TSL November 2017 by Secured Finance Network

Representing the Asset-Based Financing, Factoring & Supply Chain Finance Industries Worldwide November 17

The 73rd Annual Convention Issue IN THIS ISSUE TSL INTERVIEWS

Cybersecurity Remains An Industry Priority P.16

Rich

Gumbrecht CFA’s New CEO P.20

What Happened to

LIBOR? P.24 Anatomy of a

Fraud P.30

Corporate Governance: An Overlooked Opportunity for Lenders P.40 The Commercial Lending

Conundrum P.48

Part of Something Epic

Michael

Monk CFA’s 2018 President P.34 David

Marks Leading by Listening at Wells Fargo Capital Finance P.44 DEPARTMENTS

Collateral THE CFA BRIEF What Would You Do? Legal Notes Revolver

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THE 73RD ANNUAL

CONVENTION ISSUE

Welcome to our Annual Convention Issue celebrating CFA’s 73rd Convention in Chicago! This issue features interviews with CFA’s New CEO, Rich Gumbrecht, Michael Monk, CFA’s 2018 President, and David Marks, head of Wells Fargo Capital Finance, as well as articles on cybersecurity, corporate governance, the end of LIBOR, the anatomy of a fraud and incorporating digital workflows as a key tool in this battle for borrowers. IN OUR NEXT ISSUE We kick off the year with the info you need NOW to face the influx of competition facing the industry. Our Innovation issue will feature topics including how technology is affecting how lenders do business, ECO lending and a Reuters Capital Markets Update.

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

Volume 73, Issue 9

November 17

FEATURES

16 Cybersecurity Remains An Industry Priority Even before the widespread Equifax breach, cybersecurity was often cited as a top concern for lenders. What steps can you take now to heighten your protection from this risk? By Myra Thomas

20 CFA’s New CEO: Rich Gumbrecht

Rich Gumbrecht calls himself a “growth guy,” but you could just as easily call him an “adventure guy.” And perhaps the two go hand-in-hand. Gumbrecht’s zest for life certainly carries over into his enthusiasm for his new role: CEO of the Commercial Finance Association. Gumbrecht has spent his 25plus years in commercial finance building, expanding and operating platforms in the secured lending space, including nearly 15 years at GE running a global technology leasing business, their diversified vendor finance business, which included a trade payables platform, and as chief marketing officer for one of their largest divisions. By Michele Ocejo

24 What Happened to LIBOR?

David Morse of Otterbourg, P.C. answers some important questions about the end of LIBOR. By David W. Morse, Esq.

30 Anatomy of a Fraud

Marshall Glade and Paul Dopp of GlassRatner provide a cautionary tale of how missed red flags led to a loss in the millions for one lender. By Marshall Glade and Paul Dopp

44 34 Michael Monk: CFA’s 2018 President

CFA’s 2018 president, D. Michael Monk, has been managing partner of Amerisource Funding since 1998. He has over 25 years of experience, including senior leadership roles covering virtually all aspects of the commercial finance field, including credit, underwriting, legal, compliance, operations management, portfolio risk management, business development, marketing and public relations. By Michele Ocejo

40 Corporate Governance – An Overlooked Opportunity for Lenders

Howard Brod Brownstein explains why lenders should pay closer attention to borrowers’ corporate governance. By Howard Brod Brownstein, CTP

44 The TSL Interview: David Marks: Leading by Listening at Wells Fargo Capital Finance

David Marks has led Wells Fargo Capital Finance since May 2017. David has a broad experience across Wells Fargo’s Wholesale Banking Group, including leadership roles in commercial and corporate banking, trade finance, and credit risk management. Since joining the company in 1987, he has led Corporate Banking, served as senior credit officer for Corporate Banking and Government and Institutional Banking and Wells Fargo’s securities portfolios, and also led the International Group. By Michele Ocejo

48 The Commercial Lending Conundrum

How can banks improve their processes to stave off the fintech influx? Incorporating digital workflows is a key tool in this battle for borrowers. By Jeanne Moss

DEPARTMENTS 10

Letter From Rich Gumbrecht, CEO of the Commercial Finance Association, discusses the important role each member of the CFA Community plays in the success of the Association.

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

What Would You Do? In this edition of What Would You Do?, a retailer borrower of Overadvance Bank is preparing to file for Chapter 11 to conduct an orderly wind down of its business. A significant portion of the borrower’s current inventory was shipped on consignment from various vendors. With a potentially under-secured loan, the Chief Credit Officer of Overadvance Bank tries to determine whether the consigned inventory can be included in the Bank’s loan recovery analysis. By Dan Fiorillo and Jim Cretella

TSL Profi le As it approaches its one-year anniversary, White Oak Commercial Finance (WOCF) has experienced tremendous growth. WOCF president and CEO, Robert Grbic, discusses WOCF’s recent growth and plans ahead. By Eileen Wubbe

The CFA Brief 64 74 76

77 78

Among CFA Members CFA Chapter News Calendar

Advertisers Index Legal Notes In this issue, CFA’s Co-General Counsel report on a recent case in which a secured creditor lost its security interest because of an extremely minor error in the debtor’s name on the UCC-1 financing statement, and will also report on UNCITRAL’s new project. By Jonathan Helfat and Richard Kohn, CFA Co-General Counsel

Revolver Marty Battaglia of Encina Business Credit discusses how doing proper work upfront creates more certainty in the lending business. By Marty Battaglia

STAFF & OFFICES Michele Ocejo Editor-in-Chief & CFA Communications Director mocejo@cfa.com Eileen Wubbe Senior Editor ewubbe@cfa.com Aydan Savaser Art Director

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

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

The Commercial Finance Association is the trade group for the asset-based lending arms of domestic and foreign commercial banks, small and large independent finance companies, floor plan financing organizations, factoring organizations and financing subsidiaries of major industrial corporations. The objectives of the Association are to provide, through discussion and publication, a forum for the consideration of inter- and intra-industry ideas and opportunities; to make available current information on legislation and court decisions relating to asset-based financial services; to improve legal and operational procedures employed by the industry; to furnish to the general public information on the function and significance of the industry in the credit structure of the country; to encourage the Association’s members, and their personnel, in the performance of their social and community responsibilities; and to promote, through education, the sound development of asset-based financial services. The opinions and views expressed by The Secured Lender’s contributing editors and authors are their own and do not necessarily express the magazine’s viewpoint or position. Reprinting of any material is prohibited without the express written permission of The Secured Lender. The Secured Lender, magazine of the asset-based financial services industry (ISSN 0888-255X), is published 9 times per year (Jan/Feb, March, April, May, June, July, September, October and November) $65 per year non-member rate, and $100 for two years non-member rate, CFA members are complimentary, by Commercial Finance Association, 370 Seventh Avenue, New York, NY 10001. Periodicals postage paid at New York, NY, and at additional mailing offices. Postmaster, send address changes to The Secured Lender, c/o Commercial Finance Association, 370 Seventh Avenue, New York, NY 10001.

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letter from

THOUGHTS FROM CFA AND TSL STAFF

s I write this, the CFA Annual Convention is just a few short weeks away. This will be my first Convention as CEO of the Commercial Finance Association and I am looking forward to meeting many members of the CFA Community in person. The concept of a thriving and connected “community” is what drives our mission and goals here at CFA. We want to be the essential community for commercial lenders and service providers who do the important work of fueling our engines of commerce and making capital work. Through connected communities of interest that spark opportunities and deal flow, resources that provide insights to see around corners to make better business decisions and improve competitiveness, programs that cultivate professional development, and thought leadership that advances the interests of our industry, we will shape our future to realize our potential individually and collectively. So, who makes up this community of ours? Lenders cannot conduct this important work that is vital to our economy, without their valued industry partners, the service providers of our industry. We’ve made great strides in recent years to demonstrate this sector’s importance to the Association and the

industry, and now we are going a step further by opening up CFA membership, beginning January 1, to those whose services are critical to capital formation. This change is sure to strengthen CFA as an association and benefit us all as it will enrich the CFA experience. Industry service providers are only a part of our mission of inclusiveness. No organization can prosper without engaging and encouraging its future leaders, especially now when the workforce is facing a mass exodus of Baby Boomers (approximately 10,000 are retiring per day). CFA recognized this and set out to celebrate the next generation of commercial finance professionals. The YoPro (Young Professionals) Committee was established as well as the CFA 40 Under 40 Awards. CFA’s mentoring program was launched two years ago and the feedback has been very positive from both mentors and mentees. An intrinsic element in CFA’s efforts to engage and serve all of its constituents is the Women in Commercial Finance Committee. This is CFA’s largest and one of its most dynamic and active committees. These and, truly, all of our endeavors, are only successful thanks to our passionate, energetic, committed volunteers. If you are interested in becoming more involved in your community, please let us know. I promise we will find a spot for you! Speaking of volunteers, on page 34 of this issue, we feature CFA’s 2018 president, D. Michael Monk. He discusses how he entered the world of commercial finance, his priorities as CFA president and the

importance of volunteering. In the TSL Interview on page 44, David Marks, who has led Wells Fargo Capital Finance since May 2017, discusses his new role, the challenges facing the industry and his view of leadership. On page 20, is an interview with yours truly written by TSL editor-in-chief, Michele Ocejo. Even before the widespread Equifax breach, cybersecurity was often cited as a top concern for lenders. What steps can you take now to heighten your protection from this risk? Turn to page 16 to read Cybersecurity Remains an Industry Priority by Myra Thomas Fraud…it’s the one word that strikes fear in the hearts of lenders. On page 30, Marshall Glade and Paul Dopp of GlassRatner provide a cautionary tale of how missed red flags led to a loss in the millions for one lender. In What Happened to LIBOR? on page 24, David Morse of Otterbourg, P.C. answers some important questions about the end of LIBOR. On page 48, in The Commercial Lending Conundrum, Jeanne Moss of ProfitStars explains how banks improve their processes to stave off the fintech influx. Incorporating digital workflows is a key tool in this battle for borrowers. Howard Brod Brownstein explains why lenders should pay closer attention to borrowers’ corporate governance on page 40. I look forward to working with you all in the coming year and I hope to see you in Chicago!

“We’ve made great strides in recent years to demonstrate this sector’s importance to the Association and the industry, and now we are going a step further by opening

up CFA membership, beginning January 1, to those whose

Warm regards,

services are critical to capital formation.”

Rich Gumbrecht CFA CEO

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THE INDUSTRY IN BRIEF

Commercial Finance Association (CFA) Appoints Richard D. Gumbrecht as CEO The Commercial Finance Association (CFA), the international trade group of the assetbased lending, factoring and supply chain finance industries, has announced that Richard D. Gumbrecht has been appointed CEO. Gumbrecht had been serving as interim CEO since January. Gumbrecht was most recently the chief growth officer at EverBank Commercial Finance (2010-2016). He has served as the Immediate Past Chairman of the Equipment Leasing and Finance Foundation (ELFF) Board of Trustees since 2015 and held the position of Chairman from 2013-2015. He is a 25-year veteran of the commercial finance industry, having led diversified lending platforms at GE Capital and co-founded a successful equipment finance company. “Rich was selected to be the CEO of the Commercial Finance Association after the most thorough and systematic process ever conducted by stakeholders of the Association. The Management Committee is very impressed and thankful for the efforts of the Search Committee, comprised of Peter York, who led the effort, Jeff Walsh, representing the CFA staff, David Kurzweil, representing the CFA Education Foundation and at-large members, Michael Monk and Betty Hernandez. Rich’s experience within the asset-based lending industry, his long-term membership and role as an officer of the Equipment Leasing and Finance Association and his excellent financial management skills make him an outstanding choice for the position. The Management Committee of the CFA strongly supports Rich and believes that the Association will thrive under Rich’s management,” said Andrea Petro, 2017 CFA president, and executive vice president, Wells Fargo Capital Finance. Said Gumbrecht, “I am thrilled to be part of this vibrant and invaluable community of lenders and service providers who do the important work of fueling our engines of commerce. I look forward to partnering

with our members, staff and volunteers to help enable their success and deliver on our mission of ‘bringing together the resources that make capital work’.”

Citizens Bank’s Structured Finance Group Adds Two More to Growing Team Citizens Bank announced that Wit Derby and Vincent Ng have joined the Structured Finance Group at Citizens Commercial Banking. Derby joins Citizens from FTI Consulting where he has been a managing director for the past eight years. A Cornell University graduate, he has more than 30 years of banking experience. Ng joins Citizens from Wells Fargo. A University of Georgia graduate with an MBA from the University of North Carolina, he has a decade of banking and corporate experience. Citizens’ Structured Finance Group is focused on establishing, building and maintaining relationships with senior leaders at large and mid-tier investment banks, distressed-focus private equity funds and other intermediaries to source senior secured financing opportunities greater than $20 million. The team’s experience with lead-left financings would support mergers and acquisitions, recapitalizations, debtorin-possession (DIP), plan-of-reorganization (POR) and out-of-court (OOC) transactions. “Both Wit and Vincent are talented and experienced bankers who deliver excellent ideas and terrific service to clients,” said Brent Hazzard, head of Structured Finance at Citizens Commercial Banking. “We are very happy to have them join the growing Citizens team as we focus on helping our clients reach their potential by providing the solutions they need for every stage in the life cycle of their businesses.” Citizens is a trusted strategic and financial advisor, consistently delivering clear and objective advice. The Citizens Commercial Banking approach puts clients

REGISTRATION IS OPEN FOR CFA’S ABCC IN LAS VEGAS! WWW.CFA.COM

first by offering great ideas combined with thorough market knowledge and excellent execution to help its clients enhance their business and reach their potential. Citizens Financial Group, Inc. is one of the nation’s oldest and largest financial institutions, with $151.4 billion in assets as of June 30, 2017. Headquartered in Providence, Rhode Island, Citizens offers a broad range of retail and commercial banking products and services to individuals, small businesses, middle-market companies, large corporations and institutions. Citizens helps its customers reach their potential by listening to them and by understanding their needs in order to offer tailored advice, ideas and solutions. In Consumer Banking, Citizens provides an integrated experience that includes mobile and online banking, a 24/7 customer contact center and the convenience of approximately 3,200 ATMs and approximately 1,200 branches in 11 states in the New England, Mid-Atlantic and Midwest regions. Consumer Banking products and services include a full range of banking, lending, savings, wealth management and small business offerings. In Commercial Banking, Citizens offers corporate, institutional and not-for-profit clients a full range of wholesale banking products and services, including lending and deposits, capital markets, treasury services, foreign exchange and interest rate products and asset finance. www.citizensbank.com

Penny Fine to Lead Business Development for CIT Northbridge Credit CIT Bank, the banking subsidiary of CIT Group Inc. (NYSE: CIT), appointed Penny Fine as managing director to lead business development for CIT Northbridge Credit LLC (CIT Northbridge), effective immediately. In this role, Fine will be responsible for driving the origination efforts for a broad range of flexible asset-based debt solutions focused on middle-market

$50 billion in assets as of June 30, 2017. Its principal bank subsidiary, CIT Bank, N.A., (Member FDIC, Equal Housing Lender) has more than $30 billion of deposits and more than $40 billion of assets. CIT provides financing, leasing, and advisory services principally to middle-market companies and small businesses across a wide variety of industries. It also offers products and services to consumers through its Internet bank franchise and a network of retail branches in Southern California, operating as OneWest Bank, a division of CIT Bank, N.A. www.cit.com.

Restructuring Veteran Sheila Smith to Join Gordon Brothers’ Board of Advisors Gordon Brothers, the Boston-based global advisory, restructuring and investment firm, announced that it has appointed Sheila Smith to its Board of Advisors. Smith has over 25 years of experience in financial advisory and restructuring services. She will be responsible for providing guidance on the firm’s ongoing evolution. Smith retired in 2015 from Deloitte after serving in numerous leadership positions including Restructuring Service Line Leader for the Americas Region, Service Line Leader of the U.S. and the New England FAS practice. She has participated in hundreds of bankruptcy, restructuring, financial consulting, and §363 sell-side advisory engagements. She has been recognized by numerous professional organizations including the American Bankruptcy Institute (ABI), Hugh O’Brian Youth Leadership (HOBY), International Women’s Insolvency & Restructuring Confederation (IWIRC), New York Institute of Credit (NYIC), and Turnaround Management Association (TMA). “We are thrilled to welcome a person of Sheila’s caliber to our board. Her experience, insight and network will be invaluable in charting the future course of the

firm,” stated Ken Frieze, chief executive officer of Gordon Brothers. “Gordon Brothers holds a unique marketplace position, providing global solutions across industries and throughout challenging business lifecycles. I am thrilled to join the Advisory Board and work amongst colleagues and friends,” Smith added. Smith began her professional career as a special education teacher, moving to Boston to get her MBA in public management. Thereafter, she was a senior finance officer of a building materials company that failed, resulting in her introduction to insolvency. Since 1903, Gordon Brothers (www. gordonbrothers.com) has helped lenders, operating executives, advisors, and investors move forward through change. The firm brings a powerful combination of expertise and capital to clients, developing customized solutions on an integrated or stand-alone basis across four service areas: valuations, dispositions, operations, and investments. Whether to fuel growth or facilitate strategic consolidation, Gordon Brothers partners with companies in the retail, commercial, and industrial sectors to put assets to their highest and best use. Gordon Brothers conducts more than $70 billion worth of dispositions and appraisals annually. Gordon Brothers is headquartered in Boston, with 25 offices across four continents.

INDUSTRY NEWS

companies. She will report to group head, Neal Legan. “We’re pleased to have someone of Fine’s caliber joining our team, particularly given her extensive experience in asset-based loan origination,” said Legan. “Her proficiency in structuring asset-based revolving lines of credit will be valuable as we continue to offer our clients revolving and term-loan commitments tailored to middle-market companies.” Prior to joining the CIT Northbridge team, Fine was business development officer at Huntington Business Credit, a division of The Huntington National Bank where she focused on asset-based loan origination. Previously, Fine was Midwest region head for Chase Business Credit, a division of JPMorgan Chase where she also focused on asset-based loan origination. Before JPMorgan Chase, she was an executive director of Restructuring Services at Capstone Advisory Group, consulting on solutions for lenders and investors in distressed situations. From 2005-2008, Fine served as executive vice president and head of the National Restructuring Group at CIT. CIT Northbridge Credit LLC is a trusted financial partner with knowledge and expertise delivering a broad range of flexible asset-based debt solutions to support middle-market companies. CIT Northbridge Credit is a joint venture between CIT Bank, the banking subsidiary of CIT Group Inc. (NYSE: CIT), and Allstate as part of its investment portfolio. The joint venture will provide revolving and term loan commitments from $15 million to $150 million to companies across various industries and business cycles, and will serve primarily as sole lender, agent, club participant or co-lender. The partnership leverages CIT’s strong brand, extensive experience and competency in providing higher yielding asset-based loans and Allstate Investments’ expertise and capital. Founded in 1908, CIT (NYSE: CIT) is a financial holding company with more than

Webster Financial Corporation Announces CEO Succession Webster Financial Corporation (NYSE: WBS), the holding company for Webster Bank, N.A. and its HSA Bank division, announced that James C. Smith, chairman and chief executive officer (CEO), following a distinguished career with Webster spanning more than four decades, will retire from Webster and transition to nonexecutive chairman.

THE SECURED LENDER NOVEMBER 2017 13

INDUSTRY NEWS

collateral

John R. Ciulla, president, will become the company’s CEO and a member of the holding company’s Board of Directors. Ciulla will succeed Smith, who has served as Webster’s CEO since 1987, and will be the third CEO in Webster’s 82-year history. These changes, effective January 1, 2018, reflect the culmination of a multi-year leadership succession planning process. “It has been an honor to lead Webster and work with our community-minded, values-guided bankers as we’ve built Webster into the leading regional bank we are today,” said Smith. “Over the past 10 years in particular, we’ve undertaken a transformation to position Webster for continued growth as a high-performing regional bank. We have successfully developed and implemented our strategic management framework, which invests capital and resources to support strategies that create value for our customers and shareholders.” “John has contributed greatly to our successful transformation based on his consistently high performance, strategic acumen and strong leadership skills,” said Smith. “The Board and I are proud to select an internal candidate who understands well our business segments and who is a reliable steward of Webster’s culture, which is centered on its values of responsibility, respectfulness, trustworthiness, citizenship and teamwork. We are confident that John is the ideal leader to advance Webster’s mission of helping individuals, families and businesses achieve their financial goals.” “On behalf of the Board, I would like to thank Jim for his inspirational leadership, unrivaled integrity and extraordinary accomplishments during the past 30 years as CEO,” said John J. Crawford, lead independent director of the Webster Board of Directors. “John is the natural choice to succeed Jim. He has been a key member of our executive management team for more than a decade, and his extensive experience with, and knowledge of, our businesses and the industry have prepared him

to successfully lead and grow Webster. The Board looks forward to working with Jim, John and the leadership team to ensure a seamless transition to the benefit of all Webster stakeholders.” Ciulla joined Webster in 2004 as senior vice president for Middle Market Banking and has served in a variety of management positions with increasing responsibility, including as chief credit risk officer from 2008 to 2010. He was promoted to executive vice president and head of Middle Market Banking in 2011, and became head of Commercial Banking in 2014. Ciulla was appointed president of Webster in 2015, and is currently responsible for the management of most of the company’s business units and support functions. Ciulla is also the president of the bank’s holding company and a member of the Webster Bank, N.A. Board of Directors. Said Ciulla, “I have had the privilege of working closely with Jim over the past 14 years and appreciate and value his principled leadership and extraordinary contributions to Webster. I have benefitted from his counsel throughout my career at Webster, and especially from our close working relationship these past few years. As Webster’s incoming CEO, I look forward to working with our strong executive management team and leveraging my experience to ensure the great heritage and legacy of Webster continue to be the foundation to advance our strategic priorities.” Webster Financial Corporation is the holding company for Webster Bank, National Association. With $26.2 billion in assets, Webster provides business and consumer banking, mortgage, financial planning, trust, and investment services through 167 banking centers and 343 ATMs. Webster also provides mobile and Internet banking. Webster Bank owns the asset-based lending firm Webster Business Credit Corporation; the equipment finance firm Webster Capital Finance Corporation; and HSA Bank, a division of Webster Bank,

REGISTRATION IS OPEN FOR CFA’S ABCC IN LAS VEGAS! WWW.CFA.COM

which provides health savings account trustee and administrative services. Webster Bank is a member of the FDIC and an equal housing lender.

Wells Fargo Names Holly Kaczmarczyk Head of Supply Chain Finance Group Wells Fargo Capital Finance, part of Wells Fargo & Company (NYSE: WFC), named Holly Kaczmarczyk head of the Supply Chain Finance Group and her expected transition will take place in Q4. In her role, Kaczmarczyk will be working closely with clients to offer working capital solutions that address the financing needs of corporations and their supply chain partners to help improve growth, mitigate risk and improve cash flow across a broad range of industries, both domestically and internationally. She will be based in Charlotte, NC and report to David Marks, head of Wells Fargo Capital Finance. “Supply Chain Finance is critical to our clients and a key part of the Capital Finance business. I’m thrilled to have Holly lead this important, fast growing business and terrific group of team members,” said Marks. “Holly’s international experience and previous leadership roles in the asset-based industry position her well to lead our global Supply Chain Finance team as we continue to serve the needs of our clients.” Prior to this role, Kaczmarczyk was chief executive officer of Wells Fargo’s Irish banking subsidiary and was based in Dublin, Ireland. She joined Wells Fargo in 2002 and has held leadership roles across our Wholesale Banking Group, including senior leadership roles in Wells Fargo Capital Finance. Wells Fargo Capital Finance is the trade name for certain asset-based lending services, senior secured lending services, accounts receivable and purchase order finance services, and channel finance

White Oak Commercial Finance Taps Mignon Winston as Senior Vice President White Oak Commercial Finance, LLC (WOCF), an affiliate of White Oak Global Advisors, LLC and its institutional clients, announced that it had bolstered its AssetBased Lending team with the appointment of commercial financing veteran Mignon Winston to the position of senior

vice president. Based in WOCF’s New York City office, Winston will report directly to Gerard Hanabergh, managing director of Risk for Asset-Based Lending. In her new role, Winston will leverage more than 25 years of experience in commercial lending and portfolio management to expand White Oak Commercial Finance’s asset-based lending portfolio. Prior to joining WOCF, she served as first vice president and underwriter in the Asset-Based Lending Group at Sterling National Bank. Winston also served as asset-based lending credit officer at First Capital. In addition, she has held senior positions at prominent financial institutions such as Wells Fargo Bank, The CIT Group, Inc., Chase Manhattan Bank, and Heller Financial, Inc. “One of the main differentiators that sets White Oak Commercial Finance apart is the caliber of its human capital,” said Robert Grbic, president and chief executive officer, WOCF. “We are committed to recruiting talent that empowers us to better serve the businesses we work with. Mignon’s extensive industry experience and acute understanding of risk will serve to expedite the underwriting process and ensure that borrowers are afforded faster access to vital capital.” Winston added, “White Oak Commercial Finance’s approach to commercial lending is uniquely nimble and responsive to the unique needs of the clients it serves. I am looking forward to working with this leading organization to support its growth in financing the middle-market companies that underpin our economy.” Gerard Hanabergh, managing director of Risk for Asset-Based Lending at WOCF, commented: “In bringing Mignon on board, we are thrilled to welcome another highly qualified individual to our team. She will undoubtedly prove to be a tremendous asset.” Winston earned her undergraduate degree in economics from Harvard University. She subsequently received her Master of Business Administration, with a concentra-

tion in finance, from New York University. White Oak Commercial Finance, formerly Capital Business Credit, was acquired by White Oak Global Advisors, LLC on behalf of its institutional clients in late 2016. Today White Oak Commercial Finance has over $300 million of assets deployed with office locations in New York, Charlotte, Chicago, Fort Lauderdale, Los Angeles, Hong Kong and Shanghai. White Oak Commercial Finance, LLC is a global financial products and services company providing credit facilities to middle-market companies between $1 -$30 million. WOCF’s solutions include asset-based lending, full-service factoring, invoice discounting, supply chain financing, inventory financing, U.S. import/export financing, trade credit risk management, account receivables management and credit and collections support. WOCF is an affiliate of White Oak Global Advisors, LLC, and its institutional clients. www. whiteoaksf.com White Oak Global Advisors, LLC is a leading global alternative asset manager, specializing in originating and providing financing solutions to facilitate the growth, refinancing and recapitalization of small and medium enterprises. Typical transaction sizes range between $15-$100 million. Since its inception in 2007, White Oak Global Advisors, LLC’s disciplined investment process aims to deliver risk-adjusted investment returns for its investors while establishing long term partnerships with our borrowers. www.whiteoaksf.com Editor’s Note: Turn to page 58 for the TSL Profile article on White Oak Commercial Finance.

INDUSTRY NEWS

services of Wells Fargo & Company and its subsidiaries, and provides traditional asset-based lending, specialized senior and junior secured financing, accounts receivable financing, purchase order financing and channel finance to companies across the United States and internationally. Dedicated teams within Wells Fargo Capital Finance provide financing solutions for companies in specific industries such as retail, software and hi-tech, healthcare, commercial finance, staffing, government contracting and others. wellsfargocapitalfinance.com. Wells Fargo & Company (NYSE: WFC) is a diversified, community-based financial services company with $1.9 trillion in assets. Wells Fargo’s vision is to satisfy our customers’ financial needs and help them succeed financially. Founded in 1852 and headquartered in San Francisco, Wells Fargo provides banking, insurance, investments, mortgage, and consumer and commercial finance through more than 8,500 locations, 13,000 ATMs, the internet (wellsfargo.com) and mobile banking, and has offices in 42 countries and territories to support customers who conduct business in the global economy. With approximately 271,000 team members, Wells Fargo serves one in three households in the United States. Wells Fargo & Company was ranked No. 25 on Fortune’s 2017 rankings of America’s largest corporations. News, insights and perspectives from Wells Fargo are also available at Wells Fargo Stories.

THE SECURED LENDER NOVEMBER 2017 15

Cybersecurity Remains An Industry Priority

BY MYRA THOMAS Even before the widespread Equifax breach, cybersecurity was often cited as a top concern for lenders. What steps can you take now to heighten your protection from this risk?

“The most popular types of attacks affecting financial institutions, according to the report, were related to breaches in web application database servers and operating systems, giving attackers the opportunity to read, change and delete sensitive information.“

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TSL PARTICIPANTS

Katherine A. Lemire

Lori Nugent

Jennifer Palmer

president,

shareholder,

president,

Lemire LLC

Greenberg Traurig LLP

Gerber Finance

Richard Palmieri

Michael Stanley

managing partner,

managing director,

ANR Partners

Rosenthal & Rosenthal

iven the widespread nature of cyber attacks in the U.S. and throughout the world, itâ&#x20AC;&#x2122;s little wonder that the financial services industry is on alert and working to be ever-vigilant to protect their sensitive information. The recent data breach at Equifax put the industry on notice, and secured lenders are not taking the threat lightly. The concern is warranted. According to reports from IBM Managed Security Services, financial services jumped from the third most-cyber attacked industry in 2015 to the first most cyber-

Brendan Welter senior vice president and chief information security officer, Sterling National Bank

attacked in 2016. The most popular types of attacks affecting financial institutions, according to the report, were related to breaches in web application database servers and operating systems, giving attackers the opportunity to read, change and delete sensitive information. The report also noted a rise in reported Society for Worldwide Interbank Financial Telecommunication (SWIFT) attacks against the messaging system used by banks and companies to move cash globally. Assessing the Risk But the exposures to cyber hackers are diverse. The most significant attacks are generally associated with the vast amounts of confidential data that lenders regularly store, notes Brendan Welter, senior vice president and chief information security officer for Ster-

THE SECURED LENDER NOVEMBER 2017 17

The Dangers of Interconnectedness While cybersecurity does focus on minimizing exposures at the secured lender itself, the nature of modern finance demands that financial institutions and their clients be increasingly interconnected. Along with the convenience of interconnected systems comes a greater and greater chance of the transmission of cyber risk between parties. Welter notes, “The opportunity for cyber attacks multiply as the number of client applications and interfaces increase.” Secured lenders can minimize the risk by looking at each and every transaction they consider. Asset-based lenders and factors need to constantly evaluate the safety of the environment of the outside company, as well as consider how they interface and the back-ups and safety systems they install. Smart secured lenders are evaluating cybersecurity risk at all phases of the due diligence process, including

“

Nothing connected to the Internet can be made 100 percent secure, so it’s important to be prepared for a breach,” says Nugent, who refers to a data breach as “a tipping point” for most organizations. “Your reputation will never be the same. It will either be enhanced by the character you show in responding well to the crisis, or it will be diminished if the situation is mishandled.

“

ling National Bank. Any time a secured lender connects with clients through the Internet, probably through a client portal, there are risks. “Without the right controls and focus on protecting client data, the exposures will grow considerably against the backdrop of the rapid developments in the cyber hackers’ capabilities,” he says. Welter admits that the sheer number of sophisticated techniques that cyber hackers use is testing the industry. But he believes that assetbased lenders and factors are rising to the challenge. The key to avoiding cyber attacks, says Welter, remains with investing in the right people, processes and technology to stay ahead of the threats. “We’ve found that raising cybersecurity awareness within the bank is also key to cyber resiliency, as our employees are our first line of defense,” he adds. “The industry can never stop learning and investing in cyber. The criminals and fraudsters innovate at such a fast pace that new techniques to conduct cyber crime surface daily.”

evaluating client practices as a part of underwriting and field exams. Protecting Sensitive Data Richard Palmieri, managing partner at ANR Partners, describes the extent and possible harm that a major cybersecurity attack could represent to a client. “It’s certainly possible for a company to suffer a malware or ransomware attack that could effectively put a smaller or middle-market client out of business, unless they quickly find a solution to the attack,” he says. Generally speaking, most asset-based lenders and factors are responding to

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cybersecurity attacks on their own, but there are outside cybersecurity and risk firms that are actively helping lenders to rebuild infrastructure after an attack. Often, the entry point for a cyber criminal isn’t through sophisticated hacking. Human error is often the gateway for a cyber threat. Katherine A. Lemire, president of Lemire LLC, admits that lenders with clientfriendly platforms need to have various precautions in place to prevent a breach. But she does note, “I haven’t seen a successful phishing expedition happen just because of a user-friendly platform.” It’s often human error and sloppiness by employees that’s the real problem. Understanding the Basics Cybersecurity controls certainly need to evolve, just as the threats do, says Lemire. However, a secured lender can have the most knowledgeable tech experts on staff and a trusted third-party cyber risk firm at the ready but, without the basic precautionary steps in place, data breaches are sure to occur. Lemire notes that it’s often the simplest security errors that get a lender in trouble. For instance, secured lenders shouldn’t name their WIFI network with the firm’s name or put employee email addresses on the website, in order to reduce the risk of spoofing, she says. Lemire also recommends teaching employees to never hit reply to emails requesting large amounts of cash or click on strange links and attachments. “Instead, type in the client’s email address that you know,” she says. In other words, check to make sure you have the right email address and not one that’s simply been spoofed. And while the employees at an asset-based lender or factor might have deep knowledge about finance and their client’s industry, that is often not the case with cybersecurity. “You have to simplify it for employees and users and educate the staff by describing cyber threats,” says Lemire.

Some firms have advanced to using encryption as a means to protect documents, which adds complexity to managing hundreds of passwords for the encrypted documents. While a firewall and continuous antivirus scans are essential, Lemire also admits that no system is 100% breach-proof. The goal is to avoid a cyber attack or minimize and quickly discover and fix a breach that might lead to some sort of business interruption. “It’s an interconnected world,” she adds. “There’s a great benefit from being connected, but it comes with a great risk.” Understanding the Reality Lori Nugent, shareholder at Greenberg Traurig LLP who has served as a first-responder for more than 1,000 data breaches, notes that the Ponemon Institute’s 2017 Cost of Data Breach Study: Global Overview predicts that 27.7 percent of the studied organizations will have a material breach in the next 24 months. “Nothing connected to the Internet can be made 100 percent secure, so it’s important to be prepared for a breach,” says Nugent, who refers to a data breach as “a tipping point” for most organizations. “Your reputation will never be the same. It will either be enhanced by the character you show in responding well to the crisis, or it will be diminished if the situation is mishandled.” Secured lenders should focus on taking practical, proactive steps to mitigate the risk and enhance their resilience when faced with a cyber attack, Nugent notes. “By taking steps now, lenders can significantly improve the outcome when a serious breach happens.” Nugent suggests developing and testing an incident response plan, involving IT, in-house and outside counsel, compliance, finance, risk management, public relations, risk management, and human relations. It also makes sense to know exactly what happens to legally protected data from the moment it’s obtained until it’s destroyed. Nugent notes that secured lenders should take legally defensible steps to protect data, as well as ensure

that data shared with a vendor is protected. “While a vendor’s contractual indemnification obligation helps, the secured lender still remains responsible to regulators and clients,” Nugent adds. Reserves and cyber insurance can serve as a financial buffer if a significant breach happens. Cyber insurance is particularly important from a cash flow standpoint since breach response costs add up quickly at a time when revenue may be decreasing due to the reputational damage. Nugent also suggests the use of multi-factor authentication for access to legally protected information, including transfer of funds. Increasingly, regulators are expecting this protection. But when regulators respond to a breach, she recommends that the key is putting it in context. “Be ready to highlight the key protective steps your organization is taking, including vendor management, and its experience in successfully thwarting other breach attempts,” she notes. “The regulatory environment is tense. For over a decade, state and federal regulators have been encouraging organizations to take data security seriously, so when a new breach happens, regulators are frustrated. That’s why being prepared to defend matters.” The Reputational Risk Secured lenders certainly need to be proactive to prevent hacks, says Michael Stanley, managing director and head of Rosenthal and Rosenthal. “Companies are relying upon the vendors and their customers to join their networks to optimize the supply chain, and the supply chain platforms are increasingly connected,” he adds. It gives everyone a broader reach, but a greater risk. Major cyber threats can present a risk to business not only for the short term, but for the long term as well. “It’s all about our ability to manage our business and consistently and quickly fund our clients,” he notes. It’s also about maintaining the brand. The financial costs from a cyber attack can be high, but there’s also the reputation risk that a serious breach

can cause and the subsequent loss of clients, says Stanley. The information lenders receive about clients and prospects is extremely sensitive—financial data, business plans, trade secrets and customer lists, just to name a few. It only takes one time, one breach of a client’s data, and a secured lender’s reputation is suddenly at stake, he notes. Stanley believes the next step is for financial services and regulators to work together more effectively to protect the industry and their clients and customers from cybersecurity threats. “Cyber attacks are something that no one wants to talk about, of course,” he says. But Stanley argues that the industry and regulators need to join forces to head off the major threats from coordinated, organized, and sophisticated statesponsored hacker groups outside of the country. An Evolving Threat Given the dynamic nature of cyber threats, secured lenders have to be vigilant about constantly educating themselves, says Jennifer Palmer, president of Gerber Finance. And while safeguards are necessary for the lender’s own data, lenders also need to have serious conversations with their clients about the importance of protecting theirs. Big Data and analytics can help to reduce cyber threat incidents. “As more organizations make the transition to a digital environment and learn how to mine their data, they will be able to better identify threats and mitigate or eliminate them before they become a bigger problem,” notes Gerber. “Even though firms have implemented safeguards, hackers are always trying to stay one step ahead of us, so we need to always seek expert advice and review our policies and procedures to ensure they always remain relevant and up to date,” she concludes. TSL Myra Thomas is an award-winning editor and journalist with 19 years’ experience covering the banking and finance sector.

THE SECURED LENDER NOVEMBER 2017 19

BY MICHELE OCEJO Rich Gumbrecht calls himself a “growth guy,” but you could just as easily call him an “adventure guy.” And perhaps the two go hand-in-hand. Gumbrecht’s zest for life certainly carries over into his enthusiasm for his new role: CEO of the Commercial Finance Association. Gumbrecht has spent his 25-plus years in commercial finance building, expanding and operating platforms in the secured lending space, including nearly 15 years at GE running a global technology leasing business, their diversified vendor finance business, which included a trade payables platform, and as chief marketing officer for one of their largest divisions.

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THE SECURED LENDER NOVEMBER 2017 21

“I left GE Capital to start a new equipment finance company, US Express Leasing, which my partners and I sold after weathering the Great Recession to a group of investors (Tygris Commercial Finance) and ultimately merged into EverBank, where I became their Chief Growth Officer. My job there was to grow the commercial side of the bank and expand into new asset classes, including commercial real estate, lender finance and asset-based lending,” said Gumbrecht. “So that’s how I got to know this industry, by looking at M&A opportunities in the space and ultimately bringing on a team and a portfolio. I was a director at the CFA during that period and attended a number of events and got to know the people. I had a good deal of board experience at the Equipment Leasing and Finance Association, where I’ve been active for over 20 years, and saw a lot of parallels between the two groups and a lot of potential at the CFA,” he continued. Gumbrecht has worked in PE-sponsored, bank-regulated and Fortune 5 environments. He understands the association model, having served as a volunteer, speaker, committee member, board member and chairman of the Equipment Leasing and Finance Foundation. “I guess you could say I’ve been preparing for this role for a long time,” commented Gumbrecht. Gumbrecht has accomplished much during his time as interim CEO. “I was brought in to help the CFA go through a transition. My goals were to effect an orderly transition to the new CEO, which I suppose I’ve done,” he said with a smile, “manage the day-to-day operations of the Association in order to ensure we are meeting our operating and financial objectives and to execute our agenda to support the members of the CFA community.” As a result of these goals, CFA beat its budget estimate and laid the groundwork for continuous improvement. Gumbrecht added, “We made a number of changes to build a foundation for sustained success. In addition to operational and process fixes, we sharpened our focus on adding value to our members and building a more diverse community. Our Industry Data Survey is now up to 41 participants, up from 25 a year ago. We held our first Women in Commercial Finance Conference in September in New York City, featuring Sallie Krawcheck

as the keynote speaker, to great reviews, and our 2nd Annual 40 Under 40 Awards celebration was even bigger than the last. The level of engagement demonstrates the vitality of our industry. I am excited about the prospects for CFA’s future.” Gumbrecht explained that he and his team have completed a strategic plan laying out a path to “consistently strong” financial performance and, most importantly, a vision for the future has been articulated. “We want to be the essential community for commercial lenders and service providers who do the important work of fueling our engines of commerce and making capital work.” To that end, Gumbrecht envisions: “more connected communities of interest that foster opportunities and deal flow, better access to data that provides insights to make business decisions and improve competitiveness, new tools for professional development, and more effective communications platforms that advance the interests of our industry.” “We will reposition and revitalize the Education Foundation so that it is forwardlooking and providing data to help you see around corners,” said Gumbrecht. Something else the CFA Community can look forward to: a Market Impact Study, clearly showing the size and scope of the industry and its impact on the economy. Gumbrecht explained a key part of these endeavors is ensuring CFA has an engaged and aligned governance structure, volunteers and staff. “This doesn’t happen without the commitment, passion, and talents of all of our constituents,” he said. Spend some time with Gumbrecht and the word “inclusiveness” will be heard often. An integral aspect of his vision includes bringing together the resources that make capital work. “We don’t do this as lenders alone; we are a community, including lawyers, turnaround professionals, field examiners, accountants, and so many others who comprise the value chain to our clients. For this reason, CFA will be expanding our membership to include firms that enable and support commercial lending as well as the lenders themselves,” Gumbrecht announced. Bringing service providers in as members of CFA is a major milestone for the Association and a testament to Gumbrecht’s ability to work closely with volunteer leaders to fulfill the needs of the

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CFA community. Both Gumbrecht and CFA’s 2018 president, Michael Monk, are ardent supporters of CFA chapters. “If there is one example of how vital CFA is, it’s our chapter network. We have well-established, thriving chapters as well as new germinating chapters, one starting in DC. Their organic success demonstrates the fundamental desire to gather for deal flow, networking and professional development. We are all stronger collectively than individually,” said Gumbrecht. Rich’s leadership style emphasizes collaboration. “My late business partner and dear friend Jim McGrane taught me long ago that ‘it’s always about the people.’ Peter Schwab, past chairman of Wells Fargo Capital Finance and past CFA chair, echoed this sentiment during his keynote speech at CFA’s 40 Under 40 celebration,” said Gumbrecht. “I believe if you demonstrate trust, respect and transparency, you can achieve great things. I believe in the power of collective leadership; ‘one band, one sound.’ As volunteers and staff, we succeed together by working toward common goals.” So what does CFA’s new CEO like to do when he isn’t serving the CFA community? He has traveled all over the world and seeking adventure is apparently in his genes. “The year my dad turned 75, I turned 50 and my son turned 20, we all went skydiving. Dad’s idea. I guess the apple doesn’t fall far from the tree,” he laughed. “I’m a jack of all trades and a master of none. I love to ski, surf, participate in triathlons and I’ve written a screenplay with my brothers. I’ll be climbing Kilimanjaro in 2018 for a group called Project Education,” said Gumbrecht. “Family comes above all else. I’m one of seven kids. I’ve been married to my wife, Joanne, for 32 years.” He explained that Joanne is the grounded one (literally!) She supports him in his exploits, but doesn’t participate. Gumbrecht and his wife have two children. Their daughter is in public relations in the healthcare industry and their son won an Emmy while at NBC. With Gumbrecht at the helm, CFA is sure to soar to new heights. “I guess you could say this is my next big adventure,” said Gumbrecht. TSL Michele Ocejo is editor-in-chief of The Secured Lender and CFA director of communications.

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What Happened to By David W. Morse, Esq. David Morse of Otterbourg, P.C. answers some important questions about the end of LIBOR.

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A Lot has Happened to LIBOR By now, everyone has heard that LIBOR is on its way out. How did this ubiquitous bedrock of the financial world, come to this point? And, more importantly, how is the finance industry going to deal with it? Sure, there have been almost constant headlines about the scandals surrounding the reporting by the banks for the calculation of the London Interbank Offer Rate (LIBOR). But now, with the pronouncement by the U.K. Financial Conduct Authority (FCA), the regulator supervising LIBOR, that it will no longer support LIBOR, and its direction to the finance industry to find an alternative by 2021, the matter has risen to a whole new level. What does it mean? For now, the London Interbank Offer Rate (LIBOR) is continuing to constitute the basis for calculating interest or the equivalent payable under a vast range of credit products. LIBOR, in its various flavors and permutations, continues to be the benchmark for literally trillions of dollars (or the other currencies for which it is established) of interest, fees and other payments in respect of different forms of credit instruments, particularly derivatives and home mortgage loans, but of course more significantly for the commercial finance industry, high-yield notes, leverage loans and asset-based loans as well. Once Upon a Time… In its current form, “ICE LIBOR” (formerly known as BBA LIBOR) is a benchmark rate produced for five currencies with seven maturities quoted for each — ranging from overnight to 12 months. According to the Intercontinental Exchange (ICE) which now administers LIBOR, it is intended to provide an “indication” of the average rate at which a LIBOR contributor bank can obtain unsecured funding in the London interbank market for a given period, in a given currency. The various LIBOR rates result from a calculation done by the ICE Benchmark Administration based on rates submitted from between 11 and 17 contributor banks for each currency, which include Swiss Francs, Euros, Pound Sterling, Japanese Yen and U.S. Dollars. LIBOR, as used in the calculation of the interest rate payable by borrowers, is a relatively new phenomenon. In fact, it was not officially established until January 1, 1986. It surfaced in the realm of commercial finance in the late 1980s and early 1990s, pushing aside what until that point in time had been

a very straightforward use of the prime rate as announced by a major money center bank. Gradually, in the early 1990s, lenders began to experiment with using other rates for purposes of calculating interest, including references to treasury bills, certificates of deposit, prime…and LIBOR. By the mid-1990s, the others fell away and LIBOR prevailed. As we approach another period of change, it may be reassuring to know that such changes are not unprecedented. There was a time before LIBOR, just as there was a time before cellphones (really?), and just as the industry moved from exclusively using the “prime rate” as the basis for interest calculations to allowing for the use of LIBOR, it will move from LIBOR to another rate. (Of course, imagining the move to another rate may be easier than thinking of life without cellphones.)

lower interest rate. The headlines say banks have been fined more than $9 billion relating to interest-rate “rigging” pursuant to claims of fraud, collusion and manipulation of LIBOR rates. In September 2012, the FCA, as the regulator of LIBOR. published a report on LIBOR pursuant to a review led by Martin Wheatley (the “Wheatley Report”). The Wheatley Report led to a number of reforms in 2013. The reforms included a requirement for panel banks to use actual trades and keep records to substantiate submissions, criminal sanctions for LIBOR manipulation and a reduction in the number of rates from 150 to 35. The BBA handed over regulatory oversight of LIBOR to the FCA at that time and while the FCA took over the regulation of LIBOR, on February 1, 2014, ICE took over its administration from the BBA (hence “ICE LIBOR” was born).

The Financial Crisis and the Scandals The reign of LIBOR ran smoothly for decades. Then came the financial crisis in 2008. And, like so many other aspects of the business world and more particularly, the finance industry, LIBOR came under attack. In July and August of 2008, there were claims that the banks participating in the setting of LIBOR were, in fact, under-reporting the rate so as not to show that they were being charged more by other banks. Reporting higher rates being charged to them would reflect a weaker financial condition. And that was a perception that banks in 2008 were keen to avoid. The criticism about the accuracy of LIBOR arose particularly because dollar LIBOR had risen above the target shortterm interest rate set by the Federal Reserve, leading to an “inversion” where, for the first time, the prime rate was actually lower than LIBOR. The claims around the reporting by the contributor banks led to a number of proposals to the British Bankers Association (BBA), which, at the time, administered LIBOR, to attempt to make sure that the rates reported by the contributor banks, in fact, were representative of the actual costs of funds in the London interbank market. It was reported that most of the proposals were rejected by the BBA. In addition to under-reporting the rate, extensive litigation against most major international and domestic banks revealed that institutions were submitting rates in such a way so that traders could make more money when they stood to gain from a higher or

The Announcement On July 27, 2017. Andrew Bailey, chief executive of the FCA, announced that the FCA would not encourage or compel banks to submit LIBOR quotes after 2021. While it is unclear what may have precipitated this announcement at this particular point in time, ultimately with hindsight, it is no surprise. In some ways, the criticisms of LIBOR are relatively straightforward: ◗ First, there has been a decline in the number of transactions for interbank unsecured funding. The lack of volume for unsecured wholesale bank borrowing has led to estimates of the amounts that would be charged, rather than reflecting actual market conditions. ◗ As reflected in the heavily reported scandals, the contributing banks may have economic incentives to not provide accurate information for determining the rates. ◗ The scandals concerning the manipulation of LIBOR undermined confidence in it and reflected its weaknesses. ◗ The systemic risk of the dominance of instruments tied to LIBOR in terms of market liquidity became a point of concern for regulators (as noted in the 2014 Annual Report of the Financial Stability Oversight Council). The announcement by the FCA is even less surprising viewed in light of the recommendation of the Financial Stability Oversight Council almost three years ago, in 2014, that THE SECURED LENDER NOVEMBER 2017 25

U.S. regulators seek to establish an alternative to LIBOR and the formation at that time of the Alternative Reference Rates Committee (ARRC) with a mandate to find alternatives that addressed the weaknesses of LIBOR by being based on actual transactions and satisfying other international standards. Similar efforts have been underway in England. And, in fact, the ARRC has come up with a rate. In June of 2017, the ARRC announced that a “broad Treasuries repo financing rate” (BTRF) should be the reference rate used for derivatives denominated in US dollars. The BTRF, now referred to as the “Secured Overnight Funding Rate” (“SOFR”) — a more pronounceable acronym than “BTRF” — (you try to say it), is an overnight rate based on the interest paid on overnight loans collateralized by U.S. government debt. This rate reflects a market that is very liquid (with an average daily trading volume of $660 billion) and is transactional. Meanwhile, in the UK, the UK Risk Free Rate Working Group identified the Sterling Overnight Index Average (or “SONIA”) as the replacement rate for LIBOR (the English seem to have a better knack for finding acronyms that can be pronounced). SONIA is based on the weighted average of certain unsecured overnight sterling transactions. Both SOFR and SONIA are overnight rates and, therefore, differ from LIBOR in that they are backwardlooking rather than forward-looking So, with the government groups having selected the replacement for LIBOR, why is there any continuing discussion? First, the SOFR rate does not exist. At least, not yet. The Federal Reserve Bank of New York has said that it will start publishing the rate in mid-2018. Second, the rate, which is the cost for overnight loans using U.S. government debt as collateral, involves less risk and therefore is significantly lower than LIBOR. Third, given the low level of risk related to such loans, there will need to be a methodology for calculating a spread to account for bank credit risk. It also is only an overnight rate so there would need to be some way to have it correspond to the 1-month, 3-month, 6-month and 12-month terms that are commonly used with rates that are based on LIBOR. And the SOFR is backward-looking, while LIBOR and loans based on it are forward-looking and is used in that fashion. Can all of this be addressed? Time will

tell. As another step, the Federal Reserve issued a request for information relating to the production of rates on August 27, 2017, and is planning to collect and tabulate such information in connection with beginning the publication of SOFR in 2018. Now What? Meanwhile, where does that leave lenders and their counsel in the pricing and documentation of the transactions being done every day? Particularly since a credit facility with a 5-year tenor closed now will run past the 2021 date. There are two key provisions currently in use in credit agreements that are relevant to the LIBOR drama. First, there are the provisions intended to deal with the circumstance where LIBOR is not published. This is usually included in the definition of the term “LIBOR” and would typically say that, if LIBOR is not published by ICE or its successor or some other service, then the rate would be the rate that U.S. dollars are offered to the agent bank for the applicable credit facility in the London interbank market. Or, some agreements would say that it is the arithmetic average of the rate per annum at which deposits in U.S. Dollars would be offered by a select group of banks in the London interbank market to the agent bank at the applicable time for the applicable period. These provisions offer an alternative means to determine LIBOR, which in the case at hand is not particularly helpful, since we are addressing the possibility that there is no more LIBOR. Some LIBOR definitions in documents may however refer to a selection of alternative rates, but that is the exception. The other provisions that are directly applicable are so-called “market disruption” clauses. In fact, these clauses have been pulled from the shadows of the boilerplate in credit agreements before. In the financial crisis, there were very real concerns about the ability of lenders to continue to use LIBOR and lenders spent significant time reviewing how these provisions might work, particularly given that for the first time in its history LIBOR was actually greater than the prime rate, creating some unusual incentives for borrowers to switch from LIBOR to prime. Market disruption clauses typically have two parts. The first part is a description of the types of events that lead to the clause being applicable. The second concerns the

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mechanics for stopping the use of LIBOR and reverting to the use of the prime rate or base rate. The drafting of the first part of a market disruption clause varies, but follows some common themes. ◗ First, the right to stop using LIBOR generally arises if the agent determines that “reasonable and adequate means” do not exist for “ascertaining” LIBOR. ◗ Second, such right may arise if the agent, or a lender or a majority of the lenders determine that the interest rate using LIBOR does not “adequately and fairly reflect the cost” to such lender or lenders of making or maintaining the loans. ◗ Third, the right to eliminate the option to use LIBOR arises if U.S. Dollar deposits in the principal amounts of the loans using LIBOR are not “generally available” in the London interbank market. If any of these “market disruption” events occur, then upon notice by the agent for the lenders to the borrower: ◗ The obligation of the lenders to make LIBOR loans, and the right of the borrower to convert any base rate loans to LIBOR loans, is suspended, and ◗ The borrower is required to either (i) repay the then-outstanding LIBOR loans on the last day of the interest period applicable to such LIBOR loans or (ii) convert the then- outstanding LIBOR loans to base rate loans as of the last day of the applicable interest period for that loan. In some cases, the market disruption provisions may provide for immediate conversion of LIBOR-based loans to base rate loans. The market disruption provisions will also provide for the agent to send a notice to the borrower when the circumstances that led to the elimination of the right of the borrower to receive loans priced based on LIBOR have ended and the borrower may resume the use of LIBOR. In addition to, but similar, are provisions in credit agreement that say, if it is “unlawful” or “impractical” for a lender to provide LIBOR-based loans, it is not required to do so. These clauses using the “unlawful” or “impractical” standard further expand those circumstances where the “fall back” is to the prime or base rate provided for in the credit agreement. The critical point, however, is that, in

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general, credit agreements already address the possibility that LIBOR will not be available. The base rate or prime rate, however defined in any given credit agreement, already gives the parties a “fall back rate” in case LIBOR does not exist. Most credit facilities have the plumbing in place for using both LIBOR and a base rate. Consequently, if LIBOR becomes unavailable in the market, presumably these alternative rates that are already provided for will kick in and the world of commercial finance and lending more generally will continue on that basis—at least until the parties may come to some other agreed-upon solution. The key, therefore, becomes to make sure that the circumstances described above for triggering the elimination of the LIBOR option for the borrower will, in fact, be met. There is some risk that the circumstances described in the loan document that gives rise to the right to do so may not exactly fit the way in which LIBOR goes away, but, if nothing else, it seems likely that without banks reporting LIBOR, it will not be “readily ascertainable”, or that it will be “impractical” to use LIBOR as the reference rate in a credit agreement. Credit agreements may vary as to who can cause the agent to send the notice to the borrower to eliminate the LIBOR option—the agent, any lender or the majority of the lenders. Given the current state of matters, lenders may want to give even more flexibility to an individual lender to make this call. While perhaps originally thought to serve only as a temporary bridge, on its face, there does not seem to be any reason that the use of the base rate option could not continue as an alternative rate for as long as required. While it might be more expensive for a borrower in some circumstances, over time it would seem possible for the margins used with the base rate to be adjusted, just as margins using LIBOR have been adjusted, to reflect the larger trends of supply and demand between borrowers and lenders in the broader market. Lenders too would need to examine the impact on their yield of the shift to a base rate. Ultimately, until the matter of an alternative rate is settled within the financial markets, relying on these existing provisions may of necessity be the best default position. The Amendment Dilemma

While the market disruption clauses may be discounted by some as a solution to the current uncertainty around a replacement for LIBOR, another approach is to consider how provisions in loan documents should be structured to deal with the possibility of a new rate. Should credit agreements expressly address now how a credit agreement may be amended to replace LIBOR with a yetto-be created rate? And who would control such an amendment? In the case of syndicated credit facilities, as with all amendments to a credit agreement, there would seem to be the usual “suspects” as alternatives for approving amendments: the agent unilaterally, the lenders holding a majority of the commitments (the “Required Lenders”), the lenders holding 66 2/3% of the commitments (the “Supermajority Lenders”), the lenders “directly adversely affected thereby” or all lenders. One approach that has started to be used is to expressly allow the amendment of the interest calculation by a majority lender vote. This of course could be problematic for any individual lender depending on the actual costs of funds that a particular institution may have. This occurred when LIBOR was inverted with the prime rate during the financial crisis. Those institutions that did not have access to inexpensive funds confronted real losses. There has been some criticism of this approach. Instead, some sources have suggested that it is more appropriate to have all lenders’ approval of a change as fundamental as the rate used for purposes of determining the interest payable by the borrower. This, of course, runs the risk that, if any one lender is unwilling to provide such approval, the rest of the lender group may suffer. In theory, the right to replace a non-consenting lender pursuant to the customary “yank-a-bank” clause (those clauses that give a borrower the right to replace an institution that does not consent to an amendment in certain circumstances) could address this case, although in this case it may be the other lenders that want to remove the objecting lender. The approach most in contrast to the requirement of having the approval of each lender is to leave it to the agent to determine, perhaps “in consultation with the borrower” as has been done in one agreement. This would seem to generate the greatest opposition from lenders. As with the market disruption clauses

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already in credit agreements, it may be that there are already provisions concerning amendments to interest rates in credit agreements that provide some direction. Most syndicated credit agreements include a provision that no amendment may be made to reduce the “rate of interest” in the agreement without the written consent of each lender directly and adversely affected thereby. How would this work with having to establish an alternative reference rate? While the reference to the “rate of interest” is not exactly the same as the “amount” of interest if, in fact, the change in the reference rate used results in a lender receiving less in interest in absolute dollars, should its consent be required? Then there is the question of an approach in a bilateral arrangement with just one lender and the borrower. As in the context of syndicated facilities, the critical element will be the impact on the cost to the borrower and the yield of the lender in shifting to an alternative rate. Relying on the structure of a market disruption clause may likely be the best approach for now in the context of a bilateral arrangement. And So… It seems that it will likely be some time before a new reference rate comes to be accepted in the market and it is no doubt worthwhile to consider the approaches for dealing with the current uncertainty. It is equally without doubt that a rate will come to the forefront and, once it does, it will be incorporated into the pricing and documentation used by lenders and become as commonplace and as accepted as LIBOR has been. TSL David W. Morse is a member of the law firm of Otterbourg P.C. in New York City and is presently head of the firm’s finance practice. He has been recognized in Super Lawyers, Best Lawyers and selected by Global Law Experts for the banking and finance law expert position in New York. Morse is a representative from the Commercial Finance Association in one of the current projects of the United Nations Commission on International Trade Law (UNCITRAL) concerning secured transactions law.

Complex Times Call for Experts in the Complex.

Anatomy of a

Fraud BY MARSHALL GLADE AND PAUL DOPP Marshall Glade and Paul Dopp of GlassRatner provide a cautionary tale of how missed red flags led to a loss in the millions for one lender.

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All banks/lenders have policies, procedures and processes to monitor their credits. The overall purpose of loan monitoring is to identify, as soon as possible, any changes in the borrower’s financial condition or performance that may impact the borrower’s capacity to repay the outstanding loan as agreed. A lender’s credit file should contain evidence demonstrating the monitoring activity by the credit officer or analyst including site visits, phone calls, interim financial reporting and annual audited or reviewed financial statements; however, these policies and procedures are only as good as the credit officers and field auditors who apply them. For purposes of this article, I am referencing an asset-based loan (“ABL”) example which is, generally, any kind of borrowing secured by an asset of the company. To monitor an ABL, the lender typically relies on a borrowing base certificate (“BBC”) submitted by the borrower on a periodic basis, to evaluate the borrower’s financing needs, cash conversion cycle and quality of the collateral. The borrowing base is the collateral base which specifies the amount that can be borrowed in terms of collateral type, eligibility and advance rates.1 The Office of the Comptroller of the Currency (“OCC”) regulates and supervises all national banks and provides guidance on asset-based lending through the Comptroller’s Handbook. The OCC’s ABL guidance recommends specific monitoring actions to minimize credit, operational, compliance, strategic and reputational risks. Typically, an analyst or credit officer reviews the BBC data that details the change in the collateral base in the reporting period (payments/ credits applied to reduce AR and new billings that increase AR) and the AR aging. The aging of AR is important because banks generally only lend against “eligible” AR, typically defined as AR that is less than 90 days outstanding. Bank loan monitoring policies also require a field audit where a site visit is performed to confirm the existence and value of the collateral on some periodic basis. As noted by the OCC, fraud is a frequent cause of loss in an ABL. Accordingly, regular collateral monitoring and timely field audits

are the best deterrents to fraud-related losses.2 The BBC and field audit report are the primary means with which the lender monitors a borrower’s liquidity and collateral. The lender needs to utilize this information in order to develop a strong understanding of the borrower’s business and reporting systems. Collectively, the lender’s policies and procedures, if diligently applied, mitigate bank losses from fraud or the sudden deterioration of the financial performance of the borrower. The purpose of this article is to heighten the awareness of red flags of fraud evident in the monitoring process of an ABL facility. Recognizing and acting on these red flags early in the process is an effective way to minimize loan losses from fraud. Case Background For purposes of this article, we have used a representative case related to an ABL facility where the lender ignored the red flags of fraud or didn’t recognize them as red flags. In this case study, the bank’s credit officer and its field auditor failed to investigate red flags that, if acted on, would have avoided loan losses. The fact pattern of the borrower and loan are as follows:3 ◗ The borrower is a staffing company that provided its clients with skilled temporary workers for short-term projects, usually less than 3 or 4 months. The borrower had stabilized annual revenues of approximately $25 million and realized a 20% gross margin on its billings. The billings were approximately $2 million per month with no seasonality; ◗ The borrower’s clients were billed monthly with 30-day payment terms; however, the subcontracted workers were paid bi-monthly. The borrower obtained a $6 million ABL facility to bridge the timing differences in its operating cash flows; ◗ The loan terms included an 85% advance rate against eligible AR (AR less than 90 days outstanding); ◗ A BBC was to be submitted monthly by the borrower tracking collections,

billings and aged AR; ◗ Over a two-year period, the credit limit was frequently increased at the request of the borrower and went from $6 million to $12 million. However, the borrower had no increase in annualized revenues; ◗ After two years, and shortly after the credit limit was increased to $12 million, the CFO self-reported to the bank that the BBCs overstated AR by $6 million from a scheme involving freshening AR (issuing an internal credit memo and rebilling as current) and fictitious billings; and ◗ The bank was shocked and surprised that it was defrauded and ultimately booked loan losses of $6 million. Failure to Recognize and Investigate Red Flags Given this specific example, where the borrower’s sole tangible asset was AR, identification of potential issues with the credit should have been relatively easy via a cursory review of the BBCs. Somehow, the bank was only able to discover the fraud through the CFO’s voluntary confession and not from its own loan-monitoring procedures. There were multiple uncovered red flags that were self-evident on the face of the BBCs, but were not investigated by the bank or its loan officers. These red flags included: a) The current portion of the Aged AR exceeded the monthly billings by 30% to 40%. The credit officer never inquired how or why current AR (1 – 30 days) was 40% greater than total billings for the month; b) The AR aging summaries always showed $0 of ineligible AR (90+ day old invoices), even though the prior month’s aged AR showed $3.5 million in the 60-90 day bucket. In other words, the $3.5 million of AR in the previous month’s 60-90 day bucket was wholly reduced, notwithstanding that the BBC reported total collections and credit memos for the month of only $2 million; c) The borrower submitted a Days Sales Outstanding calculation every month to show that average AR was

THE SECURED LENDER NOVEMBER 2017 31

always under 90-days, even when the outstanding AR was $12 million on $25 million of annual sales. An independent calculation of a Days Sales Outstanding would have shown that the Days Sales Outstanding was 175 days and not under 90 days; and d) Although the requests for an increase in the credit limit was attributed to revenue growth, there was no increase in monthly revenues or annualized revenues. The above-listed observations were all red flags that the borrower’s reporting did not make sense. Had the credit officer investigated any of the discrepancies, the bank would have likely discovered the freshening activity and fictitious AR. The field auditor fared no better. Field audits are integral components of monitoring an ABL by assisting in the detection of fraud and financial weakness. As noted in the Comptroller’s Handbook, the field auditor should obtain written account verification and perform sufficient reconciliations and testing to ensure that the borrower’s financial records are accurate. This involves reviewing borrowing-base collateral – inspecting the collateral, testing its validity and value as reported, and examining original documentation with a careful review of credit memos.4 In this case, the field auditor never looked at the BBCs or reconciled them. Additionally, the CFO made excuses to the field auditor that the accounting department was busy, understaffed and did not have time to provide the auditor with access to the accounting system and other appropriate information. Instead of pushing the CFO, the field auditor accepted the CFO’s explanation, but did note that the Days Sales Outstanding was significantly greater than 90 days for all months reviewed. The credit officer likely did not read the report, but ticked it off in the appropriate box that listed the completion of the loan monitoring procedures for that period. Conclusion Obviously, bank fraud is a rare event, given the number of credits that perform

as agreed. However, it is also true that, when a bank fraud occurs, especially in an ABL facility scenario, a post mortem identifies the red flags that were missed. Bank frauds of the nature described in this article are not sophisticated. In fact, one of the more common methods is the freshening of aged AR by the use of a credit memo and then rebilling so old AR becomes current. While the borrower may rationalize its behavior with the belief that the amounts will ultimately be collected, this subterfuge prevents the credit officer from learning about potential collection issues faced by the borrower that might impact the collectability of the loan. Notwithstanding efforts made by the CFO to hide the freshening activity, the BBCs clearly disclosed the activity was taking place because: (i) the current AR was repeatedly greater than the current month’s billings, (ii) old AR that was about to age out of eligibility always was “collected” the following month even though total collections did not support it, and (iii) there was a significant disconnect between the calculation of Days Sales Outstanding and eligible AR. The above case example is a cautionary tale of what can happen when those responsible for credit monitoring go through the process and tick the boxes, but don’t apply critical analysis. There are multiple areas where the monitoring procedures could have identified the anomalies in the numbers reported by the borrower. Had these issues been identified and acted upon in a timely manner, the bank could have avoided significant loan losses. TSL Office of the Comptroller of the Currency. “Asset-Based Lending.” Comptroller’s Handbook Pg. 27. Version 1.1 January 27, 2017

Office of the Comptroller of the Currency. “Asset-Based Lending.” Comptroller’s Handbook Pg. 29. Version 1.1 January 27, 2017

The background fact pattern is from an actual bank fraud scenario but I have changed some identifying characteristics and details in order to maintain the anonymity of the lender and borrower. 3

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Office of the Comptroller of the Currency. “Asset-Based Lending.” Comptroller’s Handbook Pg. 22. Version 1.1 January 27, 2017 4

Paul Dopp is a CPA with 30 years’ experience in forensic and investigative accounting including internal corporate investigations, damage calculations, business valuations and due diligence services. While his practice is diverse, a significant portion of his engagement experience has been in the financial institution industry and investment-related investigations. Dopp has international engagement experience including matters in Canada, the Caribbean and Asia. He has testified as an expert witness on dozens of occasions in state and federal courts including testifying as an expert for the Department of Justice in federal criminal court in connection with a bank fraud. Dopp is a Certified Public Accountant licensed in Georgia, an ABV and CFF (Accredited in Business Valuations and Certified in Financial Forensics, respectively, both granted by the AICPA), a CVA (Certified Valuation Analyst designated by NACVA) and a CFE (Certified Fraud Examiner). Mr. Dopp attended Concordia University in Montreal, Quebec from 1974 to 1979. Marshall Glade, CPA, is a managing director with GlassRatner. He began his business career with Grant Thornton, a public accounting firm. His clients were in various industries such as oil and gas, convenience stores, rich media advertising, wireless security, and manufacturing. In 2017, Gladel received the Commercial Finance Association’s (CFA) 40 Under 40 Award for his exemplary work in the Bankruptcy/Restructuring realm. Marshall graduated from the University of Georgia with a Bachelor of Business Administration in Accounting and a Masters of Accountancy. He is a Certified Public Accountant licensed in the State of Georgia.

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Monk Michael

CFA’s 2018 President BY MICHELE OCEJO CFA’s 2018 president, D. Michael Monk, has been managing partner of Amerisource Funding since 1998. He has over 25 years of experience including senior leadership roles covering virtually all aspects of the commercial finance field, including credit, underwriting, legal, compliance, operations management, portfolio risk management, business development, marketing and public relations. He is also a past president of CFA’s Houston Chapter and currently serves on its board of directors. He is past president of the Houston Racquet Club. He also sits on a number of other private boards of directors and is involved with numerous trade associations and charitable organizations. Monk graduated from The University of Texas at Austin in the Honors Business Program with majors in finance and marketing and minor studies in astronomy. He also received his MBA from the University of Texas at Austin in 1992. Here he discusses how he entered the world of commercial finance, his priorities as CFA president and the importance of volunteering.

THE SECURED LENDER NOVEMBER 2017 35

Can you please give the readers some background information on how you got into ABL and how your career path led you to where you are now as managing partner of Amerisource Funding? I received my undergraduate business degree at the University of Texas in Austin. Hook em Horns! I was always interested in finance (i.e., money), so that was my focus in school. I held several internships during college, including a stint at a firm called Lumberman’s Investment Corporation, which was a subsidiary of Temple Inland and related to Guaranty Bank. I was involved with numerous projects at Lumbermen’s, but most of my time was spent in the accounting group counting beans and calculating (and recalculating and recalculating…) ledgers related to securitized mortgage pools. I developed some pretty nifty technical and analytical skills while I was there. But most importantly, it was my first exposure to collateral-based lending, and I developed a better understanding of the way lenders viewed collateral. After earning my BBA, I stayed in Austin at the University of Texas and finished my MBA in 1992. I had lived in Austin my entire life, and I was ready for a change! My plan was to finish my MBA and get a financial analyst job in New York with one of the larger investment banking firms. But this plan was upended – it was 1992, the country was in recession and investment banking firms weren’t hiring. In addition, the “technology/internet boom” in Austin was still several years away, so jobs (and recent college graduates) were scarce in Austin. Of course, Austin is totally different now. Looking at campus job postings, I thought “credit analyst at a commercial bank” sounded a lot like “financial analyst at an investment bank”. So I interviewed with a few commercial banks on campus and landed a job as a credit analyst with Team Bank in Houston. I was pretty excited about this job. Team Bank was in the Transco Tower (now known as the Williams Tower). It was a very prestigious building – over 60 stories tall – and I made sure everyone knew I would be working there. I’m mov-

ing to Houston. I will be in the Transco Tower. I’m going to be a big shot. I arrived on my first day of work and, after some paperwork, I was directed to my new work area – a tiny cubicle on floor B2. The basement. Two floors below street level. Not such a big shot, after all. Team Bank turned out to be a great experience for me. I learned a lot from a really impressive team of bankers – guys like Mike Ballases, Mike Turner, Steve Krueger, Barry Kelly, Jeff Stadler, Gale Smith, Mark Story, to name a few. Twenty five years later, most of these guys are still very active in the Houston market. Team Bank was soon acquired by Bank One, and I was recruited by Mike Hoskins to work in the Commercial Lending group. Mike, who has since passed away, was a terrific mentor to me and I will always be grateful for the time he invested in me. I was recruited several years later by Riviera Finance, out of California. I spent roughly five years there and really deepened my knowledge in the commercial finance field, from an independent, non-bank lender’s perspective. I was fortunate to find another great mentor in my early years there, Chip Wiley. I had a truly great run there. It was another terrific group of people, and it felt like a family, really close knit, one of the best jobs I ever had (outside of bartending and waiting tables as a teenager, of course!). In 1998, I decided to venture out on my own. I had a group of private investors that wanted to back me to start my own commercial finance shop. But in the midst of that planning, I met Jason Floyd, who had founded Amerisource back in 1984. He had been in business for about 14 years, had four employees, a small bank line of credit and lofty growth aspirations. We hit it off immediately, and I knew without a doubt that having a partnership with Jason would ultimately be better than starting my own shop from scratch. So, I invested my life savings into the business and bought half of Jason’s

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stock to recapitalize the balance sheet. We were positioned for growth, and we just took off. We went from four employees to ten employees in about 60 days, and our growth rate was something like 80 percent per annum over the first five years. Those were really fun years, will never forget them. Since that time, we’ve continued to build-out our platform. Today, we have borrowers in 47 states, with our ABL product comprising over 65 percent of our total earning assets. We were fortunate to have found a great core management team fairly early on, and most of those folks are still with us today. Amerisource is truly like a family to all of us, and we all have an amazing level of commitment to each other. We now have roughly 55 employees, with 10 of those having been here over 15 years. We’ve got an absolute rock-star management team. In this business, you can’t beat experience, and we’ve got loads of it – our senior management team today has over 200 years of combined industry experience. To me, that is just remarkable. We’ve been through at least three business cycles over the last 18-19 years, and we’ve certainly had our share of growing pains during that time. But we’ve learned some great lessons along the way, and I believe we’ve got a firstclass credit shop – one of the best in the country. It’s been a great ride, and it’s only getting better. What are your top priorities and goals as CFA president? It’s really a great time to be involved with the CFA. I think the past 8-9 years of suppressed, historically low interest rates have really damaged our industry, greatly increasing the supply of money and horribly distorting the balance of “supply” and “demand” for loans. With interest rates finally rebounding upwards again, we’ll hopefully continue to resolve some of that imbalance. Economic outlook and productivity is finally starting to improve as well, and I can’t overstate the impact that increased economic growth will have on our industry.

So much of the business that has been booked over the last 8-9 years, has been “refinance” business – borrowers looking to lower their financing costs. Hasn’t been a heck of a lot of “growth” financing, at least not by historical standards. And it’s been very detrimental to our industry – squeezing margins and creating a hyper-competitive marketplace for lenders. But it’s also forced lenders to streamline, to find operational efficiencies and lower their cost structures, which will serve us all well in the future. We’ve seen a lot more growth financing opportunities year-to-date, and I think this is a very positive sign. In terms of my priorities and goals for this coming year as CFA’s President – for me it’s all about expanding our membership and improving our chapters. We’ve taken a couple very big steps recently to establish more inclusive membership criteria, and I believe CFA will see this pay very big dividends very quickly. Bringing the CFA’s value proposition to all the different constituencies is something our new CEO, Rich Gumbrecht, and I will be keenly focused on this year. Look for more specialized programs targeting specific membership constituencies that deepen the value of the educational and networking opportunities for those groups. I also have a real passion for our chapters. My personal leadership path through CFA National originated in the Houston Chapter, where I was president of the Houston Chapter in 2002-03. So I know how challenging it is to be a volunteer leader at the local chapter level, as we had very little support from CFA National during those years. But it’s also very rewarding. And CFA has come a long way in terms of providing support to the chapters. But there is still much room for improvement. Right now, CFA National is an entirely different ecosystem than its chapters, with very different (albeit sometimes overlapping) members engaged. There are a large number of folks who are engaged at the national level; but quite often, these individuals are not involved at the chapter level. The reverse is

true as well – many folks who are very active with a local CFA chapter have no involvement whatsoever with CFA National. Perhaps their business is strictly local, and they have no interest in the “national agenda” or networking outside their home market. But there is also considerable overlap – quite a lot of folks that get involved at the National level originated in the chapters and were introduced to the National CFA organization through their chapter. I’d like to see greater connectivity between the chapters and CFA National so that we can identify more quickly these members who find relevance in both CFA National and local chapter engagement. These folks very likely represent our organization’s future leadership. We also need to leverage and expand on our most successful chapters. Newer and smaller chapters looking to grow should be able to model their programs and governance after successful chapters that have built great organizations and programs, have outstanding governance and an engaged board of directors. Some of the newer or smaller chapters may not yet have the critical mass of people necessary to support higher quality events. So we need the more successful chapters to share their insights and best practices with these newer chapters. At the end of the day, the chapters that work together to create better programs and a better experience will have a more satisfied membership. . To this end, my goal is to personally visit as many chapters as I can this year. My original goal was for Rich Gumbrecht and I to visit all of them this year…until I realized there were 22 chapters! So we will clearly need to do some prioritization or “division of labor” to make this happen, but I really feel it’s critical that we “plug in” with these chapter leaders. I want them to know and feel the lifeline of support from CFA National, and I want to help make all of the chapters the best that they can be.

being a CFA volunteer leader, either at the national level or the chapter level? I feel your pain! Volunteering your time for just about anything can be very daunting – especially if you have young kids at home. As an organization, we need to consider how we can make it easier to be a volunteer. I know that, personally, I don’t want to sign up to do something unless I’m going to be able to meet expectations and perform the job well. With the recent realignment of our Management Committee and Executive Committee, there is more opportunity than ever to have a positive impact through involvement with CFA. There’s more engagement, more inclusivity, and we are driving the organization in the right direction. There are tons of folks who want to volunteer and get involved. We just need to make sure these volunteers have the time, the tools, and the support to do a really good job. We have some truly outstanding folks volunteering with CFA, both at the National level and in the chapter network. These are the people who make the organization successful and such an incredible and worthwhile organization to be involved in. But I’m sure that, if you ask any of these folks about their experience, they’ll tell you it’s a lot of work and it’s time-consuming, but it’s also one of the most rewarding experiences they’ve ever had, both personally and professionally. So, if you have some time to give, do it! We need you. And our industry needs you. Get involved, and we will bust our butt to make sure you have all the support you need to be successful and to have a positive impact on our industry. TSL Michele Ocejo is editor-in-chief of The Secured Lender and director of communications for CFA.

What would you say to those who claim they don’t have the time to devote to

THE SECURED LENDER NOVEMBER 2017 37

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BY HOWARD BROD BROWNSTEIN, CTP Howard Brod Brownstein explains why lenders should pay closer attention to borrowers’ corporate governance.

Corporate Governance An Overlooked Opportunity for Lenders

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In my 25-plus years as a turnaround professional, alongside more than four decades as an independent corporate board member, I have seen first hand many occasions where, if a borrower had had stronger corporate governance, many problems would have been prevented or at least lessened, and the lender would have received greater repayment. And yet, during a lender’s underwriting process – when they theoretically can see any records of the prospective borrower – lenders rarely, if ever, pay any attention to the borrower’s corporate governance: ◗ Does the borrower have a real board of directors? Who’s on it? ◗ Does it include anyone who is really independent of the company? ◗ How often does the board meet? ◗ Are there written minutes of board meetings, and can the lender see them? These questions are seldom asked as the lending relationship begins. And then, on the “back-end”, when there may have been issues concerning the borrower’s performance. necessitating the lender to provide an extension, default waiver and/or forbearance agreement, seldom, if ever, does the lender include as one of its conditions that the borrower strengthen its corporate governance: e.g., assemble a real board, add truly independent board members, start keeping minutes of board meetings, etc. Why is this such a blind spot for lenders? The senior lenders whom I contacted admitted that paying attention to a borrower’s corporate governance had never occurred to them, nor had they ever heard of any lenders doing so. A few questioned whether inquiring into a borrower’s corporate governance might possibly “cross the line” in terms of exposure to lender liability, equitable subordination, etc. And yet, lenders readily scrutinize other risk factors in the borrower’s business during the underwriting process, as well as when an extension,

waiver and/or forbearance agreement is required. The problem is that lenders don’t typically recognize the value of the borrower’s corporate governance, i.e., that strong corporate governance potentially 1) reduces risk and 2) increases enterprise value. The academic literature from leading business schools covering larger companies readily demonstrates the correlation between governance and financial performance. Ironically, the lenders themselves likely have strong corporate governance – especially if they are regulated banks. Everyone knows that publicly held companies must meet regulatory requirements, including having a specified number of board members who meet a stringent definition of independence. Regulators know that independent board members are likelier to “speak truth to power” and ask tough questions of management, which helps to reduce risk for investors. However, the vast majority of middle-market borrowers – who are likely to deal with asset-based lenders and factors – are privately held companies and not subject to such regulations. The typical ABL or factoring underwriting process ignores the corporate governance of the borrower, and just confirms that the borrower is a corporation or LLC in good standing in the state in which it was established and is correctly named, mainly to ensure that the lender’s liens will stand up. The state laws governing the fiduciary duties of corporate board members are typically no different for publicly held and privately owned corporations, and the regulations that apply to publicly held companies arise only at the federal and/or stock exchange level. Therefore, board members of privately held companies are required to fulfill fundamentally the same duties of care and loyalty as those of publicly held companies. The only differences are that publicly held companies are usually a lot larger, so

THE SECURED LENDER NOVEMBER 2017 41

there is a lot more for board members to oversee and, as mentioned, have the overlay of regulatory requirements, but the dedication and diligence required of board members are the same for both public and private companies. While many privately owned companies may have a board of directors in name only, composed entirely of insiders, there has nonetheless been a strong and growing trend among privately owned companies to take their corporate governance more seriously. One sees this especially among multi-generational family-owned companies that want to benchmark themselves against non-family-owned companies. The National Association of Corporate Directors (NACD) has over 18,000 members, many of whom are board members of privately-owned companies and nonprofits, and other organizations offer often sold-out conferences on private-company governance, which reflects the increasing seriousness with which corporate governance is taken at privately-owned companies. What about the concern about possible exposure to lender liability and equitable subordination, which a few lenders mentioned to me as why they do not concern themselves with a borrower’s corporate governance? This is a pure canard. Certainly, at the underwriting stage, the lender is entitled to inquire into anything, but may choose to provide no feedback at this point to the prospective borrower about how to reduce risk factors. This may be because the lender is in a competitive situation, and so may feel that it has to accept or reject the borrower “as-is”, although I’ve heard that in some cases a prospective borrower might be advised, “If you will do A, B and C, we will do X, Y and Z.” The point is, lenders could easily include during underwriting an inquiry into the borrower’s corporate governance in their gathering of information, even if they make no comment upon it, and just note it for the file as a baseline.

But then, on the back-end, when there’s been a loan maturity or default, and an extension, waiver and/or forbearance agreement are required, the lender is already listing a number of conditions required for continuing to provide support to the borrower. These might include a timetable for reducing an overadvance or out-offormula condition, improving the turnover of inventory or receivables, reducing excessive concentration in the collateral, limiting compensation to management and shareholders, etc. Why not include a requirement that the borrower improve its corporate governance? Just add one or more truly independent board members. The lender would not dictate whom those new independent board members should be – instead, the lender could refer the borrower to a definition of independence like the SEC’s (even though the borrower is privately owned). And, of course, the lender itself should not serve on the borrower’s board. The idea is to include on the board individuals who – as with publicly owned companies mentioned above – “speak truth to power” and help reduce risk by asking tough questions. Such strengthening of corporate governance will also increase enterprise value: picture a private equity fund that is valuing a prospective acquisition, and noting that the privately owned target has a real board of directors, which includes some genuinely independent members, and with orderly board meeting minutes that are available for the acquirer’s due diligence. Would that not make the acquirer feel a bit more secure in terms of how the target company has been run, and the overall risks of the prospective acquisition? Conversely, it is a definite risk factor for both prospective lenders and acquirers if a company ignores its corporate governance. What else are they ignoring? Borrowers may be concerned that having a real board, which includes independent directors, would be a cost

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problem, e.g., for board director fees, holding real meetings, etc. However, director fees are often less than might be expected, and are typically paid only to the non-executive independent board members. And companies can be creative in structuring board fees, perhaps basing a major part on company performance – a surrogate for handing out equity which might not be appropriate in a privately owned company, and better aligning board members’ interests with the shareholders. Considering a borrower’s corporate governance during underwriting as well as portfolio management is, unfortunately. nearly always overlooked by lenders, but this is a readily available opportunity for lenders to help reduce risk and increase enterprise value – benefitting lender and borrower alike. TSL Howard Brod Brownstein is a Certified Turnaround Professional, President of The Brownstein Corporation in Conshohocken, PA, and has served on the Governing Board of the CFA Education Foundation.

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THE TSL INTERVIEW

BY MICHELE OCEJO

Leading by Listening at Wells Fargo Capital Finance

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David Marks has led Wells Fargo Capital Finance since May 2017. Previously, Marks was the group risk officer for Wells Fargo’s Consumer Lending and Payments, Virtual Solutions and Innovation (PVSI) businesses, and also led the Corporate Risk Program Office, where he was instrumental in strengthening the risk management functions across the company. Marks has a broad experience across Wells Fargo’s Wholesale Banking Group, including leadership roles in commercial and corporate banking, trade finance, and credit risk management. Since joining the company in 1987, he has led Corporate Banking, served as senior credit officer for Corporate Banking and Government and Institutional Banking and Wells Fargo’s securities portfolios; and also led the International Group. He earned his bachelors degree in history from Carleton College in Northfield, Minnesota. Here, he discusses his goals in his new role, the challenges facing the industry and his views on leadership.

How did you get started in commercial finance? I started with Wells Fargo in 1987 and went into a commercial training program. My first job at the bank was actually doing commercial loan workouts, learning how to collect loans and, while that is not exactly commercial finance, it led to my assignment in Hong Kong from 1991 to 1995, where we had a trade finance business that we built that was very much based on the principles of commercial finance. It’s funny because I wanted to be a lawyer when I went to college, and, when I finally got to my senior year, I realized I had borrowed far more money than one person should be allowed to borrow back then. And I knew I didn’t want to go to law school. I knew I needed to get a job, and that’s how I fell into banking. I’ve been doing it now for 30 years. To what do you attribute your longevity at one company? I’ve been in banking for 30 years and at Wells Fargo for 29 years. I was gone for a year from 2008 to 2009. What kept me at Wells Fargo for the first 20 years was just a series of very different opportunities, both geographic and line of business. I started in Minneapolis and did commercial workouts. I moved to Asia. I did trade finance. I moved back to Minneapolis. I ran our international group, our treasury group. I moved to California to join the factoring company that we acquired in 1998 and went from factoring to running corporate banking. And so there are all these different opportunities that I had my first 20 years because the company was growing and I had an interest in moving geographically and moving across different businesses. I think what’s most interesting is why I came back in 2009. I had left for what I believed was an incredible opportunity in London. I realized, when I got over to London and started working for the other firm, that I really missed the culture that I had grown up in. I really missed the people I had been working with for my entire career. That’s what brought

me back to Wells Fargo in 2009. It wasn’t so much a particular role as much as the culture and team that I wanted to be a part of. What’s funny about it is, when I left Wells Fargo in 2008, I reported to Tim Sloan who is now our CEO. When I started with the company in 1987, Perry Pelos, who runs our wholesale bank, and I were in similar training classes then. Dave Weber, who is the chief credit officer for wholesale banking, was one of the very first persons I met when Norwest acquired Wells Fargo because we were doing similar things for clients internationally. Ed Blakey, who heads up commercial capital and is my boss today, were peers working for Tim in the early/ mid-2000s. One of the really nice things about working with your friends, if you will, for so many years is that you develop these relationships and you know what your colleagues think. They may not always think the same thing as you, and you do argue like all families, but you know how to come together. Coming over to Capital Finance, and being the first leader from outside that business, means these relationships that I have in other parts of the company help us partner to do more good things for our clients and create opportunities for our team members to gain different experiences in other parts of the company. What are your immediate and long-term goals and priorities in your new role? It comes down to a couple of things. I’ll break it into two pieces. The first is for our team here in Capital Finance. We want to build an environment in which all of our team members feel like they have an ability to contribute to the success of our business, because the business is changing. So that requires us to be really transparent around some of the challenges that Wells Fargo has had over the last year. We talk a lot about rebuilding trust: rebuilding trust with our team members, our customers and our stakeholders. It was really important that we rebuild trust with our team members because

THE SECURED LENDER NOVEMBER 2017 45

they need confidence to deliver for clients. Capital Finance has gone through a series of leadership changes and I am new, so transparency is very important. People want to know if there are going to be strategic shifts and strategic realignments. This created an immediate priority for me to get on the road and visit our different offices and let people get to know me. My immediate priority was giving people a chance to see and hear from me, but, more importantly, let me hear from them because I think the people who are closest to the customers have stronger answers, stronger ideas, stronger suggestions than somebody who isn’t in front of the customer as often. So building that trust with team members by being visible and listening was a key priority. We want to connect clients better to the rest of our company. That’s really good for the clients, whether they choose to do something with us or they choose to do it with another institution. This means making sure our clients understand that, while we’re very focused on our asset-based lending arrangements, our vision and values are about helping our customers succeed financially. And to me, in the commercial finance space, that’s thinking very strategically about how the asset-based lending facility fits into their overall capital structure. Are you seeing new industries seeking out ABL that didn’t use it as much as in the past? We’re growing in certain industries; it’s one of the things I’ve been very involved with since I came here. We’re growing in our healthcare business, our channel finance business, and our supply chain business. Some of these groups are having record years. But, honestly, I think it’s less about the industry and more about how we get clients and our internal partners thinking differently about an asset-based credit facility as another way to offer provide liquidity.. Back when I was in factoring with the old Foothill in ’99, we were sometimes

viewed as the lender of last resort. Today, commercial finance, asset-based lending is so much broader than that. I was told by a private equity firm recently in New York that one of their partners wasn’t familiar with an assetbased lending facility. Our client tells us that today this partner is now a huge advocate because he understands with an asset-based lending facility you can more rapidly grow your facility size to finance your growth at a much more rapid rate than conventional financing. Another example is in our technology finance, specifically our channel finance business. We had a number of clients who had either been acquired by a private equity firm or maybe a private equity firm has taken an ownership position. Well, the channel finance product has been around for many, many years, but how we fit it into a term loan B or potentially a high-yield bond and how we make it part of an integrating financing set, I think that’s different. Again, it’s all about the client’s overall needs, the client’s overall capital structure, and how they can optimize their financing. It’s an exciting business. I’ve told folks that many times in my career someone has tapped me on the shoulder and said it would be really good if I picked up this additional experience. Maybe because now I’m older and wiser, I wanted to try something different so I raised my hand for this position and said, “This is the role that I really, really want.” I actually applied for this job. My three kids find it really funny that at this point in my life I’m applying for jobs while they’re applying for jobs. Last summer, Wells Fargo announced a new originations team for its Supply Chain Finance Group, as a result of the acquisition of GE Capital’s Commercial Distribution Finance business. This made Wells Fargo Capital Finance the largest channel-finance provider in North America. Can you give our readers an update on this sector? I love that business and am so excited to be a part of it. In my first three

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months on the job, I visited the folks in Denver and Atlanta four times, which is where our main offices are for our Channel Finance business. In September, Holly Kaczmarczyk was named head of our Supply Chain Finance Group. There are a lot of great things happening for this business and I am excited to see it through. We have worked through many of the transition and integration type of projects you would expect with the acquisition of the GE portfolio and now what we’re really focused on is making sure we’re taking the best from both firms’ approach to that sector and aligning the way we do business, with the customer at the very center. The way both groups looked at credit is similar, but not the same. We both covered different segments of the market. When you bring the two very best together, it’s a really powerful way to deliver value, not only to the vendors, but to resellers and the distributors. And what impresses me about this business more than anything else, even though it’s the fastestgrowing business that we have, is the length of these relationships. We have relationships that go back 15 to 20 years. You couldn’t do what we do if you didn’t have the relationships, if you didn’t understand the risks, if you didn’t deliver the services through the technology that we have. It’s the business I was the least familiar with and it’s one of the ones that, perhaps, I’m the most excited about because I think there is so much we can do with other parts of Wells Fargo. We’ve created, in corporate banking, a technology media telecom group. There’s an investment banking vertical across this sector. So, when we put together our channel finance business, our software finance capability, our traditional tech ABL products and relationships, I would be hard pressed to imagine anyone could have the size and scale and the breadth of products that we do in this space. It’s fantastic.

What would you say are the two or three most urgent challenges facing commercial finance lenders today? As the most seasoned industry executives retire, where does the search for talent fall into this? I actually think that this ought to be one of the most attractive sectors to young, diverse talent out of the financial services. But in terms of the more pressing priorities, it is where we are in the cycle, losses are at historic lows. Problem credits are at historic lows. We operate in an environment where the amount of capital that’s been raised to fund assetbased transactions through private equity and alternative lenders is very, very high. When you are at this point in the cycle, with lots of liquidity and low losses,that can be a challenge for making sure that you don’t get too far in front of your skis. I think we’ve been really good at managing our business with this cycle, but I think everybody wonders where does all of this liquidity go? Especially, if you overlay some relief that may come on the regulatory front. How do you support your clients and deliver for your shareholders in a safe responsible way? That’s the biggest challenge because even in the traditional banking sector for the smaller regional banks, you see some folks stretching on credit, you see them stretching on pricing, just because of where we are in the cycle. We have all seen what happens at the end of a cycle. Talent is something that I’m really, really excited about. Even before I started, I went to a meeting of our corporate finance group and I met one of the heads of our diversity and inclusion council, and I asked her, “When do we meet next?” And she said, “Oh, we met a couple of months ago. We’re supposed to meet next year.” I said, “No way. We’re going to meet as soon as possible.” And so we met two months into my new role. It’s less about the talent retiring and more about how we get the best talent in the industry and how we keep our talent engaged as much as we possibly can.

When I started at the bank in 1987, I wore a suit every day, and people smoked in the office. I had to wheel my Compaq computer in a luggage cart. Today, in our offices people wear jeans, they have their ear buds plugged into their iPhone while they’re doing their analysis for a credit request. And nobody is smoking in the office or outside the building. It is different for all of us who started many years ago. And I think it is better. At Capital Finance, we gathered the group together to figure out how we accelerate our progress on diversity and inclusion, not just at the junior levels, but also at the mid-career level, because the industry has a challenge: how do we retain mid-level women and other diverse talent? We’ve all been focused on bringing people in and one of the things that we’re doing here is, once we have you, we try to keep you engaged. Stay interviews are a part of this. Conducting exit interviews is a terrific thing to do because you learn a lot, but we need to do stay interviews because it shows our high potential team members, A) we want them to stay; and B) we want to understand what they’re thinking about. We have all the technical training in the world and so I think it comes down to a battle around culture, and I think, if you have a culture that cares for its clients, cares for its team members, that listens, that provides flexibility where it’s appropriate, the worry is not going to be about those who are retiring, the battle is over getting the best people and keeping them the most engaged. It’s important to respect not only individual needs, but also generational needs. I notice when wandering the hallways at 7:00 at night that the younger generations approach their work differently. I’m an early person. I’m usually here by 6:30 in the morning, but the younger people, they don’t come in as early, but that’s okay because they’re here till 10:00 at night sometimes, producing amazing work and you only do that if you care about your customers and you care about the people on your team.

It’s clear that you believe in transparency and the importance of being engaged with your team. What do you want readers to know about you as a leader? The best ideas in Capital Finance will not come from me. I will state that unequivocally. The best ideas on how to do new things with clients and how to engage the team are going to come from those folks closest to the clients and closest to the actual work. I think the most important thing that I can do as a leader is make myself available to listen, and ask people how they would they do it differently. And what’s interesting is the first time you ask those questions people kind of look at you funny, maybe wonder whether we will deliver. Once you start that dialogue, people have terrific ideas. And sometimes the ideas might make sense except they don’t fit into the overall strategic direction of the company, or there’s a particular issue. It may be a good idea, just not a good idea now. One of the most important things I expect of myself, as well as all the leaders in Capital Finance, is to really listen. TSL Eileen Wubbe, senior editor of The Secured Lender, assisted with this interview. Michele Ocejo is editor-in-chief of The Secured Lender and director of communications for CFA.

THE SECURED LENDER NOVEMBER 2017 47

The Commercial Lending

Conundrum BY JEANNE MOSS How can banks improve their processes to stave off the fintech influx? Incorporating digital workflows is a key tool in this battle for borrowers.

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Commercial lenders have worked themselves into a corner. For decades the industry has managed to onboard new accounts with relatively low customer expectations. Businesses needed funding and lenders relied upon their community roots and relationships to be the partner of choice. Now, the industry is faced with an Uber-effect: business-savvy, non-traditional competitors have driven service and user experience to new heights. Alternative lenders have leapfrogged traditional lending with a rapidly moving wave of technology that changes the entire lending experience. In order to compete, banks must dramatically change their processes. Bankers must take a lesson from the alternative lenders on account opening and user experience. The traditionally cumbersome and stringent application process has left some business owners with negative experiences that have driven some of them to alternative markets. This obstacle to service that banks have created — the hassle of applying for a loan, the mystery of the decision-making process and the time it takes – all of it must change! The process must be completely renovated in order to show business owners that traditional lenders can, and do, offer a fast and easy digital-loan-application process. The biggest factor holding lenders back from building a seamless, digital process is silos of information. It’s a recurring theme: one group within an institution does not know what the other is doing, and the answers are more often than not buried in overly complicated spreadsheets. Such fragmented methods lack the means for ensuring accuracy, and monitoring loan stages, volumes and pipelines; they offer management little worthwhile reporting and sometimes deliver inaccurate information. Commercial lending is a complex process that profoundly benefits from automated workflows that track a loan application throughout its lifecycle. Workflows can address a wide

range of challenges in business loan underwriting, documentation, monitoring and portfolio management. For example, an Oklahoma-based bank with a large commercial footprint was manually routing applications to loan officers throughout the state based on an applicant’s zip code. The process required a central hub to distribute information to each branch so that emails and phone calls could originate from a local loan officer across the bank’s network. Naturally, it was unwieldy. But now, using an automated workflow, the bank automatically routes its loan requests to the proper loan officer, dramatically improving efficiency through saved time and increased accuracy. Dozens of simple, automated fixes like this can be applied to antiquated manual loan processes to radically improve lending efficiency. Another important area for improvement in lending processes is in the visibility of the prospect pipeline. Where is the loan officer in the process? What papers have been filed? What loan requests are out there and where are they in that process? Digital workflows, in combination with an integrated sales pipeline tool, allow management to see every piece of information and to organize it however they choose. This enables a level of forecasting that management can use to better balance deals. Workflows can also help management proactively avert any potential bottlenecks. Different employees and departments can work on their tasks simultaneously to expedite the entire process. Facilitating the loan application process makes for a great beginning to a new commercial relationship; it encourages the customer to trust the lender’s competence and professionalism. Digital processes also create a more pleasant experience for employees. For example, instead of manually tasking a loan officer to collect financial statements (a generally laborious process that can demand numerous follow-ups), an automated

THE SECURED LENDER NOVEMBER 2017 49

AltFi Effect

Alternative lenders first entered the market with non-traditional concepts; today they operate much more like traditional financial institutions. A recent study from the Cambridge Centre for Alternative Finance reported that the U.S. alternative-finance market is actually slowing. The market reached $34.5 billion in origination volumes in 2016, marking a 22-percent increase year-over-year. This number, however, is substantially lower compared to the triple-digit growth seen in previous years. Amid this slowdown, the study found that balance-sheet lending models fared better than others. It should be no surprise, since the model offers companies protection against ﬂuctuations in investor confidence around non-traditional risks. We’re likely to see more alternative lenders shifting to a balance-sheet model, giving a boost to this segment’s growth. In fact, one leading U.S. alternative lender backed up their claims to expand into the banking market by applying for an industrial-banking license with the FDIC this summer. Although no company has received an industrialbanking charter in nearly a decade, this is one of the few fintech players with a chance to succeed. One of the most largely funded fintech lenders has the funds at their disposal to meet regulatory requirements and, according to reports, has addressed many of the questions a regulator might have regarding a financial technology company’s endeavors in the banking sector. This is a significant step taken by an alternative lender to compete headto-head in the banking space and its success would pave the path for others to follow. Its peers are adopting more stable business models forged by traditional lenders. These alternative lenders are realizing lessons from the traditional sector and expanding their market share with a keen eye towards recognizing the effects of economic cycles and underwriting standards that help mitigate risk. They pose a potentially significant threat to the future of traditional commercial lending.

request can be built-in to the application and shared with the loan officer via a secured tool as well as tracked within the system to see what’s been delivered and what is owed. No more unnecessary back-and-forth emails! Solid process reform such as this reduces the dysfunction in the application process and curbs needless employee frustration. A better process makes the loan officer more organized and can unlock their ability to better understand the customer’s needs without bothering them with redundant or scattered questions. In the early stages of implementing a digital lending process, all stakeholders must come together as a team in order to uncover hidden inefficiencies and identify the clunky and inconsistent processes. To begin finding better workflow opportunities, consider this: if any department is not building upon previous input, there is most likely an underlying operational problem. Ask why processes are the way that they are and the answer is often “because that’s the way we’ve always done it.” This is a sure indicator that parts of the process are no longer necessary and it’s time to rewrite it from an objective standpoint. There is no one way to structure efficient workflow; every institution’s results will be unique to their business. Some multibillion-asset institutions may have 300-step workflows; maybe that works well for them, or maybe those steps could be reduced by automating portions of the workflows. Changing processes can be hard for staff. An impartial project manager can be pivotal in the implementation process to help motivate change. This person’s role is to be the devil’s advocate and look at every single angle of a proposed change in workflow and how it impacts the entire organization. Decisions are not made in a vacuum; every step must be looked at in terms of the entire organization. How does this affect other departments? What is the level of visibility of the data? How does it impact the loan downstream?

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Once the group agrees collaboratively, automated workflows can be built for the most important tasks first. Soon additional requests for change will be pouring in. To ensure that the new workflows will run smoothly, invite players into a sandbox environment where they can practice them within the system. It’s important to ensure that employees are comfortable with the tools and production processes before they are live and customer-facing. Everyone on the team should have time to grow comfortable with what they are going to be using. Managers should emphasize that this time is a wise investment; the outcome will be beneficial to everyone. Incorporating digital workflows will position banks to capitalize on the commercial lending industry. Regional and community financial institutions need processes that will allow them to expand their commercial offerings into larger markets to ultimately increase interest revenue and better compete with the larger institutions and alternative lenders. Implementing behind-the-scenes workflows and process automation can improve the commercial loan application process. Done right, the technology can radically improve a financial institution’s lending processes with the ability to work smartly and provide a customer experience that better matches that of the market. TSL Jeanne Moss is manager of Implementation Services at ProfitStars®, a division of Jack Henry & Associates, Inc.®

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LOOK BACK, LOOK FORWARD, MOVE AHEAD

A Q&A WITH DAVE KUCERA, CAPITAL ONE FINANCIAL INSTITUTIONS GROUP

At the beginning of 2017, Capital One conducted a survey of asset-backed securities professionals at the SFIG Vegas annual conference. Today, we’re asking Capital One’s Dave Kucera, Head of the Financial Institutions Group, to look back at their responses, discuss how things have played out so far this year, and look ahead to 2018. The Financial Institutions Group provides financing products and solutions to the lender finance market, and works with a wide variety of non-bank financial institutions and asset managers. Question: At the start of 2017 there seemed to be a lot of optimism from survey respondents—with many predicting that buy-side interest would increase. Did you see that optimism continue throughout the year? Dave: That’s right, taking a look at the survey results, we found that, despite overall economic uncertainty, more than three-quarters of assetbacked securities (ABS) professionals (81 percent) expected buy-side interest to increase in 2017—a nearly 50 percent increase from 2016. Additionally, nearly half of respondents said they expected more relaxed underwriting standards, compared to only 25 percent of those surveyed in 2016.

Over the course of this year, I would say this has generally held true. There continues to be a lot of capital on the market, and the cashflow markets in particular are active and growing aggressively. Looking ahead to 2018, much depends on the economic cycle. It is hard to forecast exactly when things might begin to shift. For us, it’s important to stay flexible and closely monitor the market in terms of what is changing. Q: While the majority of respondents were most concerned about regulatory uncertainty, the second-biggest challenge cited was rising interest rates. Do you think this will continue to be on people’s minds into the coming year? Dave: Absolutely. Rising rates are generally a sign that the economy is healthier. It’s an issue that will continue to be top of mind because rates have been low for a long time. Rising rates could put stress on companies as they might lead to a rising debt burden—which is something we keep an eye out for. Overall, I think it’s a sign of more positive activity than not, but it can potentially lead to challenges if businesses are unprepared and not able to deal with the impact of rising rates. As we continue to see some uncertainty around the outlook for interest rates and regulation, institutions and investors can benefit from working with a trusted financial partner that has experience navigating a variety of market cycles. Q: As we all know, industries across the middle market have been subject to rapid disruption in the past few years as technology transforms the way businesses operate. How can industry players prepare and stay on top of trends? Industries are constantly evolving, and the pace of that change is only

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becoming faster. We look at market trends on broad terms as they relate to our clients so that we can understand how these changes affect them and their industries. We can often help them with these transitions and position them for growth. We try to think about the impact of those trends from a risk-and-return perspective. The goal is to think about the risk in an overall industry as well as what’s happening in various subcategories. Having a financial partner with a deep understanding of a particular sector may help provide guidance and critical capital in a changing marketplace. Dave Kucera Senior Managing Director Head of Financial Institutions Group & Head of ABS Banking 312.739.6224 david.kucera@capitalone.com Visit www.capitalone.com/FIGSBC for more information.

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Capital One’s commercial lender finance specialists use sector knowledge, data analytics and industry trends to give customers’ a business advantage. Backed by the capabilities of a top 10 U.S. bank, we lend the capital to help companies stay ahead of the competition. To see how to maximize business potential, contact a lender specialist today.

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capitalone.com/FIGSBC

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GROWING THREAT OF SYNTHETIC IDENTITY FRAUD The unsealing of four federal indictments last April, which charged 19 suspects with fraud and money-laundering offenses, revealed glaring holes in banks’ identity management practices. These charges are the result of a six-year, multiagency investigation led by the Federal Bureau of Investigation (FBI), which revealed a transnational conspiracy that orchestrated the theft of more than $13 million from 170 victims, primarily based in the US. The conspiracy crossed the borders of Europe, Israel, and the United States and involved four interconnected criminal schemes: online vehicle fraud, business email compromise (BEC), unlicensed money transmitting, and international money laundering. To date, authorities have brought 17 suspects into custody and are actively searching abroad for the other two, who remain at large. Despite being unwilling counterparties, some 45 American banks enabled this criminal conspiracy to flourish with their porous customer identification programs (CIP) and Know Your Customer (KYC) processes. Specifically, the online vehicle and boat fraud ring, which underpinned the entire investigation and functioned as the “gateway” scheme, relied on synthetic identity fraud (SIF). Last year, The Wall Street Journal identified SIF as one of the top three risk issues facing the banking industry. In SIF schemes, criminals use partially or entirely falsified consumer data to open new accounts

(New Account Fraud or NAF), procure credit cards, or apply for loans.

◗ Fabricate both the SSN and the name completely.

The synthetic ID fraud paradigm shift The case is emblematic of bank fraud’s paradigm shift away from customer impersonation to synthetic ID generation and NAF, the latter of which more than doubled in 2015, compromising 1.5 million consumers. This underworld trend is the result of widespread EMV (Europay, Mastercard, and Visa) chip credit card adoption in the U.S., which makes it harder to counterfeit consumer credit cards. Also, the spike in online consumer data theft, which has spawned a market for stolen ID credentials on the Dark Web, has created an optimal evolutionary ecosystem for SIF perpetrators. The anonymity offered by the Dark Web has not gone unnoticed by traditional organized crime groups (OCGs), which have co-opted and criminally optimized SIF rings. Alternately, fraudsters are also forming their own coordinated criminal networks of hackers and money mules to rob financial institutions (FIs) and consumers. A typical SIF ring has hundreds and sometimes thousands of fake IDs going at the same time—in 2014, it was estimated that SIF schemes account for 20 percent of credit charge-offs, where creditors determine that a debt is unlikely to be paid, and 80 percent of all credit card fraud losses.

Further, the Social Security Administration’s move away from an “orderly, rules-based numbering scheme” to random number generation in 2011 has allowed more numbers to be created, making it harder for institutions to distinguish legitimate SSNs from fake ones.

Common SIF tactics Criminals generally create synthetic identities in one of the following three ways: ◗ Pair a real Social Security number (SSN) with a fake name ◗ Use an “inactive” SSN with a real name (typically belonging to a child or someone who has died) to pass KYC filters

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Confronting the problem FIs need to adopt a leading-edge CIP regulatory technology solution that screens for evolving SIF and NAF indicators, and that is tailored to the unprecedented risk landscape of the digital age. While the plethora of data points can make ID fraud recognition difficult to detect, FIs can turn their Achilles heel into their strongest asset. With SIF scams’ disruption of customer authentication processes, institutions must invest in a next-generation KYC solution that efficiently eliminates risk at the account-opening stage. Learn more: http://legalsolutions.thomsonreuters.com/ law-products/solutions/clear-investigation-software

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what

WOULD YOU DO?

n this edition of What Would You Do?, a retailer borrower of Overadvance Bank is preparing to file for Chapter 11 to conduct an orderly wind down of its business. A significant portion of the borrower’s current inventory was shipped on consignment from various vendors. With a potentially under-secured loan, the Chief Credit Officer of Overadvance Bank tries to determine whether the consigned inventory can be included in the Bank’s loan recovery analysis. What’s Yours is Mine Achilles Heel Sports, Inc., a regional sporting goods store chain with over 60 locations, has been a borrower of Overadvance Bank for the past seven years, utilizing a $40 million senior secured revolving line of credit. Like many retailers of late, competition from e-tailers has been the Achilles heel of the company’s business. Unable to address its shrinking sales and ongoing operating losses, Achilles Heel recently decided to wave the white flag and has started to prepare to file a liquidating Chapter 11 bankruptcy case, and asked Overadvance Bank to provide Chapter 11 (DIP) financing so the company can conduct going-out-ofbusiness sales in Chapter 11. As part of its bankruptcy preparation,

Achilles Heel provided the Bank with a 13-week budget reflecting the company’s projected sales, inventory levels, cash receipts and disbursements. One item on the budget that jumped off the page was the company’s line item for “consigned inventory”, which amounted to almost 30% of the company’s total inventory projected to be sold during the Chapter 11. The consigned inventory line item also contained a footnote that read: “The amount of consigned inventory proceeds to be turned over the consignor vendors TBD.” The Chief Credit Officer was surprised to discover such a large portion of the company’s inventory on hand was shipped on consignment. While the Bank was aware that the company purchased some of its inventory on consignment, the Bank thought it was a much smaller portion than the 30% reported by the company. To date, the Bank had only received consignment notices from two vendors of Achilles Heel and, based on Achilles Heel’s most recent collateral report, the consignment inventory of those two vendors was less than 10% of its total inventory. Further, based on the Bank’s recent lien searches, these two vendors were the only vendors with UCC-1 financing statements of record against Achilles Heel to evidence their consignment interest in the inventory. For these reasons, the Chief Financial Officer was certain there must be a mistake with the budget. Unfortunately for Overadvance Bank, Achilles Heel confirmed that the budget was correct and that roughly 30% of the company’s current inventory consists of inventory purchased on consignment. The Chief Financial Officer of Achilles Heel explained to the Chief Credit Officer that, while the consignment inventory of the two vendors with UCC-1 financing statements of record against Achilles Heel did in fact constitute less than 10% of the company’s total inventory on hand, Achilles Heel recently began purchasing consigned inventory from other vendors who apparently had neither notified the Bank of their consignment interest nor filed a UCC-1 financing statement

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to evidence the same. The Chief Credit Officer is livid. If the Chief Credit Officer will have to turn over as much as 30% of the inventory proceeds to consignment vendors (as opposed to less than 10%), his prospects for a full recovery of the Bank’s outstanding loans are uncertain at best. The majority of Achilles Heel’s consignment vendors neither notified the Bank of their consignment interest nor filed UCC-1 financing statements to evidence the same. To that end, the Chief Credit Officer wonders whether he can simply retain the proceeds of the consigned inventory of those vendors and apply them to the Bank’s loan. If you were the Chief Credit Officer, what would you do? Let’s start with the basics. A sale on consignment is an arrangement in which the “seller,” or consignor, delivers goods to the “purchaser,” or consignee, for sale or use by the consignee. The consignee takes possession of the goods, but the consignor retains title to the goods until the goods are sold by the consignee. The consignee is obligated to pay the consignor from the proceeds of the sale of the goods. If the consignee does not sell the goods, the consignee can typically return the goods to the consignor without any further obligation. The Uniform Commercial Code governs the priority of a consignment interest of the consignor in the consigned goods visa-vis a competing security interest of the secured lender to the consignee. Under the UCC, the consignor’s interest in the inventory will be junior in priority to an existing lender’s perfected security interest in the consigned inventory unless the consignor complies with the following steps: First, the consignor needs to perfect its interest by filing a UCC financing statement against the consignee in the appropriate jurisdiction that adequately describes the consigned goods. Second, the consignor must file this UCC financing statement prior to the consignee’s receipt of the consigned goods. Third, within five years before shipping the consigned goods to consignee, the

consignor must send written notice to the consignee’s secured lender stating that the consignor has, or expects to acquire, a purchase-money security interest in the inventory. A consignment vendor that complies with these requirements will have priority over a prior perfected security interest in the consigned inventory. Here, the majority of the consignment vendors neither filed a UCC-1 financing statement nor notified the Bank of their consignment interest. As such, under the express terms of the UCC, the Bank’s security interest would seem to have priority over these consignment vendors. So, what’s the problem? Well, in a recent bankruptcy case in Delaware, Sports Authority, the bankruptcy court allowed the consignor vendors to be paid from the sale proceeds of consigned inventory, over the objection of the secured lenders, even though the consignment vendors failed to follow the UCC steps to establish priority over the prior perfected security

interests of the secured lenders. Perhaps due to concern over an adverse decision on appeal, the consignment vendors in that case ultimately agreed to a settlement with the secured lenders pursuant to which the proceeds of consigned inventory were split between the two creditor groups. Nevertheless, the takeaway from Sports Authority appears to be that some courts might afford priority to the unperfected consignment vendor over the existing secured lender of the consignee. Ultimately, the Chief Credit Officer decides to move forward with the plan of financing the GOB sales of all of Achilles Heel’s inventory, including the inventory that is subject to unperfected consignment arrangements. He reasons that it would be impractical to pull the consigned inventory from the sale, and it would likely have an adverse impact on the GOB sales of the company’s other inventory, if the consigned inventory was pulled out of the sale. As part of the financing, he will allow the turnover

of sale proceeds to the perfected consignment vendors but will require all other sale proceeds be applied to reduce the loan balance. If the unperfected consignment vendors object, he we will decide at that time whether it makes more sense to negotiate a consensual settlement or defend the objection. The Chief Credit Officer also notes that, going forward, the Bank should do a better job of tracking inventory shipped to its borrowers on consignment, and perhaps adjust the borrowing base reserves to account for this potential exposure. We hope you enjoyed the column and, of course, are always interested in your feedback. As such, if you ha dve any scenarios you would like to see discussed in a future column, please let us know at Dfiorillo@otterbourg.com or Jcretella@ otterbourg.com. TSL Dan Fiorillo and Jim Cretella are Members of the law firm Otterbourg P.C.

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locations: Atlanta, Baltimore, Boston, Chicago, Connecticut, New York, Philadelphia call: Warren Mino at (212) 806.4501 email: wmino@websterbcc.com *Source: National Information Center. All credit facilities are subject to the normal credit approval process. Webster Business Credit Corporation is a wholly owned subsidiary of Webster Bank, N.A. Member FDIC. The Webster symbol is a registered trademark in the U.S. ©2017 Webster Financial Corporation. All rights reserved. Equal Housing Lender

THE SECURED LENDER NOVEMBER 2017 57

tsl profile

s it approaches its oneyear anniversary, White Oak Commercial Finance (WOCF) has experienced tremendous growth. WOCF president and CEO, Robert Grbic, discusses WOCF’s recent growth and plans ahead. An affiliate of White Oak Global Advisors, LLC (WOGA), WOCF was formed in December 2016, following the acquisition of Capital Business Credit by WOGA on behalf of its institutional investors. Today, WOGA and its affiliates (White Oak) is a global financial products and services company that offers credit facilities across the entire spectrum of middle market companies. WOCF provides loans through its product suite of assetbased lending, full-service factoring, invoice discounting, supply chain financing, inventory financing, U.S. import/export financing, trade credit risk management, account receivables management and credit and collections support. “The addition of the WOCF platform enables White Oak to provide flexible factoring and asset-based revolving lines of credit to new and existing clients,” explained Grbic. “Additionally, WOCF can now grow with our clients by offering larger asset-based loan facilities and new solutions such as term loans and equipment financing solutions through WOGA. This

WHITE OAK COMMERCIAL FINANCE

allows us to better serve the universe of middle-market borrowers across all stages of their businesses.” WOCF’s team consists of industry veterans, with Grbic, current president & CEO and former chief operating officer and chief credit officer of Capital Business Credit LLC, and Tom Otte, chairman, who formally served as head of Asset Based Lending (ABL) at WOGA. In an effort to expand its ABL capabilities, WOCF recently brought on Gerard Hanabergh, Veronica Lubczenko, and Mignon Winston as senior members of the Risk team. As a member of White Oak, WOCF remains a strong financial partner for middlemarket companies seeking capital to grow both domestically and internationally. “WOCF is committed to finding and retaining the best talent in the industry. Our executives, with decades of industry experience, are a vital part of WOCF’s success,” stated Hanabergh, managing director of Risk. The new team of ABL veterans allows WOCF to provide an improved level of flexibility, both in terms of loan size and products. With its solid business model and veteran management team, White Oak has become an exciting organization to join and one that veterans like Hanabergh believe add great value to the ABL sector. White Oak’s growth has been driven by its ability to expand the breadth and depth of its specialty finance product offerings, both domestically and across the globe. The diversity of its increased product offerings, coupled with strong origination and underwriting capabilities, has allowed White Oak to provide attractive riskadjusted returns to its investors while providing an alternative financing source to middle-market companies. “White Oak’s expanding specialty finance product offerings, combined

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with the fact that many traditional banks are scaling back in their financing efforts to middle-market companies, has allowed WOCF to be an attractive provider of capital for middle-market companies,” Mr. Hanabergh explained. By leveraging WOGA and its resources, WOCF now offers trade finance and import finance facilities to its clients. With WOCF’s new and existing borrowers always looking for financing partners to facilitate their growth – and their ability to provide receivable factoring services and intransit inventory – financing options have been well received. “WOCF has a strong backlog of new business, and we expect to have a strong fourth quarter in terms of new factoring and trade finance customers,” Hanabergh added. Looking ahead, WOCF will continue to focus on growing its factoring and ABL customer base while diversifying its product offerings to include other working capital solutions such as supply chain finance and inventory financing. “You will also see us expand vertically with initial focus on factoring services such as staffing, transportation and industrial services,” Grbic said. Our goal is to become a leading specialty lender by leveraging our existing team to grow organically while satisfying the needs of the middlemarket at any stage of business.” Eileen Wubbe is senior editor of The Secured Lender.

Since its inception, the CFA Education Foundation has achieved unprecedented success raising over $8 million. These funds are critical to CFAâ&#x20AC;&#x2122;s extensive education, research and development missions. CFA recognizes the tireless efforts of the Governing Board, Advisory Board and Founders Leadership Council members who have exceeded their goals year after year through significant contributions of time and energy to the Foundation Campaign.

Particular thanks go to the following organizations which have continuously supported the Foundation during each of the past 26 years: Goldberg Kohn Hahn & Hessen LLP Otterbourg P.C.

Special thanks go to the following organizations whose contributions to the Foundation over the past 20 years have exceeded $100,000: 1stWEST Background Due Diligence Bank of America Business Capital Goldberg Kohn Greenberg Traurig LLP Otterbourg P.C. Hahn & Hessen LLP Katten Muchin Rosenman LLP Latham & Watkins LLP Skadden, Arps, Slate, Meagher & Flom LLP Wells Fargo Capital Finance Winston & Strawn LLP

Thanks also to this yearâ&#x20AC;&#x2122;s Fundraising Campaign Co-Chairpersons for their extraordinary efforts bringing in over $349,000 in contributions: Anthony R. Callobre, Buchaulter PC, and Bobbi Acord Noland, Parker, Hudson, Reiner & Dobbs LLC

PLATINUM MEMBERS $20,000 - $24,999

Goldberg Kohn, Richard M. Kohn, Principal Greenberg Traurig, LLP, David B. Kurzweil, Shareholders Otterbourg P.C., Jonathan N. Helfat, Partner and David W. Morse, Vice Chairmen

GOLD MEMBERS $12,500 - $19,999

Buchalter PC, Farhad Bahar, Shareholder, Anthony R. Callobre, Shareholder, Shadi J. Enos, Shareholder, and William Schoenholz, Shareholder Hahn & Hessen LLP, Daniel Batterman, Partner, Daniel J. Krauss, Partner, Lee Podair, Partner and Steven J. Seif, Partner Holland & Knight LLP, James C. Chadwick, Partner, Christopher C. “Chris” Kupec, Partner, Michelle White Suárez, Partner Morgan Lewis & Bockius LLP, Marshall C. Stoddard, Jr., Partner and Practice Chair, Transactional Finance Parker, Hudson, Reiner & Dobbs, LLC, C. Edward Dobbs, Partner and Bobbi Acord Noland, Partner Skadden, Arps, Slate, Meagher & Flom, LLP, Seth E. Jacobson, Partner Winston & Strawn LLP, William Brewer, Partner, Mats Carlston, Partner, Pat Hardiman, Partner, and Ron Jacobson, Partner

SILVER MEMBERS $7,500 - $12,499 McGuireWoods LLP, Wade M. Kennedy, Partner Realization Services Inc., Barry L. Kasoff, President Wells Fargo Capital Finance, Andrea L. Petro, Executive Vice President

BRONZE MEMBERS $5,000 - $7,499

Blank Rome, LLP, Lawrence F. Flick, II, Partner Choate Hall & Stewart LLP, John Ventola, Practice Group Leader Conway MacKenzie, Greg Charleston, Senior Managing Director Corporation Service Company, Paul Schultz, Account Manager Duane Morris LLP, James J. Holman, Partner Freed Maxick ABL Services, Howard Rein, President, and Michael A. Boeheim, Director Norton Rose Fulbright Canada LLP, Arnold Cohen, Partner Osler, Hoskin & Harcourt LLP, Kevin J. Morley, Partner, Financial Services Sidley Austin LLP, H. Bruce Bernstein, Partner, Thomas W. Albrecht, Angela Fontana, Michael Gold, Craig A. Griffith, Teresa Wilton Harmon, Anny Huang, Mark Kirsons, Robert J. Lewis, Patricia Ann Murphy, Tracey Nicastro, Richard S. Petretti, Allison J. Satyr Squire Patton Boggs (US) LLP and Squire Patton Boggs (UK) LLP, Guy Guinn, Partner and Paula Laird, Partner Vedder Price P.C., Thomas E. Schnur, Shareholder

BENEFACTORS $2,500 - $4,999

AloStar Business Credit, Andy McGhee, President of Commercial Banking Alston & Bird LLP, Michael G. Parisi, Partner Atlantic Risk Management Services, Richard Hawkins, Managing Director BDO Consulting, Baker A. Smith, Managing Director Bennett Jones LLP, Steve Lutz, Partner and David Rotchtin, Senior Associate BMO Harris Bank, Michael Scolaro, Managing Director CBIZ & Mayer Hoffman McCann, CPAs, Katelynn Aubrey, Senior Marketing Specialist CIBC, Bruce Denby, Group Head, Asset Based Lending Chapman and Cutler LLP, Daniel W. Baker, Partner CIT, Burt M. Feinberg, President Cost Reduction Solutions, Denise Albanese, President John M. DePledge, CFA Management Committee Dopkins ABL Consulting Services, Joseph A. Heim, CFE, CPA, Partner Faegre Baker Daniels, LLP, David A. Foster, Partner, Jennifer D. Miernicki, Partner, Jennifer A. Pearcy, Partner, James M. Pfau, Partner, Michael R. Stewart, Partner Fidelity National Financial UCC / Plus, Gary M. Zimmerman, SVP Chief Underwriting Counsel Focus Management Group, J. Tim Pruban, President & CEO Express Trade Capital, Mark Bienstock, Managing Director Getzler Henrich & Associates LLC, Joel Getzler, Vice Chairman GlassRatner Advisory & Capital Group LLC, Ronald Glass, Principal and Ian Ratner, Principal J D Factors, LLC, Stephen P. Johnson, President Charles G. Johnson, CFA Past Chairman Jones Day, Gayle A. Berne, Of Counsel, and Aldo L. LaFiandra, Partner KPMG LLP, Andrea Pipitone Beirne, Director Marquette Business Credit, Ron Vanek, President MB Business Capital, William A. Stapel, SVP Director of ABL Portfolio Management

McMillan LLP, Jeff Rogers, Co-Chair, Syndicated Finance Riemer & Braunstein LLP, Donald E. Rothman, Senior Partner Ruskin Moscou Faltischek, P.C., Jeffrey A. Wurst, Partner Scherzer International, Jessica Staheli, Sr. Vice President Tiger Valuation Services, LLC, Jack Rapp, Executive Managing Director Torys, LLC, Darien G. Leung, Partner Troutman Sanders LLP, Harris B. Winsberg, Partner and Justin A. Wood, Partner Webster Business Credit Corp., Warren K. Mino, President & CEO Women in Commercial Finance Committee, Katherine Bell, Chairperson Wolters Kluwer Lien Solutions, Robert Zurek, Marketing Manager

PATRONS $1,000 - $2,499

1STWEST Background Due Diligence, Suzanne Bury, CEO Amerisource Funding, D. Michael Monk, Managing Director Bibby Financial Services, Inc., Ian Watson, CEO North America Buchanan Ingersoll & Rooney PC, William H. Schorling, Shareholder CFA Atlanta Chapter Citizens Bank, Christopher Carmosino, President Clear Thinking Group, LCC, Lee Diercks, Partner EisnerAmper LLP, Robert D. Katz, Managing Director, Edward Phillips, Partner, Allen Wilen, Partner FGI, Sami Altaher, Executive Director First Business Capital Corp., Charles H. Batson, President & CEO GenConnect Recruiting & Consulting, Kerry Higley and Leigh Lones Howe, Keller & Hunter, PC, J. Craig Howe, President MidCap Business Credit, LLC, Steven Samson, President North Mill Capital LLC, Jeffrey K. Goldrich, President & CEO Peopleâ&#x20AC;&#x2122;s United Business Capital, Michael J. Maiorino, Jr., President Republic Business Credit, Stewart Chesters, CEO TBK Bank, Dan Karas, EVP & Chief Lending Officer The Keystone Group, Amar Shah, Managing Director Virginia Commercial Finance, Inc., John McCauley, President

MEMBER up to $999

A/R Funding, Inc., Brian Keith Holden, Chairman and CEO Allied Financial Corporation, Steven C. Gold, President Cahill Gordon & Reindel LLP, Michelle Murray, Director of Marketing & Communications Camel Financial, Inc., Helena Sopwith, Managing Partner CapitalSource, David Drogos, Managing Director, CS Business Finance CNH Finance LP, Timothy Peters, Partner Context Business Lending, John Giangiulio, Managing Director Coral Capital Solutions, Einat Steklov, Director Downtown Capital Partners, Gary Katz, Managing Partner Dwight Funding, Ben Brachot, Managing Director Einhorn Group LLC, Walter M. Einhorn, Managing Director and CFA Past Chairman Entrepreneur Growth Capital, LLC, Dean I. Landis, President Far West Capital, Cole Harmonson, CEO Flexible Funding, Steve Capper, Partner FSW Funding, Robyn Barrett, Managing Member Gateway Acceptance Co., Robert Curtis, President Goodman Factors, a Division of Independent Bank, Bret Schuch, EVP-Division Manager HPD Software, Inc., Kevin Day, CEO InCapital Financiera, S.A., Juan Antonio Lovera, President King & Spalding, Alan J. Prince, Attorney, Managing Partner King Trade Capital, Edward King, Managing Partner Lenders Funding, LLC, Harvey Friedman, Chief Operating Officer Merchant Financial Corporation, Neville Grusd, President RB International Finance (USA) LLC, Christoph Hoedl, First Vice President RSS, LLC, Robert S. Sandler, CFA Past Chairman Southeastern Commercial Finance, LLC, Patrick B. Trammell, President United Community Bank, David L. Shelnutt, SVP

Special thanks go out to the following organizations that opened their doors to the CFA Education Department this year and hosted programs: Dentons Goldberg Kohn Greenberg Traurig Hahn & Hessen Latham & Watkins Mayer Brown Morgan, Lewis and Bockius Otterbourg P.C. Paul Hastings Squire Patton Boggs Winston & Strawn, LLP

A special thank you to the following organizations who generously contributed to the Education Foundation by sponsoring the CFA 40 Under 40 Awards: Advance Partners Bank of America Business Capital Bibby Financial Services Blank Rome LLP BMO Harris Bank Choate Hall & Stewart LLP CIBC CIT Citizens Bank Crestmark Bank ExWorks Capital GlassRatner Advisory & Capital Group LLC Goldberg Kohn Ltd. Gordon Brothers Finance Company Greenberg Traurig, LLP Marquette Business Credit McMillan LLP MidCap Business Credit, LLC

Morgan Lewis North Mill Capital LLC Otterbourg P.C. Paul Hastings LLP Peopleâ&#x20AC;&#x2122;s United Business Capital PNC Business Credit PNC Capital Markets LLC Regions Business Capital Republic Business Credit Rosenberg & Fecci Consulting LLC Siena Lending Group Sterling National Bank SunTrust Robinson Humphrey U.S. Bank Asset Based Finance Wells Fargo Capital Finance White Oak Commercial Finance, LLC Winston & Strawn LLP

To learn more or support The CFA Education Foundationâ&#x20AC;&#x2122;s mission, please visit www.cfafdn.org, or contact Charlie Johnson, CFA Education Foundation Advisor, at cjohnson@cfa.com, (703) 628-6475.

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the cfa brief AMONG CFA MEMBERS

CFA NEWS IN PRINT

Accord Financial, Inc.: Kyle Moore has joined as a portfolio manager. Moore comes to Accord from Washington, DC where he was assistant vice president for CapitalSource. In that role, he managed a portfolio of up to 20 credit facilities, underwrote acquisition and refinance facility increases, negotiated legal documentation and finalized transactions. Moore also boasts a diverse background in finance, performing a variety of roles with previous employers, including: credit analyst, senior accountant and auditor. As portfolio manager—a newly created position at Accord—Moore will provide value to prospective clients by analyzing and documenting credit requests, financial statements and collateral reports, as well as monitoring client credit exposure through onsite due diligence. Accord is known for providing quick answers to financing requests, and Moore’s expertise will help further expedite the financial analysis process, leading to faster closings with mutually-beneficial terms. Accord Financial, Inc. also announced the promotion of two members of its client services team and one from its accounting department. Marilyn Batson, who has been with Accord for 27 years and tackles a broad range of accounting, administrative and systems management duties, has been promoted from senior informa-

tion analyst to assistant vice president. Batson’s tenure paved the way for her promotion, but truly it was her aptitude and willingness to accept a variety of tasks, including her expanding role working with Accord CFO Len Broderick. Lisa Gibson, with Accord for 19 years, and Leslie Ward, with Accord for 17 years, have recently been promoted to senior client service managers, taking on a more involved role by serving a wider variety of clients. This was a natural evolution as Accord continues to finance more ABL and consumer finance facilities, as opposed to strictly factoring. As senior client service managers, Gibson and Ward will continue to help Accord clients on a daily basis, but will be doing so under more complex circumstances.

(Illinois and Texas), South (Alabama and Georgia), and West (California). The business development officers for Southeast and Midwest will report to Kennedy and Albach, their respective regional sales managers. “These appointments boost our sales teams, support our business strategy and strengthen our proposition in the alternative financing market,” said Ian Watson. “BFS is making significant strides across all business lines with new client funding up 60% in the second quarter and client retention rates at an all-time high. This new sales structure will ensure that we are able to maintain and build on that momentum with a strong integrated sales team dedicated to the success of our clients and delivering the financial solutions they need.”

Bibby Financial Services (BFS) has announced strategic organizational changes to its US sales team to support continued business growth and create greater synergies across its asset-based lending, factoring and transportation finance offerings. Daniel Rodrigue, who rejoined BFS in April 2017 as national head of sales for factoring and transportation finance, is now national head of sales, overseeing all three business segment sales teams. Rodrigue will continue reporting directly to Ian Watson, CEO of Bibby Financial Services in North America. BFS veterans Blake Kennedy and Brian Albach have been promoted to newly created roles as regional sales managers for the Southeast and Midwest, respectively, reporting to Rodrigue. More business development officers have been appointed to the existing sales team to increase regional presence throughout the U.S.: Northeast (Pennsylvania), Midwest

CIT Group Inc.: Kenneth McPhail has been named executive vice president and chief strategy officer, effective immediately. In this role, he will have responsibility for strategic planning and initiatives, mergers, acquisitions and divestitures that advance the company’s goals. McPhail will report to chief financial officer John Fawcett and serve on CIT’s Executive Management Committee. McPhail succeeds Kelley Morrell who is leaving CIT to pursue another career opportunity. “Ken is a seasoned leader with more than 30 years of banking experience,” said Fawcett. “He brings broad industry perspective, strong leadership skills and a thoughtful approach to developing and executing strategic initiatives. He will be a key contributor in advancing CIT’s strategic goals for the future.” McPhail joins CIT from MUFG Union Bank where he was the managing director and head of Corporate Strategy and Development. Prior to that role, he served as the co-head of Deposi-

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tory Institutions at Bank of America Merrill Lynch where he was a strategic advisor to international and regional bank holding companies. McPhail was at Citigroup as the head of Depository Institutions from 1995 to 2006 and began his career at The First Boston Corporation in 1985. He received his bachelor degree in economics from Brown University. Citizens Bank: Jerry Hullinger was hired as managing director and head of syndicate. Hullinger has 25 years of experience in leveraged finance and worked for Wells Fargo/Wachovia Securities for the last 20 years, most recently as a managing director responsible for the loan syndicate business across the Wells Fargo platform. He has deep experience in leveraged syndicate focused on middlemarket and institutional transactions, along with a deep knowledge of the high-yield markets. “Jerry has an extensive background that fits Citizens’ current business strategies. His duties will include providing high confidence on underwritten positions, managing all aspects of the marketing, distribution and the closing of left-led Citizens transactions,” said Ted Swimmer, head of Corporate Finance and Capital Markets at Citizens. “He will also be managing the syndicate team, the collection of the market information and data, performing relevant valuation analysis and presenting syndication ideas. We look forward to Jerry bringing his considerable talents and experience to the team.” Hullinger has a bachelor degree from the University of Illinois at Urbana-Champaign and an MBA from Northwestern University’s Kellogg School of Management.

Crestmark Bank: Opens Canadian Representative Office in Ontario, Canada Mick Goik, president and chief operating officer, announced the opening of a Crestmark Canadian location to provide Crestmark’s growing line of alternative lending to businesses throughout Canada. Previously, Crestmark offered purchase-factoring solutions, but will also offer assetbased lending and ledgered lines of credit with the expansion. The new Crestmark office is located in Pickering, Ontario, just east of Toronto. Nick Dounas, who joins Crestmark as vice president, head of Canadian originations, will be the Canadian authorized representative. He will report to Ray Morandell, executive vice president, national sales director. Dounas comes to Crestmark from

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TD Asset Finance (and its predecessor, LaSalle Business Credit, a division of ABN AMRO), where he worked for more than 16 years. While there, he held numerous roles, most recently as director in asset-based lending. Earlier, he served as a senior underwriter, relationship manager, analyst, and field examiner. Prior to TD Asset Finance, he worked for KPMG as an accountant. Dounas has an Honours BA in business administration from the University of Toronto. Outside of work, he volunteers as treasurer for a nonprofit charity, and is busy with his wife raising their two wonderful little girls. “Opening a foreign representative office in Canada has been a part of our long-term strategic plan. It is the first step in building an ever-expanding Canadian presence,” said Goik. “We are

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excited to start helping businesses in the Greater Toronto area, and beyond.” “Nick will be a great asset for us as we penetrate the Canadian marketplace,” said Morandell. “Our goal is to earn the respect of the business community and be viewed as a ‘Canadian lender,’ while providing solutions within our capabilities to the lower middle-markets that we intend to serve. That focus will be the growth foundation that we build from. Having this sustainable long-term approach in building a successful platform starts with our lead Canadian business development officer. After an extensive search, we believe Nick is the perfect person to expand our footprint and lead our growth objectives.” “This is an exciting opportunity to be able to bring an extended product line to the Canadian market, helping businesses that have had difficulties and/or are growing. Crestmark’s reasonable approach to lending in difficult situations, at a reasonable price point, is what attracted me to join Crestmark,” said Dounas. “Crestmark is a respected asset-based lender, and I’m looking forward to helping businesses across Canada.” Express Trade Capital, Inc. announces Establishment of Eco-Financing Division Express Trade Capital, a leader in the trade finance, factoring, purchase order financing and logistical solutions arena, has recently established an ECO-Financing division. The announcement was made by Mark Bienstock, managing director. The division will be led by Ashley Orlando, vice president. “The ECO- Financing marketplace is experiencing tremendous growth and we will be a leader in providing customized financing solutions for this ever-expanding marketplace,” commented Mark Bienstock. With dynamic

and experienced executive Ashley Orlando leading this division, Express has quickly established themselves as the “go-to financier” for the needs of the ECO marketplace. This arena encompasses industries such as CleanLabel Food & Beverage, Natural Health & Beauty, Sustainable Apparel & Home Furnishings, etc. Express is also able to consider “seed financing” for these companies in order to assist them in moving to the next level of growth. ENGS Commercial Finance Co. (ENGS), an industry-leading commercial finance company, is pleased to announce that T.J. Gill has joined the company as vice president, business development manager to the company’s Factoring subsidiary, ENGS Commercial Capital (ECC). In this role, Gill will focus on establishing new business relationships in the Southeast in industries such as manufacturing, distribution, staffing, technology, and transportation. Gill brings over 25 years of experience in the factoring and asset-based lending industry with organizations such as TAB Bank and LSQ Funding Group, and has held various management roles throughout his career in the Financial Services industry. Tania Daniel, managing director of ECC, commented, “T.J. brings an extensive amount of industry knowledge that will translate very well to our continued expansion of the company’s product offerings. We are committed to providing our clients with unparalleled expertise in structuring working capital opportunities, delivering incomparable customer service and ensuring best-in-class products to our customer base,” Daniel continued, “T.J. has a proven track record of success in this space and will prove to be an integral part of the growth and overall success of ENGS Commercial Capital.”

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North Mill Capital: Rebecca Smith was hired as a vice president - underwriter/ account executive. Smith has over 17 years of experience in the asset-based lending and floorplanning industries. Smith has spent her entire career as an underwriter and/or portfolio manager with various regional and national financial institutions prior to joining NMC. She was directly involved in the underwriting of new business and implementing credit criteria. Smith’s primary role at NMC will focus on new business and she will underwrite loans nationally, working from Marietta, GA. PNC Business Credit: Karl Brier was appointed as senior vice president and business development officer to its senior secured financing team in the western region. PNC Business Credit is the senior secured lending division of PNC Bank, N.A., and its subsidiaries and a part of The PNC Financial Services Group, Inc. Based in Orange County, Brier is responsible for business development with private equity firms and middlemarket companies, and originating asset-based and cash flow loans in southern California, Arizona and southern Nevada. Brier joins PNC from Chase Commercial Bank, where he served as market executive. He earned a bachelor degree in East Asian studies and International Relations from the University of Southern California and an MBA from the Anderson School at UCLA. Sterling National Bank: Elvis Grgurovic was named vice president and managing director of Commercial Banking. Grgurovic, who will be based in Sterling’s White Plains, NY office and report to senior managing director Joe Giamartino, will lead the team’s sales and services efforts.

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Grgurovic was most recently a director at Credit Agricole Corporate and Investment Bank, where he acted as a liaison to the bank’s international client network in the United States. Prior experience included business development and corporate finance roles in Leveraged Finance and Financial Sponsor teams. He also previously covered middle-market commercial clients at Chase Manhattan Bank and began his career at Fidelity Investments. Grgurovic received his Master of business administration from the Johnson Graduate School of Management at Cornell University, and holds a Bachelor of Science in finance from St. John’s University. SunTrust Banks, Inc. is opening Commercial Banking representative

offices in the Midwest and Southwest regions, naming market presidents in Ohio and Texas. These new representative offices complement a number of SunTrust business lines that serve clients nationally, including corporate and investment banking through SunTrust Robinson Humphrey (STRH) and commercial real estate. “We see a gap in the commercial banking space, where many businesses have been underserved and need access to capabilities beyond a loan – like M&A advisory, capital markets, and treasury management,” said Allison Dukes, Commercial Banking executive at SunTrust. “SunTrust has the capabilities of a full-scale corporate and investment bank, partnered with the deep local knowledge of commercial bankers that together can

help businesses achieve their growth objectives.” Commercial Banking market presidents have been named for Cleveland, Cincinnati, and Dallas–Fort Worth. Joining SunTrust as Cleveland market president is Jim Geuther. Geuther has 30 years of commercial banking and private wealth experience and most recently served as managing director and regional president for northeast Ohio at JPMorgan Chase, where he focused on clients in the middle-market segment. Ben Willingham joins SunTrust as Cincinnati market president, with 30 years of corporate and commercial banking and middle-market banking expertise. Willingham most recently served as a senior vice president and senior relationship manager at U.S.

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Required by 39 U.S.C. 3685. 1. Title of publication: The Secured Lender. 2. Publication No. 0888-255x. 3. Date of filing: October 2, 2017. 4. Frequency of issue: 8x a year. 5. No. of issues published annually: 9. 6. Annual subscription price: $65 for nonmembers. 7. Complete mailing address of known office of publication: 370 7th Ave. Ste. 1801, New York, NY 10001. Contact Person: Michele Ocejo, Telephone: (212) 792-9396. Complete mailing address of the headquarters of general business offices of the publisher: 370 7th Ave. Ste. 1801, New York, NY 10001. 9. Full names and complete mailing address of publisher, editor, and managing editor: Publisher: The Commercial Finance Association, 370 7th Ave. Ste. 1801, New York, NY 10001; Editor-in-Chief: Michele Ocejo, 370 7th Ave. Ste. 1801, New York, NY 10001; Senior Editor: Eileen Wubbe. 10. Owner: (If the publication is owned by a corporation, give the name and address of the corporation immediately followed by the names and addresses of all stockholders owning or holding 1 percent or more of the total amount of stock. If not owned by a Corporation, give the names and addresses of the individual owners. If owned by a partnership or other unincorporated firm, give its name and address, as well as those of each individual owner. If the publication is published by a nonprofit organization, give its name and address.): Commercial Finance Association, Inc., A Delaware Non-Stock, Non-Profit Corporation, 370 7th Ave. Ste. 1801, New York, NY 10001. 11. Known bondholders, mortgagees, and other security holders owning or holding 1 percent or more of total amount of bonds, mortgages or other securities: None. 12. The purpose, function, and nonprofit status of this organization and the exempt status for federal income tax purposes: has not changed during preceding 12 months. 13. Publication Title: The Secured Lender. 14. Issue date for circulation data below: September, 2016. 15. Extent and nature of circulation: a. Total number of copies (net press run): Average no. copies of each issue during preceding 12 months: 6081; No. copies of single issue published nearest to filing date: 6000. b. Paid circulation (by mail and outside the mail): (1) Mailed outside-county paid subscriptions stated on PS Form 3541 (Include paid distribution above nominal rate, advertiser’s proof copies, and exchange copies): Average No. copies each issue during preceding 12 months: 5125; No. copies of single issue published nearest to filing date: 4635; (2) Mailed in-county paid subscriptions stated on PS Form 3541 (Include paid distribution above nominal rate, advertiser’s proof copies, and exchange copies): Average no. copies each

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issue during preceding 12 months: 0; No. copies of single issue published nearing to filing date: 0; (3) Paid distribution outside the mails including sales through dealers and carriers, street venders, counter sales and other paid distribution outside USPS: Average no. copies each issue during preceding 12 months: 0; No. copies of single issue published nearing to filing date: 0; (4) Paid distribution by other classes of mail through the USPS (e.g., First-Class Mail): Average no. copies each issue during preceding 12 months: 100; No. copies of single issue published nearing to filing date: 101. c. Total paid distribution (Sum of 15b(1), (2), (3) and (4)): Average no. copies of each issue during preceding 12 months: 5225; No. copies of single issue published nearest to filing date: 4736. d. Free or nominal rate distribution (by mail and outside the mail): (1): Free or nominal rate outside-county copies included on PS Form 3541: Average no. copies of each issue during preceding 12 months: 203; No. copies of single issue published nearest to filing date: 0. (2) Free or nominal rate in-county copies included on PS Form 3541: Average no. copies of each issue during preceding 12 months: 0. No. Copies of Single Issue Published Nearest to Filing Date: 0. (3) Free or nominal rate copies mailed at other classes through the USPS (e.g., First-Class Mail): Average no. copies of each issue during preceding 12 months: 0; No. copies of single issue published nearest to filing date: 0. (4) Free or nominal rate distribution outside the mail (carriers or other means): Average no. copies of each issue during preceding 12 months: 500; No. copies of single issue published nearest to filing date: 1000. e. Total free or nominal rate distribution (sum of 15d (1), (2), (3) and (4): Average no. copies of each issue during preceding 12 months: 703; No. copies of single issue published nearest to filing date: 1000. f. Total distribution (Sum of 15c and 15e): Average no. copies of each issue during preceding 12 months: 5928; No. copies of single issue published nearest to filing date: 5736. g. Copies not distributed: Average no. copies of each issue during preceding 12 months: 153; No. copies of single issue published nearest to filing date: 264. h. Total (Sum of 15f, 15g): Average no. copies of each issue during preceding 12 months: 6081; No. copies of single issue published nearest to filing date: 6000. i. Percent paid (15c/f x 100): Average no. copies of each issue during preceding 12 months: 88.1%; No. copies of single issue published nearest to filing date: 82.6%. I certify that all information furnished on this form is true and complete.

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NOVEMBER MBER 8 – 110, 0 201 22017 017 SHERATON GRAND CHICAGO

Thank You to Our CFA’s 73rd Annual Convention Exhibitors ABLSoft Inc. Accounts Receivable Insurance (ARI) All American Document Services LLC Alleon Healthcare Capital Bluechip Asset Management CODIX* Corporation Service Company* Cortland Capital Markets Services LLC Cync Software DAT Solution Dopkins ABL Consulting Services Finvoice, Inc. Freed Maxick ABL Services Gemino Healthcare Finance Global Verification Network Heartland Investigative Group HPD Software, LLC International Factoring Association (IFA) Liquid Asset Partners Maynards Industries POPin Mobile Video ProfitStars RapidAdvance Sherwood Partners, Inc. | agencyIP, LLC Shutts & Bowen LLP Thomson Reuters UCC Plus Insurance - Fidelity National Title Group William Stucky & Associates, Inc. Wolters Kluwer - Lien Solutions*

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Bank. Julia Harman, who most recently served as a managing director in Southwest Corporate Banking at STRH, has been appointed Dallas–Fort Worth market president. Harman has more than 15 years of corporate and investment banking experience, and has held commercial and corporate banking roles with Fifth Third Bank, Wells Fargo, and JPMorgan Chase. These leaders will oversee additional investment in commercial banking for these markets and will facilitate delivery of a comprehensive suite of products and services to business clients, along with focused commercial industry expertise. In addition, they will coordinate the delivery of the

investment banking and capital markets capabilities offered by STRH to commercial clients. STRH capabilities include capital raising, risk management, and strategic advice. TAB Bank: Scott F. Barnes (972-7687306, scott.barnes@tabbank.com) has joined the business development team as vice president and business development officer. Barnes will be based in Dallas and will be responsible for sourcing new business opportunities by providing asset-based and factoring working capital facilities to commercial entities in the Southwestern United States with annual revenues of $2 million to $150 million. In a career spanning more than

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two decades, Scott has served the lower and middle markets in diverse roles from finance to operations and business development. He has worked with a wide range of organizations from start-ups to publicly held Fortune 500 companies. Previously as vice president of Comerica Bank’s Technology and Life Sciences Division, he was responsible for developing and managing loan and deposit relationships with clients in multiple states. Barnes has also been an entrepreneur himself, founding a boutique investment bank and a management consulting firm while also owning and operating a food services business. He has a bachelor degree from Baylor University and an MBA from Dallas Baptist

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University. “The addition of Scott to the TAB Bank business development team will greatly enhance our ability to bring flexible financing solutions to many small and medium-sized commercial businesses in Texas and surrounding states. Barnes brings to TAB a wealth of experience in the commercial finance arena. We are very pleased to welcome him to our team and look forward to the many new opportunities that will be generated through his skill and efforts,” stated Justin Gordon, senior vice president of sales and marketing for TAB Bank. TCF Capital Funding, a division of TCF National Bank which is a subsidiary of TCF Financial Corporation (TCF) (NYSE: TCF), announced that it has surpassed $1 billion in commitments and also announced the promotions of Nick O’Brien, Mike Trojanowski and Bob Joyce to assistant vice president and Tasha Gibson to officer. O’Brien, Trojanowski and Joyce are valued members of the transaction underwriting and portfolio management team. In addition, Gibson is being recognized for her valuable contributions to the operations team and has been promoted to officer. O’Brien has over nine years of finance experience and joined TCF in 2015. In addition to being promoted to assistant vice president, O’Brien has also been named a relationship manager. At TCF Capital Funding, O’Brien covers Private Equity Sponsors based in Florida, Michigan, Wisconsin, Oregon and Washington. Prior to joining TCF Capital Funding, O’Brien was a credit analyst, relationship manager and investment banking associate at Metropolitan Capital. He received a BS in finance from the College of Business at the University of Illinois at Urbana-Champaign.

Trojanowksi brings 10 years of financial analysis and sound business processing experience to TCF Capital Funding. Prior to joining TCF in 2014, Trojanowksi was an associate at AEG Partner/Access Value Investors, a corporate restructuring and private equity firm. His primary responsibilities included strategic planning, corporate turnaround, due diligence and budget development. Prior to joining AEG, Trojanowksi was a financial analyst for The RoomPlace furniture retailer with various responsibilities including financial planning, treasury management and monitoring covenant compliance. He received a BS in finance from the University of Illinois at Urbana-Champaign. Joyce has over six years of finance experience and joined TCF in 2015. At TCF Capital Funding, Joyce’s primary responsibilities include screening and underwriting new transactions, as well as monitoring existing portfolio companies. Prior to joining TCF, Joyce was a credit analyst, relationship manager, and investment banking analyst at Metropolitan Capital. Joyce received Bachelor of Arts in both economics and geography from Northwestern University. Gibson has over eight years of loan administration and asset management experience. Gibson joined TCF Capital Funding in 2015. Gibson’s primary responsibilities include monitoring and maintaining the integrity of loans and collateral and maintaining accuracy in operational procedures. Prior to joining TCF, she worked as a commercial loan portfolio analyst with Draper and Kramer and prior to that as a portfolio analyst with MB Financial. Gibson received a Bachelor degree in business administration and management from Robert Morris University.

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White Oak Global Advisors, LLC (White Oak): John Felix was appointed as managing director and co-head of originations. Felix will be responsible for sourcing opportunities for White Oak, and co-managing the Originations team. “We have known John for nearly a decade and have observed his noteworthy capabilities and accomplishments within the middle-market lending space,” said Darius J. Mozaffarian, partner and co-president of White Oak. “We look forward to having John bring his deep relationships and industry expertise to our organization as we continue to expand our financing platform and capabilities. He will also be a great cultural fit within our organization and we couldn’t be more ecstatic to have him join the team.” Felix has been actively investing in middle-market companies for over 20 years. Most recently, he founded Consortium Finance in 2013 where he invested across the capital structure of middle-market businesses. Prior to his role at Consortium Finance, Felix worked at D. E. Shaw Group, where he opened the San Francisco office in 2005. At D. E. Shaw, Felix was responsible for originating and managing a portfolio of direct senior debt, junior debt and equity investments across a variety of industries. He was previously a managing principal of Banc of America Mezzanine Capital LLC, where he was responsible for underwriting structured senior debt, mezzanine debt, and bridge financing across a variety of industry sectors. Additionally, Felix was a former leader of Banc of America Securities, Inc.’s debt origination efforts in Australasia.

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CHAPTER NEWS

the cfa brief

Atlanta The Chapter held an Educational Breakfast at the offices of McGuireWoods on October 19. The Chapter’s Holiday Party with TMA will be held on December 7. For more information visit http://community.cfa.com/atlantachapter/home. California On October 17, the Chapter held a golf outing at Coyote Hills Golf Course in Fullerton, CA. The event included a $25,000 Hole-in-One Contest, a BBQ lunch and on-course beverages, cocktail reception, hors d’oeuvres and a Nike golf shirt with the Coyote Hills Golf Course logo. On October 19, the Chapter’s YoPro members held an Oktoberfest event at The Standard Biergarten. The rooftop biergarten offered panoramic views of downtown Los Angeles and traditional Bavarian beer. The Chapter will be holding a Sponsor Panel on November 15 at the Center ClubOrange County and a holiday party at the Sheraton Universal hotel on December 13. For more information visit community.cfa.com/californiachapter. Charlotte The Chapter held its 9th Annual Charity Golf Tournament October 17-18. On October 17, the Chapter held a reception at Carpe Diem. The following day the Tournament took place at The Palisades Country Club in Charlotte, NC. For more information, visit community. cfa.com/charlottechapter. Europe The Chapter will hold its Winter Networking Party December 12 at The Aon Centre in The Leadenhall Building in London. This relaxed and informal evening event is designed to enable attendees to connect with their ABL peers and round off 2017 on a celebratory

note. Registration includes entry to the event, drinks and canapes. For more information visit community.cfa.com/cfaeurope. Florida The Chapter held The Need for DoddFrank Relief and the State of Banking 2017 with the RMA, featuring Alex Sanchez of the Florida Bankers Association at the Citrus Club in Orlando. The Chapter held its Annual Fall CFA - TMA Networking Reception October 19 at Ouzo Bay, Mizner Park, Boca Raton. On November 14 there will be a Retail Industry Update and Overview at the Lauderdale Yacht Club in Fort Lauderdale, FL and on December 13 the Annual CFA-TMA Holiday Extravaganza will be held at the Lauderdale Yacht Club in Fort Lauderdale, FL. For more information visit community.cfa.com/floridachapter. Houston The Chapter held a Lunch and Learn hosted by Weinstein Spira on November 2 discussing The Financial Statement Maze: 5 Elements Not to Miss. The event was held at Carrabba’s in Houston. For more information visit community.cfa.com/houstonchapter. MidSouth The Chapter’s Holiday Party will be a joint event with TMA-Tennessee in Nashville (venue location TBD) on December 6. On January 25, the Chapter will hold an event in Birmingham, AL (venue location TBD) featuring Joe Brusuelas, chief economist at RSM US LLP f/k/a McGladrey LLP, the nation’s leading provider of assurance, tax and consulting services focused on the middle market. For more information visit community.cfa.com/midsouthchapter. MidWest The Chapter held “The Radio Flyer Story: Transforming & Innovating While Retaining Your Roots” Educational Event on October 4. In this program, Tom Schlegel, senior vice president of product development,

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and Amy Bastuga, senior vice president of human resources, told the story of how Radio Flyer has transformed its people and its products to create an award-winning workplace that is driving innovation in this 100-year-old company to its best year ever. Attendees learned how Radio Flyer keeps in touch with its history without getting left behind in the marketplace, and how they continuously bring innovative products to market. Lenders gained an inside perspective on how companies strategically react to outside forces to maintain and enhance their brand. In the eyes of lenders and other stakeholders, a strong brand is one of many critical assets which drive positive financial performance and support credit or investment decisions. On October 9 the Chapter held its Cubs Postseason NLDS Playoff Game event at the Wrigley Rooftop Deck in Chicago. The Pre-game Networking Party started one hour before game time. The rooftop was reserved exclusively for the Chapter event. 1038 W Waveland blends the modern luxury of a skybox with the charming experience of a Wrigley Rooftop. The first indoor level has a bar and club-style seating facing a picturesque view of Wrigley Field while the rooftop level has another bar. The Chapter’s Sporting Clays outing was held on October 27 at the Northbrook Sports Club in Northbrook, IL. For more information, visit community.cfa.com/midwestchapter. Minnesota The Chapter held an educational panel, followed by an evening networking reception, on October 25. “Capital Markets and Divestitures: Understanding the Options, Realizing the Impact” was held at the IDS Center in Minneapolis. Whether a stand-alone business or multientity corporation, the path to obtaining capital or successfully completing a sale can be complex and challenging throughout the planning and execution phases. The panel highlighted the 2017 trends in capital markets, and discussed paths to capital and related work streams, carve-out

considerations and other sell-side preparations. Presenters included John Iwanski, managing director, Riveron Consulting, and Bill Maloney, managing director, Riveron Consulting. On November 17, the Chapter will hold a Lunch and Learn from 11:30 a.m.1:00 p.m. hosted at The Platinum Group in Minnetonka, MN. For more information, visit community.cfa.com/minnesotachapter. New Jersey The Chapter held “Technology and the Future of Commercial Finance Professionals,” a joint event with the New Jersey TMA, on November 1 at the Tournament Players Club at Jasna Polana in Princeton, NJ. The event also included a buffet dinner. Paul H. Shur, Esq., Wilentz, Goldman & Spitzer P.A., served as moderator. Panelists included: John F. Azzinaro, chief operating officer of Real Time Consultants, Inc.; Robinn Mikalic, business development manager, Northeast Region, JD Factors LLC, and Jerry Ravi, CPA, CISA, partner, Consulting Services Group, EisnerAmper LLP. The Chapter’s holiday party will be held at the Highlawn Pavilion in West Orange, NJ on November 30. For more information, visit community.cfa.com/newjerseychapter. New York The Chapter’s Holiday Reception will be held at The Yale Club of New York City on December 6. Those participants who bring a gift to the Holiday Reception in excess of $15 to be donated to Toys for Tots will be eligible for a special drawing during the event. Gifts must be new in package and should be in excess of $15.00 in value. Gifts do not have to be wrapped. The New York Chapter appreciates your support of this great cause. For more information, visit community.cfa.com/newyorkchapter. Philadelphia The Chapter’s Annual Joint Holiday Networking Event will be held on December 7 at the Loews Philadelphia Hotel in Philadelphia,

PA. The networking gathering will also be held with the Philadelphia Chapter of the Turnaround Management Association and the Bankruptcy Committee of the Philadelphia Bar Association: Attendees will enjoy spectacular views of Philadelphia, 33 floors above the hustle and bustle of the busy streets below. Save the dates for 2018 events: The Chapter’s 11th Annual Philadelphia Credit & Restructuring Summit, on March 22 and 24th Annual Golf Outing at Cedarbrook Country Club in Blue Bell, PA on May 14. For more information, visit community.cfa.com/philadelphiachapter. Southwest The Chapter held a Senior Secured Financing Update at Holland & Knight in Dallas on October 26. The Chapter will hold PEGapalooza 2017, Dealmaker Wine & Whiskey Tasting on November 15 at 015 at Trinity Groves in Dal-

las, TX. Join 300-plus deal professionals from around the country for an evening of power networking over wine, whiskey and heavy apps. Attendees of PEGapalooza will include deal professionals, intermediaries and private equity investors serving the merger and acquisition community. The composition of the attendees will be: select private equity/ junior capital fund managers; regional investment bankers; sponsors and invited guests and other professional deal intermediaries. The Chapter’s Holiday Party will be held November 28 at Dallas Country Club. Ugly sweaters are optional, but not required. There will also be a toy drive. For more information, visit www.cfasw.org For more information on CFA Chapters, please visit community.cfa.com/ch/chaptersmain

COLLATERAL CONFIRMED. CONFIDENCE SECURED.

Michael A. Boeheim, CIA, CFE Director

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THE SECURED LENDER NOVEMBER 2017 75

CALENDAR

the cfa brief

November 8 – 10, 2017 CFA’s 73rd Annual Convention Sheraton Chicago Hotel & Towers Chicago, IL November 14, 2017 CFA’s Florida Chapter – Retail Industry Update and Overview Ft. Lauderdale Yacht Club Ft. Lauderdale, FL November 15, 2017 Sponsor Panel Center Club – Orange County Costa Mesa, CA November 15, 2017 CFA’s Southwest Chapter – PEGapalooza 2017 Dealmaker Wine & Whiskey Tasting 3015 at Trinity Groves Dallas, TX

November 30, 2017 CFA’s New Jersey Holiday Party Highlawn Pavilion, Eagle Rock Reservation West Orange, NJ

December 6, 2017 CFA’s MidSouth Chapter – Holiday Party Joint with Tennessee TMA Venue location TBD

November 30, 2017 CFA’s Midwest Annual Holiday Party Boleo Chicago, IL

December 6, 2017 CFA’s Minnesota Chapter – Holiday Social and Member Drive Town and Country Club St. Paul, MN

December 5 – 7, 2017 CFA’s Loan Documentation Workshop Hahn & Hessen LLP New York, NY December 5, 2017 CFA’s Charlotte Chapter – Holiday Reception and Toy Drive The Palm Restaurant Charlotte, NC

December 6, 2017 CFA’s The Future of FinTech 2017 Jones Day New York, NY December 6, 2017 CFA’s New York Chapter Holiday Reception The Yale Club of New York City New York, NY

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November 16, 2017 CFA’s Midwest Chapter – Sporting Clays Outing Northbrook Sports Club Northbrook, IL November 17, 2017 CFA’s Minnesota Chapter – Lunch and Learn The Platinum Group Minnetonka, MN 11:30 am – 1:00 pm November 28, 2017 CFA’s Southwest Chapter – Holiday Party Dallas Country Club Dallas, TX

of your clients’ equipment. Lacking in cash flow but have equipment? Utica Leaseco can help improve your clients’ position with a creative funding approach that gets challenging deals done, fast. They’ll benefit with lease and loan solutions such as: • Capital leases and sale/leaseback transactions • Secured loans • Debtor-in-possession financing Contact us today! 586-726-5637 | info@uticaleaseco.com | www.uticaleaseco.com

November 30, 2017 CFA’s Houston Chapter – ACG / CFA/TMA Joint Networking Reception Greater Houston Partnership 5:00 - 8:00 pm Houston, TX

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AD INDEX 1STWEST. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . www.1STWEST.com. . . . . . . . . . . . . . . . . . . . . . . . . . . . Bellyband ABL Soft Inc.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . www.ablsoft.com. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 3 AeroPay Express, a Division of AeroFund Financial, Inc... . . . . . www.aeropayexpress.com. . . . . . . . . . . . . . . . . . . . Page 43 Capital One. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . www.capitalone.com. . . . . . . . . . . . . . . . . . . . . . . . . . Pages 52-53 ExWorks Capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . www.exworkscapital.com. . . . . . . . . . . . . . . . . . . . . Page 38-39 Freed Maxick ABL Services. . . . . . . . . . . . . . . . . . . . . . . www.freedmaxick.com. . . . . . . . . . . . . . . . . . . . . . . . Page 75

December 7, 2017 CFA-TMA Philadelphia Annual Joint Holiday Networking Event Loews Philadelphia Hotel Philadelphia, PA

Gemino Healthcare Finance, LLC. . . . . . . . . . . . . . . www.gemino.com. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 63 Gordon Brothers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . www.gordonbrothers.com. . . . . . . . . . . . . . . . . . . . Page 27 Hilco Global. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . www.hilcoglobal.com. . . . . . . . . . . . . . . . . . . . . . . . . . BC HPD Software, LLC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . www.hpdsoftware. . . . . . . . . . . . . . . . . . . . . . . . . . . . . IBC Huntington Business Credit. . . . . . . . . . . . . . . . . . . . . www.huntington.com/commercial. . . . . . . . . . Page 9 Provident Bank. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . www.provident.bank.com. . . . . . . . . . . . . . . . . . . . .Page 70

December 7, 2017 CFA’s Atlanta Chapter Holiday Party with TMA Location TBD

Liquidity Services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . www.liquidityservices.com. . . . . . . . . . . . . . . . . . . Page 65

December 12, 2017 CFA’s Europe Chapter – Winter Networking Party The Aon Centre, The Leadenhall Building London

MidCap Business Credit, LLC. . . . . . . . . . . . . . . . . . . . . www.midcap.com. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IFC

Mazars USA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . www.mazarsusa.com. . . . . . . . . . . . . . . . . . . . . . . . . . Page 51 MB Business Capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . www.mbbusinesscapital.com. . . . . . . . . . . . . . . . Page 11 Merchant Financial Corporation. . . . . . . . . . . . . . . www.merchantfin.com. . . . . . . . . . . . . . . . . . . . . . . . Page 33 Monroe Capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . www.monroecap.com. . . . . . . . . . . . . . . . . . . . . . . . . Page 23 Phoenix Management Services. . . . . . . . . . . . . . . . . www.phoenixmanagement.com/firstcall. . Page 29 RedRidge Finance Group . . . . . . . . . . . . . . . . . . . . . . . . www.redridgefg.com . . . . . . . . . . . . . . . . . . . . . . . . . . Pages 4 Thomson Reuters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . www.thomsonreuters.com. . . . . . . . . . . . . . . . . . . Pages 54-55 Utica Leaseco, LLC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . www.uticaleaseco.com. . . . . . . . . . . . . . . . . . . . . . . . Page 76

December 13, 2017 CFA’s California Chapter – Holiday Party Sheraton Universal Universal City, CA December 13, 2017 CFA’s Florida Chapter – CFA/TMA Holiday Extravaganza Lauderdale Yacht Club Ft. Lauderdale, FL January 9 – 25, 2018 CFA’s Winter Operations Fundamentals Virtual workshops January 25, 2018 CFA’s MidSouth Chapter - Joe Brusuelas RSM US LLP f/k/a McGladrey LLP Economist Venue location TBD Birmingham, AL 5:00 – 7:30 pm 5:00 -7:30 pm February 6 – 22, 2018 CFA’s Underwriting Fundamentals Virtual Workshop March 13 – 14, 2018 CFA’s ABL & Factoring Basics Workshop Greenberg Traurig LLP Atlanta, GA

Webster Business Credit . . . . . . . . . . . . . . . . . . . . . . . . . www.websterbank.com. . . . . . . . . . . . . . . . . . . . . . . Page 57 Wells Fargo Capital Finance. . . . . . . . . . . . . . . . . . . . . www.wellsfargocapitalfinance.com. . . . . . . . . Page 2 William Stucky & Associates, Inc. . . . . . . . . . . . . . . . www.stuckynet.com. . . . . . . . . . . . . . . . . . . . . . . . . . . Page 1

March 13 – 16, 2018 CFA’s Field Examiner School Greenberg Traurig LLP Atlanta, GA March 22, 2018 CFA’s Philadelphia Chapter – 11th Annual Philadelphia Credit & Restructuring Summit Venue location TBD April 5, 2018 CFA’s Philadelphia Chapter – Day One at the Master’s Event Holland & Knight LLP Philadelphia, PA April 10 – 11, 2018 CFA’s Spring Foundations of Account Management Venue location TBD Dallas, TX April 10 – 12, 2018 CFA’s Spring What’s it Worth? All You Need to Know About Inventory Holland & Knight LLP Dallas, TX

April 24 – 26, 2018 CFA’s Spring Advanced Field Examiner School Venue location TBD Los Angeles, CA April 24 – 26, 2018 CFA’s Workouts & Bankruptcy Workshop Venue location TBD Los Angeles, CA May 1 – 17, 2018 CFA’s Spring Operations Fundamentals Virtual Workshops May 14, 2018 CFA’s Philadelphia Chapter - 24th Annual Golf Outing Cedarbrook Country Club Blue Bell, PA May 22 – 25, 2018 CFA’s Summer Field Examiner School Venue location TBD Chicago, IL

THE SECURED LENDER NOVEMBER 2017 77

legal notes

his month, Co-General Counsel Jonathan Helfat and Richard Kohn report on a recent case in which a secured creditor lost its security interest because of an extremely minor error in the debtor’s name on the UCC-1 financing statement, and will also report on UNCITRAL’s new project. JONATHAN HELFAT AND RICHARD KOHN CFA CO-GENERAL COUNSEL United States SEC v. ISC, Inc., 2017 U.S. Dist. LEXIS 139258 (W.D. Wis. Aug. 30, 2017) (Minor error in name of debtor on a UCC-1 financing statement is seriously misleading.) A recent decision by the U.S. District Court for the Western District of Wisconsin serves as a stark reminder of absolute precision required in listing the debtor’s legal name on a UCC-1 financing statement. The case is United States SEC v. ISC, Inc., 2017 U.S. Dist. LEXIS 139258 (W.D. Wis. Aug. 30, 2017). The decision offers few facts. In 2016, a receiver was appointed for ISC, Inc. and directed to sell the company or its assets. Double Bubble, Ltd. had filed a UCC-1 financing statement against ISC, Inc. and asserted that it was entitled to a share in the sale proceeds as a secured creditor. However, it turned out that the UCC financing statement filed

THE LEGAL SIDE OF ABL & FACTORING

by Double Bubble with the Wisconsin Department of Financial Institutions contained a slight error: the debtor’s name was shown as ISC, Inc . – that is, an extra space was inadvertently inserted between the letter “c” and the period in the word “Inc.” As a result, the financing statement did not show up on a search conducted against the debtor. The receiver contended that Double Bubble did not have a properly perfected security interest. Section 409.506(1) of the Wisconsin UCC provides that a financing statement is effective even if it contains minor errors, so long as the errors are not mysteriously misleading. The statute goes on to say that a financing statement is seriously misleading if it fails sufficiently to provide the name of the debtor in accordance with Wis. Stat. § 409.503(1). Section 409.506(3) provides, however, that an incorrect name will not be seriously misleading if the financing statement would be disclosed on a search of the records of the filing office under the debtor’s name. In this case, a search of the records under the debtor’s actual name (ISC, Inc.) would not have revealed Double Bubble’s financing statement, given the search logic used by the filing office. Ironically, a search of the term “ISC” would have disclosed the financing statement. Nevertheless, the Court held that Double Bubble’s financing statement was ineffective, and that Double Bubble was unsecured. The Court was unmoved by the fact that the filing office published “tips” and “hints” for obtaining broad search results, because they did not change the language of the statute. UNCITRAL Update. In July 2016, the United Nations Commission on International Trade Law (UNCITRAL) adopted a Model Law on Secured Transactions. The Model Law is designed to provide

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countries with an efficient way to modernize their secured transactions laws to promote secured credit for domestic companies. Since the enactment of the Model Law, UNCIRAL has prepared a Guide to Enactment of the Model Law, which will help legislators understand how the law works, as well as the policy considerations upon which provisions of the Model Law are based. Beginning this December, UNCITRAL will begin work on a new project: a Practice Guide to help lenders, in countries enacting a new secured transactions law based on the Model Law, understand how the law will enable them to engage in asset-based lending and other forms of secured financing. In many countries, these transactions will be novel to lenders, because the current laws of many countries, particularly developing economies, do not accommodate financing secured by receivables and inventory. The CFA actively participated in the preparation of the Model Law and the Guide to Enactment, and is also participating in the development of the new Practice Guide. Co-General Counsel will keep you advised of developments. TSL Jonathan N. Helfat, partner, Otterbourg P.C., and Richard M. Kohn, partner, Goldberg Kohn, are CFA co-general counsel.

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TSL OPINION COLUMN

arty Battaglia of Encina Business Credit discusses how doing the proper work upfront creates more certainty in the lending process.

It is never welcome when a lender hears that a borrower has suffered a deterioration in credit quality. The good news is that through careful due diligence and in-depth analysis conducted upfront, unwinding the loan at a loss can be avoided. There is hope for the incumbent lenders, advisor, and borrower to reach a solution that benefits all parties involved as illustrated by the following case study. The challenging circumstances of the deal were ones that many lenders typically face. The original terms had seemed appropriate when a lending club extended a $75MM ABL facility to a supplier of oil country tubular goods. But after a significant downturn in the industry, accounts payable became stretched and slow-moving inventory levels rose. Traditional lending was no longer suitable, given the changes in the borrower’s risk profile, as the facility was reduced to half its size. With the loan in a state of technical default, the lenders sought to exit but were challenged to avoid taking a loss on the deal by having to accept a discount or a junior note. The options weren’t appealing for the borrower, either. Having a line of credit cut off would stall operations and inhibit the execution of the turnaround plan that the company and advisor had put in place. Rather than sacrifice long term potential, the company and the financial advisor began the refinancing process. While many others would have walked away from a deal like this, the team at EBC

saw opportunity. Having worked with a few companies in the space, they gave the principal high marks for the extremely forthcoming way that he managed his obligations to trade creditors as well as his commitment to move the inventory out faster. They engaged with the financial advisor to understand the business strategy and used that knowledge as a basis for finding additional liquidity to refinance the banks in full and provide liquidity to continue execution of the turnaround plan. EBC believes that, despite any challenges, delivering a well thought out proposal with a high level of transparency would allow them to create a proposal they could truly stand behind. Their evaluation included a hard look at the value of the excess inventory as well as the relationships with the stretched trade creditors. Through a thorough due diligence process, EBC re-engaged the appraisal firm who stratified the inventory into multiple categories so as to maximize lendable value. However, diligence also uncovered undisclosed vendor and equipment liens. The team worked diligently with management and the advisor to resolve this issue through removal or subordination of these liens. Our approach was clear: find a way to fully repay the incumbent lenders rather than place any shortfall on them. Knowing all the skeletons in the closet, so to speak, can be a sobering reality. But in EBC’s eyes, eliminating potential elements of surprise through total transparency is the only way to increase the certainty of execution. Proposals that are created without basis in thorough research may appear more attractive but are likely to fall down when reality hits. EBC’s diligence paid off when they found a way to upsize the term loan and provide additional liquidity against low-moving inventory. The end result was a win-win for all involved: the exiting lenders, the advisor, and the company. The EBC financing repaid the existing lenders

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in full. The company received a $23 MM senior secured credit facility comprised of a $20MM revolving line of credit against receivables and inventory, and a $2.5MM equipment loan. The additional liquidity provided by these credit facilities allow the company the flexibility to execute on its transformation to an inventory light/toll processing model. By conducting thorough due diligence and taking the time to understand the business before rendering a proposal, EBC created a solid solution that refinanced the company’s existing indebtedness in full and provided liquidity necessary to execute on their plan. Doing the work upfront, as opposed to after the fact, points to a solution that will live up to the expectations of the lender and borrower over time. We encourage such an approach when resolving similar challenges in loan portfolios. TSL Martin J. Battaglia is CEO of Encina Business Credit. With over 30 years of industry experience, Battaglia is well versed in all facets of asset-based lending with experience in second lien and enterprise value lending. This experience includes specialized lending to industries like retail, automotive, oil & gas and metals. He has successfully started and directly managed three asset-based lending groups. During his tenure at PPM Finance, a commercial finance group he started, his group was responsible for sourcing and monitoring commercial finance as well as second lien, distressed and enterprise value loans. He is also versed in CLOs and has had been involved in distressed and near par debt trading. Battaglia is well known in the commercial finance and turnaround industries. He is active in the Commercial Finance Association (CFA) having served as a director for many years and in various roles and committees, including their executive committee. Battaglia earned a B.S. in A] accounting and an MBA in finance from DePaul University. http://encinabc.com/

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