TSL January 2022

THE ASSET-BASED CAPITAL CONFERENCE ISSUE JAN/FEB 2022 WWW.SFNET.COM

Putting Capital To Work

TSL INTERVIEW WITH WELLS FARGO COMMERCIAL CAPITAL ORIGINATIONS TEAM, HEADED BY

Dorothy Killeen A publication of:

Calling all cross-border finance experts… and enthusiasts SFNet is excited to announce its Cross-Border Finance Essay Contest, sponsored by Goldberg Kohn, with the goal of expanding understanding of, and interest in, cross-border finance within the secured finance community. The contest is open only to employees of SFNet member firms.

Members of the SFNet International Finance & Development Committee will choose three winners—1st, 2nd and 3rd place.

Winning essays will be published in The Secured Lender magazine and all three essays will be the subject of a panel discussion at SFNet’s Annual Convention, featuring the authors as well as others. Winners will also receive engraved plaques with their names.

Essays must be submitted by March 8, 2022. Send your submission in a PDF format, including your name, title, company and email address to: essay@sfnet.com.

Contest sponsored by

TOUCHING BASE FULL STEAM AHEAD

SFNet Ramps Up Member-Only Benefits for 2022

As 2022 kicks off, there is much to be excited about as our network of secured lenders and service providers presses forward, fulfilling our essential purpose of putting capital to work. After a record year of member engagement and innovation, and a successful Annual Convention that marked our return to live events, we are eager to build on those achievements. Many of you will be reading this issue in Las Vegas at SFNet’s Asset-Based Capital Conference, a testament to our commitment to provide a responsible return to live networking and events.

In 2022 we will carry over some of our most popular member-only benefits, such as company-wide registration for virtual and hybrid programs, free Crucial Conversation webinars and Member Forums, committee opportunities and editorial privileges, and differentiated event pricing. New this year will be free unlimited access to our popular on-demand education classes for all members.

SFNet and our Foundation will be investing in new programming and resources to help you succeed. As our Diversity, Equity and Inclusiveness efforts gather steam, members will be receiving a survey to benchmark our progress and we will hold our first ever DEI Conference this Spring. You will also see new and enhanced data studies and expanded education offerings.

The data gathered by Refinitiv is always a highlight of the January/February issue. On page 20, Refinitiv’s Maria Dikeos discusses the highs and lows of the capital markets in 2021 in 2021 U.S. ABL Loan Volume Tops US$125bn to Set New Record; Transactor Burnout Casts Shadow.

Our cover interview features Wells Fargo’s Commercial Capital Originations Team, headed by Dorothy Killeen. This group, formed last year, aligns ABL and equipment finance products together and collaborates with other divisions across the company, creating a one-stop shop for many of the bank’s customers.

The art of the deal is about building, balancing, and navigating the relationships with borrowers and lenders alike to provide the best possible outcome for the borrower. On page 24, we detail how Wells Fargo Capital Finance, Cathay Bank and Beacon Building Products worked together to fulfill Beacon’s commitment to socially responsible investing in Art of the Deal: How Beacon Building Products’ Commitment to Diversity and Inclusion Shaped its Financing Arrangement.

On page 28, Andrew Barone and Rob Miller of Rosenthal & Rosenthal discuss the company’s new Pipeline Division, a new e-commerce growth capital resource tailormade for entrepreneurs and founders looking for an extra edge to keep their brands charging forward.

On page 32, Charlie Perer of SG Credit Partners sits down with Andrea Petro of Ready Capital RICHARD D. GUMBRECHT Corporation and Waterfall SFNet Chief Executive Officer Asset Management to talk about her new role as Board Member at Ready Capital, and to share her advice to ABL managers about consolidation, competition and the current state of the market.

In Financial Forecasting in the Post-Pandemic World, on page 35 executives from PKF Clear Thinking provide key points that both lenders and their borrowers need to be mindful of when preparing and reviewing 2022 and beyond business plans.

Richelle Kalnit of Hilco Streambank discusses how lenders should be well-versed in the benefits of Article 9 foreclosures as part of the suite of options available to them on page 39 in Article 9 Sale Process for Intangible Assets: A Cost-Effective, Efficient Option for Disposition of Collateral.

On page 41, Wade Kennedy discusses the Pitfalls of Incorporating Term Loan Provisions into ABL Credit Agreements. The goal from the ABL lender’s perspective should be to understand the tradeoffs involved and provide a level of functional conformity in principal terms, while maintaining customary availability-based metrics and liquidity protections of ABL loan documentation.

Thank you for everything you do to make our industry thrive even in the most challenging times. Together we are poised to achieve another year of extraordinary outcomes, measuring our success by the rewarding possibilities we create for our people, our clients, our shareholders, our industry and our economies.

All the best for a healthy and rewarding new year.

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THE SECURED LENDER JAN/FEB 2022

TABLE OF CONTENTS. JAN/FEB 2022 VOL. 78 ISSUE 1

COVER STORY WELLS FARGO COMMERCIAL CAPITAL ORIGINATIONS TEAM, HEADED BY DOROTHY KILLEEN P14

Wells Fargo Commercial Capital Originations Team, Headed By Dorothy Killeen Early this year, Wells Fargo formed a Commercial Capital Originations team led by Dorothy Killeen. This group aligns ABL and equipment finance products together and collaborates with other divisions across the company, creating a one-stop shop for many of the bank’s customers. 14

BY MICHELE OCEJO FEATURE STORIES

2021 U.S. ABL Loan Volume Tops US$125bn to set new Record; Transactor Burnout Casts Shadow Refinitiv’s Maria Dikeos discusses the highs and lows of the capital markets in 2021. 20

BY MARIA C. DIKEOS

Art of the Deal: How Beacon Building Products’ Commitment to Diversity and Inclusion Shaped Its Financing Arrangement The art of the deal is about building, balancing, and navigating the relationships with borrowers and lenders alike to provide the best possible outcome for the borrower. 24

BY ANN ANDERSON

Andrew Barone and Rob Miller of Rosenthal & Rosenthal Discuss New Pipeline Division

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THE SECURED LENDER JAN/FEB 2022

FEATURED STORY ANDREW BARONE AND ROB MILLER OF ROSENTHAL & ROSENTHAL DISCUSS NEW PIPELINE DIVISION P.28

Rosenthal & Rosenthal announced the launch of PipelineTM, a new e-commerce growth capital resource tailor-made for savvy entrepreneurs and founders. 28

BY EILEEN WUBBE

An Interview with Andrea Petro, Board Member of Ready Capital Corporation and Consultant to Waterfall Asset Management In this installment of our series of executive interviews, Charlie Perer sits with Andrea Petro to talk about her new role as Board Member at Ready Capital, and to share her advice to ABL managers about consolidation, competition and the current state of the market. 32

BY CHARLIE PERER

Articles

RISK INSIGHTS

Financial Forecasting in the Post-Pandemic World Executives from PKF Clear Thinking provide key points that both lenders and their borrowers need to be mindful of when preparing and reviewing 2022 and beyond business plans. 35

BY PATRICK DIERCKS, JOSEPH MARCHESE AND BRIAN ALLEN

BANKRUPTCY INSIGHTS

Article 9 Sale Process for Intangible Assets: A Cost-Effective, Efficient Option for Disposition of Collateral For those most impacted by the supply chain disruptions, the additional funding will dry up, causing senior lenders to more seriously consider their options.

In preparation for that, lenders should be well-versed in the benefits of Article 9 foreclosures as part of the suite of options available to them. 39

BY RICHELLE KALNIT

CREDIT INSIGHT

Pitfalls of Incorporating Term Loan Provisions into ABL Credit Agreements When documenting an ABL facility alongside a separate term loan, borrowers and financial sponsors increasingly request that the ABL credit agreement be drafted to essentially match material terms of the term loan agreement. 41

BY WADE KENNEDY SFNET MEMBER PROFILE

Solifi - Reshaping the Secured Finance Industry Solifi, a multi-asset, cloud-based finance technology company, comprises financial technology leader IDS and IDS’ acquired companies, William Stucky and Associates and White Clarke Group. 47

BY EILEEN WUBBE SFNET COMMITTEE SPOTLIGHT

SFNet International Finance and Development Committee Richard Kohn, chair of SFNet’s International Finance and Development Committee, is a founder of Goldberg Kohn Ltd. and a principal in its Commercial Finance Group, where he specializes in structuring and documenting cross-border credit facilities. 49

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.

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

BY MICHELE OCEJO

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

PUTTING CAPITAL TO WORK

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

KBS: Partnership with Gerber Finance Allows Builder to Stabilize and Grow KBS started building modular homes in New England 20 years ago, and the housing industry has been on a wild ride ever since. 51

BY JENNIFER PALMER

Departments TOUCHING BASE 1 NETWORK NOTES 4 INDUSTRY DEALS 6

www.SFNet.com

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

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THE SECURED LENDER JAN/FEB 2022

DEPARTMENT DEPARTMENT NETWORK INDUSTRY NOTES MOVES CBL Expands Into California: Pioneering ABL Firm Now in 13 States Context Business Lending, LLC (CBL) announced its expansion into the California market and the hiring of three additional team members to support its continued fast-paced growth. While CBL maintains its headquarters outside of Philadelphia, PA, the majority of its team permanently works remotely across 13 states.

CBL recruited Lucy Czismas, a wellknown figure in the California specialty finance market, to be its first west coastbased director of business development.

Industry veteran MJ Hilker brings to CBL over 30 years’ experience in finance and investing, joining the company as director of portfolio management. Harmeet Sohal, based in Sacramento, CA, was hired as a senior collateral analyst.

CIBC Innovation Banking Expands to the UK with Opening of London Office CIBC Innovation Banking is pleased to announce the opening of its new office in London to support the ambitions of UK-based entrepreneurs and their Venture Capitalbackers by providing growth capital across a number of innovation ecosystems. In conjunction with the new London office, CIBC appointed Sean Duffy as managing director, Innovation Banking, and Sergey Kuzaev, CFA, director, Innovation Banking.

Citizens Financial Group Names Sarah Lindstrom to Lead Business Banking

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THE SECURED LENDER JAN/FEB 2022

Citizens Financial Group, Inc. announced that Sarah Lindstrom has become head of Business Banking. Lindstrom will report to Simon Griffiths, head of Core Banking for Citizens’ consumer bank. In her new role, Lindstrom will be responsible for helping small and medium businesses optimize their financial performance, growing the business banking portfolio, and further developing the Citizens business banking team. eCapital Corp. Hires Jeffrey Duclow as SVP, Business Development Officer Jeffrey Duclow brings more than 30 years of expertise providing working capital financing to staffing companies. Duclow will

be responsible for new business origination, sourcing and structuring of financing for staffing company owners throughout North America, supporting eCapital’s mission to empower staffing companies by accelerating their access to capital. eCapital Hires Brian Cuttic as Managing Director, Asset-Based Lending Brian Cuttic brings over three decades of experience to the role and will be instrumental in serving the ABL needs of small and medium-sized businesses across North America. Cuttic joins the company from Synovus Bank in the southeast, where he developed an ABL program and was instrumental is overseeing significant growth.

Jim Gurgone Joins Eclipse Business Capital as Chief Risk Officer In this role, Jim Gurgone will oversee EBC’s credit processes for its existing portfolio management verticals in addition to providing input into new opportunities and strategies. Gurgone has over 28 years of lending experience including senior and credit management roles.

Encina Lender Finance Fuels Continued Growth with Four New Hires Encina Lender Finance, LLC (ELF) announced the addition of Dan Avnir to its Commercial team as managing director; Jessica Ernst and Jeff Karlsson to its Risk team as portfolio manager and senior associate, respectively, and Denise Richardson, to its Operations department as collateral analyst.

Fifth Third Bank, National Association Appoints Michele Mullins Climate Risk Officer The role expands Michele Mullins’ duties as director of enterprise risk governance and business support and reflects the bank’s commitment to environmental sustainability leadership.

FrontWell Capital Partners Expands Deal Originations Team with Experienced Professionals FrontWell Capital Partners announced that it has added to its team two experienced

professionals with expertise in sourcing, structuring and executing creative financing solutions for middle-market companies. Lilies Lanway, an industry veteran with nearly 30 years of U.S. deal sourcing experience, will join FrontWell’s deal originations team as senior vice president, head of U.S. Deal Originations, and Brandon Lalonde will join the team as an associate.

Former Wells Fargo Senior Managing Director Jim Marasco Joins Gibraltar’s Board of Directors Jim Marasco, a widely respected senior executive leader with an extensive tenure at Wells Fargo Capital Finance, has been appointed to Gibraltar Business Capital’s Board of Directors. Marasco has deep expertise in all aspects of secured and assetbased lending, leveraged finance, transaction sourcing and portfolio management.

Greenberg Traurig Continues Expansion of Global Restructuring & Bankruptcy Practice; Adds Brian E. Greer in New York Citing a continued uptick in activity, global law firm Greenberg Traurig, LLP expanded its global Restructuring & Bankruptcy Practice with the addition of former Dentons partner Brian E. Greer as a shareholder in the firm’s New York office. Greer has substantial experience representing creditors, debtors, equity investors and directors in cross-border and domestic restructuring matters, both in and out of court.

Tamara Rizkalla Joins Greenberg Traurig’s Corporate Practice in Washington, D.C. Global law firm Greenberg Traurig, LLP has expanded its award-winning Corporate Practice with the addition of Tamara Rizkalla as a shareholder in the Washington, D.C. office.

Rizkalla will focus her practice on health care industry transactions, regulatory, and compliance matters.

Monroe Capital Hires Sweta Chanda to Head Business Strategy Sweta Chanda has joined the firm as managing director, head of Business Strategy, based in the firm’s New York office. She will be responsible for firmwide strategy, product and

corporate development, and new initiatives to expand Monroe’s global footprint.

Monroe Capital Appoints Zia Uddin as President Zia Uddin, who is a partner and portfolio manager, Institutional Portfolios, will continue to report to Ted Koenig, who will remain the firm’s Chairman and CEO. As president of Monroe, Uddin will oversee and implement Monroe’s long-term growth strategies.

Pitney Bowes Appoints Tom Doherty as Vice President, Lending Services and Products Pitney Bowes Inc. announced that Tom Doherty has been appointed vice president, Lending Services and Products. He joins from CIBC Bank USA, where he served as managing director and head of Business Banking.

Crossroads Systems, Inc. Announces Merger with Rise Line Business Credit Crossroads Systems, Inc., a holding company focused on investing in businesses that promote economic vitality and community development, announced a merger with SFNet member Rise Line Business Credit, LLC, a nationwide asset-based lending firm that provides innovative working capital solutions.

Riveron Welcomes Sam Shaw as New Chief Financial Officer Sam Shaw will oversee the company’s finance organization and play a leading role in executing Riveron’s purpose-driven growth strategy. Shaw brings more than 15 years of experience driving finance transformation at large organizations.

Rosenthal Announces Executive Leadership Changes Rosenthal & Rosenthal, Inc. announced a series of executive leadership changes as part of the firm’s focus on long-term strategic growth and exceptional client service. Family-owned and independent for 83 years, Rosenthal is promoting several individuals from various divisions throughout the company who will assume new roles and

responsibilities, effective January 1, 2022.

Paul Schuldiner has been named chief lending officer. Gary Norman has been named head of Factoring. Norman succeeds Michael Stanley, who left Rosenthal effective December 31, 2021. Joe Pepe, SVP, has been named Northeast regional sales manager for Factoring and Rob Martucci, SVP, in addition to his current role as senior underwriter in asset-based lending, has been named national sales manager for assetbased lending.

Josh Ceccarelli, SVP, has been named NY portfolio manager of the Factoring Division; Kevin Stapleton, currently an SVP in the Factoring Division, and Derek Sigler, who has been promoted to SVP, have both been named team leaders in the Factoring Division; Megan Flaherty has been named SVP, underwriting manager for Rosenthal Trade Capital; Andrew Barone has been named SVP, business development officer and director of sales for Pipeline, Rosenthal’s newest division serving high-growth direct-toconsumer and e-commerce businesses; John Haverly has been named SVP, controller; Daisy Dai has been named vice president in the Asset Based Lending division; Julie Hughes has been named team leader in the North Carolina office and Rochelle Lewis has been named vice president in the Credit Department .

Triumph Business Capital Appoints Rob Wright as Chief Product Officer As chief product officer, Bob Wright will be responsible for the strategy and execution of Triumph Business Capital’s product-related activities and will report to chief executive officer Geoff Brenner.

U.S. Bank Names Troy Remington as Chief Credit Officer Troy Remington has been serving as interim chief credit officer since early August when the former chief credit officer accepted a new leadership role within the company.

Healthcare Attorney Jay Greathouse Joins Waller Waller Lansden Dortch & Davis, LLP announced that Jay Greathouse, an accomplished deal lawyer focused on the full spectrum of healthcare transactions, has joined the firm as it continues to strengthen its nationally recognized and growing healthcare practice.

Kristin Lesher Named Head of Middle Market Banking for Wells Fargo Wells Fargo & Company announced that 21-year company veteran Kristin Lesher will lead Middle Market Banking.

Siena Healthcare Finance Hires Managing Director, Chief Risk Officer Siena Healthcare Finance is pleased to announce the addition of Dan Whitwer as managing director and chief risk officer.

Located in Los Angeles, Whitwer brings over 20 years of experience in asset-based lending to Siena.

Randy Mitzman Joins SLR Business Credit as Managing Director and Senior Vice President Randy Mitzman will be primarily focused on SLR’s FastPay subsidiary. Mitzman was previously with FastPay for five years and spent the last two years at a specialty assetbased lender in the direct-to-consumer and e-commerce space.

5

THE SECURED LENDER JAN/FEB 2022

DEPARTMENT INDUSTRY DEALS

6

THE SECURED LENDER JAN/FEB 2022

Lender/Participant

Lender Type

Amount

Borrower

Industry

Structure

Abacus Finance Group, LLC

Non-bank

N/A

To support the leveraged buyout of GLD, LLC by H.I.G Growth Partners, a digitally native, direct-toconsumer E-commerce jewelry, accessories, and apparel brand in the large, high-growth urban/ streetwear category, Miami, FL

Accessories

Senior secured credit facilities. Abacus made an equity co-investment in GLD, LLC.

Abacus Finance Group, LLC [Senior Secured Credit Facilities Administrative Agent and Lead Arranger]

Non-bank

N/A

To support the dividend recapitalization MGC Diagnostics Corporation, St. Paul, MN, an Altus Capital Partners portfolio company

Healthcare

Senior debt financing

Abacus Finance Group, LLC

Non-bank

N/A

To support the recapitalization of Next Net Media, LLC, a Clearview Capital portfolio company.

Abacus also made an equity co-investment in Next Net Media.

Online technology

Senior debt financing

Access Capital

Non-bank

$5 Million

Transformative Pharmaceutical Solutions (TPS) is a specialized provider of human capital and proprietary software solutions for the management and execution of clinical trials to the pharmaceutical industry

Software

Credit facility

AFC Gamma, Inc.

Non-bank

$75.4 Million

Justice Cannabis Co., a multi-state operator with licenses in eight states, Chicago, IL

Cannabis

Expanded its senior credit facility by $53.4 million

Amerisource Business Capital

Non-bank

$4 Million

Nurse staffing firm, Tennessee

Staffing

Senior credit facility

Amerisource Business Capital

Non-bank

$3 Million

Clothing apparel manufacturer, FL

Apparel

Senior credit facility

Ares Capital Management LLC [Administrative Agent and Lead Arranger]

Non-bank

$1.8 Billion

Dye & Durham Limited, a leading provider of cloud-based software and technology solutions designed to improve efficiency and increase productivity for legal and business professional

Software

Senior secured credit facility

Atalaya Capital Management

Non-bank

$75 Million

OppFi Inc., a leading financial technology platform FinTech that powers banks to help everyday consumers gain access to credit

Credit facility

ATB Financial

Non-bank

C$25 Million

High Tide Inc., Canadian retail-focused cannabis company

Cannabis

Revolving credit facility

Austin Financial Services

Non-bank

$3.6 Million

120-year-old privately owned fuel and lubricant distributor

Fuel

Revolving A/R and inventory credit facility

Bank of America, JPMorgan Chase Bank, N.A., Goldman Sachs Bank USA, Citigroup, Barclays, Credit Suisse, Jefferies Finance LLC and Morgan Stanley [Joint Lead Arrangers and Joint Bookrunner]

Bank

$1.5 Billion

CCC Intelligent Solutions Inc., a wholly owned subsidiary of CCC Intelligent Solutions Holdings Inc., a leading SaaS platform for the Property & Casualty insurance economy

Insurance

Comprised of an $800 million senior secured term loan facility and a $250 million senior secured revolving credit facility

Lender/Participant

Lender Type

Amount

Borrower

Industry

Structure

Bank of Montreal

Bank

$40 Million

Carrick Specialty Holdings LLC, an international non-life legacy business providing reinsurance and run-off management solutions

Management solutions

Credit facility

Bank of America, N.A. and Wells Fargo Bank, N.A. [Joint Lead Arrangers] and Bank of America, N.A. [Administrative Agent]

Bank

$80 Million

Helix Energy Solutions Group, Inc., Houston, TX

Energy

Asset-based revolving credit facility

Bank of Montreal [Administrative Agent] for the extension of the credit facility], BMO Capital Markets Corp., BofA Securities, Inc. and PNC Capital Markets, LLC [Joint Lead Arrangers and Joint Book Runners]

Bank

$400 Million

Centerspace, an owner and operator of apartment Real estate communities committed to providing great homes by focusing on integrity and serving others

New facility includes an accordion feature for up to $400 million

BHI Healthcare Group

Bank

$31.1 Million

Lionstone Care, for the acquisition of an assisted living and memory care facility, Southern NJ

Healthcare

Financing

Bryant Park Capital

Non-bank

$50 Million

High Rise Financial, LLC, a leading originator of receivables in the litigation finance industry for personal injury cases

Litigation finance

Senior secured debt transaction

Capital One, N.A., CIBC Bank USA, Fifth Third Bank, N.A. and J.P. Morgan Chase Bank, N.A. [Joint Lead Arrangers and Book Runners]

Bank

$900 Million

Accel Entertainment, Inc., a leading distributed gaming operator in the U.S

Gaming

Amended existing senior secured credit facility to increase its borrowing capacity from $438 million to $900 million with a new five-year term

Celtic Capital Corporation

Non-bank

$1.63 Million

Manufacturer of custom retail fixtures, Oregon

Manufacturing: Retail fixtures

Consisting of a $1 million accounts receivable line of credit and a $630,000 term loan

CIBC Innovation Banking

Bank

$15 Million

Blue Cloud Pediatric Surgery Centers, a leading Healthcare provider of pediatric dental services in ambulatory surgical centers across the country, Pennsylvania

Acquisition credit facility

CIBC Innovation Banking

Bank

$30 Million

Azalea Health, Atlanta, GA

Healthcare

Credit facility

CIT Group Inc.

Bank

$26.5 Million

Queen Esther Shipping Limited, a modern container ship operated by a joint venture led by Lomar Corporation Limited, a longtime CIT client

Shipping

Maritime financing

CIT Group Inc.

Bank

$4.4 Million

Toward the acquisition of multiple pieces of heavy equipment

Equipment

Financing

CIT Group Inc

Bank

$95 Million

Relaunch of noted Hollywood film production company Castle Rock Entertainment

Film production

Financing

Citizens (Lead) and includes Joint Lead Arrangers ING Group, BMO Harris and East West Bank {Joint Lead Arrangers]

Bank

$125 Million

SageSure, a technology-driven managing general underwriter specializing in coastal residential property markets

Real estate

Senior credit facility

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THE SECURED LENDER JAN/FEB 2022

DEPARTMENT INDUSTRY DEALS

Lender/Participant

8

THE SECURED LENDER JAN/FEB 2022

Lender Type

Amount

Borrower

Industry

Structure

Columbia Pacific Business Non-bank Finance

$17 Million

Simpay (formerly known as Alpha Card Services), an independent sales organization specializing in merchant service solutions, Trevose, PA

Card services

Term loan

Comerica Bank

Bank

$7.5 Million

Interpace Biosciences, an emerging leader in enabling personalized medicine, offering specialized services along the therapeutic value chain from early diagnosis and prognostic planning to targeted therapeutic applications

Healthcare

Revolving credit facility

Crayhill Capital Management

Non-bank

$275 Million

Urban Grid, one of the largest U.S. greenfield renewable energy project developers

Energy

Debt refinance

Crestmark, the Commercial Finance Division of MetaBank®

Bank

$300,000

Freight All Kinds trucking company, Tennessee

Trucking

Accounts receivable facility

Crestmark, the Commercial Finance Division of MetaBank®

Bank

$150,000

Dry van trucking company, Virginia

Trucking

Accounts receivable facility

Crestmark, the Commercial Finance Division of MetaBank®

Bank

$2 Million

Industrial services contractor, Louisiana

Industrial Services Asset-based lending facility

Crestmark, the Commercial Finance Division of MetaBank®

Bank

$3 Million

Well servicing company, Michigan

Well servicing

Ledgered line of credit

Crestmark, the Commercial Finance Division of MetaBank®

Bank

N/A

HVAC contracting company in the midwestern U.S. for construction equipment

Construction

Equipment finance

Crestmark, the Commercial Finance Division of MetaBank®

Bank

N/A

Transportation company in the midwestern U.S. for transportation equipment

Transportation

Vendor finance equipment finance

Crossroads Financial, LLC

Non-Bank

$1.5 Million

US Confectionary Wholesaler and E-commerce Distributor

Retail

Inventory Revolving Line of Credit

Crossroads Financial, LLC

Non-Bank

$1.5 Million

Chemical Processing and Manufacturing Company

Manufacturing

Inventory Revolving Line of Credit, partnered with Factoring company

Crossroads Financial, LLC

Non-Bank

$1.5 Million

Designer, Manufacturer and supplier of dance costumes

Manufacturing, Distributing

Inventory Revolving Line of Credit, partnered with Factoring company

Crossroads Financial, LLC

Non-Bank

$3.5 Million

Wholesaler of wood floooring and vinyl products and accessories

Distributor

Inventory Revolving Line of Credit, partnered with Factoring company

Crown Partners LP

Non-bank

$8 Million

Boston Battery, LLC, a Boston-based independent, locally-owned wholesale distributor of Interstate Batteries, North America’s marketleading automotive battery brand, and its subsidiary companies.

Automotive

Consisting of a $5.0 million revolving line of credit, $2.5 million real estate term loan and a $500,000 CapEx line of credit

Lender/Participant

Lender Type

Amount

Borrower

Industry

Structure

Eclipse Business Capital

Non-bank

$77.5 Million

Market leader in the oil and gas well services industry

Oil & Gas

Senior secured credit facility, consisting of a $50 million revolving credit facility, a $12.5 million M&E term loan facility and a $15 million term loan B facility to a market leader in the oil and gas well services industry.

Encina Lender Finance, LLC Non-bank

$35 Million

Speed Leasing Company, LLC, a technologyenabled, specialty finance company engaged in originating and servicing used motorcycle leases to consumers

Specialty finance

Senior credit facility

Encina Lender Finance, LLC Non-bank

$50 Million

Saratoga Investment Corp., a specialty finance company that provides customized financing solutions to U.S. middle-market businesses

Specialty finance

Senior secured credit facility

Espresso Capital

Non-bank

$10 Million

UPshow, the leading in-venue entertainment and marketing platform that develops interactive digital TV networks

TV and entertainment

Venture debt facility

Espresso Capital

Non-bank

$15 Million

Thentia, a global leader in GovTech software as a service (SaaS)

Software

Credit facility

Espresso Capital

Non-bank

$14 Million

MAP Health Management, LLC, which provides Healthcare proprietary long-term support model through deploying tech-enabled peer support and medical and psychiatric professional services

Credit facility

First Business Specialty Finance, LLC, a subsidiary of First Business Bank

Bank

$3 Million

Company providing technology enabled delivery services in markets throughout the nation, Minnesota

Revolving line of credit facility

Gateway Trade Funding

Non-bank

$1 Million

Global supply chain management company Supply chain supplying dollar stores with warehouse equipment management

Purchase order facility

Gerber Finance

Non-bank

$7 Million

Fair Harbor, maker of sustainable swimwear, clothing, and accessories

Apparel

Line of credit

Goldman Sachs Bank USA, Credit Agricole Securities, Natixis S.A. and Royal Bank of Canada

Bank

$500 Million

Wings Capital Partners LLC, a private, full-service aircraft leasing platform primarily investing in single-aisle, in-production commercial jet aircraft on lease to airlines around the world

Aircraft leasing

Secured loan facility.

Goldman Sachs Bank USA acted as structuring agent for the facility.

Goldman Sachs and Atalaya Capital Management

Bank and Non-bank

$271.4 Million

Openpay Group Ltd., a provider of Buy Now Pay Later (BNPL) products, Melbourne, Australia

Online financial services

Secured debt facility

Gordon Brothers

Non-bank

$85 Million

FoxPoint Trucks, LLC, doing business as OTR Leasing, based near Kansas City, MO, a leading technology-enabled, specialty finance company that leases Class 8 trucks

Trucking

Capital

Technology

9

THE SECURED LENDER JAN/FEB 2022

Haversine Funding

Non-bank

$13 Million

Equipment lender specializing in truck and trailer loans across the U.S

Equipment lending

Senior secured, lender finance facility

Haversine Funding

Non-bank

$3 Million

Funding for three assisted living centers located in North Carolina and Florida

Real estate: Assisted living

$3 million out of $4.2 million of a real estate participation

DEPARTMENT INDUSTRY DEALS

10

THE SECURED LENDER JAN/FEB 2022

Lender/Participant

Lender Type

Amount

Borrower

Industry

Structure

Haversine Funding

Non-bank

$1.8 Million

Asset-based lender

Lender finance

$1.8 million of a $3 million inventory participation in this agricultural equipment manufacturing loan

Haversine Funding

Non-bank

$1.5 million

Staffing company, Georgia

Staffing

$1.5 million of a $3 million factoring participation

Hedaya Capital

Non-bank

N/A

Italian kosher food company

Food

Advance factoring facility

Hercules Capital, Inc.

Non-bank

$235 Million

Corium, Inc., a commercial-stage biopharmaceutical company leading the development and commercialization of novel central nervous system (CNS) therapies

Biopharmaceutical

Term loan agreement

Horizon Technology Finance

Non-bank

$25 Million

Stealth BioTherapeutics Corp., a clinical-stage biotechnology company focused on the discovery, development, and commercialization of novel therapies for diseases

Biotechnology

Long-term debt facility

Huntington Business Credit

Non-bank

$10 Million

Mid America Freight Logistics, LLC, a logistics firm servicing consumer packaged goods and retail customers including niche markets of perishable, food grade and pharmaceuticals, St. Louis, MO

Logistics

Credit facility

HSBC and SEB [Coordinators] and Swedbank [Facility Agent]

Bank

$2 Billion

Ericsson, which enables communications service providers to capture the full value of connectivity

Communications

Sustainabilitylinked revolving credit facility

The Interface Financial Group

Non-bank

$21 Million

Supplier of retail and automotive buyers

Automotive

Digital supply chain finance

J D Factors

Non-bank

$200,000

Transportation company, New Jersey

Transportation

Factoring facility

J D Factors

Non-bank

$100,000

Transportation company, Georgia

Transportation

Factoring facility

J D Factors

Non-bank

$100,000

Transportation company, South Carolina

Transportation

Factoring facility

J D Factors

Non-bank

$300,000

Transportation company, California

Transportation

Factoring facility

J D Factors

Non-bank

$500,000

Transportation company, Quebec

Transportation

Factoring facility

J D Factors

Non-bank

$250,000

Transportation company, Nova Scotia

Transportation

Factoring facility

J D Factors

Non-bank

$150,000

Wrecking services company, Tennessee

Wrecking services

Factoring facility

J D Factors

Non-bank

$200,000

Transportation company, California

Transportation

Factoring facility

J D Factors

Non-bank

$75,000

Transportation company, Ontario

Transportation

Factoring facility

J D Factors

Non-bank

$400,000

Transportation company, Illinois

Transportation

Factoring facility

J D Factors

Non-bank

$250,000

Transportation company, Ontario

Transportation

Factoring facility

J D Factors

Non-bank

$200,000

Transportation company, Illinois

Transportation

Factoring facility

J D Factors

Non-bank

$150,000

Transportation company, Kentucky

Transportation

Factoring facility

J D Factors

Non-bank

$300,000

Transportation company, Ohio

Transportation

Factoring facility

J D Factors

Non-bank

$100,000

Transportation company, British Columbia

Transportation

Factoring facility

Lender/Participant

Lender Type

Amount

Borrower

Industry

Structure

JPMorgan Chase Bank, N.A. [Administrative Agent, Joint Bookrunner and Joint Lead Arranger], Bank of America, N.A. and Fifth Third Bank, National Association [Joint Bookrunners and Joint Lead Arrangers], Regions Bank and BMO Harris Bank, N.A. [Lenders].

This new credit facility replaces the Company’s existing credit facility.

Bank

$250 Million

Huttig Building Products, Inc., a leading domestic distributor of millwork, building materials and wood products

Buildings

Senior credit facility

KeyBanc Capital Markets, Inc. and KeyBank National Association [Joint Lead Arranger and Administrative Agent], Wells Fargo Securities, LLC, Citibank, N.A. and BMO Capital Markets [Joint Lead Arrangers and Co-syndication Agents]

Bank

$700 Million

SmartStop, a self-managed REIT with a fully integrated operations team of approximately 400 self storage professionals focused on growing the SmartStop® Self Storage brand

REIT

Credit facility consisting of a $450 million revolver and a $250 million term loan

Lighthouse Financial Corp.

Non-bank

$5 Million

Wholesale distributor of flooring and related materials serving Alabama, Eastern Tennessee, Florida, Georgia, North Carolina, South Carolina, and parts of Mississippi and Virginia

Flooring

Credit facility

Marco

Non-bank

$11.5 Million

MV Communications Group (MV), Doral, FL, an international electronics and accessories distributor

Electronics/ Accessories

ABL/PO financing

MidCap Business Credit

Non-bank

$3.5 Million

Momenta, Inc., an importer and distributor of arts and crafts-related consumer products, Portsmouth, NH

Importer: arts and crafts

Asset-based revolving line of credit

Monroe Capital LLC

Non-bank

N/A

To support the acquisition of Off Duty Services, a managed services provider of off-duty officers to its Fortune 500 clients in Katy, TX by Protos Security

Security

Credit facility increase

Monroe Capital LLC

Non-bank

N/A

To support the merger of Recycled Plastics Industries, LLC, a manufacturer of high-quality synthetic lumber used in outdoor applications, and Highwood USA, LLC, a manufacturer of premium, branded synthetic wood products by private equity sponsors, Kaho Partners and Nassau Point Investors. The company will operate under the name Premier Outdoor Living.

Lumber

Senior credit facility

To support the recapitalization of Health Network One, Ft. Lauderdale, FL, by private equity sponsor, H.I.G. Capital, LLC

Healthcare

Monroe Capital LLC

Non-bank

N/A

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Senior credit facility

DEPARTMENT INDUSTRY DEALS

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THE SECURED LENDER JAN/FEB 2022

Lender/Participant

Lender Type

Amount

Borrower

Industry

Structure

Monroe Capital LLC

Non-bank

N/A

To support the acquisition of decile.ten communications (“d10”) by The CM Group, LLC, an integrated healthcare agency of innovative and imaginative subject-matter experts dedicated to providing scientific and commercialization strategies, Hingham, MA

Healthcare

Senior credit facility

Morgan Stanley [Lead Arranger and Bookrunner] Barclays Bank, RBC Capital Markets, Bank of America, and JP Morgan [Joint Lead Arrangers and Joint Bookrunners]

Bank

$450 Million

Virtus Investment Partners, Inc., which operates a multi-boutique asset management business

Finance

Refinancing of Virtus' existing credit agreement with a new $275 million senior secured term loan and $175 million revolving credit facility.

M&T Bank

Bank

$35 Million

inTEST Corporation, a global supplier of innovative test and process solutions for use in manufacturing and testing across a wide range of markets, including automotive, defense/ aerospace, industrial, medical, semiconductor and telecommunications

Testing services

Five-year credit agreement, which includes a $25 million nonrevolving delayed draw term loan and a $10 million revolving credit facility

National Bank of Canada

Bank

$6 Million

Wishpond Technologies Ltd., a provider of marketing focused online business solutions, Vancouver, British Columbia

Digital marketing solutions

Credit facility

Ocean Bank

Bank

$2.5 Million

Leading growing toy manufacturer, Southeastern U.S.

Manufacturing: Toys

Factoring and purchase order (PO) financing facility

ORIX Corporation USA's Growth Capital Group

Non-bank

$12 Million

VFP Pharmacy Group, a portfolio company of BelHealth Investment Partners, LLC, a healthcare private equity firm, Fort Lauderdale, FL

Pharmaceutical

Financing

Oxford Finance

Non-bank

N/A

Endodontic Practice Partners, a River Cities Capital portfolio company

Healthcare

Senior credit facility and revolving line of credit

Pathlight Capital LP

Non-bank

$100 Million

S.P. Richards Company, a leading national business products wholesaler that distributes furniture, technology, facility breakroom, and other office products

Business products wholesaler

Last-out transaction as part of a Wells Fargo-led $275 million senior secured revolving credit facility

Republic Business Credit

Non-bank

$5.5 Million

Food service company that provides breakfast, lunch, snacks, dinner and drinks to school districts across the Gulf region, and continues to add on additional school districts and support thousands of students

Food

Consisting of a $5 million ledgered line of credit facility with a $500,000 purchase order call facility

Calling all cross-border finance experts… and enthusiasts SFNet is excited to announce its Cross-Border Finance Essay Contest, sponsored by Goldberg Kohn, with the goal of expanding understanding of, and interest in, cross-border finance within the secured finance community. The contest is open only to employees of SFNet member firms.

Members of the SFNet International Finance & Development Committee will choose three winners—1st, 2nd and 3rd place.

Winning essays will be published in The Secured Lender magazine and all three essays will be the subject of a panel discussion at SFNet’s Annual Convention, featuring the authors as well as others. Winners will also receive engraved plaques with their names.

Essays must be submitted

by March 8, 2022. Send your submission in a PDF format, including your name, title, company and email address to: essay@sfnet.com.

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COVER STORY

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THE SECURED LENDER JAN/FEB 2022

Wells Fargo Commercial Capital Originations Team, Headed By

DOROTHY KILLEEN

By Michele Ocejo Early this year, Wells Fargo formed a Commercial Capital Originations team led by Dorothy Killeen. This group aligns ABL and equipment finance products together and collaborates with other divisions across the company, creating a one-stop shop for many of the bank’s customers.

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THE SECURED LENDER JAN/FEB 2022

COVER STORY Here, Killeen and her team discuss the new centralized team, the current state of ABL and what they are focused on in 2022.

Interview participants include: Dorothy M. Killeen is a managing director and head of origination for Wells Fargo Commercial Capital. Since May 2020, she has been rresponsible for building and leading a new origination organization for Commercial Capital’s expansive secured lending businesses. Credit products covered by this team include asset-based lending, equipment finance, inventory finance/floorplanning, vendor finance, technology channel finance, and supply chain finance.

Prior to this role, Killeen served as the transformation leader for Commercial Capital, leading multiple business realignment and market strategy projects driving towards a simplified business model, a better client experience, and material cost savings.

Killeen has been with Wells Fargo and predecessor firms since 1999. She served for ten years as head of syndicate and sales for Wells Fargo Capital Finance’s Loan Syndications group. Prior to joining Wells Fargo Capital Finance in 2009, Killeen spent ten years in Leveraged Finance with Wachovia Securities, where she served in origination, underwriting, syndicate, and sales roles. She holds a B.A. cum laude in communications from Tulane University and an M.B.A. from the A.B. Freeman School of Business at Tulane University with a concentration in finance.

Lynn Whitmore is managing director and corporate originations leader for Wells Fargo Commercial Capital. In her role, Whitmore leads a team that focuses on the origination of asset-based lending and equipment finance solutions for corporate clients. Whitmore, a 20+ year industry veteran, has held various leadership positions within Wells Fargo, and most recently led the origination and underwriting for Wells Fargo Capital Finance’s market-leading Retail Finance business.

Scott Ryan is managing director and financial sponsor coverage leader for Wells Fargo Commercial Capital. Ryan leads a national team that focuses on serving Financial Sponsors, Intermediaries and large Referral Sources for origination of asset-based lending and technology finance solutions. For the last 25 years, Ryan has held various leadership positions in originations for Wells Fargo, helping drive revenue growth and cultivating new relationships.

Most recently, he led the originations for Wells Fargo Capital Finance’s Northeast region.

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Cyndi Giles is an executive vice president and middle market origination leader for Wells Fargo Commercial Capital. She leads regional and national teams focused on delivering asset-based lending, equipment finance, factoring, supply chain, and distribution finance to middle market banking customers. Throughout her career, Giles has held leadership positions in middle market banking, real estate, and small business lending. Within Wells Fargo, Giles is active in Team Member Networks and was previously a leader in the Dallas Women’s Team Member Network. She has served as co-chair of the Women in Leadership Mentorship Committee and was a member of the National Executive Advisory Board for regional vice presidents in middle market banking.

Wells Fargo recently brought together sales teams from across several secured lending groups. How do you see customers benefiting from this new, centralized team?

KILLEEN: Wells Fargo has always been a market leader in asset-based lending, equipment finance, supply chain finance, and factoring. We’ve delivered secured lending products very effectively to a broad base of customer segments and industries, but, clients want products integrated together across their capital structures and life cycles.

To help ensure we are delivering the best ideas and financial solutions to our clients, we need to be more focused and better connected across products and throughout Wells Fargo. Providing integrated access to multiple product solutions through a tightly coordinated and effective origination team is our goal, and it’s been exciting to see how much more we can do together for our clients.

RYAN: Our industry can be unnecessarily complex, with lenders maintaining operating models that became inefficient over time.

As part of our evolution, we have simplified the number of touch points for each relationship and streamlined our process. Our simple goal was to create the best client experience by leveraging each banker’s expertise and aligning client segments to the right banker. This makes us faster and ensures we structure the best deal team for each client’s unique situation.

LYNN WHITMORE Wells Fargo Commercial Capital

SCOTT RYAN Wells Fargo Commercial Capital

CYNDI GILES Wells Fargo Commercial Capital

GILES: Both Dorothy and Scott said it very well. I would add that this simplified delivery model will make it easier for all of Wells Fargo to deliver for the client. For example, better integration with Wells Fargo’s Middle Market Banking group can help deliver asset-based lending and leasing solutions more effectively for clients, as their needs evolve over their company’s lifecycle.

You’ve organized the origination team into three key areas: Middle Market, Corporate, and financial sponsor coverage.

What do each of these groups focus on, and how will they work together?

WHITMORE: One of the areas that all of us have increased our focus on is anticipating what clients need in the future. I am committed to this as the Corporate Origination leader. We have a broad platform of solutions to bring to a client and we can be agnostic to product type and help them find the best solution.

We do this by really listening to understand their needs. Internal coordination and communication are also key to delivering comprehensive solutions for our clients’ financial needs, no matter how complex the deal structure may be. It is not enough to have a diverse product set - we must bring these products together to maximize availability and deliver the optimal cost of capital. We can do this through integrating asset-based lending along with other products, such as equipment finance, supply chain, and floor planning, into the capital structure. When coupled with our investment banking group’s advisory and capital raising capabilities, it’s clear that Wells Fargo can deliver more for clients by coalescing these offerings.

GILES: As middle market origination leader, one of my priorities is improving our alignment with all Wells Fargo groups that serve middle-market companies. Being in the local market is important.

We’ve organized our team into three geographic regions, which has increased the leadership focus and ability to leverage product and market expertise to benefit our clients. In this position, I’m not only responsible for driving growth for ABL and equipment finance, but also serve as the distribution point for each of the Wells Fargo Commercial Capital specialized lending platforms – factoring, supply chain, tech, inventory finance products, and many more.

RYAN: One of our goals was to create a national team focused primarily on working with new clients through our strong relationships with private equity groups and third-party referral sources. As head of this team, it was important to me that we were able to integrate our coverage across Wells Fargo, continuing to build upon and broaden our key institutional relationships. We have a dedicated team with the skillset to identify and manage the ABL element for these relationships, but which can also deliver the full complement of Commercial Capital products that Cyndi mentioned. Each member of our team has strong technical expertise with the ability to deliver across client needs ─ whether it’s simple advice and guidance, or a complex

financing solution. Our relationships with financial sponsors are an important growth engine, and establishing a team solely focused on these key clients will lead to better execution, thought leadership, stronger relationships, and asset growth.

KILLEEN: By reorganizing this way, we have a flatter sales organization that puts senior leaders closer to clients. We’ve also eliminated unnecessary process and internal roadblocks, and we’re making better use of data and analytics. Already, our clients have noticed a difference.

You’ve got leadership and expertise across all customer segments, which I imagine gives you a great view across the industry. What would you say about the current state of asset-based lending?

RYAN: ABL’s resiliency and covenant flexibility are differentiators.

In addition, the surplus of capital ignited an already aggressive ABL market as both national and regional banks and finance companies continue to be hungry for assets and seek to grow in competitive spaces. Pricing snapped back in 2021 as companies stabilized on improved revenue visibility and consumer confidence, which has resulted in a borrower-friendly environment and lenders trying to service existing clients, and also expand and build new relationships.

WHITMORE: I think the last two years have demonstrated the resiliency, not only of our clients, but of the asset-based lending product. It helped provide maximum liquidity and flexibility at a time when our clients needed it most and allowed our customers to focus on their businesses without worrying about working capital constraints. As our clients refocus on growth opportunities and strengthening their businesses, ABL continues to provide them the same flexibility. Many of our clients are focused on new areas of opportunity in the direct-to-consumer sectors, and an ABL line of credit can provide the foundation of their capital structure at the lowest cost of capital. In other sectors, our ABL lines of credit remain the preferred working capital solution that clients complement with vendor-centric product, such as key account programs and floorplan financing. Our products work together, providing a range of working capital solutions across industries where we have deep domain expertise.

KILLEEN: I agree with Lynn and Scott, but would say “current state” is a relative concept in the ABL market, which is not especially dynamic or volatile as compared to other lending or capital markets. It has proven, over the last 20 years, to be fairly steady from a pricing, flexibility, and accessibility perspective. Those traits are the core strength of the ABL product and contribute to why we expect ABL, as well as other working capital products across our Commercial Capital business, to be a great place to develop more innovative financing solutions for our customers.

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THE SECURED LENDER JAN/FEB 2022

COVER STORY

What is Wells Fargo Commercial Capital’s growth appetite right now?

What’s one word you would use to describe your focus going into 2022?

KILLEEN: We’re in growth mode, full stop. We have the foundation for growth in place and we’re making progress across the organization. For example, in our Lender Finance business, we hit record outstandings this fall and that book continues to grow, thanks to strong credit support and a clear customer profile. We were the first bank to provide loans to software firms 20 years ago. Today, our Technology Finance practice is another area where we’re primed for growth as we continue to enhance our product offering with the support of key risk partners. We’re putting a greater focus on opportunities for our ABL team to partner with Wells Fargo Strategic Capital to provide unique junior capital, primarily for private companies in support of growth, refinancings, and recapitalizations. Our ABL practice is also well integrated with our Corporate & Investment Banking team, where we’ve reinvigorated our engagement with private equity and institutional investors and broadened our appetite across the credit risk spectrum. This evolution is evident in our 2021 results and positions us well going into 2022.

KILLEEN: Execution. This is a truism across Wells Fargo, but for Commercial Capital, in particular, we need to be more ambitious about execution as our top priority every single day. Improving upon our solution set and delivery model is irrelevant if we can’t provide the speed, certainty, and operational excellence that our clients expect.

Diversity, Equity and Inclusion (DE&I) is an integral part of the Wells Fargo culture. Can you shed light on any goals regarding DE&I within your area?

WHITMORE: Win. Anyone who knows me won’t be surprised by this. But for 2022, I’m thinking about winning in the context of better internal planning and partnerships, and leadership engagement with clients.

RYAN: Wells Fargo has made good strides in implementing DE&I programs and goals, but there is so much more to do. Our team is committed to becoming better allies, and we are having authentic conversations about inclusivity, which allows us to learn from each other. Our customers and industry peers are asking the same questions as we are, and this long-overdue focus is an important step in changing the landscape of our industry.

WHITMORE: The conversation regarding DE&I goals is important, but for us to make meaningful changes, our actions must follow our words. Our clients have high expectations of our DE&I efforts and the topic regularly comes up in our deal discussions. I was fortunate to have served as co-chair of Commercial Capital’s DE&I Council, and one of my key learning moments was about how much can be accomplished if we focus on the simple building blocks rather than the finish line. Asking ourselves, “Have we given all individuals the tools to succeed?” and “Have we identified the road blocks to developing diverse individuals for leadership roles?”

When we ask ourselves the hard questions about why more progress hasn’t been made in the past, it can lead to the discovery of a better path forward.

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THE SECURED LENDER JAN/FEB 2022

GILES: We are focused on opportunities to hire diverse talent, as well as working with our Commercial Banking Diverse Segments group to better support minority-owned businesses. In addition to our team strategies, our origination leaders take advantage of Wells Fargo programs to increase our opportunity to create diverse hiring pools. One example is the Glide - Relaunch program, which helps talented professionals looking to return to the workforce after taking a voluntary career break.

RYAN: Evolution. I’m focused on evolving our relationships with financial sponsors, both internally and externally. Better internal coordination, leveraging our capital and relationships across the firm, and providing more holistic support to our clients will help move our platform forward.

GILES: Growth. As the largest middle-market lender in the U.S., we already have an incredible customer base, but we need to grow with those customers and be very targeted in prospecting for customers who can benefit from the Wells Fargo value proposition.

KILLEEN: Can I share one more word? Talent. Wells Fargo has consistently developed some of the best talent in the ABL industry. We’re recommitting this year not only to internal talent development, but to building a stronger bench of internal and external high-performing talent to help grow our business.

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

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DATA & INSIGHTS

2021 U.S. ABL Loan Volume Tops US$125bn to Set New Record; Transactor Burnout Casts Shadow

BY MARIA C. DIKEOS Refinitiv’s Maria Dikeos discusses the highs and lows of the capital markets in 2021.

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THE SECURED LENDER JAN/FEB 2022

U.S.

Fig. 1: US: ABL Volume & Deal Count Record ABL issuance completed in 2021

asset-based lenders had an extraordinarily busy year in 2021, pushing a record US$125bn through retail syndication by mid-December to eclipse the prior market high of US$101bn set in 2011 (Fig. 1).

“The market is about as MARIA C. DIKEOS hot as it has been since the Director of Analytics, financial crisis,” said one Refinitiv LPC arranger. “We are pitching aggressively and we are seeing others come in and throw their balance sheets around to pitch aggressively.”

Fig. 2: US: ABL Volume, New Money & Refinancings New loan assets represent 27% of total ABL volume; Set record for dollars raised

“We looked at 23.6% more deals in 2021 than in 2020,” said another lender. Year over year, issuance was up over 72.5% amid what many refer to as a “COVID bump.” Almost US$30bn of assetbased lending (ABL) volume was completed in 1Q21, an 84.5% jump compared to the same time last year and the strongest quarterly results in almost three years. Borrowers and lenders built on the strong momentum each of the next two quarters to shatter previous quarterly records in 3Q21 via roughly US$47bn of issuance.

“From an ABL perspective,” said one arranger, “we knew at this time last year that we would see a market that was basically fully recovered, operating at pre-pandemic levels. By October and November 2020, we had already walked back floors and the richer pricing.”

All About the Refi Most of the momentum in the ABL market can be traced to refinancings. Just over 11 months into 2021, more than US$91bn, or 73% of asset-based loan volume, represented some sort of refinancing activity, the highest pro rata share of the market in four years (Fig. 2).

Fig. 3: US: ABL Estimated Maturing Volume Maturities pushed out to 2026

It all came down to timing and appropriate – often bundled – deal structures. Several issuers sought to reprice or restructure COVID liquidity facilities that were put in place, amended for financial flexibility or drawn in 2020, making them more permanent or regular way (Abercrombie & Fitch, Dillard’s Inc.).

Other vintage borrowers who were not able to comfortably tap the capital markets during the height of COVID uncertainty returned in 2021 for extension trades and repricings often with terms reminiscent of pre-COVID structures.

Levi Strauss tapped the market in January with an US$850m five-year ABL credit that refinanced its 2017 facility, pushing maturity out five years to 2026 and retaining existing spread levels of 150bp over LIBOR.

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THE SECURED LENDER JAN/FEB 2022

Source: Refinitiv LPC

DATA & INSIGHTS A third grouping included issuers such as American Tire Distributors (ATD) and PetSmart Inc., each of which came to market with new institutional facilities that were bundled alongside a refinancing and extension of existing ABL and term loan credits. In the case of PetSmart, the 2021 financing came only a few months after the company pulled a US$4.65bn refinancing package in November of 2020.

Fig. 4: US: ABL Market Share by Purpose Busy year includes M&A re-surgence and return of permanent working capital credits

In turn, the maturity for asset-based loans was pushed out to 2026 amid the rush of five-year credits (Fig. 3).

M&A Makes Appearance A flurry of M&A activity rounded out the calendar. Over US$36bn, or nearly 30% of total asset-based loan issuance through mid-December, backed or came in conjunction with acquisition events. The results represented the largest pro rata share of M&A activity within total ABL issuance since 2007 (Fig. 4).

In March, Goodyear Tire & Rubber amended and upsized its US$2bn ABL revolver to US$2.75bn, extending the tenor to five years, and trimming spreads by 50bp to 125bp as part of an overall financing package associated with the company’s acquisition of Cooper Tire & Rubber. The consummation of the acquisition was a prerequisite for the ABL component to take effect.

Fig. 5: US:YTD 2021 US ABL Issuance by Industry 2021 US ABL Issuance by Industry

When all was said and done, on a proportional basis, new loan assets represented 27% of total ABL issuance through early December, on par with historical levels but down from the nearly 41% pro rata share generated in 2020. More noteworthy, at US$34bn, new money dollars raised during the year marked a historic high.

Private equity sponsors were integral to the increase in new dealflow. Over US$17.2bn, or 51% of total 2021 new money ABL assets, backed sponsored activity as private equity shops flush with cash engaged in ferocious bidding activity. A combined US$4.5bn in new sponsored loan assets came to market in March and April followed by another surge totaling US$5.5bn in July. M&A transactions in the form of either buyouts or tuck-in acquisitions totaled US$10.2bn.

Eighty-two percent, or US$8.4bn, of M&A volume represented buyout financings.

Fig. 6: US: ABL Deal Size Dispersion Deals are larger; Retail syndications remain limited

Industry Specific Despite the ongoing vestiges of market uncertainty and some lingering concerns around credit quality, restructurings did not re-emerge as a meaningful contributor to the pipeline. This was especially noteworthy among industries in which operations were notably constrained during the peak of pandemic fears.

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THE SECURED LENDER JAN/FEB 2022

Borrowers in the wholesale, retail and manufacturing industries represented a combined 57% of total ABL loan volume during the year (Fig. 5). But a single manufacturing name (Libbey Glass) tapped lenders for a US$100m ABL revolver as part of an exit financing. An additional US$870m of exit financing was spread across other sectors during the year, of which only US$332m represented net new assets.

“EBITDA has increased and leverage has gone down,” said one arranger. Credit quality fundamentally remained strong, bolstering market optimism, although lenders noted that despite the pace of deal flow, ABL deal usage was down. This, of course, raises questions

Source: Refinitiv LPC

Fig. 7: US: ABL Spread Dispersion by No. of Deals US$75m+ Spreads edge down to pre-covid levels

The majority of these were clubbed among at least three and as many as 11 bookrunners, up from an average of two only a few years ago.

“The size of deals that got done [were such] that everyone is a JLA,” said one arranger. “There has been a full integration of ABL into a suite of products which are offered based on additional wallet.”

Competition Explodes Unsurprisingly, this trend only added to competitive pressures. At the end of 1H21, over 60% of total ABL issuance that come to market during the quarter was priced at or below 150bp over Libor (Fig. 8), up from less than 28% at the end of last year.

“For the most part, we are back to pre-COVID lending terms,” said one lender. “We had a lot of repeat deals from existing clients. Lots of upsizings via existing lenders. For club deals, where the client does a good job of spreading cross sell, [competitive deal terms] may work.

But for large, syndicated deals, it is hard to do aggressive deals and make money. People will do it if they need new clients.”

Fig. 8: US: ABL Pro Rata & BB Institutional Drawn Spreads Uncertain impact of direct lender deal structures on ABL pipeline

Adding to competitive tension – albeit to a limited degree for now – is the growing presence of direct lender financings. “We are generally not competing head-to-head,” said one arranger. “Where I see impact is when I am competing for an LBO and we compare an ABL plus TLB structure against a TLB with no flex or a first-lien, second-lien structure.

The certainty of execution, the lower fees, have become increasingly competitive.” (Fig. 9) “PE firms are sending out grids for all of their financings to private credit providers as well as to ABL and bank loan market,” said one lender “If you see pricing start to gap on institutional loans or bonds, then the weighted average cost to debt may narrow against the unitranche,” said another lender, providing borrowers have more options.

Onward to 2022

around the evolving nature of the asset class, heightened competition and, more critically, ROE. “How do we codify the COVID bump?” asked one arranger. “As the COVID bump unwinds, which sectors will be impacted, and what happens to the guardrails we have in place and the appetite to finance these sectors?”

These concerns become weightier amid increasing competition.

“No one is backing away from business,” said one arranger. “We were off to a rip-roaring start,” said another lender. “By the end of June, it didn’t feel as good. It felt kind of crappy.” Underwrites thinned and competition intensified.

“It has been one of the hardest years for legitimate lead left opportunities,” said a third source.

At the same time, larger deals that did come to the market were often clubbed up with limited retail sell down. Over 25% of all ABL deal flow in 2021 represented financings of US$500m or greater, the highest pro rata share on record (Fig 7).

Looking forward, few transactors expect the frenzied pace of 2021 deals to carry over into 2022. “I would be surprised if we make it over US$100bn,” said one arranger.

A bit of a breather may be inevitable at year end. 2021 was a great year “deal wise”, but not “people wise”, lenders said, noting that the market plateaued amid COVID strains, but talent turnover increased dramatically.

Sources concede that the loan market cannot go back to operating as it did prior to COVID-19. Flexible work environments seem to be the way forward. What that means, however, remains unclear.

“It comes down to competition for talent,” said one lender. “We need talent to close stuff, but we burned out talent in 2021.”

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.

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FEATURE STORY

Art of the Deal:

How Beacon Building Products’ Commitment to Diversity and Inclusion Shaped Its Financing Arrangement

BY ANN ANDERSON The art of the deal is about building, balancing, and navigating the relationships with borrowers and lenders alike to provide the best possible outcome for the borrower. Here, we detail how Wells Fargo Capital Finance, Cathay Bank and Beacon Building Products worked together to fulfill Beacon’s commitment to socially responsible investing.

A

sset-based lending is about relationships.

Secured lenders work hard to form close working relationships with the borrowers they serve. They know the ins and outs of their borrowers’ businesses and tailor financing in response. The borrower might be dealing with seasonal working-capital borrowing needs or turnaround financing. They could be making a move to acquire a competitor, requiring additional financing to seal the transaction. Secured lenders are wellequipped and experienced in dealing with the cyclical nature or strategic needs of almost any borrower in any industry.

Asset-based lending is also dependent on deep relationships between lenders, too. Lenders establish those strong relationships with other lenders to provide the capital required to service larger companies and to arrange more complex financing arrangements when needed. It often takes lenders working closely to handle a large credit facility. Today, the art of the deal is about building, balancing, and navigating the relationships with borrowers and lenders alike to provide the best possible outcome for the borrower.

For example, Beacon Building Products, the largest publicly traded distributor of roofing materials and complementary building products in the United States and Canada, had specific needs. For a large company like Beacon, the right financing was critical to its business strategy of continuing investment in new technology and growing its ever-expanding network of locations throughout the United States and Canada. A major pickup in the housing market also meant the company was ramping up services for customers and in need of financing to help meet that demand. But Beacon also wanted its commitment to socially responsible investing, in this case diversity and inclusion, to be put into action by having a minority depository institution (MDI) in the group of secured lenders required to handle financing for the Fortune 500 company. The inclusion of an MDI in the deal helped to advance Beacon’s commitment to aid in the creation of generational wealth and entrepreneurial businesses, notes Linda Lang, senior director, capital markets and risk for Beacon.

Wells Fargo Bank served as administrative agent and collateral agent on the company’s ABL credit agreement. In May, Beacon entered into a second amended and restated ABL credit facility (an amend and extend) of $1.30 billion. Typically, an amend and extend is mostly made up of the existing bank group.

But in this case, Wells Fargo Bank reached out to add Cathay Bank, an MDI, to sign on to the amend and extend. Founded in 1962, Cathay Bank began 60 years ago with a mission to provide banking to the Chinese American community at a time when many were being turned away from banks.

Lang notes that the push for broadening the diversity of Beacon’s bank group with Cathay Bank is in keeping with the company’s commitment to have MDIs compete for business where they might not have been given the opportunity.

Beacon succeeds when our communities succeed,” she

adds. “Beacon’s values drive us to help all our stakeholders reach their full potential, even in communities where we have to work harder to generate opportunity.”

According to Andrea Bernard, managing director with Wells Fargo Capital Finance, Los Angeles-based Cathay Bank was the right choice.

“We were excited when Beacon shared that they JAMES CAMPBELL wanted to expand their Cathay Bank bank group with an MDI, and we believed Cathay Bank would be a great fit, as they are an experienced asset-based lender,” she added. “Including Cathay in the bank group was a great way to meet Beacon’s objectives.”

James Campbell, first vice president and portfolio manager at Cathay Bank, agrees. He notes that, while the bank’s deep ties to the Chinese American community were a factor ANDREA BERNARD in the deal, the bank’s Wells Fargo Capital Finance expertise in secured lending was also paramount to Wells Fargo reaching out to the bank. The recent transaction gave Cathay Bank an introduction to Beacon, and some of its ESG initiatives.

It also gave them an opportunity to participate with Wells Fargo in terms of a large transaction.

Campbell notes, “We 25 worked with Wells on THE another transaction, but SECURED LENDER nothing on this scale.”

JAN/FEB 2022 He describes Beacon’s LINDA LANG commitment to broadening Beacon Building Products its bank group as a genuine effort to make sure their bank group was broad and inclusive.

FEATURE STORY

The recent debt refinancing, closed in May, was comprised of a $1.3 billion Amend & Extend ABL Facility with Wells Fargo Bank as left lead, as well as a $1 billion Amend & Extend TLB, the extinguishment of the company’s $1.3 billion 6.375% senior secured notes due 2026 and the issuance of new $350mm 4.125% unsecured senior notes due 2029. “In short, we were able to improve our balance sheet and financial ratios through the reduction of our gross debt balance, reduction of our weighted average cost of debt, extension of our outstanding debt maturities with the earliest instrument maturing in 2026 and achieving our internal objective for improved terms and conditions and bank diversification,” Lang adds.

And while adding Cathay Bank to Beacon’s banking group certainly helped to fulfill the company’s ESG mission, Lang notes that the goal is to create a mutually beneficial relationship that increases the likelihood of a long-lasting and sustainable partnership with the bank. Campbell adds, “We certainly want to broaden our efforts and give the full suite of products and bring in deposits.” Typically, in these transactions, the bank group may not provide the borrower with ancillary services, but Cathay Bank wanted to make sure they were able to participate in that.

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Lang notes, “This coincided with an ongoing internal project to reduce the overall number of our bank accounts, improve our cash visibility and velocity, and review branch proximity to our existing banking affiliates’ brick and mortar locations. We believe we have found a solution that will provide an operational framework using a third-party provider and Cathay’s virtual banking capabilities to grow our relationship with Cathay.” The solution, she says, will provide Cathay sustainable deposits that will expand their capabilities and further address underserved and underbanked communities.

Beacon’s commitment to ESG initiatives isn’t out of the ordinary. A 2021 NAVEZ Global survey found that, of 1,250 management and senior-level executives in the United States, United Kingdom, France, and Germany, 88 percent of publicly traded companies have ESG initiatives in place, followed by 79 percent of venture and private equity-backed companies and 67 percent of privately-owned companies. Bernard adds, “We are proud to have clients that share diversity, equity and inclusion as a key priority and business imperative. At Wells Fargo, we believe that MDIs play a role in the financial ecosystem by stimulating economic growth in the communities they serve.”

The recent debt refinancing, closed in May, was comprised of a $1.3 billion Amend & Extend ABL Facility with Wells Fargo Bank as left lead, as well as a $1 billion Amend & Extend TLB, the extinguishment of the company’s $1.3 billion 6.375% senior secured notes due 2026 and the issuance of new $350mm 4.125% unsecured senior notes due 2029.

Today, Cathay Bank is a subsidiary of Cathay General Bancorp and one of the largest MDIs in the country, with over 60 branches across the United States, a branch in Hong Kong, and three representative offices in Beijing, Shanghai, and Taipei. As of June 30, 2021, there were 144 FDIC-insured MDIs with headquarters across the United States, with combined total assets of nearly $316 billion and almost 1,400 branches. The FDIC defines MDIs as “federal insured depository institution for which (1) 51 percent or more of the voting stock is owned by minority individuals; or (2) a majority of the board of directors is minority and the community that the institution serves is predominantly minority.” Ownership must be by U.S. citizens or permanent legal U.S. residents to be counted in determining minority ownership.

Cathay Bank had an interest in obtaining cash deposits from some of Beacon’s 400+ U.S. and Canadian branch locations.

Lang sums it up, noting, “ESG is fundamentally linked to both opportunity and risk and driven by Beacon’s values and culture.” She adds that the company’s ESG goals are designed to improve Beacon’s overall operations, safety, societal impact, and governance through positive change throughout our business model. Ultimately, the addition of Cathay Bank to the company’s banking group allows them to follow through on their mission to improve the communities they serve and diversify their corporate banking partnerships. That’s banking that everyone can count on.

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

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TSL INTERVEW

Andrew Barone and Rob Miller of Rosenthal & Rosenthal Discuss New Pipeline Division

BY EILEEN WUBBE In early October, Rosenthal & Rosenthal announced the launch of PipelineTM, a new e-commerce growth capital resource tailor-made for savvy entrepreneurs and founders looking for an extra edge to keep their brands charging forward. Pipeline adds a range of new customized capital offerings to Rosenthal’s arsenal designed specifically for direct-to-consumer brands to fill the gaps where venture capital and equity cannot.

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THE SECURED LENDER JAN/FEB 2022

The Secured Lender’s senior editor caught up with Rosenthal’s Rob Miller, executive vice president and head of Asset-Based Lending, and Andrew Barone, senior vice president and Pipeline’s director of sales, who discussed Pipeline, how it addresses unique challenges of financing in the direct-to-consumer and e-commerce space and some of Rosenthal’s short- and long-term goals.

Rob and Andrew, can you provide our readers with some information on your career background?

ROB MILLER: The interesting part of my career with Rosenthal is that I worked here a little over 20 years ago as an account executive. I left Rosenthal in 2001 and went to GE Capital for 11 years, and then worked at Webster Bank for a few years after that. I returned to Rosenthal six years ago to head up the asset-based lending group. Prior to that, I worked for several Connecticut banks in different capacities, primarily in asset-based lending and then workouts. I grew up in Westchester County. I have an undergraduate degree from Ithaca College and an MBA in finance from Pace University.

risk profile, we offer purchase order financing, where we lend on the purchase order, or the inventory, and then the receivable gets taken out either by the existing line of credit with Rosenthal or another factor. We value those relationships that Paul Schuldiner, (newly promoted to chief lending officer from EVP, head of Purchase Order Financing) has established on the purchase order financing side, where he’s helping other asset-based lenders solve their problems. Now, with direct-to-consumer, we’re blending a portion of our asset-based lending experience with our expertise on lending on various types of inventory and the trade credit financing side, and this fills a niche.

Why did Rosenthal decide to launch Pipeline now?

ANDREW BARONE Rosenthal & Rosenthal

ANDREW BARONE: Rosenthal is only my second stop and hopefully my last stop ROB MILLER in my career. I started here Rosenthal & Rosenthal in 2016 primarily working in the factoring group on the portfolio side doing more account executive work, and my role transitioned into new business in mid-2017 to 2018. Up until now, I had been really focusing all of my sales efforts on the factoring side of our business, and now I’m working more closely with Rob and our ABL group to spearhead Pipeline, our new direct-to-consumer (DTC) financing division, which has come across a lot of business over the last two years. Prior to Rosenthal, I was at a bank working on the institutional equity sales desk.

How will Pipeline complement Rosenthal’s other offerings/services?

MILLER: Andrew’s background in factoring on both the account executive side and on the new business side, combined with my background in asset-based lending, really completes the cycle of where we lend and how we’ll approach our new product offering.

Factoring is at one end of the spectrum, where Rosenthal has tremendous expertise and experience (83 years) with over $10 billion in volume, and the largest privately-owned factor in the United States. At the other end of the spectrum, from the credit

BARONE: With the rise of new businesses in the consumer space over the last few years being primarily direct-to-consumer focused, we’ve come across many opportunities to finance brands at their earlier stages.

Many of those brands were in need of smaller-sized financing facilities that were smaller than our current portfolio parameters and what we would typically lend on. Fast forward a year or two and those same companies we had passed up on had experienced tremendous growth and now would be ideal clients for Rosenthal.

So, our thinking was, why pass up on those brands at the infancy stages? Let’s get involved with them on a smaller scale earlier and grow with them. We certainly have the capacity to scale with them, whereas most other FinTech lenders do not, essentially extending our runway with these brands.

MILLER: To dovetail on that point, smaller deals that perhaps don’t have a long track record are a little riskier, so our compensation structure will be adjusted accordingly. But we do have several exclusively direct-to-consumer clients in the asset-based portfolio already, so we’re fairly educated at this point. We’ve had tremendous success with those clients, and so with the combination of Andrew’s network, demand in the marketplace and the impact of COVID, we’re seeing a lot more opportunities in this space.

How does Pipeline address the unique challenges of financing in the direct to consumer and e-commerce space?

BARONE: Direct-to-consumer and e-commerce businesses are very capital- intensive businesses. By utilizing a working capital facility through Pipeline, emerging brands can take advantage of our debt to make their business more valuable without diluting their ownership.

Oftentimes direct-to-consumer brands will gain the attention of big box retailers, ultimately turning their business into an omnichannel operation. With Rosenthal’s expertise in factoring, asset-based lending and purchase order financing, we are well equipped to deal with the wholesale portion of their business as it scales with end-to-end financing solutions.

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TSL INTERVEW How do disruptions in the supply chain cycle affect e-commerce capital?

MILLER: The quick answer: the supply chain is wreaking havoc on not only e-commerce but also on a lot of our clients’ businesses. Everyone is suffering from this. The cost of containers has gone from $3,000 a container to $20,000 a container, a six-time increase in cost. Some are e-commerce products and lower-cost items where the freight is sometimes more than the actual cost of the product. That doesn’t necessarily fit the e-commerce profile because it’s usually more apparel or some type of consumer goods that has a higher gross margin.

The real issue is timing.

We have a direct-toconsumer catalog company that has already received enough pre-orders for products that haven’t even landed from overseas.

Whether they’re being manufactured in China, Vietnam, India or elsewhere, the product is taking longer so the whole supply chain is backing up weeks if not months. But the good news is the ultimate demand for the product is still there so they’re not cancelling the orders but rather sitting on the inventory into the first quarter of next year. Some of these products we and our clients feel have enough sell-through opportunity that holding the inventory, even if it comes in past Christmas, should be okay.

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What are some short and long-term goals with Pipeline?

BARONE: Pipeline’s short-term goals are simple. We want to connect with innovative and emerging companies to help them grow through our working capital.

Long term, aside from being known as the go-to source for financing direct-to-consumer businesses, we want to build an entire ecosystem to help our Pipeline clients. That includes everything from introductions to other entrepreneurs and service providers to hosting events and highlighting some of these great brands through our own content.

Pipeline’s short-term goals are simple.

We want to connect with innovative and emerging companies to help them grow through our working capital. Long term, aside from being known as the go-to source for financing direct-to-consumer businesses, we want to build an entire ecosystem to help our Pipeline clients.

MILLER: To add to what Andrew said, our short-term goal is to get high-growth clients in this space. We already work with several, but many are larger deals that are already in Rosenthal’s portfolio. It’s really about growing Pipeline with the ultimate goal of having those earlier stage clients graduate into our ABL group. My job is to manage risk in the asset-based lending portfolio. So, the more products we have that cross over to various industries helps us to diversify that risk.

It’s incumbent upon Rosenthal, its employees and clients to be smart about what new financing solutions are available, all with an eye towards diversifying risk and helping our clients achieve

What are some of the faster-growing companies or industries within the e-commerce space?

their goals for growth.

MILLER: What we have seen in the last 12 months specifically is that anything related to the home has just exploded. We have one client whose e-commerce business has doubled. These are generally higher margin products so as long as they’ve got access to the supply, that entire home segment will continue to mushroom. From a practical perspective, what I did, along with everybody else, is I upgraded my internet speed for working from home and my Zoom calls. I bought a new desk chair, and my kids bought me a standup desk because they want to try to keep me healthy. So, I’m a living, working example of all of these trends we’re witnessing.

Eileen Wubbe is senior editor of The Secured Lender.

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Focus 20/20, contact Nora Walls at nwalls@sfnet.com.

TSL INTERVEW

An Interview with

Andrea Petro,

Board Member of Ready Capital Corporation and Consultant to Waterfall Asset Management

BY CHARLIE PERER

In this installment of our series of executive interviews, Charlie Perer sits with Andrea Petro to talk about her new role as Board Member at Ready Capital, and to share her advice to ABL managers about consolidation, competition and the current state of the market.

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A

ndrea Petro is a consultant to Waterfall Asset Management, LLC and a member of the Board of Ready Capital Corporation, a publicly traded REIT on the NYSE, which is externally managed by Waterfall. Petro also serves on the Board of BlackRock TCP Capital Corporation, a publicly traded BDC on NASDAQ.

Those types of changes make it difficult to interpret where we are in the cycle or where we are headed.

We had been in a stagnant period from 2010 until 2017, but that’s changed significantly. I think we are living in an economic and political period that I would describe as chaotic. We really don’t know whether our political parties will be able to work together and help us return to a high-growth, enabling economy. We want to see stable growth, increasing labor force participation, and declining inflation, but a positive outcome depends on an exponentially larger number of inputs that drive the economy.

Do you see any parallels to 20 years ago when the nation’s largest banks decided to be the consolidators of the largest independent ABLs? ANDREA PETRO Ready Capital Corporation & Waterfall Asset Management

Petro began lending to specialty finance companies in 1992 and in 2000 established the Lender Finance Division of Wells Fargo Capital Finance which she led for 17 years. She joined Waterfall as a managing director in 2018 where she led the Specialty Commercial Finance Group.

She is a past President of the Secured Finance Network and a member of the Secured Finance Network Board of Directors and Secured Finance Foundation Board. Petro is also a member of the Master of Science Program Advisory Council at the McCombs School of Business at the University of Texas at Austin.

Petro graduated magna cum laude with a Bachelor of Arts degree from Kent State University and received a Master of Business Administration degree from the University of Texas at Austin.

Charlie Perer: What are you up to these days? Specifically, tell us about your role as a consultant to Waterfall Asset Management and Board Member at Ready Capital.

ANDREA PETRO: I’m a board member at Ready Capital Corporation and a consultant to Waterfall Asset Management, advising on the underwriting and portfolio management of asset-based loans. Ready Capital is one of the largest non-bank SBA lenders in 7(a) loans and the company originated over $2 billion in PPP loans during the pandemic.

The value-add to ABLs is enormous given most asset-based lenders are interested only in working capital loans for which assets turn quickly.

Ready Capital focuses on owner-occupied real estate & M&E and provides term loans for significantly lower cost than non-bank real estate loans. Lower monthly payments are spread over the amortization period of the loan. That provides borrowers of asset-based lenders with more liquidity and cash flow.

Where are we in this latest market cycle?

My view is that we don’t really have a market cycle any longer. A relatively predictable market cycle had existed post-World War II through the Great Recession. But since then, the U.S. has changed significantly, from an industrial-driven to a technology-driven economy, while the federal government has used significant liquidity to bail out the economy—twice.

I don’t see many parallels at all with the markets of 20 years ago.

Capital markets are much more efficient today. And non-banks have much greater access to those markets and to liquidity. The economy has changed dramatically as a result of technology.

Compliance and bank underwriting standards have become significantly more demanding than they were 20 years ago. In this environment, I don’t see the value of banks acquiring large-ticket independent ABLs. On the other hand, if the federal government does not have the ability to bail out lenders in the next downturn, then yes, there could be an increase in opportunistic acquisitions. But I think that’s a big “if”.

You have advised CEOs in commercial finance throughout the years. What are you counseling them on right now?

We are witnessing a sea change in terms of competition. Since ABL started in the 1970s, right through the pandemic, independent asset-based lenders and factors have relied on relationships to build their businesses.

But what’s changed recently is the way those relationships are launched and serviced. I believe that COVID-19 has diminished the personal relationship building and relationship maintenance. Now, these businesses rely on digital marketing. Winning transactions and building a portfolio rely more on the terms of a deal and the pricing. For independents who find themselves being pursued as an acquisition target, I suggest they consider their cost of funds going forward and the multiples being offered for their businesses.

Will consolidation be focused on any part of the market such as the small-ticket ABL groups?

Banks, which dominate the ABL industry, have access to significantly more information technology, marketing programs, and financial software, all of which results in lower operating costs. Currently we are witnessing a large number of bank mergers, but loan demand is tepid and net margins are the lowest in history. The most obvious growth strategy for community and regional banks in this environment is to scale up by acquiring small-ticket ABLs and factors.

Where does the large-ticket non-bank ABL world go from here?

Large pools of capital have been raised by many and these firms are becoming capital efficient.

There will certainly continue to be competition between ABLs and banks

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TSL INTERVEW on the small portion of the market that overlaps, in terms of credit risks; the highest-risk borrowers at a bank and the lowest-risk borrowers at an ABL typically overlap; that’s where the competition takes place. Yet, lending opportunities for ABLs will persist in markets that are not entirely embraced by banks, such as direct-to-consumer retail where there is no brick-and-mortar.

What can history teach us about how to navigate a very unique time and market for ABL with many groups still significantly down from their pre-COVID asset levels?

To any independent asset-based lender, I would suggest that now is the time to review your goals. Where are you in your forecasted business plan? What are your ultimate goals and how do you plan to reach those goals? This environment presents an opportunity to review the pros and cons of selling to a larger entity. Many aspects of this business will continue to be difficult with net lending margins at the lowest levels in history. Unless your ABL business can make up for the low margins with scale or lower costs, it will be very difficult to compete. And I think this period could last many years. My advice: take a hard look at your business. Do you want to continue? And if you do, what outcome might you realistically expect at the end?

What advice would you give to a team thinking about starting a new ABL group in this market?

My first response? Don’t do it.

To expand on that, I would say that this is not a time to start. It’s never been more competitive. Net interest margins for ABLs are extremely tight even as load demand is tepid. Whether or not the environment becomes more supportive for ABL startups depends largely on monetary and fiscal policies over the next several years.

How are you helping Ready Capital educate the ABL market about ways to meet the needs of a greater range of borrowers?

Asset-based lenders have been welcoming the Ready Capital team to discuss how our 7(a) lending capability is able to support the ABL business. Forward-thinking ABLs understand that to remain competitive in their market, they need to serve clients with a more differentiated offering. For many of our partners, that differentiator can be the addition of a term loan option. An additional benefit of partnering with Ready Capital is that there is no competition for cross-sell products such as depository assets since Ready Capital is not a bank.

What is your take on the lender finance community? Has it proliferated similar to the ABL world where there are now many banks and non-banks like Waterfall that play a role?

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The lender finance community has multiplied significantly over last 20 years. It’s also beginning to change. Similar to the general ABL world, relationships had at one time dominated the space because working capital lines were the lifeblood of independent asset-based lenders. Those lines are essentially their inventory and they have to trust whoever is providing their liquidity, especially when it was a very small world. At one time, there were only two or three banks competing for that business.

Now because it has become an accepted product, there has never been greater availability of credit. The product is equally dominated by the best terms and market pricing as important considerations as well as the trust-based relationships.

How is the ABL industry going to be reshaped over the next decade?

Two of the biggest trends right now have been driven by the application of technology in response to the pandemic. First, I expect that many businesses will continue to support a work-from-home or hybrid operation with diminished in-office requirements for employees. I think that is going to shape the ABL industry internally. Second, I expect there will continue to be significantly diminished levels of business travel and entertainment. Both of those are important to the bottom line. Reviewing the income statement for almost any financial institution reveals that the largest expense after staffing is occupancy. If a business can eliminate occupancy expenses through a work-from-home hybrid model, they have a competitive advantage. Similarly, travel and entertainment is typically the next largest expense category. Elimination of some of those costs by going virtual will have an impact.

It’s very likely the industry will be reshaped because the number of smaller, independent asset-based lenders will shrink. The industry will continue to gravitate towards larger portfolios, economies of scale, resulting in access to lower cost funding.

Lastly, tell us something you are worried about that the rest of the market has yet to figure out.

It’s not often discussed as a market risk, but I think cyber warfare presents a larger business risk than people realize. A widespread cyber-attack that shuts down everyday financial transactions—preventing Americans from purchasing groceries and gasoline—would shut down the U.S. economy leading to chaos and deep economic depression. I suspect cyber-attacks and ransomware events are increasing, although complete information is not made available to the general public.

Everyone is aware of this risk, even though it’s rarely cited among the top risks that could create a severe crisis for the market. But it’s not a “black swan” event because we are already aware of the threat. It’s probably a higher risk than most people realize.

Charlie Perer is the co-founder and head of originations of SG Credit Partners, Inc. (SGCP). In 2018, Perer and Marc Cole led the spin out of Super G Capital’s cash flow, technology, and special situations division to form SGCP. Perer joined Super G Capital, LLC (Super G) in 2014 to start the cash flow lending division. While there, he established Super G as a market leader in lower middle-market second lien, built a deal team from ground up with national reach and generated approximately $150 million in originations.

Prior to Super G, he co-founded Intermix Capital Partners, LLC, an investment and advisory firm focused on providing capital to small-to-medium sized businesses. At Intermix, Perer spent significant time sourcing and executing transactions and building relationships within the branded consumer, specialty finance and business services industries. Perer began his career at Oppenheimer & Co. (acquired by CIBC World Markets) where he was a member of the Media Investment Banking Group. He graduated Cum Laude from Tulane University.

Charlie is author of The Independent Lender blog. He can be reached at charlie@sgcreditpartners.com.

>> FINANCIAL PLANING >> ARTICLE 9 >>

FINANCIAL PLANNING

RISK INSIGHTS

Financial Forecasting in the PostPandemic World

BY PATRICK DIERCKS, JOSEPH MARCHESE & BRIAN ALLEN Executives from PKF Clear Thinking provide key points that both lenders and their borrowers need to be mindful of when preparing and reviewing 2022 and beyond business plans.

At this point, it would be highly unlikely that any business, irrespective of size or industry, remains unaffected by the COVID-19 pandemic. Those impacts could be positive, negative, large or small, but it would be reasonable to assume that no business has operated ‘normally’ since March 2020.

Given this lack of normalcy, and the common practice of using historical performance to guide future forecasting, a common question and theme that we are hearing from both lenders and borrowers is “How do we account for COVID impacts in 2022 and beyond?”

While there are some similarities in certain industries and lines of business, the specifics of how and when COVID impacted businesses is truly on a case-by-case basis. The first step in gaining an understanding of the “when” component is to develop a timeline that encompasses all impactful events throughout the pandemic. Some examples of macro events would be both the institution of and the subsequent remanding of governmental restrictions (national, state, local), stimulus infusions, and industry specific regulations/guidelines. On a more micro level, some items to be considered would be the type of business and or industry it is operating in, changes in business hours/days of operation, receipt of PPP funds and/ or employee retention credits, layoffs, furloughs, and remote work. The second step is to line up this timeline with the financial results of 2020/2021 and determine whether or not these events did, in fact, have an impact (positive or negative) on the business’s performance, and then measure that change in performance.

In going through the exercise of normalizing for the impacts of COVID, it is very important to not lose sight of one undeniable fact: the COVID-19 pandemic did occur. And because it did, we must recognize that it had effects and they

>> TERM-LOAN PROVISIONS >>

are likely to continue at some level for the foreseeable future.

Given that, normalization should not necessarily be viewed as an attempt to make a baseline for forecasting future periods, but viewed more as a tool to understand whether the effects of the pandemic possibly masked or exacerbated underlying business issues. Having a solid understanding of how the business performed prior to the pandemic and the trajectory it was on is critical in determining what normalization looks like. It will also serve as a guideline of determining what the future growth curve looks like.

The chart on the next page illustrates a real-world example of a recent retail client of ours that was positively impacted by the COVID-19 pandemic. As you can see based on pre-COVID data, the company was steadily growing at approximately 3.4% per annum and realized significant increases during 2020 and 2021 as would be expected. For 2022, the company is projecting a decrease in same-store sales based on the concept that the majority of increases they experienced above their historical growth rate were one time in nature. When we look at what the revenue would have looked like for 2022 had they just maintained the trend they were on for several years prior to

PATRICK DIERCKS PKF Clear Thinking

JOSEPH MARCHESE PKF Clear Thinking

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THE SECURED LENDER JAN/FEB 2022

BRIAN ALLEN PKF Clear Thinking

the pandemic, we see that they would likely be experiencing a similar level of projected revenue in 2022 even without the pandemic.

While this example serves to validate the 2022 revenue projections for this specific company, there are many other instances where businesses were experiencing downward trends pre-COVID and then saw increases purely because of COVID. It is these situations where one needs to be wary of how a company is projecting their post-COVID performance.

Just because sales or profitability increased during COVID, does not necessarily mean that the business addressed and fixed the underlying issues that were causing decline in the first place.

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There seems to be a fairly consistent practice of both lenders and borrowers relying upon 2019’s results as the baseline for what the post-pandemic business should look like. In some instances, this can be a very good tool as 2019 was certainly the most recent full year with no impact from the pandemic. However, in our opinion, it should not be the sole source of comparison. As stated above, no one was immune to COVID impacts and, therefore, some of those effects need to be taken into consideration. One of these impacts will likely be a desire for most companies to continue operating more of a hybrid remote-working environment. In most cases, this change in the work environment has resulted in a cost impact such as increased IT expenses and reduced productivity. Also, future rental income for landlords will be greatly impacted should businesses start to shrink their physical space. Some additional possible impacts that will continue for some time include the continued reductions in travel expenses, cost and productivity impacts associated with “buy online/ pickup-in-store” programs, staffing shortages, and wage increases. Obviously, every business is going to have its own circumstances, but understanding which pandemic effects will continue is key to projecting what future periods will look like.

It would be almost impossible to discuss this topic without mentioning the 1000-pound gorilla in the room: the uncertainty

surrounding supply chain issues that are likely to continue well into 2022.

The single biggest risk to any business plan for 2022 is likely to be supply-chain related. Whether it is the lack of container ships or truck drivers, freight cost increases, or log jams in the major U.S. ports, there will continue to be significant impacts at all levels related to getting any sort of product. Various iterations of sensitized plans for reductions in raw materials and finished goods availability should be a part of any forecasting process for 2022 to illustrate for all stakeholders where the “pain points” may lie, not to mention how increases in freight costs will impact margins and pricing.

The negative impacts of supply chain issues will be amplified for those that were not planning, have fewer opportunities for access to capital, or are not able to pass along increases in costs to their customers. As with any sort of “market” environment, when there is limited supply, it usually goes to the highest/best bidder. In this instance, it will likely be less about who is willing to pay a highest/best price, but will most certainly favor those that have high levels of working capital that they can leverage to pay sooner. This is not to say that there aren’t going to be increased costs across the board, especially as it relates to freight costs, which have increased exponentially. Ultimately, these supply chain issues are likely to manifest themselves at a much more macro level in the form of inflation, which, short of some sort of regulatory intervention, will continue to impact lenders and borrowers for the foreseeable future.

On the other side of the coin, there are many other COVID impacts that likely will not continue as we get to a postpandemic environment or, at the very least, not to the level that they did in 2020-2021. Over the last year, we have seen many businesses posting record levels of profitability despite little to no revenue growth. When we dig into the numbers it is plain to see that the lion’s share of this profitability can be attributed to better margins, drastic expense cuts, and PPP loan forgiveness. As inventories have been reduced due to supply chain issues and shifts in consumer spending habits, businesses have been forced to carry less inventory. Paired with the fact that the consumer was willing to pay full price, retailers did not need to discount to the same levels they did historically. This equated to increased margins, greater profitability, and reduced working capital needs as the gross margin return on inventory (GMROI) increased to levels not realized before. Additionally, while there have been some

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instances where businesses have realized that they were carrying too much expense burden and found a way to be successful without those expenses, there are many businesses that are planning to get closer to pre-pandemic spending levels because they simply cannot continue to operate productively with significant decreases to their resources. And while the PPP loan forgiveness is obviously somewhat more straightforward to identify when reviewing profitability, the PPP loans (whether forgiven or not) also need to be taken into account as it relates to projecting the working capital needs of the business.

Some of the negative effects that many businesses faced included reduced revenues due to mandated closures and changes in consumer spending habits. Many of those have already started to revert themselves back to more of a pre-COVID state. Restaurants are open, people are going to movies, travelling more, working less from home, commuting, etc. The consumer is now spending money on eating out and less at the grocery store, taking a vacation versus remodeling their kitchen.

Obviously, not all of these changes will go completely back to their pre-pandemic status, but for the most part, consumers have shortterm memories, and are likely to return to something close to their pre-pandemic habits over the next few years.

Patrick Diercks is a partner with PKF Clear Thinking.

He has over 17 years of experience as a consultant in the turnaround/restructuring arena dealing primarily with companies in the consumer product manufacturing/distribution, staffing, metal products, manufacturing and retail industries. He has led/ participated in numerous assignments related to cash management and operational performance improvement, as well as frequently serving as financial advisor to various constituents in bankruptcy proceedings.

On the other side of the coin, there are many other COVID impacts that likely will not continue as we get to a post-pandemic environment or, at the very least, not to the level that they did in 2020-2021.

Over the last year, we have seen many businesses posting record levels of profitability despite little to no revenue growth. When we dig into the numbers it is plain to see that the lion’s share of this profitability can be attributed to better margins, drastic expense cuts, and PPP loan forgiveness.

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THE SECURED LENDER JAN/FEB 2022

There may not be a “one-size-fits-all” approach as it relates to forecasting in the post-COVID era, but certainly there are some key points that both lenders and their borrowers need to be mindful of when preparing and reviewing 2022 and beyond business plans. Understanding the different nuances of each business and how they specifically will address both the positive and negative effects of this unprecedented time will be key to making sure that they are able to continue to operate in a viable manner.

Joseph Marchese is a partner at PKF Clear Thinking. He has over 20 ears of experience in business consulting and is a member of the Value Preservation Practice at Clear Thinking Group, specializing in financial advisory, bankruptcy and restructuring. His assignments have included positions as Interim CFO, CRO and VP of Finance.

He holds BSBA in Accounting and is a Certified Turnaround Professional (CTP).

Brian Allen is a partner at PKF Clear Thinking. He has over 25 years of experience serving in Controller and CFO positions with both public and private companies. Over the past 15 years, Allen has been engaged by numerous companies in the consumer electronics, beverage, nursery, media, furniture, printing, consumer product, retail, and manufacturing industries to improve financial operations and performance with strategic and financial alternatives, and to serve in interim senior financial positions.

>> FINANCIAL PLANING >> ARTICLE 9 >>

ARTICLE 9 & ASSETS

BANKRUPTCY INSIGHTS

Article 9 Sale Process for Intangible Assets: A Cost-Effective, Efficient Option for Disposition of Collateral

BY RICHELLE KALNIT As the cost of bankruptcy continues to increase, in particular due to fees and expenses associated with administering bankruptcy cases, secured lenders are increasingly turning to foreclosures under Article 9 of the Uniform Commercial Code (UCC) as a preferred vehicle for disposing of their collateral. While Article 9 can be utilized across the spectrum to liquidate any type of collateral, it is a particularly useful tool for disposing of intangible assets, as many of these assets can be legally transferred, and also delivered, by legal assignment.

During the COVID-19 pandemic, when many state courts were less accessible to address state court receivership sales, lenders increasingly explored Article 9 as a method for disposing of or owning collateral. It continues to serve as an important tool in the toolbox of getting paid following a loan default.

During the last two years, the lending community has exercised an incredible amount of patience with borrowers, and, as cash flooded the market, borrowers were able to raise additional financing. Yet, as the effects of supply chain challenges continue to reverberate throughout the market, we expect that certain lenders may no longer continue to support troubled borrowers. For those most impacted by the supply chain disruptions, the additional funding will dry up, causing senior lenders to more seriously consider their options. In preparation for that, lenders should be well-versed in the benefits of Article 9 foreclosures as part of the suite of options available to them.

Why Article 9?

Lenders are well-aware of the myriad options available to them if they need to dispose of assets belonging to a troubled borrower. A Chapter 11 bankruptcy is certainly well established as capable of achieving favorable outcomes for sellers and buyers of assets, and providing buyers with a “free and clear” sale order, but often at the expense of lenders who need to fund a budget to achieve a sale transaction. The Chapter 11 process is often unavoidable however, due to the protections of the automatic stay provided to debtors and, in more complex cases, its utility in bringing parties in complex capital structures together.

For lenders owed a smaller dollar amount (typically $5

>> TERM-LOAN PROVISIONS >>

million or less) however, Chapter 11 is often simply not cost-effective.

In such cases, lenders often consider liquidating collateral through other means, including through a receivership, an assignment for the benefit of creditors, a subchapter V bankruptcy case, or through a Chapter 7 bankruptcy case. While these options may provide solutions for lenders in certain circumstances, RICHELLE KALNIT the lender loses an element Hilco Streambank of control over the process with each of these, as they all involve an intermediary (receiver, assignee, or Chapter 7 trustee) who will take control of the assets or an additional layer of supervision (subchapter V trustee). Moreover, in a subchapter V case, the debtor is still required to go through the plan process, and because the statute is relatively new, having been enacted in February 2020, it presents some unknowns. In cases of alleged fraud or misconduct, third-party control over a process may be necessary, but in most cases involving troubled loans, lenders seek to maintain an element of control over the process in which the collateral is liquidated for their benefit.

This is where Article 9 provides a number of benefits for secured lenders. For certain classes of assets in particular, as discussed below, Article 9 offers the value-maximizing outcome of a sale event in a timely fashion, while minimizing cost. It allows the lender to maintain control of the process and maximum flexibility to see it through to a conclusion of a public auction, or pivot and test the market before trading its debt.

Piecing Together a Transaction: What Does it Look Like?

Article 9 foreclosures can be a useful tool to monetize a going-concern operation. In that circumstance, the sun, moon and stars need to align such that the assets are preserved as a going concern and the borrower is committed to achieving a favorable outcome. In transaction documents evidencing a going concern or quasi-going concern transaction, the lender may also need to be willing to make certain representations and warranties customary of a going concern transaction. This certainly can occur, and when it does, the fees associated with such a transaction tend to be considerably less than when a similar transaction is achieved through a bankruptcy. However, these types of transactions tend to be relatively rare unicorns.

More typically, by the time that a lender explores the option of Article 9, the business has started to come apart at the seams, or worse. Perhaps there are key vendors who are owed money and who are no longer performing absent payment on

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ARTICLE 9 & ASSETS

past due amounts, or a warehouse is holding inventory pending payment of overdue rent. Perhaps relationships with the borrower have soured. In those circumstances, Article 9 can serve as a particularly useful vehicle for disposing of intangible assets because what a lender can deliver, and what a buyer needs in order to utilize the assets, are complementary.

Specifically, one of the challenges in consummating an Article 9 transaction is that lenders are not willing to go beyond an “as is, where is” sale, with good reason. Typically, they are not in a position to make representations and warranties and, moreover, they cannot provide a title representation (of course, lenders do not have title to the assets, the borrowers do), and they rarely have possession of the assets that are part of the deal. However, when it comes to intangible assets, such as trademarks, patents and copyrights, these assets can be transferred by assignment, and the delivery of the assignment gives the purchaser the requisite right to update the records at the United States Patent and Trademark Office, giving the buyer everything that it needs in order to utilize the intellectual property.

Taking possession of domain names can be slightly more complicated, depending on the borrower’s level of cooperation.

While a lender can deliver a domain name assignment, without transferring the domain name itself to the buyer’s chosen domain name registrar, the buyer is not able to actually utilize the domain name. However, if the buyer receives an assignment of the related trademark, and the borrower refuses to transfer the domain name itself, the buyer could consider bringing a subsequent Uniform Domain Name Dispute Resolution Policy (UDRP) action against the borrower to obtain possession of the domain name.

It seems that counterparties to software licenses have done a good job of providing for access to source code of software via a source code escrow. If a lender has a source code escrow, it will be better positioned to deliver software collateral to a buyer than if it does not. Lenders should ensure their loan documents permit release of the escrow upon certain triggering events, one of which could include the closing of an Article 9 sale.

Creative Techniques to Encourage Borrower Cooperation

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As noted above, the extent of a borrower’s cooperation can be an important component in how the transaction is assembled, the extent of diligence that can be offered and whether there is a company representative available to engage in management calls with potential buyers regarding historic and possible uses of the assets. The sale process undoubtedly runs more smoothly with a cooperative borrower than with a borrower who not only is uncooperative, but for whom the threat of a process-delaying bankruptcy hangs overhead.

Lenders should think creatively about how best to encourage cooperation from borrowers to maximize value and de-risk a transaction. This may include waiving rights with respect to certain collateral, or against personal guarantees, if the borrower cooperates through the conclusion of the process. The borrower

also may be motivated to cooperate by the opportunity to provide transition services or gain employment from the buyer.

Sale Process Techniques for Maximizing Value in a Sale of Debt or Auction Conducting a sale process pursuant to Article 9 provides the lender with a great deal of information about the value of the assets, including in the time period leading up to the public auction. The level of interest generated from the sale, as well as the discussions with potential buyers, allow the lender to have insights that it would not have had prior to the outset of the process.

These insights give the lender optionality when it comes to a desired path for payment in the event the lender is not looking to own the asset. And, if the lender is looking to own the asset, the process gives the lender information about potential go-forward partners.

The lender may choose to engage in pre-auction discussions about the sale of debt. A pre-auction sale of the debt gives the lender certainty of payment and provides the purchaser with a potential arbitrage, because the debt often trades at a discount, but the debt purchaser is able to credit-bid the full face amount of the debt. The discussions with potential buyers as part of the Article 9 sale process often open the door to a pre-auction debt sale.

Alternatively, the lender may choose to move forward with the public auction. In that case, it also has a great deal of information about the dynamics of the process and the interested parties, having likely been on the receiving end of diligence requests from potential buyers with which it is now well-familiar.

Creative lenders will utilize this information to create an auction format that encourages the auction participants to reveal their willingness to pay. They may also choose to credit-bid as a way to set a floor for further bidding, creating additional valuemaximizing auction dynamics.

In Conclusion COVID-19-induced supply chain challenges are likely to continue to put strain on certain credits. The longer these challenges persist, the more likely it is that defaults will force lenders to exercise remedies.

As lenders consider their alternatives, Article 9 of the UCC provides an attractive option for liquidating collateral, in particular, intangible assets, and ultimately, getting paid.

Richelle Kalnit is senior vice president at Hilco Streambank, which provides intellectual property services and expertise at the intersection of intangible assets and corporate finance. Richelle focuses on management of intellectual property disposition engagements for the firm’s extensive list of clients. She can be reached at rkalnit@hilcoglobal.com.

>> FINANCIAL PLANING >> ARTICLE 9 >>

TERM LOAN PROVISIONS

CREDIT INSIGHT

Pitfalls of Incorporating Term Loan Provisions into ABL Credit Agreements

BY WADE KENNEDY When documenting an ABL facility alongside a separate term loan, borrowers and financial sponsors increasingly request that the ABL credit agreement be drafted to essentially match material terms of the term loan agreement. This understandable desire for conformity often overshadows fundamental differences between ABL and term loan facilities and can create significant issues for ABL lenders. The goal from the ABL lender’s perspective should be to understand the tradeoffs involved and provide a level of functional conformity in principal terms, while maintaining customary availability-based metrics and liquidity protections of ABL loan documentation which are often absent or inadequately covered in term loan documentation.

For a number of years now, borrowers and financial sponsors have regularly requested that revolving ABL credit agreements be drafted in general conformity with the borrower’s term loan credit agreement, particularly when the ABL facility is of a relatively small size in comparison with the term loan facility (or entered into alongside an existing term loan facility).[1] Historically, this type of request meant the ABL documentation would be drafted to generally conform with common financial definitions (particularly EBITDA), representations and warranties, affirmative and negative covenants and events of default, subject to additions and modifications to such provisions as were customary in the ABL market. The intent was to align the terminology and covenant structure with the term loan provisions so as to avoid renegotiating

>> TERM-LOAN PROVISIONS >>

commonly shared terms and permit consistent financial and covenant compliance reporting as a matter of convenience and efficiency.

This “conforming approach” typically meant that ABL documentation terms would generally align with the term loan facility, but would have some additional or different ABL-specific terms due to the fundamental WADE KENNEDY differences between a McGuireWoods LLP revolving ABL facility and a term loan facility. In particular, the ABL covenant structure would commonly omit certain specific term loan baskets due to the ABL convention of providing “payment conditions” baskets that gave the borrower the ability to make unlimited dividends, investments and debt prepayments so long as certain availability and pro forma fixed charge coverage requirements were met. Term loan baskets based on leverage, “available amounts” or net asset/EBITDA tests were not viewed as appropriate for ABL facilities nor necessary, given the unlimited baskets the ABL facility provided (so long as a payment-conditions test was met).

More recently, however, it has become common for borrowers and sponsors to request that asset-based lenders essentially match various term loan provisions (particularly covenant baskets) when these two types of credit facilities are prepared for a borrower. Notwithstanding the many fundamental differences between revolving ABL and term loan facilities, borrowers and financial sponsors often require that ABL lenders align the terms of these two types of facilities almost verbatim to ensure that the operational flexibility built into one facility (the term loan facility) is not lost due to the restrictions contained in the other (the ABL facility).[2] No longer are borrowers always willing to rely on the unlimited “payment conditions” baskets in the ABL facility to permit transactions that are allowed under “available amount”, leverage or net asset/EBITDA baskets typical to term loans.[3] This desire for conformity is understandable, but can create significant issues for ABL lenders who rely on traditional availability-based metrics and liquidity protections of ABL loan documentation which are often absent or inadequately covered in term loan documentation. The goal from the ABL lender’s perspective is to provide a level of functional conformity in principal terms, while maintaining the availability-based metrics and liquidity protections customarily provided in the ABL credit agreement.

This article discusses the four key issues that regularly arise in negotiating and drafting ABL credit facilities when borrowers push for functionally identical documentation: How the inclusion of Available Amount baskets and Grower Baskets can undercut the effectiveness of payment conditions

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TERM LOAN PROVISIONS baskets (and other availability requirements) in the negative covenants.

How limiting debt prepayment restrictions to only “Junior Debt” conflicts with long-standing ABL prohibitions on voluntary prepayment of any debt, senior or junior.

How term loan concepts of “Limited Condition Acquisitions” and “Limited Condition Transactions” have eroded ABL protections based on requiring minimum pro forma availability.

How term loan interpretive provisions (originated in the highyield debt markets) have crept into term loan and ABL facilities and can dramatically weaken ABL negative covenant baskets.

The goal is to acknowledge and understand key elements of the changing market regarding these terms and enable ABL lenders to adapt to and accommodate these changes while retaining essential liquidity protections fundamental to ABL lending.

Available Amount Baskets, Grower Baskets, Payment Conditions Baskets The “Available Amount” is a basket composed of a fixed-dollar amount or percentage of EBITDA that increases for each test period (typically rolling four quarters) based on certain cash and non-cash amounts that are deemed “available” for restricted uses such as acquisitions, investments, equity distributions (restricted payments) and debt prepayments (“Restricted Uses”).[4] The Available Amount forms a general pool of “funds” that can be “used” for Restricted Uses without any availability or pro forma fixed charge test. Given these amounts can be cash and non-cash and, even if cash, are not required to be physically segregated in specific accounts (or otherwise remain identifiable), the liquidity they represent is more conceptual than actual from the perspective of a working capital lender. In addition, there is no time correlation between realizing the amounts included in the Available Amount calculation and when those amounts can be “used” in a transaction. Finally, any calculation based on EBITDA almost certainly includes non-cash add-backs negotiated in the context of financial covenants and further limits the utility of this basket when evaluated on a liquidity basis.[5] “Grower Baskets” are similar to Available Amount baskets, but are based on a dollar amount plus a percentage of EBITDA or Total Assets (therefore the basket can increase as those metrics grow over time).[6] Like Available Amount baskets, Grower Baskets flow through negative covenants, permitting Restricted Uses up to an amount that grows as EBITDA/Total Assets increase.

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Available Amount Baskets and Grower Baskets are problematic for ABL lenders due to the illiquid nature of many of their components and the fact that time of usage of such amounts are not tied to the time of receipt of those funds. Consequently, once established, the Available Amount or the Grower Basket could conceptually permit accumulation of amounts over time sufficient to permit Restricted Uses greater than cash flow (or even a multiple thereof) for a given accounting period with no availability or liquidity test to ensure the cash being utilized derives from the

transactions producing them (and not revolving loan proceeds).

There are usually no practical means for working capital lenders to confirm that cash or other amounts, when “used”, are actually “available” from the sources indicated (despite the name).

State of the Market: Historically, ABL lenders have successfully argued that borrowers did not need and should not expect Available Amount Baskets or Grower Baskets due to the unlimited nature and flexibility of the “Payment Conditions” baskets.

[7] Borrowers and sponsors have argued that some level of non-availability-based baskets are needed in cases where the underlying transaction makes sense and availability is not sufficient to comply with the Payment Condition test. This position has largely been accepted, particularly with respect to investments (which are, in theory, accretive to the assets of the borrower) and, to some extent, debt prepayments (which reduce debt and corresponding fixed charges). As a result, many ABL facilities include some level of additional non-Payment Condition baskets, usually (i) a Grower Basket at a reduced amount (often only so long as included as “fixed charges” in the financial covenant) and/or (ii) a modified Available Amount Basket calculated based only on cash items received contemporaneously with the permitted payment or investments.[8] Similarly, additional baskets for equity-based proceeds are typically acceptable for permitting Restricted Uses, so long as they are tied in time to the particular use they fund.

Recently, however, given the competitive nature of the credit markets, some ABL lenders have agreed to incorporate Available Amount and Grower Baskets essentially identical to the term loan facility in certain larger sponsor-driven transactions. These situations should be carefully evaluated and understood in the context of the following: 1. How stringent is the total covenant package applicable to a borrower (can cash leakage be generally managed through the totality of restrictions in the credit agreement)?

2. How comfortable are the ABL lenders with the particular management team or sponsor backing the borrower (can the borrower be relied upon to manage liquidity responsibly and undertake conservative utilization of baskets)?

3. How confident is the ABL lender in its borrowing base collateral, advance rate cushions, liquidation values and exit strategies (how much liquidity will be required to “run out” the receivables or sell the inventory)?

4. What are the particular circumstances of the borrower as well as the broader context of the borrower’s business and related risk factors?

Finally, given the highly negotiated nature of these facilities, “market precedent” arguments offering up documentation “giving” on these baskets should not be accepted at face value without close analysis of the contextual factors at work and the mitigating terms that may have been negotiated in other parts of the loan documentation.

Prepayment Restrictions Only on “Junior Debt” Term loan facilities typically restrict prepayments of indebtedness only to the extent the debt is subordinated in right of payment, junior in lien priority or in some (but not all) cases, unsecured (sometimes referred to as “Restricted Debt” or “Junior Debt”),[9] leaving prepayments of pari passu debt outside the scope of the applicable negative covenant and therefore unlimited (often not even subject to an event of default test). Term lenders typically do not have significant concerns if the borrower chooses to prepay other pari passu debt, so long as the prepayment terms of the term loan facility are complied with. Since the term loan facility is typically funded at closing, the prepayments necessarily come from sources other than the term loan facility, reduce leverage and, if pari secured debt is prepaid, increase the collateral coverage of the term loan, so it is typically not a material concern for term lenders. Borrowers and financial sponsors want the flexibility the term loan facility provides to prepay more expensive or earlier maturing debt without hinderance by the ABL lenders.

ABL lenders, on the other hand, care very much about debt prepayments, particularly voluntary payments that can be financed through or otherwise drain the working capital the ABL lenders provide. As a rule, ABL lenders do not typically permit voluntary prepayments of any debt (pari passu, subordinated, secured or otherwise) unless the payment conditions can be met, thus ensuring minimum availability after giving effect to the payment.

[10] Consequently, adopting the term loan definition of “Junior Debt” with respect to voluntary prepayments is a problem for ABL lenders as it removes any limitation on the borrower using the ABL facility or the last dollars of working capital to prepay other debt (leaving the ABL lenders without sufficient liquidity or operating horizon to realize on its borrowing base collateral). Additionally, even if the covenant is not limited to junior debt, incorporating broad baskets based on leverage, Available Amounts or Grower Amounts also undercuts this fundamental protection.

Borrowers and sponsors, however, often argue that (i) prepayment restrictions amount to payment subordination, (ii) the ABL facility should not impair the ability of the borrower to repay higher priced debt, and (iii) the ABL lenders should rely on the borrower to manage its liquidity so long as the borrower is “in formula” on collateral coverage under the borrowing base.

From the perspective of ABL lenders, these arguments can fall flat. A term lender should not expect voluntary prepayment of its loan under all circumstances and restricting (but not prohibiting) those payments does not equate to subordination. The desire to prepay higher-priced debt is understandable, but should not be the priority if liquidity is tight. And finally, the argument that the ABL lender should simply “rely on the borrowing base” ignores the longstanding reason liquidity thresholds are included in ABL facilities in the first place: to address the practical difficulty of realizing on collateral without sufficient liquidity to run the business while that process takes place. The Payment Conditions test protects the ABL lenders from precisely this risk and is why voluntary payments should not be solely at the borrower’s discretion. Even

well-intentioned borrowers acting in good faith can find themselves in trouble and decide to risk repaying term debt, notwithstanding insufficient remaining liquidity. The ABL lenders should not be required to shoulder this risk.

State of the Market: Although exceptions exist, most ABL lenders will not agree to entirely omitting the restriction on voluntary prepayments of the term loan and other pari passu debt.

However, it has become more common in middle-market sponsor transactions for ABL lenders to agree to include an Available Amount Basket and/or Grower Basket amounts in the prepayment negative covenant, preferably limited to actual cash items and with some minimum availability threshold (as opposed to a full payment conditions test).

Limited Condition Acquisitions and Limited Condition Transactions A “Limited Condition Acquisition” (or “LCA”) is essentially any permitted acquisition identified by the borrower as to which the conditions to funding (including no default, representations and warranties and financial covenant tests) are only required to be met on the date of execution of the purchase agreement, and not on the consummation date (so long as completed within a certain time period).

This concept originated in the term loan market in connection with post-closing material acquisitions funded with incremental term loans. The intent was to apply the same “SunGard” and limited condition closing terms applicable to initial acquisition financings in the context of a future material acquisition (which would benefit from the same certainty of execution protections provided).

State of the Market: The Limited Condition Acquisition concept has been widely accepted in the ABL market, however, typically only so long as some level of availability is required upon consummation. This is consistent with the conceptual basis of the provision, as any “closing date” acquisition financing would requiring minimum opening availability, even if closed on a limitedcondition basis.

Limited Condition Transactions: A “Limited Condition Transaction” (or “LCT”) provision takes the Limited Condition Acquisition concept and expands it to include not only material acquisitions, but also (i) other non-controlling investments, (ii) debt prepayments and (iii) dividends. Similar to Limited Condition Acquisition provisions, this concept provides that, if the conditions to the investment, debt prepayment or dividend are met on the date of execution of the applicable agreement, those tests do not have to be met on the consummation (payment) date. For borrowers whose equity is publicly traded or who have issued high-yield debt, the practical demands to complete announced dividends and tenders may warrant inclusion of LCT provisions in the ABL facility, but otherwise, for most private companies, the certainty of execution demands in acquisition financing (and often the accretive nature of the transaction) are not present and weigh against expanding the concept of limited conditionality to include non-acquisition transactions.

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TERM LOAN PROVISIONS The Limited Condition Transaction concept has not been widely accepted in the ABL market, although exceptions do exist.[12] Expansion of the LCA concept to include equity distributions and debt prepayments can materially undermine the fundamental protection of the Payment Conditions test, given it is only tested when the contractual commitment is created, not when paid.

Borrowers have argued that, in order to comply with binding agreements and investor expectations, they should be permitted to apply the LCA concept to an expanded range of Limited Condition Transactions. As with other issues, this makes much more sense in the context of a term loan than it does a working capital ABL facility. ABL lenders predicate and underwrite their exposure based on minimum-availability thresholds and provide considerable flexibility if those thresholds are met. Creating additional carve outs that strip this minimum criteria shifts the risk of inadequate liquidity to the ABL lenders simply because the borrower has “written a check it can’t cash.”

State of the Market: Generally, ABL lenders have been able to hold the line on not agreeing to full Limited Condition Transaction provisions in ABL credit agreements. In instances where LCTs are agreed to, an availability test at some level on the date of consummation should always apply.

Interpretive Provision - Covenant Basket Aggregation and Reallocation The “interpretive provisions” of the ABL credit agreement are an oftenoverlooked category of terms that have migrated from the bond market to the term loan market and into ABL credit agreements. Although typically appearing as mere boilerplate (usually at the end of the “Definitions” section), these interpretive provisions often do not receive much attention, but can be critically important in gauging the scope and practical protections provided by negative covenants. For example, interpretive provisions often provide the borrower the ability to combine amounts from various baskets (including (i) fixed-dollar baskets (“Fixed Baskets”) and (ii) leverage ratio or fixed charge coverage ratio-based baskets, which generally include Payment Conditions baskets (“Ratio Baskets”)), to permit Restricted Uses. Typically, these terms allow the borrower to cobble together amounts permitted under multiple different baskets to achieve the needed dollar amount for a particular Restricted Use (e.g., a $50 million dividend can be made based on $20 million permitted under an Available Amount and/or Builder Basket (each a Fixed Basket) and $30 million permitted under a Payment Conditions basket (a Ratio Basket).

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In addition, these terms often allow recharacterization of such amounts after such Restricted Use is consummated to essentially “re-load” Fixed Baskets. This occurs by permitting the borrower to shift amounts used under Fixed Baskets into Ratio Baskets once financial metrics or availability improve (e.g., in the above example, if the Ratio Baskets would permit an additional $20 million in the fiscal quarter following the dividend, the Fixed Basket can essentially be credited the $20 million already used and be reloaded to its prior amount). What this can mean is that, functionally, any time the Payment Conditions Basket is available,

the Fixed Baskets would be re-loaded for future use (at a point when the Payment Conditions can no longer be met).

State of the Market: These provisions have been generally accepted in the ABL market but, as the scope and variety of covenant baskets increases, ABL lenders should be cautious about how much reliance is placed on the practical protection these baskets offer given, the “flexibility” provided by the aggregation and recharacterization interpretive provisions.

In addition, it should be noted that, recently, some term loan facilities have also included an interpretive provision that would allow borrowers to essentially disregard amounts simultaneously “used” in a Fixed Basket when calculating the amount that can be “used” under a Ratio Basket in a given transaction. If this provision were included in an ABL credit agreement, the impact could be material.

For example, using the $50-million dividend scenario above, if the dividend were permitted under an Available Amount or Builder Basket, those amounts would be excluded from the concurrent calculation of the Payment Conditions test. The borrower could arguably incur $20 million more than otherwise available under the Payment Conditions test because the $20- million dividend under the Fixed Basket could be excluded from either or both the Availability prong or the FCCR prong of the Payment Conditions basket. There are other (often nuanced) problems that can arise with this type of provision depending on how it is drafted, so the damage can be greater or lesser depending on specifics. In general, however, this type of provision is very problematic in an ABL credit facility and should be rejected in any form.

Conclusion On the whole, there has been a significant shift in the ABL market in the last several years toward accommodating borrower and sponsor requests for conformity in documentation between term loan and ABL credit facilities. Competitive debt capital markets generally, including crossover from the bond markets, in particular, have put pressure on term lenders to significantly broaden the “flexibility” and permissive nature of the covenant package contained in their facilities. In response, borrowers and sponsors have tenaciously pushed to press down these gains into the ABL market, and with much success. It is a “borrower’s market” in many respects, as there are abundant sources and providers of debt capital for borrowers to choose from. The agreement by an ABL lender to hew closely to the term loan document can easily decide who wins the deal.

Notwithstanding this environment, ABL lenders should understand the potential impact of the changes they are being asked to make and preserve certain minimum protections to liquidity and safeguards against potential depletion of the ABL facility. As has always been true of sound asset-based lending, reliance upon good collateral, proven advance rates, strong reporting and discretionary borrowing-base calculations can help lessen concerns regarding broad covenant baskets. Shared interest of term lenders in healthy liquidity can also be of some comfort, as can reliance on borrowers and sponsors to not

unreasonably deplete liquid assets. But, ultimately, term facilities are based on enterprise value considerations of lenders whose money is already committed. Short-term liquidity, cash usage and source of funds for non-accretive transactions are not always their first priority and this is reflected in nature of term loan provisions.

Similarly, borrowers and sponsors may be willing to risk short-term liquidity to pursue strategic opportunities. In either case, ABL lenders who adopt term-loan provisions wholesale risk finding themselves with insufficient liquidity to successfully realize on their collateral when aggressive acquisitions, dividend recapitalizations and debt prepayments have left the borrower insufficient cash and availability to weather a downturn. The time-tested approach of maintaining minimum availability-based metrics should not be abandoned without care. [13]. ______________________________ [1] As used herein “term loan facility” refers to privately held bank or non-bank term loan facilities as opposed to institutional term loan facilities (often referred to in the marketplace as “Term B Loan Bs”). Institutional Term Loan B facilities are typically held by non-bank CLO funds, asset managers and hedge fund lenders and will be fully funded at closing with a longer tenor than the ABL facility and a higher interest margin with built-in pricing protections in the form of call protection, most favored nation provisions and ability to decline some or all prepayments. As a result of the longer tenor and widely held nature of the facility, borrowers often push for and receive greater concessions in these deals as a means of avoiding potentially costly amendments and as a tradeoff for higher interest returns to the lenders that enhance the secondary trading activity. As a result, Term Loan B facilities tend to result in more aggressive features (many of which, however, migrate into the privately held term loan market).

[2] Obvious exceptions for revolver funding mechanics and related operational provisions unique to revolving credit facilities are assumed.

[3] In fact, it has become common in many transactions for borrowers and sponsors to require the ABL facility be drafted “starting with the term loan credit agreement”, which typically has been negotiated with no input from the ABL lenders. This approach places a significant burden on the ABL lenders and their counsel. Not only must principal terms be carefully reviewed and approved, but ancillary term loan provisions (pro forma calculations, financial covenant definitions, equity cure provisions, controlled cash, etc.) and boilerplate terms must be considered in detail by counsel as they can have material and unintended consequences for revolving lenders. Additionally, issues relating to mandatory prepayments, priority collateral, controlled accounts, etc. are all areas of negotiation, but not typically dictated by the request to conform terms and therefor are not covered in this article.

[4] The Available Amount calculation may include some or all of

the following: 1. starter amount (greater of a base dollar amount or a % of EBITDA); plus 2. retained Excess Cash Flow (“ECF”) not paid to Term Lenders or a percentage of net income; plus 3. cash and fair market value (“FMV”) of property contributed as a capital contribution or proceeds of an equity issuance; plus 4. debt converted into capital stock; plus 5. net proceeds of sale of investment positions; plus 6. net proceeds or FMV of property received as distributions on investments; plus 7. investments, cash and FMV of assets invested in redesignated restricted/unrestricted subsidiaries; plus 8. amount of mandatory Term Loan prepayments that are declined.

[5] Conceptually, EBITDA is meant to provide a “smoothed out” picture of earnings over time, exclusive of non-cash items and onetime or extraordinary events. Given add-backs for cost saving and synergies, etc. this picture has become blurred, even for its original purpose, but much more so in determining the cash position of a borrower for point-in-time metrics for transactional purposes.

The concept of an Available Amount Basket is inherently a cash flow/term loan concept useful for facilities in which maturity and repayment remains remote in time and no future funding obligations of term lenders exist.

[6] Typically drafted as “(a) [debt] [investments] [payments] not exceeding the greater of (A) $[__________] and (B) [___]% of [EBITDA] [Total Assets] for the most recent Test Period”.

[7] “Payment Conditions” means, with respect to any applicable transaction, the satisfaction of the following conditions: (a) as of the date of any such applicable transaction and immediately after giving effect thereto, no [Specified] Event of Default has occurred and is continuing; (b) Adjusted Availability, (i) computed as an average for the thirty (30) consecutive days immediately preceding the date of consummation of such proposed applicable transaction, calculated on a pro forma basis as if such proposed applicable transaction was consummated on the first day of such thirty (30) day period and (ii) immediately after giving effect to the consummation of such proposed applicable transaction on the date of consummation thereof, shall be (A) in the case of any Qualified Debt Payment or any Qualified Restricted Payment, not less than the greater of (1) [15]% of the Cap Amount and (2) $_________, or (B) in the case of any Qualified Investment, not less than the greater of (1) [12.5]% of the Cap Amount and (2) $__________; (c) the Fixed Charge Coverage Ratio, calculated as of the last day of the most recent Test Period then ended, immediately after

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TERM LOAN PROVISIONS giving effect to the consummation of such applicable transaction, shall be equal to or greater than 1.00 to 1.00; provided that, the Fixed Charge Coverage Ratio condition described in this clause (c) shall not apply if Adjusted Availability, (i) computed as an average for the thirty (30) consecutive days immediately preceding the date of consummation of such proposed applicable transaction, calculated on a pro forma basis as if such proposed applicable transaction was consummated on the first day of such thirty (30) day period and (ii) immediately after giving effect to the consummation of such proposed applicable transaction on the date of consummation thereof, shall be (A) in the case of any Qualified Debt Payment or any Qualified Restricted Payment, not less than the greater of (1) 20% of the Cap Amount and (2) $__________, or (B) in the case of any Qualified Investment, not less than the greater of (i) 17.5% of the Cap Amount and (ii) $___________; and (d) the Administrative Agent shall have received at least one Business Day prior to the consummation of such applicable transaction a certificate of an authorized officer of the Borrower Agent certifying as to compliance with the preceding clauses and demonstrating (in reasonable detail) the calculations required thereby as of the date of consummation thereof.]

[8] See footnote 5 above.

[9] Prepayments of Junior Debt are typically restricted, but usually subject to an unlimited basket based on leverage or Available Amount or Grower Baskets (discussed below).

[10] Typically, there are also correlated protections implemented though restrictions on refinancing or modifying terms of permitted indebtedness (including the Term Loan and other pari passu debt) in ways that would adversely affect the interests of the ABL lenders.

[11] For example: “Available Amount” means the sum of the following, solely to the extent applied to the consummation of a applicable transaction within [one] ([1]) Business Day[s] of receipt thereof), (a) cash contributed as part of a capital contribution or received as proceeds of an issuance of Equity Interests (other than Disqualified Equity Interests, as part of an equity cure or included as part of another basket) plus (b) net cash proceeds received in connection with the sale of, or as a distribution in respect of, an investment position in excess of the original investment.

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[12] If accepted, a minimum availability test at some level should be included. In addition, limiting the “window” to consummate the transaction can also add protection.

[13] As a final note, requests by borrowers and sponsors to conform ABL provisions to institutional Term Loan B facilities (or high yield bonds for that matter) should face significantly greater

resistance by ABL lenders. These facilities provide material protections to lenders (e.g., rating agency requirements and a liquid secondary market) and are driven by borrower imperatives (inflexible in amendment mechanics and a broadly competitive market) that are often not present in ABL facilities. The simple fact that an unhappy Term Loan B lender with liquidity or other concerns can simply sell its position in the secondary market materially changes the analysis of covenant protections. ABL lenders are much effectively “locked in” to the loan and will likely not have that same flexibility.

Wade Kennedy is the head of the McGuireWoods Asset Based Lending Group. He focuses his practice on representing lead financial institutions in complex syndicated credits to asset-based and leveraged borrowers. Kennedy has over 30 years of experience documenting asset-based credit facilities in various industries and capital structures, including in the context of sponsor-driven acquisitions, first lien/second lien transactions, unitranche facilities and debtor-inpossession and exit financings.

Kennedy serves on the Board of Directors of the Secured Finance Foundation and was Chairman of the Development Committee for the Foundation from 2017-2019. He is also a member of the Association of Commercial Finance Attorneys.

SFNET MEMBER PROFILE

Solifi - Reshaping the Secured Finance Industry

Solifi delivers a global portfolio of end-toend integrated solutions built on an open finance platform, delivering applications for equipment, working capital, wholesale, and automotive finance firms. Leading the way with true Software-as-a-Service (SaaS) solutions for the secured finance market, Solifi continues to invest in innovation ahead of the market as finance firms continue to migrate their mission-critical systems to the cloud.

Building on the strength and expertise within each of these market segments, secured finance firms can access any of Solifi’s market-leading solutions in a pay-for-what-youuse model.

“With technology changing so rapidly, Solifi credits its frequent interaction with its customers in helping to keep up-to-date on emerging trends in asset-based lending (ABL) and factoring.

ROSANNE DOYLE Solifi

IDS, William Stucky & Associates, and White Clarke Group are now Solifi, a global fintech software partner delivering a solid financial technology foundation for equipment, working capital, wholesale, and automotive finance firms.

BY EILEEN WUBBE

“They are the ones who are engaged with the needs of the market every day and it is our goal to help them make the most of identified market opportunities,” explains Rosanne Doyle, ABL/Factoring product manager, Solifi. “This helps our team approach product development with understanding and empathy as we create real solutions to our customers’ identified needs. This connection not only keeps our software offerings up-to-date, but also provides us intelligence in knowing where to invest time and resources to deliver innovation ahead of the market.”

In addition to proactively participating in ABL and factoring industry associations, such as attending and sponsoring SFNet’s 77th Annual Convention in Phoenix in November 2021, Solifi supports the research and market learning through both membership and team participation in working groups where they are not only advancing their understanding, but working to elevate the way technology companies address the real-world challenges of the secured finance community.

“Solifi also hosts a technology advisory board, which meets twice a year,” Doyle explains. “This is an opportunity to bring together customers of all sizes to provide us guidance on roadmap priorities based on insight into customer behaviors, needs, and wants to ensure we are delivering the solutions needed to support our customers’ business objectives.”

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Additionally, the company partners with other technology providers in the industry that provide complementary products, such as electronic signature technology and credit reporting software.

as Salesforce, DocuSign, or Equifax?

“Technology has its place, but we’re still people doing business with people. We listen. We talk. And we serve. That’s why we’re here.

This leads us in creating better ways and products to make sure our customers possess the technology and tools they need to achieve their growth goals, and in turn, better serve their customers,” Doyle adds.

What self-service features can I offer to my customers (e.g., borrower portal)?

SaaS - Meeting the Needs of the Secured Finance Industry Secured finance customers are looking for technology that aligns with and augments their current business workflow, which is most easily delivered through Solifi’s software-as-a-service (SaaS) solution.

“SaaS solutions offer the ability to align with customer needs without requiring heavy IT involvement and a long migration period to get the solution up and running,” Doyle says. “With SaaS, the vendor provides all of the infrastructure and application management, allowing the customer to leverage a variety of functions based upon their business needs.”

Some of the business-enabling functions include loan management – powerful tools for forecasting and monitoring trends; credit monitoring; portfolio analytics, offering a real-time view of portfolio status and a borrower portal – desktop or mobile application for client self-service.

Disruption Without Interruption From COVID-19 to explosive new growth, disruption is now the norm and the secured finance industry continues to adapt and work through it.

“From our perspective, we feel this kind of disruption makes Solifi’s SaaS solution even more attractive,” Doyle says. “Agility is a key driver for our industry when a lack of predictability is commonplace and makes it challenging to stay ahead of the speed of change. Customers who adopt a SaaS solution find that it provides the flexibility, agility, and peace of mind they need to face and overcome any potential disruption – from needing to work remotely at a moment’s notice to seamlessly upgrading or connecting to the newest technology without halting normal business operations.”

With the endless possibilities in the ever-changing technology landscape, lenders and factors can best manage expectations of their relationship with their software provider by asking: Are you a hosted cloud model or a true SaaS provider?

What is the scope of services I’m purchasing?

What am I responsible for? What are you responsible for?

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What exactly are you developing and managing when it comes to the IT infrastructure?

How do you scale your services for a company like mine? And how quickly?

Do you do upgrades? How often? How difficult is it? How disruptive?

What are your integration options?

Can you integrate easily across our entire organization?

How does your system connect with other technology providers such

Who are your technology product partners?

What core services are available to automate our tasks?

How quickly can I access my data?

What new data insights are captured that I don’t have access to now?

What is your governance model?

How do you mitigate the risk of fraud?

What’s your commitment to security? How do you handle security in the cloud? How do you protect our data and keep it safe from cyberattacks?

Do you conduct third-party audit validation assessments like System and Organization Controls (SOC)?

How do you ensure business continuity?

How much does it cost? Do you offer a pay-for-what-you-use (consumption-based) model?

What’s Next?

According to Doyle, the top challenges facing customers in the secured finance industry are eliminating low-value touchpoints by providing customers with more self-service options to allow credit analysts to focus on complex deal structures or out-of-formula requests; mitigating the risk of fraud, and connecting disparate systems. Integration is key to operational efficiency and accessing data quickly.

The most progressive companies are adopting: SaaS in the cloud as a standard operating procedure; self-service borrower portal available 24/7 to get answers more quickly; conversational AI, machine learning (e.g., chatbots); APIs and near real-time reporting and data from multiple sources to help mitigate risk of fraud; data insights, data streaming, and reporting; API-based technologies to allow for internal and external disparate systems to talk to each other and create automated workflows and more to overcome these challenges and accelerate their growth.

“Customers are leveraging an open finance platform, like Solifi’s, for agility, scalability, and differentiation, which can resolve an ongoing issue in our industry,” Doyle says. “We recognized that financial firms needed a secure foundation to build capabilities to integrate third-party technology easily and enhanced our open finance platform so that it more closely aligns with how our customers do business.

“Even in a digital-first world, we need to remember we exist to support our customers’ growth and to put people – borrowers – first.

And that support is in our DNA. You’ll find it in every touchpoint, every line of code we write, every security protocol, every technology partnership, and every feature and product we launch – tools that enable organizations of all sizes to provide financing that powers their customers’ growth and gives borrowers more of what they need,” Doyle adds.

Eileen Wubbe is senior editor of The Secured Lender.

SFNET COMMITTEE SPOTLIGHT

SFNet International Finance and Development Committee Richard Kohn, chair of SFNet’s International Finance and Development Committee, is a founder of Goldberg Kohn Ltd. and a principal in its Commercial Finance Group, where he specializes in structuring and documenting cross-border credit facilities. Richard served as Co-General Counsel of SFNet, represented SFNet at the United Nations Commission on International Trade Law and taught cross-border lending at The University of Chicago Law School.

He is a member of SFNet’s Executive Committee.

BY MICHELE OCEJO

RICHARD KOHN Goldberg Kohn Ltd.

This committee is only a year old. Please tell readers why it was developed and its mission as well as why you were interested in chairing it.

The committee was set up in recognition of the increasing importance of cross-border lending to many of SFNet’s members. We’ve set up six task forces, each with a specific goal: a. Data Collection: Although great progress has been made in collecting data on asset-based loans in general, there is still very little data on cross-border assetbased loans. This task force is investigating ways to collect data on asset-based cross-border loans made by SFNet members and other lenders, categorized by size of loan and countries involved. b. Reserve Study: This task force is developing a country-by-country database on priority claims being reserved for by asset-based lenders in cross-border loans. The goal is to create a practical tool for use by SFNet members when structuring cross-border loans. c. Advocacy: The goal of this task force is to weigh-in on proposed laws and regulations that affect cross-border asset-based lending.

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d. Education: This task force plans to work with SFNet’s Education Committee to develop programs and panels on cross-border asset-based lending. e. Outreach: The Outreach task force is reaching out to lending associations in other countries to develop relations and to explore cooperative efforts to promote cross-border asset-based lending. f.

Monitoring Developments: This task force is tracking developments in the U.S. and other countries that impact cross-border asset-based lending.

Given my interest in and involvement with cross-border lending for so many years, I was very excited at the prospect of chairing this committee. It was an opportunity I could not pass up!

2022 Annual Convention. The only requirement for the topic is that they relate to cross-border lending. Contestants can share an experience or a particularly interesting cross-border lending structure or discuss issues they’ve encountered or particular workarounds they’ve employed to address legal impediments.

In addition, I think it’s a great way for young employees to make an important contribution to our Association and our industry, and at the same time to receive some real recognition.

The contest is seeking essays on any aspect of cross-border finance. The contest is open to What are the Com- employees of SFNet member firms and essays mittee’s goals for must be submitted by March 8, 2022. 1st, 2nd and 2022?

The goals of the commit- 3rd prizes will be awarded, and all three winning tee are to continue to essays will be published in future issues of The make progress with each Secured Lender. In addition, the current plan is of our task forces. The committee meets as a to make the three winning essays the subject of whole from time to time, a panel, featuring the authors, during the 2022 but the emphasis is mainAnnual Convention. ly on separate meetings of each task force.

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SFNet announced its Cross-Border Lending Essay Contest in early November. Goldberg Kohn is sponsoring this contest and members of the Committee will be judging it. Could you tell our readers a bit about the contest and why they should enter?

The contest is seeking essays on any aspect of cross-border finance. The contest is open to employees of SFNet member firms and essays must be submitted by March 8, 2022. 1st, 2nd and 3rd prizes will be awarded, and all three winning essays will be published in future issues of The Secured Lender. In addition, the current plan is to make the three winning essays the subject of a panel, featuring the authors, during the

You’ve chaired other SFNet Committees in the past and you spent many years as SFNet’s co-general counsel. What advice would you give to others who are on committees, but would like to take on a chairperson role? Any tips for juggling the extra responsibility?

I would definitely encourage people serving on committees to consider stepping up to the chairperson role.

I’ve always found that the extra work to be more than offset by the benefits derived from a leadership role, including the gratification of contributing to our Association in a more significant way and the development of new relationships.

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

PUTTING CAPITAL TO WORK

KBS: Partnership with Gerber Finance Allows Builder to Stabilize and Grow KBS started building modular homes in New England 20 years ago, and the housing industry has been on a wild ride ever since.

BY JENNIFER PALMER

JENNIFER PALMER Gerber Finance In 2008, the housing crisis caused financial markets to crash, leading to catastrophic rates of home mortgage foreclosures and resulting in millions of people losing their life savings, jobs, and homes. The U.S. home building industry took a hard hit. Then in 2020, the COVID-19 pandemic began, causing a hundreds of thousands of deaths and the worst recession in our country’s history. While the pandemic has not slowed the demand for housing – especially as people have spent more time in their homes -- it has caused commodity price increases and massive supply chain disruptions that have wreaked havoc on builders.

And through it all, KBS has found its way.

In 2001 Ed Keiser started KBS, which, at the time, was one of four modular manufacturers in Oxford County, Maine.

The company set out to build cost-efficient, single-family homes in a factory, since modular construction make residential building faster, more affordable and offers greater flexibility. The company is committed to residential housing, net-zero design, and more recently, multi-family buildings. It works with skilled local tradespeople and partners with developers, general contractors, architects, and builders to design and manufacture modular structures. KBS built its name during the first years by building singlefamily residential homes for local builders throughout New England.

When the housing crisis hit in 2008,

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KBS was affected like many other builders. To maintain backlog and -- most importantly -- stay in business, the company expanded by venturing into the commercial construction space. KBS survived the housing crisis and was purchased by ATRM Holdings Inc. and, subsequently, merged into Star Equity Holdings Inc. A local lending institution had financed KBS, but in the fall of 2015, the company began looking for a financing partner to replace the bank. Gerber’s efforts to interview and get to know the local management team, understand their needs and how they operate sealed the deal.

They signed on in February 2016, and KBS and Gerber have been partners ever since. From the beginning of the relationship, Gerber worked closely with management to provide the flexible financing structure the company needed for success. Gerber’s creativity and speed helped KBS increase revenues, even during challenging market conditions.

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In 2020, as we know, the COVID-19 pandemic hit. The good news for KBS is that the pandemic has not negatively affected demand; both the single-family and multi-family residential building segments remain surprisingly strong despite the pandemic-driven inflation and supply chain issues. KBS has steadily grown its revenue, despite these issues. But it has not always been easy. Rising commodity prices – including lumber price increases in 2021 – have affected the company’s bottom line, and it has struggled to manage an extended backlog. KBS has also dealt with fierce competition for labor in the local work pool. Additionally, project deadlines have been difficult to manage, especially for larger projects, with supply chain disruptions making it challenging to meet production goals.

The partnership with Gerber has been critical over the past few years, while the company has been on a journey to rebuild the sales effort, recapitalize the company, and streamline operations.

“Gerber is a valued partner and has proven to be both insightful and flexible as we work to turn around KBS,” said Matt Mosher, General

Manager at KBS. “Gerber has allowed KBS to stabilize and grow despite the extreme headwinds it has experienced over the past five years.”

The business requires significant working capital as financing modular construction is more complex than conventional construction.

“Gerber Finance ABL has helped the company get through some challenging times and has allowed us to re-enter the commercial-scale multi-family business, where working capital needs are higher,” said David Noble, CFO at Star Equity Holdings Inc. “Our Gerber ABL line of credit is a critical piece of the financing puzzle as KBS balances the cash flow fluctuations of larger projects.”

As they have traveled down a long and winding road, the company has stayed true to its mission: to produce high-quality, affordable and sustainable homes for distribution throughout New England. It has succeeded – despite a financial crisis, a global pandemic and the ups and downs of business -- because it continues to exceed customers’ expectations, continuously strives to improve in all areas of the company, has developed a highly trained and motivated workforce, has established long-term partnerships with suppliers and customers, and conducts business with honesty and integrity. KBS is proud to have built more than three thousand residential homes since 2001.

Jennifer Palmer is CEO of Gerber Finance and vice president of the Secured Finance Network. Palmer, who began her career as an attorney, started at Gerber in 2006 in the marketing department, quickly moving into the position of vice president of marketing, then senior vice president, thanks to her signature work ethic and appetite for learning. In 2013, she was appointed president and then became CEO in January of 2020. She holds a JD from Fordham Law and a BA from Marist College.

®

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We unite our industry for crucial conversations, provide essential data to inform smart business decisions, attract and recognize emerging leaders, and deliver relevant, industry-specific education programs in a variety of formats.

But none of this is possible without your support.

For more information or to make a contribution, visit SFFound.org.

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