finance create customized lending solutions for business with capital requirements between $5 million and $20 million through AloStar Business Credit, AloStar Lender Finance and AloStar Real Estate Finance platforms. AloStar Capital Finance is a trade name of AloStar Bank of Commerce, Member FDIC. For more information, visit www.AloStarBank.com.

Stacey Hadash Named Managing Director and the Metro New York Market Executive for Global Commercial Banking at Bank of America Merrill Lynch Stacey Hadash is managing director and the Metro New York Market Executive for Global Commercial Banking at Bank of America Merrill Lynch. She oversees banking teams that cover New York City and Long Island, providing a full range of solutions to companies with revenues of $50 million to $2 billion.

Stacey is responsible for delivering the entire enterprise to clients, including investment banking and capital markets, credit, syndications, global treasury services, leasing, risk management, global markets and wealth management.

Previously, she was chief operating officer for the firm’s Global Capital Markets business, which includes equity capital markets, investment-grade capital markets, leveraged finance, and derivatives and foreign exchange origination.

Stacey joined the firm in 2005 from The New York Stock Exchange, where she was managing director and head of Financial Planning. Prior to that, she

worked with former Texas Governor Ann Richards at Public Strategies, a communications consulting firm.

Stacey began her finance career as an investment banking analyst at Morgan Stanley. She later worked for the mergers and acquisitions group at Goldman Sachs in both New York and London.

Earlier in her career, Stacey worked on economic policy in the 1992 Clinton/ Gore campaign. Following the election, she was appointed as a Special Assistant in the Bureau of Economic and Business Affairs at the U.S. Department of State.

Stacey holds a BA from Smith College and an MBA from the University of Chicago Booth School of Business. She is a 2003 Henry Crown Fellow of the Aspen Institute and member of the Aspen Global Leadership Network. Stacey sits on the board of the Ann Richards School Foundation.

Gibraltar Business Capital Further Expands Business Development Team Gibraltar Business Capital is pleased to announce that Dave Meier has joined as Business Development Officer. Based in the company’s Northbrook headquarters, Dave will focus on the Midwest Region – including Ohio, Indiana, Michigan, Illinois, Wisconsin, Missouri, Nebraska, Kansas, Iowa, Minnesota, North Dakota and South Dakota.

Recently, Dave worked for nearly 10 years in business development at The Gladstone Companies as Managing Director, focusing on sponsored and non-sponsored junior debt investments in the Midwest. He also served as a Vice President at Wells Fargo in the Specialty Finance division, at FINOVA Capital, as well as 4 years with Heller Financial.

Dave brings much experience and ex-

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Fifth Street Finance Corp.

Appoints Patrick J. Dalton as Chief Executive Officer Fifth Street Finance Corp. announced that its Board of Directors has appointed Patrick J. Dalton as Chief Executive Officer and elected him as a member of the Board of Directors, effective January 2, 2017. Mr. Dalton will succeed Todd G. Owens, who will continue in his roles as CEO and a member of the Board of Directors until that time to facilitate a smooth transition. The Company also announced that Ivelin M. Dimitrov will step down from his roles as President, Chief Investment Officer and a member of the Board of Directors, effective January 2, 2017.

Mr. Dalton joins Fifth Street from Gordon Brothers Finance Company, where he served as President, CEO and Chair of the Investment Committee from 2012 to 2016. Prior to that role, he was President and Chief Operating Officer at Apollo Investment Corporation from 2008 to 2012; Chief Investment Officer and Portfolio Manager at Apollo Investment Man-

agement, L.P. from 2007 to 2012; and a partner at Apollo Global Management from 2004 to 2012. Mr. Dalton previously served as a Vice President at Goldman, Sachs & Co., Chase Securities Corp. and Chase Manhattan Bank.

“We’re incredibly excited to have Patrick, an accomplished investment management executive with demonstrated success managing a public business development company, taking the reins at FSC,” said Bernard D. Berman, Chairman of the FSC Board of Directors. “Given his more than 25 years of investment experience, we’re pleased that Patrick will take over primary responsibility for all aspects of FSC’s investment and operating strategy. We are confident that Patrick has the unique skills and experience to continue executing on FSC’s goal of driving shareholder value. We sincerely thank both Todd and Ivelin for their numerous contributions to FSC and we are confident that they will both help ensure a smooth leadership transition.”

“I welcome the opportunity to lead FSC and look forward to leveraging Fifth Street’s middle-market direct origination platform as we continue to seek investment opportunities with strong risk-adjusted returns for our shareholders,” said Mr. Dalton.

“Importantly, I plan to focus a large portion of my time on improving the company’s performance and operations, stabilizing NAV and furthering our alignment with shareholders. I am confident that we will be wellpositioned to improve returns for our shareholders over the long-term.”

Mr. Dalton will also join Fifth Street Asset Management Inc. (NASDAQ:FSAM) as Co-President, effective January 2nd, succeeding Todd Owens who will be stepping down.

About Patrick J. Dalton Mr. Dalton is an accomplished investment management executive with over 25 years of investment and leadership experience. Most recently, from 2012 to 2016, Mr. Dalton was the Founder, President and Chief Executive Officer of Gordon Brothers Finance Company (“GBFC”), a portfolio company of BlackRock Capital Corporation since October 2014. GBFC is a commercial finance company that provides cash flow, asset-based and hybrid term loans to middle-market companies in North America and Europe. Prior to joining GBFC, Mr. Dalton was with Apollo Global Management from 2004 to 2012 where he served as President and Chief Operating Officer of Apollo Investment Corporation from 2008 to 2012 and served as Chief Investment Officer of Apollo Investment Management from 2007 to 2012. As one of the founding partners of Apollo Global Management, his contributions were instrumental to the firm’s development and growth, leading over $8.6 billion of investments across 165 portfolio companies from 2004 through 2011, as well as successfully navigating through the Great Recession. In addition to managing Apollo Investment Corporation, Mr. Dalton co-founded Apollo’s CLO platform, managed one of Apollo’s first Credit Opportunity Funds and was instrumental in founding Apollo’s European credit platform in 2006. Earlier in his career, Mr. Dalton served as a Vice President of Goldman Sachs & Co.’s GS Mezzanine Funds and a Vice President at Chase Securities, Inc. and The Chase Manhattan Bank, N.A. He holds an MBA from Columbia Business School and a BS in Finance from Boston College. Mr. Dalton was the founding sponsor for the Private Equity Mentorship Program at Columbia Business School.

INDUSTRY NEWS

pertise in originating and underwriting senior loans in a variety of industries.

“We look forward to a strong start to 2017, and we’re so pleased to have Dave join our business development team at this time. He brings a wealth of knowledge and experience that will be invaluable as we move into our next phase of growth and continued success,” shared Anthony DiChiara, Executive Vice President, Head of ABL Originations.

Dave attended Washington University in St. Louis, received a BS in Finance from Western Illinois University, and obtained a Master of Science in Finance from the University of Illinois.

THE SECURED LENDER JANUARY/FEBRUARY 2017 9

INDUSTRY NEWS

collateral

Antares Capital Appoints Peter Nolan Senior Managing Director, Head of Loan Syndicate, Sales and Trading Antares Capital announced today the appointment of Peter Nolan to senior managing director, head of Loan Syndicate, Sales and Trading. Effective January 1, 2017, Mr. Nolan will take the place of Kevin Burke, who will retire after more than 40 years in the industry.

Mr. Nolan brings more than 25 years of experience to his new role.

He joined Antares in 2015 after serving two years at GE Capital as part of the Capital Markets team. Prior to GE, Mr. Nolan worked for 14 years as a managing director on the Leveraged Finance Capital Markets desk at J.P. Morgan and its predecessor organizations.

Earlier in his career, he held various leveraged finance positions at Bankers Trust. Mr. Nolan holds an honors degree in economics from Trinity College and an MBA from Harvard Business School.

“Peter is a natural leader with in-depth finance and capital markets expertise,” said David Brackett, managing partner and co-CEO of Antares.

“We are proud to have one of the top loan syndicate, sales and trading teams in the middle market, and we look forward to Peter’s continued contributions as he takes on this new role. We would also like to express our gratitude to Kevin for his extraordinary contributions to our business and the industry as a whole.”

About Antares Capital Antares Capital is a leading provider of financing solutions for middle-market, private equity-backed transactions with offices in Atlanta, Chicago, Los Angeles, New York, Norwalk (Connecticut) and Toronto. Antares has facilitated more than $120 billion in financing over the past five years. Antares was named 2015 Dealmakers of the Year and 2014 Lender

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of the Year by Mergers & Acquisitions.

Visit us at www.antares.com or follow Antares Capital on Twitter at https:// www.twitter.com/antarescapital. Antares Capital is a subsidiary of Antares Holdings LP.

Kevin Day Named CEO of HPD Software HPD Software, the technology specialist for commercial finance providers, has promoted Kevin Day to the position of CEO - with immediate effect.

In his new role, Day will remain committed to making HPD the technology partner of choice for businesses in the global invoice discounting, factoring and asset based lending markets. He will also spearhead the launch of HPD 2.0, which combines a number of strategic initiatives to facilitate the increasing growth of HPD Software, whilst maintaining its strong focus on excellence of service to its growing client base.

Day began his career more than 25 years ago as a software developer at HPD and has worked his way up the ranks, holding positions as a business analyst, product director and COO. His long history with the company means that he truly understands the evolving issues the industry faces, as well as clients’ needs.

Tony Davison, executive chairman at HPD, said: “Kevin is the right person for the job of CEO. His experience and knowledge have already proved invaluable in helping to make HPD a market leader; and, combined, they will undoubtedly support our planned business growth.

“Kevin’s in-depth understanding of the company and markets in which we operate mean that HPD is wellpositioned to make the most out of the opportunities that result from the evolution of the commercial finance sector.”

Bibby Financial Services Bolsters Executive Team Bibby Financial Services (BFS) North America announced the additions of Jeff Guldner as chief credit officer and Bret Hill as chief finance officer, along with the appointment of Jeff Morse to chief operations officer. These new roles round out the company’s executive team, positioning Bibby Financial Services for strategic expansion and continued growth in 2017.

“2017 brings with it a new direction and growth strategy for our business,” says Ian Watson, CEO of Bibby Financial Services for North America. “We’re thrilled to have Jeff Guldner and Bret Hill joining us in these key executive positions and are excited to appoint Jeff Morse to his new role as COO. Together, this experienced team of credit, finance and risk management experts bring the insight and vision BFS needs to maintain its current growth trajectory and build upon the progress we’ve made as we head into a new year.”

Prior to joining BFS, Jeff Guldner served as senior vice president and director of Loan Administration at Presidential Financial Corporation, underwriting transactions between $3 and $15 million. With almost 40 years in the lending business, Guldner has the right mix of hands-on experience and industry familiarity to lead the company’s credit department, where he will manage all functions surrounding underwriting and due diligence for new business in the company’s assetbased lending (ABL) group.

A seasoned finance professional, Bret Hill has almost 20 years of experience in the industry and most recently served as Division CFO for DR Horton, where he was responsible for managing all financial operations for the division as well as developing and implementing strategy and business plans.

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that support businesses in virtually any industry. We hold memberships in the Commercial Finance Association, the International Factoring Association, and the American Finance Association. Bibby Financial Services is part of Bibby Line Group (BLG), a diverse and forward-looking family business with over 200 years’ experience of providing personal, responsive and flexible customer solutions. To find out more about Bibby USA and Bibby Canada, please visit www.bibbyusa. com or www.bibbycanada.ca.

White Oak Acquires Capital Business Credit White Oak Global Advisors, LLC on behalf of its institutional clients (collectively “White Oak”), announced today that White Oak has expanded its asset-based lending platform through the acquisition of Capital Business Credit, LLC (“CBC”), a leading commercial finance company that provides assetbased loans, factoring and trade finance products to small and middle-market companies.

As part of the transaction, White Oak acquired CBC’s existing loan portfolio, which is comprised of over $300 million of assets employed, and the CBC team along with its office locations in New York, Charlotte, Fort Lauderdale, Los Angeles, Hong Kong and Shanghai. The CBC and White Oak platform will be able to provide asset-based loans, factoring and trade finance credit facilities ranging from $1-$100 million to underserved middlemarket companies.

White Oak is pleased to welcome the senior leadership team of CBC including Andrew Tananbaum, Robert Grbic, Michael Fortino and the approximately 80 members of the CBC team, and believes their expertise will

allow White Oak to achieve further success and scale in the commercial finance sectors.

“The acquisition of CBC expands White Oak’s lending capabilities into the significant and growing assetbased lending market while providing White Oak’s investors with attractive alternative credit strategies. Capitalizing on acquisitions of platforms with disciplined lending practices, such as CBC, is an important component of White Oak’s overall strategy,” White Oak CEO Andre Hakkak said in a statement.

“This transaction with White Oak provides CBC with the capability to offer a larger set of factoring and trade finance solutions and products. We now have the ability to finance larger, more complex transactions and the flexibility to offer our current clients a broader array of offerings,” said Andrew Tananbaum of CBC. “In our nearly 30 years of providing assetbased and trade finance solutions, CBC has focused on serving small and middle-market companies and we now have the breadth and capabilities to offer our best-in-class financing products to a much broader portion of the economy.”

Houlihan Lokey served as an exclusive financial advisor to CBC in connection with the transaction.

INDUSTRY NEWS

As CFO for Bibby Financial Services, Hill will lead all financial operations efforts for the company, providing strategy and growth recommendations to improve overall financial and operational performance.

Since joining BFS in 2013, Jeff Morse has successfully managed the company’s risk portfolio for small- to midmarket lending as Director of Risk. A skilled leader with more than 35 years of experience supporting businesses in a variety of risk management roles, he will now take on a more strategic role for BFS as COO. Morse will be responsible for providing strategic operational direction to executive management as the company expands its operations and processes to meet the needs of its growing client base.

Morse is known for finding creative solutions to complex funding situations, a skill which will play a vital role in helping the company realize its long-term growth strategy.

The appointments of these three executives help round out BFS’s wellqualified leadership team as the company further expands its asset-based lending, factoring and transportation finance services. The wealth of experience and industry knowledge these new executives provide will ensure BFS is on target to meet its strategic plans for continued growth in the coming year.

Bibby Financial Services is a leading independent financial services partner to more than 9,500 businesses worldwide providing more than $1 billion in funding globally. With over 40 operations in 14 countries spanning Europe, North America and Asia, we provide asset-based lending and factoring solutions to help businesses grow in domestic and international markets. Established in 2001, Bibby Financial Services North America has seven offices in the U.S. and Canada

THE SECURED LENDER JANUARY/FEBRUARY 2017 11

BY MYRA THOMAS

PREDICTIONS

MATURE KEY PLAYERS IN THE CAPITAL MARKETS PROVIDE READERS WITH AN OVERVIEW OF THE PAST YEAR AS WELL AS A LOOK AHEAD TO 2017.

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FOR A

MARKET

THE SECURED LENDER JANUARY/FEBRUARY 2017 13

TSL PARTICIPANTS

Joye Lynn

managing director of loan syndications, Wells Fargo Capital Finance

Kara Goodwin David W. Morse Shap Smith managing director, BMO Harris Bank

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sset-based lenders from the capital markets saw incremental increases in business in 2016, but it took some effort to put new clients on the books. It was a borrower-friendly year and, according to industry players, 2017 should be too.

Spreads, not surprisingly, continue to be under pressure, and lenders are competing for business on price and structure.

While ABL players saw the number of deals inch up, deal size continued to trend downward. Industry leaders are predicting similar conditions in the year ahead.

Banks are increasing hold levels, and they are also paying more attention to relationship return models. Simply put, ancillary business is a bigger consideration than ever before. Today, banks are facing the challenge of adjusting their return models, even as they look to syndicate bigger and bigger deals. “ABL pricing is staying within a tight bandwidth,” admits Joye Lynn, managing director of loan syndications at Wells Fargo Capital Finance.

According to Lynn, the maturing of the ABL marketplace means that

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partner, Otterbourg P.C.

managing director for global markets, Citi Capital Markets

everyone is working harder to win and protect deals. “Terms were a bit more aggressive in 2016 than the prior year, and 2017 looks to be more of the same.” Unique structures and club deals are on the rise too. Sponsors have excess capital to put to work, and they are hungry for more business.

However, Lynn is not expecting things to change much in the leveraged loan space, given the current competition.

Despite the pressures, the industry still remains relatively positive about the New Year. While business was flat through the third quarter of 2016, the M&A and DIP activity picked up meaningfully. Lynn believes that bodes well for ABL players. There is other good news too. “The average syndicated deal size was actually down in 2016, but utilization levels have started to increase and clients appear to be optimistic about the year ahead,” she says.

Understanding the Competition The biggest influence on ABL continues to be competition, notes Kara Goodwin, managing director and head of the ABL retail and asset purchase group at BMO Harris Bank. “With the attractive risk profile of the industry, coupled with relatively flat demand, price and structure continue to be under siege,” she says. For the smart lenders, Goodwin notes, it’s important to keep the focus on risk control. “In 2016, we stuck to our principles and, unfortunately, lost some

Jeffery Wacker senior managing director and head of US ABL originations, TD Bank

deals on pricing, size of over-advance, covenant terms, and hold level,” she says. “We expect and are prepared for this same level of competition in 2017.”

Goodwin points to relationship building, as the best way to head off this competition. She notes, “This year has been about our bank being more integrated across the investment, commercial, and product partners, which has been a great differentiator.

Maintaining our client base is also part of the battle as our portfolio has aged, and this is aided by strong ancillary products.”

The competition is only increasing, as private equity becomes more and more comfortable with asset-based lending, particularly across sectors that lend themselves well to ABL financings. Goodwin notes, “They have realized on larger deals that, if they execute an ABL with a high-yield bond, as an example, that they can essentially operate with plenty of liquidity on the ABL, virtually no covenants, and all at a very low cost of capital.”

Goodwin adds that larger issuers are still managing to see a small amount of loan growth. “The large players have committed bigger hold sizes to deals to sustain growth, so less has been truly syndicated,” she says. “Regionally, some banks and non-banks have grown slightly, but as a whole, I would expect that some of the smaller and mid-sized banks

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have had trouble growing, based on the limited syndicated new volume, and pricing and structure have driven some banks out of the market to be replaced by the non-banks. Unfortunately, I do not expect much of a change in this in 2017.”

The Current Landscape Describing the “typical” ABL deal in 2016 depends on which part of the market is being discussed. That’s likely to be true for the New Year as well. According to David W. Morse, partner and head of the banking and finance practice at the law firm Otterbourg P.C., for the large transactions, pricing remained essentially at the same levels, and lenders did not seem inclined to stretch further on structure. He adds, “The migration of basket structures for negative covenants from the leverage finance world to ABL continued and solidified, including in particular the use of limits tied to the greater of a percentage of assets or EBITDA or a fixed dollar amount for dividends and other restricted payments.” As usual, refinancings and extensions dominated the market, with add-on acquisitions more typical than new acquisitions.

Morse does note the beginnings of some pushback on pricing and terms by market players. “In prior years, the markets seemed willing to accept any pricing, any structure, but this year there were instances where proposed facilities had to be restructured to enable them to sell,” he says. Arrangers looking to fill out the capital structure for a borrower had to turn to different markets, including funds managed by private equity firms, in order to complete a syndication, particularly in the second lien market or even downsize the second lien component.

Fortunately, no major regulatory changes took place in 2016. Banks spent the year settling into the leveraged lending guidelines issued by the Fed, OCC and the FDIC in 2013. “It is certainly well reported as to how the elements of the leveraged lending guidelines related to EBITDA have

adversely affected the willingness of regulated banks to approve certain transactions,” Morse notes. “That said, the degree of sophistication in the application of the guidance continues to grow, with banks looking at the ability of a company to reduce leverage as a critical element in finding a way for banks to do deals at the higher end of the leverage spectrum.”

Road Bumps Ahead While it’s impossible to truly predict where the market is headed, there are some things that industry players seem to agree on when it comes to 2017. The challenge ahead for asset-based lenders will be to keep growing without taking on too much risk. Shap Smith, managing director for global markets at Citi, Citi Capital Markets and others in the industry also worry about the increases in company valuations, and the impact it will have on private equity and LBOs. However, he does note growth in LBO activity toward the latter half of 2016.

Smith says that ABL lenders seem to have reached a floor, and they are now pushing the envelope on structure.

He agrees with Goodwin, noting that deals are getting harder and harder to syndicate. Lenders are doing higher holds and clubbing up, he adds. The exception is large ABL deals with liquidity in them, where the retail banks are participating.

According to Jeffery Wacker, senior managing director and head of US ABL originations at TD Bank, as prices have flattened out, large-deal features are beginning to emerge in the smaller transactions. And while there simply isn’t a lot of wiggle room on price, terms are becoming more assertive for the smaller borrowers, including such features as springing triggers. Wacker adds, “There is little differentiation made between the small-to-large high-quality borrower.”

But overall, Wacker says that lenders failed to anticipate many events in 2016. “The U.S. dollar came on strong late in the year, the Fed increased interest rates less than expected, the U.S. election had a different outcome

than many thought, and Brexit certainly was not a discussion back in January 2016,” he says. Despite these events, business conditions remained solid and the U.S. saw solid employment growth with the first wage increases in real terms since pre-recession. “The broader capital markets backed up at some point, driven by future interest rate expectations and the political environment and what it might all mean for business,” he adds. For 2017, there is still substantial capital available and competition in almost every transaction. Even with the competition, Wacker notes that many bankers still saw a modest increase in transaction volume in 2016, and he predicts more growth in 2017.

A Look Ahead Certainly, asset-based lenders are anxious to see what 2017 has in store for them. Most agree that the Fed’s cautious approach to interest rate increases has helped to avoid an economic downturn.

Further increases in the interest rate are expected, of course, and that’s likely to boost the dollar, M&A activity, and more financing. The new Trump administration is also promising to cut the corporate tax rate and increase infrastructure spending. If it all comes to pass, it could be good news for borrowers.

However, weak markets also drive ABL lending, says Goodwin, which is why she isn’t expecting the ABL market to improve dramatically in 2017.

Goodwin notes, “All indications that I have seen on the economy are that it is improving, albeit at a slow pace. Employment numbers are good, interest rates are still low, and sectors, such as metals, that suffered early in 2016 have rebounded in the second half of the year. If the economy does heat up in the coming years and interest rates increase to historical levels, some businesses will have liquidity issues, which could improve deal flow to ABL even in a strong economy.” TSL Myra Thomas is an award-winning editor and journalist with 19 years’ experience covering the banking and finance sector.

THE SECURED LENDER JANUARY/FEBRUARY 2017 15

By Maria Dikeos

CLUBBED AND SOLE LENDER FINANCINGS GAIN MOMENTUM IN ABL SPACE; SYNDICATED ISSUANCE DIPS IN 2016

Maria Dikeos of Thomson Reuters LPC provides readers with an update on the capital markets.

16

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2016 has been an unusual year. The capital markets have observed fluctuating levels of volatility, uncertainty and slowdown driven in large part by headline risk, a shifting political landscape and a smattering of less clearly defined economic jitters.

The loan market specifically got off to a slow start. In January and February, lenders were hopeful that, following the backup observed in the wake

cases, looking forward to more fertile ground for M&A opportunities.

Against this backdrop, asset-based lenders (ABL) kept busy – although for many, not as busy as they would have hoped. At just over US$65bn, syndicated ABL volume through the end of November trailed year-ago totals of roughly US$78bn, and was expected to close out the year south of the US$85bn-plus raised in 2015 (Fig. 1).

of tumbling oil prices and a struggling commodities market at the end of 2015, there would be a reset in 2106, but it was slow to take hold. In fact, it was not until the second quarter that a technicals-fueled surge boosted loan-market activity.

By 3Q16, however, there was another slowdown – and it was unclear why. There was little market angst.

At most, lenders observed, there was a bit of a “wait and see” mentality following the outcome of Britain’s potential exit from the European Union and ahead of the U.S. elections.

By late November and December, lenders were working to identify new lending opportunities and, in many

But does that mean the market is off somewhere between 15% and maybe 20% year over year?

Realistically, the answer is no. But the way deals got done in the 2016 ABL space arguably changed. At the outset, unreported sole lender deals and underreported clubbed deals gained traction not only among more traditional issuers at the smaller end of the market, but also among larger transactions that historically would have relied on retail syndication via ABL buyside investors.

“The supply/demand imbalance is as severe as I have ever felt it,” said one buyside lender. “The number of deals hitting market is down signif-

THE SECURED LENDER JANUARY/FEBRUARY 2017 17

U.S. New Money Breakout

icantly and agents are holding bigger numbers.”

Adding to lender woes was the dearth of new ABL assets. At just over US$20bn, new money ABL made up roughly one third of total issuance through the end of November (Fig. 2).

Of this total, financing to corporate lenders represented over 70% of new money issuance. Asset-based lenders point out, however, that, while there was new cash flow to ABL issuers who

18

tapped the market, there were not enough of them to soak up demand.

At one end of the spectrum, reliable cash flow to ABL corporate opportunities was constrained by regulatory rules that tested traditional lender capacity to extend credit.

“Just the reference of a special mention, even if it doesn’t fall under LLG, scares people,” said one lender.

“We are still looking at substandard credits,” added another, “but we

won’t do anybody else’s.”

At the same time, there were a number of cases where lenders amended deteriorating credit facilities to allow for more collateral coverage, but stopped short of an assetbased structure.

“We saw a high-grade deal which went from one turn of leverage to three times, but the existing lenders got comfortable with additional collateral [and it remained a cash-flow structure],” said one arranger.

At the other end of the spectrum, there were limited M&A opportunities. A relatively thin 9% of total syndicated asset-based loan volume backed M&A transactions during the first nine months of 2016. Large M&A deals for Vertiv, Petco and Staples successfully worked through retail syndication, but they were few and far between.

“M&A never picked up as we would have wanted to see it in the sponsor world,” said one ABL lender. “It feels like sponsors are bidding, but there is a lot that is not crossing the finish line.”

Post-Labor Day, the market saw a pickup in potential M&A deal flow – Bass Pro tapped lenders in early November – and, following the U.S. presidential election, there is qualified hope that there will be more opportunity for lenders to put money to work.

Nevertheless, there has been a fundamental shift in the traditional lending landscape and traditional providers of liquidity have adjusted as a result. At the smaller end of the sponsored market, for example, an increasing amount of lending is getting done outside of the bank market via direct lenders.

“We have seen a proliferation of unregulated asset managers and commercial finance lenders who can provide capital at approximately 6%,” said a lender. “Then there are the other players who will do FILO tranches which means they want last out at approximately 10%.”

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within structural dynamics, which have frayed at the edges via thinner pricing and add-backs, but still hold at their core as a result of asset quality and regular exams. TSL

Pricing Distribution

For select asset-based lenders, this has opened the doors to developing relationships with direct lenders.

“We do it all the time, especially on M&A,” said one ABL arranger of smaller deals. “We work on the multiple, then partner up with [direct lenders].”

Some of these arrangements may involve unitranche structures, which are not for everyone.

“We look to unitranche if it is in a separate document,” said a source.

“If it’s a single document, we won’t do it.”

In many cases, the ABL component becomes a small piece of the overall financing and is susceptible to comparatively thinner pricing.

“One thing we’ve done to mitigate pricing on the ABL side is deliver some term debt to our capital markets group, so that we can make some money on the transaction,” said a lender.

Against this competitive backdrop, ABL-drawn spreads did thin out to average just north of 175bp by the end of 3Q16 (down from a range of 185-190bp at the same time last year) among deals of US$75m (Fig. 3).

Among larger financings where the asset-based loan represented one financing component, albeit one sitting at the top of the capital structure,

pricing flattened out at 125bp over Libor, becoming a loss leader and stepping stone to securing more lucrative ancillary business (Fig. 4).

It follows that return models and share of issuer wallets have gained importance in overall lender decisionmaking and deal execution.

“Borrowers need to make each bank feel relevant as far as wallet share,” said one lender. “It’s all about the cross selling.”

What does this mean in practice?

First, there are fewer lenders looking to just buy the loan paper without some other type of ask. Second, for pure buyside players not selling bank products, the world has gotten smaller in that thinner-priced deals will not work and larger-sized commitments are not as feasible. The net result is that money is raised but it is done so in the agent round and via larger holds.

Still, so far, capacity has not been an issue. Southern Glazer secured a US$4.5bn revolver in 3Q16 in one of the largest, syndicated asset based loan financings of the year, in a testament to the fact that for a non-investment grade name to raise a cash flow revolver, there are dependencies. Asset-based lenders, in contrast, continue to print this paper regularly

Maria Dikeos is a director of Analytics and Global Manager of Maria League Tables & Primary Market Loan Analysis at Thomson Reuters LPC in New York. Her focus is primary market analytics including the production of league tables, time series and industry analysis, as well as the enhancement of data collection and expansion of product offerings. Dikeos has been with Thomson Reuters LPC since 2001; prior to that, she worked at a major investment bank. She has a B.A. from Wellesley College and Master in International Affairs from Columbia University and the University of Geneva.

THE SECURED LENDER JANUARY/FEBRUARY 2017 19

Two Skadden attorneys reveal what lenders should look out for in 2017.

By Seth Jacobson and Darrin Halcomb

Debt Market Outlook for 2017

20

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The debt market outlook at the close of 2016 looks deceptively similar to the outlook at the close of 2015. In both cases, the Federal Reserve had been signaling a rate increase. On October 28, 2015, the Federal Reserve’s Federal Open Market Committee stated that, “with appropriate policy accommodation, economic activity will expand at a moderate pace,” and indicated that it would be appropriate to raise the federal funds rate target with further improvement in the labor market.1 On December 16, 2015, the FOMC followed through with a rate increase. However, as 2016 played out, the FOMC did not increase the federal funds rate any further until the end of the year. Will 2017 be the same?

Before analyzing the interest rate outlook for 2017, it is helpful to examine the factors that caused the Federal Reserve to pause its policy of gradually increasing target interest rates in 2016. At the end of 2015 and in early 2016, real GDP growth was slow, with a real GDP growth rate below 1.0% for both the fourth quarter of 2015 and the first quarter of 2016. At the same time as the economy was experiencing slow growth, the unemployment rate was holding fairly steady through most of 2016. Slow growth, low but stable, unemployment, and falling energy prices were key factors in keeping inflation well below 2.0% throughout 2016.

So, as 2016 comes to an end, we see there were many macroeconomic forces resulting in little pressure on the Federal Reserve to raise target interest rates.

Similar to a year ago, at its November 2, 2016 meeting, the FOMC said that, “with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace.”2 That sounds familiar, and, in fact, the FOMC announced an increase in the federal funds rate target at the final FOMC meeting of 2016 and stated that economic conditions are expected to evolve in a manner that will warrant gradual increases in the federal funds rate.3 While the end-of-the-year yield curves on U.S. Treasuries might lead to the conclusion that the outlook for 2017 is similar to 2016, important macroeconomic data suggest otherwise. Given real GDP growth in excess of 3.0% for the third quarter of 2016 and an unemploy-

ment rate at its lowest level in over nine years, markets are anticipating further federal funds rate increases in 2017.

The trend in credit spreads is also different as 2016 draws to a close. Highyield and investment-grade corporate bond spreads rose steadily during 2015 and by early 2016 were at levels just short of their post-recession peaks.4 However, beginning in mid-February 2016, those spreads retreated and are now not far from their post-recession lows. Investors looking for higher-yielding opportunities and their willingness to accept more risk have reenergized the second-lien market, with second-lien loan issuance in November 2016 at its highest level in over two years, according to data from Bloomberg.5 The debt markets in 2017 are also expected to be affected by collateralized loan obligation issuance and inflows into leveraged loan funds. A robust rate of CLO issuance and large net inflows into loan funds should increase the supply of capital available to invest in debt markets. This increase in available capital may continue to compress spreads and create a favorable environment for issuers. The last few months of 2016 have been marked by significant loan fund inflows and CLO issuance activity. According to Lipper fund data as reported by LCD,6 leveraged loan fund inflows in late November hit the highest weekly levels in over 3 years.7 This increase in late November inflows combined with net inflows in most weeks during the second half of the year had the effect of offsetting net outflows during the first half of 2016. U.S. CLO issuance in the last few months of 2016 has also been strong, according to LCD, with September through November posting increases over the corresponding 2015 issuance numbers, though this only partially serves to offset the anemic CLO issuance activity from early 2016.8 December’s CLO issuance level will also likely be strong, but some of this issuance activity might be a result of issuers accelerating their timing to get in before the Dodd-Frank risk retention rules for CLOs go into effect on Decem-

THE SECURED LENDER JANUARY/FEBRUARY 2017 21

ber 24, 2016.

Repricing and amend-to-extend activity was significant in the latter part of 2016, according to LCD data.9 The increase in this activity may be due to a number of factors, but likely reasons include the increase in the supply of available capital, low credit spreads and the expectation that rates will rise in 2017. Refinancings in general have increased in 2016 as compared to 2015, particularly on the institutional side, with amend-to-extend activity surging in September. There was little repricing activity in the second half of 2015 and the first few months of 2016. In contrast, repricing activity was particularly strong in September and October of 2016.

Is the increased liquidity and investor demand for loan issuances a sign that bankruptcy and restructuring activity will remain muted in 2017? At the beginning of 2016, analysts and experts expected restructuring activity to increase in 2016 due to a combination of interest rate increases and sliding oil prices throughout the second half of 2015. Oil and gas restructurings (particularly by exploration and production companies) did dominate the headlines in 2016.

There were also several high-profile bankruptcy filings in the retail sector, and the healthcare sector remains under stress and uncertain as to the effects of the change in the political climate.

However, contrary to expectations early in the year, Chapter 11 filings remained flat in 2016 in spite of increased activity in the first half of the year, according to data from Epiq Systems as published by the American Bankruptcy Institute.10 With strong loan market conditions in the second half of the year allowing issuers to extend maturities and lower interest expense, and with the small amount of outstanding loans maturing in 2017 and 2018 compared ($42 billion combined, compared to roughly $461 billion in the three subsequent years combined, according to LCD), many issuers that may have been under pressure due to the high cost of debt service and looming maturities have been able to relieve that pressure through amend-

22

and-extend and repricing transactions and are therefore in a better position to weather the expected interest rate environment in 2017.11 On the other hand, if interest rates rise as expected in 2017, and given the uncertainties in Europe and elsewhere, continued pressure on oil prices and sector-specific troubles, bankruptcy and restructuring activity may increase in 2017 despite the wave of amend-and-extend and repricing transactions.

Will the results of the U.S. presidential election have an effect on debt markets in 2017? Attorneys from Skadden Arps recently analyzed the potential changes in the U.S. legal and regulatory environment under a Trump administration.12 The prospects for business tax reform, given the combination of a Trump administration and Republican control of Congress, has greatly increased. Tax reform could drive increased M&A activity, and the resulting need for debt financing, by U.S. issuers if such reform leads to lower marginal tax rates or provides for less expensive repatriation of foreign income. Lower marginal tax rates could have an impact on valuations of U.S. issuers and make them more competitive with foreign companies in M&A transactions, and a tax holiday on repatriation of foreign income or reduction in the tax rate on foreign earnings could free up cash to use for acquisitions in the U.S. With respect to cross-border transactions, the possibility of relaxed regulatory oversight under a Trump administration could lead non-U.S. companies to make increased investments in the U.S. and access the U.S. capital markets for such purpose. To the extent the Trump administration adopts a deregulation agenda, there may be additional sector-specific growth opportunities, such as in the energy sector, banking and insurance.

But some of those opportunities may be offset in other sectors if the new administration places additional scrutiny on investments by foreign companies that raise national security risks or if it implements new trade policies that spur a reaction by some of the U.S.’s global

trading partners.

Deregulation in the banking sector may also have an effect on the supply of credit. President-elect Trump has called for the elimination or substantial reduction of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and he has said that he supports proposals that would take power away from the Federal Reserve. But it is not clear that any change in the regulatory environment will result in a loosening of bank underwriting policies. Even if lending standards by regulated banks do not change, non-bank lenders have increased market share over the last couple of years and are poised to remain as a substantial influence in the debt markets, particularly in the middle market.

The strong loan market conditions in late 2016 and steady supply of credit (including by those non-bank lenders) have resulted in a borrower-friendly environment, not just in the case of pricing, but also when it comes to other loan terms and documentation. At the Loan Syndication and Trading Association’s annual conference at the beginning of November, panelists cited EBITDA adjustments for anticipated cost savings or synergies and allowing borrowers to reclassify debt and liens after they are incurred in order to create more capacity in their capped negative covenant baskets.13 The panelists also noted how these types of borrower-friendly provisions have been making their way into the middle market, as sponsors and counsel familiar with such provisions apply them to their middle-market transactions.

The asset-based lending market is no stranger to the phenomenon of borrower-friendly loan terms, as a glance at publicly available asset-based loan agreements entered into in 2016 demonstrates. The asset-based loan market has followed the institutional term loan market in permitting some borrowers to mirror some, but not all, of the terms of their high-yield bond indentures. Other borrower-favorable terms featured in multiple publicly available asset-based loan agreements

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entered into in 2016 include: (1) the ability to include unrestricted cash (subject to a cap) in the borrowing base, (2) the ability to increase commitments up to the amount of the borrowing base if there is suppressed availability (and if there are lenders willing to provide such increased commitments), (3) permitting incremental commitments to be in the form of a “last-out” tranche and (4) allowing a portion of suppressed availability to be taken into account in determining whether certain availability conditions have been triggered. Other heavily negotiated provisions of assetbased loan agreements center around the definition of the borrowing base, eligibility criteria and on the agent’s discretion to impose reserves. While borrowers have been able to negotiate some limitations on reserves, agents in asset-based loan transactions by and large retain some level of discretion over eligibility standards and reserves to protect their secured status.

New to loan documentation in 2016 was the presence of EU “bail-in” acknowledgment language, which by the end of the year had become very standard based on the LSTA’s model language. Also growing in prevalence during 2016 was the ability for borrowers to borrow incremental loans or utilize new or existing commitments, subject to the satisfaction of certain limited conditions when such loans or commitments are being used to finance an acquisition or other “limited condition transaction.” Two events occurred in 2016 that may precipitate loan documentation changes in 2017. First, the new accounting guidance for leases was finalized on February 25, 2016. The changes in lease accounting have been in the works for quite a while, and many loan agreements deal with the anticipated changes by freezing the current GAAP treatment of leases for purposes of financial calculations. As discussed in an LSTA webinar at the beginning of December, it is hoped that the finalized changes will not affect the calculation of financial ratios or covenant levels in most current loan agreements, but the

exact wording will need to be reviewed, and drafters of loan agreements going forward should consider conforming the terminology used in such loan agreements to the new standard.14 Second, with the Brexit vote over the summer, drafters of loan agreements should review the use of references to the EU and consider whether a separate reference to the UK is appropriate.

The views expressed in this article are not necessarily the views of Skadden Arps or any one or more of its clients. TSL Seth Jacobson is a partner and global co-head of Skadden’s Banking Group and practices in the Chicago office. He represents lenders and borrowers in connection with various types of sophisticated financing transactions in a wide variety of industries.

Typical transactions include acquisition financings, leveraged loans, asset-based loans, complex intercreditor arrangements and leasing arrangements.

Bloomberg Briefs: Leveraged Capital & Distress, November 8, 2016.

5

LCD (Leveraged Commentary & Data) is an offering of S&P Global Market Intelligence.

6

“Loan fund inflows surged to three-year high of $1.12B last week,” November 28, 2016, http://www.lcdcomps.com/lcd/n/article.html?rid=161&aid=12407618.

7

“Leveraged loans gain 0.26% in November; YTD return is 8.90%,” December 1, 2016, http://www.lcdcomps.com/lcd/n/article. html?rid=161&aid=12407823.

8

“A-to-E and covenant-relief activity decline in November,” December 2, 2016, http://www.lcdcomps.com/lcd/n/article. html?rid=161&aid=12407975.

9

http://www.abi.org/newsroom/bankruptcystatistics.

10

“A-to-E and covenant-relief activity decline in November,” December 2, 2016, http://www.lcdcomps.com/lcd/n/article. html?rid=161&aid=12407975.

11

Darrin Halcomb is a counsel in Skadden’s Banking Group and practices in the Chicago office. He represents borrowers, lenders, issuers and underwriters in connection with various types of complex financing transactions, including acquisition financings, asset-based loan facilities, leveraged loans, dividend recaps, cross-border secured credit facilities, secured note facilities, project financings, restructurings and workouts, debtor-in-possession financings and exit financings. Prior to joining Skadden, Mr. Halcomb worked in the economic research and public affairs departments at the Federal Reserve Bank of Chicago.

“Looking Ahead: The U.S. Legal and Regulatory Environment Under a Trump Administration,” November 14, 2016, https:// www.skadden.com/insights/looking-aheadus-legal-and-regulatory-environment-undertrump-administration.

12

“Terms and Trends in the Primary Market,” November 3, 2016, LSTA 21st Annual Conference.

13

14

1

FOMC press release, October 28, 2015.

2

FOMC press release, November 2, 2016.

3

FOMC press release, December 14, 2016

LSTA Week in Review, December 2, 2016.

BofA Merrill Lynch US High Yield OptionAdjusted Spread© and BofA Merrill Lynch US Corporate Master Option-Adjusted Spread© data retrieved from FRED, Federal Reserve Bank of St. Louis.

4

THE SECURED LENDER JANUARY/FEBRUARY 2017 23

special advertising section

LEGAL SERVICES

FINDING THE EXTRA LIQUIDITY TO WIN THE DEAL

BY RIEMER & BRAUNSTEIN LLP, DONALD E. ROTHMAN AND KEVIN M. MURTAGH, SENIOR PARTNERS

Institutional lenders are competing not only with one another, but with a growing range of non-bank commercial lenders, including hedge funds and private equity firms. Non-bank commercial lenders, in turn, compete both with one another and with providers of alternative financing, such as, factors and trade finance companies.

One of the many results of increased lender competition is the proliferation of devices to provide a prospective borrower with greater liquidity.

Suppose a prospect has significant cash flow, but not enough to support a cash-flow facility of sufficent size to meet its needs. The volume of its eligible assets under a traditional ABL model also may not generate adequate liquidity. Can you find a way to get there for them?

The answer may depend upon additional liquidity (outside the traditional lender model), utilizing any of a number of the following possible approaches: 1. The Airball/SOFA/Cash-flow hybrid.

An “airball”, “stretch piece”, or Secured Over-Formula Advance (SOFA)—these are essentially three ways of describing the same thing. The concept is an overadvance facility or facility compo-

24

nent, not based on the availability of funds constituting eligible assets, but instead on the prospective borrower’s historic cash flow and projected ability to service indebtedness.

2. Seasonal Overadvance Closely related to the SOFA is the seasonal overadvance, i.e., lending on the basis of an enhanced advance rate in the borrowing base formula during a specified window of time (usually a few months of each year).

The objective is to provide extra working capital when it is most needed, usually to enable the borrower to build its inventory prior to a peak selling period. Once the peak selling period arrives, the expectation is that the borrower quickly will return to formula under the usual borrowing base metrics.

3. The FILO Tranche A first-in, last-out component within a borrowing base is another device for stretching availbility to a prospect.

First utilized in retail deals, the FILO can be found in wholesale and manufacturing facilities as well.

The concept is a premium-priced tranche, usually fully-advanced at closing, that amortizes in a straight line, like a term loan, and customarily cannot be re-borrowed. It typically represents the sort of “delta” of additional liquidity above standard advance rates that a SOFA would embody (and is likewise senior secured), but is additionally underwritten by the increased yield embodied in the interest-rate premium and FILO deployment of lender capital.

is more of a challenge. A Lender, the Borrower, and the freight forwarder or customs broker can enter into an agreement that gives the Lender control over the paperwork that embodies ownership in the inventory throughout its voyage. The result is that advances (often subject to a sublimit) are be made before the goods arrive in the U.S. 5. Fixed-Asset Availability Extra liquidity can also be found by including fixed assets (real property and/or machinery & equipment) in the borrowing base of an ABL facility. It can utilize a reducing advance (similar to term loan amortization), allowing the Lender to limit the advance rate and minimize the size of this component relative to the overall facility.

6. IP and Foreign Assets Established brands or other intellectual property can include not only their secondary value, but also the royalties they may generate. Similarly, businesses may have assets abroad and with careful consideration of the particular foreign jurisdictions involved it is possible to make selective advances supported by foreign assets.

4. In-transit Inventory Loans It is common to lend against inventory in a Borrower’s warehouse. But inventory aboard cargo ships en route to the U.S. from China or elsewhere

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The ACA’s Impact On Healthcare Lenders The ACA has changed how healthcare providers must manage their working capital to be successful.

In this article we learn what has impacted them the most, as well as the need for lenders to continue to adapt to upcoming ACA changes under the incoming administration.

BY JENNIFER SHEASGREEN AND ZACHARY REED

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The Affordable Care Act, or ACA, was signed into law March 23, 2010, by President Barack Obama with the promise to give more Americans access to affordable, quality health insurance while reducing the growth of U.S. healthcare spending. The increased availability of health insurance to citizens has been well-documented, but the impact it has had on healthcare providers and lenders has largely gone unreported. With a new administration taking office that has promised a change to the existing form of the ACA, providers will have to continually adapt with changes in the law and lenders will have to stay apprised of those changes to ensure proper monitoring of their collateral.

Plenty of potential changes surrounding the ACA are promised to happen under a Donald Trump-led administration, but those remain unknown at this point. Early reports indicate it is likely some of the key provisions will be retained, such as the prohibition against the ban on preexisting condition exclusions and the requirement to offer dependent coverage up to age 26. The discussion of repealing and replacing the Affordable Care Act, which would not be accomplished overnight, will, probably, have delayed effective dates. One of the main provisions that Republicans have advocated is the elimination of the individual purchased insurance mandate. Insurers will need to make swift changes to comply with any sweeping reforms, and lenders will need to be conscious of payor mix changes and how those impacts will affect the healthcare system’s revenue and, ultimately, borrowing capacity.

The common thought about businesses throughout the country is: “more people through the doors equals more money and a more viable financial outlook.” However, that is not necessarily the case for all healthcare providers. It is true there are more people visiting hospitals and private practices under the current ACA structure than the years that preceded the law, but the regulations are either making it

difficult for healthcare practices to get paid or reducing the amount they receive in reimbursements.

Medicaid expansion is one of the key areas that was touted under the ACA to expand access to health insurance, which has taken place in Medicaid expansion states. The law provided states with the option to expand their Medicaid programs to include all adults with incomes that are at or below 138 percent of the federal poverty level. A total of 30 states and Washington, D.C., took advantage of this opportunity. Because of this, Medicaid enrollments have grown significantly, including in the states that have not expanded. More than 10 million additional Americans enrolled in Medicaid since the enactment of the ACA. And since the ACA’s first open enrollment in 2013, the number of Americans covered under Medicaid has risen by 21 percent to 71.1 million.1 After the first year, adults who gained coverage were 55 percent more likely to have their own doctor than those who did not, and Medicaid also increased the likelihood of receiving preventive care, such as mammograms and cholesterol checks.

The proportion of patients that private practices are seeing is rapidly shifting away from commercial health plans and toward Medicaid, which sometimes pays doctors pennies on the dollar compared to that which they were reimbursed previously under private insurance. Recently released data shows that Medicaid visits, as a proportion of all visits to doctors, increased from 15.6 percent in 2013 to 17.7 percent in 2014, and then to 21.5 percent in 2015 in states that expanded Medicaid. In states that did not, the proportion of visits remained largely flat at 9.4 percent for 2013, 9.2 percent for 2014 and 8.9 percent for 2015. But herein lies the problem: the proportion of commercially insured patients, either through the ACA marketplace exchanges or through workplace coverage, actually fell in states that expanded their Medicaid

programs. In those states, commercially insured patients comprised 65.2 percent of all patients in 2013, 64.4 percent in 2014 and then fell to 62.8 percent in 2015.2 By simply analyzing this three-year trend, it is easy to predict that physician practices will feel the financial strain. For example, under the ACA, reimbursement rates are already close to Medicaid rates for many ambulatory procedures. Add that onto the fact that many privately insured under the ACA were bumped off their prior commercial coverage and forced into an ACA exchange, which will certainly lower provider revenue. In addition, states that expanded their Medicaid programs have seen the proportion of Medicaid patients visiting doctor offices, as a percentage of physicians’ total patient volume, increase by almost 40 percent since 2013. With Medicaid paying much less than private coverage, this severely hampers the practices’ bottom lines.

In states that expanded their Medicaid programs, hospitals have seen nothing but a positive financial impact. For states that didn’t expand, their hospitals’ financial outlook remains status quo, with many accruing more bad debt. Large public hospitals in states that have opted to accept federal money to expand Medicaid are finding themselves on solid financial footing for the first time in decades, and formerly uninsured patients are now getting regular care. Nonprofit hospitals located in those 30 states reported on average 13 percent less bad debt from unpaid bills in 2014, according to Moody’s Investors Service.2 According to the Kaiser Family Foundation, hospitals in Medicaid expansion states reported an average of a 32 percent decrease in uninsured patients and a 40 percent cut in unreimbursed costs of care for patients without the ability to pay.3 In contrast, public hospitals located in states that have not expanded Medicaid have seen a negligible change.

These hospitals in non-expansion

THE SECURED LENDER JANUARY/FEBRUARY 2017 27

states have seen bad debt increase through much of the year, and the average increase in patients covered by insurance increased by less than two percent.

Overall, for most hospitals in Medicaid expansion states, they have seen working capital improve due to the lower level of uncompensated treatments. In states that have not expanded, hospitals have still seen little effect and are still as reliant on donations to make up for their charity care as they were before.

Moving forward, we may see the Trump administration provide more power to the states through federal block grants so that states have more autonomy over their own Medicaid programs. Many individuals that bought into the ACO model and purchased individual policies are finding that their premiums have increased so much, or were cancelled outright, that we may see a reversal of the progress made initially. Many states are left with a lack of choices for ACO insurers, as many have exited the program.

As lenders, we’ve seen traditional Medicaid revenue morph into Medicaid Managed Care or Managed Care Organizations (MCOs). It has not only caused extended payment cycles, but now we are seeing insurers exit the market. It will be critical for lenders to be aware of potential insurer exits and monitor large payors to ensure proper collateralization.

While not dictated by states like Medicaid, Medicare reform has had a significant impact on healthcare providers under the ACA. One major change is the reimbursement for preventative services, such as annual wellness checkups, immunizations and screen tests that are now covered without co-payments. But one of the most impactful changes is the Bundled Payments for Care Improvement (BPCI) Initiative. Historically, Medicare has made separate payments to providers for each of the individual services they furnish to beneficiaries for a single illness or course of treatment. The Cen-

28

ters for Medicare & Medicaid Services, or CMS, has felt that this approach has resulted in fragmented care with minimal coordination across providers and healthcare settings. Payment has rewarded the quantity of services offered instead of the quality of care.

The new rule holds hospitals accountable for Medicare patients long after they leave the hospital, as well as paying a fixed price for those procedures and not actually paying until the patient has been out of the hospital for 90 days. This new bundled payment system could affect many hospitals’ bottom lines, as the treatment they give patients for certain procedures won’t be reimbursed immediately and, in some cases, hospitals won’t be reimbursed at all and could end up owing Medicare because of extended stays in rehab facilities. However, hospitals could see savings if the patient recovers and gets home quickly.

Hospitals will have to budget for the delayed reimbursement from Medicare, and should expect to see their working capital cycle increase.

But for the first time, hospitals are incented to help manage what happens to patients outside the hospital walls. Realizing clinical and financial success under this new payment and incentive model means that a hospital’s patient care coordinator is more active in ensuring post-hospitalization service is provided in areas such as rehabilitation, assisted living and home healthcare. As time goes on, CMS will continue to test mandatory bundled payments in other areas, which could continue to affect how a hospital must budget their working capital.

Medicare payment changes will continue to evolve from quantity to quality and require incentives for hospitals to deliver value-based care at a lower cost, with the goal of producing speedy recoveries and preventing hospital readmission. Risk sharing model and bundled payment models will likely continue moving forward under the new administration. Lenders should analyze changes in this

payor pool with a keen eye to monitor reimbursement swings and consider those effects when assessing success under these programs and the impact to financial statements.

The healthcare space is a dynamic and fluid part of our country’s history.

The need for healthcare providers and lenders to adapt quickly to the constant changes is paramount to effective business practice and longterm success. Just as other changes -including the first HMOS in the 1970s, the privatization of healthcare in the 1980s, the cost reporting to the Balanced Budget Act of 1997, HIPAA and the ACA -- have brought the need for adaptation, healthcare lenders need to continue to stay on the forefront of future changes, monitoring their borrower’s ability to be proactive to changes while making sure to protect their own collateral. TSL Jennifer Sheasgreen is the president of Triumph Healthcare Finance. She has more than 20 years’ experience in executive leadership roles spanning all aspects of commercial finance within the healthcare industry, including credit, underwriting, loan closing, operations and portfolio management, and business development. To learn more, please visit: www.triumphhf.com.

Zachary Reed is the manager, marketing and communication for TBK Bank, SSB, a Texas-state savings bank headquartered in Dallas, Texas. His experience spans financial services, healthcare, politics and professional sports. http://ushealthpolicygateway.com/vii-keypolicy-issues-regulation-and-reform/patientprotection-and-affordable-care-act-ppaca/ ppaca-and-the-health-industry/aca-andphysicians/ 2 https://www.moodys.com/research/Moodys-Affordable-Care-Acts-Medicaid-expansion-linked-with-decline-in--PR_326917 3 http://kff.org/uninsured/fact-sheet/keyfacts-about-the-uninsured-population/ 1

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Borrowers Speak Out Ever wonder what advice borrowers would give to lenders? Or why they chose the lenders they did? In this interview, The Secured Lender’s editor-in-chief discusses those questions, and more, with Rick Lonson, CFO Factory Motor Parts (FMP), and Joe Vaccarello, CFO of Maxim Crane Works L.P. FMP was founded in 1945 and has grown from a single location in Minneapolis to over 120 locations in 19 states. FMP distributes original equipment and branded automotive parts to professional service centers, car dealerships and governmental and commercial fleets. Maxim Crane Works, with over 75 years of experience and 30 locations, specializes in the rental and sales of lift equipment, including hydraulic truck cranes, rough terrain cranes, crawler cranes, tower cranes, conventional truck cranes and boom trucks.

Both Lonson and Vaccarello will participate in the panel “Words of Wisdom (From Our Customers)” during CFA’s Asset-Based Capital Conference in Las Vegas, January 31-February 1.

By Michele Ocejo

30

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Rick Lonson CFO, Factory Motor Parts

How long has your company been utilizing ABL and how did you learn about ABL? LONSON: Approximately 20 years.

Like many industries, the automotive parts distribution network started consolidating in the mid-1990s. Since this time, ABL is one tool that FMP has successfully utilized to finance its acquisitions and greenfield expansion into new markets.

FMP’s business fits the ABL model well, given the working capital need to finance the inventory investment. Because we are dealing with established brand name products, the inventory valuation and related inventory advance rates are readily determined.

VACCARELLO: We’ve been using ABL for about 17 years. The first time was in connection with a transaction. The financing of the deal, particularly our business, lends itself out to a twopiece debt structure typically where ABL sits on top of a more permanent piece, and we’ve had that structure in place with at least four different buyers. But each one uses a very similar structure and used ABL on top of a fixed piece of debt.

I would agree with Rick as far as the reasons ‘why’. It’s usually cheaper, covenants are usually simpler, and it’s fairly available to do acquisitions.

Our business is a little bit different because it’s not a perfect workingcapital type of scenario. We have hardvalue specific assets, crane assets, that we’ve managed to make work through

Maxim Crane Works equipment hard at work

appraisal processes and other things that help people establish value and changes in value in the shorter-term window. We’ve managed to adapt to that. Even though it’s a bit different, it still speaks to ABL being a good source of cheap and flexible financing.

What about ABL first attracted you to this form of financing and what factors affected your decision to use it?

VACCARELLO: The ready availability of ABL is key because there are so many lenders that easily can put this in their charters. It’s always been there. In fact, there was a time we did a transaction when it was very difficult to get any financing, and ABL was the only thing we were able to pull off. Other than the things I’ve mentioned, it’s always been more readily available. The bond markets from time to time shut down, the term loan markets shut down. But ABL is always there.

LONSON: I agree with Joe. It’s mainly the pricing, flexibility and the covenant lite features that make ABL so appealing.

The other aspect I appreciate about ABL is the discipline ABL instills in the borrower’s finance team. ABL requires a frequent review of the numbers.

What are the current inventory levels?

How are sales and collections performing? You’re going to do that anyway, but the structure of an ABL helps keep a pulse on how the business is performing on a daily basis.

THE SECURED LENDER JANUARY/FEBRUARY 2017 31

What is it about your particular lender that convinced you to either choose them or remain with them?

LONSON: There are many great banks that offer a vast array of services for a borrower to choose from. The deciding factor typically comes down to the people that you’re working with and whether they understand your industry.

In my experience, it’s rare for a bank to come prepared with a tailored proposal that also demonstrates an ability to anticipate and make financing recommendations based on future needs of the business.

Also, in the case of a privately held company, it’s important to consider how ownership might view financial situations and making sure that’s a good match with the bank group.

VACCARELLO: Having an agent in a bank that understands your business is probably the most important thing.

I’ve had bad banks and bad agents.

Of course, our current one we’re very happy with. And the simple reasons are that we asked them to take time and get involved with the business, learn the business, understand the economic factors that will affect our borrowing base and our overall earnings, and become a partner.

Our current agent definitely does this very well and took the initiative.

We spoke to them and said we’ve had some agents that haven’t taken this very seriously, and we’ve let them go.

We consider them more of a partner than just a lender.

Asset-based lenders and factors are known for building relationships with their borrowers. It seems that aspect of ABL is important to both of you, and that sounds like one of the main reasons you chose the lenders you did.

VACCARELLO: This type of financing requires you to be a little bit more involved with your borrower. You have to be able to forecast and predict the changes in your collateral by using availability. So you’re a lot more tuned to a constantly changing credit avail-

32

ability and, because both sides have to share in that, it becomes much more of a joint effort between the two groups.

LONSON: A key function in my role as CFO is to bridge the communication between ownership and the ABL agent. A strong relationship with the agent and frequent communication is a requirement if a business has changing financing needs. I’ve found a relationship-based and communicative approach has worked well to prevent any “surprises” by the stakeholders.

Do you feel as if the prevalence of automation has taken away from the relationship aspect of lending?

LONSON: I don’t think automation is diluting the impact of the lending relationship. In fact, I think the technology sometimes has the opposite impact.

For example, the prevalence of spoofing and wire fraud in today’s banking environment has only been made possible by recent technology advances.

Often, the best defense against these fraudulent tactics is personal communication, requiring a phone call or call back, confirming a personal detail or requiring someone to provide you with a hard copy of the documents, etc.

VACCARELLO: I think it’s all positive, but, of course, the things that improve our productivity we like. We have to be focused to make sure it doesn’t create unwanted results. I don’t see anything negative about the automation process other than you need to be sure you don’t lose touch as a result.

We’re getting more done with less. It just helps your company to grow.

Is there any advice as borrowers you would offer to lenders, whether they’re first courting a borrower or further along in the process?

LONSON: As mentioned previously, I would spend more time up front to make sure the lending proposal is highly tailored to the client. It’s also likely that the borrower is considering multiple lending proposals that

look very similar. I think a lender that makes an aggressive proposal early in the bid process has a strong ability to distinguish themselves, earn trust and guide the client’s lending decisionmaking process.

Lastly, I think lenders can do a better job communicating the credit decisionmaking process at the bank and who will be serving the client in the future.

Often times, this aspect of the banking relationship can change quickly and lacks transparency which can lead to frustration on behalf of the client.

VACCARELLO: I can build on some of Rick’s points because we’ve looked beyond just our agent and to our group. I think it’s important that you do spend a little bit of time knowing who makes up the syndication. And, if the agent wants to arrange for you to meet with the other key stakeholder departments within the agent bank, it is worth a brief meeting.

You have to go deep. You want to go across the syndication and deep within the syndication and take the time and meet with those groups because there will be a time it will become necessary when you may want to do an accordion, or you have an amendment, so the more people you deal with there, the better. It’s important to invest that time because it will pay off.

LONSON: This one may seem obvious to any banker or salesperson, but I would just say stay connected to the client.

In my 15 years at FMP, we’ve been able to figure out a way to do business with many people that briefly check in a couple of times a year just to see how we are doing. This persistence pays off.

Also, I wouldn’t be shy about consistently approaching a client for additional banking services. Even if you are not the agent, a good CFO should consistently be aware of trying to balance out the needs that members of the bank group have for ancillary services. TSL Michele Ocejo is editor-in-chief of The Secured Lender.

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y

tsl profile

vonne Kizner, senior vice president at Blue Hills Bank Asset-Based Lending Group, and Keith Broyles, senior vice president, head of AssetBased Lending, discuss starting up Blue Hills Bank’s first ABL group.

For a small community bank now celebrating its 145th year in business, Blue Hills Bank has undergone some changes in recent years. The bank underwent a transformation when CEO William (Bill) Parent came on board in 2010, changing its name from doing business as Hyde Park Savings Bank to Blue Hills Bank, to signal a change in its business model and intention to become a fully diversified bank serving the needs of both businesses and consumers in the area.

“In between the time Bill joined and when we went public in July 2014, the commercial lending unit expanded,” explained Yvonne Kizner, senior vice president at Blue Hills Bank Asset-Based Lending Group. “Several professionals from Bill’s days at Bank Boston joined and really grew the commercial lending side.”

One item that was in Blue Hills’ strategic plan that had not yet been added was an asset-based lending division.

Keith Broyles, now Head of Blue Hills ABL group, discovered Blue Hills’ ideas of developing an ABL group through networking and the timing was right for Kizner and Broyles to join and start up the group.

“The genesis of our creation of the ABL

BLUE HILLS BANK ASSET-BASED LENDING GROUP

division within the bank really started over a lunchtime conversation between myself and the chief risk officer of the bank, Tom Sommerfield, who I’ve known for about 20 years,” Broyles added. “We were meeting as acquaintances, catching up.”

“During our lunch meeting a rather innocent comment I made regarding asset-based lending and Blue Hills Bank turned into a deeper conversation about the potential creation of an ABL group at the bank. That lunch turned into a meeting with Tom O’Leary, the executive vice president and head of commercial banking for Blue Hills Bank and the introduction of Yvonne and myself to Tom O’Leary and Bill Parent, kicking around ideas and philosophies.”

Blue Hills Bank’s asset-based lending group launched in early March. Broyles explains that launching an ABL Group for Blue Hills Bank was a startup in every sense of the word since the bank didn’t have anything related to ABL in its product offerings.

“We had to identify and secure a few of the basic tools that make up the foundation of most ABL Groups, including a lockbox service provider as well as what loan and collateral monitoring system we wanted to use. We ended up selecting the ABLSoft platform, which we implemented over early fall 2016 and is now fully operational in our daily activities here,” Broyles said. “Since the end of March and going forward, we have been working on getting the word out to the marketplace. That’s our big challenge.”

Broyles and Kizner explain they are off to a good start, and have been going to market the old-fashioned way, through networking and word of mouth and trying to source deals through referral sources.

“Getting the word out is a challenge, Broyles said. “I’ve done this a couple of different times where I’ve been early stage, growing a group. This is certainly

the earliest stage where there’s a pure startup. I was the second employee in the Boston office for a group within National Bank of Canada. I was the first business development officer for direct lending for Siemens Financial Services’ asset-based lending group. It’s always been a challenge to generate new business opportunities in the early stages, fortunately I have had a fair amount of success in this area in the past and expect to do the same here at Blue Hills Bank.”

The group closed its first direct deal in November 2016, has two other deals on the books that are participations and has multiple term sheets out in the marketplace at this time.

“There’s nothing like driving new business by demonstrating the fact that you can actually get business done,” added Broyles.

Blue Hills Bank’s ABL Division’s target market currently is the northeast, including New England and New York, encompassing upstate New York, New York City and Long Island. Loan commitment size ranges from $3 million to $20 million.

When asked to give advice on starting up an ABL division, Broyles joked, “Stay away, we don’t need more competition,” then added, “I know it sounds cliché, but it’s important to hire the right people. It’s a people business.”

“Wit`h a startup, especially in the beginning, you need people who can wear many hats and feel comfortable jumping from being in operations to business development to internal compliance,” Kizner added. “There are a lot of different facets to this business, and you only can hire so many people upfront. That’s a challenge. We’re excited to see what 2017 will bring for our group.”

Eileen Wubbe is senior editor of The Secured Lender.

THE SECURED LENDER JANUARY/FEBRUARY 2017 33

what

i

WOULD YOU DO?

n this edition of What Would You Do?, the Chief Credit Officer of Overadvance Bank learns that one of the Bank’s borrowers has several hundred thousand dollars in state tax liens filed against it in various states for past due sales taxes, and owes another $2 million in sales taxes for which a lien has not yet been filed.

The borrower is tight on availability and tries to persuade the Bank not to implement reserves for the unpaid sales taxes.

Sales Tax: When You Can’t “Trust” Your Lien!

Five years ago, Overadvance Bank closed a senior secured, $70 million revolving line of credit with Magic Rug Business Machines, Inc., a lessor of cash registers and other point of sales (“POS”) equipment. Magic Rug leases its POS equipment in over 20 states across the U.S. All of Magic Rug’s customers pay their lease payments directly into blocked bank accounts that are swept daily to Overadvance Bank and applied against Magic Rug’s revolving line of credit.

With the exponential growth and popularity of online retail shopping over the last few years, Magic Rug’s

34

financial performance has been in steady decline. Many of Magic Rug’s retail customers have fallen on hard times and, consequently, have either stretched their lease payments owing to Magic Rug or have simply gone out of business, leaving unpaid leases and repossession headaches for Magic Rug. Magic Rug, as a result, has been stretching some of its payables, including the timely payment of sales taxes due in the various states in which it leases its POS equipment.

Recently, Magic Rug disclosed to Overadvance Bank that it received tax lien notices in several states for unpaid sales taxes totaling a little over $200,000. Magic Rug’s Chief Financial Officer was also quick to point out that Magic Rug recently paid the sales taxes associated with these tax liens, and would provide the Bank with evidence of the tax lien satisfaction shortly. The Chief Credit Officer decided to implement an availability reserve for the unpaid sales taxes until receipt of the tax lien satisfaction, but he was still nervous about this situation. As such, he also arranged for tax lien searches in all of the states in which Magic Rug leases POS equipment, and required Magic Rug to provide the Bank with an updated report reflecting the outstanding sales taxes in each state.

While the searches came back with no additional sales tax liens, the report from Magic Rug reflected that it had a little over $2 million of unpaid sales taxes in addition to the $200,000 of sales taxes evidenced by the tax liens. Without knowing when tax liens might actually be filed with respect to the $2 million-plus of additional unpaid sales taxes, the Chief Credit Officer is very concerned that the $200,000 reserve is woefully insufficient. However, Magic Rug’s funding requirements could barely absorb

the $200,000 tax lien reserve, and the Chief Financial Officer of Magic Rug implores the Bank to refrain from increasing the tax lien reserve.

The CFO argues that the sales tax liens for the other unpaid sales tax, if they arise at all, would not prime the Bank’s prior perfected lien on the company’s assets. Even if the CFO is correct, and the sales tax liens are not “priming liens”, the Chief Credit Officer recalls something about how certain states treat sales tax proceeds as “trust funds” for which a lender in receipt of these funds may be directly responsible to pay in the event the borrower/tax payer fails to do so. Accordingly, if Magic Rug hits a major snag and goes out business, this “trust fund” liability could cause the Bank to have a shortfall.

If you were the Chief Credit Officer, what would you do?

Let’s start with the basics. While the scope and extent of sales tax varies from state to state, it can be generally defined as a transaction tax (calculated as a percentage of the cost of the applicable transaction) on the sale, transfer, lease or rental of goods or services transacted in the state between two parties authorized to do business within the state. In most instances, the seller/lessor is responsible to collect the sales tax from the buyer/lessee and remit the same to the applicable state taxing authority.

When the party responsible for remitting the sales tax to the applicable state taxing authority fails to do so, most states will have the right to obtain a tax lien against the taxpayer’s assets. Unless the applicable state tax lien law provides otherwise, a tax lien arising from unpaid sales taxes will not immediately prime the existing liens of a senior secured lender (although they may prime the liens

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of an existing secured lender with respect to certain future advances).

However, aside from any priority afforded a state tax lien, some states treat the collection of sales tax proceeds as “trust funds”. If the secured lender to the taxpayer/borrower responsible for remitting the sale tax maintains control over such taxpayer’s cash management arrangements, such that all collections subject to sales taxes are paid into blocked accounts controlled by the secured lender, then some states will deem the secured lender directly responsible for the turnover of all “trust fund” sales tax proceeds that flowed to the secured lender. As such, irrespective of the tax lien priority, these “trust fund” states create direct liability

for the secured lender to the extent of any sales tax proceeds that were swept to the lender and were not otherwise paid by the taxpayer/borrower.

In this case, the Chief Credit Officer of Overadvance Bank determines that three of the states in which Magic Rug has unpaid sales taxes (totaling $400,000) are “trust fund” states. As such, the Chief Credit Officer recommends implementing a reserve to account for these unpaid sales taxes, along with implementing other measures that will allow the Bank to better monitor and account for the accrual of unpaid sales taxes in these states. The Chief Credit Officer also makes a mental note to sensitize his loan officers to this issue in other

credits where delinquent sales taxes have come up.

We hope you enjoyed the column and, of course, are always interested in your feedback. As such, if you have any scenarios you would like to see discussed in a future column, please let us know at Dfiorillo@otterbourg. com or Jcretella@otterbourg.com. TSL Dan Fiorillo and Jim Cretella are Members of the law firm Otterbourg P.C.

THE SECURED LENDER JANUARY/FEBRUARY 2017 35

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Bibby Financial Services (BFS): Jim Vargo has joined as senior vice president of business development. Vargo will lead the asset-based lending (ABL) division of the company’s Midwest office in Lombard, working to build long-term relationships with stakeholders, referral sources and banks. with the company’s referral source base.

Vargo brings more than 20 years of experience in the financial services industry to his new role with BFS. He has held a number of senior-level management positions with high-profile companies such as Wells Fargo Bank, HomeDirectUSA, Bekins Van Lines and The CIT Group, successfully driving growth and profitability by reducing costs and improving controls for multimillion dollar corporations as a CFO. Most recently, Vargo served as senior vice president and business development manager at Wells Fargo Bank. He managed more than 200 bank prospects and opportunities for the company, converting 14 of them to new customers within the last few years.

Capital One: Jacob Villere was appointed as senior vice president to lead Capital One’s West Coast Corporate Banking team, where he will be responsible for building relationships with large-cap companies. Villere will be based in Los Angeles and will report to Karen DeBlieux, head of US Corporate Banking.

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With more than a decade of experience in commercial and corporate banking, Villere has been instrumental in the growth of the Corporate Banking team. Villere has consistently led innovation across the firm, developing creative capital structures as well as liquidity and treasury management solutions for clients. Prior to Capital One, Villere worked as an Audit Manager with Fidelity Information Services and began his career in Assurance Services with Arthur Andersen.

CIT Group Inc.: Marisa J. Harney was appointed as executive vice president, chief credit officer. Harney will report directly to executive vice president and chief risk officer Robert Rowe.

“We are pleased to have Marisa join CIT and our senior management team,” said Rowe. “Marisa is a highly regarded credit professional with several decades of experience. She brings to our organization a wealth of knowledge and strong credit skills in the products and industries in which CIT continues to focus as we execute our strategic initiatives.”

Harney’s primary responsibilities will include setting credit policy and overseeing the transaction approval process across CIT’s three operating segments, as well as overseeing the Company’s special assets function. She will also ensure the regular review, adherence to, and effective communication of credit policy and procedures across the organization.

Harney most recently served as chief risk officer, GE Capital Americas, with oversight of all risk activities. She previously served as head of corporate credit risk of the Americas for Bank of America after spending 11 years in various roles of increasing responsibility in both the credit and risk departments. While at Bank of America, she also served as credit executive for various segments that included leveraged finance, consumer/retail, media/ telecom and specialized industries. Before Bank of America, she served as unit head

for Chemical Bank’s and CIBC World Markets’ Media & Telecom groups and as a senior credit executive for Credit Suisse First Boston.

Crestmark: John D. Gullman has joined as regional first vice president, business development officer, to its East Division.

Gullman will represent Crestmark in the Florida market, which he has covered for more than 30 years, and will be responsible for developing diverse working capital solutions for businesses. He reports to first vice president, east division sales manager, James Farrell.

Gullman is a 30-plus-year veteran of the asset-based lending industry, and spent many of those years helping middlemarket companies across Florida access financing. He joins Crestmark from BB&T where, as senior vice president, commercial finance specialist, he supported corporate and commercial lenders throughout Florida.

Gullman began his career in assetbased lending at First Pennsylvania Bank in Philadelphia, PA, and later Chicago, IL. Later roles include: senior vice president at PNC Bank, where he worked with middlemarket companies, and vice president at Fifth Third Bank, where, in addition to working with middle-market companies, Gullman worked in commercial and industrial lending; and in structured finance.

He co-founded and was senior partner at GSR Capital, a private investment firm serving middle-market companies in the Southeast.

Gullman is a member of the Association for Corporate Growth (ACG). He is a past president of the board of directors for ACG’s South Florida Chapter; and a past chairman of ACG’s international board of directors, and its annual conference InterGrowth. Gullman founded the Florida Chapter of the Commercial Finance Association (CFA), and is a past president. He currently serves on the board of directors for CFA’s Florida Chapter.

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Crestmark Equipment Finance (CEF): Mark Sheehan has joined as national account executive. Sheehan is based in Flower Mound, TX, and represents the equipment finance division in the South. He will work with companies to maximize their equipment budgets with customized financing and leasing solutions. Sheehan reports to Chris Emge, regional vice president at CEF. Sheehan comes to Crestmark with more than 15 years of sales experience in the equipment finance and leasing industry.

He has worked extensively with small- and medium-sized businesses, and large corporations, specializing in vendor programs, and developing creative financing and leasing solutions for all types of equipment. Most recently, Sheehan worked for Wintrust Capital as vice president of business development. His career also includes the following positions: vice president of business development at EverBank; vice president of sales at PNC Financial Services Group; and regional sales manager at Comdisco, among others.

In addition to his successful sales background, Sheehan has expertise in information technology equipment and software. He began his career in information management systems (IMS), where his diverse experience includes managing information management systems, providing product support for technology hardware, and sales of B2B software.

Crestmark Bank: Mick Goik, president and chief operating officer of Crestmark Bank, recently announced the promotions of three employees at its corporate headquarters in Troy. Josh Beauvais was promoted to the newly created position of special assistant to chief credit officer, Mark Matheson, from vice president, account executive. Heather Weir was promoted to assistant vice president, learning and development specialist in the human resources department and Eric Ball was promoted to operations

officer, senior client analyst and team leader for the Midwest region.

In his new role, Beauvais assists with the enforcement of Crestmark’s creditquality standards, conducts loan analysis and portfolio reviews, and manages processes related to regulatory compliance, among other duties. Beauvais joined Crestmark in 2007 as a month-end analyst in the operations department, and since then he has held positions in field exam, portfolio management, and underwriting.

Beauvais has a B.S. in business management from Central Michigan University, and an M.B.A., focused on accounting, from Walsh College.

In a new role, Weir identifies employee training objectives, and develops and implements programs to meet milestones for ongoing internal professional development. Weir is also the new administrator and director of Crestmark University, the company’s online employee-development program. Weir transitioned from operations where she has been a key contributor since joining the company in 2006. During her career at Crestmark, Weir has been promoted several times, most recently in March 2016, to assistant vice president, senior client analyst, team leader from operations officer. Based in Troy, she reports to first vice president, human resources director, Roland Pascua.

Ball, who has been important to building successful client relationships for Crestmark, now leads a team of client analysts in the Midwest region, and provides mentoring and training. In addition, he is a member of the company’s client retention committee. Ball joined Crestmark in 2008 as an invoice analyst, and in 2010, he was promoted to client analyst. Earlier this year, Ball was promoted to operations officer, client analyst. He is based in Troy, and reports to first vice president, operations supervisor, Douglas Kollman.

DS-Concept: René Pastor was promoted on November 1 to president, global

commercial operations from senior executive vice president, global business development. He continues to report directly to Ansgar Hütten, CEO and executive director.

All commercial, account management and marketing departments report to the newly created position. Pastor joined DSConcept in 2007 and has held roles with increasing responsibilities. He has more than 15 years of experience in trade financing and insurance, and is widely recognized as an expert in this field.

DS-Concept also announced that Peter Maerevoet will join the company as chief financial officer (CFO) and chief human resources officer (CHRO), a newly created role. He will be responsible for leading all aspects of the global finance and HR functions, including controlling, reporting, recruitment, talent planning and organizational development.

Maerevoet started his career at Procter & Gamble in Belgium where he held various finance functions in product supply, logistics, sales, marketing and corporate. He moved on to Levi Strauss & Co for 10 years, where he held responsibilities in supply chain finance Europe and global strategy prior to moving to San Francisco in 2010 to become VP Global Supply Chain Finance, managing all cost of goods sold, inventory and payables for the company. He provided financial leadership towards the sourcing strategy and the optimal supply chain organization.

Chris Chang, currently CEO for USA & China, was promoted to CEO, head of global sales. In this newly created role, Chang will increase synergies and opportunities between DS-Concept’s multiple international offices. Chang joined DS-Concept seven years ago. Prior to joining DSConcept, Chang spent 10 years at ITOCHU Corporation, as manager of business development and corporate planning. Prior to ITOCHU, Chang worked in the international fashion industry, at GFT/Giorgio Armani,

THE SECURED LENDER JANUARY/FEBRUARY 2017 37

the cfa brief

amongst other major fashion houses.

Chang holds a BA in international business and marketing from the Gallatin Division of New York University.

DS-Concept also announced the promotion of John Stillwaggon, currently senior vice-president sales in the New York office, to managing director USA, where he will be responsible for general management and commercial performance of the region.

Stillwaggon will continue to advise and partner with the head office in Germany on the company’s global strategy.

Stillwaggon has been with DS-Concept for over four years. Prior to joining DSConcept, he was employed at COFACE, a €1.6 BB revenues insurance and financial services firm. He holds a BA from Siena College, an MA from Boston University, and certificates in international trade, logistics, finance, and credit analysis from New York

University.

Charles Doc Lundberg, who joined DS-Concept early 2016, will be promoted to senior vice-president, based out of the company’s Los Angeles office. Lundberg will continue to originate commercial opportunities, and expand DS-Concept’s network in the Western United States, as well as focus internationally on the substantial trans-pacific trade between the USA and China, Vietnam and other Asian markets.

With more than 15 years of experience in financial management and deal generation, Lundberg was most recently director of finance for an alternative lender in the field of purchase order finance transactions in the middle-market and government sectors. Previously, Lundberg was CFO for a privately held registered investment advisory group and private equity fund in Scottsdale, AZ.

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Brian Dowd, currently assistant vicepresident business development was promoted to vice president. Dowd has been instrumental in continuing to grow the market’s awareness of DS-Concept, and has also directly contributed in originating many successful transactions in a variety of industries, both in the USA and internationally. Prior to joining DS-Concept, he served as AVP of business development at FGI, a New York-based trade finance and factoring firm. He is a graduate from CUNY Baruch College, Zicklin School of Business with a degree in statistics & quantitative modeling and economics.

Hilco Global: Jeffrey B. Hecktman, chairman and CEO of Hilco Global, announced the launch of a new operating company, Hilco IP Merchant Banking. This new business unit will provide intellectual property-based financial and technical advisory services, IP monetization solutions, and will be a proprietary investor in IP-driven transactions. These services will be provided to IP owners and the financial and investment communities.

“Hilco IP Merchant Banking adds a unique and critical capability to our current suite of valuation, monetization and advisory solutions”, said Hecktman.

The new patent and technology centric practice will operate as one of the 20+ operating companies within the Hilco Global portfolio and is expected to focus on the growing need for this valuable expertise.

Hecktman continued, “This sector requires a unique and highly specialized skillset that will complement our current intellectual property capabilities in trademarks, domains and IP addresses.”

Hilco IP Merchant Banking will be managed by Michael D. Friedman as its chief executive officer. Friedman joined Hilco earlier this year after leaving Ocean Tomo, LLC. A specialist in intellectual property finance and investing, Friedman has significant expertise in originating, structuring and financing transactions driven by IP. He has

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advised on and managed dozens of multimillion-dollar intellectual property transactions. Prior to 2007, Friedman founded FHS Investments, LLC, a multi-strategy hedge fund. Prior to FHS, he was co-head and managing director of UBS’s global special situations investing portfolio.

Friedman indicated that Hilco IP Merchant Banking will seek transactions ranging from $100 million to $150 million, but we will consider deals outside of this range where appropriate.

Along with Friedman, a team of 13 senior professionals will be joining Hilco IP Merchant Banking from Marquis Technologies – a full-service IP consultancy formed by the former leaders of Rockstar Consortium, the team behind Nortel’s historic $4.5B IP transaction. Joining in executive roles will be John Veschi (former CEO of Rockstar and chief IP officer of Nortel) as chief operating officer; Gillian McColgan (former CTO of Rockstar and Nortel IP) as chief technology officer and Afzal Dean (former VP of Rockstar and Nortel) as chief licensing officer.

Along with Veschi, McColgan and Dean will be 10 others from Marquis, all of whom have held senior positions with Rockstar and/or Nortel, having a combined tenure of over 150 years of experience.

King Trade Capital: Brandyn M. Prust has joined King Trade Capital’s east coast finance team. A seasoned financial executive, Prust joins as regional manager of business development in King’s New York office, bringing more than 11 years of experience in the purchase order, trade and asset-based finance business.

In his new role, Prust will be responsible for growing King Trade’s business on the upper east coast.

“We are excited to continue to enhance and grow our client focused business finance offering with Brandyn’s help,” said Edward King, founder, and managing partner of King Trade Capital. “With Brandyn’s energy and relationships, I’m confident

King Trade Capital will continue to expand our presence in a very important market thus helping more small to medium-sized companies with complex finance needs.”

Prust has five years sales experience in purchase order finance and three years in international factoring. He most recently was a business development officer for Medallion Business Credit responsible for originating asset-based loans. Prust can be contacted at: bprust@kingtradecapital. com; Tel: (917) 754-1568.

Liquid Capital: Adam Flomen has joined the team as assistant vice-president, risk, working out of the Toronto, Ontario, Canada headquarters. Flomen joins a team of experienced risk professionals who together review all new business opportunities and manage on-going operational risk within Liquid Capital’s portfolio.

Flomen comes to Liquid Capital with over 15 years’ experience in business development, sales and underwriting. He obtained an MBA from the University of Toronto in 1993 and received the Chartered Accountant designation in 1995. Notably, Flomen has worked in senior leadership positions with multiple financial lending facilities, serving businesses of all sizes across Canada and the United States.

Reporting to vice president Tammy Kemp, and working closely with over 80 franchisees across North America, Flomen will be assessing new opportunities and will be a key player in Liquid Capital’s growth.

Marquette Business Credit: Michel Lynch was appointed as senior vice president, senior credit officer. Working out of Minneapolis, MN, Lynch will support credit activity within the existing portfolio and on new business transactions.

Lynch brings more than 22 years of banking and commercial finance experience from companies such as Wells Fargo,

Marquette Financial Companies, First Capital and Triumph Commercial Finance and has a bachelor degree in accounting from Iowa State University.

Milberg Factors, Inc.: Daniel R. Milberg has been promoted from senior vice president to president. In this new role, Milberg will oversee all areas of Milberg Factors, one of the largest factoring and commercial finance companies in the U.S. His focus will be on managing Milberg’s business development, client loan portfolio and overseeing Milberg’s regional offices in Los Angeles, California and Winston-Salem, North Carolina.

“We are exceptionally pleased to have Dan at the helm of Milberg Factors. As senior vice president, he laid the groundwork for expansive growth at the firm, and was an exceptional partner to his clients. As president, we can look forward to an even greater level of growth and leadership,” says Leonard Milberg, chairman of Milberg Factors.

Milberg has a longstanding relationship with Milberg Factors. He came to the firm in 1989, and worked in the Credit Department until 1998, when he was given primary responsibility for business development.

NBH Capital Finance: Andrew Bae has joined as director for the asset-based lending platform. Based in Dallas, Bae is responsible for new business development and portfolio management activities for the Southwest region. He has more than 15 years of experience in asset-based lending, leveraged lending and commercial finance.

He previously held positions at Regions Business Capital, PNC Business Credit, Wachovia Bank (now Wells Fargo) and Citi where he completed the bank’s formal credit training program.

Bae holds a bachelor degree in economics from Rutgers University and a master degree in international business from

THE SECURED LENDER JANUARY/FEBRUARY 2017 39

Seton Hall. He is a member of the Association for Corporate Growth and Commercial Finance Association. Bae can be contacted at: Tel: (214)756-6712 or andrew.bae@ nbhbank.com.

Republic Business Credit: Thomas Harris was hired as senior vice president of business development. As the new business team continues to expand, this appointment adds depth and strength to the already cemented Midwestern presence supporting Republic’s ability to provide cash flow solutions throughout the U.S. Thomas marks the fourth Midwestern-based hire this year.

“Tom is a highly experienced professional with substantive relationships throughout the Chicagoland and Midwestern marketplace,” said Robert Meyers, chief commercial officer, Republic Business Credit. “Tom brings strong credit, underwriting and sales leadership skills within the vertical markets of factoring, assetbased lending, consulting, equipment leasing and banking. He is a great addition to our team and his efforts will support our continuing growth.”

Harris previously worked as a director of underwriting and regional sales executive with a national factoring company.

Sterling National Bank: Joe Giamartino has joined the bank’s Westchester commercial banking team as senior managing director and senior vice president.

Giamartino will help drive the bank’s growth across the middle market, focusing on relationship management, client retention and business development initiatives. He will also be responsible for supporting underwriting, portfolio administration and cash management functions.

Giamartino brings to Sterling extensive experience in team leadership, client development, new business acquisition, operations management and credit risk management. He was most recently

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market manager and senior vice president at Citizens Bank, where he was responsible for maintaining existing relationships and new client acquisition. He was also instrumental in recruiting and coaching new bankers to better serve clients and increase market share. Prior to joining Citizens Bank, he held positions in commercial banking with Bank of America, Fleet Bank, NatWest Bank and First National Bank of Central Jersey, in the New York and New Jersey metro areas.

SunTrust Robinson Humphrey: Aaron Peyton has joined as a managing director to be head of Consumer & Retail Syndicated & Leveraged Finance based in New York. Peyton has over 16 years of experience in Leveraged Finance covering the consumer and retail and healthcare sectors, along with extensive experience with financial sponsors. He was most recently head of Consumer & Retail Leveraged Finance at Goldman, Sachs and prior to that was a managing director at Bank of America Merrill Lynch, covering several sectors. In these roles, Peyton executed over 100 financing transactions totaling approximately $125 billion.

US Capital Partners Inc.: Britt Doyle has joined the firm as senior vice president. A 30-year veteran of the capital markets, Doyle started his career as an institutional fixed-income salesman for Security Pacific Asian Bank in Singapore directly out of college. After receiving an M.B.A. in the late 1980s, Doyle moved to the private client side of the business, working for various large investment banks, including Kidder Peabody, Merrill Lynch, and UBS. The majority of his career, however, was spent as a member of Citigroup’s elite Family Office division, where he developed the knowledge and skill set necessary to work with ultrawealthy families on a variety of relevant topics.

Joe Giamartino, senior managing director, Sterling National Bank

Frank Villarreal has joined US Capital Partners Inc. as vice president. With 24 years of asset management and client relationship experience, Villarreal has a strong and distinguished track record at industry leaders such as Merrill Lynch, Hambrecht & Quist (Executive Financial Services), Credit Suisse (US Private Banking), J.P. Morgan Securities (Private Wealth Services), and Stifel Financial Corp. (Private Client Group).

Most recently at Stifel in San Francisco, Villarreal was responsible primarily for portfolio management for the firm’s private and corporate clients, and for developing the firm’s international clientele for domestic public and private investments. At Credit Suisse, he provided US private banking services for domestic and international clients, and at J.P. Morgan he provided asset management and credit solutions to targeted high net worth clients, while assisting private wealth clients with retirement plan strategies.

Wells Fargo & Company: Monica Cole has succeeded Laura Oberst to head middle-market banking for the North Region. Oberst was tapped in September to lead the company’s Business Banking Group.

Cole has led the Southern Division of Wells Fargo Middle-market Banking since 2014, managing more than 100 team members at regional offices in Arkansas, Kansas, Missouri, North Texas, and Oklahoma.

In her new role, Cole, who is relocating to Chicago, oversees more than 350 team members in six states, including Illinois, Indiana, Michigan, Minnesota, Ohio, and Wisconsin. She will report to John Adams, head of Middle-market Banking, which serves mostly privately-held, family-owned businesses with annual sales of $20 million

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A 22-year Wells Fargo veteran, Cole began her career as a Norwest Corp. corporate banking trainee. She then held roles of progressing responsibility, building broad experience as a senior portfolio and relationship manager, as well as a loan administration officer. Cole joined Middle-market Banking in July 2014 after spending four years as east region business credit manager for Wells Fargo Capital Finance, where she was responsible for growth and risk management of smaller middle-market accounts in the eastern U.S. and eastern Canada.

A champion of diversity and inclusion, she co-chairs Wells Fargo’s Middle-Market Women’s Growth Initiative, creating events and other services to help women expand their businesses. Cole also serves on the Wells Fargo Black African American

Leadership Council. She volunteers on the Boys and Girls Club of Greater St. Louis board.

Wells Fargo Capital Finance also announced that Richard Zeni has joined its Loan Originations team in Canada as a business development officer. Based in Toronto, Zeni is primarily responsible for sourcing and structuring flexible assetbased financings for companies with credit needs of $5 million and above. He will cover Ontario and Manitoba provinces. In addition, Zeni will be responsible for sourcing financings for other specialty units within Wells Fargo Capital Finance, including retail, commercial finance, and technology. Zeni will report to Steve Bishop, executive vice president of Wells Fargo Capital Loan Originations for Canada.

Prior to joining Wells Fargo, Zeni spent

12 years working at GE Capital Canada in their Corporate Finance Group, where he managed asset-based and cash flow relationships. He was also in charge of structuring and underwriting transactions with middle-market companies throughout the country. Prior to GE, Zeni spent three years at PriceWaterhouseCoopers in their Corporate Finance Advisory Group, as well as three years as a senior auditor at Arthur Andersen. He is a Chartered Professional Accountant, Chartered Accountant, and a Chartered Financial Analyst and received his Bachelor of Business Administration with honors from the Schulich School of Business, York University. Zeni is also a member of various trade groups, and volunteers his time with several charitable organizations, including Level, the Daily Bread Food Bank, and the Good Shepherd Centre.

THE SECURED LENDER JANUARY/FEBRUARY 2017 41

the cfa brief

AMONG CFA EDUCATION FOUNDATION MEMBERS Conway MacKenzie: Turnarounds & Workouts, a Beard Group publication tracking distressed businesses in the U.S. and Canada, has recognized Conway MacKenzie as an 2016 Outstanding Turnaround Firm. This marks the 15th time the firm has earned this elite industry distinction.

With over 120 active turnaround management engagements during 2016, Conway MacKenzie achieved impressive results, as cited by the award selectors, including working with a $100 million confidential specialty niche metals distributor; NoviXus Pharmacy Services, LLC; and US Shale Solutions, among other clients.

This year, Conway MacKenzie also added 22 new employees to its team roster and launched two new service

line offerings, including its Valuation & Opinion Services and Case Management Services practice groups.

“We entered our 29th year as the premier financial advisory firm driving growth and creating value,” said Don MacKenzie, CEO, Conway MacKenzie.

“As we continue along this path, we will look to further expand our service offerings while providing vision and expert counsel to our clients. Our team remains committed to this industry and those we serve.”

Getzler Henrich & Associates: David R. Campbell, Jr. has joined the firm to lead the Midwest region. Campbell, who will be a managing director, will be based in the firm’s Chicago office at the Willis Tower.

Campbell has extensive corporate restructuring, capital markets, and

leveraged finance experience, having completed restructurings and financing across multiple industries including healthcare services and providers, steel, metals, automotive and technology, media and telecom.

Campbell is a financially-focused professional with expertise in creating and executing strategies that maximize stakeholder value throughout a company’s life cycles, from pre-acquisition through investment exit. He has more than 20 years’ experience with in- and out-of-court restructurings and recapitalizations, M&A and divestiture initiatives.

He will continue his work with private equity firms, banks, family offices and commercial lenders to bring transformational leadership, operational excellence and strategic advice to their investments. David’s functional expertise includes special-situation strategies,

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financial and due diligence, and capitalization initiatives.

Prior to joining Getzler Henrich, Campbell was a managing director in the private equity coverage group at Fifth Third Bank, where he focused on healthcare leverage finance. He was also a managing director with Almeric Capital Partners, a credit opportunity fund focusing on distressed first- and secondlien leveraged loans. Earlier, he served as a senior vice president with GE Capital’s Health Care Finance group and a principal at Potak, Campbell & Co., a boutique corporate restructuring firm providing advisory services to unsecured creditors.

David graduated with an MBA from the University of Chicago’s Booth School of Business and received a master degree from the University of Chicago’s Harris School of Public Policy. He received a Bachelor of Arts from Boston University.

GlassRatner: Restructuring industry leader Daniel Scouler Sr. will lead the firm’s New York, NY office. Scouler Sr. joined GlassRatner in 2016 as a principal and head of the firms New York, NY office. He is a seasoned and highly regarded leader in the restructuring industry. His experience in a wide range of assignments has provided him with knowledge and insight into a variety of industries including major manufacturing, retail, financing, leasing, broadcasting, airline, real estate, high technology, telecom and distribution.

Prior to taking on his current position with GlassRatner, he was a managing director in the Los Angeles office of Alvarez & Marsal. Prior to joining A&M, Scouler Sr. was the founder and CEO of Scouler & Company, a boutique restructuring and crisis management firm that he managed and grew successfully to national prominence from 2004 through 2015.

With over 40 years of experience assisting companies experiencing financial difficulty, he specializes in bankruptcy re-

organization, out-of-court restructuring, and interim management. Scouler Sr. has extensive experience, consisting of over one hundred in-court and out-of-court restructurings. Specifically, he played a leading advisory role in the bankruptcies of Contessa Premium Foods, Rhythm & Hues, and Hot Dog on a Stick, all three engagements recognized by peer review awards. Other notable assignments include Deak & Co., Wheeling- Pittsburgh Steel, LTV, Allis Chalmers, Ernst Home Centers, Mercury Finance Company, National Auto Credit, Hechinger Company, AB Dick and numerous private companies. His interim management experience includes Chief Restructuring Officer of TVC, Inc., Warehouse Entertainment, and Interim CFO of NUI Corp.

As an experienced expert witness on insolvency and reorganization matters,

Dan Scouler provides expert testimony on a broad range of issues including, date of insolvency, the creditors’ motion for the appointment of a Chapter 11 Trustee, reorganization plan feasibility, business plan viability, valuations and the reasonableness of select transactions. His experience in a wide range of assignments has provided him with knowledge and insight into variety of industries, including major manufacturing, retail, financing, leasing, broadcasting, airline, real estate, high technology, telecom and distribution.

Prior to establishing Scouler & Company, Scouler Sr. was a senior managing director and founder of FTI Corporate Recovery, a wholly owned subsidiary of FTI Consulting, and the leader of FTI’s interim management practice.

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CHAPTER NEWS

the cfa brief

Atlanta The Chapter’s Holiday Party was held December 8 at the Cobb Energy Performing Arts Centre in Atlanta, GA. The event was held in the open atrium, using the Centre’s Grand Lobby, Mezzanine Lobby and Grand Tier. Attendees donated toys for Toys for Tots at the party.

For more information visit community.cfa.com/atlantachapter.

California The Chapter’s Holiday Party was held December 14 at the Sheraton Universal Hotel. Buffets included chilled shrimp, sushi, pasta bar, carving stations and dessert bars.

For more information visit community.cfa.com/californiachapter.

Charlotte The Chapter’s Holiday Reception and Toy Drive was held at The Palm restaurant in Charlotte. Attendees enjoyed an evening of networking, socializing and hors d’oeuvres and cocktails. Toys were donated for Toys for Tots.

For more information, visit community.cfa.com/charlottechapte.

Florida The Chapter held a Post Election Insights 2016: Issues, Impacts of Election Results in 2017 and Beyond event with Senator George S. Lemieux on November 15 at the Lauderdale Yacht Club.

The CFA Florida Chapter - Tampa

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held a fun-filled afternoon of networking, holiday music and give-away gifts for its holiday party on December 7.

The party was held in conjunction with SBRN and TMA. Attendees were encouraged to donate to the Ready for Life, Inc. charity. Ready for Life, Inc. serves youth 15-23 years old in Pinellas and Pasco Counties that are in foster care or have already transitioned out and are on their own. The youth RFL serves are “put out” of the foster care system on their 18th birthday regardless of their housing situation, support system or knowing that they have what they need to be successful on their own.

The Chapter’s Annual Holiday Extravaganza with TMA was held December 6 at the Lauderdale Yacht Club in Ft. Lauderdale, FL. On December 8, the Florida Chapter – Orlando held its Second Annual Jingle & Mingle Holiday Party hosted by CFA, TMA & ACG Orlando at Ferg’s Depot in Orlando, FL. For more information visit community.cfa.com/floridachapte.

Houston The CFA Houston Chapter will hold its Annual Economic Forecast on January 25 at La Colombe d’ Or Restaurant - Le Grand Salon in Houston, TX. For more information, visit community.cfa.com/houstonchapte.

MidWest The Chapter will hold its 5th Annual Blackhawks Outing on March 23 at the United Center Super Suite West C&D. Save the date for the Chapter’s 23rd Annual Cubs Outing that will be held on Monday, May 22. Chapter attendees will watch from the Budweiser Patio at Wrigley Field.

For more information, visit community.cfa.com/midwestchapter.

Minnesota The Chapter’s Annual Holiday Social and Member Drive was held December 7 at Town and Country Club in St. Paul, MN. The Chapter held a Lunch and Learn: Lender Jeopardy Event on November 18 at Winthrop & Weinstine in Minneapolis, MN. There were four presenters from Winthrop & Weinstine: Dan Beck, shareholder, focusing on the representation of secured lenders with loans that are in workout, forbearance, foreclosure, receivership, liquidation or bankruptcy; Jim Dierking, shareholder, Winthrop & Weinstine, and a member of the Commercial Lending group; Tom Kettleson, shareholder and practice group leader for the firm’s Commercial Lending Group and Kristopher (Tip) Lee, a shareholder with Winthrop & Weinstine, P.A. and practices in the areas of Commercial Lending and Creditors’ Remedies & Bankruptcy.

The Chapter held a Young Professional Networking event with ACG Minnesota’s Young Professionals on November 8 at Tattersall Distilling in Minneapolis, MN. Attendees enjoyed a great night of food, drinks and networking! There was an optional tour from 6:00 - 6:30 p.m.

For more information visit community.cfa.com/minnesotachapter.

New England The Chapter held its Post-Holiday Party at the Boston Marriott Long Wharf in Boston, MA on January 12.

For more information visit community.cfa.com/newenglandchapter.

New Jersey The Chapter held its holiday party at Liberty House Restaurant in Jersey City on December 15. The Chapter’s Joint Super Networking Party, held in conjunction with the New Jersey TMA and New York Institute of Credit, will be held on January 25, 2017 at The

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Metropolitan Room at The Newark Club in Newark, NJ. The event will gather members from: 475 Credit Club; Association for Corporate Growth (ACG) - New Jersey Chapter; American Bankruptcy Institute (ABI); Association of Insolvency & Restructuring Advisors (AIRA); Commercial Finance Association (CFA) - New Jersey; Commercial Finance League (CFL); Financial Executives International (FEI) - New York City Chapter; FEI - New Jersey Chapter; International Factoring Association (IFA); IFA - Northeast Chapter; IWIRC New Jersey; IWIRC Philly; Turnaround Management Association (TMA) – Chesapeake; TMA – Connecticut; TMA - New York City; TMA – Northeast; TMA – Philadelphia and TMA - Upstate NY. The event will be preceded by a Complimentary and Optional Mentor Meet and Greet, hosted by the NYIC Future Leaders for Future Leaders. There will be giveaways, prizes and a silent auction with drink tickets distributed for open bar. Attendees are encouraged to wear business casual dress or the football jersey of choice.

For more information, visit community.cfa.com/newjerseychapter.

New York The Chapter held its Holiday Reception at The Yale Club of New York City on November 30. Attendees donated a toy for Toys for Tots and enjoyed an evening filled with networking and prize drawings.

For more information, visit community.cfa.com/newyorkchapter.

Northern California The Chapter held its Chapter Holiday Reception & Annual Meeting on December 14, 2017 at the Wayfare Tavern - Sequoia Room in San Francisco, CA. For more information, visit community.cfa.com/norcal.

Philadelphia The Chapter held its holiday party with TMA and the Bankruptcy Committee of the Philadelphia Bar Association on December 8 at the Loews Philadelphia Hotel. Attendees enjoyed spectacular views of Philadelphia, 33 floors above the hustle and bustle of the busy streets below. New, unwrapped toys were donated to Toys for Tots.

For more information, visit community.cfa.com/philadelphiachapter.

Southwest The Chapter’s Holiday Party was held with the TMA and TFF at the Dallas Country Club in Dallas, TX on November 29.

For more information, visit www.cfasw.org.

For more information on CFA Chapters, please visit community.cfa.com/chaptersmain

If you have too much business, please stop reading Reach your audience through the most trusted and widely read magazine in the industry The Secured Lender will maximize your exposure while putting your competitors on notice Email James Kravitz at jkravitz@cfa.com for more information on advertising in The Secured Lender

THE SECURED LENDER JANUARY/FEBRUARY 2017 45

the cfa brief

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January 11-February 15, 2016 CFA’s Winter Underwriting Fundamentals Virtual Workshops January 25, 2017 CFA’s Minnesota Chapter – Lunch and Learn Hellmuth & Johnson PLLC Minneapolis, MN January 25, 2017 CFA’s New Jersey Chapter Joint Super Networking Party Metropolitan Room at The Newark Club Newark, NJ January 25, 2017 CFA’s Houston Chapter – Annual Economic Forecast La Colombe d’ Or Restaurant Le Grand Salon Houston, TX January 26, 2017 CFA’s Europe Chapter – Frankfurt Asset Based Lending & Private Equity Deals in Germany Mayer Brown LLP Frankfurt am Main, Germany January 31 – February 1, 2017 CFA’s Asset-Based Capital Conference Encore at Wynn Las Vegas Las Vegas, NV March 1 - April 5, 2017 CFA’s 2017 Spring Factoring Fundamentals Virtual Workshops March 7 - 9, 2017 CFA’s Spring What’s It Worth? All You Need to Know About Inventory Exact location: TBD Los Angeles, CA

46

March 7 - 10, 2017 CFA’s Spring Field Examiner School Exact location TBD Los Angeles, CA

April 25 – 27, 2017 CFA’s Workouts & Bankruptcy Workshop Exact location: TBD New York, NY

March 9, 2017 CFA’s New Jersey Chapter – Topgolf Event Topgolf Edison Edison, NJ

May 3 – June 7, 2017 CFA’s Spring Operations Fundamentals Virtual Workshops

March 28 - 29, 2017 CFA’s Spring Foundations of Account Management Exact location: TBD Dallas, TX March 28 - 29, 2017 CFA’s Spring ABL & Factoring Basics Workshop Exact location: TBD Dallas, TX April 6, 2017 CFA’s Philadelphia Chapter – Day One at the Masters Networking Event Exact location: TBA Philadelphia, PA April 18 - 20, 2017 CFA’s Spring Advanced Field Examiner School Exact location: TBD Atlanta, GA April 18 - 20, 2017 CFA’s Spring Fraud Awareness Workshop Location: TBD Atlanta, GA

May 8 – 10, 2017 Advanced Legal Issues Workshop Exact location TBD New York, NY May 11, 18 and 25, 2017 Essentials of UCC - Three intensive workshops at your desk May 17 – 19, 2017 CFA’s Independent Finance & Factoring Roundtable Driskill Hotel Austin, TX June 2017 CFA/ACG Joint Event New York, NY September 2017 Annual Cross-Border Lending Summit New York, NY November 8 – 10, 2017 CFA’s 73rd Annual Convention Sheraton Chicago Hotel & Towers Chicago, IL

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t

legal notes

he past year produced a number of important legislative and judicial developments affecting secured lending. In this issue, we have selected and summarized certain of the most interesting legislation and cases previously reported on by us in The Secured Lender.

We hope you find this review to be informative and useful.

JONATHAN HELFAT AND RICHARD KOHN CFA CO-GENERAL COUNSEL California Enacts Wage Lien Law On October 11, 2015, the State of California enacted Senate Bill 588 (Cal. Lab. Code §§ 690.020 et seq) which provides the California Labor Commissioner with remedies against employers who fail to pay wages to their employees: Once a judgment for the employees is entered against the employer, the California Labor Commissioner has the ability to create liens against the employer’s personal and real property located in California and to revoke the employer’s good standing status. With respect to an employer’s real property, a lien is perfected by recording a certificate of lien with the clerk of the superior court of the county where the real property is

48

THE LEGAL SIDE OF ABL & FACTORING

located, and with respect to an employer’s personal property, a lien is perfected by filing a financing statement with the California Secretary of State.

Liens created under Senate Bill 588 remain effective for ten years unless terminated earlier. In order to return to good standing or to terminate the liens against its property, an employer must pay the amount due per the judgment against it, reach a final accord with the plaintiff and file the notarized accord with the California Labor Commissioner, or file a surety bond for a statutorily prescribed amount with the California Labor Commissioner, based on the amount of the judgment entered against the employer.

Senate Bill 588 should not cause alarm among secured lenders for two key reasons: (1) the statute does not include a priming provision, so security interests existing as of the effective date of the statute should not be affected, and (2) priority is not addressed in the statute at all, so presumably the California Labor Commissioner would be subject to the same priority rules as any other secured creditor. Secured lenders should, however, take steps to protect themselves from the implications of Senate Bill 588 when extending any new credit by running standard UCC lien searches and local county searches in California if a potential borrower has employees who work, or have done any work, in California.

In re RadioShack Corp., No. 15-10197, Docket No. 67 (Bankr. D. Del. May 11, 2016) (A prepetition restructuring of an ABL credit agreement did not waive or otherwise impair the lenders’ first-priority security interests in receivables and inventory because such restructuring was permissible under the intercreditor agreement.)

In RadioShack, the Delaware Bank-

ruptcy Court was asked to determine the allocation of sale proceeds among secured lenders based on language contained within the governing intercreditor agreement.

Prior to commencing its chapter 11 cases, RadioShack obtained $835 million in financing from two lenders; Salus Capital Partners, LLC, as agent for various lenders (the “SCP Lenders”) under a term loan facility (the “SCP Facility”) and General Electric Capital Corp., as agent for various lenders (the “Original ABL Lenders”) under an asset-based loan facility (the “Original ABL Facility”) secured by the majority of RadioShack’s assets. The intercreditor agreement among the SCP Lenders and Original ABL Lenders set forth the relative priorities of security interests in various RadioShack assets among the secured lender groups: obligations under the Original ABL Facility were secured by, among other things, a first-priority security interest in RadioShack’s “liquid” assets (the “Liquid Assets”) up to the “Maximum ABL Facility Amount”; obligations under the SCP Facility were secured by, among other things, a junior lien on the Liquid Assets.

In October 2014, the Original ABL Lenders sold their interests to new lenders (the “Subsequent ABL Lenders”), pursuant to which the ABL Facility was restructured and amended.

More specifically, a portion of the approximately $235 million in revolving loan obligations outstanding under the ABL Facility were restructured as term loan obligations. RadioShack subsequently commenced chapter 11 cases and liquidated its assets. Approximately $232 million in proceeds from the sale of the Liquid Assets were distributed to the Subsequent ABL Lenders.

The SCP Lenders took issue with the amount of proceeds distributed

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to the Subsequent ABL Lenders, asserting, among other things, that the partial restructuring of the Original ABL Facility (into a term loan and smaller ABL facility) had reduced the amount of obligations that fell within the meaning of the “Maximum Facility Amount”. The Subsequent ABL Lenders disagreed, asserting that the partial restructuring of the Original ABL Facility did not affect the Maximum ABL Facility Amount because the revolving loans were unambiguously outstanding commitments at the time of the restructuring, and that, significantly, the intercreditor agreement expressly permitted amendments and restructuring to the original ABL credit agreement.

The court sided with the Subsequent ABL Lenders based on strict contract interpretation analysis. The court noted that the intercreditor agreement unambiguously provided for the restructuring of obligations under the Original ABL Facility “so long as that refinancing did not encroach on those specific terms that would directly affect SCP’s exposure as a subordinated lender to RadioShack.”

The court was not convinced that, as a result of the restructuring, SCP’s exposure as a subordinated creditor was affected since the obligations upon which the ABL Lenders were paid were already outstanding at the time of the restructuring and those obligations fell within the definition of Maximum ABL Facility Amount.

In re Domistyle, Inc., 811 F.3d 691 (5th Cir. 2015) (Fifth Circuit Court of Appeals surcharged a secured lender for expenses incurred by a bankruptcy trustee to maintain property during an extended and unsuccessful sale process.)

Domistyle Inc., a manufacturer of home goods, owned a factory secured by three mortgages, the largest of

which was held by Southwest Securities, FSB. After Domistyle filed for bankruptcy, the bankruptcy trustee (the “Trustee”) spent close to one year attempting to sell the factory before ultimately moving to abandon the factory to Southwest Securities. The Trustee then sought to surcharge Southwest Securities under section 506(c) of the Bankruptcy Code for factory-related upkeep and maintenance expenses incurred by the Trustee since the inception of the bankruptcy. Section 506(c) provides that a bankruptcy trustee may recover from a secured creditor’s collateral the “reasonable, necessary costs and expenses of preserving, or disposing of, such property to the extent of any benefit to the holder of such claim.”

The Fifth Circuit sided with the Trustee. In doing so, it departed from established precedent in two key respects. First, a majority of circuit courts have held that the § 506(c) surcharge is warranted only when a bankruptcy trustee can establish that it incurred costs “primarily for the creditor’s benefit”; however, the Fifth Circuit in Domistyle rejected this approach, instead holding that a section 506(c) surcharge is appropriate upon a showing that the secured creditor received a direct benefit from the Trustee’s expenditures. Second, the Fifth Circuit departed from the long-held view that a secured creditor can be charged under section 506(c) only after the bankruptcy trustee has sought to abandon the collateral and only for the expenses incurred thereafter. In contrast to the established majority view, the Fifth Circuit reasoned that any limitation on a section 506(c) surcharge for bankruptcy trustee expenses incurred prior to attempted abandonment would result in unjust enrichment to the secured creditor, especially where the creditor

would have incurred those same costs trying to sell the property.

In re Energy Future Holdings Corp., No. 14-10979, 2016 WL 944608 (Bankr. D. Del. Mar. 11, 2016) (Adequate protection payments and plan distributions after an internal spin-off were not the first-lien creditors’ collateral or proceeds of their collateral.)

Texas Competitive Energy Holdings (“TCEH”), a subsidiary of Energy Future Holdings (“EFH”), had approximately $25.6 billion of first lien debt consisting of approximately (i) $22.6 billion of term loan and revolving loan bank debt, (ii) $1.75 billion of 11.5% first lien notes held by the “First Lien Noteholders” and (iii) $1.23 billion of debt outstanding under certain first lien interest rate swap agreements and secured hedge and power sales agreements (collectively, the “First Lien Obligations”). The First Lien Obligations ranked pari passu and holders of the First Lien Obligations (the “First Lien Creditors”) were secured by substantially all of TCEH’s assets. The relationship among the First Lien Creditors with respect to their shared collateral was governed by an intercreditor agreement.

EFH and its subsidiaries, including TCEH, filed for bankruptcy on April 29, 2014. On December 9, 2015, the debtors confirmed their plan of reorganization that contemplated, among other things, the “TCEH Spin-Off” in which holders of the First Lien Obligations would receive stock in reorganized TCEH on account of their prepetition claims. The plan also allocated plan distributions and adequate protection payments among the First Lien Creditors on a pro rata basis based on the amounts owed to them as of the petition date (the “Petition Date Allocation Method”).

THE SECURED LENDER JANUARY/FEBRUARY 2017 49

legal notes

Nevertheless, the First Lien Noteholders filed a complaint asserting that the plan distributions and adequate protection payments should be made in accordance with the waterfall provisions in the intercreditor agreement, notwithstanding commencement of the bankruptcy case, and that any payments made on account of the First Lien Creditor’s “Secured Obligations” (as defined in the intercreditor agreement) should include post-petition interest whether or not allowed under the Bankruptcy Code. Based upon their interpretation, the First Lien Noteholders were entitled to a larger share of the adequate protection payments and plan distributions since the debt owing to the First Lien Noteholders carried a higher interest rate than the debt owing to the other first lien creditors and would accrue post-petition interest at a faster rate than the other first lien creditors.

In order for the applicable provision in the intercreditor agreement to apply, the First Lien Noteholders needed to show that (i) collateral or any proceeds of collateral had to be distributed to the first lien creditors; (ii) the collateral or proceeds must have been “received” by the collateral agent; (iii) the collateral or the proceeds must have resulted from a sale or other disposition of, or collection in respect of, such collateral; and (iv) the sale, disposition, or collection must have resulted from the exercise of remedies under the security documents. The bankruptcy court systematically found that each element had not been satisfied.

First, the bankruptcy court held that plan distributions (i.e., the stock in reorganized TCEH) are not the First Lien Creditor’s collateral or proceeds thereof. Rather, such distributions are simply distributions made on account of the First Lien Creditor’s

50

prepetition debt and are obligations of reorganized TCEH, not an asset of reorganized TCEH into which the collateral was converted. Similarly, any adequate protection payments are not distributions of collateral or proceeds thereof, but rather are payments “designed to protect secured creditors against diminution in value of their collateral”. Second, the court held that the TCEH Spin-Off was not a “sale” of collateral or proceeds of collateral since there was no ‘economic event’ that would create [a seller/purchaser] relationship.”

In re Sentinel Mgmt. Grp., 809 F.3d 958 (7th Cir. 2016) (Seventh Circuit Court of Appeals voided the bank’s liens where the bank was on inquiry notice that the assets used to secure the bank’s loans had been fraudulently conveyed to the bank.)

Sentinel Management Group, Inc., an investment manager, traded securities on behalf of its customers but also traded on its own proprietary accounts, usually using funds from loans provided by Bank of New York Mellon Corp. (“BNY”). The loans from BNY were secured by cash and securities held in Sentinel’s proprietary accounts; Sentinel’s customer accounts were segregated and not subject to BNY’s lien. Notably, however, following significant trading losses in its own proprietary accounts, Sentinel began transferring assets out of the customer accounts and into other accounts subject to the bank’s lien to secure overnight loans from BNY. After Sentinel filed for bankruptcy in August 2007, the bankruptcy trustee brought a claim against BNY, alleging that Sentinel’s transfer of customer securities to the firm’s proprietary accounts constituted a fraudulent transfer and was therefore avoidable. The court explained, that under 11 U.S.C.

§ 548(c), the transfer would not be avoidable if BNY accepted the pledge of the assets “in good faith”; however, the bank could not have been acting in good faith if it had “inquiry notice” and consequently would only be entitled to an unsecured claim. The court further explained that “inquiry notice” is not actual knowledge of fraud or other wrongdoing but “… merely knowledge that would lead a reasonable, law-abiding person to inquire further.

The Seventh Circuit found that BNY had inquiry notice of the fraudulent transfers of customer securities to the proprietary accounts and, as a result, could not have acted in “good faith”.

The court cited emails from BNY employees demonstrating suspicion as to the amount of collateral pledged

by Sentinel and BNY’s rights to such collateral as well as other documents in BNY’s possession that show Sentinel lacked authority to pledge all the assets that were, in fact, pledged to BNY. Although the court did not find that BNY’s behavior was so egregious to require equitable subordination of their claims, BNY’s actions (or inactions) resulted in the court voiding its liens on the funds transferred from the customer accounts.

Husky International Electronics, Inc. v.

Ritz, 578 U.S. __ (2016) (The United States Supreme Court held that the “actual fraud” exception to the dischargeability of an individual debtor’s debt under §523(a)(2)(A) of the Bankruptcy Code does not require an actual misrepresentation by a debtor to a creditor but also includes forms of fraud such as fraudulent conveyance schemes.)

Husky International Electronics Corp., a supplier of components used in electronic devices, sold its products to Chrysalis Manufacturing Corp. (“Chrysalis”). Unbeknownst to Husky,

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Daniel Lee Ritz, Jr. (“Ritz”) a director of Chrysalis and owner at least 30% of Chrysalis’ common stock, was transferring Chrysalis’ assets to other entities owned by Ritz and limiting the assets available for Chrysalis to pay its debts.

When Ritz filed for chapter 7 bankruptcy in December 2009, Husky filed a complaint seeking to hold Ritz personally liable for Chrysalis’ debt to Husky and contended that the Chrysalis debt could not be discharged in bankruptcy because the intercompany transfer scheme constituted “actual fraud” under §523 of the Bankruptcy Code.

The Fifth Circuit Court of Appeals, in affirming the decision of the District Court, held that while Ritz could be held personally liable for the debt, the debt was not obtained by “actual fraud” and therefore could be discharged in Ritz’s bankruptcy.

Specifically, the Fifth Circuit Court of Appeals held that a necessary element of “actual fraud” is an affirmative misrepresentation from the debtor to the creditor was which missing in this case since Ritz made no false representation to Husky regarding the intercompany transfers.

The Supreme Court reversed the Fifth Circuit Court of Appeals, holding that debt can be nondischargeable for “actual fraud” under §523 of the Bankruptcy Code even if there was no fraudulent misrepresentation made to a creditor. Rather, “actual fraud” encompasses other forms of fraud, like fraudulent conveyance schemes, that can be achieved without false representation.

Janvey v. Golf Channel, Inc., No. 13-11305, 2016 WL 4432633 (5th Cir. Aug. 22, 2016) ($5.9 million payment by a company engaged in a Ponzi scheme to a trade creditor for advertising services was not a fraudulent transfer because the advertising services provided were of a

reasonably equivalent value.)

Stanford International Bank, Limited was engaged in a multi-billion dollar Ponzi scheme and had paid $5.9 million to The Golf Channel, Inc. for advertising services that Stanford hoped would recruit new investors. After the Ponzi scheme was discovered, Stanford’s assets were seized and Ralph S. Janvey was appointed as receiver over the estate. Janvey uncovered the payment to Golf Channel and filed suit under the Texas Uniform Fraudulent Transfer Act (“TUFTA”) for recovery of the full payment. The District Court granted the Golf Channel’s summary judgment motion finding that Golf Channel had received the payments “in good faith and for a reasonably equivalent value.” The Fifth Circuit, however, reversed the District Court’s ruling holding that TUFTA requires that “value” be measured solely from a creditors’ perspective, and that the fees paid to the network did not have any value to Stanford’s creditors because of the Ponzi scheme, and thus were voidable under TUFTA. Further, the court noted that there were no exceptions for trade creditors who provided the services in good faith.

In response to the Fifth Circuit’s decision, the Golf Channel filed a petition for rehearing. The Fifth Circuit vacated its prior opinion and certified the question to the Supreme Court of Texas. The Supreme Court of Texas, in Janvey v. Golf Channel, Inc., 487 S.W.3d 560 (Tex. 2016), responded that TUFTA’s “reasonably equivalent value” requirement can be satisfied by evidence that the transferee (1) fully performed under a lawful, arm’s-length contract for fair market value, (2) provided consideration that had objective value at the time of the transaction and (3) made the exchange in the ordinary course of the transferee’s business. TUFTA’s purpose is to ensure that debtors

aren’t defrauding their creditors by placing their assets out of the reach of creditors, but it is also designed to protect those transferees that “took in good faith and for reasonably equivalent value.”

Following the determination by the Texas Supreme Court that the transfer was for reasonably equivalent value because the Golf Channel provided advertising services to Stanford in the ordinary course that had objective value of equal consideration at the time they were agreed upon, the Fifth Circuit reversed its decision and affirmed the decision of the District Court granting summary judgment in favor of the Golf Channel. TSL Jonathan N. Helfat, partner, Otterbourg P.C., and Richard M. Kohn, partner, Goldberg Kohn, are CFA co-general counsel.

THE SECURED LENDER JANUARY/FEBRUARY 2017 51

revolver

j

TSL OPINION COLUMN

oe Accardi of Santander discusses the future of professional jobs and the importance of lifelong learning and adaptability.

I know it’s really hard to do, but I’m asking you to give it a try. Go back in your mind 20 years to 1996. Think of all that was part of our world back then, and all that wasn’t. (I know I was 10 pounds lighter and had hair on my head.) Technologically, we were in a very different place: Internet use was in its infancy, there was no GPS, and no social media.

Keep remembering, if you can, what life was like in 1996. Now picture this: you are sitting with someone, let’s call him Gerry, who is describing to you, in great detail, what some “device” is like 20 years henceforth, in 2016. It’s like a really big powerful computer, but very portable at a mere 4.5 ounces. Gerry is talking about it replacing cameras, video recorders, phones, Walkman cassette players, alarm clocks, flashlights, encyclopedias, maps…and hundreds of other things. Gerry continues on and on about the transformational nature of this “iPhone”. You, understandably, believe he is simply crazy. Gerry is caught up in a lot of sci-fi fantasy.

Much has changed in the last 20 years. Globalization, technological

52

advances, and automation have affected every aspect of our society, including, of course, human work. Think of the many industrial jobs that existed 40 years ago in American middle-class society.

The world changed and a great many of those jobs have been permanently lost.

With major transformational changes in the past, there have been winners – entrepreneurs, investors, and specialized labor related to new markets and innovations - and unfortunately, losers – people whose skills could not keep pace with rapid technological changes.

Ready or Not, the Future is Here Today we are at a tipping point with autonomous vehicles. Truck drivers, bus drivers, and taxi drivers are obsolescing because of technology that assures us that it is safer and less expensive to get the inefficient human work machine out of the way.

In the way that machinery has replaced certain manual human labor (in agriculture and manufacturing for example), artificial intelligence is about to disrupt white-collar professional jobs.

Very recently, one of the country’s largest law firms hired “the world’s first artificially intelligent attorney”, powered

by IBM’s Watson technology. Lenders, attorneys, accountants and a variety of other professionals will, in the next 5-10 years, be replaced to some degree, by artificial intelligence – complete with competencies in judgment and creativity - that will continue to dramatically transform our world, including financial market platforms. And once again, there will be winners, and there will be losers.

The concept of “creative destruction” – the simultaneous destruction of old industries, companies, and jobs, and the creation of new ones – applies here.

“It’s tough to make predictions, especially about the future.” Yogi Berra was right. It is really difficult to paint a picture of the future with great preci-

sion. But there are some big-picture issues worth pondering. Obviously, the job transformation landscape mentioned above raises sociologic and economic questions about conflicts of interest between governments (with its citizenry needing jobs), shareholders (seeking maximized returns on their capital with reduced costs of production), and consumers (demanding more for less).

Income and wealth inequality will likely worsen due to seriously disrupted labor markets. The need for “universal basic income” will likely complicate discussions about fiscal policy.

Staying Relevant It’s crucial to understand and accept that the world is changing more rapidly than ever before, and that we will need to be increasingly receptive to change and ready to adapt. Continuous learning and growing will be critical so that we can constantly evolve our skill sets. For those who don’t, their careers will likely be cut short like industrial workers of yesteryear, or like truck drivers of today; they didn’t adapt and got left behind.

So how will white-collar professionals respond to upcoming disruption? Will they be disciplined and courageous enough to abandon mindsets and some practices that made them successful in the past, or will they keep trying to do what is familiar and comfortable? John Kelly, IBM’s SVP for Cognitive Solutions: “You know how the mirror on your car says ‘Objects in your rearview mirror are closer than they appear’? That now applies to what’s in your front windshield, because now it’s the future that is much closer than you think.”. TSL Joe Accardi is the NY/NJ/PA Market Leader for the ABL Division of Santander. Feedback welcomed: jaccardi@santander.us

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JANUARY/FEBRUARY 17

IN THIS ISSUE PREDICTIONS FOR A MATURE MARKET P12

THE CAPITAL MARKETS ISSUE

CLUBBED AND SOLE LENDER FINANCINGS GAIN MOMENTUM IN ABL SPACE; SYNDICATED ISSUANCE DIPS IN 2016 P16 DEBT MARKET OUTLOOK FOR 2017 P20 THE ACA’S IMPACT ON HEALTHCARE LENDERS P26 BORROWERS SPEAK OUT P30

DEPARTMENTS COLLATERAL // THE CFA BRIEF PROFILE // WHAT WOULD YOU DO? REVOLVER // LEGAL NOTES

ACCOUNTS RECEIVABLE INVENTORY DISPOSITION

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SECURITY

An examination of Hilco Global today illuminates the unparalleled depth and breadth of our integrated services. Our team has a unique understanding of tangible and intangible assets built upon decades of experience in providing both healthy and distressed companies with creative solutions. We often support our recommendations with capital, sharing both risk and reward. As principal or agent, we have completed billions of dollars of transactions, and are truly vested in your success. Please contact Gary Epstein at +1 847 418 2712 or gepstein@hilcoglobal.com.

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Yearly Review

THE

CAPITAL MARKETS ISSUE