TSL January 2020

ASSET-BASED CAPITAL CONFERENCE ISSUE

THE SECURED

JAN/FEB 2020 WWW.SFNET.COM

Putting Capital To Work

Interview With

Hamid Namazie MCGUIREWOODS PARTNER DEDICATES TIME AND ENERGY TO SFNET’S ADVOCACY EFFORTS

A publication of:

More capabilities.

Same commitment.

Siena Lending Group offers a growing suite of asset-based lending solutions and strong financial backing.

Siena is expanding with the launch of our healthcare finance division. This follows our acquisition by Business Development Corporation of America, an affiliate of Benefit Street Partners LLC. Amid these exciting developments, we’re as committed as ever to crafting flexible financing solutions—and delivering on our promises.

For more information, visit sienalending.com or sienahealthcarefinance.com

Siena INTRODUCING Healthcare Finance

TOUCHING BASE CHANGE IS IN THE AIR

SFNet Offers the Tools You Need for 2020

Happy 2020! After an impactful 2019 marked by heightened competitive pressures and protracted economic expansion, our industry continues to thrive. Whenever the turn comes, we are well positioned to fulfill our purpose of fueling our country’s engines of commerce, helping our clients compete in any environment. As we embark on a new year, your Secured Finance Network is here to help you make the most of what lies ahead. It’s our mission to arm you with the data, education, insightful content and essential connections to inform your business and professional development decisions and advance your success.

Investment in attracting, developing and retaining people is at the top of most of our priority lists for the new year.

Along with our evolving Guest Lecture Program, designed to attract new talent to the industry and the return of our special recognition 40 Under 40 Awards, SFNet is making significant investments in our education programming. We realize that content must stay dynamic and remain in tune with current business challenges. SFNet’s new initiative, Education Focus 20/20, supported by the Secured Finance Foundation, brings that vision to life. We are revamping course content to reflect the changes in the industry and to better respond to the needs of our members. For further details, turn to page 50.

Much of the content of this issue addresses key changes affecting the industry in 2020. Some of the most challenging changes surround new legislation being proposed (and in the case of California, passed) calling for financial disclosure and licensing requirement for non-bank originated financial transactions. Hamid Namazie, managing partner of McGuire Woods’ Los Angeles - Downtown office, has been a tireless SFNet advocacy volunteer. He has dedicated much time and energy to SFNet’s efforts, especially CA SB 1235, which requires new financial disclosures for lenders in California.

Turn to page 18 for an interview with Hamid and page 27 for a rundown of bills that SFNet is currently addressing. On page 21, you’ll find a detailed update on the Small Business Reorganization Act by SFNet co-general counsel, Jonathan Helfat and Richard Kohn.

In this ever-changing lending landscape, attorneys from Skadden, Arps, Slate, Meagher & Flom LLP offer ideas on

minimizing risks for lenders on page 42 in Where Past is Prologue – Applying Lessons from the Past to Protect ABL Lenders in a World of Future Distress.

Growth remains high on everyone’s agenda. With the cannabis industry eclipsing $10 billion in 2018 and on track to have hit more than $16 billion in 2019, the ancillary cannabis market RICHARD D. GUMBRECHT has enjoyed tremendous

SFNet Chief Executive Officer development recently.

Turn to page 40 to read The Anatomy of a Deal: Financing in the Ancillary Cannabis Sector by Rob Miller and Paul D. Schuldiner of Rosenthal & Rosenthal.

In Syndicated ABL Volume Up in 2019, Deal Count Down on page 24, Refinitiv’s director of analytics, Maria Dikeos, shares with readers the latest data surrounding the syndicated market. Note that Maria will be a speaker at SFNet’s Asset-Based Capital Conference in Las Vegas, February 4-5.

As secured lenders step up their efforts to secure their own systems and data, there is a growing understanding of the complexity of that task, but it isn’t just your own security you need to worry about. Lenders need to address the risks to their clients as well. Find out how lenders are minimizing their exposure on page 32.

Asset valuations are certainly a significant and fluid part of your business and can be a challenge in cross-border transactions. On page 36, in Across Global Jurisdictions – The Secured Lender’s Perspective by Rafael Klotz, Frank Grimaldi and Scott Fuller of Gordon Brothers discuss the practical considerations in valuations across different countries. A deep understanding of the local commercial environment, as well as enforcement customs and procedures, is essential to a sound valuation and proper collateral-risk underwriting in cross-border secured loans. This is part 2 in a 3-part series.

Part 1 was published in the November issue.

Wishing you a very happy, healthy and prosperous New Year!

1

THE SECURED LENDER JAN/FEB 2020

TABLE OF CONTENTS. JAN/FEB. 2020 VOL. 76 ISSUE 1

COVER STORY INTERVIEW WITH HAMID NAMAZIE P18

Interview with McGuire Woods’ Hamid Namazie Hamid Namazie is managing partner of McGuireWoods’ Los Angeles - Downtown office. He concentrates his practice on representing a wide range of clients, including banks, institutional lenders and commercial finance companies, providing asset-based loans. 18

BY MICHELE OCEJO ADVOCACY UPDATE

Small Business Reorganization Act Takes Effect In February 2020 On August 23, 2019, President Trump signed into law the Small Business Reorganization Act of 2019 (“SBRA”), which will take effect on February 23, 2020. The SBRA provides for a new Subchapter V to existing Chapter 11 of the Bankruptcy Code dealing exclusively with the reorganization of Small Business Debtors. 21

BY RICHARD KOHN AND JONATHAN HELFAT

Syndicated ABL Volume up in 2019, Deal Count Down Refinitiv’s director of analytics shares with readers the latest data surrounding the syndicated market. 24

BY MARIA C. DIKEOS

Articles SFNET ADVOCACY UPDATE

FEATURED STORY 2

THE SECURED LENDER JAN/FEB 2020

ISN’T THAT WHAT IT SAYS? POTENTIAL PERILS OF INCORPORATION P28

Financial Disclosure & Licensing Bills Affecting Industry Synopsis of financial disclosure and licensing bills affecting lenders, actions taken by SFNet and the bills’ current status. 27

BY MICHELE OCEJO

VALUATIONS Asset Valuations Across Global Jurisdictions: The Secured Lender’s Perspective

CYBERSECURITY YOUR CLIENT’S CYBERSECURITY THREAT IS YOUR THREAT TOO P32

FEATURE STORY

FEATURE STORY

Isn’t That What it Says?

Potential Perils of Incorporation by Reference in Finance Transactions

Your Client’s Cybersecurity Threat is Your Threat Too

The author discusses the potential perils of improper use of “incorporation by reference” in commercial lending transactions, as well as potential strategies for reducing potential incorporation by reference hazards. 28

BY BRIAN SMITH

The specter of cybercrime haunts every industry, but none more so than financial services. As secured lenders step up their efforts to secure their own systems and data, there is a growing understanding of the complexity of that task. Asset-based lenders and factors are increasingly aware that their cybersecurity procedures must be ongoing and dynamic to thwart a network intrusion and to quickly shut down and mitigate a hack if it does happen. 32

BY MYRA A. THOMAS

While the concept of an orderly or forced liquidation value is interpreted similarly across the globe, the practical considerations underpinning these definitions vary broadly across different countries.

A deep understanding of the local commercial environment, as well as enforcement customs and procedures, is essential to a sound valuation and proper collateral-risk underwriting in cross-border secured loans. (Editor’s Note: This is part 2 in a 3-part series.

Part 1 was published in the October issue.) 36

BY RAFAEL KLOTZ, FRANK GRIMALDI AND SCOTT FULLER ASSET-BASED LENDING THE ANATOMY OF A DEAL: FINANCING IN THE ANCILLARY CANNABIS SECTOR Rosenthal & Rosenthal executives reveal details of a recent cannabis-related deal amid growing interest in this industry. 40

BY ROB MILLER AND PAUL D. SCHULDINER RESTRUCTURING Applying Lessons from the Past to Protect ABL Lenders in a World of Future Distress In this ever-changing lending landscape, attorneys from Skadden, Arps, Slate, Meagher & Flom LLP offer ideas on minimizing risks for lenders. 42

TRENDS & OUTLOOK OPTIMISTIC SMALL BUSINESSES EXPECT GROWTH IN 2020 P45

BY SETH JACOBSON, SHANA ELBERG AND GEORGE HOWARD TRENDS & OUTLOOK

Optimistic Small Businesses Expect Growth in 2020

With solid growth continuing, unemployment at a 50-year low and rising payrolls, the economy continues to roll forward. 45

BY DAVID CICCOLO

3

THE SECURED LENDER JAN/FEB 2020

Three Industry Executives Discuss Possible Changes in 2020 48 Departments TOUCHING BASE 1 PUTTING CAPITAL TO WORK P54

ON THE HORIZON Thoughts on the Third Quarter 2019 Asset-Based Lending Index. 6

BY THE SFNET DATA COMMITTEE COMMITTEE SPOTLIGHT SFNet Education Committee 2020

INDUSTRY DEALS 8 NETWORK NOTES 14 SFNET EDUCATION UPDATE SFNet Education Focus 20/20 Dynamic Educational Content is Key for Members. 50

This column highlights the hard work and dedication of SFNet Committee Volunteers. Here we speak with Joseph Lehrer, Chairman of the SFNet Education Committee for 2020 52

PUTTING CAPITAL TO WORK Prestige Capital Customer Vernon Francois Prestige Capital Supports Entrepreneur’s Partnership with Sally Beauty 54

Online Exclusives and News Visit sfnet.com to read the latest issue and web-exclusive subscriber-only content. Also sign up for our daily enews blast highlighting industry deals, moves and more — signup at sfnet.com/tslexpress

Join us @

THE SECURED LENDER JAN/FEB 2020

The Secured Finance Network 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 asset-based financial services industry (ISSN 0888-255X), is published 8 times per year (Jan/Feb, March, April, May, June, September, October and November) $65 per year non-member rate, and $105 for two years non-member rate, SFNet members are complimentary.

ONLINE SUBSCRIBER CONTENT

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Photo credit: @vernonfrancoishair

CHANGE ROUNDTABLE

@SFNet_National @SFNet_National Secured Finance Network | National

Secured Finance Network 370 Seventh Avenue, New York, NY 10001.

(212) 792 -9390 Email: tsl@sfnet.com

www.SFNet.com Periodicals postage paid at New York, NY, and at additional mailing offices. Postmaster, send address changes to The Secured Lender, c/o Secured Finance Network, 370 Seventh Avenue, New York, NY 10001 Editorial Staff Michele Ocejo Editor-in-Chief and SFNet Communications Director Eileen Wubbe Senior Editor Aydan Savaser Art Director Advertising Contact: James Kravitz Business Development Director T: 646-839-6080 jkravitz@sfnet.com

40 Under 40 Awards

The SFNet 40 Under 40 Awards are back in 2020 Now is your chance to recognize young talent poised to impact the future of our industry—nominate them for an SFNet 40 Under 40 Award.

Visit www.sfnet.com for details or email awards@sfnet.com.

Nominations Deadline: February 7

ON THE HORIZON

Thoughts on the Third Quarter 2019 Asset-Based Lending Index

BY THE SFNET DATA COMMITTEE

6

THE SECURED LENDER JAN/FEB 2020

Q3 2019 results generally demonstrate the continuation of trends observed throughout 2019. Year to date, we continue to have growth in the industry as a whole and credit quality remains solid. There are a few notable deviations from trends observed throughout the year as we will see.

General economic conditions continue to be top of mind for the secured finance community, but it is interesting to note that we continue to see a divergence between Bank and Non-Bank Lenders with respect to the SFNet Confidence Index. As a reminder, starting in 2019, we have chosen to divide the ABL lender universe along Bank and Non-Bank lines, as opposed to our previous methodology of splitting up the ABL lender universe by portfolio size.

SFNet Confidence Index The SFNet Confidence Index is based on responses from senior executives. They revolve around anticipated activity or conditions in the forward three-month period. As seen in the summary below, there are some notable differences in the outlook of Bank and Non-Bank lenders. The SFNet Confidence Index responses are on a 3-point scale where a response of “1” indicates a decrease/ decline, a response of “2” indicates that things are expected to stay the same and a response of “3” indicates that the expectation is an improvement/increase.

One of the notable areas where responses diverge is the forward outlook for business conditions, taking into account the economy overall. Bank lenders are somewhat pessimistic with an average response of 1.81 (a score which is below 2.0, the level whereby things are expected to remain the same). This is in sharp contrast to the Non-Bank average score of 2.50, a level which is significantly higher than the Bank score as well as materially higher than the Non-Bank score from the prior quarter (which was hovering around 2.0). It is also interesting that Bank lenders have a Portfolio Performance score below 2.0, albeit an increase from

the prior quarter, whereas Non-Bank lenders have a Portfolio Performance score above 2.0 with a decrease compared to prior quarter. One possible explanation is that Non-Bank lenders may view uncertainty with broader economic conditions as an opportunity for new business while Bank lenders may not share this view. The Non-Bank lenders also seem to acknowledge that this may come at the expense of Portfolio Performance (which is still above 2.0, but with a rather large negative change quarter over quarter).

Survey Category

Bank Score (with change vs. prior quarter)

Non-Bank Score (with change vs. prior quarter)

Economy/Business Conditions

1.81 (-0.03)

2.50 (+0.42)

Portfolio Performance

1.94 (+0.15)

2.08 (-0.17)

Demand for New Business

2.25 (+0.09)

2.58 (+0.25)

Utilization

2.06 (-0.05)

2.27 (+0.10)

Hiring Expectations

2.13 (-0.13)

2.08 (-0.19)

Commitments, Outstandings and Utilization Total Commitments for Bank Lenders was $252.5B for Q3 2019, up compared to both the prior quarter (+1.8%) and the same period in the prior year (+6.6%), continuing the growth trend noted in 2019. While Commitments were up, Outstandings were flat quarter over quarter at $111.1B. Similarly, Utilization (Loans Outstanding as a Percent of Total Commitments) was basically flat at 44.8% in Q3 2019 compared to 44.9% in Q2 2019. Utilization is down from the peak level noted in Q1 2019 of 45.6%, a high point which we believe may have been driven by some noise and disruption in the broader credit markets around Q4 of 2018. In Q1 2019, we noted in our analysis that, absent any unforeseen changes or market conditions, that we expected utilization for the Bank segment to level off and start to decline and that appears to be the case as of Q3.

For Non-Bank Lenders, the trends were generally the same, but with higher growth in commitments at 4.3% growth quarter over quarter and 17.9% growth year over year to $4.69B in Q3 2019. Similar to Bank lenders, Outstandings were relatively flat quarter over quarter with growth of 1.7% to $2.264B. Utilization (Loans Outstanding as a Percent of Total Commitments) by Non-Bank Lenders was down quarter over quarter to 49.3%, a decrease from 50.5% in Q2 2019 (which was the highest point since 2015). While this has come down somewhat, utilization is still generally at an elevated level relative to the past few years.

Credit Quality Credit quality remains solid in Q3 2019 with Bank Gross WriteOffs as a % of Total Outstandings at a level near historic lows at 0.018% for the quarter. While Gross Write-Offs hovered near

historic lows, there was a notable uptick in Non-Accruing Loans as a % of Total Loans Outstanding as Non-Accruals came in at 0.77% in Q3 2019, the highest level in a single quarter since 2016. Whether this will translate into higher Write-Offs in the coming quarters remains to be seen, but this is something to watch. Bank Criticized or Special Mention Loans also had an uptick relative to the prior quarter at 12.3% compared to 11.8% last quarter. This reverses a downward trend noted since Q3 2017; however, 12.3% is still well below the Q3 2017 level of 15.2%.

Conclusion The industry continues to grow and credit quality remained very strong, but sentiment among Bank lenders is less positive than it has been in the past. Non-Bank lenders, however, are more bullish and see business conditions improving in the short term, perhaps with a view of capitalizing on perceived uncertainty with general economic conditions. While credit quality remains strong, the uptick in Non-Accruals and, to a lesser extent, the increase in Criticized or Special Mention Loans is something to keep an eye on. It is far too early to say that we should expect a decline in credit quality in coming quarters as Write-Offs remain near historic lows. Overall, this quarter was a solid one for the ABL industry.

If you find our industry analysis helpful, we strongly encourage you to participate in future surveys if you are not already doing so. We try to provide meaningful reporting, but having participation from all of our lender members will ensure that we provide the best industry information possible. Please contact Michele Ocejo at mocejo@sfnet.com or Aydan Savaser at asavaser@sfnet.com for details.

7

THE SECURED LENDER JAN/FEB 2020

DEPARTMENT INDUSTRY DEALS

8

THE SECURED LENDER JAN/FEB 2020

Lender/Participant (Role)

Lender Type

Amount

Industry

Borrower

Structure

BofA Securities, Inc. (Sole Lead Arranger and Sole Bookrunner and Bank of America, N.A. (Administrative Agent), KeyBank National Association and Morgan Stanley (Participants)

Bank

$75 Million

Hospitality

Braemar Hotels & Resorts

Secured credit facility

Crystal Financial LLC (Lender)

Non-bank

$60 Million

Retail: Apparel

True Religion Apparel, Inc., Vernon, CA

Senior credit facility

Fifth Third Bank (Lender)

Bank

$225 Million

Hospitality

Bluegreen Vacations Corporation

Amended syndicated credit facility which includes a $100.0 million term loan with quarterly amortization requirements and a $125.0 million revolving line of credit

LBC Credit Partners (LBC) (Agent and Sole Lead Arranger)

Non-bank

N/A

Construction

To support the refinancing of Sciens Building Solutions and the add-on acquisition of SmartWatch Security & Sound

Senior secured credit facilities

Oxford Finance LLC (Lender)

Non-bank

N/A

Healthcare

Portfolio company of Skyway Group that will be managed by Mission Health Communities LLC, a provider of senior living and skilled rehabilitation communities

Term loan

First Business Capital Corp. (Lender)

Non-bank

$12 Million

Manufacturing

Home and bath storage products distributor, Oregon

Revolving line of credit facility and real estate term loan

Gateway Trade Funding (Lender)

Non-bank

$1 Million

Retail: Apparel

Company selling specialist towels and linens to hotels that are imported from India, Canada

Purchase order facility

Amerisource Business Capital (Lender)

Non-bank

$25 Million

Oil

Oil field services company based in Texas and Oklahoma

Credit facility

Sallyport Commercial Finance (Lender)

Non-bank

$500,000

Manufacturing-Food

Producer of a complete range of European style deli meats

Accounts receivable facility, including a small purchase order solution

Lender/Participant (Role)

Lender Type

Amount

Industry

Borrower

Structure

Wells Fargo Securities (Left Lead Arranger, Bookrunner and Administrative Agent)

Bank

$800 Million

Energy

Northern Oil and Gas, Inc., Minnetonka, MN

Senior secured revolving credit facility

TradeCap Partners (Lender)

Non-bank

$1.4 Million

Retail

West coast, branded, consumer goods company

Purchase order facility structured to satisfy a seasonal working capital need related to a program with a key customer

North Mill Capital (Lender)

Non-bank

$6 Million

Technology

Logistics company providing maintenance, supply and warehouse chain management, transportation, IT and base operations support personnel primarily for the U.S. military, North Carolina

Credit facility

Austin Financial Services (Lender)

Non-bank

$5 Million

Transportation

Full-service courier company that provides parcel delivery throughout the country, Midwest

ABL credit facility

TAB Bank (Lender)

Non-bank

$4 Million

Transportation

Transportation company, Kentucky

Asset-based revolving credit facility

JPMorgan Chase Bank, N.A; BofA Securities and Citizens Bank, N.A. (Joint Bookrunners and Joint Lead Arrangers)

Bank

$800 Million

Manufacturing

Kaman Corporation, Bloomfield, CT

Credit facility

Lighthouse Financial Corp. (Lender)

Non-bank

$4 Million

Manufacturing

Manufacturer and distributor of narrow fabrics, North Carolina

Credit facility

Bibby Financial Services Canada (Lender)

Non-bank

$1.8 Million

Retail: Apparel

Apparel company that designs and provides quality jean-wear products at accessible pricing, Quebec

Factoring Line

CIT Northbridge Serves (Lender)

Bank

$40 Million

Manufacturing

Hantover Inc., a leading distributor of products to the food processing industry, Overland Park, KS

People's United Bank, N.A. (Lender)

Bank

$57.5 Million

Healthcare

ReNew REIT, a privately held healthcare real estate investment trust (REIT) formed in 2018 that focuses on independent living, assisted living and memory care communities

Senior secured credit facility

Credit facility

9

THE SECURED LENDER JAN/FEB 2020

DEPARTMENT INDUSTRY DEALS Lender/Participant (Role)

Lender Type

Amount

Industry

Borrower

Structure

JPMorgan Chase Bank N.A. (Administrative Agent, Sole Bookrunner and Sole Lead Arranger), CIBC Bank USA and Bank of America, N.A. (Lenders)

Bank

$100 Million

Manufacturing

Lawson Products, Inc., a distributor of products and services to the MRO marketplace

Credit facility

PNC Bank, National Association (Lender and Agent)

Bank

$100 Million

Manufacturing

Ferroglobe PLC (GSM), London, UK

Asset-based revolving credit facility

Encina Business Credit, LLC (EBC) (Lender)

Non-bank

$25 Million

Healthcare

Pharmaceutical company

Senior secured credit facility, consisting of a revolving line of credit based on accounts receivable

Fifth Third Business Capital (Sole Lender and Administrative Agent)

Bank

$8 Million

Retail: Apparel

Troy Lee Designs, LLC, a Senior credit designer and distributor facility of high-quality helmets, apparel, safety gear and accessories used in the off-road motorcycling and mountain biking industries, Corona, CA

Crossroads Financial (Lender)

Non-bank

$12 Million

Manufacturing: Textiles

Distributor, retailer and wholesaler of interior fabrics

Inventory revolver

Wells Fargo Bank, N.A. (Lender)

Bank

$312.5 Million

Lender Finance

Siena Lending Group LLC

Secured credit facility increase

MidCap Business Credit LLC (Lender)

Non-bank

$5 Million

Technology

Blonder Tongue Laboratories, Inc., Old Bridge, NJ

Asset-based credit facility

Blacksail Capital Partners (Lender)

Non-bank

$5.875 Million

Manufacturing

Sponsor-owned industrial manufacturer, North Carolina

Senior credit facility

TCF Middle Market Banking (Lender)

Bank

N/A

Electric

Slifco Electric, LLC, Troy, MI, a provider of professional electrical contracting services throughout North America

Secured financing

Utica Leaseco, LLC (Lender)

Non-bank

$500,000

Manufacturing

Hemp processing company, Kentucky

Capital lease secured by machinery and equipment

North Mill Capital LLC (Lender)

Non-bank

$1 Million

Staffing

Staff Right Solutions, LLC, New Jersey

Accounts receivable facility

Encina Business Credit, LLC (EBC) (Lender)

Non-bank

$15.3 Million

Manufacturing

Manufacturer of thermoplastic molds and modeled parts

Senior secured credit facility

10

THE SECURED LENDER JAN/FEB 2020

Lender/Participant (Role)

Lender Type

Amount

Industry

Borrower

Structure

LBC Credit Partners (Lender)

Non-bank

N/A

Manufacturing

Increase in the DreamLine senior secured credit facilities to support an investment in Arizona Shower Doors, LLC

Senior secured credit facilities

ING Capital LLC (Administrative Agent), Deutsche Bank and Rabobank (Joint Lead Arrangers), including MUFG, Bank of China, HSBC and Credit Agricole (Commodity Finance Lenders)

Non-bank

$300 Million

Metals

GT Commodities LLC, the North American trading hub for Gerald Group, the world's largest employee owned metals merchant

Syndicated financing, includes a $50 million accordion feature

Siena Lending Group LLC (Lender)

Non-bank

N/A

Printing

Doodad Printing, LLC, Asset-based Austell, GA, a portfolio revolving credit company of Chicagofacility based private equity firm, Waveland Investments, LLC

36th Street Capital (Lender)

Non-bank

$6 Million

Energy

A leading energy services company that provides fuel cell solutions to commercial clients

Equipment financing

Access Capital (Lender)

Non-bank

$1 Million

Staffing

HonorVet Technologies, a Certified Service-DisabledVeteran-Owned Small Business (SDVOSB), New Jersey

Credit facility

Sterling National Bank (Lender)

Bank

$843 Million

Lender Finance

Agreement to acquire a Acquisition of portfolio of middle market loans commercial equipment finance loans and leases from Santander Bank, N. A.

Citibank, N.A. (Administrative Agent and Lender) Citibank, N.A., BofA Securities, Inc., Bank of the West, Credit Suisse Securities (USA), LLC, Deutsche Bank Securities Inc., and Wells Fargo Securities, LLC (Joint Lead Arrangers and Joint Bookrunners), Bank of America, N.A., Bank of the West, Credit Suisse AG, Cayman Islands Branch, Deutsche Bank Securities Inc., and Wells Fargo Bank, N.A., Syndication Agents and Lenders ) Deutsche Bank AG New York Branch, Fifth Third Bank, Texas Capital Bank, N.A., BMO Harris Bank N.A., CIBC Bank USA, MUFG Union Bank, N.A., Regions Bank, and Zions Bancorporation, N.A. dba California Bank & Trust (Additional Lenders)

Bank

$800 Million

Construction

KB Home

J D Factors (Lender)

Non-bank

$250,000

Transportation

Transportation company, Missouri

Hedaya Capital Group (Lender)

Non-bank

$500,000

Retail: Cosmetics

Beauty and cosmetics Factoring facility company startup, New York

Revolving credit facility

11

Factoring facility

THE SECURED LENDER JAN/FEB 2020

DEPARTMENT INDUSTRY DEALS

Lender/Participant (Role)

Lender Type

Amount

Industry

Borrower

Structure

Bank of America and Barclays Bank (Joint Coordinators ) and a syndicate of 25 banks

Bank

$10 Billion

Oil and Gas

Royal Dutch Shell plc, The Hague, Netherlands

Revolving credit facility. The new facility replaces Shell’s existing $8.84 billion revolving credit facility.

Bridge Bank, a division of Western Alliance Bank

Bank

$6 Million

Technology

Streamline Health Solutions, Inc., provider of integrated solutions, technology-enabled services and analytics supporting revenue cycle optimization for healthcare enterprises, Atlanta, GA

Credit facility

Wells Fargo Bank, National Association (Administrative Agent), RBC Capital Markets (Syndication Agent, Joint Lead Arranger and Joint Bookrunner), Wells Fargo Securities, LLC, BMO Capital Markets Corp., Barclays Bank PLC, BofA Securities, Inc., JPMorgan Chase Bank, N.A., Citigroup Global Markets Inc., and Credit Agricole Corporate and Investment Bank (Additional Joint Lead Arrangers and Joint Bookrunners)

Bank

$460 Million

Oil and Gas

Legacy Reserves Inc.

Reserve-based credit facility

Republic Business Credit

Non-bank

$6.5 Million

Manufacturing: Food

Private equity owned, Receivables line natural food manufacturing of credit facility company

Huntington Business Credit

Non-bank

$26,400,000

Manufacturing

Chandler Industries, Inc., Minneapolis, MN, a multi-facility contract manufacturer specializing in precision machining, sheet metal fabrication, welding of high tolerance parts and complex components and assemblies.

Credit facilities

KeyBank National Association (Lender)

Bank

$100 Million

Lender Finance

Great Rock Capital, an asset-focused commercial finance company specializing in middlemarket lending

Leverage facility

Finacity Corporation (Lender)

Non-bank

EUR 15 Million

Technology

Wiko Mobile, a rapidly growing maker of popular smartphones, Europe

Receivables financing facility

Newbridge Global Sourcing (Lender)

Non-bank

$50 Million

Lender Finance

Technology-enabled specialty lender provides receivables financing to companies with strong end-debtors

Credit facility

12

THE SECURED LENDER JAN/FEB 2020

Lender/Participant (Role)

Lender Type

Amount

Industry

Borrower

Structure

Republic Business Credit (Lender)

Non-bank

$1.5 Million

Transportation

Intermodal trucking company

Receivables line of credit facility

Allied Affiliated Funding, a division of Axiom Bank, N.A. (Lender)

Non-bank

$250,000

Construction

Company that primarily Receivables provides commercial financing roofing services on new construction and sheet metal fabrication, including standing seam metal roofs, gutter, downspouts and flashing, Texas

Pinnacle Capital Finance (Lender)

Non-bank

$900,000

Printing

Commercial and digital printer, Oregon

Accounts receivable line of credit

Bank of Montreal and TD Securities (Co-lead Bank Arrangers and Joint Bookrunners), National Bank of Canada, Scotiabank, RBC Royal Bank and Desjardins Capital Markets (Participants)

CA$300M

Manufacturing

LOGISTEC Corporation, a marine and environmental services provider, MontrĂŠal, QuĂŠbec

Renegotiated its existing credit facility

Newbridge Global Sourcing (Lender)

Non-bank

$40 Million

Telecommunications

Telecommunications equipment manufacturer, Mexico

Receivables financing facility

Santander Bank (Lender)

Bank

$142 Million

Technology

WEX Inc., a leading financial technology service provider of payment processing and information management services in North America, South America, the AsiaPacific region, and Europe.

Participation commitment in connection with a $1.7 billion senior credit facility and acted as both joint lead arranger and joint bookrunner for a $1.3 billion term loan B facility

Santander Bank (Lender)

Bank

$120 Million

Manufacturing

The Eastern Company (EML), a leading industrial metal products manufacturer spanning the hardware, security products and metal castings segments.

Revolving credit and term loan facility

Encina Business Credit, LLC (EBC) (Lender)

Non-bank

$30 Million

Energy

Coal producer for blastfurnace steel production

Senior secured credit facility

Crystal Financial and Second Avenue Capital Partners (Co-Agents)

Non-bank

$40 Million

Retail: Apparel

JackRabbit, a leading omni-channel retailer of athletic footwear, apparel, and accessories owned by affiliates of CriticalPoint Capital

Senior credit facility

International Materials, Inc., Boca Raton, FL

Revolving line of credit

Citizens Bank (Lender)

Bank

$290 Million

Manufacturing

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THE SECURED LENDER JAN/FEB 2020

DEPARTMENT DEPARTMENT NETWORK INDUSTRY NOTES MOVES Cathy Osborne Joins Accord Financial as Senior Vice President, Human Resources Accord Financial Corp. has created a new executive leadership position, hiring Cathy Osborne as Senior Vice President, Human Resources. Osborne will lead all human resources functions across the entire Accord Financial organization, developing a unified culture between the firm’s six operating units. She will be in the firm’s Chicago office.

Amerisource Business Capital Announces Acquisition of Two Specialty Finance Businesses from MidSouth Bank Amerisource Business Capital announced the acquisition of two specialty finance business units from MidSouth Bank, based in Lafayette, LA. The two acquisitions included loan portfolios of over 1200 commercial borrowers.

Gail Heldke Joins Big Shoulders Capital (BSC) Gail Heldke has joined Big Shoulders Capital (BSC) as Senior Vice President and Chief Credit Officer.

Cambridge Savings Bank Hires John Bobbin to Join its Asset-Based Lending Team Cambridge Savings Bank (CSB) announced the addition of John Bobbin, First Vice President, Senior Asset-Based Lending Officer, to join its Asset-Based Lending Team, which sits under CSB’s wellestablished Corporate Banking division.

Carl Marks Advisors Promotes Scott Webb to Partner

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THE SECURED LENDER JAN/FEB 2020

Carl Marks Advisors announced the promotion of Scott Webb to Partner. As Partner, Webb will continue to specialize in advising companies and creditor groups throughout the capital structure on financial restructurings, distressed mergers and acquisitions, capital raises and other special situations.

Change Capital Appoints Scott Bernstein as General Counsel Change Capital, a corporate financing provider headquartered in New York City,

is pleased to announce that Scott H. Bernstein, Esq., has joined the company as Senior Vice President and General Counsel.

City National Bank Appoints Rick Hariman to Succeed John Beale as Chief Information Officer City National Bank, America’s Premier Private and Business Bank®, announced that Rick Hariman will join the company as executive vice president and chief information officer. Hariman will succeed John Beale, the current chief information officer, who retired in January after 23 years with City National.

CIT Names Director to Technology, Media and Telecommunications Group CIT Group Inc. has appointed Mihir J. Shah as director of technology Originations in its Technology, Media and Telecommunications business.

Crestmark Announces Launch of Healthcare Financial Services Division led by Ray Zilke Crestmark is pleased to announce the launch of a new division offering medical accounts receivable financing to businesses in the healthcare industry.

The newly created division will be led by Ray Zilke, first vice president, division manager. Zilke is based in Franklin, TN.

Finvoice Names SVP, Director of Sales and Marketing in New York Finvoice announced the hiring of Jennifer Rabinowitz as senior vice president, Director of sales and marketing.

Rabinowitz will be based in New York City and can be contacted at (917) 796-9591 or jennifer@getfinvoice.com.

FSW Funding Hires Director of Underwriting FSW Funding, a Phoenix-based company specializing in financing solutions for small to mid-size businesses, hired Patrick Cooper as Director of Underwriting. Cooper is based in Phoenix and will help build out the underwriting and credit team to support continued growth.

Karina Davydov Joins Gemino Healthcare Finance Karina Davydov has joined Gemino Healthcare Finance and will also be working with North Mill Capital. She will be based out of Gemino’s Chicago office and can be reached at: (847) 644-8124 and karina.davydov@gemino.com.

Gibraltar Business Capital Welcomes Bruce Mettel as its Newest SVP and Account Executive Gibraltar Business Capital welcomes Bruce Mettel as its newest SVP and Account Executive.

Eastern Bank Expands Asset-Based Lending Team

Goodman Factors is now Goodman Capital Finance

Eastern Bank, America’s oldest and largest mutual bank, is pleased to announce that Daniel J. Bolger has joined its Commercial Lending Division as Senior Vice President, Asset Based Lending.

Goodman Factors, a name that for nearly 50 years has been tantamount to reputable and innovative factoring service to businesses nationwide, is changing.

Goodman Factors is now Goodman Capital Finance, a name that better reflects its new and broader product offering.

Brad Quade Joins First Business as Deputy Chief Credit Officer First Business Financial Services, Inc. announced that Brad Quade has been hired as Deputy Chief Credit Officer of First Business Financial Services, Inc.

Hilco Corporate Finance Team Hires Steven Wrobel as Managing Director Stephen Wrobel has joined the HCF team as a Managing Director. In this role, Wrobel will be responsible for business development, as the business continues to expand its advisory services and adds

new investment banking clients who are seeking strategic solutions.

HPD LendScape Acquires Software Consultancy, Finaptix, to Accelerate Global Growth Working capital finance software provider, HPD LendScape, has acquired leading software implementation consultancy, Finaptix, in a move to address the asset finance sector, extending its LendScape platform to all forms of secured lending.

Jones Day Adds Partner Thomas M. Devaney to Private Equity Practice in New York The global firm Jones Day announced that Thomas M. Devaney has joined its New York Office as a partner in the Firm’s Private Equity Practice.

Ziv Biron Named CEO Of IDB Bank; Uri Levin Promoted to Lead Parent Company in Israel IDB Bank announced its Board of Directors has named Ziv Biron its president and

CEO. Biron currently serves as chief financial officer and Head of Planning Strategy and Finance Division at IDB’s Tel Aviv-based parent, Discount Bank.

McGuireWoods Continues Texas Growth with Arrival of Debt Finance Partner Phyllis Young Phyllis Young, an accomplished transactional lawyer who advises public and private companies, commercial banks and investment funds in financing transactions and has extensive energy industry experience, has joined McGuireWoods’ debt finance practice as a partner in the firm’s Dallas and Houston offices.

MidCap Business Credit Announces Two New Hires MidCap Business Credit LLC appointed Bill Nay as Senior Vice President to its business development team and Rebecca Smith as Senior Vice President to its risk team as an underwriter.

MidFirst Business Credit Announces the Addition of new Senior Vice President, Business Development Officer MidFirst Business Credit, Inc. announced the addition of William “Bill” Bogatay as senior vice president, business development officer.

Monroe Capital Wins Small Middle Markets Lender of the Year Award for 2019 by Global M&A Network Monroe Capital LLC has been recognized

by Global M&A Network as the Small Middle Markets Lender of the Year for the seventh consecutive year. Award winners were honored at the Americas M&A Atlas Awards Gala Ceremony held in New York City on October 25.

Moritt Hock & Hamroff Announces New Resource for the Secured Lending and Equipment Finance Sectors Moritt Hock & Hamroff LLP (MH&H) announced a new resource for companies in the secured lending and equipment finance industries. The firm’s Secured

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THE SECURED LENDER JAN/FEB 2020

DEPARTMENT DEPARTMENT INDUSTRY NETWORK NOTES MOVES Lending, Equipment & Transportation Finance practice area has created a blog featuring posts that provide timely insights on many legal issues facing these industries.

senior vice president. She is based out of the Salt Lake City, UT office and can be reached at: JRoss@NorthMillCapital.com or (801) 474-9018.

Newbridge Global Sourcing Hires Credit and Underwriting Associate to Support Growth

Stephanie Koveleski has been promoted to Assistant Vice President. Koveleski is based out of the Princeton, NJ office and can be reached at: Skoveleski@northmillcapital. com or (609) 917-6248.

Pinnacle Bank announced that Kevin O’Hare has joined the bank as President of their newly formed Capital Finance Group. O’Hare brings more than 40 years of lending and factoring experience to Pinnacle Bank.

Pacific Western Bank’s Corporate Asset Finance Group Hires Columbus Johnson

Pioneer Bank Hires KeyBank Executive for Commercial Lending

Pacific Western Bank announced the addition of Columbus Johnson as Senior Vice President, Originations. In his new role, he will be responsible for originating and structuring new business opportunities, with a focus on the rail and power sectors.

Pioneer Bank hired former KeyBank executive Rob Nichols as senior vice president of commercial development.

Sam P. Gilliss, CPA was hired as an Associate of Credit and Underwriting. He will be responsible for evaluating and underwriting supply chain, receivables, and asset-based lending facilities.

North Mill Capital Announces Promotions North Mill Capital promoted Jennifer Borg from Vice President to Senior Vice President. She can be reached at: JBorg@ NorthMillCapital.com or (952) 259-6247.

North Mill Capital announced the promotion of Tessa Brend from Assistant Vice President to Vice President. She can be reached at: TBrend@NorthMillCapital.com or (952) 259-6226.

Jennifer Ross has been promoted to

Patrick Donnelly Joins People’s United Bank’s Nonprofit Specialty Finance Group as Senior Vice President People’s United Bank, N.A. announced that Patrick Donnelly has been appointed Senior Vice President, Nonprofit Banking.

Kevin O’Hare Joins Pinnacle Bank as President of Their Newly Formed Capital Finance Group

Prestige Capital Retains Midwest Sales Director Prestige Capital hired Stacey Huddleston of Kansas City, MO, to join its team as Sales Director, Midwest. Huddleston has almost two decades worth of experience in the financial services sector specifically in the Commercial & Industrial and assetbased lending spheres.

Anand Ramachandran Joins Regions Bank Corporate and Institutional Markets Group as a Managing Director

TRANSACTION CONFIRMED. CONFIDENCE SECURED. Michael A. Boeheim, CIA, CFE Director, Practice Leader ABL Services

David L. Mancuso, CPA Director, Practice Leader Transaction Advisory Services

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THE SECURED LENDER JAN/FEB 2020

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TRANSACTION ADVISORY SERVICES Due diligence Quality of earnings Structuring Paul Ciminelli, President & CEO Ciminelli Real Estate Corporation

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Regions Bank announced that Anand Ramachandran has joined the firm as a Managing Director, reporting to Robert Heffes, Managing Director and Head of Trading and Credit Distribution and CEO of Regions Securities LLC. Republic Acquires Continental and Fast A/R Funding Republic Business Credit further expanded its business finance platform with the acquisitions of Continental Business Credit (CBC) and Fast A/R Funding.

Republic Business Credit will remain headquartered in New Orleans, with offices in Los Angeles, Houston, Chicago, Nashville and Minnesota. Republic also announced that Jason Carmona was promoted to EVP, Western Regional Manager. Additionally, Vanessa Johnson joined the team as EVP, Asset Based Lending.

Rosenthal Hires Two New Sales Execs to Southeast Team Rosenthal & Rosenthal, Inc. announced the appointment of Leigh Lones as Senior Vice President, Southeast Regional Sales Manager, and Al Foster as Vice President, Business Development Officer. Lones will be based in the Atlanta office and Foster will operate remotely out of Tennessee.

hiring of Adam Fromowitz. Fromowitz brings nearly a decade of experience in financial, technology, and professional services to his new role as a Managing Director for Vcheck Global.

Webster Promotes Sam Hanna to Executive Vice President, Middle Market Banking

Santander US Announces Leadership Appointments

Sam Hanna has been promoted to executive vice president, Middle Market Banking, reporting to Chris Motl, Executive Vice President, Head of Commercial Banking.

The Boards of Directors of Santander Holdings USA, Inc. and Santander Consumer USA Holdings Inc. (SC) announced several executive changes:

Wells Fargo Strategic Capital Expands Healthcare Group with 20-Year Industry Veteran, Emergency Physician

Timothy Wennes has been named Santander US CEO and Country Head.

Wennes succeeds Scott Powell, who has left the company to pursue an outside opportunity. Mahesh Aditya has been named SC CEO, succeeding Powell in his CEO role there. Sarah Drwal has been appointed Santander US and SBNA Chief Risk Officer, succeeding Aditya, bringing more than 20 years of experience to the role. Juan Carlos “JC” Alvarez, Santander US and SBNA CFO, has been named to the SC Board of Directors.

diversified direct lender focused on providing asset-based loans (ABL) and related senior secured loans to U.S.-based middle market borrowers. Wingspire, a portfolio company of Owl Rock Capital Corporation, is led by David Wisen, a 25year commercial finance industry veteran who previously served as Group President of Textron Financial Corp., a $12 billion diversified commercial finance company.

Wells Fargo Strategic Capital, a division of Wells Fargo & Company, announced Dr. Rodney Altman as the newest managing director in its Healthcare Group.

Wingspire Capital Launches Diversified Asset-Based Lending Platform Wingspire Capital Holdings announced its official launch as an independent

Let Utica Leaseco

Umpqua Bank Names Jonathan Dale Regional Director of Commercial and Corporate Banking Umpqua Bank, a subsidiary of Umpqua Holdings Corporation, announced that Jonathan Dale has been named regional director of commercial and corporate banking to support the growth needs of enterprising businesses across Portland Metro, Eastern Washington and Idaho.

UMB Capital Finance Strengthens Business Development Team with New Hire Doug Motl, SVP, Director of Originations Doug Motl joins UMB Capital Finance as Senior Vice President, Director of Originations to manage its rapidly expanding business development department initiatives.

Vcheck Global Hires Adam Fromowitz as a Managing Director for New York Operations Vcheck Global is delighted to announce the

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THE SECURED LENDER JAN/FEB 2020

COVER STORY

Interview with of McGuire Woods

BY MICHELE OCEJO

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THE SECURED LENDER JAN/FEB 2020

Hamid Namazie is managing partner of McGuireWoods’ Los Angeles - Downtown office. He concentrates his practice on representing a wide range of clients, including banks, institutional lenders and commercial finance companies, providing asset-based loans. Â

Hamid Namazie 19

THE SECURED LENDER JAN/FEB 2020

COVER STORY: HAMID NAMAZIE From the start of his legal career, Hamid has specialized in representing asset-based lenders and has particular experience in syndicated loan transactions, cross-border financing and lending into complex capital structures with difficult intercreditor issues. He also has an in-depth understanding of secured loan facilities extended to borrowers who are in the business of providing financing to consumers and the related issues such as compliance with Truth-in-Lending regulations and similar local laws and regulations. Since graduating law school Hamid has practiced in Los Angeles, California. He is a frequent speaker for SFNet’s Southern California chapter and is the General Counsel of that chapter. Hamid is married to his beautiful wife Terry, has two young boys and lives in the Pasadena area of Southern California with a blind dog named Spyro.

Since July 2018, Hamid has been a tireless SFNet volunteer, dedicating much time and energy to SFNet’s advocacy efforts, especially CA SB 1235, which requires new financial disclosures for lenders in California. For Advocacy Updates, see pages 27 and 21.

Please tell our readers a bit about your career path and what attracted you to commercial finance law.

Growing up, my father was a computer programmer working for various banks. Part of his work included incorporating the computer systems of banks acquired by his employer into the employer’s existing systems. He often had calls with his colleagues regarding this integration process which included detailed discussions of the integration of commercial loan software. Listening to these discussions, I learned some commercial finance terminology and for the first time heard the term “asset-based loan.” Living in a family of engineers and medical professionals, commercial lending was a very foreign concept and I quickly became interested in learning more. I followed this interest while in school and worked at Bank of America as a bank teller. Once in law school, my focus changed as I did not have an appreciation that there was an intersection between lending and the law. It wasn’t until I started working as a lawyer that I learned that such a legal specialty existed. Before the end of my first year as a lawyer, I transitioned into a banking and finance legal team and have worked in that specialty ever since.

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THE SECURED LENDER JAN/FEB 2020

You’ve played an integral part in SFNet’s Advocacy efforts focused on these financial disclosure bills that are popping up. Why is this such an important issue and how can other members of the SFNet community contribute to the advocacy efforts?

There are a number of concerns with the commercial disclosure requirements. The most important concern is to make sure (and the legislature in each state should also want to make sure) that loans continue to be broadly available to businesses of all sizes in every state. If the disclosure requirements are poorly drafted, lenders may make the decision to avoid potential liability and stop lending into the impacted state which will significantly limit the availability of commercial loans to businesses in that state. The biggest limitation

on SFNet and other groups to properly follow and address these issues in each state as they come up is the amount of resources required.

SFNet members can help this effort financially and through giving their time to assist in the advocacy process. Lawyers and lobbyists in each state can be expensive and having the manpower and funds to hire the right people in each state and properly advocate for our community is very important.

What have you learned during your time spent on these legislative issues?

This is my first experience with the legislative process and I am both impressed and disappointed by the efforts put in by the state representatives in drafting legislation which is outside of their area of expertise. With some exceptions, most legislators do put in the effort to understand the impact of the laws they are proposing and make sure that the proposed legislation is narrowly drafted to not have unintended consequences. Also, the political process is one that is very different from my day-to-day life. Backroom deals and bending rules to reach these backroom deals seem to occur often in the political world. It’s definitely a different world from my daily life as a commercial lending lawyer.

Other than the legislative challenges mentioned, what potential legal challenges should lenders be aware of in 2020?

Over the last few years as the commercial lending market has become more and more borrower friendly and credit has become broadly available to creditworthy borrowers, lenders have competed with each other on the structure of loan facilities and documentation of those loan facilities. On top of the competition between lenders, this process is also driven by the private-equity sponsored transactions as the sponsors (with help from their law firms) are using friendly terms obtained from one lender to extract concessions from other lenders. As the economy potentially slows down and the number of trouble loans increases, it will be interesting to see these structures and document terms get tested. Hopefully, there will be no legal challenges, but there could be situations similar to those experienced in the PetSmart and J. Crew credit facilities.

What do you enjoy doing when not working?

I work more when not working. I’ve ridden bicycles all of my adult life and road raced for a number of years. I still enjoy it quite a bit and try to ride as often as I can. My boys are now getting into competitive mountain biking and I am helping coach the local high school team.

It’s a fun way of doing something I really enjoy, doing it with my kids and giving back to the community. And it’s also very efficient since I can do those three things with the little free time I have.

Michele Ocejo is editor-in-chief of The Secured Lender and communications director for SFNet.

ADVOCACY UPDATE

FEBRUARY 2020

Small Business Reorganization Act Takes Effect in February 2020

BY JONATHAN HELFAT AND RICHARD KOHN, SFNET CO-GENERAL COUNSEL On August 23, 2019, President Trump signed into law the Small Business Reorganization Act of 2019 (“SBRA”), which will take effect on February 23, 2020. The SBRA provides for a new Subchapter V to existing Chapter 11 of the Bankruptcy Code dealing exclusively with the reorganization of Small Business Debtors.1 The Secured Finance Network advocated on behalf of our industry on certain aspects of the bill to limited avail and believes that this legislation, which had bipartisan support in the Congress, may have a significant and positive impact on certain borrowers that are experiencing financial difficulties.

Outlined below are the key provisions of this legislation and the reasoning supporting its enactment.

I. Background According to the legislative history supporting the SBRA, in all the small business bankruptcies filed under the pre-SBRA Bankruptcy Code, the overwhelming majority of the debtors do not ultimately reorganize, but rather end up in liquidation.

According to the commentary, this disappointing result can be traced to two main causes. First, the existing small business bankruptcy provisions contained in Chapter 11 of the Bankruptcy Code are not providing the relief necessary to allow Small Business Debtors to reorganize. Second, existing Chapter 11, save the small business provisions, do not offer appropriate relief for a Small Business Debtor as Chapter 11 was primarily designed for larger, often publically traded, entities, with complicated debt structures. The Chapter 11 proceedings for these entities generally are expensive to administer (including by engendering substantial professional fees), have a protracted timeline with regard to confirming a plan of reorganization (“Plan”) and are based upon what is known as the “Absolute Priority Rule” (referred to below).

The SBRA changes this paradigm and allows the Small Business Debtor to retain the equity in its business (assuming compliance with the provisions of the new legislation), limits creditor input, accelerates the time period necessary for confirmation of a Plan, eliminates the need for a Disclosure Statement and the necessity of an unsecured creditors JONATHAN HELFAT committee (with its attendant professional fees) Otterbourg while at the same time offering the Small Business Debtor all of the discharge benefits currently available to Chapter 11 debtors who successfully reorganize, as well as, the other benefits of Chapter 11 including debtor-in-possession status and the benefits of the automatic stay.

The SBRA also abrogates the “Absolute Priority Rule” which requires, subject only to a consensual arrangement RICHARD KOHN between the debtor and its Goldberg Kohn creditors, that all secured debt must be paid in full under the terms of a Plan before the holders of unsecured debt receive a distribution and that all unsecured debt must be paid in full under the terms of a Plan before equity can retain its ownership interest (with the consequence that, in almost all cases, the shareholders of the Small Business Debtors lose their equity). As a result, most Small Business Debtors do not seek relief under Chapter 11. The SBRA eliminates the necessity of complying with the Absolute Priority Rule and allows the owners of a Small Business Debtor to retain their equity even if the Small Business Debtor does not pay its unsecured creditors in full.

II. Key Terms Of The SBRA A. Voluntary: Filing for relief under the SBRA is totally voluntary on the part of the Small Business Debtor. The

1 A Small Business Debtor as defined by the SBRA is a person engaged in commercial or business activities [including any affiliate of such person that is also a debtor under this title and excluding a person whose primary activity is the business of owning (or operating real property or activities incidental thereto) single asset real estate] with non-contingent secured and unsecured debt as of the filing date not to exceed $2,725,625. The Secured Finance Network believes that increasing this amount would be more beneficial to small businesses as the legislation is as a practical matter only available to smaller businesses.

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THE SECURED LENDER JAN/FEB 2020

Small Business Debtor remains the exclusive party allowed to propose and confirm a Plan.

B. Plan Terms: The Small Business Debtor’s Plan under the SBRA must be filed within 90 days of the filing date unless, for cause shown, that date is extended by the Bankruptcy Court.

The terms relating to the approval of the Debtor’s Plan under parameters of SBRA are radically different than those that currently exist under Chapter 11. Secured and unsecured creditors of the Small Business Debtor are still free to consensually agree on the terms of a Plan if, however, unsecured creditors object to the Debtor’s Plan but, nevertheless, if the Bankruptcy Court finds that the Small Business Debtor’s Plan is “fair and equitable” and “does not discriminate unfairly,” unsecured creditors are only entitled, at the option of the Small Business Debtor, to receive pro rata share of either (i) the Small Business Debtor’s Disposable Income2 over a minimum of three years and a maximum of five years after the confirmation of the Plan depending on the terms of the Plan or (ii) the proceeds arising from the sale of a portion of the Small Business Debtor’s unencumbered property in an amount equal to the anticipated Small Business Debtor’s Disposable Income for either the three- or five- year period as long as this Disposable Income is more than would be available to creditors in a liquidation.

The concept of a creditor voting to accept or reject a Plan as currently exists under Chapter 11 is not applicable under the SBRA as unsecured creditors do not vote on the Small Business Debtor’s Plan under the SBRA. Therefore, at the end of the proposed five-year period or a minimum of three years, the unsecured creditors, absent a sale of the Debtor’s business, have no further claim against the Small Business Debtor, who may continue to operate its business. To be clear, absent a consensual resolution, this Small Business Debtor’s Disposable Income represents 100% of what the unsecured creditors can expect to receive other than through a sale of the business or discrete assets.

Finally, upon the confirmation of a Plan, the SBRA does not require the payment of any fees to the United States Trustee as exists presently under Chapter 11.

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The Secured Finance Network raised the issue of what is to be the disposition of the Small Business Debtor case if the Small Business Debtor has little or no Disposable Income, since many Small Business Debtors are unable to generate Disposable Income due to the fact that they are often undercapitalized and do not have Disposable Income.

C. Operating Under the SBRA: The SBRA provides for the role of a “Standing Trustee” to be appointed by the Office of the United States Trustee in a Small Business Debtor case.

This Standing Trustee in effect supersedes the concept of a Creditors’ Committee which is not provided for under the SBRA, unless the court orders otherwise. The Standing Trustee,

among other obligations, is charged with: 1. Insuring compliance with the statute.

2. Advising the court as to the viability of the reorganization and assisting in the reorganization process.

3. Providing an accounting for all property received by the Debtor.

4. Examining and rejecting, if required, any claims against the Debtor.

5. Conducting a review of the Debtor’s financial condition and business operations.

6. Reporting any fraud or misconduct to the Court.

7. Appearing at status conferences and materially significant hearings.

8. Preparing a final report of the case for the Bankruptcy Court.

9. Assisting as necessary in the facilitation of the Plan.

10. Distributing the Debtor’s property in accordance with the Plan.

11. Confirming the Debtor’s adherence to the court-approved Plan during the payment period.

12. Valuing the property subject to liens.

13. Overseeing the sale of any property of the Debtor sold prior to the confirmation of the Plan or during the payment period provided for under the Plan.

The Secured Finance Network unsuccessfully argued to expand the role of the Standing Trustee to include a neutral adviser who would provide financial assistance and counseling to small business owners with regard to the restructuring of the small business, including preparing a meaningful budget for the court and creditors and developing a plan of reorganization.

The Secured Finance Network was of the belief that, without financial consulting, it was highly likely that the small business owner would repeat the same mistakes that caused the business to fail in the first instance.

D. Secured Claims: Under the SBRA, and unless a consensual resolution is reached, the Standing Trustee would first value each secured lender’s collateral and the Small Business Debtor would have four Plan options when dealing with the secured lender’s collateral: 1. Surrender the collateral to the secured lender.

2. Allow the secured lender to retain its liens and receive on account of its claims deferred cash payments totaling the allowed amount of its secured claims as valued by the Bankruptcy Court with interest commencing on the Plan’s Effective Date. While this result may or may not be satisfactory to the secured lender, it raises the issue of whether such a result is viable for the Small Business Debtor, as the Small Business Debtor would, in effect, be obligated to repay the secured lender 100% of the value of

2 Disposable Income means the income that is received by the Debtor and that is not reasonably necessary to be expended from the payment of expenditure necessary for the continuation, preservation or operation of the business of the Debtor.

the collateral over an extended period without any relief.

3. If the Plan contemplates the sale of the property securing a secured claim, then the Plan must provide that the security interests attach to the proceeds of the sale. A § 363 sale under the SBRA can now be accomplished more quickly than under existing Chapter 11.

4. If the Small Business Debtor chooses neither option (2) nor (3) above, then the Plan can provide that the secured creditor receive the indubitable equivalent of its claim.

This concept is a carryover from existing Chapter 11 and has not been extensively implemented as a remedy at the indubitable equivalent is extremely difficult to value.

Valuation will be determined either consensually or through a contested hearing (“cram down”). That portion of the secured lender debt which is in excess of the valuation will be treated as unsecured debt under the Small Business Debtor’s Plan and will be paid in accordance with the treatment provided for unsecured creditors Small Business Debtor’s Plan.

The Secured Financing Network raised the issue of providing the Small Business Debtor with financing during the Chapter 11 process rather than rely on the dictates of existing Chapter 11, which appear completely contrary to the aims of the SBRA. E. Administrative Expenses and Priority Claims: The SBRA removes the requirement of existing Chapter 11that all administrative expenses be paid in full at the time of the confirmation of a Plan, and permits the payment of postpetition indebtedness for goods and services to be “stretched” over the life of the Plan. An example would be the Debtor’s legal fees which, are often an impediment to confirmation. A Small Business Debtor’s plan no longer requires these fees to be paid upon confirmation of the Plan in one lump sum, but rather allow them to be paid over a longer period of time through the Plan. Similarly Priority Claims can now be paid over the “life” of the Plan.

amendments to this statute. If you have any questions please contact Michele Ocejo at mocejo@sfnet.com.

Jonathan Helfat is a partner with Otterbourg P.C. He specializes in the representation of foreign and domestic banks, commercial finance companies, hedge funds and other specialty lenders in the restructuring of secured loan transactions, including workouts, forbearance and restructuring agreements, Chapter 11 Debtor-in-Possession and “Exit” financing facilities and the use of cash collateral. Mr. Helfat graduated from American University, received his law degree from the University of Louisville School of Law and a Master of Laws (Corporation Law) from New York University. Mr. Helfat is Co-General Counsel to the Secured Finance Network.

Richard Kohn is a co-founder of Goldberg Kohn and a Principal in its Commercial Finance Group, where he specializes in cross-border and other financing transactions. He has served as Co-General Counsel of SFNet since 2001. He has been named by Chambers as a leading lawyer in the United States in Banking & Finance and is a Fellow of the American College of Commercial Finance Lawyers. Mr. Kohn received his B.A., with distinction, in 1966, and his J.D., cum laude, in 1969, both from The University of Michigan.

III. Preference Actions The new statute has one change that will affect all bankruptcy cases, whether under the SBRA or Chapter 11 or Chapter 7, relating to the preference provision (Sec. 547(b) of the Bankruptcy Code). Under the SBRA, the Trustee who commences an action to avoid pre-petition transfers must first engage in “reasonable due diligence” taking into account a party’s known or reasonable knowable affirmative defenses.

Any suit brought thereafter by a Trustee to collect the alleged preference must, if the claim is less than $25,000 be brought in the jurisdiction where the defendant subject to the preference resides.

The foregoing is merely an overview of the legislation. SFNet will continue to seek opportunities to advance the interests of our industry relative to implementation and potential

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THE SECURED LENDER JAN/FEB 2020

DATA & INSIGHTS

Syndicated ABL volume up in 2019, deal count down Refinitiv’s director of analytics shares with readers the latest data surrounding the syndicated market.

BY MARIA C. DIKEOS 24 THE SECURED LENDER JAN/FEB 2020

MARIA C. DIKEOS Director of Analytics, Refinitiv LPC On the back of a strong start, 2019 syndicated asset-based loan (ABL) volume is up nearly 5% annually through the middle of December with almost US$90bn of completed issuance (Fig 1).

An additional US$4.4bn has closed via clubbed distribution.

With the exception of 2Q19, which observed a modest dip in lending year over year, quarterly issuance has been up 30% compared to the year ago period. Despite this good news and what should otherwise suggest positive momentum in the market, ABL lenders note that a number of market trends have raised concerns. Some of these reflect the impact of normal cyclical market swings. Others raise broader questions around possible permanent changes to syndicated loan market dynamics.

At less than US$15bn, 4Q19 syndicated ABL loan volume to date is less than half that of year-ago levels with only a few weeks left to the quarter.

It is also down over US$8bn compared to the prior quarter. Most of this shortfall can be traced to the strength of the high yield bond market – most notably in the context of strong BB and single B credits – in 4Q19 and the relative value play which has favored the high yield bond market at the expense of ABL loans. It is, in fact, the flip side of the market dislocation observed in the first half of

Fig. 1: ABL Volume (US$bn): New Money

the year, which ultimately supported ABL deal flow.

In October, United Rentals, a substantial player in the ABL space, opted to supplement liquidity needs via US$750m in eight-year senior secured notes priced at 3.875%. In Europe, Ball Corp priced US€1.3bn in five-year notes at 0.875%, highlighting the broad pricing benefits of tapping the high yield market at the time.

Apart from market technical, which increasingly skewed in favor of the high-yield bond market, the data suggests that while there has been net growth of dollar volume year over year, ABL deal count was down. As of the middle of December, 238 ABL deals were completed via retail syndication compared to 287 during the same period last year. Lender noted that borrower bank groups continue to be streamlined and hold levels are going up.

Fig. 2: ABL Volume (US$bn): Refinancings

Digging into the numbers further, the respectable aggregate volume masks a more worrisome and yet, arguably, increasingly entrenched market trend. Namely, the squeeze being experienced by lower-tier bank lenders either closed out of deals altogether, or facing looser terms and thinner spreads.

Amid easy access to cheap cash, “buyside lenders will be less relevant in the market until the cost of capital goes up and/or is more valued by banks,” said one arranger.

At this time, non-event driven, best-effort deals with few timing concerns are being readily clubbed up. So are many smaller acquisition financings. A flurry of US$75-175m ABL revolving credit facilities, which combined with either cash-flow loan structures or high-yield bond issues to support 2019 M&A undertakings by issuers including TruckPro LLC, Kaman Corp, Imperial Dade and Autokiniton US Holdings, were managed by two or three banks.

Larger, more storied acquisitions or event-driven deals are more likely to require a broader lender group.

Fig. 3: ABL Volume (US$bn): Syndications & Deal Counts

“In cases where it is not manageable for a corporate to oversee ten banks, you will see one to two banks arrange, bring in banks, and get them through the diligence process,” said one lender.

In practice, it also comes down to the underlying assets that make up the ABL borrowing base.

“It will depend on whether they are non-traditional ABL assets and how much banks are willing to hold,” said another lender. “In those cases, the buyside may be more relevant.

But, ultimately, you will continue to see smaller bank groups because lenders are willing to hold more and issuers want fewer banks.”

Source: Refinitiv LPC

The market saw this play out in several ways. At over US$63bn, refinanced ABL issuance was up over 12% year over year (Fig. 2). What is perhaps more interesting, however, is that many of these refinancings were not only completed with more aggressive terms, but with upsizings as well. Nearly US$15bn in new ABL assets raised during 2019 came in the form of recycled credits that were upsized.

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DATE & INSIGHTS

Fig. 4: Historical Data - US: ABL Deal Size Dispersion that cause deals to struggle are poor credit quality and low or zero usage,” said a source.

To date, the tougher credits that have come to market – Briggs & Stratton recently completed a US$750m financing in what is a border-line pass name – have cleared the market, albeit in many cases, via broader lender groups.

“Everything will be a big club,” an arranger said.

And the signs have not changed in this regard. The ABL financing backing Apollo Management’s US$6bn purchase of Tech Data has been filled by joint lead arrangers.

Source: Refinitiv LPC

This represented over half of the almost US$26bn in total new money raised through the middle of December (Fig. 3).

With deal counts down, but volume up for the year, it follows that individual credits were – on the whole – larger in 2019. In the first nine months of 2019, 21 deals with at least US$1bn of ABL loan volume were syndicated to retail lenders (Fig. 4).

The average deal size for ABL issues was north of US$375m for the same period, up from US$320m in 2018.

What does this all do to spreads? For now, not much.

Average drawn spreads on ABL of at least US$75m continue to hover just north of 165bp. And while lenders grumble about awful documentation – “it gets worse, before it gets really bad”– few expect wholescale spread erosion.

More significantly, the portfolio of syndicated ABL assets currently stands at about US$280bn, largely flat from year-ago levels but up from less than US$270bn in 2017 and under US$260bn in 2016. The growth of individual portfolios is arguably even greater when one takes into account the clubbed and bilateral markets.

“There are grids that go down there,” said one source. “But pricing models do not work well down there and the market has reverted to the mean.”

So how does all this bode for 2020? While the financial markets keep rising, there are some technical drivers hinting at an ongoing softening. In the leveraged loan market, although the spread gap between BB and single-B credits observed in the back half of 2019 has slowed, many say there is a widening bifurcation among single-B credits alone. B-/B3 rated issues specifically are still difficult.

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“If we look at the consolidation going on in industries traditionally financed by ABL – metals, construction, chemicals – the larger corporates are getting larger and this favors the larger banks which can hold more,” said an arranger. “There will be more barbelling among lenders in the space.”

Entering an election year, large capital decisions may be put on hold according to a number of lenders.

“Capital spending has already slowed down a lot,” said one arranger. “But there is an awful lot of buffer built in there – low unemployment, lower corporate debt burden. Activity should hold.”

“I don’t think that uncertainty will help us,” said another lender. “And that will put more of a natural slowdown in ABL.” Lender capacity, nevertheless, remains intact. “The things

The number of deals priced at 125bp over Libor or less is small and has not changed over time.

Added another source, “We will bump along where we are.

Will we see some deals priced through LIB+100? I doubt it.

Maybe on one-offs where yields are made up elsewhere.”

Maria C. Dikeos is a director of Analytics and head of Global Loans Contributions at Refinitiv LPC in New York. Maria runs a team of analysts in the US, Europe and Asia who cover analysis of the regional syndicated loan markets. She has a B.A. from Wellesley College and Masters in International Affairs from Columbia University.

SFNET ADVOCACY UPDATE FEBRUARY 2020

Financial Disclosure & Licensing Bills Affecting Industry

BY MICHELE OCEJO

SFNet is your advocate at the state and federal level. See below for current legislative issues SFNet is working on relevant to secured finance. If you have any questions or comments, please reach out to the Advocacy Committee Staff Liaison, Michele Ocejo, mocejo@sfnet.com.

California Financial Disclosures, CA 1235, Sponsored by Senator Steve Glazer In July 2018, SFNet informed members about proposed legislation pending before the California legislature imposing new and potentially challenging disclosure requirements on certain commercial financing transactions in California. Despite months of lobbying against the bill by SFNet and other interested parties, Governor Brown signed the bill into law on September 30, 2018.

Since then, SFNet, with the help of our California legislative advocate, general counsel and volunteers, has been working with the CA Department of Business Oversight as they draft legislation. SFNet has reviewed the initial regulations, which can be viewed at: https://dbo. ca.gov/regulations-legislation-opinions-releases/. We are awaiting the next draft of regulations.

For the full text of the Bill: https://leginfo.legislature.ca.gov/faces/ billTextClient.xhtml?bill_id=201720180SB1235

New Jersey Confession of Judgment Bill, NJ3581 Sponsored by Senator Troy Singleton This bill would prohibit providers from extending business financing to a concern in this State that contains a judgment by confession. Provides that no judgment may be entered on warrant of attorney in any action on a bond or other instrument for the payment of money, except on motion after notice to the defendant served in lieu of summons in accordance with applicable court rules or by registered or certified mail. Defines “judgment by confession” as a written agreement that accepts liability and specifies damages in cases in which a concern is in violation of a business financing agreement. For full text of bill: https://www.njleg.state.nj.us/2018/Bills/S4000/3617_I1.HTM Action: SFNet held productive conversations with Senator Singleton.

At press time, the bill had passed and was awaiting Governor Murphy’s signature. SFNet will continue to work with our lobbyist in order to

achieve the best possible outcome for SFNet members.

New Jersey Financial Disclosures Bill NJ2262, Sponsored by Troy Singleton in the Senate and Clinton Calabrese in the Assembly.

Similar to CA 1235, this bill requires certain disclosures by providers of small business financing $500,000 and below. For full text go to: https://www.njleg.state.nj.us/2018/Bills/S2500/2262_I1.HTM Action: SFNet staff and members, along with our lobbyist, have had numerous conversations with Senator Singleton and Assemblyman Calabrese. SFNet was successful in getting certain key requested amendments, but not all. We are awaiting the next round of amendments from Assemblyman Calabrese.

New Jersey Licensing Bill, NJ S3617, Sponsored by Senator Nellie Pou This bill requires licensing for certain non-bank lenders and certain brokers that make or arrange alternative small business loans as well as certain disclosures. See full text here: https://www.njleg.state. nj.us/2018/Bills/S4000/3617_I1.PDF Action: SFNet submitted an initial comment letter in May. As of this writing, the Senator’s staff informed SFNet that they would be rewriting the bill. SFNet will arrange to meet with the Senator after the next version is published.

New York State Licensing Bill, S6688, Sponsored by James Sanders This bill would require the licensing by the Superintendent of Banking of the New York State Banking Department of persons or entities engaged in the business of making or soliciting commercial financing products to businesses located in New York State. The bill applies to loans or lines of credit of $500,000 and below.

The full text of the bill can be found here: https://www.nysenate.gov/ legislation/bills/2019/s6688

New York Financial Disclosures Bill, NY S5470, Sponsored by Senator Kevin Thomas Similar to both the California and New Jersey bills, this bill seeks to amend the New York state financial services law to provide that, immediately prior to entering into various types of commercial lending transactions, the potential lender must prepare and send in writing to the potential borrower various financial disclosures.

The full text can be found here: https://www.nysenate.gov/ legislation/bills/2019/s5470 Action: SFNet has engaged a legislative advocate in NY to work on achieving the best possible outcome for SFNet members. We will provide further updates as they occur.

Any member who wishes to become involved in SFNet’s efforts with regard to this proposed legislation should contact Michele Ocejo at: mocejo@sfnet.com.

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FEATURE STORY

Isn’t That What it Says? -Potential Perils of Incorporation

by Reference in Finance Transactions

BY BRIAN SMITH

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The author discusses the potential perils of improper use of “incorporation by reference” in commercial lending transactions, as well as potential strategies for reducing potential incorporation by reference hazards.

Takeaways

C

ommercial lending transactions are memorialized with a comprehensive, and often voluminous, set of loan documentation. In an attempt to expedite closing, and reduce closing binder sizes, BRIAN SMITH lenders (and their counsel) Partner are always seeking ways Holland & Knight to streamline the loandocumentation process. On occasion, lenders may be tempted to simplify documentation by relying on “incorporation by reference” - i.e., within document A, merely referring to certain terms in document B (and incorporating them within document A), instead of spelling out the same terms and provisions in both document A and document B. Such use of “incorporation by reference” sounds appealing (why say the same thing in two different documents?) and, in some instances, “incorporation by reference” can be an appropriate strategy for producing more concise loan documentation.

However, a few recent cases show that blind reliance on “incorporation by reference” can occasionally have disastrous (and unintended) consequences for secured lenders. These cases do not state that “incorporation by reference” can never be done. Still, the scrutiny that the courts in these cases applied before narrowly approving, or denying, attempts to validate key deal terms that were allegedly “incorporated by reference” may lead many lenders to question whether the space saving from incorporation by reference is worth the potential risk of having the propriety of “incorporation by reference” challenged at some point in the future in a “hindsight” review.

In re Financial Oversight and Management Board for Puerto Rico – The Perils of Incorporation by Reference Within UCC Financing Statements The first, and perhaps most troubling, example of unexpected “incorporation by reference” consequences entails the use of “incorporation by reference” to describe collateral in a Uniform Commercial Code financing statement. Such unintended consequences of incorporation by reference for perfection purposes placed the secured lenders from In re Financial Oversight and 1

1

Though incorporation by reference is commonly used in securities matters, reliance on incorporation by reference in corporate finance transactions (especially perfection matters) can have unintended consequences.

2

Be specific about your intent to incorporate documents, terms, or other information by reference. Making some passing mention of a document is not necessarily the same as incorporating such document (or the information within) by reference.

3

When using “incorporation by reference” in lien perfection materials, consider including instructions regarding where the materials incorporated by reference may be obtained (ideally, from a source that is available to the public, free from charge).

4

Different jurisdictions may have different views regarding what sorts of incorporation by reference is permissible for perfection purposes. When in doubt, check.

5

If possible, try to minimize reliance on “incorporation by reference” in financing statements and other materials related to the perfection of liens under the Uniform Commercial Code.

Spelling out key perfection terms in full can help to avoid hindsight questions about whether incorporation by reference caused a document to say something other than what its author intended.

Management Board for Puerto Rico 1 on the precipice of a $2.9 billion perfection failure.

In the Financial Oversight and Management Board case, the lenders extended almost $2.9 billion of credit to a Puerto Rico government agency that had recently been authorized to borrow to address underfunded pension liabilities. Such secured credit extension was authorized by a pension funding resolution referred as the “Resolution”. Among other things, the “Resolution” authorized the government agency to grant a security interest in certain “Pledged Property” to secure its borrowings and provided a definition for what constituted “Pledged Property.”

As every lender knows, maintaining a validly perfected security interest is crucial to preserving the priority and validity of a lien during an insolvency proceeding.

Furthermore, as lenders are aware, perfection requires both (a) attachment of a security interest in certain property (generally accomplished via a security grant set forth in a written security agreement) and (b) some further act to perfect the attached security interest (most commonly, filing a UCC financing statement describing the collateral subject to the security agreement). Consistent with such perfection requirements, the Financial Oversight and Management Board lenders both (a) entered into a written security agreement granting the lenders a security interest in the “pledged property” and (b) filed a UCC financing statement that indicated a security interest in certain “pledged property.”

Though this may sound like a standard (and otherwise appropriate) way to ensure a validly perfected lien against the “pledged property,” these efforts did not spare the lenders an almost catastrophic perfection challenge because both the security agreement, and the lenders’ initial financing

In re Financial Oversight and Management Board for Puerto Rico, 914 F.3d 694 (1st Cir. 2019).

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FEATURE STORY statement, relied upon “incorporation by reference” to describe the “pledged property” collateral. Specifically, the lenders’ security agreement did not define the term “pledged property” within the four corners of the security agreement.

Instead, it incorporated by reference the term “pledged property” set forth in the Resolution. Similarly, the lenders’ initial UCC financing statement did not contain a description of “pledged property” within the four corners of the financing statement. Instead, it attached (and incorporated) the security agreement, which, in turn, incorporated by reference the “pledged property” definition in the Resolution.

When Puerto Rico instituted a court-supervised restructuring, the lenders’ perfection efforts were challenged due to reliance on terms outside of the financing statement to describe the lenders’ collateral. According to the challenging parties, because a financing statement reader would need to go outside the four corners of the financing statement to determine what constituted the “pledged property” collateral, the financing statement did not sufficiently describe the collateral as required under UCC 9-504, and was thus defective and ineffective for perfection purposes.

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because a subsequent amendment to their initial, defective UCC financing statement did include a definition of the “pledged property” in the financing statement itself and thus perfected the lenders’ security interest as of the date of the amendment. Such subsequent perfection may not have insulated the lenders against intervening liens that were filed between the date of the initial (defective) financing statements and the later (effective) amendments, but intervening filings were not an issue in this case.

Again, the Financial Oversight and Management court did not hold that incorporation by reference could never be used for perfection purposes, and other courts, under similar facts, have held that incorporation by reference that was substantially identical to the incorporation by reference used by the Financial Oversight and Management lenders was indeed sufficient for perfection purposes. 2 However, the mere fact that more almost $2.9 billion of security interests was placed in jeopardy because of shortcut taken when preparing the financing statement will likely give other lenders pause before relying solely on incorporation by reference for future UCC filings.

In response, the lenders claimed that the financing statements were sufficient for perfection purposes because the financing statement is merely a notice filing, intended to appraise other parties of the existence of some potential security interest against “pledged property” (even if more investigation would be required to discern the parameters of that security interest). Furthermore, the Resolution was a publicly available document (though the lenders’ UCC financing statement did not contain any directions for how to obtain copies of the Resolution).

The Financial Oversight and Management Board case also strongly suggests that if any materials are incorporated by reference into a financing statement, the financing statement should have a description of where to obtain copies of the materials incorporated by reference. Thus, for any UCC filings that use incorporation by reference, lenders would be wise to consider including instructions for where the incorporated materials can be located (even better if they can be obtained free of charge).

Troublingly for the lenders, both the trial court, and the First Circuit Court of Appeals, concluded that the lenders’ reliance on incorporation by reference rendered their initial financing statements defective and unable to perfect their $2.9 billion of secured indebtedness. Though the First Circuit did not hold that incorporation by reference in a financing statement was per se improper, it did hold that on the facts presented, the lenders’ financing statement was defective because, among other things: (i) the term “pledged property” was not defined within the four corners of the financing statement, (ii) the financing statement did not tell readers where they could locate the Resolution, and (iii) the Resolution itself was not contained within the UCC filing office. Furthermore, though the First Circuit noted that although interested parties could have contacted the debtor (or some other party) to obtain more information about the “Pledged Property,” that should not change the result, as requiring other persons to engage in further inquiry to determine the scope of the collateral would conflict with UCC notice policy.

In re Linn Energy – Intent to Incorporate Materials by Reference Must Be Explicit

Ultimately, the Financial Oversight and Management Board lenders were spared a disastrous perfection failure 2

See In re I80 Equipment, LLC, 938 F.3d 866 (7th Cir. 2019)

3

In re Linn Energy, LLC, 927 F.3d 350 (5th Cir. 2019).

Another potential pitfall of incorporation by reference is that the intent to incorporate must be explicit. Failure to sufficiently indicate an intent to incorporate a document by reference can prevent the effectiveness of the attempted incorporation and inject unwanted uncertainty into a transaction. Such reliance on insufficiently explicit incorporation by reference language recently cost a group of lenders millions of dollars of default interest in connection with the Linn Energy plan. 3 In Linn Energy, the parties disputed the impact of two potentially competing terms within the confirmed chapter 11 plan for the Linn Energy debtors. One provision of that plan specifically allowed the Linn lenders’ claims in a specific principal amount, together with “other obligations arising under or in connection with the [proofs of claim filed by the Linn Lenders].” The other provision of the Linn Energy plan provided that “unless specifically provided for in the Plan or Confirmation Order”, default interest would not accrue in respect of allowed claims.

The Linn lenders claimed that the plan had otherwise specifically provided for an award of default interest because their proofs of claim specifically included default interest, and

the plan specifically allowed “other obligations arising under or in connection with the [proofs of claim].” In essence, this was an argument that the default interest terms set forth in the Linn lender proofs of claim was incorporated by reference into the plan’s treatment of the Linn lenders.

In contrast, the Linn debtors claimed that the language prohibiting default interest was controlling. They claimed that such language must control because nowhere in the plan itself was there any mention of paying default interest to the Linn lenders – a reader would have to go outside the plan (to the lender proofs of claim) to find any mention of default interest.

Though the Court noted that both interpretations were potentially colorable, it held the debtor’s interpretation was clearly the better one because there was nothing within the plan itself specifically allowing default interest in a manner to override the plan’s general prohibition against default interest.

Acknowledging that the plan did make some mention to the lenders’ proof of claim forms, the Court held that the plan would have led a reader to understand that there was an intent to incorporate the proof of claim’s default interest provisions into the plan.

In other words, there was not requisite specificity for any purported incorporation by reference of the proof of claim’s default interest language (and thus, nothing the plan specifically overriding the plan prohibition against paying default interest).

transactions, the “hindsight” questioning in both cases regarding what was incorporated (or whether anything was incorporated) should serve as a reminder that lenders should be deliberate, thoughtful, and transparent about their use of incorporation by reference. Such deliberate, thoughtful use of incorporation by reference will help to avoid injecting unwanted future uncertainty regarding whether a document says what it was expected to say.

Brian Smith is a senior counsel in Holland & Knight’s Dallas office. His practice focuses on bankruptcy, corporate finance and general corporate matters.

Another potential pitfall of incorporation by reference is that the intent to incorporate must be explicit. Failure to sufficiently indicate an intent to incorporate a document by reference can prevent the effectiveness of the attempted incorporation and inject unwanted uncertainty into a transaction.

Such reliance on insufficiently explicit incorporation by reference language recently cost a group of lenders millions of dollars of default interest in connection with the Linn Energy plan.

The Financial Oversight and Management Board and Linn Energy cases highlight the sorts of unintended consequences that excessive reliance on incorporation by reference can have for perfection and claim allowance purposes. Though both cases confirm that incorporation by reference remains a viable tool for documenting loan

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FEATURE STORY

Your Client’s Cybersecurity Threat Is Your Threat Too

BY MYRA THOMAS

The specter of cybercrime haunts every industry, but none more so than financial services. If there is considerable money involved or sensitive client data to steal, then there is certainly some cybercriminal looking for a financial firm to target. As secured lenders step up their efforts to secure their own systems and data, there is a growing understanding of the complexity of that task. Asset-based lenders and factors are increasingly aware that their cybersecurity procedures must be ongoing and dynamic to thwart a network intrusion and to quickly shut down and mitigate a hack if it does happen.

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A

s lenders, the information from current clients and prospective clients is extremely sensitive. “We are looking at hundreds of prospects a year, so the amount of information we receive is staggering,” says Jennifer Palmer, CEO of Gerber Finance. “Safeguarding this information has to be one of our greatest priorities.” But secured lenders are also realizing that not only should their cybersecurity be top of mind, their clients’ cybersecurity procedures need to be as well.

Roundtable Participants

Understanding the Relationship Ultimately, a client’s cybersecurity measures do impact the asset-based lender and factor. Secured lenders receive a considerable amount of information from their potential and current clients, including detailed and historical financial data, proprietary information, background information on the management team, credit reports, and much, much more.

That data needs to be protected, so it isn’t manipulated.

Palmer notes, “At Gerber, we are concerned about the risk a hack to our client’s information would pose to our client and to us. We need to ensure safeguards are in place to protect our own data, as well as theirs, and all the more reason to have a conversation with our clients about the importance of protecting theirs.” That data, as any cybercriminal would know, is valuable on the dark Web, so it’s important for asset-based lenders and factors to not only secure their own systems and networks, but ensure that their clients are doing the same.

KEATRON EVANS

VINCE MANCUSO

KM Cyber Security

IconiQ Finance

JENNIFER PALMER

BUDDY PITT

Gerber Finance

Network Support Co.

Whether it’s a cybercrime that leads to theft of the client’s data or a ransomware attack that causes an interruption in the client’s business, the secured lender is obviously on the proverbial hook too. A major financial risk to the client certainly becomes the secured lender’s problem. Consequently, says Michael Stanley, managing director at Rosenthal & Rosenthal, the underwriting process has to take cybersecurity into serious consideration. The initial field exam is the time to assess the cybersecurity measures of a prospective client.

It’s a smart move, says Stanley, given the very real and ever-growing threat of data theft or ransomware. He notes, “In this climate, we feel it’s imperative for our clients to have the appropriate systems and procedures in place to protect themselves and their businesses. Throughout our initial field exam and review of the company’s books and records, our examiners question prospects regarding their cybersecurity procedures and confirm their servers are backed up to thirdparty outside locations, protecting themselves in the event of a cyber-attack.” The process should also assess whether or not a current cybercrimes insurance policy is in place.

What to Fear The very nature of the secured lender’s and client’s business

MICHAEL STANLEY

Rosenthal & Rosenthal

33

relationship requires that they be continuously interconnected.

Palmer notes that secured lenders have access to their clients’ systems and, in turn, manage collection of their receivables.

When clients need money to operate their business, they provide their secured lender more information to request it, and the lender then sends funds to their bank accounts. “We are sending out millions of dollars every day, which leaves us

THE SECURED LENDER JAN/FEB 2020

potentially exposed,” she adds. But what is the risk?

According to Keatron Evans, president at KM Cyber Security, the “bad guys” aren’t always trying to hack into a lender’s network directly. They may be more likely to try to get to the end user or, in this case, the client. Once a cybercriminal gains access to the secured lender’s network via the client, they will act as if they are the client. Evans says that a malicious attack sometimes results in a client’s funds being erased, or the cybercriminal will pretend to be the client and ask for funds to be paid out to a bank account. Cybersecurity efforts can take into account everything from password protection to a multifactor authentication system for releasing funds.

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Not surprisingly, the number of cybercrimes and the dollars directly lost from theft or business interruption is steadily rising, particularly as businesses continue to digitize, the amount of financial transactions increase, and clients demand a more seamless and real-time relationship with their lenders.

“Cybercrimes are happening more and more frequently, but the cybercriminals are usually very smart and keep the amounts under a certain threshold, so they don’t get the U.S. Secret Service involved,” Evans adds. But even a small financial theft from a client can result in a bigger problem, especially if the word gets out. Given the media’s focus on cybercrimes, secured lenders need to be well aware of the reputational risk involved with the theft of a client’s data or a client’s own customer data.

company is focused on. At Rosenthal, we pride ourselves in the strength of our platform and how transparent we are with our clients. As a result, this opens us up to potential threats that we need to protect ourselves against.”

How to Respond That real-time connection and seamless relationship that secured lenders pride themselves on can also be an area of concern, if cybersecurity isn’t considered. The threat could come from a cybercriminal finding a vulnerability in a network and introducing sophisticated malware, or it could be a relatively simple attack caused by an untrained and unsuspecting employee falling for a phishing attempt and clicking a hyperlink on an email and inviting a cybercriminal into the network. And, the damage caused from the phishing attack could be just as great as the more sophisticated hack.

Cybercriminals can also cause extreme business disruption... Stanley notes that secured lenders need to upgrade systems consistently, realizing that the process is always ongoing. Says Stanley, “We are constantly upgrading our firewalls and software protection systems. These hacks are becoming more and more complex, so cybersecurity is an important issue our company is focused on. At Rosenthal, we pride ourselves in the strength of our platform and how transparent we are with our clients.”

Cybercriminals can also cause extreme business disruption, which may take considerable time and money to resolve.

Stanley notes that secured lenders need to upgrade systems consistently, realizing that the process is always ongoing.

Says Stanley, “We are constantly upgrading our firewalls and software protection systems. These hacks are becoming more and more complex, so cybersecurity is an important issue our

Palmer points to a situation at Gerber Finance, when client email addresses were spoofed. “We’ve received loan requests to new suppliers and new bank accounts,” she says. “In some cases, the requests for funds were as high as $500,000.

Fortunately, we’ve always caught these attacks before any damage was done, but the negative impact could have been huge. Had our team not been extremely cautious and our safeguards not been in place, these situations could have been a disaster.”

Obviously, those safeguards in place need to deal with not only systems and networks, but also with the secured lender’s and client’s employees, says Stanley. He adds, “We attempt to educate our employees and clients on potential threats and advise them to filter any suspicious items through our IT departments to be properly evaluated.” However, just as secured lenders up their cybersecurity efforts, hackers get

more sophisticated.

Cyber analytics and user behavior analytics tools can prevent some of the risk, and that’s where outside and expert cybersecurity advice can help. But no matter what the secured lender or client does, Evans notes that, at some point, there will be a breach. “What you want to do is to have the least amount of impact,” Evans says. “Often, it’s how quickly you detect it, respond, and contain it that can be even more important than the prevention.” The question is whether the client will be able to recover from the cyberattack.

A strong business and financial continuity plan can often get a client through a cyberattack, says Buddy Pitt, director of client services at Network Support Co. “It all really comes down to the measures they’re taking,” he adds. “Someone will always be knocking on the door, constantly trying different types of attacks.”

Simply put, most businesses don’t have the right people to prevent and deal with the many types of cybersecurity breaches that could happen, says Pitt. It takes outside cybersecurity experts to audit IT before and after a breach.

The secured lender and, especially, the client are unlikely to know the right questions to even ask. He notes that it takes professional cybersecurity advisors to do proper due diligence and audit the secured lender and client. “With the many data breaches, people are certainly getting numb to the risk,” Pitt adds. But he notes that can be a costly mistake, since a loss of productivity and an inability to service clients, as well as the secured lender’s and client’s reputation, are all at stake.

A New Wrinkle to Consider According to Vince Mancuso, president and CEO of IconiQ Finance, the entry of digital competitors into the secured lending community means cyberthreats are becoming ever more real for the industry. The risk can come from a third-party vendor who is providing technology for core business functions, he adds. “If you are a lender highly dependent on the automated exchange of information, you’ve often not built the platform yourself, so there are additional layers of risk.” The cybercriminal could penetrate the lender via the third-party vendor who may have created the code for the lender or the client, so that the client can then send their data to the lender.

of cybercrimes the policies cover. Plus, there doesn’t appear to be one consistent type of cyber insurance policy. He notes, “The policies really need to be dumbed down a bit for the client, so they can easily see what is reimbursable.” Plus, cybercrime riders attached to other types of insurance, such as E&O policies, may not adequately cover all cybercrimes. He surmises that cyber insurance will become more common and standardized in the future, but that it will take secured lenders to get their clients to routinely consider buying it.

A Look Ahead At the end of the day, the right policies and procedures, as well as the right people on the task, are just as important as the technology to prevent a cybercrime. One of the bigger mistakes that secured lenders might make is in assuming the larger the client, the better prepared they will be for a cyber threat.

According to Palmer, business leaders could theorize that a bigger company would have “greater systems and technology to help minimize the threats.” She adds, “We have seen many small companies with better systems in place than larger ones to help protect against these threats.” It takes people and technology working in tandem to constantly monitor, prevent and mitigate a cybercrime.

Cybercriminals are constantly looking for vulnerabilities in systems and networks and, if the secured lender isn’t the target, then the client just may be. Outside advice and cybersecurity expertise is certainly important, given the amount of threats financial firms face. Palmer adds, “First, you need to spend money on getting the right advice, second, on purchasing the right technology and, third, you need to spend the time and dedication in implementation, maintenance, evaluation and upgrades.” Certainly, secured lenders can’t be expected to be technological wizards. It takes leadership to make cybersecurity a priority in the organization, and to demand the same of the client, to make a lasting impact.

Given the dynamics, it’s not enough for secured lenders to develop best practices and then sit on their laurels. “The industry is highly dependent on technology to keep the business thriving and adapting to change,” says Mancuso. It’s not enough to settle for today’s security measures. “You have to ask how are you going to defeat attackers tomorrow.” Some might assume that cyber insurance is one way to do just that.

According to Mancuso, no one can be an expert in all of the cyber risks out there. “I think cyber insurance, eventually, will be one of the most cost-effective ways to deal with the risk,” he adds. However, the cyber insurance landscape is a bit complicated, at least for the moment. Mancuso notes that clients have a difficult time understanding exactly what type

Myra Thomas is an awardwinning editor and journalist with 20 years’ experience covering the banking and finance sector.

MYRA THOMAS

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VALUATIONS >> ASSET-BASED LENDING >> RESTRUCTURING >>

VALUATIONS

BUSINESS INSIGHTS

Asset Valuations Across Global Jurisdictions

The Secured Lender’s Perspective

BY RAFAEL KLOTZ, FRANK GRIMALDI AND SCOTT FULLER While the concept of an orderly or forced liquidation value is interpreted similarly across the globe, the practical considerations underpinning these definitions vary broadly across different countries. A deep understanding of the local commercial environment, as well as enforcement customs and procedures, is essential to a sound valuation and proper collateral-risk underwriting in cross-border secured loans.

(Editor’s Note: This is part 2 in a 3-part series. Part 1 was published in the October issue.)

“The value of a thing, is the price it will bring.” — Fred Case, Emeritus Professor, UCLA Anderson School of Management An essential element of underwriting risk for a secured loan is a reliable valuation of the pledged collateral. Ultimately, what a secured lender needs to know is quite simple: how much will someone pay for my collateral in an enforcement process?

That is a plain question, but when it comes to cross-border secured loans, the answer is hardly straightforward.

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The two primary valuation metrics used in asset-based lending (ABL), Net Orderly Liquidation Value (NOLV) and Forced Liquidation Value (FLV), are, by and large, interpreted consistently around the world. Almost everywhere, professional appraisers adhere to the fundamental concept adopted by leading organizations such as the American Society of Appraisers and the International Society of Appraisers.

Thus, virtually everywhere that secured loans are made, NOLV means a sale conducted under orderly conditions over a defined period of time and within the economic trends existing at the time of the appraisal, and FLV denotes duress — a sale on an as-is, where-is basis as of an arbitrarily imposed date which bears no relationship with value maximization.

Beyond these basic conceptual commonalities though, notions such as an “orderly” sale or a “compelled” sale are unique to each country. Like politics, all valuations are local.

>> TRENDS AND OUTLOOK >>

Although the list of factors affecting value in different jurisdictions is very broad, there are primarily three critical elements to consider in cross-border secured loans: the location of the collateral, the time it takes to enforce a loan, and whether local political and social dynamics affect legal outcomes.

Another material risk factor in cross-border loans worth mentioning is the

existence of restrictions on the repatriation of funds by foreign lenders. While this is not per se a valuation element, and thus beyond the scope of this article, we note that the advance rate must account for any controls or assessments (e.g., withholding taxes) on the transfer of funds outside of the enforcement jurisdiction.

RAFAEL KLOTZ Gordon Brothers

Location, location, location A critical element of a sound FRANK GRIMALDI cross-border appraisal is a

Gordon Brothers keen understanding of the collateral’s marketability and demand, locally and abroad. This is of particular importance if the assets are transportable. A valuation cannot consider comparative global sales in a vacuum.

Instead, it must consider the context of demand for each asset regionally and globally. The level of demand and high economic activity encountered in developed markets like the United States and Europe SCOTT FULLER is not present in many

Gordon Brothers other regions of the world.

Recovery expectations must be adjusted to account for

Key Points 1

ABL collateral valuation metrics are consistent across the globe.

2

However, the practical application of common valuation standards differs across jurisdictions.

3

Cross-border secured lenders must understand the range of commercial and legal options available in each country in which their collateral is located.

4

The most critical elements to consider in cross-border secured lending are the location of the collateral, the time needed to enforce a loan, and any local political and social dynamics that may affect enforcement.

5

A cross-border valuation is as much art as it is science.

the fact that, in many places, there will be little or no demand for the pledged assets. If the assets are likely to be of interest solely to non-local purchasers, the valuation must make full allowance for the risks and costs that potential buyers will consider when bidding for that collateral (e.g., export costs, accessibility, removal costs, reliable transportation, etc.). The rule of thumb is that the more restrictive the system or remote the location of the assets, the greater the additional costs and risks that would be incurred by prospective buyers. While most valuations make broad assumptions regarding sale strategies, in the cross-border context, the appraisal should address any unique factors that may affect value in a more exhaustive fashion.

Furthermore, even when assets are expected to be sold locally, the particular market dynamics are of acute importance. A good case study to illustrate this point is wholesale inventory. This type of collateral is particularly reliant on available sale channels. In the United States or Europe, there are many well-established institutional off-price retailers. However, those do not exist in many parts of the world. Instead, most off-price goods are channeled through small regional retailers or individual stores of the “mom and pop” variety. In those locations, it is crucial to understand the capacity in each market to absorb large volumes of inventory at any one time and to adjust the sale period to the time the local market would reasonably require to process these goods. Or the valuation must take into account the sale to existing “full-price” retail channels, considering the constraints of seasonality and shelf space availability. This is but one example of the type of collateral and dynamics that are often taken for granted by appraisers and lenders alike in more developed ABL markets.

Expense considerations A reasonable estimate of enforcement expenses is an essential element of an ABL appraisal. In addition to well-developed concepts like “carve outs” in US Chapter 11 cases to the “prescribed part” in UK insolvencies, a valuation must account

for the variety of other costs that the lender will be forced to incur to conduct an orderly sale of its collateral. Again, it is vital for a lender to have a full understanding of everything it will encounter along the way, including statutory costs, expenses germane to each jurisdiction, and the specific type of assets comprising the collateral. Of particular importance are statutory expenses such as labor, tax, and similar claims, which in many jurisdictions have priority over prior-recorded liens. This also relates to specific critical vendor obligations which may raise to a different level of importance depending on the borrower’s location and available alternatives.

The time from default to a sale Another key element of any collateral value assessment is the expected time to convert the pledged assets into cash proceeds once the secured lender can enforce its rights.

While a possessory security interest will generally (but not everywhere) allow for a quicker sale, every legal system has a different number of hoops to jump through before a lender can dispose of its collateral. Moreover, what is orderly in one country may look like a forced sale in another. And forced does not necessarily mean rushed. For instance, in many countries (mainly civil law jurisdictions as commonly found in Latin America and continental Europe), it may take years for the sale of the collateral to be authorized, yet once that milestone is reached, the sale must happen within a very limited (and often arbitrary) period of time.

Such disparities require a profound understanding of the lender’s right to force, or at least cause, the sale of its collateral on a jurisdiction-by-jurisdiction basis. In some countries like the United Kingdom or Australia, a lender generally has the right to unilaterally, and without court supervision, select and appoint an administrator or other fiduciary to sell its collateral after a default goes uncured. In these jurisdictions, the lender-appointed administrator can even operate the underlying business for the sole purpose of disposing of the collateral. Conversely, there are many countries (mainly civil law jurisdictions as noted above) where a secured lender is powerless to enforce its rights without undergoing a lengthy judicial process. Similarly, many of these countries’ laws impose restrictions on auction sale prices which are tied to valuations conducted by courtappointed appraisers (not selected by the lender) with little or no practical understanding of the market for the underlying assets. Most other countries’ practices fall somewhere along this continuum. A deep understanding and assessment of the local enforcement process, customs, and their impact on the conversion of assets into proceeds is essential to a trustworthy cross-border valuation.

Legal, political and social considerations Every country with active commerce possesses some form of secured financing and insolvency courts to adjudicate rights

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between debtors and creditors. However, for secured lenders accustomed to traditional ABL underwriting benchmarks, this is where the similarities end. There are countless dynamics that affect enforcement in each legal system, many of which are extraneous to the written law or the four corners of the loan agreement. Many of these factors are driven by political and social conditions. One typical example is the presumed priority of labor claims over secured creditor rights, even if not written into the law. Another is the unwillingness of many courts to allow the enforcement of rights against key operating assets of a borrower, even if not included in the borrower’s insolvency proceedings. In addition, the U.S. Chapter 11 concept of adequate protection, which is entrenched in traditional ABL underwriting, is not afforded to secured lenders everywhere.

And there are many jurisdictions where courts will not look kindly at contractual penalties and default interest, even if the borrower was highly sophisticated and had other funding options at the time it agreed to those terms.

conclusions of a valuation without being fully satisfied that every foreseeable hurdle indigenous to the collateral location that may affect recoveries has been accounted for.

Rafael Klotz is a senior managing director involved in all areas of Gordon Brothers’ business outside of North America, including deal structuring and execution, business development, and global expansion across all of the company’s business lines. rklotz@gordonbrothers.com

The U.S. Chapter 11 concept of adequate protection, which is entrenched in traditional ABL underwriting, is not afforded to secured lenders everywhere. And there are many jurisdictions where courts will not look kindly at contractual penalties and default interest, even if the borrower was highly sophisticated and had other funding options at the time it agreed to those terms.

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It is not the onus of a valuation to address all legal, social, and political factors that may affect risk. Nonetheless, in the increasingly global footprint of many asset-based loans, it is incumbent upon the appraiser to be acquainted at a minimum with the specific traits of the legal and political system that will govern disposal of the collateral being valued. That knowledge should be a part of any well-thought-out appraisal involving assets in cross-border facilities.

Conclusion In summary, while valuation theory is mostly consistent across the globe, asset recovery expectations vary wildly by location. There are a multitude of factors to consider, some of which may matter in one jurisdiction and not at all in another one. A prudent cross-border lender should not rely on the

Frank Grimaldi has over 30 years of experience in asset valuation, lending, and collateral management. He leads all valuation business development initiatives for Gordon Brothers, working closely with asset-based lenders, private equity sponsors, and corporate management teams to help them understand the underlying value of all types of assets. fgrimaldi@ gordonbrothers.com.

Scott Fuller leads the international valuation team with over 20 years of experience in the European ABL market where he has held a number of senior portfolio and underwriting positions. He has successfully underwritten, syndicated, managed, and exited some of the largest asset-based lending facilities in the U.K. sfuller@gordonbrothers.com.

SFNet Education Focus 20/20 Networking Industry data Education Advocacy

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ASSET-BASED LENDING >> LEADERSHIP >> OUTLOOK >> LEGAL NOTES >>

ASSETBASED LENDING

LENDER INSIGHTS

The Anatomy of a Deal Financing In The Ancillary Cannabis Sector

BY ROB MILLER AND PAUL D. SCHULDINER

Rosenthal & Rosenthal executives reveal details of a recent cannabis-related deal amid growing interest in this industry.

With the cannabis industry eclipsing $10 billion in 2018 and now on track to hit more than $16 billion in 2019, the ancillary cannabis market has similarly enjoyed tremendous growth this year. The ancillary sector is comprised of hundreds “nonplant-touching” companies that provide a range of services and products tailored to meet the needs of cannabis retailers and cultivators. Ancillary cannabis companies specialize in everything from product testing and packaging, to extraction and cultivation equipment, to security solutions and technology products.

Cannabis retailers and distributors have faced significant challenges securing financing from traditional lenders, especially as competition for market share increases and the legalization battles continue. The ancillary cannabis market, however, does not face the same shortage of available lenders and financing solutions. In fact, many banks and alternative lenders are beginning to find new and creative ways to provide sound financing solutions that support ancillary businesses in this rapidly expanding sector.

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When an industry-leading horticulture lighting manufacturer operating in the ancillary cannabis industry approached Rosenthal seeking growth working capital, we jumped at the opportunity to explore this relatively uncharted sector. The company manufactures specialized LED lighting systems for both horticulture and cannabis customers, primarily in an indoor greenhouse environment. Headquartered in Texas, with both domestic and overseas manufacturing facilities, the business is part of a portfolio of a large New York-based private equity firm focused on agricultural investments.

Both traditional farmers and cannabis growers and suppliers have increasingly come to rely on specialized LED lighting to improve indoor production and enhance product yield. As a result, our client was facing a larger and expanded order book this year and was struggling to keep up with the demand from farming and cannabis customers. The company was fortunate that its long-term capital needs were being supported by the private equity group, but that did not solve its more immediate

>> TRENDS AND OUTLOOK >>

problem – how to address the uptick in sales orders it was experiencing. Once Rosenthal was introduced to the client and had the opportunity to learn more about the business, its supplier relationships, customers and unique financing needs, we knew this challenge required an outside-the-box solution.

Rosenthal was able to put together a soundly structured $5 million ROB MILLER combined production/ Executive Vice President work-in-process and assetRosenthal & Rosenthal, Inc. based lending program to provide the company with the growth working capital it needed. This dual solution has allowed the client to obtain required components (i.e., LED boards, cables, metals) from multiple domestic and overseas suppliers – both by issuing letters of credit and domestic purchase guarantees – as well as cash funding to cover direct labor and logistics costs. Once the components are received from the overseas PAUL D. SCHULDINER suppliers, the company’s Executive Vice President proprietary technology is & Division Manager, added to complete the Rosenthal & Rosenthal, Inc. assembly of the specialized LED lighting equipment. The final product is then shipped and the end customer is invoiced.

But the deal was not without its hurdles, as we faced underwriting challenges on both the production financing and asset-based lending sides of the joint facilities.

On the production financing side, the bill of material for the lighting product had to be vetted for supplier history, capacity, quality control and reliability of these same suppliers to ensure that the conforming components were shipped on time. We also need to be sure that alternatives were available in the event that one or more suppliers could not ship on time or deliver the right quantity or quality of components. The deal also required us to perform a thorough analysis of the production timeline (including sourcing components, assembly, final quality check and shipment to the end customer) as well

Takeaways 1

The cannabis sector, including ancillary products associated with this sector, represents a dynamic growth opportunity for lenders operating in the alternative finance space.

2

Marrying asset-based lending and purchase-order financing with private equity allows for a one-stop, comprehensive solution that can address short-term working capital needs alongside long-term capital needs.

3

Production financing – also known as work-in-process-based purchase order financing -- requires lenders to manage both a borrower’s performance risk as well as cash-flow risk.

4

While collateral performance is paramount to an asset-based lender, understanding short-term and long-term cash flow requirements are a critical component to staying ahead of potential liquidity shortfalls.

5

The cannabis regulatory environment appears to be loosening up, which will potentially allow for more financing opportunities throughout the sector.

as an analysis of direct labor needs for assembly of the final lighting fixtures. The final step involved utilizing the analysis of the aforementioned items in comparison to a 13-week cash-flow projection of the transaction – as well as the overall company cash flow projection during the transaction period.

This was a critical step to ensure there would be sufficient cash flow to sustain the company in the event of production delays of any nature. We also wanted to ensure that the customer orders that the production financing would support were truly incremental to the overall business operation.

On the asset-based lending side, the company had been incurring a substantial cash burn due to very high expenditures associated with bringing a newer version of the lighting product to market. This new product provides an integrated solution that measures the analytics of both light and moisture of the agricultural end products. With few covenants proposed, it was crucial for our underwriting team to ascertain the level of support needed prior to the creation of the sales that would ultimately result from the production financing. It was also critical to verify that the existing private equity ownership would cover the burn rate during this period. Evaluating the end customer debtor base also proved to be challenging, as many of the end customers (who would be the eligible accounts receivable) were not household names. A deeper dive by our credit department was able to help determine the eligibility of the customer base.

One of the more appealing aspects of this deal is that when the resulting accounts receivable were created, Rosenthal’s facility actually repays the production financing and provides the company with the incremental liquidity it needs to fulfill its growing book of customer orders. Bundling purchase order financing with asset-based lending allows businesses like this one to effectively support short-term working capital needs, without putting undue strain on existing funding sources. In the case of this particular client, that meant they did not have to look to their private equity group to fund their short-term

working capital needs and could instead continue to rely on them solely for their much-needed long-term capital. Moreover, combining purchase order financing with asset-based lending will allow the client to focus on offering N30 and N45 terms to their larger cannabis-growing customers, as well as potentially adding an additional production line and staff to expedite the assembly process.

As the cannabis industry continues to grow at an exponential pace, there is little doubt we will continue to see more and more companies crop up that are offering ancillary products and services. In order to help those burgeoning companies remain competitive and scale their businesses, lenders will need to be even more nimble and creative in determining the best structure for financing deals. This not only requires marrying short-term inventory financing tools with other, complementary lending solutions, but also collaborating with private equity and other partners to ensure that short-term working capital needs are being met alongside the longer-term capital needs.

Robert Miller is currently executive vice president and runs Rosenthal’s Asset Based Lending Division. An experienced financial services executive, Paul has held senior leadership roles in various asset based lending and workout group at banks across the industry. He holds a Bachelor’s degree in finance from Ithaca College and an MBA from Pace University. He can be reached at 212-356-0960 or RMiller@rosenthalinc.com.

Paul D. Schuldiner is executive vice president at Rosenthal & Rosenthal and leads the firm’s Purchase Order Financing Division. Paul is a seasoned financial executive with over 20 years of experience in the purchase order and trade finance business. Paul is currently the Chairman of the International Factoring Association (“IFA”) Northeast Chapter and a member of the IFA national advisory board, and on the Board of Directors of the New Jersey Chapter of the Turnaround Management Association. Paul received his Bachelor’s degree in accounting from Queens College, City University of New York. He can be reached at 212-3561703 or PSchuldiner@rosenthalinc.com.

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ASSET-BASED LENDING >> RESTRUCTURING >> VALUATIONS >> LEGAL

RESTRUCTURING

DISTRESSED WORKOUTS

Where Past is Prologue

Applying Lessons from the Past to Protect ABL Lenders in a World of Future Distress

BY SETH JACOBSON, SHANA ELBERG AND GEORGE HOWARD In this ever-changing lending landscape, attorneys from Skadden, Arps, Slate, Meagher & Flom LLP offer ideas on minimizing risks for lenders.

The financial world is actively monitoring the U.S. domestic and global economies, including lending markets, for indicators of potential distress. Many financial participants believe a downturn in the economy is forthcoming.

Today, U.S. borrowers are more indebted than ever before – U.S. non-financial corporate debt of large companies now stands at $10 trillion, or 48% of U.S. GDP, a 52% increase from its last peak in the third quarter of 2008.1 Moreover, borrowers have become increasingly aggressive in using secured leverage, and in taking advantage of “cov-lite” loan documents to engage in creative (and sometimes controversial) transactions to transfer assets beyond the reach of existing secured lenders by way of distributions to shareholders or contributions to unrestricted subsidiaries and then utilize those assets to raise additional secured financing (i.e., J. Crew and Neiman Marcus). While the debt levels and cov-lite structures of leveraged loans may create risks for many stakeholders, lenders under asset-based loan facilities (“ABL facilities”) should be well-positioned to weather any storm.

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ABL facilities typically offer lenders greater protections in a liquidation scenario. In addition, ABL facilities often are a critical lynchpin of debtor-in-possession financing facilities (“DIP facilities”) when borrowers are looking to effectuate comprehensive restructurings through chapter 11. As a result, lenders should position themselves to understand and use the chapter 11 process to ensure their debt claims retain, and even gain, protections in bankruptcy.

As a starting point, existing ABL lenders should regularly be (i) examining their current debt holdings (including analyzing their borrowers and the industries in which they operate) for signs of potential distress, (ii) proactively reviewing credit agreements for potential weaknesses, and (iii) engaging with their borrowers to identify and problem solve for issues while 1

>> TRENDS AND OUTLOOK >>

ensuring that their secured lending position is protected under all scenarios. This article briefly describes (1) important features of ABL facilities that protect lenders from loss, and (2) key tools ABL lenders use in order to safeguard their interests in distressed situations.

Key Protective Features of ABL Facilities In the first instance, ABL facilities are structured to have an extremely low rate of loss given default (“LGD”). The low LGD produces favorable pricing, making ABL facilities extremely attractive to borrowers – especially those without a steady stream of EBITDA necessary to meet quarterly leverage covenants in cash flow revolvers.

SETH JACOBSON Partner, Skadden, Arps, Slate, Meagher & Flom LLP

ABL facilities typically are secured on a firstpriority basis at a minimum SHANA ELBERG by the borrower’s most

Partner, Skadden, Arps, Slate, liquid assets – inventory and

Meagher & Flom LLP receivables and the cash proceeds thereof – and the exposure under ABL facilities is typically capped by a monthly borrowing base consisting of an advance rate applied to a subset of the collateral defined as “eligible inventory” and “eligible receivables.” Moreover, the ABL facility typically allows the administrative agent to establish reserves to reflect any deterioration of the collateral. The GEORGE HOWARD cushion in collateral

Counsel, Skadden, Arps, Slate, value provided by the

Meagher & Flom LLP combination of advance

See Valladares, Mayra Rodriguez. “U.S. Corporate Debt Continues To Rise As Do Problem Leveraged Loans”

Forbes July 25, 2019.

Takeaways 1

2 3

There are several tools available to ABL lenders to protect their credit position in the event that a borrower finds itself in a distressed situation – these include reserves, imposing cash dominion and requiring more frequent collateral reporting and monitoring and eliminating certain baskets for investments, restricted payments and payments of other debt when certain minimum excess availability requirements are not satisfied.

In a chapter 11 case, secured lenders have a number of options to gain additional protection.

In bankruptcy, a secured lender may be able to “roll up” their prepetition debt and turn it into post-petition debt on a partial or full basis. ABL lenders have recently been successful in obtaining a full roll-up of their prepetition ABL facility at the first-day hearing in a bankruptcy case.

4

The creative secured lender may look for additional types of adequate protection payments including mandatory paydowns of the borrowing facility to remain within formula, required lump sum payments on specific dates, consent fees, and payments into an indemnification reserve account.

5

Requiring specific actions to be completed by specific dates (i.e., milestones), is another way for lenders consenting to the use of their cash collateral or providing a DIP facility to have some control over a chapter 11 case. Savvy lenders may use milestones and case controls to create a bespoke set of protections tailored to the unique facts and circumstances of a case.

rates, eligibility standards, reserves and limits on line usage to avoid springing a financial covenant should sufficiently protect lenders under an ABL facility in a liquidation.

In addition to this inherently safe structure from a credit standpoint, there are other structuring techniques that protect ABL lenders in distressed situations. First, notwithstanding the fact that many assets (i.e., general intangibles, intellectual property, equity interests in the borrower and subsidiaries, equipment and real estate) are not in the borrowing base for an ABL facility, ABL lenders often require “all asset” grants of collateral. This is beneficial even if only a second lien as the value of this additional collateral may help prove the ABL facility is over-secured. Second, ABL facilities typically contain tools to monitor the collateral as liquidity tightens, including: (i) “springing cash dominion;” (ii) a “springing financial covenant” or an availability block at 10% of the lesser of the commitments and the borrowing base; (iii) a trigger to weekly borrowing base reports; and (iv) a trigger to more frequent field exams and appraisals.

Finally, many ABL facilities have features that limit value leakage and protect lenders when the borrower’s liquidity is challenged. For example, restricted payments, permitted investments and the ability to designate unrestricted subsidiaries are extremely limited unless minimum availability conditions are satisfied. Likewise, most ABL facilities limit the voluntary prepayment of other senior debt – a valuable feature that ensures the ABL facility is not used to prepay other debt (including pari passu senior debt) at a time when liquidity is tight.

Finally, some (but not all) transactions require the borrower to

reimburse the administrative agent for the cost of a financial advisor as well – another good protection for lenders in a distressed situation.

This combination of features should continue to make ABL facilities a valuable tool in the next economic downturn, without exposing lenders to significantly higher rates of LGD.

Protective Tools for Lenders in Chapter 11 If an ABL borrower does become a debtor in a chapter 11 case, lenders have a number of options to gain additional protection during the pendency of the bankruptcy case.

In the first instance, the needs of the ABL lenders often are addressed very early in a chapter 11 case. The borrower’s need to use existing cash collateral and obtain working capital to finance, at least in part, the chapter 11 case with post-petition inventory and receivables often results in an ABL facility being refinanced or protected and continued. The following is a discussion of a variety of protections ABL lenders might seek when a borrower wishes to continue an ABL facility during a chapter 11 case.

Additional Collateral An ABL lender without an “all assets” grant might try to expand its security package. While lenders often are advised to take additional collateral before a bankruptcy filing (if available), there may be a risk of potential claw-back actions. Such risks may be mitigated, particularly where the additional collateral is provided in exchange for lenders agreeing to an amendment or forbearance, but might not be completely eliminated.

Where sufficient risk exists, lenders may insist that the provision of additional collateral be approved as part of the DIP facility to eliminate claw-back risks. Approval as part of a DIP facility also has another benefit – automatic perfection of the lenders’ liens and security interests by order of the bankruptcy court. Where the additional collateral spans multiple jurisdictions or is, by its nature, harder to perfect upon, the automatic perfection by order of the bankruptcy court can be a significant benefit.

There are many categories of collateral that may become available or more attractive to ABL lenders when a borrower becomes distressed, including intellectual property, real property, the proceeds of real property leases and the proceeds of avoidance actions. A borrower, however, may be reluctant to give up valuable assets that might be used to secure additional debt financing, or that might put management and the board in the crosshairs of actions brought by unsecured creditors.

There are creative solutions and structures that lenders might consider to provide a borrower with the flexibility they need, while at the same time giving the lenders greater security. Junior liens, marshalling rights, reverse marshalling structures and priority of payment concepts are just some things that ABL lenders can consider to strike the right balance between protecting

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RESTRUCTURING

their claims and allowing a debtor sufficient flexibility in its restructuring efforts.

Roll-Up of Prepetition Debt In bankruptcy, a secured lender may be able to “roll up” their prepetition debt and turn it into post-petition debt on a partial or full basis, whether all at once or as a “creeping” roll-up over time. Roll-ups have become a common ask by ABL lenders, and some ABL lenders have recently been successful in obtaining a full roll-up of their prepetition ABL facility at the first-day hearing in a bankruptcy case (e.g., VER Technologies and Remington Outdoor). Although not as immediate, a creeping roll-up that converts prepetition debt into post-petition debt as it is borrowed and repaid on a revolving basis over time is often a strong fall-back option.

Post-petition debt status can provide significant advantages to ABL lenders, including: (i) eliminating cramdown risk (i.e., unless a lender agrees otherwise, the debt must be paid in full, in cash in order for the company to emerge from bankruptcy through a chapter 11 plan); and (ii) ensuring the validity and enforceability of all liens and claims. Moreover, as a postpetition lender, lenders almost always obtain various case controls and milestones for their benefit (as discussed below).

Protection of Bank Products and Cash Management Services Care also should be taken to protect bank products and cashmanagement services – two catchall terms that can cover everything from letter of credit facilities to hedging to corporate credit card programs provided by lenders or their affiliates under an ABL facility.

A number of simple steps can be taken to ensure their protection, starting with careful monitoring. Understanding the size and scope of such programs allows lenders to determine how much may be at risk and how aggressively to pursue further protection, such as reserves against the borrowing base. Likewise, ensuring all such programs are properly documented and paid in the ordinary course can help mitigate risk.

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In addition to making sure bank products and cash management services are continued as part of a DIP facility, such programs and services should be addressed (and authorized to continue) in the bankruptcy court order approving the borrower’s cash management system. While such orders typically contain broad and general language to authorize all bank products and cash management services, important products and services should be called out specifically, and the language should be sure to cover all important categories of products or services. It is powerful to be able to point to specific language in a bankruptcy court order that clearly authorizes a product or service if it is challenged later in the case.

Thinking Beyond Traditional Adequate Protection Payments While adequate protection for prepetition secured lenders almost always includes the payment of current interest as well as fees and expenses, the creative secured lender may look for additional types of adequate protection payments. For example, lenders have successfully negotiated for, among other things: (i) mandatory paydowns of the borrowing facility to remain within formula; (ii) required lump sum payments on specific dates; (iii) consent fees; and (iv) payments into an indemnification reserve account. While the ability to obtain such payments is often highly fact specific, lenders should not be skittish about seeking additional payments where necessary and appropriate.

Milestones and Other Case Controls Requiring specific actions to be completed by specific dates (i.e., milestones), is another way for lenders consenting to the use of their cash collateral or providing a DIP facility to have some control over a chapter 11 case.

However, enforcement of milestones requires lenders to call an event of default and force a company into complete liquidation if a milestone is missed. Aggressive borrowers and their counsel may dare lenders to take such a drastic step in large and highprofile chapter 11 cases where thousands of jobs are at stake.

On the other hand, milestones provide a clear timeline for all stakeholders to work towards completing important tasks, and also provide the bankruptcy court with a clear sense of the anticipated progress and timeline of a case. In other words, milestones can serve a valuable purpose even if they ultimately are adjusted outwards.

There also are other types of case controls that secured lenders may seek as a condition to allowing the use of cash collateral and/or for a new money DIP facility. Examples include: (i) consent rights over material asset sales; (ii) consent and/or consultation rights with respect to material business decisions and important court orders, including the approval of management incentive plans; and (iii) the right to select a liquidator in the event the borrower ceases operating.

In sum, savvy lenders may use milestones and case controls to create a bespoke set of protections tailored to the unique facts and circumstances of a case.

Seth Jacobson is a partner and global head of the banking group at Skadden, Arps, Slate, Meagher & Flom LLP. Shana Elberg is a partner and George Howard is counsel in the corporate restructuring group.

This article represents the opinions of the authors only and not of Skadden, Arps, Slate, Meagher & Flom LLP or its affiliates, and is not intended and should not be construed as legal advice.

ASSET-BASED LENDING >> RESTRUCTURING >> VALUATIONS >> LEGAL

TRENDS & OUTLOOK

ECONOMIC TRENDS

Optimistic Small Businesses Expect Growth in 2020

With solid growth continuing, unemployment at a 50-year low and rising payrolls, the economy continues to roll forward. BY DAVID CICCOLO While there are some warning signs in the form of rising business inventories and the fact that some of the current economic strength is related to temporarily increased government spending, small businesses still maintain a strong positive outlook. It’s this type of perspective that can lead to a deepening relationship between lenders and these thriving companies.

Just how strong could this relationship become? That’s one question we sought to answer through the 2019 Bibby Financial Services Global Business Monitor Report. To build the report, we surveyed 538 US small businesses across various industries, broken down as follows: 28 percent manufacturing, 28 percent wholesale/distribution, 17 percent business services, 14 percent transportation, 7 percent gas/oil services and 6 percent staffing services. We were interested to understand what this audience is thinking and feeling about the coming year and how the financial community might play a new role in their plans for the future.

Small businesses are doing well—and many expect to do better still Our survey generated an overwhelming response on how small businesses are feeling in the current economic climate.

A significant majority (65 percent) of executives from smallto-medium enterprises shared their belief that the economy is doing well, with 43 percent expecting it to improve even further next year and 33 percent expecting it to stay at the same level of prosperity. While those numbers are based on perception, they are backed up by hard data; 49 percent of companies surveyed report sales growth over the past year.

Further, 59 percent predict growth over the next year. This

>> TRENDS AND OUTLOOK >>

forecast includes 66 percent of respondents expecting some of this growth to come from new customers and 60 percent expecting increased demand from existing customers.

But challenges remain...

The highly positive outlook of small business executives is tempered by warning signs on the horizon. While the opinion of the U.S. economy is overwhelmingly positive, 59 percent of those surveyed still DAVID CICCOLO have concerns about the state of

president and CEO, the global economy. Executives have

Bibby Financial Services some anxiety over the state of their

(BFS) North America own businesses, with 33 percent of respondents reporting concerns about rising raw materials costs as a threat to their economic growth.

This number is nearly five times higher now than it was at the time of the Global Business Monitor Report in 2017 when only seven percent of small businesses ranked rising raw materials costs as a top threat to global growth.

As a companion to rising materials costs, cash flow also finds its place as an area of serious concern for small business, even slightly edging out materials costs in our survey:

The greatest challenges for 2019 Cashflow - 42 percent

Rising Costs - 39 percent

The greatest challenges over the next 12 months Cashflow - 37 percent

Rising Costs - 35 percent

There were some other key points that caught our attention.

Of the companies surveyed, 47 percent admitted that their most significant cash flow challenge was getting paid on time.

An inability to collect money owed impacted 30 percent of respondents in the last year and 41 percent felt that bad debt had affected their profits or the growth of their business.

What industries are feeling a cashflow squeeze the most?

According to Inc. and Sageworks, the top ten industries with the highest number of days in Accounts Receivable include: n Management of Companies and Enterprises n Oil and Gas Extraction n Technical and Trade Schools n Automotive Equipment Rental and Leasing n Outpatient Care Centers n Support Activities for Mining n Architectural, Engineering and Related Services

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Takeaways

TRENDS & OUTLOOK n

Scientific Research and Development Services

n

Foundation, Structure and Building Exterior Contractors

n

Other Types of Heavy and Civil Engineering Construction

Cashflow challenges are an opportunity to form growth partnerships with alternative financiers Small businesses are planning to tackle these challenges head-on. One of their primary tools is a partnership with an external finance company. We found that 35 percent of our respondents already work with a third-party financier and 10 percent plan to apply for funding over the next year. We also discovered that the rate of third-party financing was highest in the oil and gas industry, with 14 percent of those companies surveyed working through a financing relationship, followed by 13 percent of businesses in manufacturing.

The fact that the economy is currently strong makes for an argument for small businesses to consider expanding their financing options. What do businesses plan to do with the extra working capital that they could receive? As expected, a significant 90 percent of our respondents plan to invest in their businesses, with 38 percent of that group looking to

1

According to the 2019 Bibby Financial Services Global Business Monitor Report, U.S. small businesses have a positive economic outlook; this perspective can lead to a deepening relationship between small businesses and lenders.

2

65% of executives from small-to-medium-sized enterprises believe the economy is doing well, with 43% expecting it to improve even further next year.

3

While the opinion of the U.S. economy is overwhelmingly positive, 59% of those surveyed still have concerns about the state of the global economy.

4

Executives revealed that their most significant threats are rising raw material costs and cash flow, with 47% admitting that their most significant cash flow challenge is getting paid on time; cash flow challenges are an opportunity to form growth partnerships.

5

2020 is not a year to be wasted; lenders should be focusing on how to engage with small businesses and work with them to move beyond any roadblocks that prevent their access to financing.

invest specifically in new equipment; 35 percent of companies participating in our survey are currently importing and/or exporting goods, with a key 43 percent stating that, while they do not currently engage in international trade, access to funding is the essential component that will enable them to move into this area in the future. This represents an opportunity for lenders to support the growth of small businesses across the country and ultimately around the world.

Small-business interest is real, but so are the roadblocks

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There’s no denying the opportunity small businesses present to the finance community.

Our survey showed that 56 percent of respondents would consider factoring, or accounts receivable finance, as a potential source of finance. While 43 percent of participants in our survey felt that the availability of financing was good or excellent, another survey still shows that 54 percent of small employer firms that applied for $250k in funding or less did not receive the full amount of financing they sought. The respondents in our own survey cite high interest rates (57 percent), documentation requirements (44 percent) and “financing is there, but wasn’t made available to me” (33 percent) as the top three reasons that they feel access to finance is difficult. Ultimately, only 25 percent of these small businesses state that they were actually rejected by an external finance company.

David Ciccolo is president and CEO of Bibby Financial Services (BFS) North America. He has over 30 years of experience in commercial banking, factoring, and ABL. BFS funds over 10,900 businesses worldwide from start-ups to well established mid-size companies. You can find all the details of the BFS US Global Business Monitor Report @ https://www.bibbyusa.com/ about-us/news-and-insights/reports/bfsglobal-business-monitor-usa-2019

2020 is not a year to be wasted With small- and midsized businesses showing such strong optimism about their own growth potential and the fact that underlying this optimism are legitimate concerns about rising costs of business and late payments that can hinder cashflow, alternative finance companies must not be complacent in the coming year. Lenders should be focusing on how to engage with small businesses and work with them to move beyond any roadblocks that prevent their access to financing.

Special attention should be given to key industries such as manufacturing and the oil and gas sector, as our survey results show both interest and opportunity can be found in these areas. Lenders should also keep watch for domestic operations that are looking to move on to the global stage. With so many openings and a positive overall attitude, 2020 holds promise to be a highly successful year for both small businesses and lenders alike.

With small- and mid-sized businesses showing such strong optimism about their own growth potential and the fact that underlying this optimism are legitimate concerns about rising costs of business and late payments that can hinder cashflow, alternative finance companies must not be complacent in the coming year. Lenders should be focusing on how to engage with small businesses and work with them to move beyond any roadblocks that prevent their access to financing.

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CHANGE ROUNDTABLE

Three Industry Executives Discuss Possible Changes in 2020

JOSEPH ACCARDI Head of New Business Development, People’s United Bank

What changes do you foresee in 2020 that will affect our industry? How can industry executives minimize the effect of negative changes?

Yogi Berra said: “It’s tough to make predictions, especially about the future.” I think he was right! However, very generally, the economic picture for 2020 seems fairly stable. I have no reason to believe that unemployment, interest rates, inflation, economic growth, consumer spending, or capital spending are likely to change substantially, although there is a better chance of moderate weakness rather than strength relative to where we are now. The one thing that warrants concern is that the bubble of private equity valuations may burst. There has been so much capital to be deployed in that market that purchase prices have been pushed to sky-high levels lately, and in 2020 prices for these kinds of transactions will probably reverse. Lenders who lacked discipline and aggressively provided financing for these highmultiple deals may wish they had been more conservative.

There are certain things that could happen in 2020, that are extremely difficult to predict, that could wreak havoc with economic stability. Geo-political events, major cyber issues, and trade war escalation are a few examples that come to mind.

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I think there is truth to the Bill Gates quote, “People tend to overestimate change over the next year, and underestimate change over the next 10 years.” Over this longer timeframe, substantial changes are inevitable. The current inefficient processes for sourcing, underwriting/approving, documenting, and monitoring loans will be disrupted with technological advances. Although the destination is unclear, the status quo not surviving is definite. A major responsibility of leadership during this time of accelerating change is to build corporate cultures that are ready to embrace change and adapt to different ways of doing things. Leadership should be actively encouraging continuous learning and growing for all team members.

MICHAEL E. JACOBY, CTP Senior Managing Director, Phoenix Management Services

Please name one positive and one negative change (if any) that you see affecting the industry in 2020.

I think a modest (not dramatic) economic correction will be positive for secured lenders. Industry participants, including yours truly, have been incorrectly forecasting a pullback for the past several years. Despite historically low unemployment, relatively low inflation, and low interest rates, the probability of a recession appears to be increasing. Lenders in our 4th quarter 2019 survey expressed a very pessimistic view of the economy with a long-term GPA of 1.65 (essentially a C-), which is the lowest GPA since the 4th quarter of 2008! This would strongly suggest a correction in 2020.

On the negative change front, the lack of stability surrounding tariffs is making it difficult for many borrowers to adequately plan.

Migrating production away from China is often a major undertaking.

In the meantime, borrowers are stuck in the middle – negotiating for lower prices with their factories while attempting to pass along the impact of tariffs as price increases to their customers.

What kind of effect do you see them having?

An economic correction will be helpful to secured lenders who have maintained their underwriting standards as it will likely remove some of the marginal lenders from the equation and begin moving the pendulum towards less aggressive structure and pricing.

How can industry executives minimize the effect of any negative changes?

Your borrowers should be able to track the economic impact of tariffs to their gross margin. How and where are they in inventory and the borrowing base, when and how much have they been able to increase prices, etc. If they are not volunteering this answer, do yourself a favor and ask them!

“People tend to overestimate change over the next year, and underestimate change over the next 10 years.”

— Bill Gates COLE BUCKFELDER Managing Director, Wells Fargo Capital Finance

I expect to see an increase in opportunities for the ABL industry in 2020 with more “fallen angel” activity, where companies that may not have necessarily looked to ABL as a financial option in the past find it to be the right solution in the current economic environment.

syndication processes in the current environment are focused on existing lenders upsizing their commitments to take-down facility increases or to replace non-extending lenders. Cash flow conversion transactions could make it possible to bring in new banks if certain existing lenders aren’t active in the ABL space or if there’s deal fatigue for a certain credit profile. Bringing new banks into the syndicate can be great for borrowers as their new lenders will focus less on the past and more on building a relationship.

ABL lenders are seeking asset-growth opportunities and these situations provide a great opening to lend into transactions that tend to either (1) fall into the upper echelon of the ABL credit spectrum or (2) provide a premium to current market pricing. Most importantly though, it’s an opportunity to help a company by providing incremental liquidity and both financial and operational flexibility.

As it relates to documentation changes, it does benefit the customer in the near-term, but could potentially create issues in the future, if there is an economic downturn. Furthermore, certain institutional term-loan concepts that work their way into large syndicated ABL documents will likely find their way into middle-market ABL deals over time, where ABL lenders are less likely to benefit from deep capital structures.

Please name one positive and one negative change (if any) that you see affecting the industry in 2020.

The convergence of ABL credit agreements with those of institutional term loans is not a new challenge, but it is one that I expect to see accelerate in the coming year. This is prevalent in negative covenants where the typical ABL payment condition concept should support a borrower’s needs in most situations, but the push for consistency amongst documentation – and the resulting combination of assetbased and cash-flow concepts – could create the potential to breakdown certain foundational principles of ABL.

What kind of effect do you see them having?

The headline effect of increased “fallen angel”activity will mean more volume for the industry and I believe the market is ready to meet the new supply. The underlying effect, from my position in syndications, is that it could create more opportunities to invite new participants into transactions, which is great for these companies entering ABL. Many

How can industry executives minimize the effect of any negative changes?

It is important for ABL lenders to be creative and develop tailored solutions for their clients, while also ensuring appropriate protections are in place for the tougher times.

Executives can ensure appropriate yet flexible documentation by staying on top of market developments, through effective credit monitoring and active dialogue with their clients.

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SFNET EDUCATION UPDATE

SFNet Education Focus 20/20

Dynamic Educational Content is Key for Members

BY MYRA THOMAS

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MYRA THOMAS

As the Secured Finance Network celebrates its 75th anniversary, its commitment to the education of its membership remains tantamount to the organization. Part of that commitment is making sure that secured lenders of all stripes are provided with the essential tools, training, and best practices to ensure their professional success. But that educational content must stay dynamic, updating foundational courses and offering new and compelling material to deal with current business challenges.

SFNet’s new initiative, Education Focus 20/20, supported by the Secured Finance Foundation, brings that vision to life. We are revamping course content to reflect the changes in the industry and to better respond to the needs of our members.

While we have a commitment to provide the basics of the trade, we have listened to our members and are making sure that our educational content remains current, providing an educational trajectory that better promotes professional development.

“It’s our goal to foster a stronger community by providing the knowledge and tools necessary to succeed in our continually evolving industry,” said SFNet CEO Rich Gumbrecht. “Our members count on us to complement and supplement their own education offerings. Together we are making a conscious decision to invest in our people.”

The new Education Focus 20/20

curriculum provides a consistent, clear and logical pathway for members. It consists of five tracks in the categories of field exam, account management, business development, operations, and underwriting, with a level one and level two course for each.

An introductory ABL course--a beginner level class--serves as a precursor to the various tracks.

Almost every class in Education Focus 20/20 will be brand new or updated from a previous SFNet class, so participants can be assured they are gaining relevant, up-to-date knowledge.

In addition to CPE credit, SFNet will now offer Certificates of Completion for every track and for each individual class. Members will immediately know the relevant sequence of classes to follow to meet their professional goals. SFNet is also ensuring members will be able to plan ahead and take advantage of course offerings by providing an updated education calendar on the website, outlining courses available over the next two years.

In-person and online training will continue to cater to a wide range of professionals, whether they are just starting out, have advanced to the executive ranks, or are looking to move into a new discipline. In addition, SFNet’s educational offerings will continue to include webinars with content designed to reflect topics relevant to secured lenders today, like retail finance, tech finance, and healthcare ABL. Of course, asset-based lenders and factors face hectic schedules, and so SFNet is mindful of the time constraints of our membership. In 2020, the rollout of new and revamped online courses and webinars will be a big focus, making it easier for even the busiest secured lender to take part in the best of what SFNet has to offer.

members. As with all our in-person courses, this workshop will provide attendees the opportunity to not only learn from industry leaders but to network with other secured lenders taking the course.

Simply put, there are changes afoot for 2020. But as always, SFNet’s membership can count on their organization to provide practical knowledge, as well as leading educational programming to advance their career. In 2020, members can expect a more logical and clear pathway to SFNet’s educational content. SFNet’s teaching faculty will continue to be made up of a diverse group of industry leaders—leaders who are passionate about their areas of expertise and committed to providing an interactive and demanding educational experience. Education is and will continue to be one of the key values of SFNet and our Foundation.

“Simply put, there are changes afoot for 2020. But as always, SFNet’s membership can count on their organization to provide practical knowledge, as well as leading educational programming to advance their career. In 2020, members can expect a more logical and clear pathway to SFNet’s educational content.”

Whether it’s in-person training across the country, online content, or even personalized in-house training at your organization, the emphasis remains on the real world. Course material will put a stronger emphasis on case studies to better align with the challenges secured lenders face in the business world today. With Education Focus 20/20, SFNet will also focus on promoting career advancement for secured lenders by offering a new leadership development program, tailor-made for our

No matter the secured lender’s business title or years in the industry, SFNet is offering quality content and programming that is responsive to each and every members’ needs and, in turn, ensuring their professional success.

Member companies can be assured that SFNet’s programming provides the necessary educational tools to supplement on-thejob training and in-house programs. And SFNet will continue to act as a network of peers, keeping secured lenders on the cutting edge of developments in the industry.

For more information on SFNet education programs, please visit www.sfnet.com or contact Nora Walls at nwalls@ sfnet.com.

Myra Thomas is an award-winning editor and journalist with 20 years’ experience covering the banking and finance sector.

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COMMITTEE SPOTLIGHT

SFNet Education Committee 2020 This column highlights the hard work and dedication of SFNet Committee Volunteers. Here we speak with Joseph Lehrer, Chairman of the SFNet Education Committee for 2020.

BY EILEEN WUBBE

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JOSEPH LEHRER SVP, Asset Based Finance Citi Commercial Bank What would you say has been the best part of chairing the Education Committee and the most challenging?

It is my honor to be the chair of the Education Committee this year, as I have personally enjoyed the experiences and benefits the SFNet has afforded me over the many years I have been in the finance industry. My favorite part of being involved with this committee is working with the other committee members and the SFNet staff discussing best practices and options to provide relevant educational content and programs to our membership.

We are continuing to introduce new courses, update and modernize delivery of our educational programs throughout the year and strive to continually provide content to educate members about specific topics and roles related to the secured finance industry.

The most challenging aspect of our committee is to keep our content relevant and meaningful to our membership as well as providing our content to our members in the most cost-and time-efficient manner. We must provide content that provides value to our younger members (“YoPro�) as well as our more-experienced members to keep their skills sharp. We try to provide in-person classes alongside our networking events whenever possible in order to provide the best value to our members. We also offer over a dozen webinars a year that are

free to members on such subjects as Healthcare Finance, Leveraged ESOP Finance, and Arbitration for the Resolution of Commercial Disputes.

Why were you interested in this particular Committee?

I have been a member of SFNet for over 20 years and have found my involvement throughout my career to be very valuable and gratifying.

I have experienced many different roles at SFNet, starting at the Midwest Chapter level, where I participated on various committees and progressed to president of the Midwest Chapter. After having such a great experience with the Midwest Chapter, I became more involved at the National level on various committees and eventually became a member of the Executive Committee. In 2018 I chaired the Convention Programming Committee, which is our marquee and largest networking event of the year.

This year I wanted to chair the Education Committee to continue to broaden my knowledge of another one of the main value propositions of our SFNet trade association. Our three primary value propositions include facilitating networking among our members through conferences and other events, educating members and others through courses and publications, and providing advocacy for our industry with regulators and legislators.

How do you manage to juggle your high-pressure “day job” along with the time required for chairing a committee and what advice would you give to others who are interested in joining a committee?

as their experiences will often relate to one of my own challenges. In terms of the specific time commitment for this committee, I can easily say it would not be possible for me to chair this committee properly without the significant help I receive from the SFNet staff. They are outstanding and I am forever grateful for their knowledge, expertise and willingness to help us achieve our goals.

For others that are interested in joining a committee, I would encourage them to let anyone on the Executive Committee or staff know they are interested, and they will be added to a committee. The time commitment from a new committee member will not be a burden and we are always looking for additional volunteers and input.

What do you do to enjoy your time outside of Citibank and SFNet involvement?

I am truly passionate about my career at Citibank and my involvement with SFNet, but I do understand that my career and success is directly related to taking advantage of the support system that I have around me. When I am home and able to take off my “finance” hat, I enjoy spending quality time with my wife, son and two dogs. I enjoy biking on Lake Shore Drive with my family, “losing” to my wife on the tennis court, and spending time with my son including watching offbeat/ awful comedy TV shows with him. Our current favorite is a Canadian family-friendly show called Trailer Park Boys that I highly recommend. As many people can relate, it is sometimes difficult to find a balance between work and play, but thankfully I have people in my life who make me want to be better at achieving that balance and to take a time away from my day job to enjoy what is right in front of me and to be present in the special moments we share.

For others that are interested in joining a committee, I would encourage them to let anyone on the Executive Committee or staff know they are interested, and they will be added to a committee. The time commitment from a new committee member will not be a burden and we are always looking for additional volunteers and input.

In my personal experience, it is necessary to multitask (within reason) because we are often pulled in multiple directions every day. We are constantly managing multiple tasks, personalities, and customer/client interactions. There is always outside pressure to continue to exceed in our business and I find it important to continue to develop personally in order to meet these demands. By broadening my own knowledge and experience, I have found that the SFNet enables me to constantly think outside of the box as I continue to learn from my friends and colleagues. At the end of the day, it is comforting to sit back and listen to my colleagues

Eileen Wubbe is senior editor of The Secured Lender and TSL Express.

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PUTTING CAPITAL TO WORK

Vernon Francois: Prestige Capital Supports Entrepreneur’s Partnership with Sally Beauty

BY RACHEL HERSH

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RACHEL HERSH sales director, North America Prestige Capital Vernon Francois grew up in a Rastafarian household where the weekly tradition was having his hair braided every Sunday. The experience was so painful that he decided to learn how to braid hair himself, using carpets and window shade edges as practice.

All that practice paid off. When he was just 17 he won “Newcomer of the Year” at the Black Hair Sensationnel Awards in London.

Winning this very prestigious award launched his career. It gained him celebrity clients spanning across America and the UK. Early on, Francois styled the hair of celebrities such as Keyshia Cole, Kerry Washington and Naomie Harris. He also worked with popular European celebrities, and that is how he met the actress, Lupita Nyong’o, who would go on to win the Academy Award for “12 Years a Slave”.

This friendship and eventual partnership helped him cross the pond to the United States. His successful partnership with Nyong’o and move to California created a buzz for Francois and he began to receive calls from other major celebrities such as Solange Knowles and Amandla Stenberg.

These celebrities recognized his efforts to shift people’s mindsets away from popular beauty standards. Because of his passion for showcasing textured hair and his incredible talent, his celebrity client base rapidly grew.

Nyong’o accused Grazia magazine of editing her hair when she appeared on its cover to “fit a more Eurocentric notion of what beautiful hair looks like.” Solange had

the same situation occur when she graced the cover of the Evening Standard. Her beautiful braids, styled over seven hours by Francois, were also airbrushed out. Both publications later apologized for their actions. However, the damage was already done. By airbrushing their hair, they erased the celebrity’s heritage and personal style choices.

Accepting oneself and natural-born textured hair has become a crusade for Francois.

So much so that he has created a video series on his Instagram page (@vernonfrancois). There, he has positive conversations with strangers on why they love their natural-born textured hair. He has made it his mission to change the conversation, teaching young people that they do not need to conform to society’s expectations of what is beautiful.

This has become a game changer, especially in light of recent news stories where students in school have been kicked out due to wearing their hair naturally. The timing of Francois’s message could not be more important.

When I received a referral from a banker to his company, I felt immediately connected to him. I wanted to do anything within my power to help his company succeed.

The order for which he was seeking funding was to the beauty retailer, Sally Beauty.

Photo credit: @vernonfrancoishair

As a young girl, I had a difficult time accepting my naturally curly hair. At the time, Farrah Fawcett was the ultimate beauty idol/standard, and to have hair that did not conform to look like hers was very difficult. I remember struggling with hair dryers and hoping for a day with no humidity so that the dreaded frizz did not ruin my carefully created hairstyle. I look back and wish that Francois and his products were available for me. If I could have watched his Instagram stories and learned more about positive selfimage, it would have made a big impact on my self worth.

We were the perfect solution for Francois. And we continue to be for so many other businesses that get large orders and do not know how quickly their companies will grow and how fast their numbers will rise.

As many businesses learn, suppliers want assurances that they will be paid quickly. They are often not willing to wait until the client is paid by the retailer in order to be paid themselves. Therefore, one of the pieces of the financing puzzle that Prestige was able to solve was providing a factor’s assurance letter to his supplier. This letter from Prestige guarantees payment to the supplier as soon as the invoice is purchased and approved. Having this allowed the supplier to feel comfortable shipping this large order knowing that they had a successful 35-year-old finance company behind them guaranteeing payment.

Nick, Francois’s CCO, recently said, “From the very start, Prestige Capital understood my business needs and they were able to quickly assess where they could be of maximum support. At every stage of the process each member of the allocated team was helpful, accommodating, and approachable. Most importantly, as someone who had not worked with a factoring company before, every question was answered clearly and professionally. “ As the orders have shipped and replenishment orders have come in and been fulfilled, I personally feel like I am helping change the conversation on what beauty looks like. It feels good to know we have had a part in helping a company that teaches people everywhere to embrace one’s true self.

Rachel Hersh is the sales director, North America for Prestige Capital. She is an active member of the Secured Finance Network, International Factoring Association and Turnaround Management Association. Rachel was selected as a Woman in Commercial Finance for The Secured Lender and recognized as a Top Woman in Business on Long Island by Long Island Press. Some of her speaking engagements include the Daymond John Academy, LaunchPad Long Island, FoodTech FastTrack, New York New Jersey Minority Supplier Development, and various accounting firms for continuing professional education credits. She holds a bachelor degree in psychology from Brooklyn College.

Vernon Francois creates a oneof-a-kind hairstyle for his client Lupita Nyong’o.”

He had recently formed a strong partnership with Sally Beauty stores to carry his hair care product line. When he was a teenager, Sally Beauty was one of the first beauty retailers that he visited. Even then he dreamed of the day that his products would be available across the United States. By partnering with this retailer, his mission was to get his products into even more hands and to spread his message of beauty to all those who have curls, kinks, and coils.

Since Prestige Capital funds accounts receivable, we were able to evaluate his purchase order, credit check his customer, and approve them for the amount that he would ultimately ship. He needed a partner who could support his growth as his business scaled.

Prestige funds companies between $1-250 million in annual sales.

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The 2019 Secured Finance Market Sizing & Impact Study The Authoritative Tool for the Secured Finance Industry to Plan, Benchmark, & Raise Capital The Secured Finance Foundation, in conjunction with Ernst & Young, has conducted the first of its kind Secured Finance Industry Market Sizing and Impact Study for the purpose of benchmarking, strategic planning, attracting capital and assisting in advocacy efforts on behalf of the industry.

Through primary and secondary research, the study dimensions the size and scope of the commercial marketplace for secured lending and its related products and services. Part primer, part data compilation and part analytical assessment, the study provides the reader with a detailed view into the highly interconnected segments of this network and their collective impact on capital deployment and economic development. The findings dimension an industry that is far-reaching, influential, thriving and presenting significant growth opportunities for its participants to expand their served and available markets.

VISIT WWW.SFNET.COM AND DOWNLOAD YOUR COPY TODAY!

SFNet Compendium of Secured Finance Law NETWORKING INDUSTRY KNOWLEDGE EDUCATION ADVOCACY

The Secured Finance Network Compendium of Secured Finance Law is a time-saving digital tool that enables you to research important legal issues related to secured transactions in any U.S. state within seconds.

In 2019, 14 of the most active states were updated and additional states are being updated in 2020.

Covered topics include: ■ ■ ■ ■ ■ ■ ■

Lending Licenses Wage Liens Environmental Liens Processors’ and Repairmen’s Liens Corporate Guarantees Liens Against Personal Property Landlords’ Liens

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SMART COOKIE

Chew on this: each year, Hilco Global provides appraisals of more than $10 billion in asset values and millions of dollars in asset monetization for over 150 food and beverage companies worldwide.

It’s no wonder we’re the world’s most experienced, resource-rich appraiser in the industry.

We can help you become Asset Smarter at www.HilcoGlobalAssetSmarter.com.

Contact Gary Epstein at 847.418.2712 or gepstein@hilcoglobal.com

VALUATION + M O N E T I ZA T I O N + A D VI SO RY