TSL November 2018 by Secured Finance Network

Representing the Asset-Based Financing, Factoring & Supply Chain Finance Industries Worldwide November 18

CFA’S 74TH ANNUAL CONVENTION: NAVIGATING CHANGE IN THIS ISSUE

Standing Out

From The Competition P.14 Intellectual Property Lenders: How Secure Are You? P18 Registered Organization Debtor Names: Still a Problem for UCC Filers? P22

Tipping the Scale: Will the Weight of Tariffs Affect Collateral Values? P.26

Lenders Beware: Expectations and Unintended Consequences P34

TSL INTERVIEWS

David

Grende CFA’s 2019 President P.44 Beth

Comstock Navigating and Inspiring Change P.48

DEPARTMENTS

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

Volume 74, Issue 8

November 18

FEATURES

14 22 14 Standing Out From the Competition In this competitive environment, what are commercial finance executives doing to stand out from the crowd? Understanding clients’ needs, filling a niche, underwriting and understanding technological changes are all discussed. By Myra Thomas

18 Intellectual Property Lenders – How Secure are You?

Doug Jung of Hilco Diligence discusses factors that can impact intellectual property values, what IP lenders need to know and how they can protect themselves against erosion of the value of their collateral. By Doug Jung

22 Registered Organization Debtor Names – Still a Problem for UCC Filers?

Paul Hodnefield of CSC® provides a refresher on the importance of filing UCC records under the correct name of the debtor, including a review of the debtor name sufficiency requirements, some of the most common registered organization name errors. Also, suggestions are offered for reducing the risk of these errors. By Paul Hodnefield

26 Tipping the Scale – Will the Weight of Tariffs Affect Collateral Values?

What are the possible implications of recent tariff announcements and how can lenders prepare for this climate of uncertainty? A team of executives from Gordon Brothers answers these questions. By Rick Wilichowski, Wendy Eng, Ken Bloore, Alex Sutton and Becky Goldfarb

J. Crew, Chewy. iHeart...these cases have been unpleasant surprises for lenders. An experienced commercial finance attorney details the cases that should serve as warnings to lenders. 34 Lenders Beware: Expectations and Unintended Consequences--It’s Not Just Financial Covenants!

44 David Grende CFA’s New President

Dave Grende, CFA’s new president, is president and CEO of Siena Lending Group. He has more than 30 years of experience building and running ABL businesses, advising on debt restructurings, and filling interim management roles. Prior to Siena, Dave founded Burdale Capital Finance as the U.S. ABL Subsidiary of Bank of Ireland. His professional experience also includes roles at Huron Consulting Group, Comdisco Ventures, Arthur Anderson, CIT and a Bank of America subsidiary. By Michele Ocejo

48 Beth Comstock: Navigating and Inspiring Change

Beth Comstock, former Vice Chair of GE and the first woman to ever hold that post, will be the keynote speaker at CFA’s Annual Convention on November 7. Over her career, Beth was responsible for leading innovation and change while building GE’s global brand. She operated GE Business Innovations, which developed new businesses, markets and service models; and, as chief marketing officer, created GE’s “Ecomagination” initiative and partnered to enhance GE’s inventive culture. As president of Integrated Media at NBC Universal, she led the company’s digital efforts, including the founding of Hulu. Beth was twice named by Forbes as one of “The World’s 100 Most Powerful Women”. By Michele Ocejo

DEPARTMENTS 7

Letter From Richard D. Gumbrecht, CEO of the Commercial Finance Association, discusses how CFA assists the CFA community in navigating change, overcoming obstacles and identifying opportunity.

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

TSL Profi le Founded in 2015, Breakout Capital Finance set out to be more than just another small business lender. The company attributes its success to staying laser-focused on its core missions: transparent lending and product innovation, as well as education and advocacy. By Eileen Wubbe

What Would You Do? In this edition of What Would You Do?, a struggling borrower of Overadvance Bank filed for Chapter 11 under the Bankruptcy Code without giving the Bank any prior warning whatsoever. Upon receiving notice of the borrower’s bankruptcy filing, the Bank scrambles to assess the situation and consider its options. By Dan Fiorillo and Jim Cretella

The CFA Brief 60 69 72

Among CFA Members CFA Chapter News Calendar

Advertisers Index

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

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

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

The Commercial Finance Association is the trade group for the asset-based lending arms of domestic and foreign commercial banks, small and large independent finance companies, ﬂoor plan financing organizations, factoring organizations and financing subsidiaries of major industrial corporations. The objectives of the Association are to provide, through discussion and publication, a forum for the consideration of inter- and intra-industry ideas and opportunities; to make available current information on legislation and court decisions relating to asset-based financial services; to improve legal and operational procedures employed by the industry; to furnish to the general public information on the function and significance of the industry in the credit structure of the country; to encourage the Association’s members, and their personnel, in the performance of their social and community responsibilities; and to promote, through education, the sound development of asset-based financial services. The opinions and views expressed by The Secured Lender’s contributing editors and authors are their own and do not necessarily express the magazine’s viewpoint or position. Reprinting of any material is prohibited without the express written permission of The Secured Lender. The Secured Lender, magazine of the assetbased financial services industry (ISSN 0888255X), is published 8 times per year (Jan/Feb, March, April, May, June, 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.

letter from

“

THOUGHTS FROM CFA AND TSL STAFF

avigating Change” is the theme of CFA’s 2018 Annual Convention as well as being a key part of CFA’s mission. The educational panels at the convention, as well as many of the articles in this issue of TSL, cover changes that provide both opportunities as well as challenges to the industry. Helping our members discover opportunities and overcome obstacles are fundamental to what we do as an association. CFA fulfills this mandate many ways, including our advocacy efforts which can directly affect how you and your clients do business. A recent and important example is the work we have done and continue to do related to CA SB 1235, which passed September 30. This Bill imposes new and potentially challenging disclosure requirements on certain commercial financing transactions in California that could affect our smaller independent members in particular. Although the bill passed, despite CFA’s efforts, our discussions with the sponsoring Senator’s chief of staff were successful in amending the bill to distinguish ABL and factoring from other commercial transactions. The work of creating specific regulations and compli-

ance requirements for our industry was deferred to the CA Department of Business Oversight. The good news: Such drafting may take up to a year to complete and is subject to public comment and review, allowing us to further champion our desired outcomes. Lenders are not required to comply with the Bill until the regulations from the DBO are completed. For those of you attending the Convention, the Bill will be discussed in further detail during the Report of CFA Co-General panel on Thursday at 2 pm. For those not able to be in San Diego, we will hold a teleconference. For further information, please reach out to Michele Ocejo at mocejo@cfa.com. Change can come at us from many directions, including shifting collateral values. On page 18, Doug Jung of Hilco Diligence discusses factors that can impact intellectual property values, what IP lenders need to know and how they can protect themselves against erosion of the value of their collateral. In this dynamic competitive environment, what are commercial finance executives doing to stand out from the crowd? Understanding clients’ needs, filling a niche, underwriting and understanding technological changes are all covered in the Standing Out from the Competition by Myra Thomas on page 14. In Registered Organization Debtor Names – Still a Problem for UCC Filers? on page 22, Paul Hodnefield provides a refresher on the importance of filing UCC records under the correct name of the debtor, including a review of the debtor name sufficiency requirements, and some of the most common registered organization name errors. What are the possible implications

of recent tariff announcements and how can lenders prepare for this climate of uncertainty? On page 26, a team of executives from Gordon Brothers answers these questions in Tipping the Scale – Will the Weight of Tariffs Affect Collateral Values? J. Crew, Chewy. iHeart...these cases have been unpleasant surprises for lenders. On page 34, David Morse of Otterbourg details the aspects that should serve as warnings to lenders in Lenders Beware: Expectations and Unintended Consequences--It’s Not Just Financial Covenants! On page 44, don’t miss an interview with CFA’s new president, David Grende, who is president and CEO of Siena Lending Group. Dave has been in the industry over 30 years. Here he shares his goals for the coming year as well as his views on what the industry can expect in 2019. Beth Comstock, former vice chair of GE and the first woman to ever hold that post, will be the keynote speaker at CFA’s Annual Convention on November 7. Over her career, Beth was responsible for leading innovation and change while building GE’s global brand. On page 48, Beth discusses what inspired her to write her new book Imagine It Forward, learning from her mistakes and kickstarting your creativity. Many of you will be reading this issue of TSL while at CFA’s Annual Convention in San Diego. I look forward to the opportunity to speak with you during the week and get to know each other better. I am confident you will find your time spent at the Annual Convention to be rewarding.

“CFA fulfills this mandate many ways, including our advocacy efforts which can directly affect how you and your clients do business. A recent and important example is the work we have done and continue to do related to CA

Warm regards,

SB 1235, which passed September 30.”

Richard D. Gumbrecht CFA CEO

THE SECURED LENDER NOVEMBER 2018

collateral INDUSTRY NEWS

THE INDUSTRY IN BRIEF

Waterfall Asset Management Launches Specialty Commercial Finance Group, Led by Andrea Petro Waterfall Asset Management, LLC (Waterfall), a leading alternative asset manager, announced the launch of its Specialty Commercial Finance Group (SCFG). SCFG, led by Andrea Petro, has been established to provide high yield senior secured debt to specialty commercial finance companies. Ms. Petro has 26 years of experience lending to specialty finance companies, beginning her specialty finance career at Transamerica Business Credit and culminating in 17 years with Wells Fargo Capital Finance’s Lender Finance Division. Ms. Petro commented: “SCFG will work with Waterfall’s consumer finance and esoteric finance businesses to provide a full suite of debt offerings to specialty finance companies across a broad array of asset classes. Providing alternative senior secured lending that is supported by Waterfall’s expertise and deep knowledge of both debt and equity markets will significantly enhance Waterfall’s ability to serve counterparties. I am enthusiastically looking forward to working with the Waterfall team to build the premier alternative specialty commercial finance lending platform.” Jack Ross, Waterfall managing partner, commented: “Waterfall’s core competency is specialty finance with a goal to become a leading capital provider to the industry. Andrea’s decades long track record, deep relationships and credit expertise, along with the recent addition of a private equity team, underscore our commitment to this goal. We welcome one of the specialty finance industry’s leading professionals to our firm.” Waterfall Asset Management, LLC is an SEC-registered institutional asset manager focused on structured credit (asset-backed securities and loans)

and private equity investments. Waterfall was founded in 2005 by Tom Capasse and Jack Ross, two individuals who were early leaders of the ABS industry, and who together have over 60 years of proven ABS/Loan credit analysis, trading, banking and servicing experience. Capasse and Ross started the ABS Group at Merrill Lynch in the 1980s and conducted the first ABS issuances for many of the more than 40 ABS sectors in which Waterfall invests. Waterfall has approximately $7.3 billion (as of 7/1/18) in assets under management. www. waterfallam.com.

Accord Financial Corp. Unveils Leadership Transition Accord Financial Corp. (Accord) (TSX: ACD) announced that it has appointed Simon Hitzig as president and chief executive officer effective October 1, 2018. Hitzig takes on the role as Accord completes a five-year transformation, becoming one of North America’s leading commercial finance companies. Former president and CEO Tom Henderson remains with the company as vice chairman and director. Hitzig joined Accord in 2011 after a long career in the investment industry. Notably, he spent ten years with DundeeWealth Inc. where he led the product development and marketing teams, driving growth from 1999 to 2009, leading up to the company’s sale to The Bank of Nova Scotia. In his seven years at Accord, Simon has been a catalyst for change and a key member of the executive team. Mr. Hitzig joined the Company as President of its non-recourse factoring division, and went on to structure and close three acquisitions, which diversified Accord’s product offerings, giving the firm a strong presence throughout the

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United States and Canada. Mr. Hitzig stated, “Tom brought me in to advance our evolution and strategic plan, which has been a terrific mission for seven years. And he’s worked hard to prepare me for this role and to ensure a smooth transition.” Henderson passes on a growth mandate he directed for a decade as CEO. During that period, he carried on the tradition of strategic adaptation that has made Accord successful since 1978. Over the last five years, in particular, he orchestrated dramatic change, taking the company into complementary and profitable new market segments. Henderson also deepened the management team, bringing on veteran banker Terry Keating to lead the U.S. asset-based lending division, and Simon to keep the growth plan on track. “Two of Accord’s founding fathers, Ken Hitzig and Fred Moss, are still a key part of our leadership team, and we’ve added top talent from outside and through acquisitions. The senior team has never been stronger,” says Mr. Henderson. From its roots as a respected factoring company, Accord has transformed into a commercial finance powerhouse, offering a one-stop source of senior secured financing to middlemarket businesses. This transformation is now driving financial results to a new level, with revenue and total funds employed closing the second quarter at record highs. “We’ve set the bar high, and fully intend to clear it,” says Hitzig, adding, “our clients, staff and shareholders expect nothing less.” Accord Financial Corp. is a leading North American finance company providing distinctive working capital solutions to companies from coastto-coast. Accord’s flexible finance programs cover the full spectrum of asset-based lending, including factoring, inventory finance, equipment

Wells Fargo Capital Finance Names Kevin Gillespie Head of Middle Market Asset-Based Lending Wells Fargo Capital Finance, a division of Wells Fargo & Company (NYSE: WFC), announced that executive vice president Kevin Gillespie has been named head of its Middle Market Asset-Based Lending Group, a newly formed business group focusing on transactions under $35 million. Gillespie will serve as lead executive for middle-market relationships for Capital Finance with shared responsibility for credit, operational risk, compliance and new business development. He will also work closely with the head of Middle Market National Originations and the Middle Market ABL group Credit Officer for Wells Fargo Capital Finance. Both positions are new and are expected to be filled in Q3, 2018. “Wells Fargo is the #1 Middle Market Banking lender in the U.S. and Capital Finance is a leader in asset-based lending, so strengthening our Middle Market ABL group and finding the right leaders to accelerate the growth is critical,” said David Marks, head of Wells Fargo Capital Finance. “With his experience in asset-based lending, along with leading Wells Fargo’s Capital Finance factoring business, which is the largest bank-owned factoring business in the country, Kevin’s expertise and determination makes him a key leader to help strengthen our commitment to the middle-market ABL industry.” A 20-year industry veteran, Gillespie joined Wells Fargo in 2010, and most

recently led the relationship and credit management teams for the Commercial Services Group, part of Capital Finance. Prior to joining Wells Fargo, Gillespie spent 14 years at The CIT Group where he held numerous positions in account management, underwriting, and business development. He is a member of the Commercial Finance Association and is active in several credit and trade associations. Gillespie holds a Bachelor of Science in finance from Villanova University and a Master of Business Administration in finance from The Gabelli School of Business, Fordham University. Wells Fargo Capital Finance is the trade name for certain asset-based lending services, senior secured lending services, accounts receivable and purchase order finance services, and channel finance services of Wells Fargo & Company and its subsidiaries, 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

Blank Rome Welcomes Seasoned Finance and Restructuring Partner in Houston Blank Rome LLP is pleased to announce that James T. Grogan has joined the firm as a partner in the Finance, Restructuring, and Bankruptcy group in the Firm’s Houston office. Grogan focuses his practice on Chapter 11 bankruptcy cases, representing

a client base of debtors, lenders, and committees of unsecured creditors across a wide range of industries. He joins Blank Rome from Paul Hastings LLP, where he was a member of the Corporate Department and the Finance and Restructuring practice. “James is an accomplished attorney with tremendous experience in counseling his clients on their most complex finance and restructuring matters,” said Alan J. Hoffman, Blank Rome’s chairman and managing partner. “From his experience representing some of the largest Chapter 11 debtors in history, to his broad client mix, James fits in seamlessly with our practice and we are thrilled to welcome him to Blank Rome.” Most recently, Grogan has had a particular focus on restructuring transactions in the energy sector, but over his almost 20-year career he has counseled companies in the automotive, telecom, manufacturing, entertainment, financial services, and retail industries. Grogan, who is licensed in both Texas and New York, has extensive experience with complex crossborder restructurings, having advised on some of the most important, market-leading engagements in recent years. “With the recent wave of restructuring activity in the Houston market, combined with the cyclical nature of bankruptcy within various industries, Grogan could not be joining us at a better time,” said Regina Stango Kelbon, co-chair of the Finance, Restructuring, and Bankruptcy group. “James has built a solid reputation counseling clients through every stage of Chapter 11 filings, and we’re excited to welcome him to our team.” In addition to his restructuring practice, Grogan also brings a passion for serving the local Houston community. He currently serves as Master of

INDUSTRY NEWS

finance, trade finance, and film/media finance. For 40 years, Accord has helped businesses manage their cash flows and maximize financial opportunities. www.accordfinancial.com

THE SECURED LENDER NOVEMBER 2018

INDUSTRY NEWS

collateral

the Bench for the Moller-Foltz Inn of Court, and is a member of the Houston Chapter of the Turnaround Management Association. Additionally, Grogan gives back to the community by dedicating many hours of pro bono legal counsel each year. “I’m truly excited to be joining a firm as accomplished as Blank Rome. The Firm has an incredible practice mix that is wellsuited for the Houston market, and I feel privileged to be joining so many outstanding practitioners.” James adds, “I’m looking forward to collaborating with many of the Firm’s highly regarded practice groups, including its market-leading maritime practice in Houston, and working to build a preeminent restructuring practice in the Texas market.” James earned his B.A. from Wheaton College and his J.D. from the University of Kansas School of Law, where he was associate editor of the Kansas Law Review. Blank Rome is an Am Law 100 firm with 13 offices and more than 600 attorneys and principals who provide comprehensive legal and advocacy services to clients operating in the United States and around the world. Its professionals have built a reputation for their leading knowledge and experience across a spectrum of industries, and are recognized for their commitment to pro bono work in their communities. Since its inception in 1946, Blank Rome’s culture has been dedicated to providing top-level service to all of its clients, and has been rooted in the strength of its diversity and inclusion initiatives. blankrome.com

People’s United Bank Bolsters Asset-Based Lending Team with Hiring of Three Senior Industry Specialists People’s United Bank, N.A. (NASDAQ: PBCT), announced the hiring of three senior industry specialists to its AssetBased Lending team. Joe Accardi, Tony

Cortese and Greg Russano each bring more than 25 years of commercial lending experience and will be responsible for new business development, client relationships and liaising with People’s United’s community partners in the Northeast and nationally. Each will be based in Iselin, NJ. Joe Accardi, senior vice president, business development: Accardi brings 35 years’ experience with responsibility for new business development and client relationships. Accardi is a longtime member of the Commercial Finance Association and currently serves on the Education Committee. He was a faculty member of the New York Institute of Credit for 16 years and served on the Institute’s Board of Trustees. Additionally, Accardi has served on committees of various charitable organizations, including most recently Eva’s Village. He holds a BA cum laude in economics from Rowan University, an MBA in finance from Fairleigh Dickinson University, and is a graduate of The Stonier Graduate School of Banking and The London Business School’s Leadership Development Program. Tony Cortese, senior vice president & regional manager: Cortese brings 35 years’ of commercial lending experience, focusing on business development, portfolio management and credit risk. Most recently Cortese was employed at Santander Bank for more than 15 years, where he held various senior positions. He received his Bachelor degree in Accounting from Rider University and his CPA credentials in New Jersey. He is a member of the CFA and NJ Society of CPAs. Greg Russano, senior vice president & regional team leader: Russano brings 25 years of secured lending experience and will be responsible for a new business team covering New Jersey and Pennsylvania. His prior roles

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included various new business development and relationship management positions with Santander Bank, Bank of America and National Bank of Canada. He is an active member of the CFA, TMA and ACG in New Jersey, and received his Bachelor degree in accounting from Franklin & Marshall College, and an MBA from Fairleigh Dickinson University. “Greg, Tony and Joe each bring a unique skillset and an understanding of the ever-changing needs of our clients, delivering tailored, flexible capital solutions,” said Mike Maiorino, EVP of Specialized Lending at People’s United Bank. “Our clients increasingly demand banking partners who understand their business, and have the ability to act as an advisor, helping them to overcome financing and growth challenges.” People’s United Bank’s Asset-Backed Lending team provides senior secured asset-based loan facilities for borrowers requiring between $5 million and $40 million. Industries include manufacturers, distributors, wholesalers, business services and retail, for companies in transition, for turnarounds, refinancings, acquisitions and seasonal businesses. People’s United Bank, N.A. is a subsidiary of People’s United Financial, Inc. (NASDAQ: PBCT), a diversified financial services company with approximately $45 billion in assets. People’s United Bank, founded in 1842, is a premier, community-based, regional bank in the Northeast offering commercial and retail banking, as well as wealth management services through a network of nearly 400 retail locations in Connecticut, New York, Massachusetts, Vermont, New Hampshire and Maine.

The following obituary was published in The Oklahoman. David Harold Pendley, 75, passed away Sept. 20, 2018. Born and raised in Oklahoma City just three blocks from Catherine Ann Butler, the love of his life. After graduating from Northwest Classen High School, they were married on June 1, 1963. Dave began providing commercial business loans in 1965, founding three asset-based loan companies, the First Asset-Based Lending Group, First Capital Corporation and American Business Finance, after working for 16 years for GE Capital. After selling his interest in his second start-up, First Capital, he founded American Business Finance to provide financial services to small commercial companies. Dave served on the Executive Committee of the Commercial Finance Association for seven years and was its Chairman in 1993. Dave founded the CFA/Wharton Institute of Secured Lending and the CFA Educational Foundation. A few of the many fast-growing companies that Dave provided working capital loans to included: Dell Computers, Express Personnel, Snyder General Corporation, Aaron Rents, Southwest Factories, CMI, Farah Manufacturing, and the Telxon Corporation. A graduate of Washington University in St. Louis, the Stonier Graduate School of Banking and the Venture Capital Institute, he specialized in secured commercial lending for more than 50 years. Dave was an Eagle Scout and was designated in 2016 as the Council’s Outstanding Eagle Scout and was the recipient of the Silver Beaver Award. He loved the outdoors and raised his children camping and hiking and took them to Philmont Scout Ranch as soon as they were old enough. Dave was a Master Gardener,

spending his spare time in his beautiful gardens. He loved to travel and woke every morning and asked Catherine what adventure she would like to have that day. His legacy will live on in his children and grandchildren as they continue their passions for the wilderness, sporting and adventure and when they wander through beautiful gardens. Family - Husband of 55 years to Catherine Butler; father of Happy D. Pendley and Suzie Pendley (DIL), Joy L. Pendley and Mark Griffin (SIL), and Noel B. Pendley and Jennifer Pendley (DIL); grandfather, known as PawPaw to Sarah, Chris, Brooke, Austin, Willa, Ansel, Isaac, Caleb, Micah, Abigail, Elaina, Kalvin, and Jonah. He was adored by all of us. When we gathered for meals, he would pray and thank us for being with him. He took the time to look at each of us and you knew you were in the right place at that moment. Farewell Tribute - Relatives and friends gathered to attend Dave’s Celebration of Life Ceremony Friday, Sept. 28, 2018, 2 p.m. at First United Methodist Church in Edmond, OK. In lieu of flowers, memorial contributions may be made in Dave’s memory to The Muscular Dystrophy Association, 5601 NW 72nd St., Ste. 124, Oklahoma City, OK 73132 (www.mda.org/office/oklahoma)

INDUSTRY NEWS

IN MEMORIAM David Pendley, Past CFA Chair

THE SECURED LENDER NOVEMBER 2018

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the invoices the company purchases are backed by legitimate business entities. His investigation software of choice is Thomson Reuters CLEAR because, “Our industry is a big target for fraud. We’ve been hit big a few times – once for almost a million dollars – and I don’t want that to happen again.” Because OFS is a private lender, not a bank, its only protection against fraud is its own due diligence. The company uses fraud-detection software to learn as much as it can about its clients and the businesses connected to the invoices it purchases, and from whom it must collect. For Rapaport, the advantage of CLEAR is that it enables him to do research on both businesses and the individuals behind the business, and gives him a wide variety of investigative tools that allow him to dig much farther and deeper than any conventional search engine could. “I’d rather have more information than less, and CLEAR lets me look at anything I want,” says Rapaport. “I’ve had enough sleepless nights in this business. My appetite for risk is basically zero, so I do everything I can to avoid it.” Factoring in the transportation business is inherently risky, however, because there’s no guarantee the debts OFS purchases will be paid back. Fraudsters can work any number of factoring scams, says Rapaport, from sophisticated money-laundering schemes that involve hiding assets in shell companies and offshore accounts, to lone operators down on their luck who try to pass off a fake invoice for some quick cash. These are just a few reasons why it is paramount due diligence is conducted to mitigate risk. “It’s hard to tell how many people we’ve turned away who might have tried to defraud us, but using CLEAR I can look at the individual truckers,

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the principals, and individuals in those companies,” says Rapaport. “I’m looking for any kind of white-collar criminal history, a propensity for starting up businesses that go bankrupt, criminal charges, liens, judgments, lawsuits, things like that. I also look at how much equity they have in their trucks and their house, and whether they own their truck outright. That information is important to us.” Discover CLEAR for yourself at tr.com/clear

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Standing Out From

the Competition BY MYRA THOMAS

In this competitive environment, what are commercial finance executives doing to stand out from the crowd?

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TSL PARTICIPANTS

Darren Alcus

Mark Hafner

Jim Hudak

Capital One

Celtic Capital Corporation

CIT Group

Kathleen Lepak

Roger Sametz

People’s United Business Capital

Sametz Blackstone Associates

any in the secured lending community would argue that standing out from the competition is what leads to success in the industry. But when you ask them to define it, it becomes much harder than one might imagine. Obviously, servicing the client is the very first thing to come to mind. But what does that really mean in a dynamic and increasingly competitive environment? Simply put, the answer is complicated. While secured lenders watch as more entrants flood the marketplace, the profile of the industry is

increasing as well. Asset-based lenders, factors, and alternative lenders need to be well aware that the client has a better understanding of secured lending than ever before, and, in turn, their expectations are growing. The main concern can often be just how long it will take to get financing. According to Jim Hudak, president, commercial finance for CIT Group, clients are focused on certainty of execution and speed of closing. But for that to happen, he notes, the secured lender needs to first have a firm understanding of nuts and bolts of the client’s business. “The most important factors to the clients we serve are our industry knowledge and product expertise, as well as our deep understanding of asset values, especially through cycles,” Hudak says. A dynamic and competitive marketplace demands that asset-based lenders and

THE SECURED LENDER NOVEMBER 2018

“Midcap lenders distinguish themselves by local presence and an understanding of the immediate market, while small-cap lenders provide consistent working capital to businesses operating in leveraged financial environments.” Kathleen Lepak

factors be at the top of their game when it comes to service, as well as underwriting, he notes. Understanding the Client and their Needs A deep knowledge of the client’s business ensures that secured lenders aren’t simply spinning the proverbial “wheels” of the client. Hudak notes that expertise and industry knowledge enable CIT to “create the right deal structures and greatly increase the probability of consummating transactions”. Longstanding client relationships can certainly make the process easier, and it also helps if the secured lender is deeply involved in the deal, he says. “We are focused on leading more deals, which drive stronger relationships and fee opportunities,” Hudak adds. It’s a win-win for the client and the secured lender. But large, mid- and small-cap lenders do sometimes operate differently from one another. Kathleen Lepak, asset-based lending business director at People’s United Business Capital, explains that asset-based lender or factor size can definitely impact market practices. “Large-cap lenders distinguish themselves by providing a broad array of products and services required by their client,” she notes. “Mid-cap lenders distinguish themselves by local presence and an understanding of the immediate market, while small-cap lenders provide consistent working capital to businesses operating in leveraged financial environments.” Of course, no matter

the size of the lender, every client is looking for “maximum availability at a minimum price and a customer-centric focus,” Lepak adds. In many ways, they expect the lender to become a trusted business advisor. Lenders Filling a Niche While clients might not expect alternative lenders to be as close to their business as a traditional asset-based lender or factor, hedge funds, equity funds, CLOs and BDCs are filling another need for clients. “Over the past few decades, numerous non-bank sources have evolved to provide capital across the market spectrum in an unregulated environment,” notes Lepak. The unregulated market does provide a certain benefit to the client, providing flexible structures and availability. While Lepak does note that non-bank lenders are not set up to provide a full banking relationship, such as treasury management or trade finance, they can be a viable solution when there is simply more risk on the table. “Partnerships between capital segments have formed to deliver a full solution, as well as manage pricing to the client,” she adds. Given the many entrants into secured lending, clients have more financing options than ever before. According to CIT’s Hudak, the larger secured companies simply have more critical mass, more market presence and, therefore, more varied access to capital. “However, the basic tenets of successful underwriting hold no matter what the size of the client is,” he notes. It’s all about a credible business plan and assessing whether or not the client can execute it. “How will they perform in a downturn?” he adds. Proper underwriting brings success for client and the lender. Standing Firm on Underwriting The “willingness to do the right thing,” says Darren Alcus, head of the corporate banking group for Capital One, has to be the driving principle for every secured lender. Risk management remains paramount for any successful asset-based

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lender or factor. But there’s still a way to balance the risk and provide a customized solution for the client. “You’re not just dealing with the customer’s assets,” he notes. “It’s about asking for the right information at the right moment,” says Alcus. Market conditions are going to change, and so there have to be open lines of communication with the client. Open lines of communication are especially essential when there are new lenders appearing around every corner. If a secured lender is looking to offer customized solutions and specialty platforms, as well as establish a long-term relationship, the client will need to feel as if the lender is their business partner. But Alcus cautions that secured lenders still need to take a disciplined approach despite the competition. The best secured lenders are the ones that stay around to service the client. “We want to be a leader in the middle market and that requires long-term thinking.” Relationship management is the key, Alcus adds. Large-cap lenders, for instance, might have sophisticated bank product offerings that fulfill every client need, domestically and internationally. “They might need to provide investment banking support, introduction to other capital segments, such as fixed income, or even equity support,” Lepak notes. Small ABL firms can provide sufficient working capital in a challenging financial performance environment. Not surprisingly, small clients often show signs of high leverage and cash flow constraints. “That’s when the lender balances loan availability with understanding business trends through a transition,” she adds. It takes listening skills, says Lepak. “You have to know their market and the market considerations to understand the pressures they face.” It’s really about finding out what the client needs, as well as bringing the experience to the table to find the right solution and build an appropriate structure. Secured lenders need to get beyond

the phrase “customer-centric”. While it is a phrase that’s used quite liberally in the industry, it really is much more than providing a fast financing option. Mark Hafner, president and CEO for Celtic Capital Corporation, argues that asset-based lenders and factors have to take a keen interest in their client’s business to find out if what the client wants is really right for them. “If you have an unsophisticated client, they might ask for too much or too little,” he says. “We have to understand their business and come back to them and educate them.” Hafner notes that clients want to trust their lender, first and foremost, so it pays to be transparent when dealing with the borrower and offering the right solution. Understanding the Changes Afoot It helps that secured lenders have gained a higher profile in the lending community. Asset-based lenders and factors aren’t just handling businesses that are distressed. With the growing profile, expectations grow too. Hafner says that, if secured lenders want to stand out from the competition, they need to make sure they aren’t doing the same thing that they did 10 to 20 years prior. “We have to adapt and stay current,” he says. The competition is forcing lenders to offer more products and to be more responsive. It also means thinking about secured lending in a brand new way. For the smart secured lenders who choose to use it, updated technology has enabled asset-based lenders and factors to be much more efficient and in touch with clients. That’s a plus when it comes to standing out from the competition. The technology has made data more available, and often in real time, so secured lenders can have a better underwriting grip on their client. But while technology has improved turnaround time and the way secured lenders interact and communicate with clients, Roger Sametz, president and CEO of Sametz Blackstone Associates, a brand strategy and communications firm based in Boston, notes that many secured lenders still

need to take their technology a step further to give the industry more of a 21st Century appeal. “If a website or electronic report looks dated or is hard to navigate, that sends a message,” Sametz continues. Setting Yourself Apart And yes, secured lenders do need to think about branding, which means planning and developing websites are in line with increased market expectations—and by getting rid of outdated messaging, Sametz says. “The industry isn’t doing enough on social media,” he adds. “The goal is to control what people think about your firm through the communications you create—and also have these efforts influence the chatter you can’t control; otherwise, you remain at the mercy of what everyone else says about you.” Secured lenders have to make sure their prospective clients understand they are not the lenders of last resort; they need to actively manage away some old perceptions. Right now, Sametz notes that secured lenders may be good in communicating the deals they’ve placed, but if “you’re only talking about deals, then your business will be perceived as a commodity—and not as a more valued and valuable partner.” It becomes especially important to distinguish one’s self when entrants are flooding the marketplace. CIT’s Hudak adds that lenders need to remember that “customer focus doesn’t change through economic cycles.” As the pace of lending accelerates, asset-based lenders and factors have to be wary. “It’s partly a byproduct of too many institutions chasing too few deals—the abundance of capital in the marketplace. Today, it’s critical that you get to the right decision and do so quickly.” Customer focus has to be a top priority. “If you don’t serve your customers and remain responsive to their needs, the business will be taken away from you quickly in this environment.” Secured lenders require a deep understanding of collateral values, as well as how they change over time and in different economic cycles.

“It’s partly a byproduct of too many institutions chasing too few deals—the abundance of capital in the marketplace. Today, it’s critical that you get to the right decision and do so quickly.” Jim Hudak

In other words, secured lenders need to think of themselves as the stewards of their client’s business, as well as their own. “Having industry and product expertise are the differentiators in good and bad economic times and in competitive and less competitive markets,” says Hudak. “As lenders, we shouldn’t get carried away in an overheated market, and we shouldn’t pull away when the economy starts to cycle.” Strong due diligence and making the appropriate decisions based on those findings help lenders temper behavior, leading to more sustained success and long-term client relationships. TSL Myra Thomas is an award-winning editor and journalist with 19 years’ experience covering the banking and finance sector.

THE SECURED LENDER NOVEMBER 2018

INTELLECTUAL PROPERTY LENDERS – HOW SECURE ARE YOU? Doug Jung of Hilco Diligence discusses factors that can impact intellectual property values, what IP lenders need to know and how they can protect themselves against erosion of the value of their collateral.

BY DOUG JUNG

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I’ll begin with an axiom that I’ve come to realize during my career as an asset-based lender and workout advisor—the quality of your collateral at the beginning of the deal is not the same as the quality of your collateral just before liquidation. Why? For those of you who have gone through a cradle-to-grave situation, you know that the company you underwrote at the outset may have had solid prospects and that your ABL deal assisted the company’s liquidity. However, as time marches on, management is unable to execute their business plan, and the company’s performance deteriorates. They’re fully drawn under the borrowing base, and their situation begins to take its toll on collateral quality. With poor cash flow, the company begins to lower prices to raise revenue and generate cash, losing margins to cover payroll, rent, other overhead or administrative expenses. To preserve cash for inventory purchases--the lifeline of any company--management reduces other expenditures. At some point, the company is only selling inventory they are currently buying, and whatever remains in the distribution centers is slow-moving. Manufacturers will undertake credit risk to make sales that they ordinarily wouldn’t. In short, AR and inventory quality deteriorate. Your collateral and the resultant recoveries will be lower than expected--particularly if your last appraisal and field exam are a year old. What does this have to do with intellectual property values? The same concepts in an AR and inventory deal apply to IP. Just like any other form of collateral, IP requires proper maintenance to hold its value. Here are a few thoughts: Ownership, Maintenance and Administration Often, some of these assets are attained through acquisitions, and they may be registered under a long-dormant legal entity. In these situations, it may not be clear that these IP assets exist or what entity may own them.

THE SECURED LENDER NOVEMBER 2018

Even if not the case, frequently the management of IP may fall under more than one group in a company. IT, marketing or even legal may have their hands in IP-related administration. In addition to potential dormant or forgotten legacy legal entities owning certain IP, some companies are choosing to transfer intellectual property assets into an IP Co or an unrestricted entity. This transfer may occur after the deal closes. Although this is a basic credit concept, lenders need to ensure who their borrower is and that their borrower is the unrestricted owner of their collateral. Trade names, domain names and customer lists all require proper administration. The administrative aspects of IP--such as the ability to access the USPTO site, domain registrars or opt-in records for customer lists-may have been decentralized under the legacy company or may have been lost during the acquisition process. Although many registrars offer drop-catch services, domain names need to be renewed, so expiries need to be monitored. Customer lists and email/SMS text marketing campaigns need to be maintained in accordance with the CAN-SPAM Act and the Telephone Consumer Protection Act. Both are US Federal laws, but are also specifically regulated at the statelevel in many jurisdictions. If applicable, the newly enacted General Data Protection Regulation (EU) is relatively broad-reaching and is written with strong consumer protection at its core. Your borrower should have a centralized department: a function within it to ensure all IP administration and compliance is appropriately and timely managed. If not, their ultimate value in a liquidation situation may be impaired. They may be unsalable due to regulatory reasons, their registrations may have expired, or they do not have the proper logins and passwords. Current systems supported by their vendors together with service or maintenance contracts are critical as

well. The lender should be informed as to the status of their borrower’s principal financial reporting systems, critical business applications, and email systems. In other words, the company’s primary systems should be up-to-date and enjoy the support of its primary vendors—both from a version and a service/maintenance agreement perspective. This is key because the sale of customer lists requires the electronic transfer of those files, and should any technical issue arise in that process, the company or the estate needs to be able to access its software vendors for support. The costs associated with maintenance and upkeep may be expenses that a company under financial duress could forgo. Therefore, the IP values may erode as a result. E-Commerce and Customer Database Critical Vendors Many retailers utilize third-party vendors to support various aspects of its e-commerce platform and to manage its communications with its customers. This includes email hosting and support for marketing campaigns. Costs for digital marketing firms, which promote traffic, may also be vital to an e-commerce platform. Other examples may include expenses for Google Adwords for paid searches and search optimization agencies to increase successful SERPS (search engine results pages), as well as software tools for web page optimization/ personalization. Google Analytics is vital to obtain website performance metrics. These providers are essential elements to (1) maintain the e-commerce ecosphere and (2) maintain the email marketing database and communications platform. Trimming down or eliminating these valuable tools could diminish the value of the e-commerce platform as its performance, such as conversion rates, click-through rates, add-to-cart rates and others may deteriorate as a result. As those performance metrics decline, so could the

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value of the IP. Moreover, if database maintenance and email marketing functions are outsourced to third parties, these vendors may be an impediment to customer communications during a liquidation event. What Should a Lender Do? To ensure the security and quality of your IP collateral, it’s very simple. Perform your diligence on the prospect/borrower. Keep your appraisal updated and utilize the field exam process to diligence, test and verify all the above. This is key for retailers whose e-commerce platforms provide a significant percentage of revenues to the overall total. Engage with your valuation and field exam professionals about these factors and how your borrower benchmarks against others. At Hilco Diligence, we work hand-in-hand with our intellectual property counterparts in the Valuation group and the Streambank trading group, who are in their markets every day and have the practical experience of how these factors affect intellectual property recoveries. TSL Doug Jung is a financial professional with over 25 years of experience with diverse diligence, credit and lending, restructuring, field exam, advisory, and investigation background. He launched Hilco Diligence Services (HDS) in late 2013. Jung oversees HDS and manages day-to-day client engagements. Jung is a CPA (non-public practicing) who began his career at Ernst & Young. He entered the asset-based lending industry as the field examination manager for Fidelcor Business Credit. There, he managed a team of 25 field examiners in offices throughout the US. Jung has a BS in Business Administration with a concentration in accounting from the Whitman School of Management at Syracuse University.

Registered Organization Debtor Names

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Still a Problem for UCC Filers?

BY PAUL HODNEFIELD The author provides a refresher on the importance of filing UCC records under the correct name of the debtor, including a review of the debtor name sufficiency requirements, some of the most common registered organization name errors. Also, suggestions are offered for reducing the risk of these errors.

THE SECURED LENDER NOVEMBER 2018

Secured lenders are generally aware that getting the debtor name correct is the most important part of the UCC filing process. This is especially the case when the debtor is a registered organization, the most common type of debtor involved in commercial secured transactions. Yet, a recent non-scientific sampling of one secretary of state UCC index, conducted by the author, found that an astonishing 41% of the registered organization debtor names reviewed were not correct. Many of the errors identified in the foregoing review were seemingly minor, but any error in a debtor name, no matter how small, has the potential to leave the secured party with an unperfected security interest. This article is intended to serve as a refresher on the importance of filing UCC records under the correct name of a registered organization debtor. It will review the debtor name sufficiency requirements, identify some of the most common registered organization name errors, and offer suggestions for reducing the risk of these errors. Registered Organization Debtor Name Sufficiency A registered organization is an organization formed or organized by the filing of a public organic record with a state or the United States. The term includes limited liability companies, corporations, limited partnerships, and statutory business trusts. As a general rule, a registered organization debtor name is sufficient only if it exactly matches the name stated to be the name of the organization in the public organic record. For most registered organizations, the public organic record consists of the articles of organization, articles of incorporation, or equivalent formation documents for other entities, including any amendments that purport to change the name. There is no wiggle room for providing the correct debtor name. The name provided is either the correct name of the debtor or it is not. There is no gray

area. Any deviation, however slight, means that the financing statement fails to sufficiently provide the name of the debtor. A financing statement that fails to sufficiently provide the name of the debtor will, in most cases, be seriously misleading under UCC § 9-506(b). There is, however, one exception. If a search of the filing office records under the debtor’s correct name, using the filing office’s standard search logic, would disclose the record, then the otherwise insufficient debtor name does not make the financing statement seriously misleading. Note that, even if a UCC § 9-506(c) search discloses the record with an insufficient debtor name, the name provided is still incorrect. It just doesn’t make the record ineffective. Perfection in such cases depends entirely on the filing office search logic. Unfortunately, relying on the filing office standard search logic for perfection is a risky proposition. Standard Search Logic Most, but not all, state-level filing offices have adopted a version of the standard search logic set forth in the Model Administrative Rules (“MARS”) promulgated by the International Association of Commercial Administrators (“IACA”). The MARS search logic is designed to disregard spacing, punctuation, and ending noise words, such as LLC, Corporation, etc., through a normalization process. When a debtor name is entered into the searchable index, the system runs through a multi-step process that strips the spacing, punctuation, ending noise words, and “The,” if it appears at the beginning of the name. The result is a string of characters derived from the name on the financing statement. When an interested party conducts a search, the system runs the name searched through the same normalization process and then matches the resulting normalized name to the normalized names in the index. At that point, the search logic will report only exact matches.

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The MARS standard search logic, however, was not uniformly implemented. Actual performance of the search systems can vary somewhat between jurisdictions due to interpretation and programming differences. For example, some filing offices have interpreted the MARS search logic to disregard the last ending noise word (ABC COMPANY INC), while others disregard all ending noise words (ABC COMPANY INC). Likewise, some filing office systems were programmed to treat “&” as the equivalent of “AND”, while others treat the ampersand as punctuation and disregard it. Finally, some filing office UCC systems will disregard all spaces, while others will disregard one space, but not two spaces that appear in sequence. Common Registered Organization Debtor Name Errors and Prevention One of the most common types of registered organization debtor name error is the simple typo. At some point in the loan documentation process, a human generally types the registered organization name either into a loan documentation system which will later generate the UCC record directly onto the UCC form itself, or into the filing office’s web-based online filing system. During data entry, the filer may hit the wrong key, omit one or more characters, or transpose letters. As a result of such an error, the string of letters and numbers represented as the debtor name on the financing statement will not match the correct debtor name set forth in the public organic record. The standard search logic used by the vast majority of filing offices will not overlook typos involving the letters or numbers that make up the registered organization name. In most cases, such errors will render the financing statement seriously misleading and leave the secured party unperfected. Therefore, it is important for secured parties to have a process in place to catch these errors before filing. Perhaps the most reliable process for catching registered organization

debtor name errors is old-fashioned proofreading. Ideally, the process should include a character-by-character comparison with the public organic record. If possible, the proof reader should be someone other than the person who entered the data. After all, it is notoriously difficult for a person to proofread his or her own work. This method of catching errors, however, requires dedicated time and personnel. Not all secured parties have enough of these resources to fully proofread every UCC record for debtor name errors. There are other tools that can help catch many typographical errors in registered organization debtor names. Some service companies, for example, have systems that automatically check the entered debtor name against the state’s business entity data and flag any names that do not match. This is especially helpful for volume filers because the secured party can limit its review to just the flagged names. While these registered organization debtor-name review systems are great time savers, they should not be relied upon exclusively for the correct debtor name. The business entity data may not be entirely correct, especially when it comes to spacing and punctuation. Therefore, any names flagged by these systems need to be verified against the name set forth in the public organic record, not the online data. A filer can get the words that comprise the registered organization debtor name correct, but still make errors or omissions in other parts of the name, such as missing or extra spaces, punctuation differences, and variations in ending noise words. These deviations, like errors within the words that comprise the name, can be the result of typos. However, these errors often occur when the filer takes a shortcut to determine the correct name of the debtor. Those who file UCC records might obtain the registered organization debtor name from a source other than the public organic record, such as a

state-issued certificate of good standing, the filing office online database, or a credit report. These records were never intended to provide the correct name of a registered organization for UCC purposes. As a result, they frequently contain minor deviations in spacing, punctuation, and ending noise word errors. If the registered organization debtor name provided on the financing statement has any discrepancy from the public organic record, even in spacing, punctuation, or ending noise words, then it is not the name of the debtor. In that case, the filing office standard search logic will determine whether the financing statement will be sufficient to perfect the security interest. Unfortunately, it is never safe for the secured party to rely on the standard search logic to compensate for an otherwise insufficient debtor name, no matter how small the error. As previously noted, there are search logic performance differences between filing offices that have adopted the MARS search logic and several state-level filing offices that don’t follow the MARS at all. The search logic in any particular state may not disregard certain spacing, punctuation, or ending noise word errors. As a result, a minor debtor name error may not adversely affect a record filed in one state, but the same error would make the record seriously misleading if filed in another. This is not a hypothetical concern. There are plenty of cases in recent years that demonstrate the harsh results courts are willing to tolerate for the simplest errors. One example is the 2017 case of United States SEC v. ISC, Inc., which involved a record filed at the Wisconsin Department of Financial Institutions (“DFI”). In that case the court found that an extra space before the period in “INC.” rendered the financing statement seriously misleading. Unlike the standard search logic used by most state-level filing offices, the search logic used by the

DFI was not programmed to disregard spaces. Consequently, the extra space prevented a search under the correct name from disclosing the record. The simplest and most effective way to reduce errors in the spacing, punctuation, or ending of a registered organization debtor name is to always use the public organic record as the source of that name. Any other source has the potential to include minor deviations that could come back to haunt the secured party. Of course, errors to spacing, punctuation, and endings can also be the result of typos, so careful proofreading should also be performed on every debtor name listed on a financing statement. Conclusion Secured parties continue to make a significant number of registered organization debtor name errors when filing UCC financing statements. Each and every debtor name error has the potential to make the financing statement seriously misleading, which may result in harsh consequences for the lender if the debtor defaults or files for bankruptcy. Fortunately, there are steps a secured party can take to prevent the most common registered organization debtor name errors. These include starting from the public organic record to determine the correct name, carefully proof reading each debtor name following data entry (preferably by someone other than the person who entered the data) and taking advantage of automated tools if available. TSL Paul Hodnefield is associate general counsel for CSC® and is a frequent speaker and writer on UCC due diligence issues. Please feel free to contact him with questions or comments at paul.hodnefield@cscglobal.com or 800-927-9801, ext. 61730.

THE SECURED LENDER NOVEMBER 2018

TIPPING THE SCALEWILL THE WEIGHT OF TARIFFS AFFECT COLLATERAL VALUES? What are the possible implications of recent tariff announcements and how can lenders prepare for this climate of uncertainty? A team of executives from Gordon Brothers answers these questions. BY RICK WILICHOWSKI, WENDY ENG, KEN BLOORE, ALEX SUTTON AND BECKY GOLDFARB.

Summer 2018 saw the continuation of tariff threats among major world trading partners affecting nearly all major industries. Following the Trump administration’s announcement of tariffs on imports from Canada, Mexico, Turkey, the European Union, and China, many of these countries announced countermeasures, escalating the situation and threatening a trade war. Affected goods range from imported steel and aluminum, fruit, handbags, and beauty products, to exported lumber, pork, cheese, fruit, corn, and grain, as well as whiskey, motorcycles, technology components, and lawnmowers. While the picture has evolved since then and, as of this writing, a general climate of uncertainty has given rise to mixed reactions among asset-based lenders. Of respondents to a joint TSL and Gordon Brothers survey, 41 percent are concerned about recently announced or enacted tariffs, while 47 percent are neutral. (See infographic on page 28.) The balance, 12 percent, feels positively about the impact of tariffs. After all, the intention of the administration’s tariffs is to stimulate domestic industry, and some sectors are benefitting. At the same time, others are poised for stress depending on the degree and duration of changes and customer response to increased pricing. For better or worse, change brings potentially increased risk and lenders are adapting. The majority of respondents (63 percent) have adjusted their portfolio monitoring based on their level of concern. Specific sectors where clients have altered monitoring include metals (55 percent) and agricultural commodities (31 percent) where tariffs are already in place. Additional sectors lenders felt warranted monitoring include automotive (41 percent) and retail (35 percent), while technology (18 percent) ranked lower. As part of their efforts to mitigate risk, lenders reported increasing their “diligence regarding potential direct and indirect impact[s] on borrowers;” “relying on third-party appraisal firm[s] to help monitor go-forward changes;”

“avoiding cross-border activities with Chinese companies;” and limiting certain asset categories and sectors from their portfolios. High-Level Impacts to Asset Values Macro-economically, some sectors will benefit, like domestic metals manufacturing, and others suffer, like U.S. soy farming. In the short term, some inventory values may increase, though the gain will be short-lived. Long term, tariffs may make certain business or product lines uneconomical, and they will certainly have an inflationary impact across a large number of industries To the extent investment occurs to support positively affected industries, machinery and equipment values may increase. However, it is unlikely that significant investment will occur until a new paradigm of tariffs and trade agreements is in place and stability returns to the market. In sectors where investment is not occurring, machinery and equipment values will decline. The impact on retail and consumer finished goods inventory will depend on consumers’ willingness to withstand price increases. To the extent that increased costs cannot be passed on to consumers, asset values will suffer. Below we detail broader trends by asset class and the sector-specific impacts to help lenders understand how to focus their monitoring activity. Keeping It In Perspective—Geographically and Historically The early action in U.S.-imposed steel and aluminum tariffs has affected North American trade more so than Chinese trade to date. The Chinese retaliatory rates on soybeans, seafood products, and other products have had significant impacts, but compared to a full-on trade war like that of the early 1930s, current tariffs are still very low. Nevertheless, Great Depression era history shows that unabated tariff escalation can have a detrimental impact on economic growth. At its peak in 1932, the average U.S. import tariff rate was just under 20

percent. Current rates are comparatively low at 1.5 percent for the year-to-date period ended July 2018. In examining China only, year-to-date duties are 2.8 percent relative to 2.7 percent for the same period in 2017. As U.S. steel and aluminum trade volume with Mexico and Canada is high, the impact of tariffs has been material with a $332 million increase in Canadian duties in 2018 and a $145 million increase in Mexican duties. Again, duties still remain historically very low at aggregate rates for imported goods of around 0.2 percent for each country. But this could change; in fact, governments have announced that it will. These figures only show the change in duties paid to the U.S. and do not measure the increase in duties paid abroad by U.S. exporters. These tariffs also don’t reflect the impact of trade diverted and shifts in pricing that has affected trade flows. For example, soybean tariffs implemented by China in June shifted Chinese buyers to the Brazilian market. This shift depressed U.S. soybean prices, but did not result in a significant increase in duties paid on soybeans in China. A Mixed Blessing for Manufacturers New tariffs could spur investment domestically to offset the lack of imported supply, as seen with U.S. solar panel manufacturing, where about $1 billion in new spending plans were announced. To meet this new demand, companies will have to increase production. Braidy Industries, for example, recently broke ground on a $1.3 billion aluminum rolling mill in Ashland, Kentucky. In Illinois, U.S. Steel Corporation has reopened one of its shuttered steel manufacturing facilities. Equipment asset reinvestment can be achieved in a number of ways including reactivating idle equipment, upgrading existing equipment with new technology, or making capital expenditures in new machinery. However, many producers are hesitant to make the investment due to concerns that these conditions will not prevail long-term. On the other hand, new tariffs are THE SECURED LENDER NOVEMBER 2018

GAME CHANGERS:

How asset-based lenders are responding to recently announced and enacted tariffs.

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E.U.

The word on the street, in investors’ own words

hitting some industries, like agriculture, twice as hard. According to the U.S. Farm Bureau, the farm economy is suffering under reduced commodity prices and income, at the same time that it’s facing rising interest levels, increased debt and lower loan performance. Fixed asset and equipment costs are also rising. Retaliatory tariffs on agricultural exports, such as pork and soybeans, are exacerbating headwinds for many farmers. Further in the supply chain, increased metals costs, for example, are increasing canned food and beverage production costs. The long-term impact is still to be seen, in large part based on the end consumer response. Ability to Push on Cost Increases Will Make or Break Many With the prospect of increasing costs of goods, wholesalers and retailers’ success will largely be determined by consumers’ tolerance of price increases. For many borrowers, tariffs will be a non-issue, especially if they are able to push cost increases through the supply chain, or constrain cost increases by shifting purchasing away from affected countries. For example, one heavy equipment wholesaler now facing increased costs for Chinese-cast parts is transitioning to South Korean suppliers. However, moving capacity or switching suppliers takes time and wholesalers may not reap the benefits immediately. To the extent increased costs can be pushed to customers, increased tariffs may not immediately impact NOLVs; however, it may eventually have an effect on wholesalers’ sales volume as tariffs take hold and/or expand across additional categories. From an inventory perspective, input cost increases will buoy the value of some firms’ inventories in the short term. Once that product is sold, however, and is removed from inventory, that one-time gain will disappear. Thereafter the same volume of parts will require additional capital to procure and the price of finished goods must increase to maintain gross margins. Price increases may ultimately temper demand or compress

margins to the extent that prices require discounting to sell through. Wholesalers and retailers are still assessing how tariffs will affect pricing to their end customers. Presently, affected products include imported Chinese and Canadian raw materials and finished goods including cotton, leather, clothing, and handbags.

Taking a more conservative approach on inventories that have been affected by tariff. Relying on third party appraisal firm[s] to help us monitor the go-forward changes.

Sector-Specific Impacts Metals Domestic steel prices have increased and producers will see higher values as margins rise. In the short term, some companies holding commodity steel are seeing an increase in raw material values as the market price rises relative to booked cost. Conversely, the entire supply chain is impacted by increased costs. Many manufacturers are reporting compressed margins and/or price increases to end users. Raw material costs move quickly, with the impact on finished goods and downstream markets moving more slowly. Producers expect that rising costs will lead to increased prices for all canned products, food, and beverages. The ultimate impact on gross margins and how much of that can be passed along will be a major monitoring point. Additionally, the increased cost of new equipment will have an inflationary effect on used equipment prices. As tariffs increase prices on imported steel, consumers may be reluctant to buy new and instead buy used. Agriculture Approximately 20 percent of U.S. agriculture revenue comes from exports. The U.S. Agriculture Department has forecasted approximately $11 billion of losses due to new tariffs. For example, National Milk Producer Federation economists are forecasting tariffs to cost farmers $1.10/cwt in the second half of 2018. To date we have seen decreasing commodity prices in agricultural products including dairy, soybeans, corn, wine, and others. In response to tariffs on soybeans, fruit, and other items, the U.S. government is

When companies are sourcing products overseas […] make sure they have a plan B.

Only [concerned] if costs cannot be passed down.

Given our group is non-regulated, we think it could increase new business flow.

Avoiding crossborder activities with Chinese companies.

Not [altering strategy] yet. Getting close.

In the long-term, it will all balance out.

Pro forma projections must include [the] potential impact of tariffs on cash flow. Increased workouts / restructurings [are coming].

[It’s] too early to tell. THE SECURED LENDER NOVEMBER 2018

planning a $12 billion bailout for farmers, but there could still be a long-term impact of lost markets and customers. With fewer international buyers, the U.S. meat industry is seeing an oversupply of protein and decreasing prices as a result. Tyson Foods recently cut its profit forecast, citing lower U.S. meat prices due to duties on pork and beef exports. New equipment prices are also rising as a result of steel tariffs. Energy and Chemicals Steel tariffs have increased the cost of pipe, fittings, and equipment for oil and gas producers. As the majority of drill pipe is imported and it takes time to change producers, margins are compressing and energy costs are rising. The American Chemical Council warned that impacts from tariffs on over 1,600 Chinese chemicals and plastics would increase prices for U.S. chemical firms and the end users of their products. To the extent that the increased cost of goods cannot be passed along to the end user, manufacturers’ gross margins will compress, negatively affecting appraised values. Construction Most machinery contains steel or aluminum elements. Tariffs on these metals will increase the cost of virtually all new machinery and equipment. Caterpillar stated that tariffs on imported metal would raise its production cost $100 to $200 million during the second half of 2018. Those increases may be pushed to customers, and Caterpillar has largely succeeded in doing so. Many heavy equipment manufacturers are anticipating lower margins and earnings in 2019. Lumber costs have increased to an alltime high as a result of the 2017 U.S. tariff on Canadian lumber. Over the past year, lumber pricing increased in certain markets due to opportunistic domestic mills “matching” imported Canadian lumber pricing. Subsequently, the cost to produce homes has increased in some markets. Automotive The auto industry has been particularly affected due to the large number of inputs subject to tariffs, ranging from tires and

brake pads to engines and batteries, and steel and aluminum. Ford and GM lowered profit forecasts for 2018, with Ford estimating the cost to its business at $1.6 billion. BMW announced a combined response of raising prices and absorbing some costs. Harley Davidson plans to absorb the cost of European tariffs. Aerospace Aerospace has not yet felt the impact of imposed tariffs, but rising metals and fuel prices will create headwinds for the industry. Boeing delivers 80 percent of its aircraft outside the U.S., putting it at elevated risk. Additionally, increased input costs are driving up the cost of other transportation categories, specifically shipping and logistics. Retail Retailers face the perpetual challenge of assessing how much additional cost can be passed on to consumers, in addition to constraining their own costs of goods. Firms that are best positioned to do this include vertically integrated firms and those that have large buying power and relationships that enable effective supplier negotiations. To the extent that retailers can pass along these costs, and their gross margin and average discount rates remain consistent, NOLVs should also remain consistent. Lenders should continue to monitor these metrics in addition to comparable and new sales to ensure that customer goodwill remains stable. For those companies that depend heavily on products sourced from Chinese manufacturers, consumer price tolerance remains to be critically tested before customers seek alternatives or abstain. Where Do We Go From Here? The long-term impact to some manufacturers could include major disruptions such as switching suppliers or moving production overseas. Compressed margins and lower sales could lead many companies into distress. Alternatively, some segments may thrive as production moves onshore. Across all five continents on which we operate, we have observed varying impacts

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and are actively assessing the effects on all sides. Changing dynamics are affecting our disposition strategies and these considerations are reflected in our valuations, even as they change week-to-week. As noted, asset-based lenders are altering their portfolio monitoring or are using increased appraisal discipline to minimize downside risk. This is an important step in mitigating risk associated with the geopolitical change and uncertainty. Values across the supply chain are fluctuating quickly based on changing market prices, input costs, and buying patterns. Continued variation in these patterns is likely. Under these quickly shifting conditions, knowledge is power. TSL Rick Wilichowski is managing director, Machinery & Equipment Valuations, at Gordon Brothers. He oversees the production of machinery and equipment valuations. During the past two decades, Wilichowski has managed complex valuation projects throughout the world and also has experience executing orderly services. Wendy Eng is managing director, Consumer Product Valuations, at Gordon Brothers. She is responsible for all aspects of wholesale consumer product asset valuations to ensure the highest degree of quality and customer service. Ken Bloore in managing director, Valuations, at Gordon Brothers. With two decades of experience in the valuation and appraisal industry, he has performed or supervised approximately 5,000 appraisals in wholesale, manufacturing and retail industries. Alex Sutton is managing director, Industrial Valuations, at Gordon Brothers. He oversees the production of Gordon Brothers inventory valuations. Becky Goldfarb is managing director, Retail Valuations, at Gordon Brothers. Bringing over 15 years of experience in the disposition and valuation of retail and consumer products, she oversees all aspects of retail asset valuations to ensure the highest degree of quality and customer service.

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TD Bankâ&#x20AC;&#x2122;s Asset-Based Lending team can help you maximize your borrowing capacity. Our client-focused approach ensures that you receive solutions tailored to your specific needs. Put our deep industry expertise and financial strength to work for you.

Find out more: Jeffery Wacker Head of US Originations, ABL jeffery.wacker@td.com 203-761-3831

White Oak Commercial Finance

CAPITAL THAT WORKS White Oak Commercial Finance, LLC provides debt and alternative finance products to small and middle market companies throughout the United States. Our credit facilities range in size from $1 - $100 million. We are an affiliate of White Oak Global Advisors, LLC, and its institutional clients, an asset manager with more than $5.6 billion assets under management.1

SOLUTIONS

FULL-PAGE AD PAGE 32 facing small to middle market At White Oak, we understand the unique challenges

companies in varying economic cycles. Our flexible and creative financing structures are built for all stages of business, from rapid growth and refinancing to turnarounds and workouts. For over 30 years, White Oak Commercial Finance executives have helped businesses access growth and working capital by providing a diverse set of asset based products. • Asset-based Loans

• Acquisition Funding

• Term Loans

• Innovative Factoring Solutions

• Staffing Loans

• DIP Financing

• Cap Ex Facilities

• Trade Finance

WHITE OAK COMMERCIAL FINANCE New York | Los Angeles | Charlotte | Boca Raton www.whiteoaksf.com

1. White Oak Global Advisors’ AUM is unaudited and estimated as of July 31, 2018 based on the most recently available net asset value of funds and managed accounts, uncalled capital commitments and expected capital commitments and subscriptions through August 1, 2018. White Oak Global Advisors’ regulatory AUM number in its most recent Form ADV may be materially different than White Oak’s AUM presented herein. White Oak Global Advisors, LLC, is registered with the SEC as an investment adviser, and additional information about White Oak Global Advisors is available on the SEC’s website at adviserinfo.sec.gov.

White Oak Commercial Finance

CAPITAL IN ACTION Below is a select representation of asset based facilities provided by White Oak Commercial Finance in 2018.

Consumer Manufacturer ---------------$20 million ---------------Revolver

Jewelry Designer and Manufacturer ---------------$5 million ---------------Revolver

Energy Services ---------------$22 million ---------------Revolver & Term Loan

Pet Food Distributor ---------------$5 million ---------------Revolver

Consumer Products ---------------$8 million ---------------Revolver

Womenâ&#x20AC;&#x2122;s Apparel ---------------$20 million ---------------Revolver

Staffing ---------------$2.5 million ---------------Revolver

Industrial Services ---------------$18 million ---------------Revolver

Accessories Distributor ---------------$25 million ---------------Revolver & Term Loan

CONTACT WHITE OAK COMMERCIAL FINANCE Robert Grbic | 212.887.7902

David Montiel | 704.248.5748

Gino Clark | 213.226.5350

rgrbic@whiteoakcf.com

dmontiel@whiteoakcf.com

gclark@whiteoakcf.com

Lenders Beware:

Expectations and Unintended Consequences — It’s Not Just Financial Covenants! BY DAVID W. MORSE, ESQ.

J. Crew, Chewy, iHeart...these cases have been unpleasant surprises for lenders. An experienced commercial finance attorney details the cases that should serve as warnings to lenders.

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Over the last few years, there have been a series of cases where lenders have been unpleasantly surprised by transactions that borrowers have entered into which have increased the lenders’ risk, reduced assets available to repay debt, and changed the nature of the borrower’s business, while the borrowers have taken the view that the transactions are permitted under specific exceptions (the “baskets”) to the negative covenants in the credit documents. The key issue to consider is how the use of these provisions by borrowers in these instances may be inconsistent with lenders’ expectations. Background While the weakening of financial covenants has been highly publicized, either as a function of the “covenant lite” approach that is rampant, the speculative nature of addbacks to EBITDA or the amount of “headroom” allowed in financial covenants, it is only more recently that other covenants in credit agreements have gained the attention of lenders, particularly as there have been a series of high profile cases where borrowers have used credit agreement provisions for transactions in unanticipated ways to the detriment of senior lenders. Given the current state of the larger economy lenders might take some comfort that the risks are not likely to materialize. After all, broad based economic data shows the economy booming based on metrics of unemployment, consumer optimism and GDP growth. Still, in the face of the longest economic boom in history, sophisticated economic players are beginning to look down the road to what the future may hold. Maybe not today, maybe not tomorrow…but… Factors like rising interest rates, the much ignored negative repercussions of tax reform, the spectacular growth of the national debt, tariffs and trade wars, are often identified as part of a cascade of possibilities that may lead to a recession.

In the face of a downturn in the economy, with the resulting increase in risk of defaults on loans, what will happen to recoveries? In comparing today to 2007, certain elements surface that may affect them: ◗ the dramatic decrease in junior debt in the capital structure of companies that would provide a cushion before losses would hit senior debtholders, ◗ the lack of reliability of cash flow projections based on the standards that allow more speculative events to show better performance than may ultimately, in fact, be the case, and ◗ the loosening of covenants in loan documents that will mean less opportunity for lenders to react to problems and leave fewer assets as a source of recovery. Some reports have said that the convergence of terms within the high-yield bond and loan markets is setting the stage for weaker recoveries when the current economic expansion ends. Federal regulators have noted the loosening of covenants. While the 2018 Shared National Credit Review has not been issued yet, the 2017 Shared National Credit Review certainly raised the flag. Notwithstanding that nonpass credits were down dramatically during the Review for the third quarter of 2016 and first quarter of 2017, the Review expressly warned of weaknesses in underwriting standards, including “ineffective covenants.” The “Covenant Quality Indicator,” published by Moody’s, which measures how covenants protect lenders on a scale of 1 to 5 (with 5 being the least protective), hit a record “high” of 4.12 (which means a “low” for lenders) for the first quarter 2018. Before J. Crew: Claire’s and iHeart The J. Crew case has perhaps received the most publicity for its impact on lenders, but actually it follows on several other workouts that effectively set the playbook for J. Crew. Claire’s Stores is one of them. Back in 2016, while the Apollo owned retailer, Claire’s Stores, had a complex

capital structure, the immediate issue was the looming maturity of its 10.5% senior subordinated notes due in 2017, which had to be addressed. Any problem with refinancing these subordinated notes would be compounded by the impact on the other debt of Claire’s. The company kicked off its debt restructuring with a transfer of its intellectual property from a “Restricted Subsidiary,” CBI Distribution Corp., to a newly formed “Unrestricted Subsidiary,” CLSIP LLC (that is a subsidiary whose assets are not collateral and is not bound by the terms of the credit documents). Sound familiar? In addition to moving its intellectual property, in a twist that did not arise in J. Crew, Claire’s also used its European assets in its debt restructuring. Claire’s took its 8.85% second lien notes, 7.75% senior notes (which were unsecured) and 10.5% senior subordinated notes and offered to exchange such debt for: ◗ $31 million of secured term loans issued by Claire’s Stores which would be pari passu on a first lien basis with its existing $1.34 billion of first lien notes and a new $75- million revolving facility, ◗ $101 million of secured term loans issued by CLSIP LLC, the new owner of the intellectual property and an unrestricted subsidiary, and ◗ $46 million of unsecured term loans issued by Claire’s (Gibraltar) Holdings Limited, the holding company for Claire’s European operations. As part of the debt exchange, Claire’s and its subsidiaries agreed to pay CLSIP, the new owner of the intellectual property, $12 million annually for the use of the intellectual property. The proceeds of such license fees could then be used by CLSIP to pay the interest on the new now-senior secured debt, which prior to the exchange offer had been junior in the capital structure to the senior secured debt of Claire’s. Claire’s was now paying for the privilege of using assets that it formerly owned and using funds THE SECURED LENDER NOVEMBER 2018

from the borrower of the senior secured debt to pay debt that had been junior. While the effect of all of this was to push out the maturities of the debt, it also transformed subordinated, unsecured and second lien debt and made it senior secured debt while taking away assets that might otherwise have been available for the existing senior secured debt. Although no litigation arose out of the Claire’s exchange, not so with a similar tactic by iHeartCommunications, a company owned by sponsors

ings, Inc. from a “Restricted Subsidiary” that was a ”Loan Party” (and therefore had guaranteed other iHeart debt) to an “Unrestricted Subsidiary”, Broader Media, LLC (that accordingly was not a guarantor and whose assets were unencumbered). A group of secured priority noteholders issued a notice of default on the basis that the transfer violated the terms of the indentures governing the debt owing to them. The consequences of such a notice were particularly significant to iHeart, since a default

was as “determined in good faith by the Issuer” (that is the company). The company concluded that the 100,000 transferred shares had a fair market value of $5.16 per share based on the closing price for what iHeart argued was a comparable publicly traded class of shares of Clear Channel Outdoor Holdings. The noteholders counterattacked, arguing first that the contribution of the shares did not fall within the definition of an “Investment” and second, that even if it did, the shares were

s part of the debt exchange, Claire’s and its subsidiaries agreed to pay CLSIP, the new owner of the intellectual property, $12 million annually for the use of the intellectual property. The proceeds of such license fees could then be used by CLSIP to pay the interest on the new now-senior secured debt, which prior to the exchange offer had been junior in the capital structure to the senior secured debt of Claire’s. Bain Capital and Thomas H. Lee Partners, formerly known as Clear Channel Communications, Inc. Like Claire’s, iHeart had a complex capital structure, with multiple layers and categories of debt, most of which arose out of its 2008 LBO by the sponsors. The debt was principally organized around its two business lines: its outdoor advertising business in Clear Channel Outdoor Holdings, Inc. and its subsidiaries and its radio business in Clear Channel Worldwide Holdings, Inc. and its subsidiaries. The outdoor advertising business carried about $5 billion of debt and the radio business carried about $16 billion. Here again, the rapidly approaching maturity of debt for a company in distress led to a series of “liability management” exercises. Instead of transferring intellectual property like J. Crew did, in December of 2015, iHeart made a contribution of 100,000 shares of Clear Channel Outdoor Hold-

and acceleration under this set of notes would trigger cross-defaults throughout the capital structure. In response to the default notice, iHeart filed suit in the District Court of Bexar County, Texas seeking a temporary restraining order and an injunction to have the notice of default rescinded. iHeartCommunications, Inc. v. Benefit Street Partners LLC, et al., No. 2016 CI 04006, 2016 WL 902088 (Tex. Dist., Bexar County Mar. 8, 2016). iHeart argued that the contribution of the shares constituted a “Permitted Investment” within the definition of the term in the applicable indentures. The term “Investment” included “capital contributions” and the term “Permitted Investments” allowed additional Investments having an aggregate fair market value of up to the greater of $600 million or 2.00% of “Total Assets.” By the way, “fair market value” by the terms of the Indenture

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not properly valued. In its decision, the Bexar County court concluded that the transfer of the shares was an “Investment” and was a “Permitted Investment”, accepting the value of $516 million used by the company and therefore finding that the transfer was permitted and it granted the injunction on the notices of default requested by the company. iHeartCommunications, Inc. v. Benefit Street Partners LLC, et al., No. 2016 CI 04006, 2016 WL 3029926 (Tex.Dist., Bexar County, May 24, 2016). Notwithstanding this victory for iHeart, these “liability management” activities did not prevent iHeart from ending up in Chapter 11 in the Bankruptcy Court for the Southern District of Texas on March 14, 2018, where it remains. Don’t be “J. Crewed”! Much has been written at this point

about the transfer by J. Crew of its intellectual property to an unrestricted subsidiary using a series of baskets in its credit documents so that its lenders lost the benefit of it as collateral. The J. Crew credit agreement included three baskets: ◗ a basket allowing a “Loan Party” to make an investment in a non-Loan Party that was a “Restricted Subsidiary” so long as the aggregate amount of such investments outstanding at any time did not exceed the greater of $150 million or 4.0% of “Total Assets” plus the “Available Amount” (an amount tied to earnings); ◗ a general basket allowing the Loan Parties and the Restricted Subsidiaries to make “other” investments of up to the greater of $100 million or 3.25% of Total Assets (plus if there is no event of default, the Available Amount); and ◗ a basket for investments made by a Restricted Subsidiary that was not a Loan Party “to the extent such investments are financed with the proceeds received by such Restricted Subsidiary from an investment in such Restricted Subsidiary.” It is this last basket, which, when put together with the first two, constitutes the “trap door,” the ability to move assets of any type into—not a new business venture or to support a supplier or customer—but just another subsidiary and more particularly an “Unrestricted Subsidiary,” whose assets are not collateral and which is not subject to any of the covenants in the credit documents, and so may be used for any purpose. While the intent of the exception to allow investments may have been intended to permit a borrower to make a cash investment in a new business or in a customer or supplier, since the provision allowing investments did not limit the types of assets that could be used (e.g., cash versus intellectual property or other collateral) or the party in which the investment may be made (e.g., a joint venture or third party versus an unrestricted subsidiary), this exception

arguably allowed valuable collateral to be lost to the secured lenders. To take advantage of the “trap door”, J. Crew engaged in a series of transfers of its trademarks, so that an undivided 72.04% interest in the trademarks that had once been owned by the Loan Parties and part of the collateral for the term loans, became the property of an Unrestricted Subsidiary, no longer collateral for the term loans and available to be given as collateral to secure new debt of such Unrestricted Subsidiary, free from any of the limitations in the credit agreement. As in iHeart, certain of the J. Crew lenders were not so quick to let this go. To preempt the issuance of notices of default by the disgruntled lenders, on February 1, 2017, J. Crew commenced a suit in New York State Supreme Court seeking a declaratory judgment that the transfer of the interest in its trademarks did not constitute a default under the term loan agreement. J. Crew Group, Inc., et al. v. Wilmington Savings Fund Society, FSB, No. 650574/2017 (N.Y.Sup., New York County, Feb. 1, 2017); Eaton Vance Management v. Wilmington Savings Fund Society, No. 654397/2017, 2017 WL 2705332 (N.Y.Sup., New York County, June 22, 2017). In response, Wilmington Trust, as trustee for the lenders, argued that the transfer was part of a multi-step fraudulent transfer aimed at expropriating the value of the trademarks to restructure some $500 million of PIK notes issued at the parent holding company level. It also claimed a breach of fiduciary duty by the officers, directors and controlling shareholders. And, more specifically, in terms of the negative covenants in the loan agreement, the lenders argued among other things that: ◗ J. Crew was not permitted to form the Unrestricted Subsidiaries that received the trademark interests because the total leverage ratio that had to be satisfied to designate a subsidiary as “Unrestricted” had not

been satisfied due to the incorrect calculation and use of “cost savings and synergies” in determining EBITDA and because the calculations were not made in good faith and were not based on assumptions that were reasonable as was required under the agreement. ◗ The transfer breached the covenant on permitted investments because the value of the transferred interests exceeded the limitations for such investments. J. Crew had only transferred a 72.04% interest because multiplying that percentage by the third party valuation of the total value of the transferred trademarks would be within the basket amount. The lenders argued that the mathematical exercise of taking 72.04% of the total value did not accurately reflect the actual value of the transferred 72.04% interest, which was in fact more valuable, particularly in view of the rights of the owner of the interest under the license agreement. ◗ The term loan agreement prohibited any encumbrance on the 27.96% interest in the trademarks that remained with the Loan Parties. The lenders argued that the license agreement was such an encumbrance because it provided that the Unrestricted Subsidiary that was the owner of the licensed intellectual property was entitled to the remaining interest owned by the operating company Loan Party in the event that the operating company did not pay the license fee or failed to otherwise comply with the license agreement. ◗ The term loan agreement also prohibited any Restricted Subsidiary from disposing of all or substantially all of its assets. In the course of the series of transfers by J. Crew, one of the companies was a holding company for the trademarks, so, when it transferred the interest in the trademarks, it transferred all or substantially all of its assets in violation of this covenant. J. Crew has since gone on to enter into THE SECURED LENDER NOVEMBER 2018

various term loan amendments obtaining the consent of approximately 88% of the holders of the debt to allow the transfer of the intellectual property in conjunction with a series of other transaction, including the purchase by J. Crew of $150 million of the term loan debt. Meanwhile, the litigation continues. After J. Crew—Chewy.com PetSmart, like J. Crew and Claire’s, is owned by a private equity firm. In PetSmart’s case, the private equity firm, BC Partners, acquired PetSmart from Longview Asset Management in 2015 in a leveraged buyout for $8.7 billion. Two years later, in May 2017, PetSmart acquired the online pet product retailer, Chewy.com. The $3 billion acquisition was financed with $1.35 billion in first lien notes, $650 million in unsecured notes and $1 billion in equity from BC Partners. PetSmart already had a $205 million asset-based facility, a $4.16 billion term loan facility and $1.9 billion in senior unsecured notes. While the Chewy.com acquisition left the company with around $8 billion in debt overall, the move to expand from just a brick and mortar retailer into e-commerce through the acquisition of Chewy.com was seen by lenders and investors as a smart move at the time. However, despite the acquisition, EBITDA, revenues and same store sales at PetSmart all declined in its 2017 fiscal year. On June 1, 2018, PetSmart executed two transactions “as part of its ongoing efforts to manage its capital structure”: ◗ First, PetSmart made a distribution to its parent, Argos Holdings, of 20% of the outstanding common stock of Chewy.com, followed on the same day by a distribution of such common stock by Argos to its parent company. ◗ Second, PetSmart made an “investment” of 16.5% of the outstanding common stock of Chewy.com in the form of a capital contribution to a newly formed wholly owned subsidiary of PetSmart created on May 30, 2018 and designated as an

“Unrestricted Subsidiary” under the ABL credit agreement, the term loan credit agreement and each of the three indentures. The effect of the distribution of the 20% of the shares to the parent holding company and the investment of 16.5% of the shares was that the senior secured lenders to PetSmart lost the value of those shares as part of their collateral. The parent holding company that received the 20% of the shares was not a guarantor and its assets were not part of the collateral and the “Unrestricted Subsidiary” that received 16.5% of the shares also did not guarantee any of the applicable debt or grant liens on its assets to secure any such debt (and being an “Unrestricted Subsidiary” was also not subject to any of the covenants or other terms of any of the applicable credit facilities or indentures, allowing it to obtain other financing should it so elect without restriction). And, the credit agreement included a provision requiring the lenders to release liens on assets of companies that were not wholly-owned subsidiaries of PetSmart, so, once Chewy. com ceased to be a wholly-owned subsidiary, the company argued that the lenders had to release their liens. While the lenders have challenged whether the transactions were, in fact, permitted, if the permitted investments were limited to cash or cash equivalents and/or excluded investments with assets in unrestricted subsidiaries or non-loan parties, the issue might have been avoided. On June 26, 2018, PetSmart filed a complaint in the United States District Court for the Southern District of New York against Citibank, the former administrative agent under its $4.16 billion term loan facility. Argos Holdings Inc. and PetSmart, Inc. v. Citibank, N.A., No. 18-cv-5773 (S.D.N.Y. filed June 26, 2018). The complaint charges that Citibank failed to fulfill its contractual obligations under the credit agreement to release the assets of Chewy. com.

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In their response the lenders claimed that the transactions were an attempt by the sponsors to strip some $900 million of value out of the business and place PetSmart’s most promising asset outside the reach of PetSmart’s creditors, forcing PetSmart’s creditors to rely on PetSmart’s struggling brick-and-mortar business as security and that these actions violated the terms of the debt documents and the law. ◗ First, the lenders said that PetSmart did not have a “Fixed Charge Coverage Ratio” of 2 to 1 as was required under its indentures in order to be permitted to make the distribution of the Chewy.com shares to its parent. The lenders argued that the EBITDA used by PetSmart for such ratio was vastly overstated through the use of purported “cost savings” and “synergies” from PetSmart’s acquisition of Chewy.com that were simply manufactured. ◗ Second, the lenders argued that PetSmart violated the credit agreement’s restrictions on transactions with affiliates. Under the credit agreement, PetSmart was only permitted to transfer assets to its affiliates so long as the transfer was on terms substantially as favorable as would be obtained in a comparable arm’slength transaction. The distribution of the 16.5% equity stake in Chewy. com to PetSmart’s parent did not meet this standard. ◗ Third, the security agreement included a provision that PetSmart would not exercise its rights as the owner of Chewy.com stock to “materially and adversely affect” the rights and remedies of PetSmart’s secured creditors. According to the lenders, the transfer of the Chewy.com equity to an Unrestricted Subsidiary did exactly that, depriving the lenders of a lien on the equity which had significant value. ◗ Finally, with the coup de grace, the lenders stated that the distribution and the investment were “unlawful.” They argued that it was an “actual fraudulent conveyance” specifically

designed to hinder and defeat the rights of PetSmart’s creditors. And, the distribution of the shares to the parent company was a “constructive fraudulent conveyance” because PetSmart was insolvent and received no value in return. For the same reason, the distribution was an illegal dividend under applicable corporation law. The lender’s answer to the complaint of PetSmart was filed on September 6, 2018 and the litigation continues.

In April of 2015, Windstream entered into a series of transactions to restructure its debt, which included a sale and leaseback of certain assets that became the basis for litigation between noteholders and the company. The restructuring included the following: ◗ Windstream Services, a subsidiary of Windstream Holdings, made a capital contribution of its telecommunications network assets to one of its wholly own subsidiaries, the Uniti Group.

Services the former owner of them. On September 21, 2017, a holder of the 6.375% senior notes issued by Windstream Services sent a notice of default to Windstream Services on the basis that the sale and leaseback of the network assets breached the covenant in the indenture. On September 29, 2017, the company sought a declaratory judgment in Delaware courts that it was not in default and to enjoin the noteholder from acting on the basis of the default notice. Windstream Services LLC v. U.S.

n June 26, 2018, PetSmart filed a complaint in the United States District Court for the Southern District of New York against Citibank, the former administrative agent under its $4.16 billion term loan facility. Argos Holdings Inc. and PetSmart, Inc. v. Citibank, N.A., No. 18-cv-5773 (S.D.N.Y. filed June 26, 2018). The complaint charges that Citibank failed to fulfill its contractual obligations under the credit agreement to release the assets of Chewy.com When is a Sale-Leaseback, not a SaleLeaseback? The Windstream Case It is not just baskets for “permitted investments” and “restricted payments”, coupled with “unrestricted subsidiaries” that have been used by borrowers creatively. The Windstream case provides another lesson for lenders in the context of a sale and leaseback covenant. Sale and leaseback transactions are usually structured with a sale of existing assets, most commonly real estate and/or equipment, to an entity owned by a lender, which then immediately leases the sold assets back from the lender controlled entity. The lease is often a capital lease and the transaction typically functions as indebtedness, with the lease payments the equivalent of amortization on a loan and the leased assets the collateral. For purposes of credit documents, most sale and leaseback transactions are addressed in a manner similar to other forms of indebtedness.

◗ In exchange for receiving these assets, Uniti Group paid a $1.035 billion dividend and issued approximately $2.5 billion of debt payable to Windstream Services. ◗ Windstream Services exchanged the $2.5 billion of debt it was owed by Uniti Group for debt that Windstream Services owed to third-party creditors (so the creditors ended up with recourse to Uniti, which was now the owner of the network assets formerly owned by Windstream Services) and made some cash payments to such creditors. ◗ Then Windstream Services took 80.04% of the equity of Uniti Group and distributed it to the shareholders of Windstream Holdings (the parent of Windstream Services). ◗ Uniti Group as the owner of the network assets it acquired from Windstream Services then leased the assets to Windstream Holdings—the parent company. Not to Windstream

Bank National Association, as Indenture Trustee, No. 17-0693 (Del. Ch. filed Sept. 9, 2017); Windstream Services LLC v. U.S. Bank National Association, as Indenture Trustee, No. 17-cv-01389 (D.Del. 2017). Meanwhile, U.S. Bank, in its capacity as the indenture trustee for the 6.375% senior notes, brought an action on behalf of the noteholders in Federal court in the Southern District of New York against Windstream Services to obtain a declaratory judgment that the sale and leaseback transaction did constitute a default and that the notice of default sent by a noteholder to Windstream was effective. U.S. Bank National Association v. Windstream Services LLC, No. 17-cv-07857 (S.D.N.Y Oct. 12, 2017). The company said it was not in breach of the sale and leaseback covenant in the indenture because the transfer of the network assets from Windstream Services to Uniti and the leasing of those same assets back by

THE SECURED LENDER NOVEMBER 2018

Uniti to Windstream Holdings did not fit within the definition of the term “Sale and Leaseback Transaction” in the indenture. Why did the company say this was not a sale and leaseback transaction subject to the negative covenant in the indenture? Here’s why. The indenture defines a “Sale and Leaseback Transaction” to mean, “with respect to any Person, any transaction involving any of the assets or properties of such Person …whereby such Person sells or otherwise transfers such assets or properties and then or thereafter leases such assets or properties or any part thereof or any other assets or properties which such Person intends to use

master lease, Windstream Services and its subsidiaries were the actual parties that used the leased assets. In fact, as U.S. Bank pointed out in its complaint, Windstream told the regulators that the Windstream Services companies would be using the assets in order to get the required government licenses. The financial statements were consistent with this structure as well. The trial finished in July 2018, and the case is waiting for the court’s judgment. Next time a lender looks at a basket for sale and leaseback transactions— it will need to check the definition to make sure it picks up leases back to affiliates, not just the same party that originally owned the leased assets!

being at least as good for the company as the existing debt, including having the same or a longer maturity, so that the existing lenders on other debt are effectively more or less in the same or better position than they were in with the old debt. When companies use the concept of “refinancing indebtedness” to take second lien, unsecured or subordinated debt that the senior secured lenders had considered as junior to them in the company’s capital structure in making the decision to make loans to the company and replace it with senior secured debt, and use assets that might have otherwise been available to the senior secured lenders to secure such debt, the concept may not

ake the case of “Norske Skog”. Norske Skogindustrier had issued two series of senior unsecured notes that were coming due. It had also issued senior secured notes. Having difficulty with refinancing the unsecured notes, Norske launched an exchange offer. In exchange for the unsecured notes, Norske offered the holders of the unsecured notes new senior secured notes. for substantially the same purpose or purposes as the assets or properties sold or transferred.” (emphasis added) Did you follow the references to “such Person” in the definition? It says that “such Person” sells the assets and then leases such assets back while “such Person” intends to use the assets for substantially the same purpose. But Windstream Services transferred the assets and Windstream Holdings leased them back! So it was not the same “Person” who transferred them as leased them back. Voila! No “Sale and Leaseback Transaction”--at least based on the definition in the indenture. So, what’s the issue? The issue is that while Windstream Holdings was the “lessee” under the

Creativity Knows No Bounds! “Refinancing Indebtedness” Too Permitted investments, restricted payments, unrestricted subsidiaries, asset dispositions, even sale and leaseback covenants—and yet another basket for permitted debt has surfaced as the basis for dispute where transactions occur that are inconsistent with lenders’ expectations: “Refinancing Indebtedness.” Usually one of the exceptions from the negative covenant limiting the ability of a company to incur additional debt permits the incurrence of “refinancing indebtedness”. It is a relatively straightforward concept. The idea is to essentially swap out existing debt for new debt, the “refinancing indebtedness”, with the terms of the refinancing indebtedness

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be perceived by lenders as so benign. Take the case of “Norske Skog”. Norske Skogindustrier had issued two series of senior unsecured notes that were coming due. It had also issued senior secured notes. Having difficulty with refinancing the unsecured notes, Norske launched an exchange offer. In exchange for the unsecured notes, Norske offered the holders of the unsecured notes new senior secured notes. The new notes would be secured by receivables of certain subsidiaries that were not collateral for the existing secured notes. These new notes were to be issued using the basket in its indentures for a “Qualified Securitization Financing.” In effect, Norske Skog would refinance the unsecured notes using the proceeds

from the issuance of the new secured notes. Of course the first question that comes to mind is: Why did the company use the Qualified Securitization Financing basket to refinance the unsecured notes, rather than the basket for “Permitted Refinancing Indebtedness” that was included in the indenture? Here was the rub. The definition of “Permitted Refinancing Indebtedness” expressly stated that it did not include refinancing of the unsecured notes that Norske Skog wanted to refinance. On February 2, 2016, Citibank, N.A. as the trustee for the senior secured notes brought an action against the company in the Supreme Court of the State of New York, Citibank, N.A., London Branch v. Norske Skogindustrie ASA, et al., No. 650503/2016 (N.Y.S. Feb. 2, 2016), that was promptly removed to Federal court in the Southern District of New York seeking a preliminary injunction to prevent the exchange offer. Citibank N.A. v. Norske Skogindustrier ASA, No. 16-cv-850, 2016 WL 1052888 (S.D.N.Y. Mar. 8, 2016). The trustee argued that the new secured notes to be issued by the company as part of the exchange offer did not fit within the definition of the term “Qualified Securitization Financing.” The definition of “Qualified Securitization Financing” in the indenture was “any financing pursuant to which the Issuer or any Guarantor may sell, covey or otherwise transfer to any other Person or grant a security interest in, any Securitization Assets (and related assets)…” (emphasis added) The trustee said the exchange offer was not in fact a “financing” as the term was used in the definition of “Qualified Securitization Financing” but was a “refinancing” and therefore had to be permitted under the basket designed for a “refinancing”. In addition, the trustee went on to point out that the terms of the new exchange notes did not meet the requirements of the definition of “Qualified Securitization Financing”

because, among other things, the notes were not on market terms, included above-market interests rates and the principal amount was not equivalent to the fair market value of the collateral— all requirements to fit within other parts of the definition of the term. Meanwhile, the company argued that it was permitted to incur debt pursuant to a “Qualified Securitization Financing” and there was no limitation on how it used the proceeds, so what was the problem? In addressing the trustee’s request for an injunction to stop the exchange offer, the District Court said: “The Court is skeptical of Defendant’s proposed interpretation of the term “financing” to include the very type of refinancing that is explicitly prohibited by Section 4.09(b)(5)… Put simply, the Exchange Offer does not raise new funds for Defendants, but rather allows them to delay payment on unsecured notes that would otherwise be due in 2016 and 2017 – thus increasing their short-term liquidity – in exchange for secured notes collateralized by assets of a subsidiary. This is a quintessential refinancing… In essence, Defendants’ interpretation of a QSF would permit an end-run around the Indenture’s explicit prohibition against the refinancing of the Parent Notes set forth in the definition of “permitted refinancing indebtedness.”

lenders cannot count on another court to suggest the same interpretation that the District Court took in the Norske case and need to make sure that the conditions of refinancing indebtedness apply where intended. What’s a Lender to Do? The cases noted above, and others, all lead to the question: What should lenders do? Some have suggested that when it comes time for amendments, waivers, extensions, lenders should revisit some of the covenants implicated in these cases and modify them to attempt to put the genie back in the bottle—so that the covenants will better align with the actual expectations of the lenders both as to the nature of the business, the priority of their debt and the scope of the assets available to them. Certainly going forward, limiting the assets that might be transferred through the various baskets to cash or cash equivalents, limiting the transfer of assets to unrestricted subsidiaries, or the designation of unrestricted subsidiaries, are all some of the steps for a lender to consider. 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.

Citibank N.A. v. Norske Skogindustrier ASA, No. 16-cv-850, 2016 WL 1052888 (S.D.N.Y. Mar. 8, 2016). However, the District Court did not grant the trustee’s request for an injunction since the trustee could not show irreparable harm to the secured noteholders in allowing the exchange offer to proceed, which was a requirement for the court to grant such an injunction. This is tricky case because credit agreement baskets may be interpreted to allow a transaction if it fits into any one basket, even if there is another basket designed to apply to the specific type of transaction. For this reason,

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$10,000,000 in Working Capital Financing

$5,000,000 in Workking Capiitall Financing

$13,000,000 in Workking Capiitall Financing

$5,000,000 in Workking Capiitall Financing

U.S. Multi Media Company

U.S. Based Mobile Payment Processing

Satellite Equipment Manufacturer

Entertainment Staging Company

June 2017

£6,000,000 in Purchase Order Financing Coal Mining Company January 2018

January 2018

$5,000,000 in Working Capital Financing

$6,200,000 in Working Capital Financing

U.S. “Disruptech” Company

Fabricator March 2018

January 2018 $2,000,000 in Working Capital Financing

$2,500,000 in Trade Financing

$500,000 in Trade Financing

£1,000,000 in Working Capital Financing

Finned Tube Manufacturer

Professional Services

Mining Equipment Manufacturer

Consumer Products

May 2018

March 2018

June 2018

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AGILIT Y AND FLEXIBILIT Y THE KEY LIQUIDITY ISSUES Consider this real case study from 2018: Presented with the opportunity to help another nontraditional company, ExWorks Capital’s timely funding for NOVAE – a company making extraordinary waves in what’s becoming known as “Disruptech” – was right up our street. Based in San Francisco, but with innovation hubs in Miami and London, the company leverages disruptive technology to provide superior user experiences in mobile transactions, services via an app – with white-labelling potential and with rewards programs and other incentives attached – NOVAE’s powerful model has resulted in the company expanding rapidly, particularly in Latin America and Europe. Yet such rapid expansion required major capital injections to heard about the company when approached by a boutique Our view was that the company’s owners should save their

“ExWorks Capital was able to step in and provide a time-

enough to keep pace with the company’s rapid expansion

its international contracts without having to dilute its equity,” said Matt Stanley, Managing Director of ExWorks Capital. “To accomplish this, we had to work collaboratively internally as well as with the borrower to create a unique structure. I believe NOVAE and ExWorks are pleased with the outcome.”

the traditional banking sense, ExWorks Capital structured a creative $5 million working capital facility collateralizing the company’s contracts, as well as its extraordinary IP.

www.ExWorkscapital.com info@exworkscapital.com 312.443.8500

David Grende

CFA’s New President

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How did you get into the industry and how did your career lead to starting Siena? My introduction to the industry was completely accidental. I answered a few ad placements at the college recruiting center, one of them being a placement for an assistant account executive at Trefoil Capital, a commercial finance company—whatever that was. To this day, I still remember that I was offered the job on a Friday, after two hours of interviews, and was told to start on Monday. During the interview, there was lots of screaming and yelling in the hallways and I tossed and turned all weekend trying to decide if I was going to show up at all. And if I did show up, I wondered what I was getting myself into. Well, here I am, many years later and what an incredible journey it has been. From my beginning at Trefoil Capital, I’ve been given outsized responsibilities, benefited from exposure to many industries, hundreds of different companies, good and bad management teams, financial reporting and collateral and, through it all, I ate it all up. My boss, and mentor, Gerald Blum, was a screamer from a different era, but brilliant in collateral lending. He, together with his contemporaries, Bob Miller, Bob Goldman, John Nickoll, George Baronkay, were the true founders and icons of this industry and I was lucky to have learned from each of them. Trefoil Capital became Fidelcor Business Credit, which then became CIT Group Credit Finance. I had worked my way up to running the small ABL business of the CIT Group. Most trajectories are not a straight line up with successes at each step – mine wasn’t either. The next opportunity was to start an ABL business for NationsCredit, a NationsBank company. This experience taught me a lot about startups and failures. In 2006 I was approached to start an ABL business for Burdale Capital in the U.S. as a Bank of Ireland company. I was eager to once again take on the startup challenge and prove I had learned from the past. At Burdale, I, along with many of my present colleagues, built an excel-

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lent ABL business to achieve $1.1billion in outstandings within four years. As with most things, the good times must come to an end and, in 2012, the business was sold to Wells Fargo, due to the IMF mandate for Ireland to deleverage their banks. When our U.S. business, alongside the UK business, was sold to Wells Fargo, I was told by senior Wells employees that, if the team could find equity, they would be happy to provide a leverage facility to start an independent finance company. That gave me and my colleagues (the six of us) the tailwind to go down the road and keep plugging away until we succeeded in raising equity for a relaunch, and so became Siena Lending Group. It took nine hard months, along with a lot of second guessing this path we chose, but today we are very happy we stuck with it and were able to welcome back colleagues from Burdale who were unable to be there from the start. How did you become involved in CFA and what motivated you to become a volunteer leader? Since my very first job, I was encouraged to enroll in the CFA education programs, the local chapter and then become involved at the national level. To my mentor and all his contemporaries, involvement in CFA was vital to our success and the success of the Association. This message was delivered not only to me, but to everyone at their respective organizations. My path to my involvement at this level today began about eight years ago at Burdale as a member of the CFA Finance Committee. At that juncture, the finances of the CFA were in rough shape, but I was able to see how my involvement had immediate impact and how I could contribute to the organization. Through this committee and others, I began to see an organization that was crying out for volunteers who really want to engage and help make a difference. I started to get more and more involved and here we are today. To this day, we are still an

organization that relishes volunteers who are truly engaged and for those who are, the impact is immediate and meaningful for both sides. What are your main priorities and goals as CFA President? My first goal is the same goal I have had since I started volunteering and that is to leave this place better than when I got here. In that regard I am excited to work with Rich Gumbrecht to continue to strengthen the Association. The appointment of Rich as CEO has had an extremely positive impact and we want to continue to build on that. This year we will be effecting the name brand change as well as a major web redesign. I will continue to work on the value proposition for all constituencies in order to demonstrate that CFA involvement is vital to success now, just as it was when I was first introduced to CFA. This is critical as it is the major issue mentioned by non-renewing members-- a lack of value. Towards that end we have worked tirelessly to improve the data assembly and distribution, commissioned the first market impact and sizing study of our industry, are making strides in advocacy and have a major push on reworking our education content and delivery. We have also worked diligently to make this an all-inclusive organization and have pushed the governance down to the 16-member Executive Committee and away from the Management Committee. The standing committees are more robust than ever, and this vitality must continue to be fostered. Also, we have made great progress in strengthening the balance sheet so I will focus on making sure that continues. My final priorities are to continue the great work of Chapter inclusion that Michael Monk championed and to make this a place that Gen Xers, Millennials, and all future generations want to be part of, as they will be our leadership going forward. I guess that’s a lot to do and we

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will be busy, but we certainly won’t be bored. What are CFA’s greatest strengths? Its greatest strength lies in its ability to create a sense of common community amongst its members. You can’t overstate the importance of networking and engaging with professionals you would not have had the opportunity to meet or engage with otherwise. No matter where you do business from, geographically, or where your firm fits in the hierarchy of secured lending products, you feel a sense of commonality and inclusiveness with the fellow CFA member. What challenges and opportunities do you see for lenders in 2019? I see the middle-market lenders grabbing back some market share from the entrepreneurial lenders. Their portfolios are very clean, the credit cycle is in a good place, and regulatory pressures have eased. This comes with pressure on pricing and structures as they look to grow their books. The entrepreneurial lenders facing more competition from new players, as well as banks, will have pressures to grow their book also with pressure on pricing and structures. The challenge both face are maintaining discipline to achieve growth. Finally, I see both worlds facing unprecedented attrition numbers in their portfolios due to the state of the credit markets; but, if the economy remains strong, there will be plenty of opportunity to replace it and continue to grow and thrive. TSL Michele Ocejo is editor-in-chief, The Secured Lender and director of communications for CFA.

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BETH COMSTOCK: Navigating and Inspiring Change

BY MICHELE OCEJO Beth Comstock, former Vice Chair of GE and the first woman to ever hold that post, will be the keynote speaker at CFA’s Annual Convention on November 7. Over her career, Beth was responsible for leading innovation and change while building GE’s global brand. She operated GE Business Innovations, which developed new businesses, markets and service models; and, as chief marketing officer, created GE’s “Ecomagination” initiative and partnered to enhance GE’s inventive culture. As president of Integrated Media at NBC Universal, she led the company’s digital efforts, including the founding of Hulu. Beth was twice named by Forbes as one of “The World’s 100 Most Powerful Women”.

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Beth Comstock navigates change. She prepares for it, inspires it, and considers it an essential part of the growth of individuals, organizations and industries. For Beth, organizational change starts with the self. She has infused her life and work with the habit of discovery, of ideas, places, people even during times of discomfort. Here she discusses her first book, Imagine It Forward, offers lessons from a life of continual transformation, and discusses mistakes from which she has learned.

What inspired you to write your book, Imagine It Forward, and who is your target audience? I worked in a big company for most of my career and a lot of my job ended up being about change and navigating change and innovation. And I just wanted to chronicle the journey of how hard it is and how important it is in companies. That was the key reason.

I 50

What is one lesson or thought you’d want people to take away from the book? I titled it Imagine It Forward because we need more people in our companies fighting for the future. It can be the future of how your team works. It doesn’t have to mean take on everything for your whole company, but continuing to do things the same way doesn’t lead to us moving forward. I’m really encouraging people to just unlock their imagination, to think more

power than they think. I worked with people who would come to me and talk about concerns and things customers were asking for, change that was happening in the market. Competitors were doing different things and teams seem to see what needs to happen, but they hold back. They think, “I can’t do that, my boss will never go for that, I don’t have any budget, my boss says the board won’t let us do that.” There’s always some excuse and often the excuse is actually valid; it’s not like you have unlimited money. But often, if you really stop and think, you realize you the ability to do more than you thought without needing to ask permission. Sometimes constraints actually challenge your creativity to find a different way forward. So that’s how I think about that. You’re all about using your imagination and thinking outside the box to effect change. What is one thing our readers can do today to kick-start

titled it Imagine It Forward because we need more people in our companies fighting for the future. It can be the future of how your team works. It doesn’t have to mean take on everything for your whole company, but continuing to do things the same way doesn’t lead to us moving forward. I’m really encouraging people to just unlock their imagination, to think more about the courage it takes to make small change.

And secondly, to your other part of the question, I felt it really necessary for myself to target people mid-career, mid-level of the organization. They’re the people who I was most inspired by to write the book to hopefully connect with them because they’re the ones we need in our organizations. When change is happening, they’re often the ones that get all the pressure, all the expectation and with little coaching, few tools and not much inspiration to do so. Often in change our perception is that it was some amazing leader

responsible when it’s really the people in the middle of our companies who make change happen. That’s why it was important for me to try to take myself back to the early to mid-part of my career and kind of document the lessons I had learned, as opposed to just providing a checklist. It was about being able to share the personal story and to create some way to try to encourage people to move forward.

about the courage it takes to make small change. I’m not talking about big sweeping “bet the farm” kind of change. I have a little bit of that in there, but it’s much more about everyday change and this kind of mantra, that if you want your place to change, it starts with you making change. Simple stuff. If you make many small, simple changes, it often leads to a more drastic change, right? Yeah, well I think people have more

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their creativity? You don’t always have to pressure yourself to think outside the box. I think to what we were saying earlier, I think having good constraints helps. I like this idea of freedom within a framework. Meaning there are rigid rules and restrictions that every industry has, we’re talking about financial services and finance. And there are rules and regulations in most established industries. And those are a starting point to say: What are the boundaries and let’s figure out how

we get creative with them. So that would be the first thing I’d encourage people to do, and then start to push your elbows and your boundaries outside the box. The next step is to be sure you are clear on what problem you are trying to solve. Is this something that your company, your team, your business unit is really good at doing or are you doing it just because someone said you should or because it’s trendy? There’s a lot of work to do to determine your strengths and whether you really should be solving that problem. Give yourself time, iterate, you will get there, but at first just get started. How often do you reevaluate the little challenges you’ve given yourself as shared on social media? A lot. I always like hearing from different people and these days I’ve been thinking a lot about scenarios. To me, Imagine It Forward, is really an invitation to creative problem solving by having different scenarios. In the book, I lay out many different scenarios, but one I’ve been thinking a lot about this week is this idea of a worst-case scenario. And I put a little bit of that in the book, but I’ve heard from a lot of people in the past couple of weeks about how they think about worst-case scenarios. Another scenario that I picked up is “how could I do this if this were easy?” Meaning, we’ve made it so complicated that we’re never going to reach our goal. What if we made this really simple? This is an absurd example, but it makes the point: what if we took a competitor’s product and put it out as our own? We would never do this, but it at least is a creative exercise to say, well, we’re not going to do that but where else could we go to find a product and that may be an upstart company we could partner with and white-label the product. I think sometimes those absurd simple prompts help you and wondering what would we do if this were easy? That’s the new hack I’ve picked up recently.

We all know we should learn from our mistakes. What is one mistake you’ve made in your career that taught you a valuable lesson? One mistake I have made is a fear of speaking up, a fear of putting an idea out there, either due to being shy, but also just because I felt maybe I didn’t have confidence in it or people would think it was stupid. I’ve learned to put myself out there. I’ve also mistakes when hiring people. I’ve either not hired someone because I was afraid to take a chance on somebody who came with a different kind of background or, conversely, I underestimated the abilities of people who were already working with me and didn’t give enough time for them to find a different way to express what they’re good at so they moved on. We know you’re a proponent of pushing yourself into small acts that are at the time scary. What are some scary steps you took as you advanced your career? Scary steps for me were just going into new settings, new industries, where I didn’t have expertise. I built my career as a marketer and I had marketing expertise, but I had to go and meet with hospital administrators or heads of airlines and it could be intimidating. When I worked my last assignment at NBC, I was doing digital media and I didn’t really know about internet technology. I didn’t know how things worked. And it’s kind of intimidating in that moment because I thought, “You have to do your homework and learn about it,” but then I had to remind myself my expertise is on trends and consumer experience and what’s happening in the market. Let me bring that to the experience, not worry about the experience I lack.

dustry members need to get out there and meet younger people and let them know they are hiring. Potential employees need to see that these firms are hiring other people like them, so the organizations need to highlight some of the people that actually have joined their companies. And I’m really intrigued by the concept of putting out challenges and offering people opportunities as residents, as fellows, those kinds of things. Maybe you offer someone a year assignment with a commercial finance organization and pose a problem to be solved. Be clear that you are specifically looking for people with different experiences and backgrounds. That might be a way to think about it. Create a challenge, a limited assignment project, or some kind of residency or pass-through program, and let them create the future that you envision. TSL Michele Ocejo is editor-in-chief, The Secured Lender, and director of communications for CFA.

Can you offer any thoughts on how an industry could attract younger and a more diverse workforce? I think, one, actually making a commitment to diversity is great, and then understand it’s going to take time. In-

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Since inception, the CFA Education Foundation has achieved unprecedented success and has raised over $8.5 million. These funds have been, and continue to be, critical to CFA’s extensive education, research and development missions. CFA recognizes the tireless efforts of the Foundation’s Board of Directors, as well as its Governing Board, Advisory Board and Founders Leadership Council members. These individuals have exceeded their goals year after year through significant contribution of their time, talent, treasure and energy to the Foundation’s Fundraising Campaigns.

Particular thanks go to the following organizations which have continuously supported the Foundation during each of the past 24 years: Goldberg Kohn Hahn & Hessen LLP Otterbourg P.C. Skadden, Arps, Slate, Meagher & Flom LLP Winston & Strawn LLP

Special thanks go to the following organizations whose contributions to the Foundation have exceeded $200,000: Goldberg Kohn Greenberg Traurig LLP Otterbourg P.C. Hahn & Hessen LLP Latham & Watkins LLP Skadden, Arps, Slate, Meagher & Flom LLP Wells Fargo Capital Finance Winston & Strawn LLP

Thanks also to this year’s Fundraising Campaign Chairperson for their extraordinary efforts bringing in over $340,000 in contributions: Wade M. Kennedy, Partner McGuireWoods LLP

2018 CORPORATE CONTRIBUTORS PLATINUM MEMBERS $20,000 - $34,999 Goldberg Kohn, Richard M. Kohn, Principal Greenberg Traurig, LLP, David B. Kurzweil, Shareholder Otterbourg P.C., Jonathan N. Helfat, Partner and David W. Morse, Partner

GOLD MEMBERS $12,500 - $19,999

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 McGuireWoods LLP, Wade M. Kennedy, Partner Morgan Lewis & Bockius LLP, Marshall C. Stoddard, Jr., Partner and Practice Chair, Transactional Finance Parker, Hudson, Rainer & 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

Buchalter, Farhad Bahar, Shareholder, Anthony R. Callobre, Shareholder and William Schoenholz, Shareholder Wells Fargo Capital Finance, Stewart W. Hayes, Managing Director

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 CSC, Paul Schultz, Account Manager Duane Morris LLP, James J. Holman, Partner McMillan LLP, Jeff Rogers, Co-Chair, Syndicated Finance 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 Vedder Price P.C., Thomas E. Schnur, Shareholder

BENEFACTORS $2,500 - $4,999

AloStar Capital Finance, Andy McGhee, President Alston & Bird LLP, Michael G. Parisi, Partner AtlanticRMS LLC, 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 Chapman and Cutler LLP, Daniel W. Baker, Partner CIBC, Bruce Denby, Group Head, Asset Based Lending Cost Reduction Solutions, Denise Albanese, President Dopkins ABL Consulting Services, Joseph A. Heim, CFE, CPA, Partner Focus Management Group, J. Tim Pruban, President & CEO and Barrey Davis, Sr. Managing Director Freed Maxick ABL Services, Howard Rein, President, and Michael A. Boeheim, Director KPMG LLP, Andrea Pipitone Beirne, Director Marquette Business Credit, Ron Vanek, President MB Business Capital, William A. Stapel, SVP Director of ABL Portfolio Management North Mill Capital LLC, Jeffrey K. Goldrich. President & CEO Phoenix Management Services, Michael E. Jacoby, Senior Managing Director Riemer & Braunstein LLP, Donald E. Rothman, Senior Partner Ruskin Moscou Faltischek, P.C., Jeffrey A. Wurst, Partner Santander Bank, N.A., Brian P. Schwinn, EVP, ABL & Restructuring Finance Southeastern Commercial Finance, LLC, Patrick B. Trammell, President TBK Bank SSB, Dan Karas, EVP & Chief Lending Officer TCF Capital Funding, Joseph P. Gaffigan, President Troutman Sanders LLP, Hazen H. Dempster, Esq., Partner Webster Business Credit Corp., Warren K. Mino, President & CEO

PATRONS $1,000 - $2,499

Amerisource Business Capital, D. Michael Monk, Managing Partner Citizens Bank, Patrick Bickers, Managing Director CNH Finance, LP, Timothy Peters, Principal and Co-Founder EisnerAmper LLP, Robert D. Katz, Managing Director, Edward Phillips, Partner, Allen Wilen, Partner GlassRatner Advisory & Capital Group LLC, Ronald Glass, Senior Managing Director J D Factors, LLC, Stephen P. Johnson, President Howe, Keller & Hunter, PC, J. Craig Howe, President MidCap Business Credit, LLC, Steven Samson, Vice President Peopleâ&#x20AC;&#x2122;s United Business Capital, Michael J. Maiorino, Jr., President Virginia Commercial Finance, Inc., John McCauley, President

MEMBER up to $999

Allied Financial Corporation, Steven C. Gold, President Bluewater, Robert W. Bowles, Founder & Executive Director Downtown Capital Partners, LLC, Gary Katz, Managing Partner King & Spalding, Alan J. Prince, Attorney, Managing Partner Magnolia Financial, Inc., Marc D. Smith, President Winstead, PC, Nelson R. Block, Shareholder, and President

2018 INDIVIDUAL CONTRIBUTORS FOUNDATION BENEFACTOR: $5,000-$7,999

Andrea L. Petro, Waterfall Asset Management LLC, CFA Education Foundation Board of Directors & CFA Past President

FOUNDATION PATRON: $2,500-$4,999

Raffi Azadian, Change Capital William Brewer, Winston & Strawn, LLP, CFA Education Foundation Board of Directors John M. DePledge, Citibank, N.A., CFA Management Committee Jeffrey K. Goldrich, North Mill Capital LLC, CFA Management Committee Richard Gumbrecht, CFA Chief Executive Officer Charles & Jane Johnson, CFA Education Foundation Chairman & CFA Past Chairman Wade M. Kennedy, McGuireWoods LLP, CFA Education Foundation Development Chairman David Kurzweil, Greenberg Traurig, LLP, CFA Education Foundation Board of Directors Robert Meyers, Republic Business Credit, CFA Executive Committee D. Michael Monk, Amerisource Business Capital, CFA Past President

FRIEND OF THE FOUNDATION: $1,500-$2,499

James C. Chadwick, Holland & Knight, CFA Foundation Governing Board Anthony R. Callobre, Buchalter, CFA Education Foundation Immediate Past Co-Development Chair David Grende, Siena Lending Group, President Robert and Stacy Katz, Katz Family Scholarship Bobbi Acord Noland, Parker, Hudson, Rainer & Dobbs LLP, CFA Education Foundation Immediate Past Co-Development Chair

MEMBER OF THE FOUNDATION: UP TO $1,499 Gail K. Bernstein, PNC Business Credit, CFA Education Committee Chairperson Michael A. Boeheim, Freed Maxick ABL Services, CFA Foundation Governing Board Phil Coffin, Coffin & Associates Michael Coiley, CIT Healthcare, CFA Past Chairman Cindy J.K. Davis, Greenberg Traurig, LLP Bruce Denby, CIBC Beatriz (Betty) Hernandez, North Mill Capital, CFA Chapter Committee Vice Chair Stephen & Janelee Johnson, J D Factors, LLC David J. Kantes, CFA Past Chairman Dean Landis, Entrepreneur Growth Capital Joseph Lehrer, Citibank, N.A., CFA Convention Chair David W. Morse, Otterbourg P.C., CFA Executive Committee Howard Rein, Freed Maxick ABL Services Robert S. Sandler, CFA Past Chairman Stacy Schacter, Vion Investments William Stapel, MB Business Capital, CFA Advocacy Committee

A special thank you to the following organizations who generously contributed to the Education Foundation by sponsoring the CFA 40 Under 40 Awards: Bank of America Business Capital Bibby Financial Services Breakout Capital Finance, LLC Capital One, N.A. Carl Marks Advisors Change Capital Chapman and Cutler LLP CIT Citizens Bank Cost Reduction Solutions Dopkins ABL Consulting Services Goldberg Kohn Ltd. Gordon Brothers Greenberg Traurig, LLP Hilco Global Holland & Knight LLP Marquette Business Credit McMillan LLP

Morgan Lewis North Mill Capital LLC Norton Rose Fulbright Otterbourg P.C. Paul Hastings LLP PNC Business Credit RBC Capital Markets RedRidge Diligence Services Regions Business Capital Republic Business Credit Rosenthal & Rosenthal, Inc. Siena Lending Group Skadden, Arps, Slate, Meagher & Flom LLP SunTrust Robinson Humphrey US Bank Asset Based Finance Wells Fargo Capital Finance 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.

tsl profile

ounded in 2015, Breakout Capital Finance set out to be more than just another small business lender. The company attributes its success by staying laserfocused on its core missions: transparent lending and product innovation, as well as education and advocacy. With ten years of experience as an investment banker, Breakout Capital founder and CEO Carl Fairbank was able to recognize that, despite fantastic innovation in technology and the speed of access to funds, the small business lending market remained “broken” and product development had not kept pace. “For years, despite many products changing names, the actual product delivery, underwriting, and repayment structure remained basically the same,” explained Fairbank. Breakout Capital’s primary component is transparent lending and product innovation. The company actively promotes industry-wide adoption of cost and product transparency/disclosure and works hard to remove rapacious practices that adversely affect small businesses across the country. “We want small business owners to be educated to make fully informed financial decisions,” Fairbank added. He stressed how transparency and innovative lending are two of the biggest opportunities for lenders to make a positive impact in favor

BREAKOUT CAPITAL

of small businesses’ ability to borrow and grow. “Borrowers have access to funding through a click of a few buttons; but, if they aren’t fully aware of the terms of their financing, they could be stuck in debt traps and debt cycling for years which will significantly negatively impact their business. “We are pushing the envelope to innovate through ML/AI and blockchain to introduce revolutionary new products, with our most recent being FactorAdvantageSM. Launched earlier in 2018, FactorAdvantageSM benefits small businesses by providing them with an integrated financing solution combining Breakout Capital’s technologyenabled lending platform with their factoring solution. With all new product innovations, it’s important that pricing disclosure tools and metrics are available for borrowers to understand the full picture across different product offerings.” Breakout became the first small business lender to offer an “online” shorterterm loan product that didn’t double dip, and aggressively educate small businesses, regulators, and other industry stakeholders about this predatory practice. They were also one of the first online lenders offering a monthly payback scheduling option, helping borrowers bridge to better suited products like SBA loans. Breakout also educated small businesses on the dangers and drivers of debt traps, stacking, brokers, and many of the hidden fees and confusing marketing. Helping borrowers to grow, not just owe, education and transparent lending have gone hand-in-hand. “Empowering Small Businesses” is Breakout Capital’s tagline, and is an essential pillar in its core mission. Breakout created the first and only Double Dipping calculator along with a unique APR calculator to help small businesses understand the true cost of their financing and refinancing. A blog series covers topics that are under-discussed in the small business lending space and helps shed light on a wide range of topics solely for small businesses to learn.

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Breakout is also a Board Member of the Innovative Lending Platform Association (ILPA), a group of lenders, small business organizations, and small business advocacy groups dedicated to advancing best practices and standards that support responsible innovation and access to capital for small businesses. Through the ILPA, Breakout is a SMART BoxTM adopter – a model pricing disclosure and comparison tool that will enable small businesses to better assess and compare their finance options. “We have also recognized that there are gaps in the market which require true product innovation, beyond the traditional improvements in alternative lending (speed to approval/speed to funding),” Fairbank said. “We launched HatchB Labs, a tech accelerator within Breakout Capital, to really push forward our company’s ability to innovate in and out of the FinTech space.” Looking ahead, Fairbank says there are always new products or processes being tested or formalized within Breakout. Internally, there are numerous products being deployed from Breakout’s technology team, which will improve efficiency and accuracy in underwriting amongst other operational areas. “FactorAdvantageSM is the latest financing product that we launched, and our next one is just around the corner,” he added. “We’ve been in growth mode with our lending operations since inception, based on strong demand for our customerframed product, coupled with the operating efficiency we get from tech innovation. Breakout is going to continue to be an innovator and a leader in FinTech for many years to come.” Eileen Wubbe is senior editor of The Secured Lender.

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what

WOULD YOU DO?

n this edition of What Would You Do?, a struggling borrower of Overadvance Bank filed for Chapter 11 under the Bankruptcy Code without giving the Bank any prior warning whatsoever. Upon receiving notice of the borrower’s bankruptcy filing, the Bank scrambles to assess the situation and consider its options. Surprise! I Filed for Bankruptcy! Seat of Your Pants, LLC (“SYP”), a lowpriced denim jeans supplier, entered into a $25-million revolving credit facility with Overadvance Bank several years ago. Unlike many of its competitors, SYP has virtually no internet sales, but rather, relies exclusively on sales to regional discount store chains. Unfortunately, several of SYP’s customers have felt the sting of e-tail competition and have gone out of business over the last 18 months. SYP’s shrinking sales and other factors challenging its business have caused SYP to be in default under the Bank’s credit agreement and have insufficient availability under its line of credit to fund operating expenses. Concerned over SYP’s worsening financial condition, the Chief Credit Officer at Overadvance Bank opted to spring cash dominion over SYP’s collection accounts, and reached out to the CEO of SYP to discuss the framework of a for-

bearance agreement between the Bank and SYP, pursuant to which SYP would engage a Chief Restructuring Officer to assist SYP in preparing a 13-week cashflow forecast and supervise the sale or orderly wind down of the business. The Chief Credit Officer explained that the Bank could get comfortable making over-advances to SYP pursuant to the 13-week budget, as long as the budget made sense and the newly installed CRO of the company was guiding the process toward repaying the Bank’s loan. Of course, if in the interim SYP could find a replacement lender or other means with which to raise enough capital to repay the Bank’s loan, this approach would at least give SYP more time to find a better alternative to simply shutting its doors for good. SYP’s CEO was not thrilled with the Chief Credit Officer’s proposal. He said that the CRO would be too expensive and that the CRO would not know the business nearly as well as the CEO’s team. He also thought SYP was just in a bad business cycle, and liquidating his family business was not an option. A week of radio silence passed since their last conversation and the Chief Credit Officer was growing more concerned. Adding to his anxiety, the Bank’s counsel was advised that SYP recently changed legal counsel to a firm known for its bankruptcy practice. The next Wednesday morning, the Chief Credit Officer received a panicked call from SYP’s loan officer at the Bank. He received a Federal Express package containing SYP’s Chapter 11 bankruptcy petition and a motion requesting the use of the Bank’s cash collateral, both of which were filed last night! The Chief Credit Officer was stunned. He never expected SYP to file for bankruptcy without at least discussing things first. Now, the Chief Credit Officer is scrambling to figure out next steps. The company has payroll due on Friday, and with no cash

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in their accounts (as the Bank sprang cash dominion the week prior), the Chief Credit Officer wonders what SYP was thinking. If you were the Chief Credit Officer, what would you do? As usual, let’s start with the basics. Upon a company filing for Chapter 11 of the Bankruptcy Code, the automatic stay, or injunction, is generally imposed on all creditors of the Chapter 11 debtor. With certain specific exceptions, Section 362(a) of the Bankruptcy Code bars all creditors from, among other things, (i) commencing or continuing any action to collect or recover against the bankrupt company or its assets for a claim arising prior to the Chapter 11 case, (ii) taking any action to obtain possession of, or to exercise control over, property of the debtor, and (iii) creating, perfecting, or enforcing any lien against property of the debtor. In our case, Overadvance Bank is not permitted to apply, or even permit the automatic sweep, of cash collections to pay down the loan balance without violating the automatic stay. Aside from the automatic stay, a borrower filing for Chapter 11 has other ramifications for the Bank to consider. For example, while other non-debtor parties to contracts with the Chapter 11 debtor may be required to continue performing under those contracts under Section 365(a) of the Bankruptcy Code notwithstanding the bankruptcy and existence of pre-bankruptcy payment defaults, lenders are not required to continue lending to their borrower postbankruptcy pursuant to Section 365(c) (2). Indeed, before lending money to a Chapter 11 debtor, a lender is best advised to obtain a bankruptcy court order authorizing any loans to the Chapter 11 debtor. Additionally, floating liens that secured lenders typically have against a borrower’s “after acquired” assets are cut off upon the borrower filing for bankruptcy pursuant to Section 552(a)

“Aside from the automatic stay, a borrower filing for Chapter 11 has other ramifications for the Bank to consider. For example, while other non-debtor parties to contracts with the Chapter 11 debtor may be required to continue performing under those contracts under Section 365(a) of the Bankruptcy Code notwithstanding the bankruptcy and existence of prebankruptcy payment defaults, lenders are not required to continue lending to their borrower postbankruptcy pursuant to Section 365(c)(2).”

of the Bankruptcy Code. Accordingly, inventory and accounts receivable acquired by the Chapter 11 borrower after the bankruptcy filing will not be subject to the secured lender’s lien, absent a bankruptcy court order granting such a lien. In our case, while the Chief Credit Officer is not exactly familiar with the applicable Bankruptcy Code sections discussed above, he understands that the Bank’s rights are seriously curtailed following the unexpected SYP Chapter 11 filing. Like a surgeon conducting triage on the battlefield, the Chief Credit Officer immediately instructs his cash management team to put a freeze on all of SYP’s accounts held with the Bank. He also instructs the loan officer on the account not to honor any outstanding borrowing request, and to carefully track all collections received from SYP’s collection accounts on and after the bankruptcy filing. The Chief Credit Officer recognizes the risk associated with not immediately suspending the automatic sweep of SYP’s collection accounts to the Bank’s payment account, but he also does not want to turn away collections and payments that are hitting the collection account, for fear that the payments may be lost, so he instructs his deal team to carefully track the collections and reverse any applications to the loan balance in recognition of the automatic stay. The Chief Credit Officer also understands that SYP’s motion requesting authority to use the Bank’s cash collateral is not a continuation of the lending arrangements between the Bank and SYP, as the requested use of cash collateral is not subject to borrowing availability, covenant compliance and other conditions associated with the Bank making revolving advances. Rather, the use of the Bank’s cash collateral is predicated on SYP convincing the bankruptcy court that the Bank has adequate collateral

coverage to allow SYP to use the cash collections to fund operating expenses, rather than being applied to the Bank’s loan balance. Plus, SYP offers the Bank “replacement liens” on assets acquired or arising after the bankruptcy to cover any deterioration in the Bank’s secured position. The Chief Credit Officer knows from experience that the Bank has little chance of depriving SYP from having access to the cash collections from day one of the Chapter 11 case, no matter how strong the Bank’s legal position might be to oppose the relief. So, instead, the Chief Credit Officer, through the Bank’s counsel, attempts to negotiate a shortterm cash collateral use arrangement, which will give the Bank the opportunity to both negotiate for a better, long-term deal with SYP, and to simultaneously prepare for a full-blown evidentiary hearing to oppose SYP’s further use of the Bank’s cash collateral. We hope you enjoyed the column and, of course, are always interested in your feedback. As such, if you have any scenarios you would like to see discussed in a future column, please let us know at Dfiorillo@otterbourg.com or Jcretella@ otterbourg.com. TSL Dan Fiorillo and Jim Cretella are Members of the law firm Otterbourg P.C.

THE SECURED LENDER NOVEMBER 2018

the cfa brief AMONG CFA MEMBERS

CFA NEWS IN PRINT

AloStar Capital Finance: AloStar Capital Finance announced the addition of Jonathan Schuster to its new business origination team. Based in AloStar’s Los Angeles office, Schuster will be responsible for sourcing both asset-based and lender finance deals for the West Region of AloStar Capital Finance. Schuster brings more than 20 years of commercial finance experience, having sourced, analyzed, underwritten and managed asset-based deals in both family office and regulated environments. He began his career by launching, developing and growing his family’s startup factoring company. Schuster later became a consultant for a global consulting firm and an investment banker for a boutique firm before returning to his commercial lending roots. Most recently, Schuster spent six years at a division of one of the nation’s largest bank holding companies. In that role, he sourced, underwrote and managed asset-based deals covering California, Oregon and Washington, and built a portfolio comprised of companies in various business sectors including technology, manufacturing, distribution and service. “Jonathan is an outstanding addition to our robust team of banking professionals,” said Andy McGhee, president of AloStar Capital Finance. “With more than two decades of com-

mercial finance experience on the West Coast, Jonathan understands the financial needs of growing businesses in this region. That experience will enable him to best serve business owners, entrepreneurs and professionals in this key market, strengthening our presence and capabilities across California and beyond.” Schuster is active in several industry groups including Association for Corporate Growth, Commercial Finance Association, and Turnaround Management Association, and engages with private equity sponsors and influencers. He received his bachelor degree in business administration from the University of Denver and MBA from the University of Southern California. AloStar Capital Finance provides capital and counsel to business leaders across America who are creating their own success stories. Through its Asset-Based and Lender Finance platforms, it creates customized lending solutions for customers with capital requirements up to $60 million. To date, AloStar has closed more than 180 deals with commitments totaling more than $2.3 billion. At AloStar, they’ll have direct access to decision makers with deep capital industry experience who are responsive, flexible and eager to help them you write their success story. AloStar Capital Finance is a division of State Bank and Trust Company, Member FDIC. For more information, visit www.AloStarBank.com. Axiom Bank N.A.: Pete Longo was hired as VP, AxiomGO product manager in Orlando. In this role, Longo will oversee the technology, operations and new accounts for AxiomGO, the bank’s checkless checking account and cutting edge mobile app. Longo has more than a decade of

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experience in banking, business development and financial software vendor management. He graduated with a degree in business management and an MBA from Stetson University. “AxiomGO has resonated with our current customers and attracted new ones. We believe Pete’s experience will allow our team to refine this new product based on feedback and continue providing consumers with the features they want,” said Daniel Davis, president and CEO at Axiom Bank. Since the launch of AxiomGO in January, the app has generated 3,500 downloads. The app allows customers to conduct all their banking needs including setting their budget, savings goals and spending limits from the convenience of their smartphone. Scott Amatuccio was promoted to vice president, SBA manager. In his new role, he will oversee all Small Business Administration (SBA) loans from the initial review to underwriting an approved loan and monitoring the portfolio for its duration. “Scott has been an integral part of building our commercial lending division, and his extensive knowledge of SBA helped Axiom Bank receive our preferred lender status in July,” said Daniel Davis, president and CEO of Axiom Bank. “I’m confident Scott’s leadership will continue strengthening Axiom Bank’s commercial assets.” Prior to the promotion, Amatuccio was responsible for generating and managing the bank’s commercial relationships in the Tampa Bay area. Before joining Axiom Bank in March 2017, he provided leadership to SBA underwriters across a five-state footprint for a regional bank. Bank Leumi USA: Mario De Lecce and John Bryson were hired to join the bank’s growing technology banking team and lead its U.S.-focused tech

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business, helping to expand the client base beyond tech companies with Israeli roots. De Lecce will serve as group head, U.S. tech and joins Leumi from Wells Fargo; Bryson will be a relationship manager within the group and most recently worked at FastPay. Leumi leads the Israeli technology banking sector globally under the LeumiTech brand, with more than 60% of the market share. Bank Leumi’s tech practice in the U.S., historically focused on Israeli technology companies and venture capital firms with a U.S. presence, has been growing quickly in recent years. Given the institution’s deep sector experience and comprehensive U.S.-based tech banking capabilities, the decision to broaden its focus to include non-Israel-related companies was a logical strategic next step for the bank. This initiative is expected to open up a new and growing market for Leumi as it reaffirms its role as one of the leading financial partners to the tech ecosystem. “Our ability to attract top talent like Mario and John speaks to Leumi’s leadership in the tech space, and we’re excited to have them on board to help expand our offerings and the pool of companies we can serve,” said Shawn McGowen, head of Commercial Banking. “This strategic expansion reflects our long-term commitment to supporting the U.S. tech sector under the direction of Eitan Sapir, head of International and Technology Banking.” Mario De Lecce comes to Leumi with extensive experience building and running technology groups for corporate and commercial divisions of several large banks. Most recently, as a director and senior relationship manager at Wells Fargo, he established a Corporate Banking Technology, Media & Telecom (TMT) Group in New York, where he was instrumental in developing the bank’s brand through venture

capital/private equity partnerships. At HSBC in San Francisco, he helped to form and build the bank’s nationwide large-cap TMT segment, closing more than $400M in new commitments and onboarding 10 new clients. John Bryson joins Leumi from FastPay, a financial technology platform providing credit and payment solutions to digital industries. As director of business development there, he established the company’s financial solutions segment for the New York office and cultivated satellite channel partnerships in secondary markets. Prior to that, Bryson spent several years in senior account roles at Onswipe, MaxPoint Interactive and Interclick/Genome. Capital One: Stan Meyers has joined the company as a director in its Technology, Media, and Telecommunications (TMT), Investment Research Group. He brings over a decade of sell-side equity research experience covering the broad media sector. Capital One’s TMT business provides financing for corporate growth, mergers and acquisitions, balance sheet refinancings and recapitalizations to companies across TMT sectors including application and infrastructure software; financial technology; cable, radio and television broadcasting; business information services and data analytics; educational media and services; entertainment media; and communications infrastructure. Meyers comes to Capital One after seven years as a media analyst at Piper Jaffray. Before that, he held research analyst positions at J.P. Morgan and Macquarie. At Capital One, Meyers joins Martin Mickus, managing director in the TMT, Investment Research Group.

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CIT Group Inc. (NYSE: CIT) announced it has named Christopher M. McLaughlin as chief underwriting officer for the company’s Commercial Finance division. In his new role, McLaughlin is responsible for leading a team of underwriters and portfolio managers across a wide range of business segments, including healthcare, energy, capital markets, maritime, aerospace, entertainment and media, sponsor finance, commercial and industrial, communications and technology, asset-based lending and syndications. He will be based in Manhattan. “We are pleased to welcome Chris to CIT’s Commercial Finance team as we continue to focus on managing risk while pursuing growth opportunities,” said Jim Hudak, president, Commercial Finance. McLaughlin joins CIT from Capital One N.A., where he has worked in middle-market banking in positions of increasing management responsibility since 2009. His most recent role was as head of underwriting and portfolio management for middle-market banking. Earlier in his career, McLaughlin led underwriting teams at Merrill Lynch Commercial Finance Corp. and worked as a risk manager and underwriter at First Union National Bank. CIT’s Commercial Finance division provides lending, leasing and treasury management services to middlemarket businesses nationwide. The division’s core strength is leading complex transactions that demand deep industry knowledge and customized solutions to deliver successful results. Founded in 1908, CIT (NYSE: CIT) is a financial holding company with approximately $50 billion in assets as of June 30, 2018. Its principal bank subsidiary, CIT Bank, N.A., (Member FDIC, Equal Housing Lender) has approximately $30 billion of deposits

and more than $40 billion of assets. CIT provides financing, leasing, and advisory services principally to middlemarket 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. CIT Group Inc. (NYSE: CIT) announced that it has named Chris Ralston as a director in the Lender Finance business within CIT’s Business Capital division. In his new role, Ralston will be responsible for analyzing portfolio opportunities and engaging with independent leasing and finance companies to provide funding for lease or loan transactions. “We are pleased to add Chris, an experienced executive, to CIT as we continue to grow,” said Hal Atkinson, managing director of CIT’s Lender Finance business. “His significant industry experience and solid capital markets relationships will broaden the market coverage of our team – a key component to achieving our growth initiatives.” Ralston joins CIT from TIAA Bank Commercial Finance, where he had been vice president of capital markets. Ralston’s industry tenure exceeds 25 years with significant experience in a broad range of asset types, including healthcare, industrial and technology. CIT’s Lender Finance business is one of the nation’s leading providers of capital markets funding for leasing and finance companies that seek to monetize equipment financing transactions, providing both debt and debt/equity solutions. Founded in 1908, CIT (NYSE: CIT) is a financial holding company with approximately $50 billion in assets as of June 30, 2018. Its principal bank subsidiary, CIT Bank,

N.A., (Member FDIC, Equal Housing Lender) has approximately $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. Hitachi Capital America (HCA), a recognized leader in commercial transportation financing, recently divided their loan and lease programs into medium-duty and heavy-duty truck teams and added several experienced heavy-duty experts. Among those new to the Transportation team are Dave Herring, Jeff Mills, and Thomas Ball. Led by industry veteran Kirk Mann, the Transportation team now offers a full range of financing solutions aimed at both mediumand heavy-duty truck markets. Herring brings more than 25 years of market experience to the newly formed heavy-duty Transportation finance team. As heavy-duty national sales director, Herring is leading the team that delivers HCA’s competitive financing solutions to both dealerships and fleet operators across the country. “The team we’re assembling is unmatched in the industry,” says Herring. “No one else can offer both medium- and heavy-duty truck and trailer financing solutions like we do. The breadth of experience we offer, combined with our robust programs and deep industry relationships, allow us to offer our customers the creative financing options they’re looking for.” Mills, another industry veteran with 25 years of experience, is specializing

in financing/leasing of medium-tolarge for-hire and private fleets. His prior experience includes managing national and regional accounts for the top 500 transportation fleets in America. Ball is HCA’s vice president of Intermediary Finance and leads the company’s loan syndication and portfolio purchase initiatives. He also works with new brokers and large dealers to deliver multi-product financing solutions. Russ Yanaga is the national sales director for medium-duty trucks and continues to be a key player on the Transportation finance team. A key driver of HCA’s growth since 2007, Russ continues to work diligently with his team to support HCA’s dealer network, including a new initiative aimed to deepening HCA’s understanding of dealer needs to better align HCA’s products and services with dealers’ growth objectives. “This team and their drive makes me excited to come to work every day,” says Kirk Mann, senior vice president and GM of the Transportation Finance Division. “We have decades upon decades of experience and the skill set of this team is truly remarkable. We’re at an exciting juncture in our business and I’m confident that we’re going to achieve great things. We have a solid foundation in place and have big expectations for our future successes.” Gerber Finance: Howard Moore, Ill was appointed as vice president in the marketing division. In his new role Howard will be responsible for generating, analyzing, structuring and managing new client relationships. With his extensive experience working through new and existing transactions, Moore has a very unique and in-depth way of looking at his clients.

THE SECURED LENDER NOVEMBER 2018

the cfa brief

Prior to Gerber, Moore has worked with a wide variety of companies across many industries nationwide. Moore is a member of the New York Commercial Finance Association, New Jersey Commercial Finance Association, National Commercial Finance Association, Garden State Credit Association, New York Banking and Finance, Needlers Foundation and Big Brothers Big Sisters of New York. Moore graduated from Rider University with a B.A. in liberal arts, focused on business and a minor in communications. “We are excited to have Howard join our team at Gerber,” said Jennifer Palmer, president. “With his unique style and extensive relationships throughout the industry, we are confident that Howard will further drive Gerber’s growth. Howard brings a wealth of experience and industry knowledge, which will help better service Gerber’s existing portfolio.” Gulf Coast Business Credit (GCBC) announced major success in the first half of 2018 leading to an exciting move for GCBC business development officer, Ryan Dendinger, to the DFW Metroplex. Dendinger will join the Dallas team at the 5949 Sherry Lane, Park Cities location with approximately 25 other employees located in that regional office to date. Prior to his move, Dendinger was an underwriter for GCBC out of the Austin, TX location. Dendinger holds a BA in finance and a BS in economics from St. Edward University where he was also a NCAA Division II soccer player. Prior to GCBC, Dendinger worked for Vida Capital and Ovation Finance. Dendinger describes his tenure at GCBC by stating, “My time with GCBC so far has been fantastic. The company culture promotes growth both personally and professionally.” When asked about his transition

and what goals he hopes to accomplish, Dendinger noted, “Dallas is one of the fastest growing markets in the country that companies across a wide range of industries call home. I hope to further promote the GCBC brand in the Dallas market.” Dendinger can be contacted by phone at (972) 685-6672 or by email at ryandendinger@gulfbank.com Magnolia Financial: James McArthur has joined the senior management team while expanding its presence across the state of Florida. With over 30 years’ experience in commercial finance, McArthur will serve as executive vice president and lead Magnolia’s originations and business development efforts throughout its southeastern footprint. He will also sit on Magnolia’s Credit Committee while helping manage the company’s strategic growth initiative. Most recently, McArthur was EVP of Aegis Business Credit and was a founding partner of Southern Capital Strategies, a consulting firm focused on recapitalization, turnarounds, and strategic planning. He is an active board member of the ACG (Association for Corporate Growth) in Tampa, Florida, past president of the Florida TMA (Turnaround Management Association) Chapter, and active on a national level in the Commercial Finance Association. “I am excited about joining Magnolia and making a contribution towards growing our presence in Florida and throughout the southeastern region”, said McArthur. “We could not be more thrilled to have James join our team. His reputation and experience are second to none in the industry,” said Marc Smith, president of Magnolia Financial. “He will play an integral role as we continue to grow and offer accessible cash

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flow solutions to small and mediumsized business across the southeast”. Founded in 1999, Magnolia Financial is an asset-based lender providing accounts receivable lines of credit to companies that typically are unable to secure traditional bank financing. Magnolia provides working capital lines of credit from $20,000 to $2 million. Monroe Capital LLC: Stewart Hanlon has joined the firm’s technology team as managing director in its San Francisco office. Stewart will co-lead the firm’s technology vertical alongside Mark Solovy. “We are very excited to add Stewart to the Monroe Capital originations team,” said Tom Aronson, managing director and head of originations of Monroe Capital. “Stewart has an accomplished career of over seven years providing financing solutions to middle-market companies and brings with him many great relationships and a wide range of experience across the technology industry. He will help us continue to grow our robust direct origination platform that we have built throughout the U.S.” PNC Business Credit, a senior secured lending division of PNC Bank, N.A., announced two appointments to its senior secured financing team in the Western and Southeast regions. Alex McCombs has been appointed senior vice president and business development officer for PNC Business Credit. Based in San Francisco, he is responsible for business development and direct origination with middlemarket companies in the Greater Bay area and Central Valley markets. McCombs joins the organization from the Industrial Commercial Bank of China (ICBC), where he served as business manager for Commercial Banking. Prior to ICBC, he served as a director

for Commercial Banking with Bank of America. McCombs holds a bachelor degree from Baylor University and a master degree from the American Graduate School of International Management (Thunderbird), at Arizona State University. An 18-year PNC veteran, Todd Austhof, senior vice president, has been appointed business development officer with the senior secured financing team. Based in West Palm Beach, he is responsible for business development with private equity firms and middlemarket companies, as well as origination of asset-based and cash flow loans in the Florida market. Austhof most recently served as relationship manager with PNC Business Credit. He holds a bachelor degree in accounting and finance from Grand Valley State

University and an MBA from Western Michigan University. RedRidge Diligence Services: RedRidge Diligence Services is pleased to announce its expansion to the East Coast. With an office in Philadelphia, PA, RedRidge will be positioned to serve our clients in the region more effectively. RedRidge plans to further develop the office and expand its presence in the Northeast in the coming months. Arpit Patel, a senior member of the RedRidge Diligence Services management team, will lead the Philadelphia office. He has experience helping financial institutions’ clients with working capital solutions in numerous industries such as healthcare, energy, automotive, retail, food services, con-

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struction, technology and manufacturing. Prior to joining RedRidge, Arpit worked in the Transaction Advisory Services group at FTI Consulting. He worked on more than 100 ABL and A/R Securitization transactions ranging from $1 million to over $1.5 billion for companies located in North America, Asia, Europe and Australia. RedRidge Diligence Services performs financial due diligence for funds, banking institutions, and privately held and publically traded companies. Due diligence offerings include M&A advisory, lender services, specialty finance and business valuations. Utilizing decades of financial due diligence experience, RedRidge offers a unique and efficient approach to client services. The RedRidge advantage is driven by an issues-based focus and an exceptionally qualified team dedicated to meeting client expectations and deadlines. Regions Bank: Kate Danella was named head of Strategic Planning and Corporate Development. In this expanded role, Danella will lead a team responsible for enterprise-wide strategic planning; mergers, acquisitions and divestitures; and corporate development. Danella will report directly to president and CEO John Turner. “This is an exciting time for our company as we identify opportunities to make banking easier for our customers, operate more effectively and continue to invest in the communities we serve,” said John Turner, Regions president and CEO. “Kate brings a strong background in strategy, customer service, team building and creative thinking to this important role. Under her leadership, Regions will work collaboratively across the company and with external stakeholders to create shared value for our customers, associates, communities

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NOVEMBER 2018

the cfa brief

and shareholders.” Danella most recently served as head of Private Wealth Management, a division of the Regions Wealth Management Group serving high-net-worth individuals and families. Tenured wealth executive Leslie Carter-Prall will succeed Danella as head of Private Wealth Management and will report to Bill Ritter, head of Regions Wealth Management. Carter-Prall was most recently Private Wealth Management Central Region Executive. “We are fortunate to have a seasoned professional like Leslie to lead the Private Wealth Management team,” said Bill Ritter, head of Wealth Management for Regions. “Leslie’s industry experience spans more than 25 years, and her background and strong leadership skills will support our efforts to meet our clients’ unique financial needs through personalized service and local expertise.” Danella is executive vice president and head of Strategic Planning and Corporate Development. Danella joined Regions in July 2015 as the Wealth Strategy and Effectiveness Executive, responsible for overseeing the development and implementation of business strategies across the Regions Wealth Management Group. She was named head of Private Wealth Management in May 2016, leading a team of Private Wealth Management professionals providing banking, trust and investment management services to affluent and high-net-worth individuals and families. Prior to joining Regions, Danella served for 13 years as vice president for Capital Group Companies, a global wealth management organization managing more than $1.4 trillion in assets. During her career at Capital Group, she was a senior sales and service leader for Capital’s institutional business, senior marketing leader for the global mar-

keting organization, and strategy and business manager for the American Funds mutual fund business. A native of Tuscaloosa, AL, Danella earned a Master of Business Administration from Harvard Business School. She also holds degrees from the University of Cambridge as well as Vanderbilt University. Leslie Carter-Prall is executive vice president and head of Regions Private Wealth Management, responsible for leading a team of Private Wealth Management professionals providing banking, trust and investment management services to affluent and highnet-worth individuals and families across Regions’ 15-state footprint. She previously served as Private Wealth Management Central Region Executive. Carter-Prall’s industry experience spans more than 25 years and includes branch management and bank operations, sales and marketing, commercial banking and wealth management. She joined Regions in 1991 and previously served as Indiana Area president. Before that, she was area wealth executive for Private Wealth Management over Indiana and Illinois. She also served as Consumer Banking Executive, as well as director of Consumer, Mortgage, Private Banking and Treasury Management for the area. Carter-Prall is a native of Scottsburg, IN, and is a graduate of Indiana University’s Kelley School of Business in Bloomington, IN. John Stacy has joined Regions and will serve as managing director and head of Diversified Corporate Banking for Houston. In this newly-created role, Stacy will oversee additional investment in Corporate Banking for Houston and South Texas and will facilitate delivery of a comprehensive suite of products and services to Diversified Industries business clients. “John’s experience and passion for

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excellence make him a natural fit for this role,” said Bryan Ford, Mid-America and South Corporate Banking Executive for Regions Bank. “His success in leading a team of professionals and developing relationships with corporate clients go hand-in-hand with our vision for growth, and we are excited to welcome him to our Houston Corporate Banking team.” Stacy brings 30 years of banking, leadership and financial management experience and knowledge to this role. Stacy served in leadership roles for Corporate Banking client management and growth initiatives most recently at BBVA Compass and prior to that with BNP Paribas. His experience also includes serving in financial and investment services and investor relations roles where he was involved with commercial real estate development projects and raising private equity capital from university endowments, family offices, and highnet-worth individuals. “Regions has made a significant investment in its capabilities, resources and talent to best serve our clients. We will be expanding our Houston Corporate team with a goal of growing our business with existing clients as well as developing new relationships throughout the Houston and South Texas communities,” Stacy said. “The firm’s values and culture encourage our team to focus on the individual needs and goals of each client while providing superior service. Our team will coordinate the delivery of the capital markets and traditional banking capabilities offered by Regions, to include capital raising, risk management, and strategic advice tailored to meet individual client needs.” Santander Bank: Brian Schwinn has been appointed to head the bank’s asset-based lending (ABL) and restruc-

turing finance business in its Commercial Banking division. Schwinn is responsible for growing Santander’s ABL business, a full-service provider with a highly diversified portfolio and particular expertise in equipment financing, wholesale trade and financial services. He is based in Boston and New York City and reports to Robert Rubino, Santander’s co-president and head of Commercial Banking. Schwinn transitions into his new role after joining Santander as Commercial Banking’s chief credit officer in November 2016. Prior to Santander, Schwinn spent 18 years at GE Capital holding several leadership positions, including London-based chief credit officer for Europe, the Middle East and Africa. Before GE Capital, Schwinn was with UBS and JPMorgan Chase. During his career, he has advised clients and managed portfolios across a wealth of different product categories including leveraged finance, securitization, asset-based lending, debt capital markets, real estate, commercial aviation and structured products. “Our growth strategy in the U.S. is centered on being an effective life cycle financial partner to our clients and prospects,” said Rubino. “Assetbased lending, and our continued investment in growing its capabilities, is core to this strategy. Brian’s diverse experience, proven leadership and ability to collaborate effectively will serve us well as we continue to build a best-in-class asset-based lending and restructuring practice. His industry knowledge and expertise will be instrumental in serving the financial needs of our clients.” Santander Bank also announced that Robert Cerminaro has joined the Bank as the regional executive of Commercial Banking for Connecticut. In this role, Cerminaro is responsible for growing the Bank’s corporate and

commercial business and delivering Santander’s distinct value proposition and international expertise to clients and prospects throughout the state of Connecticut. With more than 25 years of commercial, corporate and investment banking experience, Cerminaro comes to Santander Bank after serving as senior vice president and Tri-State market executive at KeyBank, where he led the overall corporate and commercial banking business effort for Connecticut, New Jersey, New York City and Westchester County, New York. He began his career with Bank of America Merrill Lynch where he held several positions of increasing responsibilities, delivering capital market advisory and global banking services to large and mid-size companies. Cerminaro brings extensive global banking experience and coverage expertise to include assignments at the regional, national and international levels. Robert Rubino, Santander Bank’s co-president and head of Commercial Banking, commented, “Robert’s extensive commercial banking experience in both the large corporate and middlemarket sectors will help leverage our success and enhance our position in the marketplace as we continue to make significant investments to build our Commercial Banking division across the U.S. His appointment complements our growth strategy where we earn our clients’ business by taking them valuable ideas based on our institutional, industry, and corporate finance knowledge and deliver it as a life-cycle financial partner.” Cerminaro reports to David L’Heureux, Santander’s Commercial Banking New England market manager. “Robert is a known leader in Connecticut who will serve our customers well and generate new opportunities with companies seeking a financial

partner and trusted advisor committed to providing valuable ideas and solutions to help grow their businesses.” Cerminaro holds a B.A. in economics from the University of Pittsburgh, a certificate in finance from the London School of Economics and an MBA from St. John’s University Tobin School of Business. He resides in Darien, CT. TCF Middle Market, a division of TCF National Bank, which is a subsidiary of TCF Financial Corporation (TCF) (NYSE: TCF), announced that it hired Jeff Morsman as senior portfolio manager. Morsman brings deep banking experience to TCF with over 22 years at Wells Fargo, including time as a relationship manager in Wells Fargo’s Leveraged Finance Group and as Team Lead – Commercial Credit Services, where he was the portfolio manager responsible for leading a team to complete annual reviews and renewals for a commercial credit portfolio. “Jeff will be able to put his deep client, credit and portfolio management skills to work at TCF and is looking forward to returning to active client engagement and working with the team to win and underwrite new business”, said Joe Gaffigan, TCF Middle Market national director. TCF Middle Market is part of the commercial division of TCF Bank. With offices in Minneapolis, Denver, Milwaukee, Detroit, Chicago and Madison, they provide a full array of banking services to privately held middlemarket companies and non-profits. Webster Bank is pleased to announce that Philip Falivene has joined the company as senior vice president, senior relationship manager. Falivene is based in the company’s metro New York City commercial lending division, where he assumes responsibility for developing and managing middle-mar-

THE SECURED LENDER NOVEMBER 2018

the cfa brief

ket corporate banking relationships. Falivene joins Webster from The Bank of New York Mellon, where he spent more than two decades developing a broad background in originating and executing leveraged and non-leveraged commercial loans for a diverse group of corporations, governments, and non-profits. He has held key roles in syndications, capital markets, relationship management, and risk management, and formerly led the bank’s Public and Not-for-Profit Global Client Management Division and the Sponsor Prior to joining The Bank of New York, Falivene began his career at The Chase Manhattan Bank and received his credit training at Chemical Bank, where he worked in middle-market banking. He has also served as a Managing Director in Sponsor Finance for Orix USA. A resident of Far Hills, NJ, he received his Bachelor of Arts degree from Colgate University and his MBA from New York University’s Leonard N. Stern School of Business. Active in his community, Falivene is a trustee at the New York Blood Center. He has also served as a corporate affiliate board member of the National Association of State Treasurers. Webster Financial Corporation is the holding company for Webster Bank, National Association and its HSA Bank division. With $27 billion in assets, Webster provides business and consumer banking, mortgage, financial planning, trust, and investment services through 163 banking centers and 326 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, which provides health savings

account trustee and administrative services. Webster Bank is a member of the FDIC and an equal housing lender. For more information about Webster, including past press releases and the latest annual report, visit the Webster website at www.websterbank.com. Wells Fargo & Company (NYSE: WFC), the No. 1 lender to middle-market companies nationwide, announced that 33-year banking veteran Alfred (Al) Kenrick will lead Middle Market Banking (MMB) in Silicon Valley, including three offices in Palo Alto, San Jose and Monterey. Based in Palo Alto, Kenrick now leads a local team of 30 commercial banking experts in Silicon Valley who provide credit, treasury management and deposit products to middle-market companies outside the technology sector with annual revenues of $20 million and higher. Tech companies in Silicon Valley are served separately by the bank’s Technology, Media and Telecom group. Reporting to Kenrick are Marci Davis, head of the Monterey team, and Troy French, head of the San Josebased Santa Clara Valley team. Kenrick will manage the Palo Alto regional office formerly led by Sunil Pandya, who joined the bank’s commercial loan supervisory group. “Al has a long history of building trust and helping Silicon Valley middle-market companies succeed,” said Steven Sloan, Northern California Division manager for Wells Fargo Middle Market Banking. “He has demonstrated leadership qualities and commitments to this market and team. Al will lead with integrity, diligence and continued commitment to serving our clients and this community.” Kenrick most recently led the Silicon Valley region for Wells Fargo Global Banking. He began his career in

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1984 as a commercial banking officer for First Interstate Bank of California, progressing through commercial and corporate banking roles in San Francisco and Silicon Valley. In 2000, Kenrick joined Silicon Valley Bank, responsible for providing private equity placement and sell-side advisory services to early-stage tech companies, eventually managing a commercial banking team for the semiconductor and communications equipment industries. He returned to Wells Fargo in 2004 to develop relationships with venture capital-backed technology and life sciences companies. Kenrick earned a bachelor degree from the University of California, Santa Barbara, and an MBA from San Francisco State University. He is past board chair of Lytton Gardens Senior Communities, Palo Alto, and has been active with the Silicon Valley Association for Corporate Growth; the University of California Santa Barbara Alumni Association; and Covia Affordable Communities. A Palo Alto resident, Kenrick is among more than 43,000 Wells Fargo employees who live, work, and support customers and communities in California. More than 1,600 Wells Fargo team members live and work in Silicon Valley communities. In 2017, Wells Fargo served Silicon Valley customers and communities through philanthropic investing of more than $22.7 million to 97 local nonprofits and schools, including $1.15 million for community development projects. Wells Fargo offers financial services — including banking, investments, mortgage, and consumer and commercial finance — to customers in Santa Clara County.

CHAPTER NEWS Atlanta The Chapter will hold a CFA/TMA Joint Holiday Party at the College Football Hall of Fame in Atlanta on December 11. For more information visit community.cfa.com/atlantachapter California The Chapter held its Annual Fall Golf Classic at Coyote Hills Golf Course on October 23. Upcoming events include: a sponsor panel or networking event (TBD) at Center Club – Orange County on November 15; a Women of CFCC event on November 28 (location TBD); and the Holiday Party at the Sheraton Universal on December 12. For more information visit community.cfa.com/californiachapter Florida The Chapter held two roundtables on October 18. The first was a C-Suite Roundtable Luncheon at Akerman LLP in Orlando. Attendees listened to local senior executives discuss topics that impact business, its people, and the community. The discussion’s goal was to share learning through a roundtable conversation that shares best practices to drive business, develop talent and increase growth. The second was Physician Practice Management: Where Do We Go from Here? at the Lauderdale Yacht Club in Ft. Lauderdale, FL. The Chapter’s Annual CFA- TMA Fall Networking Reception was held on Octo-

ber 25 at Louie Bossi’s in Boca Raton, FL. For more information visit community.cfa.com/floridachapter Houston The Chapter held a CFA/TMA Networking Social on October 25 at The Grotto Downtown in Houston, TX. On November 14, the Chapter will hold a members-only Lunch and Learn at Weinstein Spira at Three Greenway Plaza in Houston, TX. For more information visit community.cfa.com/houstonchapter MidWest The Chapter hosted a CFA Women in Commercial Finance/TMA NOW Lunch & Panel Discussion at Petterino’s Restaurant in Chicago on October 24. For more information, visit community.cfa.com/midwestchapter Minnesota The Chapter will host a Lunch and Learn Series, titled “LIBOR in Loan Transaction,” and sponsored by Hellmuth & Johnson, PLLC, on November 14. The panel will discuss the future of LIBOR. More than one hundred trillion dollars of financial products use LIBOR as a reference rate. But after 2021 the UK will no longer require banks to submit LIBOR quotes. Avoid disputes/litigation by transitioning from reliance on LIBOR now. Presenters include Karl Johnson and Michael Howard of Hellmuth & Johnson, PLLC. Save the date for February 6 for the Chapter’s Top Golf Social at Top Golf Minneapolis in Brooklyn Center, MN. Attendees will get to enjoy an evening of golf in this brand new, state-of-the art-facility. Space is limited so be sure to register early for this fun evening. For more information, visit community.cfa.com/minnesotachapter

New Jersey The Chapter will hold a Panel Event Joint with the NJTMA on November 15 at the Tournament Players Club at Jasna Polana in Princeton, NJ. The Chapter’s holiday party is scheduled for December 13 at Stone House at Stirling Ridge in Warren, NJ. For more information, visit community.cfa.com/newjerseychapter New York The Chapter’s holiday party will be held November 28 at The Yale Club of New York City. For more information, visit community.cfa.com/newyorkchapter Philadelphia The Chapter’s Annual Joint Holiday Networking party will be held December 5 at The Racquet Club of Philadelphia in Philadelphia. Save the dates for the Chapter’s Day One at the Masters Networking Event on April 11 at Tavern On Broad in Philadelphia and the 24th Annual Golf Outing on May 13. For more information, visit community.cfa.com/philadelphiachapter Southwest On November 7, the Chapter will hold its fourth PEGapalooza private equity event. More than 300 deal professionals from across the nation are expected to gather for an evening of power networking, wine, whiskey and heavy apps. For more information, visit www.cfasw.org. For more information on CFA Chapters, please visit community.cfa.com/ ch/chaptersmain

THE SECURED LENDER NOVEMBER 2018

the cfa brief

The liquidity you need. Assistance you appreciate. You have big goals for your business. At Webster, you also have your own go-to team of asset-based lending specialists and direct access to senior decision-makers who can help you move forward faster. It’s this higher level of assistance that’s made us one of the largest banking organizations in the Northeast*… one relationship at a time. locations: Atlanta, Baltimore, Boston, Charlotte, Chicago, New Milford, 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. Equal Housing Lender is a registered trademark in the U.S. ©2018 Webster Financial Corporation. All rights reserved.

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STATEMENT OF OWNERSHIP, MANAGEMENT AND CIRCULATION 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: 8. 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, 2018. 15. Extent and nature of circulation: a. Total number of copies (net press run): Average no. copies of each issue during preceding 12 months: 5056; No. copies of single issue published nearest to filing date: 5000. 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: 4564; No. copies of single issue published nearest to filing date: 4231; (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.

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copies each 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: 95. c. Total paid distribution (Sum of 15b(1), (2), (3) and (4)): Average no. copies of each issue during preceding 12 months: 4664; No. copies of single issue published nearest to filing date: 4326. 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: 0; 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: 200; No. copies of single issue published nearest to filing date: 600. 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: 200; No. copies of single issue published nearest to filing date: 600. f. Total distribution (Sum of 15c and 15e): Average no. copies of each issue during preceding 12 months: 4884; No. copies of single issue published nearest to filing date: 4926. g. Copies not distributed: Average no. copies of each issue during preceding 12 months: 172; No. copies of single issue published nearest to filing date: 74. h. Total (Sum of 15f, 15g): Average no. copies of each issue during preceding 12 months: 5056; No. copies of single issue published nearest to filing date: 5000. i. Percent paid (15c/f x 100): Average no. copies of each issue during preceding 12 months: 95.49%; No. copies of single issue published nearest to filing date: 87.81%. I certify that all information furnished on this form is true and complete.

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AD INDEX ABL Soft . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . www.ablsoft.com. . . . . . . . . . . . . . . . . . . . . . . . . Page 57 Breakout Capital Finance. . . . . . . . . . . . . . . . . . . . www.breakoutfinance.com. . . . . . . . . . . . . . Page 47 ExWorks Capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . www.exworkscapital.com . . . . . . . . . . . . . . . Pages 42-43 Freed Maxick ABL Services. . . . . . . . . . . . . . . . . . . www.freedmaxick.com. . . . . . . . . . . . . . . . . . . Page 65 Hilco Global. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . www.hilcoglobal.com. . . . . . . . . . . . . . . . . . . . BC HPD Software, LLC. . . . . . . . . . . . . . . . . . . . . . . . . . . . www.hpdsoftware.com. . . . . . . . . . . . . . . . . . IBC

November 6, 2018 CFA’s Idea Exchange - Five Distinct Tracks, Two Top Economist Keynote Speakers and A Memorable Luxury Cruise Marriott Marquis San Diego Marina San Diego, CA November 7, 2018 CFA’s Southwest Chapter – PEGapolooza 3015 at Trinity Groves Dallas, TX November 7 - 9, 2018 CFA’s 74th Annual Convention Marriott Marquis San Diego Marina San Diego, CA November 14, 2018 CFA’s Minnesota Chapter – Lunch and Learn Hellmuth & Johnson, PLLC Edina, MN November 14, 2018 CFA’s Houston Chapter – Lunch and Learn (members-only event) Weinstein Spira Houston TX November 15, 2018 CFA’s California - Orange County Event Sponsor Panel or Networking Event (TBD) Center Club - Orange County Costa Mesa, CA November 15, 2018 CFA’s New Jersey Chapter - Panel Event Joint with the NJTMA Tournament Players Club at Jasna Polana Princeton, NJ

MB Financial Bank. . . . . . . . . . . . . . . . . . . . . . . . . . . . www.mbfinancial.com/healthcare. . . . . . Page 61 Phoenix Management Services. . . . . . . . . . . . . . www.phoenixmanagement.com. . . . . . . . Page 3 Red Ridge FinanceGroup. . . . . . . . . . . . . . . . . . . . . www.redridgefg.com. . . . . . . . . . . . . . . . . . . . . IFC Rush Street Capital. . . . . . . . . . . . . . . . . . . . . . . . . . . www.rushstreetcapital.com. . . . . . . . . . . . . Page 21 TD Bank. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . www.tdbank.com. . . . . . . . . . . . . . . . . . . . . . . . . Page 57 Thomson Reuters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . www.thomsonreuters.com. . . . . . . . . . . . . . Pages 12-13 Utica Leaseco, LLC. . . . . . . . . . . . . . . . . . . . . . . . . . . . www.uticaleaseco.com . . . . . . . . . . . . . . . . . . Page 72 Webster Business Credit. . . . . . . . . . . . . . . . . . . . . www.websterbank.com. . . . . . . . . . . . . . . . . . Page 70 Wells Fargo Capital Finance. . . . . . . . . . . . . . . . . www.wellsfargocapitalfinance.com . . . . Page 2 White Oak Commercial Finance. . . . . . . . . . . . . www.whiteoakcf.com. . . . . . . . . . . . . . . . . . . . Pages 32-33 William Stucky & Associates, Inc.. . . . . . . . . . . . www.stuckynet.com . . . . . . . . . . . . . . . . . . . . . Page 1

Experience a whole new

on life for your clients. It’s difficult for financially challenged companies to preserve capital and manage cash flow to move ahead. 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! 248-710-2134 | info@uticaleaseco.com | www.uticaleaseco.com

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Finance with collateral, not credit.

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Europe, Middle East and Africa: +44 (0)20 8780 68 00

www.hpdlendscape.com

Asia and Pacific: +61 2 8823 3490

North and South America: +1 805 544 5821

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Hilco Merchant Resources offers consulting, management, and disposition services to retailers around the world. Hilco provides healthy or distressed retailers with critical solutions to maximize retail inventory value. • Analyze and accurately determine the retail asset value.

• Equity or fee arrangements to buy and sell retail inventory.

• Design, organize and implement store-closing events, including on-site supervision.

• Facilitate M&A through inventory due diligence and availability of capital for unwanted assets.

Comprehensive solutions for today’s complex retail challenges.

Gary Epstein at 847.418.2712 or gepstein@hilcoglobal.com

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