THE 75TH ANNUAL CONVENTION ISSUE
THE SECURED
NOVEMBER 2019 WWW.SFNET.COM
Putting Capital To Work
Interview With SFNet Incoming President
John DePledge DEPLEDGE OUTLINES SFNET’S 2020 GOALS AFTER ITS RECENT TRANSFORMATION
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*Source: National Information Center. All credit facilities are subject to the normal credit approval process. **Source: Commercial Finance Association. Webster Business Credit Corporation is a wholly owned subsidiary of Webster Bank, N.A. The Webster symbol is a registered trademark in the U.S. ©2019 All Rights Reserved, Webster Financial Corporation Member FDIC.Equal Housing Lender
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TOUCHING BASE TSL’S NEW LOOK
Rebranded and Reimagined Communication Tools
One of my heroes, Mahatma Gandhi famously said, “Be the change that you wish to see in the world.” While that maxim certainly has more global implications, it applies to our corner of the marketplace as well and the good work our members, association and Foundation continue to do to positively impact our clients, our community and our economy. In recent years we have been driving the evolution of the Secured Finance Network toward a more inclusive, forwardlooking and value-providing community that helps you successfully put capital to work. The redesign of The Secured Lender is yet another important part of our transformation. Through our rebranding and reimagined communication tools, we will be helping you and your business navigate and lead change, by enabling you to see around corners through data-rich curated content, informative conference panels and enlightening education. Inclusiveness was a significant driver in the rebrand and it has flowed into the The Secured Lender redesign. On the following pages you will find content relevant to communities of interest across our network, from ABL, purchase order and other supply chain financiers to intermediaries, attorneys and appraisers.
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THE SECURED LENDER NOV. 2019
The elements of this redesign are the results of many interviews the editorial staff conducted last spring. You’ll notice a renewed emphasis on people (you may see some familiar faces in the photos) and their contributions to the industry, the economy and the association. New columns include Putting Capital to Work, in which we highlight borrowers of SFNet members and how the capital they received has helped them to achieve their goals. We’ll also be focusing on our volunteer leaders. One of them landed on the cover: John DePledge, our 2020 president. The timing was perfect as John works in New York City, the location of SFNet’s 75th Annual Convention. Don’t miss the iconic New York photos on page 28. We’ll also be shedding light on our dedicated volunteers in a new column called Committee Spotlight. This issue features David Morse, SFNet Annual Convention Committee Chair. Immediately following this page, you will find “Network Notes” which serves as your own personal LinkedIn. See who
has been hired, promoted, honored, etc. To help you on those days when your schedule doesn’t allow you to dive into a long article, we’ve included key takeaways for our features. The content in this issue is as diverse as our community. On page 34, in The Digital Transformation is Severely Disrupting Retail: The Time for Action is Now, Antony Karabus, of HRC Advisory, explores the obstacles facing retailers in these tumultuous times.
RICHARD D. GUMBRECHT SFNet Chief Executive Officer
On page 60, in Financing Trade Receivables: Beyond ABL or Factoring, Tom Huntingford, a Demica senior director, explains how trade receivable securitization programs can be used as a valuable alternative to other funding solutions, especially in cross-border or challenging credit environments. The head of Capital One’s Financial Institutions Group reviews the trends that lenders should be watching as we shift into 2020 in Lenders Thinks about Recession Readiness on page 58. In considering the “what ifs” of life, succession planning is crucial to any organization as illustrated in The Many Facets of Succession Planning on page 44 by Terry Keating of Accord Financial. In celebration of SFNet’s 75th Anniversary, on page 38, industry executives, of multiple generations, reflect on how SFNet has affected their careers and what they envision for the future. On page 40, SFNet past chair and Hall of Fame inductee Steve Bakke gives us a history lesson in Butchers, Bakers and Candlestick Makers. Steve looks back on the early days of ABL and factoring and the industry’s pioneers, as discussed in The History of Asset-Based Lending by Sidney Rutberg. I hope to spend time with many of you in New York City at SFNet’s Annual Convention and would appreciate your feedback on The Secured Lender’s new look and feel.
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TABLE OF CONTENTS. NOV. 2019 VOL. 10
COVER STORY JOHN DEPLEDGE: INCOMING SFNET PRESIDENT DISCUSSES 2020 AND BEYOND P28
Interview with Incoming SFNet President John DePledge John DePledge currently serves as the head of Asset Based Lending of Bank Leumi USA. With over 35 years of ABL experience, John has built portfolios in numerous new markets and has held senior leadership roles in originations, portfolio management, underwriting, asset recovery and field examination. Here, he outlines SFNet’s 2020 goals after its recent transformation. 28 BY MICHELE OCEJO
The Digital Transformation is Severely Disrupting Retail: The Time for Action is Now The transformation of retail is creating new and significant challenges for traditional retailers. Antony Karabus, CEO of HRC Advisory, explores those obstacles and offers solutions to help retailers survive – and even thrive during these tumultuous times. 34 BY ANTONY KARABUS
SFNet Members Reflect on the Past and Future In honor of SFNet’s 75th anniversary, we asked several members to talk about how SFNet has affected their careers and what they envision for the industry’s future. 38
Articles
FEATURED STORY 6
THE SECURED LENDER NOV. 2019
THE DIGITAL TRANSFORMATION IS SEVERELY DISRUPTING RETAIL P34
PURCHASE ORDER FINANCE
Purchase Order Financing Then, Now and What’s Ahead. Purchase order financing has been around nearly as long as its close relatives (factoring) and distant ones (merchant banking), but has become much more prevalent in the last decade. 42
BY PAUL D. SCHULDINER
Departments TOUCHING BASE 4 DATA & INSIGHTS Findings from Q219 SFNet’s ABL Survey
LEADERSHIP
As highlighted in the 2019 Secured Finance Market Sizing and Impact Study, the ABL market has in recent times benefited from a strong economy, low default rates, an abundance of complementary capital and easing regulatory hurdles. 10
THE MANY FACETS OF SUCCESSION PLANNING P44
LEADERSHIP
LEGAL VIEWS
The Many Facets of Succession Planning
Looking For A Better Mouse Trap?
Succession planning is not a contingency plan. It is a core human-resources function that builds and sustains shareholder value. 44
Article 9 Sales Spring To Action. 54
BY TERRY KEATING
Lenders Think About Recession Readiness
HEALTHCARE
Nursing Facility Medicaid UPL Payment Programs and A/R Financing Jumping through the legal and operational hoops for lenders. 48
BY JEFFREY A. WURST, ESQ. TRENDS & OUTLOOK
As the pace of technological change continues to increase, fierce competition is driving looser lending standards and decreasing margins. How are clients preparing for the next economic cycle? 58
BY DAVE KUCERA
BY KRISTEN GENTRY KLOS AND JENNIFER SHEASGREEN
ON THE HORIZON Unveiling the SFNet Market Pulse SFNet’s new economic forecast report will help you gauge where the economy is headed. 12
INDUSTRY DEALS 14 NETWORK NOTES 20 SFNET 75TH ANNIVERSARY Butchers, Bakers, and Candlestick Makers An SFNet former chairman looks back on the early days of ABL and factoring, as discussed in The History of Asset-Based Lending by Sidney Rutberg. 40
PUTTING CAPITAL TO WORK Far West Capital Customer Drink Daily Greens Meet an entrepreneur trying to make the world a “greener” place. 64
TRENDS & OUTLOOK LENDERS THINK ABOUT RECESSION READINESS P58
WHAT WOULD YOU DO? Sell My Assets, Please! In this edition of What Would You Do?, the Chief Credit Officer of Overadvance Bank considers the unique request from one of its borrowers to conduct an Article 9 secured party private auction sale of the borrower’s assets to maximize the recoveries to the borrower’s creditors. 66
7
THE SECURED LENDER NOV. 2019
SUPPLY CHAIN FINANCE
The Secured Finance Network is the trade group for the asset-based lending arms of domestic and foreign commercial banks, small and large independent finance companies, floor plan financing organizations, factoring organizations and financing subsidiaries of major industrial corporations.
FINANCING TRADE RECEIVABLES P60
SUPPLY CHAIN FINANCE
Financing Trade Receivables
Trade receivables securitization can deliver a unique funding solution. 60
Departments
COMMITTEE SPOTLIGHT Convention Programming Committee 2019 This column highlights the hard work and dedication of SFNet committee volunteers. Here we speak with David Morse, chair of the Convention Programming Committee 2019. 70
SFNET CHAPTER CONNECTIONS Southwest Chapter, Eighth Annual Energy Summit SFNet’s Southwest Chapter, Association of Insolvency and Restructuring Advisors, and Turnaround Management Association co-hosted the Eighth Annual Energy Summit in Dallas, Texas. 72
SFNET MEMBER PROFILE Founded For Entrepreneurs, by an Entrepreneur FTC Commercial Corporation was launched in 2002 with a strong focus on small and medium-size enterprise. 74
ONLINE SUBSCRIBER CONTENT
The objectives of the Association are to provide, through discussion and publication, a forum for the consideration of inter- and intra-industry ideas and opportunities; to make available current information on legislation and court decisions relating to asset-based financial services; to improve legal and operational procedures employed by the industry; to furnish to the general public information on the function and significance of the industry in the credit structure of the country; to encourage the Association’s members, and their personnel, in the performance of their social and community responsibilities; and to promote, through education, the sound development of asset-based financial services. The opinions and views expressed by The Secured Lender’s contributing editors and authors are their own and do not necessarily express the magazine’s viewpoint or position. Reprinting of any material is prohibited without the express written permission of The Secured Lender. The Secured Lender, magazine of the asset-based financial services industry (ISSN 0888-255X), is published 8 times per year (Jan/Feb, March, April, May, June, September, October and November) $65 per year non-member rate, and $105 for two years non-member rate, SFNet members are complimentary. Secured Finance Network 370 Seventh Avenue, New York, NY 10001. (212) 792 -9390 Email: tsl@sfnet.com
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THE SECURED LENDER NOV. 2019
Online Exclusives and News
www.SFNet.com
Visit sfnet.com to read the latest issue and webexclusive subscriber only content. Also sign up for our daily enews blast highlighting industry deals, moves and more — signup at sfnet.com/tslexpress
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Join us @
Editorial Staff Michele Ocejo Editor-in-Chief and SFNet Communications Director Eileen Wubbe Senior Editor
@SFNet_National
Aydan Savaser Art Director
@SFNet_National
Advertising Contact: James Kravitz Business Development Director T: 646-839-6080 jkravitz@sfnet.com
Secured Finance Network | National
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DATA & INSIGHTS
Findings from Q2 ’19 SFNet’s ABL Survey As highlighted in the 2019 Secured Finance Market Sizing and Impact Study, the ABL market has in recent times benefited from a strong economy, low default rates, an abundance of complementary capital and easing regulatory hurdles.
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THE SECURED LENDER NOV. 2019
BY THE SFNET DATA COMMITTEE
For the first half of 2019 these tailwinds continued except for a brief disruption in the leveraged loan markets at the beginning of the calendar year.
Correlation (or lack thereof?) We acknowledge there is less than perfect correlation between the ABL market and certain economic / market indicators. However, we consider the following data as we evaluate the Q2 ABL market as there is some degree of inter-connectivity: Economic/ Capital Markets Indicators
Q1 ‘19
Q2 ‘19
US GDP growth
3.1%
2.0%
10 year Treasury yield
2.40%
2.00%
90 Day Libor
2.60%
2.33%
ISM Purchasing Managers Index1
55.3
51.7
Consumer Confidence Index2
124.1
121.5
Commodity Price Index3
120
116
WTI $/bbl
$60
$58
Hot Rolled Coil Steel/ton
$697
$536
USA M&A Volume4
$478B
$631B
Leveraged Loan and High Yield Volume
$193B
$189B
C&I Loan Growth
9.3%
2.5%
Institute for Supply Management Purchasing Managers Index 2 Conference Board Consumer Confidence 3 IMF World Commodity Price Index 4 Source: FactSet 1
In Q2 there were several forces that seemed to contribute to a vibrant ABL market including: n Robust M&A volume n GDP growth n Resurgence in the High Yield bond market n Lower interest rates. Notwithstanding the advantageous factors noted above, there were some darker clouds forming (escalating global trade tensions) on the economic horizon as we wrapped up Q2
including declines in: n Consumer Confidence index n Purchasing Managers Index n Commodity prices Over the years we’ve witnessed ABL market resilience during times of economic uncertainty. When other markets have soured and economic conditions softened, the ABL market often rides out the storm. The data from 2012 and 2016 supports this claim. With an uncertain outlook, it will be interesting to see how the ABL market performs in the back half of 2019 and into 2020.
Q2 Data Highlights Now to the hard data. For Q2 we analyze both the Bank and Non-Bank ABL data. As a reminder, we recently made a change to the reporting methodology. In lieu of dissecting the market by size only (large lenders versus small lenders) we now review the data by type of lender.
Commitments and Outstandings In Q2 the ABL Bank Market realized the largest net increase in both commitments ($3.6B) and outstandings ($2.5B) since the data has been collected. The $3.6B net increase was significantly higher than the $0.7B experienced in Q1 ’19. Similarly, the $2.5B net increase in outstandings is the highest recorded and compared favorably to the $1.6B registered in Q1 ’19. The Q2 ’19 net increase in outstandings continues the growth trend witnessed since Q2 2018 and likely reflects a greater willingness of corporate and sponsor clients to utilize the ABL product to finance their current business activities or prepare for uncertain economic times ahead. Also noteworthy is 62.5% of lenders enjoyed an increase in new credit commitments in Q2 versus 30.4% in Q1, which suggests a ‘spreading of wealth’ around the industry for Q2 loan activity. Given the strong Q2 growth in net loan commitments and net loan outstandings, it is not surprising that Bank responses to the SFNet Confidence Index Survey were favorable related to future: 1) utilization; and 2) hiring expectations. For the Non-Bank market similar themes were found in the survey data, most notably: n Dollar commitments rose 4.4% in Q2 compared to Q1. Loan outstandings increased approximately 5% in Q2 versus both Q1 ’19 and Q2 ’18.
the highest percentage on record and 45% in Q2 stacks well against most of the quarterly measurements from 2016-2018. The Q1 ABL utilization was positively impacted by the dislocated leveraged lending market for Term Loan B, and High Yield Bonds coming into January 2018. The subsequent thaw within those markets has likely led to ABL pay-downs via new Term Loan B and HY bond issuance. As we write this report, we continue to watch the HY bond market conditions which are currently quite favorable for higher quality and seasoned issuers. For the Non-Bank market, the strong net loan growth in Q2 had a favorable impact on utilization which increased to 59.5% in Q2 ’19 from 57.2% in Q1.
Credit Quality Compared to most historical measures, the quality of Bank loan portfolios remained very high during Q2 ’19. However, we bring to your attention two data points from the survey (see pages 15&19). A larger percentage of lenders experienced higher levels of both non-accruals and gross write-offs in Q2 versus Q1. Specifically, 35.3% of lenders surveyed in Q2 witnessed higher levels of non-accruals versus 17.6% in Q1. Further, 23.5% of lenders incurred higher gross write-offs in Q2 versus 17.6% in Q1. The Q2 data related to non-accruals and write-offs may have influenced how the Bank market participants responded to our survey. The SFNet Confidence Index registered declining sentiment in Q2 for the areas of portfolio performance and the business conditions outlook. The Non-Bank portfolio quality remains high in Q2 with lower levels of non-accruals (both $ and %) as compared to Q1. Additionally, NonBank survey respondents were more optimistic about future portfolio performance in Q2 as compared to the Q1 survey results.
Conclusion Q2 2019 was a favorable quarter for both segments (Bank and Nonbank) in terms of new loan activity and continued the positive trend witnessed over the last few quarters. Loan quality for both segments also remains sturdy. There is, however, some divergence in the business outlook between Bank and Non-Bank lenders with respect to economic conditions and portfolio quality. We will continue to monitor future responses for clues to lender’s optimism and outlook. It is interesting to note that for Q2, the Non-Bank lenders scored a higher response than Bank lenders for all five (5) categories within the SFNet Confidence Index survey:
n The $210.6 M increase in net commitments is only the third quarter on record with net commitment growth above $200M. Furthermore, the net growth in loan outstandings of $129.8MM is the largest recorded and the third consecutive quarter of net loan outstanding growth. This dynamic had a favorable impact on line utilization in the Non-Bank segment.
Line Utilization In the Bank market, utilization declined in Q2 ’19 by 70 basis points to 45.0% from 45.7% in Q1. It’s important to note that Q1 utilization was
Survey Category
Bank Score
Non-Bank Score
Economy/Business Conditions
1.84
2.08
Portfolio Performance
1.79
2.25
Demand for New Business
2.16
2.33
Utilization
2.11
2.17
Hiring Expectations
2.26
2.27
Note: The responses are on a 3-point scale where a response of “1” indicates a decrease/decline, a response of “2” indicates that things are expected to stay the same and a response of “3” indicates that the expectation is an improvement/increase.
*
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THE SECURED LENDER NOV. 2019
ON THE HORIZON
Unveiling the SFNet Market Pulse Most secured finance professionals understand their business, their portfolio, and their borrowers. But are they confident in knowing where the economy is headed and how their area of the market will be affected? BY ELIZABETH RUST
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THE SECURED LENDER NOV. 2019
ELIZABETH RUST Senior Economist, Keybridge Beginning in November 2019, SFNet is pleased to present the SFNet Market Pulse, a periodic report that will inform lenders about emerging economic trends likely to affect secured lending and their borrowers’ industries over the next one to two quarters. Through the curation and display of proprietary data from SFNet and other leading indicators of market behavior, together with a clear narrative highlighting areas of risk and opportunity, the SFNet Market Pulse promises to bridge the gap between the secured finance market and the broader economic landscape. The SFNet Market Pulse will be produced in collaboration with Keybridge, a research consultancy comprised of economists and policy experts. In researching for the first edition of Market Pulse, Keybridge economists conducted a set of interviews with secured finance leaders. They sought ways to tailor their expertise in economics and financial markets to the secured lending market, by discovering what secured finance professionals really want to know about the market outlook. Barry Bobrow, chair of SFNet’s Advocacy Committee and managing director Wells Fargo Securities, LLC, said: “One of the most important economic factors affecting secured lending is the business cycle. Will the U.S. economy see a recession soon and, if so, how bad will it be? A mild recession is normally good for
secured lending, but today’s tight spreads could make it difficult for some lenders to hang on through a market downturn.” Lenders interviewed by Keybridge share an interest in receiving regular updates on the outlook for the U.S. and global economies, the economic trends driving credit markets, and the implications for their segment of the market. They hope to see SFNet’s proprietary data – the quarterly asset-based lending survey and confidence index – displayed in context with broader market trends. They want to know when a recession might occur, and how severe it might be. They’re also curious about economic trends affecting their borrowers’ industries, primarily the core sectors of retail trade, wholesale trade and general manufacturing. Overall, they hope to learn about key areas of market risk and opportunity. Putting those needs together, SFNet and Keybridge have crafted a report that explores the near-term economic outlook and implications for credit markets, including ABL and other areas of secured finance. The upcoming November edition of the SFNet Market Pulse will feature:
Global Economic Outlook: A broad slowdown in the global economy – particularly in export-driven markets – shows no sign of abating. China’s slowdown remains the key factor weighing on the global economy.
Credit Markets Credit Demand & Growth: Large business demand for credit is likely to wane over the next two quarters, but an uncertain outlook could prompt a shift toward secured lending. Credit Supply: Sinking global interest rates will put pressure on lenders to ease collateralization requirements. Lender Profitability & Portfolio Performance: Despite a murky outlook for portfolio performance, financial stress remains low.
SFNet Market Pulse Portfolio Performance: Featured Chart
SFNET MARKET PULSE: NOVEMBER REPORT PREVIEW
Economic Outlook U.S. Economic Outlook: Although economic activity continues to hum along – with U.S. consumers leading the way – an ongoing manufacturing contraction threatens to take down the rest of the economy and reduce overall business demand for credit. Recession Monitor: Despite recent jitters in the markets, the probability that a recession will hit the U.S. economy in the next several months remains relatively low. Risks are rising, but most signs point to recession onset in 1-2 years.
SFNet Market Pulse Recession Monitor: Featured Diagram Overall, the November report and all future editions of the SFNet Market Pulse will highlight the trends that secured lenders need to know about in order to make business plans, anticipate market shifts and adjust their portfolios accordingly.
Sector Activity: While the U.S. industrial and wholesale trade sectors are buckling under tariffs and flagging global economic activity, the retail and oil & gas sectors face cross currents with potential upsides for secured lenders.
Elizabeth Rust is a senior economist with Keybridge, where she focuses on macroeconomic analysis and forecasting, international political economy, and economic policy analysis. She authors economic analyses and outlooks for private sector clients and industry associations in the financial, oil & gas, industrial, and telecommunications sectors. She led the development of Keybridge’s Recession Monitor designed to assess the timing and severity of the next U.S. recession, has developed country political risk monitors for key emerging markets, and manages Keybridge’s suite of proprietary leading indicators of US economic activity. Rust speaks regularly to business and professional audiences about global economic trends and political risk.
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THE SECURED LENDER NOV. 2019
DEPARTMENT INDUSTRY DEALS
Lender/Participant (Role)
Lender Type
Amount
Industry
Borrower
Structure
AloStar Capital Finance (Lender)
Bank
$30 Million
Lender Finance
BlackRiver Business Capital (doing business as ACG Equipment Finance)
Credit facility
Bank of America Merrill Lynch, CitiBank, affiliates of Credit Suisse, KeyBank and Silicon Valley Bank (Lenders)
Bank
$325 Million
Energy
Vivint Solar, Inc., Lehi, Utah
Revolving warehouse facility
Bank of Montreal (BMO) (Lead Underwriter)
Bank
$84 Million
Cannabis
Auxly Cannabis Group Inc.’s joint venture partner, Sunens Farms Inc.
Syndicated senior debt facilities
BOFA Securities, Inc. JPMorgan Chase Bank, N.A., and Wells Fargo Bank, National Association (Co-syndication Agents); Mercedes-Benz Financial Services USA LLC and Toyota Motor Credit Corporation (Co-documentation Agents); Bank of America, N.A. (Administrative Agent). Lenders in the new syndicated credit facilities include five manufacturer-affiliated finance companies consisting of American Honda Finance Corporation, BMW Group Financial Services NA, LLC, Mercedes-Benz Financial Services USA LLC, Nissan Motor Acceptance Corporation, and Toyota Motor Credit Corporation, and it includes eight commercial banks and other lending institutions consisting of Bank of America, N.A., Branch Banking & Trust Company, JPMorgan Chase Bank, N.A., Mass Mutual Asset Finance LLC, Santander Bank, N.A., SunTrust Bank, U.S. Bank National Association, and Wells Fargo Bank, National Association.
Bank
$1.45 Billion
Retail: Automotive
Asbury Automotive Group, Inc., Duluth, GA
Five-year syndicated senior credit facility
Capital One (Joint Lead Arranger)
Bank
N/A
Tech
STEMCELL Technologies, a Canada-based biotechnology and life science company
Senior secured credit facility, consisting of a revolving line of credit and a senior term loan
Celtic Capital Corporation (Lender)
Bank
$3 Million
Manufacturing: Pet Products
Manufacturer of treats for dogs including dog biscuits, meat treats, and soft and chewy treats, Washington
Accounts receivable line of credit
CIT - Healthcare (Sole Lead Arranger)
Bank
$27.2 Million
Healthcare
Two assisted living facilities, Texas
Loan proceeds to refinance existing debt and cover closing costs on the assisted living facilities
14
THE SECURED LENDER NOV. 2019
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THE SECURED LENDER NOV. 2019
Lender/Participant (Role)
Lender Type
Amount
Industry
Borrower
Structure
CIT Group Inc. (Lender)
Bank
$140 Million
Energy
To support construction of the Lotus Solar Farm, a 67-megawatt solar project in Madera, CA
Debt financing
CIT Group Inc. (Sole lead arranger)
Bank
$60 Million
Food services, restaurant
Carolina Restaurant Group (CRG)
Financing
Crestmark - Asset-Based Lending Division (Lender)
Bank
$5 Million
Manufacturing
Manufacturer of packaging materials, Ohio
Asset-based line of credit facility
Crestmark - Asset-Based Lending Division (Lender)
Bank
$750,000
Energy
Oil and gas services provider, Texas
Accounts receivable purchase facility
Crestmark (Lender)
Bank
$500,000
Transportation
Trucking company, Texas
Accounts receivable purchase facility
Fifth Third Business Capital (Sole Lender and Administrative Agent)
Bank
$9.5 Million
Transportation
Ross Technology, Leola, PA
Senior credit facility
Goldman Sachs Specialty Lending Group, L.P. (Lender)
Bank
$45 Million
Healthcare
Catasys, Inc., a leading AI and technology-enabled healthcare company
Financing agreement involving the placement of Senior Secured Notes due 2024 pursuant to a committed purchase of up to $45 million, comprised of a $35 million initial purchase and up to $10 million in additional issuances
Huntington Business Credit (Lender)
Bank
N/A
Energy
First SOURCE Electrical, LLC, Houston, TX
Credit facility
JPMorgan Chase Bank, N.A. (Administrative Agent) Bank of America, N.A., Bank of Montreal and Wells Fargo Bank, National Association (Joint Lead Arrangers)
Bank
$625,000
Manufacturing
Briggs & Stratton Corporation
Revolving credit facility
People’s United Bank (Lender)
Bank
$92 Million
Lender Finance
MidCap Financial
Credit facility
PNC Bank, National Association (Lender)
Bank
$235 Million
Manufacturing
To support New Yorkbased KPS Capital Partners’ acquisition of Life Fitness
Senior secured credit facility
Sterling National Bank (Lender)
Bank
$15.5 Million
Manufacturing
Wing Inflatables, Inc., California
Senior secured credit facilities
Wells Fargo, N.A. (Lender)
Bank
$125 Million
Lender Finance
Gibraltar Business Capital
Credit line increase from $100 million to $125 million
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DEPARTMENT INDUSTRY DEALS
Lender/Participant (Role)
Lender Type
Amount
Industry
Borrower
Structure
Amerisource Business Capital (Lender)
Non-bank
$3 Million
Transportation
Long haul trucking company, Ohio
Credit facility
Austin Financial Services (Lender)
Non-bank
$4 Million
Food & Beverage
Custom poultry processor Senior secured credit and distributor, facility comprised of Southeast US an AR and inventory revolver
Austin Financial Services, Inc. (AFS) (Lender)
Non-bank
$3 Million
Manufacturing: Chemicals
Developer & manufacturer of specialty chemical compounds, Southwest
Senior secured credit facility comprised of an AR and Inventory revolver
Bibby Financial Services (Lender)
Non-bank
$750,000
Staffing
Staffing company, Indiana
Factoring facility
Celtic Capital Corporation (Lender)
Non-bank
$1.15 Million
Food & Beverage
Company that distributes dry and frozen vegetarian food products, California
Accounts receivable and inventory lines of credit
Crossroads Financial (Lender)
Non-bank
$1.8 Million
Retail: Shoes
Shoe retailer
Inventory revolver
Crystal Financial LLC (Agent)
Non-bank
N/A
Tech
Computer Data Source (“CDS�
Senior credit facility
Gibraltar (Lender)
Non-bank
$13 Million
Furniture/Retail
Designer, marketer and distributor of home fashions, New York, NY
Asset-based line of credit
Great Rock Capital (Lender)
Non-bank
$50 Million
Construction
Environmental restoration, land reclamation, and construction business
Senior secured credit facility
InterNex Capital (Lender)
Non-bank
$500,000
Transportation
Vessel maintenance company, Louisiana
Revolving line of credit
Iron Horse Credit (Lender)
Non-bank
$5 Million
Tech: Electronics
Electronic goods wholesaler
Stand-alone inventory facility
J D Factors (Lender)
Non-bank
$2 Million
Telecommunications
Telecommunications company, Missouri
Factoring facility
King Trade Capital (Lender)
Non-bank
$2 Million
Health & Beauty
Fragrance company, New York
Purchase order facility
Magnolia Financial (Lender)
Non-bank
$1.5 Million
Manufacturing: Medical Device
Emerging manufacturer of medical devices
Line of credit
Monroe Capital (Sole Lender and Administrative Agent)
Non-bank
$50 Million
Cannabis
KushCo Holdings, Inc., Garden Grove, CA
Senior secured revolving credit facility
North Mill Capital (Lender)
Non-bank
$750,000
Media
Metromedia Technologies, Inc. in New York, NY
Accounts receivable facility
Oxford Finance LLC (Lender)
Non-bank
$25.5 Million
Healthcare
PhysicianOne Urgent Care, an operator of 18 urgent care centers in Connecticut, Massachusetts, and New York
Term loan and revolving line of credit
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THE SECURED LENDER NOV. 2019
Lender/Participant (Role)
Lender Type
Amount
Industry
Borrower
Structure
Rosenthal & Rosenthal, Inc. (Lender)
Non-bank
$2 Million
Health & Beauty
Cosmetic and beauty products company, California
Purchase order finance facility
Sallyport Commercial Finance (Lender)
Non-bank
$250,000
Food & Beverage
Producer of Mexican food favorites
Accounts receivable facility
Sallyport Commercial Finance (Lender)
Non-bank
$500,000
Construction
Demolition and excavation company
Accounts receivable facility
Second Avenue Capital Partners, LLC (Lender)
Non-bank
$12.5 Million
Retail
Carlisle Etcetera, LLC, a direct-to-consumer women’s luxury apparel brand
Senior secured credit facility
Second Avenue Capital Partners, LLC (“SACP”), and White Oak Commercial Finance, LLC (Lenders)
Non-bank
$16 Million
Manufacturing
Marolina Outdoor, Inc., Charleston, SC
Asset-backed revolving credit facility
Siena Lending Group LLC (Lender)
Non-bank
$14.6 Million
Manufacturing
Innovative Hearth Products (IHP), Russellville, AL
Asset-based revolving line of credit and term loan
Siena Lending Group LLC (Lender)
Non-bank
$17.7 Million
Manufacturing
Greenfiber LLC, Charlotte, NC
Credit facility
Thermo Credit, LLC (Lender)
Non-bank
$1.5 Million
Tech: Telecommunications
Process Cellular, LLC, Southern California
Factoring Facility
Tradewind (Lender)
Non-bank
$800,000
Cross-border
Tire company, China
Financing solution that expedited cash flow to the client
US Capital Global (Lender)
Non-bank
$8 Million
Healthcare
Medical disease-testing kit company based in the Southeastern United States
Debt financing
Utica Leaseco (Lender)
Non-bank
$350,000
Agriculture
Current Utica customer operating within the agricultural sector
Capital lease
Utica Leaseco (Lender)
Non-bank
$450,000
Construction
Current Utica customer in the construction industry
Capital lease
White Oak Healthcare Finance, LLC (Administrative Agent and Lead Lender)
Non-bank
$241 Million
Healthcare
19 skilled nursing facilities diversified across six states.
Administrative agent and lead lender
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THE SECURED LENDER NOV. 2019
Want to submit a news item or deal for TSL Express? Please e-mail tslexpress@sfnet.com.
DEPARTMENT DEPARTMENT NETWORK INDUSTRY NOTES MOVES Matthew Ozanich Joins 36th Street Capital as VP of Risk Management 36th Street Capital Partners LLC announced the appointment of Matthew Ozanich as Vice President of Risk Management.
Axiom Bank, N.A. Promotes Joshua Ocampo As Digital Banking Relationship Manager
Jeremy Harrison will lead an origination team with a focus on providing flexible funding solutions to mid-market, corporate and international businesses with financing needs across the UK and Europe.
Joshua Ocampo was promoted to Digital Banking Relationship Manager. In this role, Ocampo will oversee the continued growth of Axiom Bank’s digital services and products.
Accord Financial Hires Irene Eddy as Senior Vice President, Capital Markets
BBVA USA Hires Luisa Gavino Martinez as Commercial Relationship Manager in Austin Market
Ares Commercial Finance Adds West Coast Managing Director Ares Commercial Finance (ACF) announced that James Paterson has joined as Managing Director, Business Development Officer in Los Angeles, where he will focus on originating asset-based lending opportunities on the West Coast. Atlantic Risk Strengthens its European Footprint and Lands in Germany
THE SECURED LENDER NOV. 2019
Axiom Bank N.A. welcomed Lisa Johanning as VP, Consumer Loan Program Manager. In this role, Johanning will oversee the development and introduction of new credit lines for retail customers.
Jeremy Harrison Appointed new Head of Sales for ABN AMRO Commercial Finance (‘ACF’) UKB
Accord Financial Corp. hired Irene Eddy as Senior Vice President, Capital Markets. Eddy will be a member of the executive leadership team at Accord, focusing on all aspects of capital markets, including sourcing, closing and managing financing relationships. She will be located in the firm’s New York office.
20
Axiom Bank, N.A. Hires Lisa Johanning As VP, Consumer Loan Program Manager
BBVA USA has named Luisa Gavino Martinez as its new Commercial Relationship Manager, where she will be tasked with managing and developing a robust portfolio of commercial and Global Wealth clients in the Austin market. Blank Rome Welcomes Seasoned Consumer Financial Services Partner in New York Blank Rome LLP is pleased to announce that Scott D. Samlin has joined the firm as a Partner in the Consumer Financial Services group in the New York office. Capital One Adds Larry Schmill to Government Contracting Banking Team, Boosting West Coast Presence
David Bosselait. Citizens Further Expands Corporate Banking Capabilities by Adding New West Region, Leadership David Musicant joined Citizens as the leader of its newly established West Region. Musicant, based in Los Angeles, has more than 30 years of banking experience and most recently served as a managing director at Fifth Third Bank where he led their geographic expansion on the West Coast. CIT to Acquire Mutual of Omaha Bank CIT Group Inc. (NYSE: CIT) and Mutual of Omaha (Mutual) announced a definitive agreement for CIT’s banking subsidiary, CIT Bank, N.A., to acquire Mutual’s savings bank subsidiary, Mutual of Omaha Bank, for a purchase price of $1 billion. The purchase price will be comprised primarily of cash and up to $150 million of CIT common stock, the amount of which will be determined by CIT. CIT Names Ken Martin as Managing Director of Small Business Solutions Unit” CIT Group Inc. (NYSE: CIT) announced that Ken Martin has joined the company as managing director of the Small Business Solutions unit, which is part of its Business Capital division. Martin will lead the strategy and operation of the digital small business financing area of CIT. CIT Names Philip Robbins as President of Asset Management and Capital Markets
Atlantic RMS has extended its reach and presence in Germany. Atlantic Risk Sela GmbH, a JV together with Sela group, is based in Munich and led by Peter Klaus.
Larry Schmill has joined Capital One’s Government Contracting Banking Group as a Managing Director, Aerospace, Defense and Government Services, and will be based in Los Angeles.
Philip Robbins has joined as the president of Asset Management and Capital Markets. In this role, he will manage the capital markets portfolio of products, the syndicated loan group and CIT’s asset management activities.
Axiom Bank, N.A. Hires Joe Dear as SVP, Commercial Team Lead
Citizens Expands Capabilities by Adding Insurance Industry Banking Expertise
CIT Names David Harnisch President of Commercial Finance as Jim Hudak Retires
Axiom Bank N.A. hired Joe Dear as SVP Commercial Team Lead. In this role, Dear is responsible for helping the bank’s commercial clients in Central Florida grow their businesses.
Citizens Commercial Banking has hired two senior bankers as it increases its commitment to its financial institution and insurance industry clients. Peter Wesemeier, based in Atlanta, and Ben Los, based in Chicago, have joined Citizens as managing directors and will work with Boston-based
CIT Group Inc. (NYSE: CIT) announced that David Harnisch joined the company as president of Commercial Finance. Harnisch will succeed the current president of Commercial Finance Jim Hudak who elected to retire following a 20-year career at CIT, effective Sept. 3, 2019.
DEPARTMENT NETWORK NOTES
CIT Names David S. Bagatelle Head of Relationship Commercial Banking, Eastern Region
in North Carolina, he will report to Crestmark President Mick Goik.
David S. Bagatelle has joined the company as a managing director and will lead the relationship commercial banking activity in the Eastern region.
Dan Roderigues Joins Diamond Business Credit
Commercial Finance Partners Announces Kevin Soles has Joined to Manage Business Development Efforts in the Northeast Commercial Finance Partners announced the recent addition of Kevin Soles to manage business development efforts in the Northeast. Conway MacKenzie Hires Steven J. Alexander as an Executive Director for its Grand Rapids Office Steven J. Alexander has joined the firm as an Executive Director and will lead the Grand Rapids, MI office. In his role Alexander will provide strategic counsel to senior leaders of middle-market companies and their constituents. Conway MacKenzie Launches Consumer Products Practice Conway MacKenzie announced the launch of its Consumer Products Practice (CPP). This team will help clients capitalize on growth opportunities and navigate challenges while facing unprecedented disruption from e-commerce, demographics trends, regulatory uncertainty, and shifts in consumer-brand relationships. Crestmark Equipment Finance Welcomes Rick Pierman as Senior Vice President, Strategic Operations
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THE SECURED LENDER NOV. 2019
Crestmark is pleased to announce the return and appointment of Rick Pierman as senior vice president, strategic operations to its equipment finance division. Based in Troy, MI, he will report to Crestmark Equipment Finance Chief Operating Officer and General Counsel Jim Recker.
pleased to announce that Travis Smith has joined as Vice President, Business Development Officer.
Dan Roderigues has joined the firm to lead the new business development effort. He has over 18 years of success building and leading teams of sales professionals and as an entrepreneur in the financial services industry. ExWorks Capital Welcomes Donald Baty to the Team After 34 years in private practice, Donald Baty joined ExWorks Capital as Chief Transaction Counsel and Managing Director in July 2019. He is responsible for managing and supervising legal matters for both domestic and international financing transactions.
FSW Funding Announces New Director of Operations FSW Funding hired Todd Weber as Director of Operations. Weber will manage the FSW factoring and asset-based lending portfolios to minimize risk and increase operational efficiency. Gibraltar Continues Business Development Expansion with New Northeast SVP, Tony Vassallo Tony Vassallo has joined as the newest veteran specialty-finance expert to join its experienced and dynamic Northeast regional business development team. Great Rock Continues Expansion, Adds Northeast Originator
Travis Smith Joins ENGS Commercial Capital ENGS Commercial Capital, a subsidiary of ENGS Commercial Finance, a Mitsubishi UFJ Lease & Finance Company, is
Great Rock Capital announced Randy Lederman has joined the firm as Managing Director of Originations. He is based in New York City.
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of your clients’ equipment. Lacking in cash flow but have equipment? Utica Leaseco can help improve your clients’ position with a creative funding approach that gets challenging deals done, fast. They’ll benefit with lease and loan solutions such as: • Capital leases and sale/leaseback transactions • Secured loans • Debtor-in-possession financing Contact us today! 248-710-2134 | info@uticaleaseco.com | www.uticaleaseco.com
Crestmark Appoints Jon Ellis Vice President, Renewable Energy Jon Ellis was appointed as vice president, renewable energy. Based
Finance with collateral, not credit.
CongratulatesÂ
DEPARTMENT DEPARTMENT INDUSTRY NETWORK NOTES MOVES Great Rock Capital Expands Origination Team, Adds Managing Director to Toronto Office Ronnie Bloom has joined as Managing Director of Originations. Bloom will be based in Toronto and will be responsible for building relationships, sourcing investment opportunities, and driving the continued expansion of the firm’s footprint in the Canadian market. Nicole Rosciano Joins Hilco Global as Vice President, Chief Human Resources Officer Nicole Rosciano has joined the holding company as Vice President, Chief Human Resources Officer. Industrial Real Estate Executive, Mark Levy, Joins Hilco Redevelopment Partners as Executive Vice President - Industrial Acquisitions Hilco Redevelopment Partners, a unit of Hilco Global, announced that Mark Levy has joined its real estate redevelopment team as Executive Vice President – Industrial Acquisitions. Hitachi Capital America Welcomes Tom Waters as Director of Clean Technology Tom Waters has joined the company as Director, Clean Technology. Waters is responsible for developing and executing HCA’s strategy and new business development activities in the clean technology sector. Hogan Lovells Adds Former Delaware Court Judge Kevin Carey as Partner
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THE SECURED LENDER NOV. 2019
Global law firm Hogan Lovells announced the Honorable Kevin J. Carey joined the firm’s Business Restructuring and Insolvency Practice as a partner effective October 1. Judge Carey joins the firm following his retirement on August 31 from the United States Bankruptcy Court, District of Delaware, where he earned a reputation for being one of the nation’s top bankruptcy judges. Moritt Hock & Hamroff Partner Leslie Berkoff Appointed by Court of Appeals for the Second Circuit to Mediator Panel Moritt Hock & Hamroff announced that
Partner Leslie Berkoff, who serves as Co-Chair of the Litigation and Bankruptcy Practice Group and Co-Chair of the firm’s Dispute Resolution Practice Group, has been appointed by the Court of Appeals for the Second Circuit to serve on its Pro Bono Appellate Mediator Panel.
of loan and lease financing options to the commercial vehicle industry.
Moritt Hock & Hamroff Welcomes New Partner Danielle J. Marlow
Wells Fargo Unveils Commercial Banking Leadership in the Northeast
Moritt Hock & Hamroff announced that Danielle J. Marlow has joined the firm as a Partner in its Ligation practice group. Marlow resides in the firm’s Garden City office.
Wells Fargo (NYSE: WFC) announced its Commercial Banking leadership team for the Northeast, which includes leaders serving businesses in New England, Western New York, and Eastern Canada.
MUFG Expands Food & Beverage Practice, Hiring Three Senior Restaurant Finance Bankers
As part of the new structure, 35-year industry veteran, Greg O’Brien, has been named division executive for Wells Fargo Commercial Banking’s Northeast Division and is based in Boston.
Mitsubishi UFJ Financial Group (MUFG), Inc. announced it is expanding its Food & Beverage practice by hiring three corporate bankers with extensive experience in the restaurant finance sector. Christopher Addison, Shawn Janko and Jake Nash have joined as Managing Directors. North Mill Capital is Proud to Announce the Acquisition of Summit Financial Resources North Mill Capital, a wholly–owned subsidiary of Solar Senior Capital, has acquired Summit Financial Resources. People’s United Bank Establishes New Lender Finance Team as it Expands ABL Specialty Business People’s United Bank, N.A. has expanded its Commercial Specialty Business with the formation of a dedicated Lender Finance team. The team will be led by Patrick Lee, Managing Director, Head of Lender Finance, Asset-Based Lending. Wells Fargo Equipment Finance Appoints Specialty Industries Leaders Wells Fargo Equipment Finance (WFEF) announced the appointment of three key leaders in its Specialty Industries business unit, led by Executive Vice President Byron Payne. National Sales Executive John Crum leads the Commercial Vehicle group, a top provider
National Sales Executive Jim Heron heads the Construction Industry group. Newly promoted National Sales Manager Scott Dienes leads the Specialty Industries Verticals.
In addition to O’Brien, the following leaders have also been named to Wells Fargo’s Northeast Commercial Banking team. Gary Pirri has been named as market executive for New England Commercial Banking, reporting to O’Brien. Boston-based Bob Beveridge has been named as commercial banking leader for Massachusetts. Michael DiSandro continues to lead teams in Southeastern and Eastern Massachusetts as well as the Providencebased Rhode Island team. Based in Boston, Paul Forester will oversee Wells Fargo’s Commercial Banking teams covering Northern New England. As part of O’Brien’s expanded regional territory, he has also named longtime Wells Fargo bankers as market executives in the key markets of Buffalo, New York and Shelton, Connecticut. Tara Handforth will continue to lead commercial banking operations in Central and Western New York, as well as Eastern Canada. Based in Shelton, CT, Kevin Burke will continue to lead commercial banking operations throughout Connecticut and New York’s Capital Region.
Synovus Launches New Specialty Finance Division and Structured Finance Team Synovus Bank announced the launch of a new Specialty Finance Division, focused on providing debt capital financing and commercial banking solutions to fund companies operating in niche asset classes. The division includes the addition of a structured finance team and builds on the expertise of Global One Financial, the insurance premium finance lender acquired by Synovus in October of 2016. The division will be led by Jonathan Rosen, who founded Global One in 2003 and continues to manage it as chief executive officer of the Specialty Finance Division at Synovus. A group of industry veterans have joined the firm to spearhead this new effort: Sal Carvo, managing director; Jayan Krishnan, managing director; Roman Mazo, managing director and Mehul Patel, director. Santander Bank Adds Industry Veteran to its Asset Based Lending Business Paul Cronin has been selected to lead the Bank’s asset-based lending (“ABL”) business in its Commercial Banking division. Cronin will be responsible for growing Santander’s ABL business. SG Credit Receives $113 Million Investment; Andrew Hettinger, Lon Brown and Christopher Koenig Join MidMark Financial Group, along with The Cynosure Group and The 4612 Group, announced a significant closing of $113 million in growth capital to acquire majority control of SG Credit Partners, Inc., in partnership with management. As part of the investment, industry veterans Andrew Hettinger, Lon Brown and Christopher Koenig will join the firm as Chief Investment Officer, Senior Credit Advisor and Managing Director, East Coast, respectively. Siena Lending Group Launches Siena Healthcare Finance Siena Lending Group, (“Siena”), announced the expansion of its national commercial lending capabilities with the launch of Siena Healthcare Finance. Siena has hired Jennifer Sheasgreen to be President of
Siena Healthcare Finance. Edward Kauffman will join the division as Managing Director in charge of new business originations. Also joining Siena Healthcare Finance will be Stephen Gaut, as Vice President of Underwriting, and Dan Carroll, as Vice President of Portfolio Management. Tradewind Appoints Jose E. Roca as Senior Vice President Jose Roca has joined the team as Senior Vice President in the firm’s New York office. Roca will be responsible for expanding the company’s sales base and program offerings. Rhett Bentley Joins UMB Capital Finance UMB Capital Finance is pleased to announce that Rhett Bentley has joined its business development team as a Senior Vice President - Asset Based Lending and is based in Atlanta. Utica Equipment Finance Announces New Hire Byron Howell has joined as Managing
Director-Sales. He will be responsible for sourcing and developing client and referral source relationships throughout the United States. Vcheck Global Announces the Opening of D.C. Office and New Senior Level Hire Vcheck Global announced the hiring of senior level management as part of the launch of its new office in Washington D.C. Rahul Ravi joins Vcheck as the Director of Client Management. White Oak Commercial Finance Responds to Increasing ABL Demand with New Key Hires White Oak Commercial Finance announced the addition of two new professional underwriters. Sudhir Chaudhry joins White Oak’s Los Angeles office bringing nearly 25 years of structured finance and underwriting experience. Kevin Maitland joins White Oak in Boca Raton with over 14 years of asset-based lending and commercial banking experience.
TRANSACTION CONFIRMED. CONFIDENCE SECURED. Michael A. Boeheim, CIA, CFE Director, Practice Leader ABL Services
David L. Mancuso, CPA Director, Practice Leader Transaction Advisory Services
Industry experience, proactive scheduling and rapid deployment that top lenders and private equity groups demand. ASSET BASED LENDING Pre-loan surveys & rotational inspections Fraud investigations Portfolio reviews Mark Stebbins, Director Freed Maxick CPAs
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THE SECURED LENDER NOV. 2019
WHITE OAK
Where Depth White Oak provides a suite of products tailored to meet your capital needs... Asset-based Loans Discount Invoicing Equipment Loans Staffing Loans Cap Ex Facilities Acquisition Funding Factoring DIP Financing Trade Finance
White Oak Commercial Finance, LLC is a global financial products and services company providing credit facilities to middle market companies between $5- $50 million. WOCF's solutions include asset-based lending, full-service factoring, invoice discounting, supply chain financing, inventory financing, U.S. import/export financing, trade credit risk management, account receivables management and credit and collections support. WOCF is an affiliate of White Oak Global Advisors, LLC, and its institutional clients. More information can be found at www.whiteoaksf.com.
Meets Breadth …and the industry expertise to effectively serve your business
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Contact Us Today! Glenn Noble 301.961.8558 | gnoble@whiteoakbc.com
Clark Griffin 415.644.4192 | cgriffin@whiteoakabl.com
David Montiel 704.248.5748 | dmontiel@whiteoakcf.com
www.whiteoaksf.com NEW YORK | LOS ANGELES | CHARLOTTE | WASHINGTON D.C.
COVER STORY
Interview with
SFNet’s New President BY MICHELE OCEJO
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THE SECURED LENDER NOV. 2019
John DePledge: John DePledge currently serves as the Head of Asset Based Lending of Bank Leumi USA. With over 35 years of ABL experience, John has built portfolios in numerous new markets and has held senior leadership roles in originations, portfolio management, underwriting, asset recovery and 29 field examination. THE SECURED LENDER NOV. 2019
John has Series 63, 79 & 24 securities licenses and is a graduate of Sacred Heart University (MBA – Finance) and Franklin Pierce University (BS – Accounting).
COVER STORY: JOHN DEPLEDGE Tell us a bit about how you got into the industry and your career path. I completed an undergraduate degree with a B.S. in accounting. During my initial job search, I became more interested in finance than public accounting, so I joined a private factoring company, Associates Factors. I worked there as an account exec assistant and performed well so they expanded my duties to be the AR verification manager. My next stop was as a field examiner for a bank in New England (Citytrust) which had a small-ticket ABL portfolio and was growing in the CT/ NY area. I was also able to receive formal credit training during my time at this bank. From there, I became an account exec for another bank in New England (People’s Bank). During my time there, the economy experienced a recession and that’s where I started getting workout/asset recovery experience. In addition, I went to graduate school in the evenings and weekends and completed an MBAfinance.
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THE SECURED LENDER NOV. 2019
manager for its ABL practice. Next, I was recruited out of TD to restart an ABL practice for Citibank’s commercial banking business. My initial role was to become the national sales manager with the intent of becoming the business head as the portfolio grew, which it did. I recently joined Bank Leumi USA, where I’ve been tasked with leading its ABL practice and expanding the business within the principal markets it serves, in particular the U.S. middle market. I am very excited about the opportunity to build another successful ABL business. In summary, my career has ranged from small, regional and large, international firms. My responsibilities have grounded my view to be a leader who has a balanced approach to risk/reward.
SFNet has made supporting the next generation a high priority, through its YoPro Committee and conferences, as well as the 40 Under 40 Awards. As president, I plan to attend as many YoPro events nationally as possible. I will also focus on strengthening pillars of our member value proposition, including Education/Information/Advocacy/Networking. Our goal is to increase engagement across the board. Engagement is the best indicator that we are providing real value to our community.
Next stop was a relocation to Philadelphia to join a regional bank (Mellon) where I was a senior account exec. The ABL portfolio of that firm was purchased by LaSalle Business Credit. During my tenure there, I had a variety of roles including senior account exec, portfolio team leader, regional underwriting manager, and was heavily involved in geographic expansion, workout/ asset recovery as well as managing team members in multiple offices.
I was introduced to an opportunity to start a MidAtlantic office for TD Bank when it was still a New England-based bank, (pre-Commerce Bank acquisition). The appeal was the expansion plans this firm had for the Eastern seaboard. Like previous positions, my role and responsibilities changed as the business grew. My last position at TD was the national sales
How did you become involved in SFNet and what motivated you to become a volunteer leader? My early involvement was attending periodic dinner/ networking events in Connecticut and then the NYC Chapter holiday party.
When I relocated to Philadelphia, I attended events as a way to meet people in a new area and was eventually asked to become the treasurer of this chapter. I enjoyed the involvement and worked my way through the leadership ranks and, after finishing my tenure as chapter president, I was asked to join a committee on the national level. Over the past 15 years, I’ve had great opportunities to serve on many committees as a participant and/or leader, including the Executive and Management Committees. The personal and professional dividends I’ve received far outweigh the time involvement. The volunteers, as well as the employees of SFNet, are dedicated to the betterment of the practitioners in our industry community. We share the common cause of continuing to adapt and create value-added services and programs that our members desire.
What are your main priorities and goals as SFNet president?
working to establish cooperative relationships around the globe.
SFNet has made supporting the next generation a high priority, through its YoPro Committee and conferences, as well as the 40 Under 40 Awards. As president, I plan to attend as many YoPro events nationally as possible.
What challenges and opportunities do you see for the industry in 2020?
I will also focus on strengthening pillars of our member value proposition, including Education/Information/Advocacy/ Networking. Our goal is to increase engagement across the board. Engagement is the best indicator that we are providing real value to our community. I plan to continue building on the the excellent foundational work my predecessors have laid, including fiscal responsibility, inclusion of all constituents, as well as collaboratively championing new initiatives.
You’ll be taking the helm during the association’s first full year as SFNet. How do you think this will affect the Network and its members? It’s more than just a name change. With all the positive developments at the former CFA over the past few years (more inclusive membership; new, focused programming for diverse constituents; new, value-added information resources), we see this as a great opportunity to further invigorate, energize and better serve our community.
How will the Network honor its history while moving forward under the new brand? CFA will always be in our DNA. It’s where we came from and it’s a proud and rich heritage. Under the new brand we will build on that legacy. Just one example is introducing the Hall of Fame at the Annual Convention to honor and recognize those who have given so much to our industry. We have four main areas of focus in which we are making substantial investments: The first is networking, which is critical for business growth. SFNet fosters communities of shared interest that generate opportunities and deal flow. These connections often lead to meaningful, long-term relationships and collaborations.
I think a big risk is an eventual economic contraction. A downturn could easily result in lower lending volumes as some firms are consumed with addressing portfolio issues. This could easily bleed over to other professionals who focus on new business activity for their practices. A downturn can also present opportunities, if history repeats itself. Supply and demand principles will prevail and those lenders who have the ability and desire to put capital to work should be rewarded with better structures and pricing. In addition, there will be the natural progression of borrowers under cash-flow structures to refinance their loans into ABL structures. We also face risks on the legislative front, particularly relating to priority of lien rights, disputes over asset proceeds and these financial disclosure bills that keep popping up. SFNet is working hard to educate uninformed lawmakers and get the best possible outcomes for our community. A coordinated effort is underway with SFNet constituents with diverse backgrounds and perspectives to advocate and influence proposed laws to the benefit of the secured lending community.
How do you spend your time when you aren’t working? Family time is most important, but I do enjoy the ongoing challenge of chasing a better golf index. I also enjoy exercising, cooking and reading fiction. These are some of the ways I escape the rigors of work. Michele Ocejo is editor-in-chief of The Secured Lender and communications director for SFNet.
SFNet also offers industry data through its Foundation. We provide data and insights that help members see around corners and improve competitiveness. Knowledge is another key area. Whether you’re a smallto-large regulated bank, an independent entrepreneurial enterprise, a factoring firm, a private direct lender, law firm, or advisor, SFNet develops and delivers content, training, and best practices to advance your organization and your career. Advocacy is an integral offering of any trade association and we’ve sharpened our focus on legislative and regulatory matters; this includes educating regulators, filing briefs, and
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THE SECURED LENDER NOV. 2019
LONDON • CHICAGO • NEW YORK • WASHINGTON D.C. • WEST PALM BEACH • ATLANTA • LOS ANGELES
$2,500,000 in Purchase Order Financing
£1,000,000 in Working Capital Financing
£1,500,000 in Working Capital Financing
£7,500,000 in Working Capital Financing
LED Lighting Company
U.K Based Chemical Company
Electronic Video Game Company
U.K. Based Media Company
June 2019
£4,000,000 in Trade Financing U.K. Based Agriculture Company March 2019
April 2019
£1,000,000 in Purchase Order Financing
Fire Safety Equipment Manufacturer
£2,000,000 in Bridge Financing U.K. Based Scaffolding Company March 2019
January 2019 $10,000,000 in Bridge Financing
$15,000,000 in Purchase Order Financing
Chocolate Manufacturer
Commodity Trading Company
Electrical Consulting Company
Cannabinoid Oil Manufacturer
February 2019
February 2019
February 2019
February 2019
EXPORT | IMPORT | BRIDGE FINANCING
offering financing solutions to businesses utilizing its own capital as well as through its Delegated Authority granted by both the SBA and EXIM Bank
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Rapid Growth Requires
STRONG FINANCING Consider this real case study from 2019: Founded in 2012 by CEO Nick Link, FireBug manufactures innovative, environmentally-friendly firefighting equipment using its groundbreaking WaterMist technology. Originally developed for potential decontamination use, mist technology harnesses pulse-water engineering to create a super-fine, low-pressure, water mist to extinguish fires. So while a typical fire engine will use on average 1,000 litres of water to extinguish a fire, FireBug’s product can achieve the same result with just 40 litres, making it 63% more efficient. But FireBug’s innovation doesn’t stop there. One practical efficiency of Firebug’s WaterMist technology is the potential for smaller fire vehicles than the traditional large engines. So it made sense that FireBug’s next step was to develop its own range of vehicles – ranging from four-wheel drives to six-wheel sprinters – enabling the quicker deployment of fire-safety personnel and requiring fewer staff to operate. Not unexpectedly when considering constraints on public spending across much of the developed world, these vehicles are proving very popular. Yet the opportunities go beyond the developed world. Offering high-level firefighting facilities in smaller, more affordable vehicles provides a much more financially-sustainable option for countries with water shortages or where the infrastructure to support the production of large, costly fire engines is lacking.
“The financing solution not only ensured we had sufficient working capital to continue to manufacture our product – but also that we didn’t have to dilute our equity.” - Nick Link, CEO, FireBug FireBug has seen interest from Africa, Asia and the Middle East. So much interest, in fact, that alongside its British production unit, FireBug has opened an additional facility in Dubai, which serves its Middle Eastern and Asian customer base. FireBug has already supplied fire safety vehicles to the Burj Khalifa (the world’s tallest building) and Dubai Airport, and has seen increasing orders from Nigeria, Qatar and India.
Having expanded significantly since its inception in 2012, FireBug – a manufacturer of pioneering firefighting equipment – found it needed additional finance to support its growing product line. Peter Kirkham, Director at ExWorks Capital, explains how ExWorks stepped in to provide a diverse, flexible funding solution to support the financial needs of this growing business. The need for finance Such rapid growth requires strong financial support that goes beyond the capacity of existing investors. Going from manufacturing nozzles – which have a quick cash-flow cycle and are fairly cheap to produce – to building entire vehicles of which the nozzle is only a very small component, is a significant jump. Production of a vehicle can take up to nine months and – since a client only pays the full invoice upon receipt of the product (and with a growing number of orders in the pipeline) – such a gap needs financing. Additionally, considerable financial support is required for the development of a fairly niche new product without a longstanding track record. And financing destined for developing economies such as India and Nigeria increases its risk profile, thus ruling out banks and larger lenders unable to finance such projects due to regulatory constraints. So when FireBug first approached ExWorks Capital, it was after a long and arduous struggle to find a lender willing to take the time to understand the product and company and take a calculated risk based on its innovation and sales success. Our first step was to undertake a thorough due diligence investigation through our sister company, RedRidge Diligence Services. This allowed us to evaluate all aspects of the business, including looking beyond FireBug’s existing balance sheet. ExWorks ended up providing FireBug with two different products. The first: a revolving £1 million (US$1.3 million) credit facility that provides working capital to manufacture the product, and can be renewed on a yearly basis. In addition, we financed a £300,000 term loan to be paid in two parts, and which FireBug began amortising at the end of its first profitable quarter. This additional financing saved FireBug from any potential dilution of its equity – a major benefit to a company rapidly increasing its potential share value. ExWorks has developed a strong partnership with FireBug that we hope to continue into the future. Through cooperation and mutual understanding, we have established a deep appreciation of FireBug’s business model and have been able to fund a product that is both innovative and environmentally friendly.
EXWORKS WAS ABLE TO SUPPORT FIREBUG THROUGH: £1 MILLION REVOLVING CREDIT FACILITY, RENEWED YEARLY
£300,000 TERM LOAN FINANCING, PAID IN TWO PARTS
providing working capital for product manufacture
which Firebug began to amortise at the end of its first profitable quarter
www.ExWorkscapital.com | info@exworkscapital.com | 312.443.8500
FEATURE STORY
The Digital Transformation is Severely Disrupting Retail: The Time for Action is Now BY ANTONY KARABUS
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The transformation of retail is creating new and significant challenges for traditional retailers. Antony Karabus, CEO of HRC Advisory, explores those obstacles and offers solutions to help retailers survive – and even thrive — during these tumultuous times
Takeaways
T
he traditional retailer economic model has been severely disrupted and will not return to the historic model. With digital growing so rapidly these days, retailers are not just competing with other brick-and- mortar stores; ANTONY KARABUS they are competing against CEO the growing dynamic of the HRC Retail Advisory merchandise rental and resale market as well as Amazon, Wayfair and the universe of digital channels, including their own. As a result, some retailers face a real risk to their survival, while many others are experiencing significant declines in their operating earnings and working capital. And the digital phenomenon is not about to slow down anytime soon. Consider this: While Amazon grows by more than 20 percent annually, most traditional retailers celebrate flat-to-slightly positive comparable sales (with many others experiencing significant negative comparable sales and profitability trends). The digital behemoth is adding incremental $20 billion in sales each year – on top of the $20 billion each previous year. That cumulative impact is substantial. And it is coming straight out of retail market share, leaving little growth for the remaining
1
The retail landscape has been transformed from a fixed-cost store structure to a fixed-cost store one plus a variable-cost digital channel cost structure
2
Retailers are not just competing with other brick and mortar stores; they are competing against the growing rental and resale market as well as Amazon, Wayfair and the universe of digital channels, including their own.
3
Amazon grows by more than 20 percent annually while most traditional retailers experience negative comparative sales or celebrate flat to slightly positive year-over-year trends
4
More than 90% of digital sales for most retailers are shifts from store channels, thus cannibalization of existing store sales
5
Creating a compelling omni-channel program is the best weapon retailers have in combatting digital competitors and enabling them to create new opportunities for consumers to interact with their brand and to increase sales
traditional retailers in their crosshairs. Amazon is also continuously innovating and raising the bar. Determined to protect existing sales, traditional retailers are pressured to follow suit. But often they’re simply increasing their costs and complexity without bringing additional topline sales. When Amazon introduced Prime membership, for example, and its two-day free shipping guarantee (recently evolved to one-day), traditional retailers felt compelled to match that offering. Though profitability is compromised by shipping costs, Amazon can make it work thanks to their 100-million-plus Prime membership base generating more than $10 billion in fees annually and the rapidly growing profit generated by Amazon Web Services (“AWS”). Traditional retailers don’t have
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FEATURE STORY the benefit of those membership fees and AWS profits to offset costs and fund the investments needed to make e-commerce profitable. So, while Amazon continues to expand its market share (representing almost 42% of total retail industry online revenue this year and anticipated to be increasing to 50% over the next few years due to its far faster growth rate), numerous traditional retailers struggle to maintain relevance and profitability on a less-than-equal playing field.
E-Commerce is Cannibalizing Store Sales To remain competitive and play to their strengths of offering a physical experience that allows customers to “touch and feel” the merchandise, many brick-and-mortar retailers have adopted omni-channel offerings. The approach helps bridge the gap between their offline and online channels and provides both an offensive and defensive weapon against Amazon and other e-commerce-only retailers. But our survey of senior executives at more than 30 North American retail chains found that, while omni-channel is vital, if not implemented properly, the move can lead to financial and customer-service related problems, thus undermining its benefits. Additionally, for the majority of retailers, e-commerce represents a cannibalization of sales that were made previously through physical stores. The cannibalization means retailers have to add significant capital and operating expenses to achieve the same total sales level — or in many instances lower sales and profitability levels.
High Costs and Accompanying High Merchandise Returns from Digital Sales Retailers may claim they do not care whether a customer shops online or in store – so long as they shop with them — but the reality is not so simple and the impact on profitability doesn’t support that claim. Revenue from multiple channels may equal prior total store sales, but this is only made possible by the addition of massive capital and operating costs, with no overall incremental sales bump.
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The retail landscape has been transformed from a largely fixed-cost environment to an increasingly variable-cost one to serve digital and omni-channel sales. Our primary research with dozens of large retail chains found that digital sales now accounts for up to 15% — and as much as 40% or more for those with a digitally connected customer demographic — of total sales. And, for most retailers, up to 95% of those digital sales represent a channel shift from their brick-and-mortar stores, rather than incremental sales.
Inventory Investment Issues and Serial Returners Contribute to Complexities As omni-channel-focused retailers try to determine the right inventory investment while ensuring ROI on the significant accompanying expense, unproductive inventory often gets
“trapped” in the wrong store or distribution center. They are then faced with the high costs of addressing that issue — whether through transfers, deep markdowns, liquidation or write-offs. Add to those challenges the additional costs of free shopping and excessive returns. In fact, studies conducted by our firm found that e-commerce returns is a serious issue for retailers and is severely undermining their profitability. Serial returns can be offset by firmer corporate policies. But most traditional retailers are resistant to firmly addressing the problem.
A Tailored Approach is Key When seeking out advice from a consulting firm, lenders should make sure the firm understands the challenges facing retailers in the increasingly complex and competitive digital retail environment. Many firms offer cookie-cutter solutions to help retailers overcome those difficulties, whether imposing heavy store labor or marketing and headquarters cost reductions so they can announce big cuts. Without completely discounting the value of that approach,
the reality is that quick-cost reduction wins almost always cause greater problems, reversing many of those savings in the long run. Each retailer’s situation is unique, requiring a tailored approach to its turnaround and performance improvement efforts. A bespoke solution is key, starting with diagnosing the underlying performance inhibitors and obstacles to the turnaround. Consultants should develop and partner with the retailer to implement a plan that not only drives improvements, but better positions the retailer for long-term sustainability – and even to thrive. It’s an approach that could prove especially important with the anticipated consumer slowdown, as the margin of error for retailers will then tighten due to a combination of fixed cost inflation and declining sales.
Solutions to Help Brick and Mortar Retailers Survive In these circumstances, a retailer would be advised to raise the bar. By creating a compelling customer service experience and a seamless omni-channel offering, they can mitigate the loss of customers to Amazon or other competitors. Omni-channel is one of the strongest weapons retailers have in their arsenal, as it allows them to create new opportunities for customers to engage with their brand and increase sales.
In this way, they can ensure that product is available where and when it’s needed to meet customer demand locally, while minimizing markdown and inventory liability. Finally, it’s vital that brick-and-mortar retailers put in place the right tools, processes, infrastructure and organization to best and most profitably enable their success in this new digital environment.
Retailers Need to Play to their Own Strengths The financial performance of numerous traditional retailers in this evolving environment is taking a serious hit. They’re incurring high costs trying to meet and exceed customers’ needs across all channels, while meeting e-commerce demands and the invasion of Amazon. A bespoke approach with solutions tailored to each retailer can help them rise above and survive these difficult circumstances. For brick-and-mortar retail chains it’s no longer a question of whether to implement the solutions, but how soon they can get started and how they can best differentiate in this crucial journey.
Retailers may claim they do not care whether a customer shops online or in store – so long as they shop with them – but the reality is not so simple and the impact on profitability doesn’t support that claim. Revenue from multiple channels may equal prior total store sales, but this is only made possible by the addition of massive capital and operating costs, with no overall incremental sales bump.
When successful, omni-channel increases traffic and customer loyalty. But it’s not easy to get it right. Retailers must also make sure that their inventory is accurate and that it’s integrated across channels. And considering the complexity of omni-channel and the need to maintain profitability, retailers should define success before implementing or expanding their omni-channel.
Improving the Profitable Precision of Execution Retailers must optimize margins and inventory management practices over the entire product lifecycle, from concept to exit.
Top Five Questions for Retail Lenders and Investors to Consider n How differentiated is the retailer’s value proposition? n How impacted is their business by Amazon or Way-
fair? n How sharp is their execution precision? n How does their P&L benchmark to their peers? n How strong are their end-to-end merchandising and inventory management processes and tools? Antony Karabus is CEO and co-founder of HRC Retail Advisory (www.hrcadvisory.com), a leading retail consulting firm. Antony has more than 30 years’ experience in consulting to retailers on improving their financial performance and can be reached at akarabus@hrcadvisory.com.
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SFNet Members Reflect on the Past and Future
In honor of SFNet’s 75th anniversary, we asked several members to talk about how SFNet has affected their careers and what they envision for the industry’s future. As we celebrate 75 years, how has SFNet affected your career? SFNet has provided an opportunity for networking with industry peers and impactful educational events such as the YoPro Leadership Summit. The networking both locally and nationally, have proved beneficial with building business contacts. These contacts have supported current career goals of executing asset-based lending transactions and helped shape long term plans as well. What do you think will have the biggest effect on shaping the industry over the next 5-10 years? I think the changing of the guard will have the biggest effect on shaping the industry over the next 5-10 years. For both firms and the overall industry, I believe developing and mentoring young professionals will be key. Especially in a changing world where technology, economic uncertainty, baby boomers vs millennials, and etc. are consistently shaping the industry (or turning the industry upside down depending on who you ask). Hence, the importance of events such as the SFNet YoPro Leadership Summit.
WILL KEMP VP-Business Development, Republic Business Credit
EVA CHALEFF, Assistant Vice President, Underwriter, Crestmark
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As we celebrate 75 years, how has SFNet affected your career? SFNet has become an essential part of my career growth and overall experience in secured finance. Through chapter meetings, networking events, and educational opportunities, I have been able to participate in a professional community centered around meaningful connections and personal development. What do you think will have the biggest effect on shaping the industry over the next 5-10 years? We are seeing more and more technological advancements that I believe will continue to permeate the finance space. Whether that comes in the form of automation, robotics, or artificial intelligence, technology will play a large role in the way we do business and interact with customers. It’s important we stay receptive to change and keep our finger on the pulse.
How has SFNet affected your career? SFNet has helped my personal and professional development and has provided me with an array of networking opportunities. Over the years, the SFNet has afforded me the opportunity to make connections with other professionals in the industry and to give back to the industry through the participation in subcommittees, which has ultimately led to my current appointment as chairperson of the Women in Secured Finance Committee. What do you think will have the biggest effect on shaping the industry over the next 5-10 years? Continued competition from specialized FinTechs and emerging business/financial models. It will be interesting to see how these non–bank financial institutions fare during the next downturn compared to traditional ABL units.
PAULA CURRIE Senior Vice President, Internal Controls Director PNC Business Credit
STEVEN GOLD President & CEO, Allied Financial Corp.
As we celebrate 75 years, how has SFNet affected your career? This organization has been essential for us to get deals, refer deals, find participants as well as lenders. The SFNet events/conferences have provided a wide variety of topics and situations that offer an on the job training ground for all levels of employees. Last, the relationships and life-long friendships that I have been fortunate enough to make throughout my time in this industry are extraordinary. What do you think will have the biggest effect on shaping the industry over the next 5-10 years? There are many factors that can and will shape our industry over the next 10 years. The one thing that I think will shape our industry is good old-fashioned “competition”. Great new technology and advancements coupled with many new players will continue to force everyone to distinguish themselves with their own identity.
As we celebrate 75 years, how has SFNet affected your career? SFNet has played different roles for me as I’ve moved through my lending career. When I was just starting out it gave me important information on the industry and the opportunity to form a peer group across other institutions. As I’ve grown in experience and seniority, SFNet has provided me with leadership roles and the opportunity to play a role in helping steer the direction of the industry. The knowledge and relationships I’ve gained from that work have been critical. The people I’ve met across the industry are collectively some of the smartest and most supportive people I’ve ever met, and they have helped guide and sustain me throughout my business career. What do you think will have the biggest effect on shaping the industry over the next 5-10 years? Our customers are faced with enormous challenges and changes that can be helped by the credit and services we provide. The demographics of our members are changing rapidly, leading to different needs for information, mentoring and career development. The organizations we work for are also challenged and are evolving rapidly. SFNet needs to continue to evolve its organizational structure and offerings to stay relevant.
BARRY BOBROW Managing Director, Wells Fargo Securities, LLC
PAT TRAMMELL President & Founder, Southeastern Commercial Finance
As we celebrate 75 years, how has SFNet affected your career? My career has been positively impacted by SFNet since my very first job. I remember taking a class on business development sponsored by the Education Foundation the first year of my first professional job. When we founded our own firm, in 1996, relationships in SFNet developed over the years gave me friends to call for advice, business opportunities and information. Every employee ever hired has taken at least one (and most multiple) SFNet education class. We have literally built our company on the backs of SFNet education instructors. I know that a large measure of the success we have achieved, and will continue to achieve, is because of SFNet relationships and resources. Because of the work of our industry, our economy is stronger, entrepreneurs have flourished, kids have gone to college, and hard working people have built secure lives. The SFNet has been, and will continue to be, a vital part of that. What do you think will have the biggest effect on shaping the industry over the next 5-10 years? Continued technology, and the cross-border globalization of the marketplace, both of which SFnet has been on the leading edge of for many years.
MEMBERS How did SFNet affect your career? SFNet has always provided the opportunity for personal networking with peers in other organizations. Over the years I have found this to be an invaluable resource. The friendships made during trade association meetings and events have allowed me to discuss issues and share solutions with other ABL professionals facing the very same problems and successes at each stage of my career journey. What do you think will have the biggest effect on shaping the industry? The amount of information factors and ABLs need to properly monitor their transactions and serve their borrowers has always been higher than what’s required in the traditional commercial banking space. Both ABL and traditional banking have moved rapidly away from manual, paper-based processes. It’s all about meeting our information needs while providing a reasonable digital experience for the businesses we serve. Artificial Intelligence (“AI”) is gaining traction as a means of reducing needed manual / human interpretation. Machines now use data we already have at our disposal to help make better and faster decisions. I expect to see all bank members and most of the larger independents using AI extensively within five years.
CHARLIE JOHNSON Secured Finance Foundation and Past SFNet Chairperson
JORDAN KLEIN Partner, Winston & Strawn
As we celebrate 75 years, how has SFNet affected your career? SFNet has had a tremendous impact on my career - from being named one of the inaugural “40 Under 40” in 2016, to attending the Annual Convention for each of the last several years, to moderating a panel at this year’s YoPro Summit in Chicago, I’ve had the opportunity to meet, become friends with, and work with several folks in the finance community that I might not otherwise have had the good fortune to know. SFNet broadened my professional horizon by a good margin, and for that I’m forever grateful. What do you think will have the biggest effect on shaping the industry over the next 5-10 years? It may sound obvious, but I think it will be regulation. That’s pretty broad, but I think new laws governing or addressing everything from digital banking, certain asset classes (like cannabis), further accountability and transparency in the financial system, and energy resources will, much like the last five to ten years, drive a good bit of business within our industry. If I’ve learned anything in my relatively short career, it’s that change is the only constant. I’m excited to see what’s to come.
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SFNET 75TH ANNIVERSARY
Butchers, Bakers, and Candlestick Makers An SFNet former chairman looks back on the early days of ABL and factoring, as discussed in The History of Asset-Based Lending by Sidney Rutberg. 40
BY STEVE BAKKE
THE SECURED LENDER NOV. 2019
STEVE BAKKE Former Chairman Secured Finance Network The following is from Robert I. Goldman’s foreword to Sidney Rutberg’s 1994 publication, The History of Asset-Based Lending: “About ten years ago, a few of us in the Commercial Finance Association thought it important to put on paper something never before attempted: a history of the commercial finance and factoring industries. A number of the pioneers of what is now called asset-based finance were still active. We wanted to preserve their insights and record their impressions.” Anticipating the upcoming 75th Anniversary of SFNet (formerly Commercial Finance Association) as well as the inaugural SFNet Hall of Fame, I was rereading Rutberg’s book. Early on I realized something I hadn’t thought about before. The Secured Finance Network’s founders came from all corners of the economic community. The unexpected diversity of their backgrounds is what this article is about. Their motivations for getting into this business ranged from opportunism to harsh necessity. Together, these economically and vocationally diverse entrepreneurs formed the commercial finance industry in the United States. Sidney Rutberg’s book reminds us it’s
okay to “pick people’s brains” to fill in the inevitable historical “blanks.” He provides many details that would otherwise be lost in the passage of time. It’s a tremendous resource for better understanding the story our industry is celebrating. I thank Sidney for that inspiration. I’ve done very little more than to gather information located throughout his book, and then bring it together in the context of this article. I’m confident Rutberg’s interest in simplicity would allow him to accept my omission of cumbersome footnotes and references. It’s all from the book unless otherwise stated. It all started in 1904 when two encyclopedia salesmen started a commercial finance company. Arthur R. Jones and John L. Little sold their encyclopedias on the installment plan and found they needed a mechanism to extract cash from their installment accounts before maturity. With that insight, they realized others also were looking for a way to speed up cash flow, and Mercantile Credit Co. was formed. They bought receivables from other small companies and notified their clients’ customers of the transaction. While it’s impossible to provide a complete list, let’s at least look at a few other industry founders, mostly from the first half of the 20th century: n Walter E. Heller started his iconic finance company as a young man in his 20s. He was previously in the sausage-casing business and the retail jewelry business. It was 1919, automobiles were becoming popular, and he wanted to loan money so people could buy them. He borrowed the required funds from his father, and the rest is history. n Heller’s very short-term partner, Seymour Marks, was a mortgage banker. n Alexander E. Duncan, founder of Commercial Credit Co., was a Kentucky native with a background in small-town merchandising, and was also an insurance salesman. n Jack Seiler, founder of A.J. Armstrong & Co., was an attorney. His partner, brother David, was in the furniture business.
borrowed a small amount of money to start Centaur Credit Corp. which eventually became part of James Talcott, Inc. n Ben Milberg and his brother Irving invested in a small finance business that became Milberg Factors. He and other members of his family were originally in the lingerie business. n Stanley Tananbaum and his brothers owned a silk fabric converter before they purchased what would eventually become Century Business Credit. n After attending NYU, Jimmy Rosenthal worked as an accountant for an accounting firm, and then worked in his family’s childrenswear manufacturing company. In the late 1930s he decided to start a commercial finance business that eventually became Rosenthal & Rosenthal.
Sidney Rutberg’s book reminds us it’s okay to “pick people’s brains” to fill in the inevitable historical “blanks.” He provides many details that would otherwise be lost in the passage of time. It’s a tremendous resource for better understanding the story our industry is celebrating.
Here, I’ll briefly step away from information in Rutberg’s book and relate a story from my own experience. Over two decades ago I was privileged to serve as president of Republic Acceptance Corporation in Minneapolis. The company was formed in 1929 and was an early member of the industry. According to credible company “lore,” our founder, Fred Weil Sr., was in the tire business when, in 1929, the stock market crashed. He and his partner realized they didn’t have enough business to support them both. They flipped a coin to see who would continue selling tires, and Fred “lost.” He ended up financing receivables for other small companies. During my tenure there, Republic became part of what is now U.S. Bank. Ultimately, a few imaginative businessmen, in combination with enlightened self-interest, formed this industry. Then, in 1944 they came together as an official association. Initially called the National Conference of Accounts Receivable Companies, it soon became the National Commercial Finance Conference, Inc., then the National Commercial Finance Association, and eventually the Commercial Finance Association. And now, we are all proudly part of the Secured Finance Network, or SFNet.
n Theodore H. Silbert, founder of Standard Financial, was a banker.
These early entrepreneurs came out of a broad variety of businesses, mostly from outside of banking and finance, and many of their stories demonstrate the old saying, “necessity is the mother of invention.” These merchants, accountants, lawyers, and perhaps some butchers, bakers, and even candlestick makers, recognized an opportunity and pursued it. We are all in their debt.
n In 1934, Herbert R. Silverman was attending law school and working as an office manager for a manufacturer of display fixtures. Sensing an opportunity in commercial finance, he
Steve Bakke is a former chairman of the Secured Finance Network and an SFNet Hall of Fame inductee.
n Milton Jones of Jones & Co., was also in the furniture business. Jack Seiler claimed that Jones decided to go into the finance business when he found out the Seiler brothers were planning on doing it.
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HEALTHCARE >> LEADERSHIP >> OUTLOOK >> LEGAL NOTES >>
PURCHASE ORDER FINANCE
CAPITAL INSIGHTS
Purchase Order Financing Then, Now and What’s Ahead. BY PAUL D. SCHULDINER
Purchase order financing has been around nearly as long as its close relatives (factoring) and distant ones (merchant banking), but has become much more prevalent in the last decade. With better technology and other innovations accelerating manufacturing and production timelines to meet demand from e-commerce and big box customers, the global supply chain has never been under more stress. We see this with the China tariffs, Brexit and other significant changes to trade policy. Purchase order financing has never been a more valuable option for companies buying and selling around the globe.
The Evolution of Modern Day Purchase Order Financing In the 1990s, purchase order financing gained relevance as consumer product companies began to shift domestic production to overseas sourcing and manufacturing in an effort to cut costs. When that happened, many factors were unwilling to give credit in a company’s borrowing base for letters of credit, even if those letters of credit were critical for companies attempting to source from overseas. For most factors, purchase order financing was initially too risky because they did not understand the nuances of international trade or the process of managing the logistics of inventory and meeting delivery times on overseas shipments. Some even worried that suppliers would ship low-quality or imitation products. Or worse, what if suppliers shipped rocks in the containers instead of apparel? Factors were more accustomed to lending against products they could see or touch, not products on the water.
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Seasonality issues also posed challenges for lenders. As single-season businesses like outerwear or swimwear companies began to grow, their financing needs changed, making it even more complicated for factors to support them. But the emergence of big box retailers was perhaps the biggest game changer of all. Small and middle-market importers now had a new sales channel to grow their businesses, though for many of those companies, it was both a blessing and a curse. Importers were inundated with large sales orders during their busiest seasons, like Back-to-School, Black Friday and Christmas. This strained cash flow and tied up working capital for longer periods of time. As time went on, the production cycle for buying and manufacturing products overseas – once as long as 120 days from order to delivery – was cut shorter. Retailers had no desire to hold inventory for long periods of time, which gave way to inventory management issues and a growing reliance on replenishment programs when selling into retailers. Furthermore, inventory financing to grow e-commerce companies and
>> SUPPLY CHAIN & TRADE FINANCE >> PURCHASE ORDER FINANCE
bridge the divide between brick-and-mortar sales and direct-to-consumer distribution makes it more critical than ever to implement multiple inventory financing solutions. The confluence of all of these factors has led to the evolution of the product we know today as purchase order financing. Entrepreneurial or bridge lenders recognized a gap in the industry early on and saw that purchase order financing could be an alternative PAUL D. SCHULDINER for businesses raising more Executive Vice President permanent capital. Most & Division Manager, lenders preferred companies Rosenthal & Rosenthal, Inc. with stronger balance sheets, but their borrowers were rarely looking for funders that would become permanent equity partners. Production financing – or work-in-process financing – also became a much-needed financing tool. A form of cash-flow financing for the creation of finished goods, production financing funds raw materials, components and direct labor costs. Though more challenging to underwrite, it became an option for companies manufacturing in the government contracting space, light assembly businesses and other sectors that export under contracts or are supported by letters of credit from foreign customers.
Intercreditor Agreements: The Key to Effective Collaboration Intercreditor agreements were always the major obstacle in closing a purchase order financing deal. For starters, as purchase order financing started to be utilized more frequently, there was a good deal of unfamiliarity – even concern – that the purchase order funder was usurping the senior lender’s collateral position. This, of course, was never true, as funders were only asking the senior lender to subordinate on the purchase orders and the collateral that would be created through the purchase order financing, nothing more. Purchase order funders typically prefer senior lenders to advance on the receivables in order to pay off the financing, and then the funder subordinates the security interest back to the senior lender upon receipt of the advance on the newly created accounts receivable. As these tandem deals have gained popularity, the intercreditor agreement has become a more widely accepted and effective tool. Unlike an intercreditor agreement used in the second lien lending market, one that’s used in purchase order financing is transactiondriven, with a clear start and finish. It’s beneficial for the factor or other senior lender to recommend purchase order financing in lieu of providing the over advances themselves, as lenders are always looking to reduce inventory reliance in the borrowing base structure. Furthermore, for the borrower, relying on a form of transaction capital
Takeaways 1
China tariffs, Brexit and other trade policy changes have made PO Financing an integral part of the financing options used by companies buying and selling globally.
2
PO Financing continues to be an excellent alternative for businesses considering raising permanent capital to fill shorter-term liquidity requirements.
3
For companies in a growth period or in a turnaround situation sourcing from overseas, PO Financing can help either enhance or rehabilitate insufficient trade payment terms from global suppliers.
4
The inter-creditor agreement used between factors and asset-based lenders and PO Funders has become time-tested, helping to ensure a soundly structured deal for all parties.
5
The PO Funder of the future must be able to embrace technology changes and legal considerations. By doing so, it will enable better monitoring and structuring required to finance the buying and selling of products on a truly global scale.
like purchase order financing is often a more favorable alternative to giving up equity. Factors and traditional lenders now happily co-exist with purchase order funders, and the intercreditor agreement is the critical component to any soundly structured deal. Without it, a purchase order financing deal simply would not work for all parties.
The Growing Impact of International Trade on Financing The international trade environment is at a crossroads. The United States is engaged in a seemingly never-ending tug of war with China and the end is not necessarily in sight. Over the last several years, the credit and banking environment in China has become so leveraged that Chinese manufacturers require pre-payments or large deposits in place of letters of credit, which had previously been widely accepted. With a pre-payment, suppliers are paid before goods are even shipped or delivered. The risk of non-performance by the Chinese factory is too great for many funders to bear and they don’t typically prefer the idea of sending cash before there is assurance of production and delivery of finished products. The increasing reliance on pre-payments, coupled with the threat of tariffs, has created a burdensome liquidity challenge for companies importing overseas products. As a result, ownership and management teams are diversifying sourcing, looking to Vietnam, Bangladesh and other alternative markets. Likewise, letters of credit have been on the rise again in those countries, especially as importers rely on them as part of redeploying sourcing outside of China. For companies unable to reduce their reliance on Chinese suppliers, purchase order funders have stepped in to also provide funding for logistics, freight, and duty, as well as funding “cash against documents” for inventory in transit when letters of credit may not be necessary. Companies in a growth period and companies in a turnaround situation that are sourcing from overseas are also relying more on purchase order financing to rehabilitate insufficient trade payment terms from global suppliers.
The Future of Purchase Order Financing Despite the ongoing challenges with China and the looming threat of tariffs, international trade will continue to thrive, albeit within a new framework. The rise of smart technology and innovations like blockchain will help to streamline and monitor transactions in real time, potentially making those transactions more secure and provide more transparency and real-time data to purchase order funders and anyone lending on international trade deals. There are two recent trends in financing products that bear mentioning. The first is what is known as supply chain financing. Even though the two terms are often used interchangeably, supply chain financing and purchase order financing are not one and the same. Supply chain financing, which has shown significant growth of late, relates more to offering a buyer extended payment terms, but may also provide suppliers with an early payment option. Usually this means that goods have been delivered or services have been rendered. Given that purchase order financing addresses the need for pre-shipment finance between a buyer and a supplier, it can be an integral part of the overall supply chain finance needs of a business that trades globally. A second notable trend is the tendency of certain lenders to act like trading companies, providing unsecured inventory financing as an alternative to purchase order financing. While these programs are intriguing, they usually require the lender to underwrite the borrower itself, which may limit the ability of a small- to lower-middle market business to take on larger orders, beyond what the company’s balance sheet can support. Companies are always on the hunt for the highest quality and lowest costs in manufacturing and they will travel far and wide to find it. If they haven’t already, businesses that import or export will soon discover there is a whole world outside of China. Purchase order funders will need to understand and adapt to the various legal issues related to collateral control, logistics, title transfer, foreign duties (including VATs) and other issues related to cross-border trade, and they must get comfortable lending to foreign borrowers. The purchase order funder of the future must truly be global – able and willing to finance a company based in London, sourcing product from Bangladesh and selling to retailers in Japan. As businesses become more sophisticated and their financing needs become more complex, there is an enormous opportunity for lenders of all stripes. Partnering with a purchase order funder that is highly experienced navigating international trade issues as well as domestic manufacturing is critical for factors, assetbased lenders and other traditional lenders. But aligning with a purchase order funder that can think and react globally will be the real key to remaining competitive in the future. Paul Schuldiner is executive vice president and division head at Rosenthal & Rosenthal Inc., the leading independent factoring, asset-based lending and purchase order financing firm in the United States.
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HEALTHCARE >> LEADERSHIP >> OUTLOOK >> LEGAL NOTES >>
LEADERSHIP
BUSINESS INSIGHTS
The Many Facets of Succession Planning
Succession planning is not a contingency plan. It is a core human resources function that builds and sustains shareholder value. BY TERRY KEATING Succession planning is a cornerstone of any successful and long-lived company. Unfortunately, it is also a concept and phrase that is frequently bandied about, but all too often given only lip service. Sometimes a plan is developed, documented, filed and pulled out years later when prompted by an urgent change—and then found to be out-of-date and insufficient. Good succession planning requires ongoing updates and tackling uncomfortable questions, but the reward for doing so is empowering throughout an organization and builds value. So, what is succession planning? Succession planning covers both management and ownership transition. Sometimes one in the same, sometimes the two are separate. Management succession is far more complex than simply replacing the CEO when she or he retires. Ownership succession is much more than who inherits the shares when the current ownership passes away.
SFNet Independent Finance and Factoring Roundtable
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At the 2019 SFNet IFFR held in May in Nashville, TN, we tackled this topic in a guided discussion of its importance, its component parts and some particular suggestions for getting started or enhancing the process. Why should a company engage in succession planning? What are the facets of succession planning? What are the component parts of different types of succession planning? To start, we took an informal pool of the 30-plus executives present. While virtually all agreed it is a relevant topic, only a surprising minority felt they had sufficiently addressed the topic, if at all. Sure, most of the companies were small, but none denied the importance of the topic. In my nearly 30 years of lending to, raising capital for,
>> SUPPLY CHAIN & TRADE FINANCE >> PURCHASE ORDER FINANCE
advising and most recently managing a commercial finance business, I have found that succession planning is either flat out ignored or so far down the priority list as to not be addressed except in times of crisis, or otherwise forced upon ownership and management. This is typically true regardless of the size of the organization. Some of the largest in the industry don’t effectively deal with succession planning—even the publicly traded companies, which you’d think have the greatest external scrutiny.
TERRY KEATING President & CEO Accord Financial, Inc
Let’s look more closely at reasons to conduct succession planning. It is, of course, a contingency for absenteeism, short and long-term. There are, however, very powerful strategic reasons for having a good succession plan in place. Succession planning has two principal divisions: management succession and ownership succession. We’ll explore each of these separately, though they are often intricately intertwined.
Management Succession – Contingency Plans All too frequently, short-term “succession” or coverage issues are only dealt with as they arise, not thought about or planned for in advance. The individual may be absent for a few weeks or months while recovering from illness, injury, or some other form of incapacitation such as substance abuse recovery or mental illness. An employee may be the father or mother of a newborn and be away from their duties for parental leave. The employee may be in the National Guard or Reserve forces and called up for deployment. In all these cases, though the employee will be returning to work, their duties need to be attended to during the absence. This isn’t to suggest that a detailed document for every position in your organization exists, but good managers will ask themselves “What if?” and have at least a clear idea of who can do what, or if outside assistance will be required to accommodate these short-term, or non-permanent changes. Not having some thoughtful contingency plans can mean critical gaps in work or excessive burden on an unprepared staff. Somewhat more often considered is long-term or permanent turnover. People leave organizations for a variety of reasons, but in all cases, the result is the same. There are responsibilities that must be handled by another employee or someone outside the organization.
Key Points 1
Robust succession planning is key to long-term success and building enterprise value that is frequently ignored or given limited attention.
2
Succession planning is more than who takes over for the CEO; it covers both the broader team management and ownership transition.
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Good succession planning requires ongoing updates and tackling sometimes uncomfortable questions. With some thoughtful contingency planning, companies avoid critical gaps in work, excessive burden on unprepared staff, and rash decisions that are detrimental to our organizations and our own mental wellbeing. Regardless of the size, age, or type of organization that you are part of, a thoughtful, proactive approach to succession planning is a good business practice that will create lasting benefits and boost the value of the business.
In some cases, the impact of not planning can immobilize a manager from taking necessary and appropriate actions that can have very negative long-term consequences. For instance, let’s say you have an employee that isn’t performing up to expectations, you’ve coached and counseled, but to no avail and you know deep down that you need to make a change. Subconsciously, you aren’t confident of how to bridge the gap to replace this individual and so you think, “Well, is it really that bad…” or “I’ll give them another chance…” Having a backup plan will give you confidence and make dealing with this change more palatable. Similarly, you may have an employee who does great work, but exhibits some behavior that is inappropriate and should not be tolerated. If you ignore, look past or excuse that behavior based on “who would do the work”, consciously or subconsciously, you are putting your organization, and probably yourself at risk. The business world is replete with real examples of the foregoing and when this occurs, not only do you fail in dealing with the immediate circumstance, you are sending a message internally and externally that you are not a healthy organization. This causes employees to be less motivated, leave the organization or never join in the first place. People also leave our organizations for reasons outside our control. They become seriously ill and can no longer work, or they pass away. We often think about this only in the context of an older employee. To be sure, older employees are statistically more likely to have such an occurrence and so planning for this is somewhat more frequent, but still oft ignored or deferred. After all, no one likes to deal with questions relating to mortality, our own or others. It might be considered impolite or ungracious. In fact, it is neither of those, it is the opposite. It is the “elephant in the room” and will, at times, be a burden to the very person facing sickness or disability. Or maybe they’d just like to retire, but don’t feel they are able. By planning for these eventualities, the organization is better off, and the individual may well be unburdened. Sometimes as managers we have significant time to accommodate change. For instance, a beloved CFO has
informed us that they’ll be retiring in six months and will carry over part time to assist in the transition. But this isn’t always the case and often we can be left scrambling, distracted and distraught. This can result in hurried and rash decisions that are detrimental to our shareholders and our own mental wellbeing. What is very rarely thought about proactively is what would happen if that key, high-performing 40-year-old is struck down or incapacitated. It will be a devastating emotional shock no matter what planning may have been done. However, companies have been thrown into a tailspin and can take years to recover, if at all, for lack of considering the succession to key positions. Similarly, people leave our organizations because a competitor offers them better pay, or a promotion. Maybe they simply have decided they’d like to try a different industry or career. It may be that family considerations require them to have more flexible hours or live in a different part of the country.
Management Succession – Business Strategy I’ve discussed many of the sometimes more uncomfortable tactical reasons for engaging in succession planning. Let’s turn our attention now to some of the strategic business reasons for this important, ongoing task. Succession planning is much more than just mapping out who will run things when you or someone else is gone; it goes to the very heart of a good human resources strategy. This will empower your executive team, operating management, and functional staff to greater accomplishments and greater value for the shareholders through continuity. When your executive team, management team and employee base understand that there are well-considered plans for the future health of the business, it assures them their career and financial future have a road map as well. They will want to be part of this process and demonstrate how they can rise in the organization as part of a planned evolution. A good succession plan also provides confidence to stakeholders outside of management and outside of the organization. It gives guidance to shareholders about who will look after their investment and ensure ongoing returns through inevitable change. A good succession plan will provide assurance to lenders that their money will be repaid irrespective of changes in executives and key staff. A good succession plan signals to potential investors or purchasers of the business that there is a rock-solid foundation, backed up by disciplined processes that will result in increased future value of the enterprise. A good succession plan will answer the following questions: Who will carry leading the strategic vision of the business and key functions within the organization? Who will execute key functions that keep the day-to-day work going and support the strategic vision?
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LEADERSHIP
Ownership Succession Ownership succession is—on the surface—the least complicated. We’ll leave out personal and family dynamics for the purposes of this article. Management succession planning, or lack thereof, strongly influences ownership transition. The assessment and planning for the management and daily operations can direct a board of directors and shareholders about their options going forward. Ownership transition has a few straightforward options: a) pass the business to the next generation through inheritance, b) sell/merge the business or c) wind the business down and distribute the proceeds. If selling the business is the chosen path, there are several paths that can be taken: a) sell to a financial buyer, b) sell to a strategic buyer, c) sell to management. Succession planning influences the viability of each of these options. There is also the mirror image. Just as the caliber of management succession planning influences ownership’s options for succession, if ownership would like to have certain options, then they should direct and insist in a good robust management transition plan to facilitate that option.
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For small organizations you may wish to engage a consultant to assist you in the process, or you may simply choose to take a few hours one day to think through and commit to writing your thoughts on the topics outlined. In a larger organization, your human resources department can be tasked with coordinating this process. But bear in mind, succession planning isn’t just a human resources function or responsibility, though often it’s administered by a Human Resources department; it is a core leadership tactic that ensures organizational health, continuity, and builds shareholder value.
Addressing succession planning requires assessing the current responsibilities and skill set of your team and comparing these to the needs of the organization. The executive team, operating management an other key staff positions are all important to consider for this exercise. When replacing positions, should we hire from the outside? Develop internally?
Conclusion
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team, ownership, organization composition, strategy or similar events. This will ensure business continuity, motivate the staff, minimize disruption when change occurs and maximize shareholder value.
Addressing succession planning requires assessing the current responsibilities and skill set of your team and comparing these to the needs of the organization. The executive team, operating management, other key staff positions are all important to consider for this exercise. When replacing positions, should we hire from the outside? Develop internally? Maybe the need is so great that we acquire, merge or sell to infuse the human capital needed. Succession planning is something that every business organization should engage in and have a process for periodic updating. At a minimum, a succession plan and its components should be reviewed, and updated if appropriate, at least annually and whenever there are changes in the
So, no matter the size of the business, its age or other factors, a thoughtful, proactive approach to succession planning in its broadest form will create lasting benefits and boost the value of the business.
Terry Keating is the president & CEO of Accord Financial, Inc. the US ABL/factoring subsidiary of Accord Financial Corp. and is based in Greenville, South Carolina. Terry’s career has spanned nearly 40 years in varying roles of leadership and building organizations. If you’d like a summary outline of the above article you can write him at tkeating@ accordfinancial.com.
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LENDER INSIGHTS
Nursing Facility Medicaid UPL Payment Programs and A/R Financing Jumping through the Legal and Operational Hoops for Lenders. BY KRISTEN GENTRY KLOS AND JENNIFER SHEASGREEN
Medicaid supplemental payment programs, otherwise known as “upper payment limit” or “UPL” programs, have made their way into almost every facet of healthcare in one form or another. In general, when one refers to a UPL program, they are referring to a Medicaid payment program that directs periodic payments as an add-on payment to the base Medicaid payment rate for that service. UPL programs find their basis in federal Medicaid law and regulation, which allow federal financial participation for Medicaid services for payments to providers that do not exceed the federal limit for such payments, thus the “upper payment limit.” Most states set their base Medicaid rates well below the federal limit for federal financial participation due to state budgetary concerns. State Medicaid programs can choose to direct finite resources through supplemental or UPL payments to providers, usually high Medicaid utilization providers, through their Medicaid UPL programs. This article focuses on those Medicaid UPL programs that direct UPL payments to non-state governmental healthcare providers.
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Medicaid is a state and federal medical assistance program and each state designs its unique Medicaid program to meet the needs of its residents and healthcare providers as permitted under both state and federal law. Thus, each state’s Medicaid program, including each UPL payment program, is unique and each state must obtain approval from the Centers for Medicare and Medicaid Services (“CMS”) for each UPL payment program. UPL payment programs that are traditional fee-for-service programs can be approved through the Medicaid State Plan Amendment approval process, while Medicaid managed-care UPL payment programs must be approved through the Medicaid waiver approval
process, and are subject to the limitations of Medicaid managed-care waivers. Additional differences in state UPL payment programs include the availability of non-state governmental health care providers within a state that have the authority to provide Medicaid services to residents throughout the state, and eligible funds available to provide the non-federal share of UPL payments. The importance of JENNIFER SHEASGREEN these differences cannot be overlooked and makes each Co-founder Siena Healthcare Finance UPL payment program different from the next, requiring careful review and analysis prior to implementation of any program. One key difference in state UPL programs is how UPL payments are paid to providers. UPL payments are typically separate from regular base-rate payments, made periodically to the provider, including payments that are made monthly, quarterly or annually. States may choose to deposit the UPL payments directly into KRISTEN GENTRY KLOS a provider’s governmental Partner depository account or may Taft Stettinius & Hollister LLP choose to send a check that the provider deposits into its own accounts. Key legal considerations for lenders arise from the fact that UPL payments are typically paid to governmental providers, which are more limited in their ability to borrow and lend credit. One particular nuance is when there is a third-party manager that is running the day-to day-operations of the provider and looks to obtain financing to support those operations. The governmental provider is constitutionally prohibited from lending its credit to a third-party entity. While the governmental provider will typically pledge the accounts receivable as collateral for the loan, lenders may become concerned about how to perfect their security interests in the collateral that is owned by the governmental provider, which is not itself a named borrower. Another stateby-state consideration, is a governmental entity’s ability to file bankruptcy. Finally, each state is different in the types of governmental entities that provide health care services, their authorization to provide certain types of health care services
Takeaways by their enabling statute, rule, ordinance, or other authority and their authorization to provide health care services in the city, town, county or state in which they are located. Indeed, governmental boards typically must approve and authorize the activities of the governmental provider.
Lender Considerations Ensuring that there is perfection in the collateral, as well as understanding and mitigating the risks associated with this type of collateral, are key from the lender’s perspective. The structure for the lender will depend upon the state’s specific UPL structure, as each state determines their own guidelines. For example, in Texas, skilled nursing facility (“SNF”) licenses may either be owned by a county or district hospital or the SNF may receive Medicaid Upper Payment Limit (“UPL”) proceeds directly from state Medicaid, depending upon certain conditions. If the licenses are owned by the hospital, the hospital often contracts with the SNF under a management agreement. In this scenario, the lender must carefully review the collateral that is available for the loan. For example, is the lender satisfied with the management fees that are earned by the borrower or will it need to reach the accounts receivables of the hospital? Under the Texas management agreement scenario, in order to perfect its security interest in the accounts receivable, the lender may want to enter into a separate security agreement with the hospital, whereby the hospital would grant a security interest to the lender in specifically defined collateral. The security agreement would cover the portion of collateral that is SNF-earned only, and not hospital-related, and include only the SNF-related collateral. Since the SNF and hospital proceeds may be co-mingled upon receipt, Control agreements would perfect the lender’s interest in collections and a Deposit Account Instruction Service Agreement (“DAISA”) would allow for the hospital to remain in control of the account. Proceeds would flow through the DAISA account into a Deposit Account Control Agreement (“DACA”) account and sweep to the lender. Risks from a lender’s perspective include ensuring that the collateral you are lending against is at little risk of adjustment. If the SNF is under a management agreement and the manager is the borrower, it is important to consider the risk of offset or take-back to the governmental entity, and the financial condition of the governmental entity. Also of importance is understanding the state’s payment cycle, how the UPL payment is calculated and earned and over what period of time, especially if that collateral is part of a borrowing base. In Idaho, for example, SNFs are given a state letter a few months in advance that provides the amount of payment that will be forthcoming under the UPL program, which is dispersed only annually. As managed care and value-based reporting gain traction, many states are now tying reimbursement to quality measures, which will be an important indicator of the actual reimbursement that SNFs will receive.
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State Medicaid programs are unique and borrowers and lenders should have an expert for guidance through the legal aspects Governmental board of directors need to lend support to the borrower so lender can perfect their security interest Understanding the state’s UPL payment cycle is key for borrowing base consideration Control of cash should be structured to be in compliance with anti-assignment laws Value-based reimbursement may change the course of these programs and lenders should monitor those changes
Outlook of UPL Programs According to the Commonwealth Fund, Medicaid has emerged as the nation’s largest health insurer over the past 20 years, accounting for over $500 billion in spending in 2015. The federal outlook of funding to states is also something that could change as block grants gain momentum. With the growth in managed care programs that include quality reporting and changes in federal oversight rules, and indication by CMS that it is looking to tie even fee-for-service UPL payment programs to quality metrics, it is likely that some changes to UPL programs will follow. Lenders should stay informed of the specific changes in the state in which UPL collateral is eligible for their borrowers, as this payor shift and reform may require a change in the way this collateral is valued. Kristen Gentry Klos is a law partner in the Health and Life Sciences group of Taft Stettinius & Hollister LLP. Her practice includes working with state and health care providers in the development, implementation and operation of Medicaid special payment programs, including Medicaid upper payment limit programs. She can be contacted at kgentryklos@taftlaw.com. Jennifer Sheasgreen is co-founder of Siena Healthcare Finance, offering asset-based loans from $1-$30 million to providers of goods or services to the healthcare industry. Siena Healthcare Finance lends against Medicare, Medicaid and commercial receivables. Siena Healthcare Finance is a division of Siena Lending Group, which is a portfolio company of Business Development Corporation of America, an affiliate of Benefit Street Partners LLC. She can be contacted at jsheasgreen@sienahealthcarefinance.com.
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Creating the Future of Secured Finance Today www.sffound.org Since its inception, the Secured Finance Foundation has achieved unprecedented success and has now raised over $8.75 million. These funds are critical to SFNet’s extensive education, research and development mission. SFNet recognizes the tireless efforts of the Foundation’s Governing Board, Advisory Board and Founders Leadership Council Members who have exceeded their goals year after year through significant contribution of time and energy to the Foundation Campaign. Particular thanks go to the following organizations which have continuously supported the Secured Finance Foundation during each of the past 25 years and whose combined contributions to the Secured Finance Foundation exceeded $1,776,000:
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Thanks also to this year’s Development Chairperson for his extraordinary efforts bringing in over $342,800 in contributions: Wade M. Kennedy, Partner McGuireWoods LLP
2019 Corporate Contributors Platinum Members: $20,000 - $34,999 Goldberg Kohn, Richard M. Kohn, Principal Greenberg Traurig LLP, David B. Kurzweil, Shareholder and Bethani R. Oppenheimer, Associate Otterbourg P.C., Jonathan N. Helfat, Partner and David W. Morse, Vice Chairman Gold Members: $12,500-$19,999 Bank of America Business Capital, Darryl Kuriger, Head of ABL Capital Markets 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 LLP, 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 Bennett Jones LLP, J. Steven Lutz, Partner and David S. Rotchtin, Senior Associate Buchalter, Farhad Bahar, Shareholder, Anthony R. Callobre, Shareholder and William Schoenholz, Shareholder Bronze Members: $5,000-$7,499 Blank Rome LLP, Lawrence F. Flick, II, Partner BMO Harris Bank/Bank of Montreal, Michael Scolaro, Managing Director Chapman and Cutler LLP, Daniel W. Baker, Partner and Steven G. Hastings, Partner Choate Hall & Stewart LLP, John F. Ventola, Practice Group Leader CIT Northbridge Credit, Bert M. Feinberg, Managing Director and Group Head Duane Morris LLP, James J. Holman, Partner Fifth Third Business Capital, Michael D. Sharkey, Managing Director – ABL Group Head and William A. Stapel, SVP Director of ABL Portfolio Management McMillan LLP, Jeffrey Rogers, Co-Chair, Syndicated Finance Vedder Price P.C., Thomas E. Schnur, Shareholder White Oak Commercial Finance, LLC, Thomas K. Otte, Partner and Head of ABL Benefactors: $2,500-$4,999 AmeriFactors Financial Group, LLC, Kevin R. Gowen, Sr., President & CEO Accord Financial Inc., Terry M. Keating, President & CEO Atlantic Risk Management Services, Richard Hawkins, Managing Director Baker, Donelson, Bearman, Caldwell & Berkowitz PC, Timothy M. Lupinacci, Chairman BDO Consulting, Baker A. Smith, Managing Director CIBC, Bruce Denby, Group Head, Asset Based Lending Conway MacKenzie, Greg Charleston, Senior Managing Director Cost Reduction Solutions, Denise Albanese, President Fidelity National Title Group-UCCPlus Division, Gary M. Zimmerman, SVP Focus Management Group, J. Tim Pruban, President & CEO Freed Maxick ABL Services, Michael A. Boeheim, Director
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Secured Finance Foundation
Gemino Healthcare Finance, Thomas Schneider, President & CEO Gerber Finance, Inc., Jennifer Palmer, President J D Factors LLC, Stephen P. Johnson, President KPMG LLP, Andrea Pipitone Beirne, Director MidCap Business Credit, LLC, Steven Samson, CEO North Mill Capital LLC, Jeffrey K. Goldrich, President & CEO Osler, Hoskin & Harcourt LLP, Kevin J. Morley, Partner, Financial Services Paul Hastings LLP, Katherine E. Bell, Partner 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 Shipman & Goodwin LLP, Michael L. Widland, Partner TBK Bank, John Hanley, SVP - ABL Portfolio Manager TCF Capital Funding, Joseph P. Gaffigan, President Webster Business Credit Corp, Warren K. Mino, President & CEO Patrons: $1,000-$2,499 1STWEST Background Due Diligence, Sue Bury, President & CEO Amerisource Funding, D. Michael Monk, Managing Director Bay View Funding, Glen E. Shu, President Buchanan Ingersoll & Rooney PC, William H. Schorling, Of Counsel Celtic Capital Corporation, Mark A. Hafner, President & CEO Clear Thinking Group, Lee A. Diercks, Partner Citizens Bank, Patrick Bickers, Managing Director - Head of Business Capital Dopkins ABL Consulting Services, Joseph A. Heim, CFE, CPA, Partner EisnerAmper LLP, Robert D. Katz, Managing Director, Allen Wilen, Partner FGI Finance, Sami Altaher, Executive Director Finvoice, Andrew Bertolina, CEO & Founder Gordon Brothers Finance Company, Lawrence E. Klaff, Senior Managing Director, Chris Carmosino, President, Valuations Hilco Global, Gary C. Epstein, EVP - Chief Marketing Officer Howe, Keller & Hunter, PC, J. Craig Howe, President Monroe Capital LLC, Theodore J. Koenig, President & CEO Moritt Hock & Hamroff LLP, Marc L. Hamroff, Managing Partner Siena Lending Group, David Grende, President & CEO People’s United Business Capital, Michael J. Maiorino, Jr., SVP and Kathleen Z. Lepak, ABL Business Head Southeastern Commercial Finance, LLC, Patrick B. Trammell, President
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Members: Up To $999 Allied Financial Corporation, Steven C. Gold, President Cash Flow Resources, LLC, Kevin Laborde, President Coffin & Associates, Phil Coffin, President & Founder King Trade Capital, Edward P. King, Founder & Managing Partner Entrepreneur Growth Capital, LLC, Dean I. Landis, President Bluewater, Robert W. Bowles, Founder & Executive Director Sidley Austin LLP, James A. Snyder, Partner Winstead, PC, Nelson R. Block, Shareholder
2019 Individual Contributors Foundation Patron: $2,500-$4,999 John M. DePledge, SFNet Management Committee Jeffrey K. Goldrich, SFNet Management Committee David Grende, SFNet Management Committee Richard Gumbrecht, SFNet Executive Director Charles & Jane Johnson, Secured Finance Foundation Chairman & SFNet Past Chairman Wade M. Kennedy, Secured Finance Foundation Development Chairman Friend of the Foundation: $1,500-$2,499 James C. Chadwick, Holland & Knight Member of the Foundation: up to $1,499 John Fox, Capital Foundry Funding, Inc. Thomas A. Greco, Hilco Global Beatriz (Betty) Hernandez, North Mill Capital LLC Stephen & Janelee Johnson, JD Factors, LLC Darryl Kuriger, Bank of America Merrill Lynch Robert Meyers, Republic Business Credit David W. Morse, Otterbourg P.C. Howard Rein, Freed Maxick ABL Services Robert S. Sandler, SFNet Past Chairman Gary Katz, Downtown Capital Partners
SFNet Education Venues Special thanks go out to the following organizations that opened their doors to the SFNet Education Department this year and hosted programs: Greenberg Traurig (Atlanta, GA) Hahn & Hessen LLP (New York, NY) Otterbourg P.C. (New York, NY) Winston & Strawn (Chicago, IL)
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LEGAL VIEW
UCC INSIGHTS
Looking For A Better Mouse Trap?
Article 9 Sales Spring To Action. BY JEFFREY A. WURST, ESQ. The time and cost of liquidating collateral can often be prohibitive and is always a nuisance. Of course, this problem is exacerbated when the asset value is less than the balance owed to the secured creditor(s), leaving no value for unsecured creditors. Lenders often step up and carve out an amount to be distributed to unsecured creditors to enable a Chapter 11 to proceed to effect a sale of the debtor’s assets free and clear of liens. Some consider this to be a price to be paid by secured creditors for the privilege of utilizing the bankruptcy court to sell their collateral. Thus, the cost of a bankruptcy can be very expensive not only to the debtor, but also to the secured lender. As a result, small and middle-market companies and their lenders have grown receptive to non-bankruptcy vehicles for the disposition of assets. State law assignments for the benefit of creditors (ABCs) have grown into a popular alternative to bankruptcy. This is often a nonjudicial proceeding existing under a state’s debtor-creditor law where a debtor selects an assignee to liquidate the company’s assets. Some jurisdictions (including New York) provide for judicial proceedings where the ABC is supervised by the court and the court ultimately issues an order confirming the liquidation. Article 9 of the Uniform Commercial Code provides for a fast, simple and effective process for liquidating a secured lender’s collateral. Of course, the Article 9 sale must be conducted in a commercially reasonable manner. Commercial reasonableness, however, is measured by the process and not by the results. Notice is only required to be given to the debtor and secondary obligors on the secured debt (e.g., guarantors, co-borrowers, etc).
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In recent years I have found myself involved in more and more Article 9 sales. For example, when a bankruptcy judge would not permit a bankruptcy §363 sale (claiming that the sale would be a sub rosa plan) we obtained relief from the automatic stay to enable our lender-client to sell the assets in an Article 9 sale – fully disclosed to the Court and the creditors. In other situations where the assets are insufficient to pay the lender in full, instead of funding a borrower’s Chapter 11 and carving out amounts for unsecured creditors, we are turning to Article 9 to realize on the debtor’s collateral. We recently represented a client who was interested in acquiring the assets of a distressed company where the liabilities owed to three secured lenders exceeded the value of the collateral. The debtor wanted to sell and the junior-most lender was amenable to a discount.
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The purchaser, however, was reasonably concerned that unsecured creditors might try to upset the sale made in an armslength transaction. We worked with our client in purchasing the assets from the junior-most secured party – subject to the senior creditors’ liens – in a public sale in accordance with Article 9. Notice of the public sale was published and sent to all known unsecured creditors. The reason for such broad notice – in excess of what is JEFFREY A. WURST, ESQ. required under the UCC – was to flush out a challenge before Shareholder Ruskin Moscou Faltischek, PC the purchaser committed and to allow him to exit should a challenge arise. The sale proceeded without objection. The juniormost secured creditor willingly accepted a payment that was less than the debt owed and the purchaser ultimately paid off the senior debt. Thus, the purchaser was able to acquire the assets free and clear of all liens, except without the benefit of a bankruptcy court order. Of course, there are purchasers and secured creditors who are unwilling to proceed in this manner out of fear of post-Article 9 sale litigation challenging the efficacy of the transaction. Shortly after that sale was concluded, a decision was issued by the New York State Appellate Division which was spot-on in addressing the concerns of buyers in Article 9 sale. As a result, the decision sparks thoughts for an expanded role for Article 9 sales. In this case the collateral was not your typical accounts, equipment, inventory, etc. which ABL lenders typically rely on for collateral. Instead the collateral was membership units in limited liability companies, each of which was a single-asset real estate company. The membership units were given as collateral (or boot collateral) to secure loans. Yes, membership units are Article 9 collateral. Atlas MF Mezzanine Borrower, LLC (Atlas), the debtor, brought an action asking to unwind a UCC sale of the equity interest in 11 commercial properties which was collateral for Atlas’ $71 million mezzanine loan, borrowed from defendant Macquarie Texas Loan Holder LLC, the secured creditor. The properties were valued at $240 million and subject to senior loans aggregating about $140 million. The history of this action is interesting. When Atlas failed to pay its loan at maturity and after a brief forbearance period, Macquarie served Atlas with a “Notification of Disposition of Collateral” which set forth the proposed terms of a nonjudicial public sale of “[o]ne hundred percent (100%) of the limited liability company interests in Atlas MF Holdco, LLC.” The sale was published in The Wall Street Journal and a data room was established to enable prospective purchasers to conduct due diligence. Atlas brought an action in Federal Court to enjoin Macquarie’s sale of the membership units. However, the Court denied the injunction,
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LEGAL VIEW holding that there was no irreparable injury (a critical prong to be established in order to obtain an injunction) in that Atlas could be satisfied by a money judgment should Macquarie act improperly. Atlas, through an affiliate, then qualified to bid at the auction Four bidders appeared at the auction including Atlas’ affiliate. After bidding closed, Macquarie rejected Atlas’ highest bid because it was not satisfied that Atlas had the ability to close and proceeded to accept a lower bid. Following the sale, Macquarie transferred ownership of the LLCs to the purchaser. Atlas then brought an action in state court for a declaratory judgment that Macquarie improperly rejected Atlas’ bid, that Macquarie lacked authority to transfer the membership units, that the sale was commercially unreasonable and other claims not relevant to this article. Macquarie brought a motion to dismiss the action, which motion was denied by the trial court and Macquarie appealed. In its complaint, Atlas alleged that under equitable considerations, the Court had the right under UCC 9-617 to declare the sale void, to order the sale unwound and order the property returned to Atlas. The Court ruled that Atlas erred in its interpretation of UCC 9-617 stating:
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The Court reversed the trial court and dismissed Atlas’ cause of action to unwind the sale, holding that the UCC did not provide this as a remedy available to a debtor and that the debtor retained the remedy of money damages if it prevailed on its claims. However, the Court did not dismiss Atlas’ cause of action on commercial reasonableness, stating that involved a determination of fact that could be done on a motion to dismiss. The court also declined to dismiss Atlas’ claim that it was entitled to be paid the surplus attained at the sale inasmuch as Macquarie’s claim for attorneys’ fees (which exceeded the surplus) could not be determined on a motion to dismiss. What is most significant from the Atlas case is the appellate court’s statement:
When Atlas failed to pay its loan at maturity and after a brief forbearance period, Macquarie served Atlas with a “Notification of Disposition of Collateral” which set forth the proposed terms of a nonjudicial public sale of “[o]ne hundred percent (100%) of the limited liability company interests in Atlas MF Holdco, LLC.” The sale was published in The Wall Street Journal and a data room was established to enable prospective purchasers to conduct due diligence.
…a disposition “(1) transfers to a transferee for value all of the debtor’s rights in the collateral; (2) discharges the security interest under which the disposition is made; and (3) discharges any subordinate security interest or other subordinate lien” … The section also addresses “good-faith transferee[s]” and “other transferee[s]” in terms of the transferee’s rights after disposition. If the transferee acts in good faith, then it takes the collateral “free of the rights and interests [of the debtor] even if the secured party fails to comply with this article or the requirements of any judicial proceeding”… However, if the transferee is something other than a “good-faith transferee,” it takes the collateral subject to “the debtor’s rights in the collateral.”
…if UCC sales could be unwound, it would only serve to muddy the waters surrounding non-judicial sales conducted pursuant to article 9 of the UCC, and to deter potential buyers from bidding in non-judicial sales, which would, in turn, harm the debtor and the secured party attempting to collect after a default.
The issue of commercial reasonableness is one that remains in any situation where a non-judicial disposition of collateral occurs but is easily manageable by the secured creditor assuring that it adheres to sound procedures in effecting its sale. The take-away, however, is that purchasers in secured party sales can take comfort that their acquisition will not be set aside – even if the selling secured party failed to effect the sale in a commercially reasonable manner. Jeffrey A. Wurst is a shareholder at Ruskin Moscou Faltischek, PC in New York where he is the chair of its Financial Services Banking and Bankruptcy Department. He is the author of www.WurstCaseScenario.com, a blog that covers topics of interest to secured lenders. He can be reached at jwurst@rmfpc.com.
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HEALTHCARE >> LEADERSHIP >> OUTLOOK >> LEGAL NOTES >>
TRENDS & OUTLOOK
ECONOMIC TRENDS
Lenders Think About Recession Readiness
As the pace of technological change continues to increase, fierce competition is driving looser lending standards and decreasing margins. How are clients preparing for the next economic cycle? DAVE KUCERA The head of Capital One’s Financial Institutions Group reviews the trends that lenders should be watching as we shift into 2020. These are remarkable times. Back in 2008, few observers would have predicted that the economic recovery following one of the worst recessions would have lasted as long as it has or that the U.S. economy would be so resilient. Trade tensions, decelerating global growth and geopolitical maneuvering are all contributing to exceptional global volatility and complexity, yet the U.S. economy has remained remarkably stable. Today, the United States is posting decent growth, stock markets are near all-time highs, we continue to experience record low unemployment, and wages are rising, albeit slowly.
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In fact, the sheer length of our recovery—now exceeding any in U.S. history—is responsible for the note of uncertainty that invariably intrudes into any discussion about the economy. It is well accepted that a recession at some point in the future is inevitable, but its timing, duration and depth are, at best, matters for speculation. As a result, U.S. businesses by and large are taking a cautiously optimistic view of the immediate future, but, at the same time, are more guarded about the middle-to-long-term outlook. A similar picture emerges on the consumer side. The Conference Board Consumer Confidence Index, even after declining marginally in August, is still at its highest level in 19 years. Nonetheless, there is evidence that consumers are less optimistic about the future, seeing moderate downturns in business conditions and jobs in coming months.
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Given this sentiment, non-bank financial institutions (NBFIs) should engage in strategic evaluation, borrowing and capital raising to improve their balance sheets and expand their businesses, invest in technology, and strengthen their lending and capital partner relationships. In this way, they will be able to confront the recession—when it comes—from a position of strength.
Engage in Strategic Capital Raising
DAVE KUCERA Head of Financial Institutions Group Capital One
Many of Capital One’s commercial and consumer finance clients have already begun to use this grace period to become more recession-ready. Their efforts are being facilitated by the abundance of capital available to U.S. borrowers. Although borrowing rates in the United States have come down, they are still in positive territory, making them relatively attractive to global investors looking for a better return or a safe haven. The resulting low cost of capital in U.S. markets and the enthusiasm for U.S. debt instruments is one reason that our team has had one of its busiest years ever. The NBFI market and, in particular, the consumer and commercial finance companies that we support, are taking advantage of low rates to refinance their existing debt, expand their businesses and, in some cases, make strategic acquisitions. In doing so, our clients are not only preparing for an uncertain future, but also positioning themselves to more efficiently meet the capital requirements of their commercial and consumer customers. On the commercial side, the lending environment for companies that provide equipment finance, factoring, small business finance, floorplan and asset-based lending is still reasonably well balanced, though larger EBITDA add-backs and higher leverage have become more common in cashflow-based lending. There has been less growth in companies exploring secured financing because the cash flow markets are still available to most companies, but we expect this situation will change when and if a downturn occurs. We have seen moderate growth opportunities for lenders serving consumer markets like mortgage and auto, although we saw a downturn in August in the growth of student loans. We are also seeing moderate growth in unsecured consumer debt. Our clients are continuing to meet the needs of their customers even as they put their financial houses in order.
Invest in Technology
important under rigorous economic conditions.
In addition to strengthening their balance sheets and growing their businesses, our clients are also viewing the favorable lending environment as an opportunity to invest in technology, which they see as an essential bulwark to economic headwinds. In virtually every sector, they are turning to data analytics, artificial intelligence, and machine learning to better serve their clients, streamline their financial processes, lower regulatory compliance costs, develop new products, and better assess risk.
Non-bank lenders need a financial partner who understands the business they are in and has been through the entire business cycle. They should find a partner who believes in their ability to achieve their goals and is committed to working with them for the long term.
For instance, in consumer finance, lenders are considering integrating alternative data into credit decisions and, in a number of sectors, like home mortgages, they are digitizing the approval process to significantly shorten the time to close. In commercial finance, non-banks are beginning to use modeling and advanced analytics to validate borrowing companies and accelerate loan decisions.
Although no one can predict the future, we can all do our best to prepare for it. And for non-bank lenders, a critical part of that preparation is finding a financial partner that you can trust.
For instance, in consumer finance, lenders are considering integrating alternative data into Strengthen Lend- credit decisions and, in a number of sectors, ing and Capital like home mortgages, they are digitizing the Relationships approval process to significantly shorten the Regardless of their goal, time to close. In commercial finance, nonthe favorable lending market as this long banks are beginning to use modeling and recovery progresses advanced analytics to validate borrowing has put companies in an ideal position to companies and accelerate loan decisions. evaluate their financing alternatives, diversify their financing, and potentially elongate it. For companies interested in locking in low fixed-rate terms for the long run, we recommend they not waste time waiting for the perfect execution, but act on one that is attractive. Hedging options have also become attractive for many companies to take advantage of the currently low fixed rates available to many. When a recession strikes, those few extra basis points they might have gained will likely not matter materially. It also makes sense to build a relationship with a financial partner who offers a broad array of products and services, providing the added flexibility and speed that so often are
Dave Kucera has more than 25 years of investment and commercial banking experience advising owners and managers of financial assets, assisting in financing, raising capital and delivering customized solutions to clients in many countries. As head of Capital One’s Financial Institutions Group, Dave leads a team that provides advisory services, recourse and non-recourse financing, capital markets solutions, investment banking, term ABS/CLO financing, and other services to financial institutions throughout North America.
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HEALTHCARE >> LEADERSHIP >> OUTLOOK >> LEGAL NOTES >>
SUPPLY CHAIN FINANCE
TRADE FINANCE INSIGHTS
Financing Trade Receivables Beyond ABL or Factoring. BY TOM HUNTINGFORD
A Demica senior director explains how trade receivable securitization programs can be used as a valuable alternative to other funding solutions, especially in crossborder or challenging credit environments. Trade receivables securitizations (TRS) may be less well known to certain asset-based lending or factoring practitioners, but TRS can deliver a funding solution where other structures cannot be implemented. With a well-established position in international markets, and significant benefits for corporates, TRS should be part of every advisor and corporate toolbox.
Priorities Drive Funding Choices In a TRS, the costs are pre-agreed, and funding availability is based on a set mechanism driven by overall portfolio performance – in comparison to less-transparent and availability-dependent factoring. The receivables sale to a TRS vehicle has no, or limited, recourse to the seller and, if required, can be structured as off-balance sheet – in comparison to a full-recourse and consolidated ABL.
From Dutch Taxes to U.S. Commercial Mortgages Securitization, in its purest form being the transfer of assets into a vehicle that issues securities, started as early as the 16th century, with Dutch provinces issuing bonds secured by tax-revenue receivables.1
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This financial technology was expanded to all types of assets including trade receivables, commercial and residential mortgages, auto loans and credit cards, with over $1tn issued in 2018 alone2. Trade receivables securitization, mostly financed privately by bank conduits or specialized lenders, performed notably well during the financial crisis with no conduit defaults and very few back-up servicer interventions. This is in stark contrast to certain well-known mortgage securitization programs.
Corporate Benefits and Expanding Abroad TRS programs are highly valued by corporates. Firstly, they significantly reduce their funding costs, especially for noninvestment-grade rated companies, by accessing capital markets investors, in particular the very liquid commercial
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paper market. Access is granted by adherence to specific and transparent risk methodologies and precise legal structures that will ensure that investors will take the risk on the receivables portfolio (as opposed to risk on the corporate originator). Secondly, programs can diversify their funding sources, leading to a more sustainable capital structure with receivables TOM HUNTINGFORD financing committed over Senior Director, several years. Finally, the Working Capital Structuring, ability to deconsolidate Demica the receivables from their balance sheet, and associated debt, can deliver significant financial benefits. Corporates with more challenging credit positions, high leverage and large working capital requirements will find the most value in launching a TRS programme. Private equitybacked companies or levered public companies are strong users of TRS programs that reduce their cost of funds. For corporates with cross-border trade receivables portfolios outside of common law jurisdictions, or low-rated debtors, TRS can be used as a financing alternative. Certain jurisdictions present significant challenges on recourse enforceability, application and enforcement of security, and complex insolvency regimes. These challenges can be mitigated, or even fully resolved, through a securitization structure. An international TRS program can also be used to complement a local ABL facility.
Not so Fast: Key Requirements To ensure a TRS program delivers the benefits of a diversified portfolio, debtor concentrations should remain low (think below 5-10%), especially for non-investment grade debtors. It is also important the receivables are fully transferable, without any restrictions due to the underlying contracts or debt covenants. The service or product needs to have been fully rendered or delivered to ensure the debtor has a full contractual obligation to pay and the receivables have limited offset risk. Seller risk is also important. Corporates that are well below investment grade will need to work around the risk that they may not exist in the future to collect the receivables. This can be done through specific triggers where the receivables can be perfected (including debtors notified of the receivables sale) and the presence of a back-up servicer to ensure continuity of receivables management and collections.
1
A Financial Revolution in the Habsburg Netherlands, Renten and Rentiers in the County of Holland, 1515-1565, James D. Tracy.
2
S&P Global Ratings, 7 Jan 2019 Research Note.
Building Blocks The core TRS structure is simple. It is fundamentally a sale of receivables to a special-purpose entity, funded through the issuance of senior debt instruments. The sale of receivables needs to be structured as a legal true sale, and the special-purpose entity needs to meet certain governance and structural requirements to ensure bankruptcy-remoteness from the corporate originator. Funding of the trade receivables purchase price is done through the issuance of a senior note or loan, together with an equity tranche, sometimes also mezzanine, a deferred purchase price, or a combination of these. The collections and distributions from the vehicle are governed by a pre-agreed schedule, also called a waterfall. The distribution of risks and rewards, bankruptcy remoteness or non-consolidation, and level of control, will be key factors auditors will consider in determining if the receivables, and underlying debt, is de-consolidated from the corporate’s balance sheet. The results of this analysis will vary significantly depending on what GAAP standards are applicable.
Team Effort
It should also be noted that the advance rate and all parameters of TRS are formula-based and therefore highly predictable and expressed in a detailed documentation.
Getting Started An initial assessment of the receivable portfolio, including consolidated aging balance and rollforward, can help confirm if the portfolio is suitable for a TRS. Reviewing the underlying contracts and seller and debtor jurisdictions involved can also increase certainty of execution. Once commercial terms and advance rate methodology is agreed, the most intensive workstream will be drafting documentation. Appointing experienced trade receivables securitization drafting counsel is key to ensuring a robust structure and timely execution. There are many important and jurisdiction-specific pitfalls that a good firm will help you navigate, especially in cross-border transactions.
Closing thoughts
Funding of the trade receivables purchase price is done through the issuance of a senior note or loan, together with an equity tranche, sometimes also mezzanine, a deferred purchase price, or a combination of these. The collections and distributions from the vehicle are governed by a preagreed schedule, also called a waterfall.
The special-purpose entity is frequently managed by a corporate services provider, who will ensure the entity is filing all required returns, paying relevant taxes and meeting applicable local regulatory and legal requirements. Most structures will also require a security trustee, vehicle account bank, cash manager (to manage the waterfall payments) and reporting agent. In addition to this, an auditor will be appointed to perform an annual review of the corporate’s underwriting, collections and arrears-management procedures. Using a reporting agent that can connect to the corporate’s ERP system for automated processing and performance reporting can help drive higher utilization and lower funding costs. Having the data sourced directly and automatically from the ERP system can significantly lower fraud risk, reduce reporting costs and optimise advance rates.
TRS programs can be used as a valuable alternative to other funding solutions, especially in cross-border or challenging credit environments. With a long history and an established and transparent framework, TRS can drive significant benefits for corporate clients.
Tom Huntingford, senior director, working capital structuring, joined Demica in January 2019 from Liberty Global where he was a Structured Finance Director, responsible for all trade receivables financing and assetbased programmes, including the first European handset receivables securitization. Tom joined Liberty Global from Anglia Investment Services where he led several mid-market corporate finance transactions. www.demica.com
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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 1, 2019. 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: Secured Finance Network, Inc. 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.): Secured Finance Network, 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, 2019. 15. Extent and nature of circulation: a. Total number of copies (net press run): Average no. copies of each issue during preceding 12 months: 5197; No. copies of single issue published nearest to filing date: 4719. 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: 4720; No. copies of single issue published nearest to filing date: 5000; (2) Mailed in-county paid subscriptions stated on PS Form 3541 (Include paid distribution above nominal rate, advertiser’s proof copies,
and exchange copies): Average no. copies each 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: 70. c. Total paid distribution (Sum of 15b(1), (2), (3) and (4)): Average no. copies of each issue during preceding 12 months: 4820; No. copies of single issue published nearest to filing date: 4789. 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: 100. 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: 5020; No. copies of single issue published nearest to filing date: 4939. g. Copies not distributed: Average no. copies of each issue during preceding 12 months: 177; No. copies of single issue published nearest to filing date: 61. h. Total (Sum of 15f, 15g): Average no. copies of each issue during preceding 12 months: 5197; 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: 96.01%; No. copies of single issue published nearest to filing date: 97%. I certify that all information furnished on this form is true and complete.
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The 2019 Secured Finance Market Sizing & Impact Study The Authoritative Tool for the Secured Finance Industry to Plan, Benchmark, & Raise Capital The Secured Finance Foundation, in conjunction with Ernst & Young, has conducted the first of its kind Secured Finance Industry Market Sizing and Impact Study for the purpose of benchmarking, strategic planning, attracting capital and assisting in advocacy efforts on behalf of the industry. Through primary and secondary research, the study dimensions the size and scope of the commercial marketplace for secured lending and its related products and services. Part primer, part data compilation and part analytical assessment, the study provides the reader with a detailed view into the highly interconnected segments of this network and their collective impact on capital deployment and economic development. The findings dimension an industry that is far-reaching, influential, thriving and presenting significant growth opportunities for its participants to expand their served and available markets.
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PUTTING CAPITAL TO WORK
Far West Capital Customer
Drink Daily Greens “I’d like to buy the world a Coke….” — Coca-Cola commercial, 1971 BY COLE HARMONSON
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COLE HARMONSON CEO Far West Capital Shauna Martin wants to buy the world a green juice. Well, that’s not entirely accurate. Shauna Martin would love the world to drink a green juice, every day. At 33 years old, Shauna was diagnosed with breast cancer - a head-spinning diagnosis for anyone, but especially a new mother at 33 who considered herself fairly healthy. Then came the draining, life-sapping chemo that would save her life, but leave her feeling weak and malnourished. Trying to detox and strengthen her body, Shauna started juicing at home — and found that it made an enormous difference in her day to drink a fresh-pressed juice every day. She had more energy and she felt better. But when she shared this with the group of young women she’d found who were going through similar cancer experiences, or her friends and family, the response she got was: “This is hard. I don’t know if I can do this every day.” And to be fair, juicing isn’t the easiest thing. There are the ingredients — all that fresh produce, which doesn’t come cheap. There’s the time it takes — especially for young moms like Shauna, who are pressed for time. And then there’s the flavors — it might take you a dozen trial and errors before you found the right combination for you.
The Hustle Begins At the time, Shauna was a successful lawyer, working for a telecom company. But on her nights and weekends she began making
juice, working on flavors and bottling ones she liked to sell at the farmers market. Soon her tent was packed every weekend, and Shauna was thinking about leaving her law career behind. “I just knew that, if I could get everyone to drink a green juice — well, I’d seen it play out for me, my friends. Everything about their health situation got better,“ Shauna says. “They wouldn’t be deficient and malnourished. They’d eat better the rest of the day.” The Consumer Packaged Goods (CPG) industry can be incredibly tough to get into, but Shauna didn’t know any of that. All she knew was that she had a product people really liked. By the end of that first year, Whole Foods and HEB had added her juices to their stores.
Eventually, as distribution deals from Whole Foods and Walmart kicked in, Shauna needed to find investment to scale her production. She found it from two angles — capital lending (aka, what we at Far West do) and equity investment from folks with CPG experience, adding industry expertise to her team. “I think you have to have good investors — hopefully, you pick one that adds value. We have an amazing one — and we also have an amazing partner in Far West Capital, to even out our cashflow through time.” For our part, we were able to support a rapidly growing company keep their purchase orders covered — and kept Shauna’s equity from dilution.
“I didn’t want to start a juice bar. I wanted to get it out there everywhere. I wanted everyone to have access to it,” Shauna says. “I think that I didn’t know how hard it was to crack into this industry, or I might not have done it. Ignorance is bliss, you know?” Shauna laughs.
Keeping up Success
A Changing World
“It’s a David and Goliath situation… they can overspend us if they want to, and that’s been a challenge,” said Shauna.
Daily Greens launched at a fortuitous time, right as the market was changing — and customers were beginning to look for healthier options. “When we started the company, a green juice was a luxury item for a yoga mom on the cutting edge,” Shauna says. “Now, our consumer work tells us that everybody in our customers’ families are drinking daily greens — including the children.” Shauna also realized that the existing products were full of sugars and all fit a relatively narrow profile. So she developed flavors she knew her Texan friends would love — including her bestseller, Vitality, made of savory cucumber, kale, and cilantro, with a bit of pineapple, a touch of lime, and a dash of Himalayan pink salt — with a jalapeno kick at the end. “I came up with that at a barbecue,” she says. “It still does very well in Texas.”
Today, they’re the third biggest bottled juice in their category, and the only one still family-owned.
But for Drink Daily Greens, big television advertisements aren’t necessary. They have a great story, and they can tell that story straight to their consumers via social media. “People really like to connect with the brand that has a purpose and a why behind it,” Shauna says. “It’s not necessarily to make money - it’s to provide health and wellness to everyone.” “Consumers actually care. They want to know: Who? What? Why? How?”
Shauna Martin of Daily Greens, and Cole Harmonson of Far West Capital
“There’s a lot of juice in our category that’s really loaded up with sugar. There’s an overall misconception that just because it’s the color green, it’s healthy. If it’s got more sugar in it than a Coke, it’s probably not healthy.”
Pricing is Everything It helps that her juice is remarkably cheap — $2.99 at Walmart for a 12-ounce bottle of cold-pressed fresh ingredients. That was important to Shauna. She didn’t want Daily Greens to be a luxury product; she wanted it to be something you could find and afford for less money than a Starbucks latte.
Shauna knows she had an unconventional journey to CPG success. Yet she believes it’s replicable - under one condition. “I would tell them to believe in their product 100% in their heart and soul. The first year will be really hard, and they will want to give up, but if they just go to their ‘why’ — that really good reason why they’re creating the product — that will get them through.”
For us at Far West Capital, that belief was a big part of our initial partnership with Shauna and Drink Daily Greens. There are many risks with CPG deals — there could be a recall; a big customer, like Walmart, could stop carrying the product; but we believe in her purpose, her why, and her product. And we know she’ll never stop making it better. Cole Harmonson is the president and co-founder of Far West Capital.
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WHAT WOULD YOU DO?
Sell My Assets, Please! In this edition of What Would You Do?, the Chief Credit Officer of Overadvance Bank considers the unique request from one of its borrowers to conduct an Article 9 secured party private auction sale of the borrower’s assets to maximize the recoveries to the borrower’s creditors. 66 THEBY DAN FIORILLO AND JIM CRETELLA SECURED LENDER NOV. 2019
DAN FIORILLO Otterbourg P.C.
JIM CRETELLA Otterbourg P.C. Overadvance Bank provides a $30,000,000 senior secured, asset-based revolving line of credit to Rockhill Fashions, LLC, a designer and supplier of relatively expensive menswear, womenswear and related accessories. For the last 10 years, the two principals and founders of Rockhill, Paul Picasso and Charlie Monet, have created and sold popular clothing lines through many of the high-end national retail store chains, and in the process established Rockhill as a solid brand name in the apparel industry. Notwithstanding the fickle fashion industry, Rockhill has been a rock-solid credit for the Bank through the years and has plenty of borrowing availability under its revolving line with the Bank. As such, the Chief Credit Officer was somewhat surprised to learn that
Rockhill recently missed a deadline to deliver its financial statements to the Bank under the credit agreement and that Rockhill’s sales have declined for three consecutive months. The Chief Credit Officer at Overadvance Bank reached out to the Rockhill for some answers. Picasso responded to the Bank’s inquiry by advising the Chief Credit Officer that he and Monet were in the process of dissolving their partnership, both personally and professionally, and that the split between the two principals was bringing Rockhill’s business to a grinding halt and jeopardizing Rockhill’s ability to fulfill its orders for the next season. The Chief Credit Officer was shocked. What he initially thought was a minor hiccup with a good credit has now mushroomed into a major credit risk. Any failure of Rockhill to fulfill its order for next season would likely dilute the existing accounts receivable, jeopardize Rockhill’s ability to generate new sales and materially damage value of Rockhill’s brand. The Bank met separately with Monet and Picasso, and the estranged business partners agreed to immediately pursue a sale of the company outside of bankruptcy. Monet and Picasso also considered pursuing a sale through Chapter 11 but decided against Chapter 11 due to the cost (especially relatively to an out of court sale process) and the potential negative impact a bankruptcy would have on value of Rockhill’s brand.
auction of eligible bidders to select the highest bid and then quickly close on the winning bidder’s offer. The CFO noted that, during the forbearance period, several potential buyers expressed an interest to buy Rockhill’s assets from the Bank in an Article 9 sale, as opposed to dealing with dysfunctional Picasso and Monet on a direct asset purchase from Rockhill. The CFO reasoned that the Article 9 sale process he suggested to the Bank would remove Picasso and Monet from interfering with the sale and, based on the offers submitted for Rockhill during the forbearance period and on recent appraisals of Rockhill’s intellectual property and other assets, would produce a viable purchaser willing to pay the most for a business that still had going concern value in excess of the Bank’s debt. The Chief Credit Officer is intrigued with the CFO’s idea, but wonders whether such sale process could work in the context of an Article 9 secured party sale. The Chief Credit Officer is familiar with secured party sales under Article 9 of the Uniform Commercial Code, but only in a liquidation scenario whereby the borrower’s operations either ceased or were substantially reduced to a “warm shut down” mode and the Bank took possession of its collateral to sell the collateral on an “as is, where is” basis (in either a private sale or public auction) with no representations or warranties being made to the buyer. By contrast, the process described by the CFO sounds more like a going concern sale process run by an investment banker engaged by the company to run a marketing and sale process, culminating in a private auction attended by bidders qualified to participate in the process and ending with a closing on an asset purchase agreement to sell the business as a going concern.
The Chief Credit Officer knows that, to pursue a sale process outlined by the CFO, he will have to fund operations of Rockhill for several weeks leading up to the auction sale, as well as costs of engaging an investment banking consultant to conduct the marketing and sale process.
Monet and Picasso made a strong case to the Chief Credit Officer that Rockhill, despite its troubles, still had going concern value in excess of the working capital collateral. Accordingly, the Bank entered into a forbearance agreement with Rockhill pursuant to which Rockhill engaged a financial advisor to assist with operations and the marketing efforts for the sale of the business. However, after a month of soliciting and receiving multiple offers for sale of the business, Monet and Picasso could not agree on a buyer or terms of the sale. Frustrated with playing mediator between Picasso and Monet, and wanting to close a sale of Rockhill before its going concern value is entirely gone, Rockhill’s Chief Financial Officer suggested that the Bank conduct a secured party sale of its collateral under Article 9 of the Uniform Commercial Code. The CFO envisioned a sale process whereby the Bank could set deadlines for submissions of bids, conduct a private
The Chief Credit Officer knows that, to pursue a sale process outlined by the CFO, he will have to fund operations of Rockhill for several weeks leading up to the auction sale, as well as costs of engaging an investment banking consultant to conduct the marketing and sale process. Of course, the alternative is a shutdown/liquidation of Rockhill, which does not bode well for the Bank’s full recovery prospects. If you were the Chief Credit Officer, what would you do? Article 9 of the UCC allows a secured creditor to sell all, right, title and interest of the debtor (i.e., borrower) in and to collateral covered by
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WHAT WOULD YOU DO? Article 9 (e.g., inventory, equipment, contract rights, receivables, but not items such as real estate or deposit accounts). Article 9 provides that a secured party sale may be conducted as either a private sale or a public sale (i.e., a sale that is advertised and open to the public) so long as “every aspect of the disposition, including the method, manner, time, place and other terms” is commercially reasonable. In other words, Article 9 allows the type of secured party sale proposed by Rockhill’s CFO so long as the sale is commercially reasonably in all aspects. Getting back to Rockhill, the Chief Credit Officer organizes a teleconference with Picasso, Monet, Rockhill’s CFO and Rockhill’s restructuring advisor to lay out a strategy for proceeding with a secured party sale of the going concern of Rockhill’s business. The Chief Credit Officer explains that he would consider amending the forbearance agreement between the Bank and Rockhill to provide for the Bank’s engagement, at Rockhill’s sole cost and expense, of an investment banker consultant with a specialty in selling apparel companies to coordinate a private auction sale process, which would include giving the investment banker total access to the company’s data room, personnel, books and records. The investment banker would prepare and distribute a bid package describing Rockhill’s assets to potential bidders that the investment banker determined where suitable to participate in the sale process. The bid package would disclose the sale as a secured party private sale, with assets being sold on an “as is, where is” basis. Bid deadlines and an auction date and place would also be included in the bid package, so that the auction could take place between 30-45 days from engagement of the investment banker consultant.
The Chief Credit Officer also required that Rockhill appoint the company’s current restructuring advisor as its Chief Restructuring Officer to run the operations during the marketing period, and appoint an independent director to Rockhill’s board, to whom the CRO would directly report and who would have exclusive authority over all corporate decisions affecting the sale process (considering neither Picasso nor Monet could agree on anything anymore). The amended forbearance would specifically provide that Rockhill consented to the private auction secured party sale, waived any rights to notice of the sale, and would include as an exhibit an executed collateral peaceful possession letter in favor of the Bank, which would go effective simultaneously with the closing of the winning bidder’s private auction sale offer. The Chief Credit Officer understands that there is a risk that the increased costs associated with running this sale process may not be realized by the results of the private auction. However, he reasons that the shut down/liquidation analysis is sure to result in a loss, and this process clearly gives the Bank, as well as other creditors of Rockville, the best shot at a robust recovery. 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. Dan Fiorillo and Jim Cretella are members of the law firm Otterbourg P.C.
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Good to Know
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Same trusted company. Same dedicated people. Brand new name and look.
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COMMITTEE SPOTLIGHT
Convention Programming Committee 2019 This column highlights the hard work and dedication of SFNet committee volunteers. Here we speak with David Morse, chair of the Convention Programming Committee 2019. BY MICHELE OCEJO 70
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DAVID MORSE Partner Otterbourg P.C. What would you say has been the best part of chairing the Convention Committee and the most challenging? The best part of working on the Convention is getting to work with the various committee members, to talk to moderators and panelists for the programs and to get a chance to think about what is really of interest to our community and would make for great content for us. I am very excited about the programming because we have done a couple of things a bit differently. First, many of the panels are going to have various publications and other organizations that assemble data about aspects of our market, or on matters that impact our network’s market, present the results of their surveys and data followed by panelists who can speak to that data in the context of their specific businesses. So people attending the conference will get unique access to a combination of objective information and subjective real-life context for that information—not really available in any other way. Second, reflecting the complexity of the current state of affairs, we are going to have a lot of commentary on macroeconomic and geopolitical events from experts, kicking off with our keynote speaker, Peter Zeihan, and including what should be an extremely engaging debate between Professor
Kelton as a proponent of Modern Monetary Theory and Marci Rossell, a CNBC economist and Sqawk Box commentator, all moderated by a CBS business journalist. This promises to be one of the highlights of the Convention. At the same time, we are going to have some serious content about topics that are integral parts of our secured finance businesses...issues around covenant deterioration, trends in Chapter 11 financing: our “not for lawyers only” program should cover some key matters like LIBOR replacement from the likes of Meredith Coffey, who is the cochair of the committee responsible for developing the approach for its replacement, the Alternative Reference Rate Committee. I really hope that everyone takes full advantage not only of the great opportunities to network, but to listen to some truly engaging programs. Why were you interested in this particular Committee? Having worked on the International Lending Conference since Richard Kohn and I started it 13 years ago, I knew how rewarding it could be to help to put together an event like this, although I confess this is of a somewhat larger scale and compounded with the challenges of New York City. The nice thing about this committee is, somewhat like the deals that I work on, it has a clear beginning, middle and end—just a different type of closing. How do you manage to juggle your high-pressure “day job” along with the time required for chairing a committee and what advice would you give to others who are interested in joining a committee?
good news is that, generally, timing for most tasks has some flexibility so you can manage around the time pressure that may surface in connection with other work. Ultimately, of course, in terms of working with a committee, sometimes, in the spirit of the Nike slogan, you just have to do it. What is the last book you read? While I have always loved to read (go figure, a lawyer who likes to read…), most of my reading consists of cases and articles related to secured finance, but I actually did get a couple of days of downtime on Cape Cod with family this summer, where I read a fascinating history of New York City for the period from 1898 to 1919 by Edwin G. Burrows and Mike Wallace called Greater Gotham: A History of New York City from 1898 to 1919. It captures an era of intense change in our world, not unlike when we look back over the last few decades now, laying out the competing forces driving such change and its direction and at the same time gives a perspective on how different the places that we pass each day as we work and live here are from that bygone era.
The best part of working on the Convention is getting to work with the various committee members, to talk to moderators and panelists for the programs and to get a chance to think about what is really of interest to our community and would make for great content for us. I am very excited about the programming because we have done a couple of things a bit differently.
My involvement with the Secured Finance Network over a lot of years has always been a challenge, but the SFNet staff is just great to work with and really pull a lot of weight in getting things done, particularly at those times when my “day job” may not leave me the time to spend on it at least at a specific moment. It is very reassuring to be able to rely on them to spend a lot of the time needed to get things done. The
Michele Ocejo is director of communications for the Secured Finance Network and editorin-chief of The Secured Lender.
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SFNET CHAPTER CONNECTIONS
Southwest Chapter, Eighth Annual Energy Summit The Secured Finance Network’s Southwest Chapter, Association of Insolvency and Restructuring Advisors, and Turnaround Management Association co-hosted the Eighth Annual Energy Summit in Dallas, Texas, on September 17, 2019 BY H. JOSEPH ACOSTA 72
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H. JOSEPH ACOSTA Partner FisherBroyles, LLP Over 120 attendees gathered to hear from industry leaders about the current trends in the energy industry. Presentations were made by Exxon Mobil, FTI Consulting, AlixPartners, Alvarez & Marsal, Huron Consulting, Jones Day, Kirkland & Ellis, Akin Gump, Haynes & Boone, and Riveron Consulting, to name a few. The keynote speaker, Peter Trelenberg, a manager of Environmental Policy and Planning at ExxonMobil, discussed Exxon’s Energy Outlook for the next 20 years. Currently, while the populations of China and India dwarf that of most other countries, energy consumption is highest in countries like the United States, where energy is more heavily relied on for human development. Indeed, almost half of the world’s energy is dedicated towards industrial activity, while commerce and trade drive transportation energy consumption by more than 25%. As the global population grows by approximately 1.6 billion in the next 20 years, energy demand is also predicted to grow by more than 20%. Global energy consumption will shift to lower-carbon fuels, although coal is still expected to comprise almost 20% of consumption. While oil and nuclear energy consumption will increase slightly, the largest increases in primary energy consumption will come from natural gas and wind/solar energy. Meanwhile, global electricity demand is expected to rise 60%. Because oil and natural gas will remain important energy sources, trillions of dollars of investment will
be needed to generate sufficient supplies of this type of energy to meet demand. On the more domestic front, the Restructuring Panel, moderated by Lloyd McGuire of FTI Consulting, discussed the rise in oil and gas bankruptcies in 2019 and the challenges that face financially distressed energy companies due to unsustainable capital structures, continued depressed commodity prices and a weak M&A market driven by capital providers wary of a nearterm market recovery. In fact, many companies are making a return trip to the bankruptcy court to shed additional debt as pricing assumptions embedded in prior plans of reorganization did not materialize. The unique environment has, by necessity, created innovative approaches to restructuring E&P companies, including a strategy of private equity firms to “mash-up” one or more insolvent companies through a merger transaction that theoretically allows the combined companies to scale their operations and achieve certain efficiencies.
Energy, Inc, discussed how M&A transactions are currently less common amongst middle-market companies, where there is less liquidity. M&A transactions in this market appear to be driven by cash flow considerations and deleveraging, in an effort to create an entity that can drill out of its cash-flow issues. While conventional wisdom is that large companies, like Chevron and BP, are gearing up to acquire smaller, ailing companies at bargain prices, indications are that investors are closely scrutinizing potential acquisitions this time around, seeking not just any bargain, but producers that can achieve the highest production at the cheapest cost. One of the panelists also reported it was taking a longer period of time for M&A transactions to close, as buyers have multiple options and fear making the wrong strategic move.
Keynote Speaker Peter Trelenberg, ExxonMobil
Scott Price of Kirkland & Ellis and Brian Cumberland of Alvarez & Marsal discussed how to navigate the retention of key executives necessary to effectuate a restructuring of an insolvent company. This is not a simple matter of executives (insiders) naming their price. Rather, given the restrictions imposed by the Bankruptcy Code, compensation for key executives is now largely tied to the performance of the company and other benchmarks achieved during a restructuring.
Overall, the Energy Summit shed much light on topics that have been, and should continue to be, at the forefront of everyone’s mind. H. Joseph Acosta is the co-chair of the 2019 Energy Summit, immediate past president of the Secured Finance Network’s Southwest Chapter and a partner in the Corporate Restructuring Department of the national law firm of FisherBroyles, LLP, which has approximately 250 attorneys and 23 locations in the U.S. He is lead counsel in some of the most complex restructuring, bankruptcy and commercial litigation matters in the country.
Co-Chairman Peter Heinz, FTI Consulting, introducing Restructuring Panel Moderator, Lloyd McGuire, FTI Consulting; and Presenters JP Hanson, Houlihan Lokey; Sarah Schultz, Akin Gump Strauss Hauer & Feld; Monty Kehl, Huron Consulting, and Eli Columbus, Haynes & Boone
Lastly, the M&A Panel, moderated by Tony Schnur of Yuma
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SFNET MEMBER PROFILE
Founded For Entrepreneurs By an Entrepreneur
FTC Commercial Corporation was launched in 2002 with a strong focus on small and medium-size enterprise. Co-founder Ken Wengrod tapped into his experience, having worked in factoring and retail to create a company that understands the entire trade cycle of manufacturing and importing. 74
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BY EILEEN WUBBE
KEN WENGROD Co-founder FTC Commercial Corporation FTC Commercial Corporation specializes in financing start-up businesses, public entities and global businesses. It provides its services to small and mid-size companies that are expanding and need solutions to accelerate their working capital. FTC co-founder Ken Wengrod’s background includes running numerous factoring operations for banks, managing a large manufacturing and retail operation, as well as setting up and owning two of his own successful apparel companies. His specialization in the fashion industry leads to an extensive understanding of the entire trade cycle of manufacturing and importing, from design concept to sales. Furthermore, Wengrod is the Chairman of the Regulatory & Legislation Committee and was appointed by the U.S. Secretary of Commerce to be a member of the District Export Council of Southern California. He was also appointed as a member to the Trade Finance Advisory Council (TFAC) by Secretary of Commerce and Vice Chair of the Sub-Committee Private-Public Partnerships. “I am actively involved in advocating on an educational basis to the legislators and Congressional leaders to make sure they understand the benefits of exporting and creating jobs in the United States, primarily in our region,”
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SFNET MEMBER PROFILE Wengrod said. “I was recently appointed to the Trade Finance Advisory Council, the principal advisory body to the Secretary of Commerce on matters relating to trade and accessing trade finance for U.S. exporters. “I also worked in the private sector; one of my clients hired me, and I ran a large garment company as COO,” Wengrod continued. “After we completed an acquisition of a retailer, I had about 1,200 people report to me. I moved on from there and became the manager of a converting company. I set up two garment companies, one in which I still own an interest; both companies are in the $20 and $30 million range. I got bored and realized there was a void in the market for someone who truly understood the need and aspirations of an entrepreneur. So, I created FTC as an entrepreneur for entrepreneurs, with a very strong focus on small and medium-size enterprise. I felt there was a huge void in this area and that’s where we started.” FTC has since factored numerous companies from startups to major labels including William Rast /Justin Timberlake, Tom’s Shoes, Sally Hershberger, Joe Jean’s Kids, and many others, some having grown to over $40 million in sales. FTC has done over $3 billion in factor volume since inception.
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“With my background being on all sides, I understand what it takes from concept to market and what the manufacturer, wholesaler or an importer or exporter go through and what their needs are, and how to help them,” Wengrod explained. “I think this is what is really crucial, where we differentiate from other companies.”
better than some of the US retailers,” he said. “I’ve done a reverse spin in working with young companies and encourage them to build their European customer base or even parts of Asia. When the US merchant sees that you’re offshore, you are going to be more in demand. That has worked very effectively. Ninety-five percent of the customers are outside our boundaries. In the US, people are fighting for the same customers. Why not expand it and go further?” “If you make goods in the States you don’t have queue or idle time, where merchandise sits on the water for 15 days or longer,” Wengrod explained. “You can reduce your cycle time, so you don’t have to rely so heavily on labor prices. Chinese labor prices are on par with Mexican labor prices. Everything must be looked at on these supply chains; how do you run your business more effectively and efficiently? The same holds true for the factoring community and commercial finance. I think it’s a huge, wide open market, on exports especially when the customer’s credit is very strong offshore. How do you lend and how do you do it efficiently for all parties?” Eileen Wubbe is senior editor of The Secured Lender.
“With my background being on all sides, I understand what it takes from concept to market and what the manufacturer, wholesaler or an importer or exporter go through and what their needs are, and how to help them,” Wengrod explained. “I think this is what is really crucial, where we differentiate from other companies.”
FTC has had clients throughout the world from Mexico, Spain, Morocco, China and Southeast Asia that do business in the States. Wengrod received the U.S. Presidential E Award from U.S. Secretary Ross on behalf of FTC for export service. “We’re a large believer in exports, not only to help our country create more jobs, but I feel that on exports in particular, especially if they are good credit customers, pay
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