TSL March 2017

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

The Blockchain Moves Fast

The Laws Less So PAGE 12

ALSO IN THIS ISSUE CREDIT RISK MITIGATION, CAPITAL RELIEF & INSURANCE GUARANTEES P16

TSL INTERVIEW

STUART BRISTER:

LEADING WELLS FARGO COMMERCIAL SERVICES GROUP INTO THE FUTURE P28

SUPPLY CHAIN FINANCE ACCOUNTING MYTHS AND REALITY P20

FROM THE GARAGE TO THE HIGH-RISE TO THE GARAGE: PART 2 P24

DEPARTMENTS

COLLATERAL // THE CFA BRIEF WHAT WOULD YOU DO? REVOLVER // LEGAL NOTES

NOMINATE

A RISING STAR NOW

CFA is Looking for the Best and Brightest in the Industry You know the type: Energetic self-starters with superior skills. They get noticed. Do great work.

Represent the best of the industry.

And they haven’t even reached 40.

The 2nd Annual 40 Under 40 Awards will celebrate the achievements of young professionals in the commercial finance industry — movers and shakers who exemplify true excellence in their careers and who bring a strong voice and commitment to the industry at large.

Last year’s 40 Under 40 celebration drew over 350 current and future industry leaders and was THE New York networking event of the fall. Make sure your rising stars are represented this year!

please contact Michele Ocejo at mocejo@cfa.com.

CFA 40 Under 40 Awards

Visit www.cfa.com/40under40 to start nominating now!

EVENT HELD SEPT. 28, 2017 NYC

All nominations are due by May 1, 2017. For further questions,

“Wells Fargo Capital Finance has been by our side, supporting us and working with us every step of the way.�

CA P I TA L FINANCE Our Lender Finance team serves: Asset-based lenders Factors Equipment leasing and finance companies Other specialty finance companies

Steve Lowenthal and Brian J. Van Nevel, Co-CEOs, SPECTRUM Commercial Services Company

SPECTRUM Commercial Services offers asset-based loans and accounts receivable financing services nationwide. When Steve Lowenthal and Brian Van Nevel purchased the company in 2001, they needed a lender who could help them weather market challenges and capitalize on opportunities.

With the Lender Finance team at Wells Fargo Capital Finance, Steve and Brian found a team of professionals that truly understood asset-based lending and factoring. Since that first conversation more than 14 years ago, our teams have worked side by side, successfully navigating the changing landscape of the marketplace. To learn more about what our Lender Finance team can do for your business, talk with us today by calling 1-877-770-1222, or visit wellsfargocapitalfinance.com/spectrum.

Š 2015 Wells Fargo Capital Finance. All rights reserved. Products and services require credit approval. Wells Fargo Capital Finance is the trade name for certain asset-based lending services, senior secured lending services, accounts receivable and purchase order finance services, and channel finance services of Wells Fargo & Company and its subsidiaries.. WCS-1168043 (06/15)

CFA’S 73RD

ANNUAL CONVENTION

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NOVEMBER 8 – 10, 2017 SHERATON CHICAGO HOTEL & TOWERS CHICAGO, IL BE PART OF SOMETHING

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CFA ANNUAL 2017 brings together the CFA Community to network with the premier decision makers our industry has to offer. Impactful panels, thought leaders and industry insiders all converge at our EPIC event each year – Be part of it. Reinforce your brand loyalty, increase your visibility and boost your market share, become an official sponsor of the CFA 73rd Annual Convention Sponsor.

The Annual has been the Premier Networking Event for the Commercial Finance industry for over 70 years!

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

Volume 73, Issue 2

March 17

FEATURES 12 The Blockchain Moves Fast; The Laws Less So While distributed ledger technology offers a potentially revolutionary way for investors to track ownership and other interests in invoices and reduce information risk, the full potential of this technology will not be achieved until its use is fully incorporated into the law. By Jason Kravitt, Massimo Capretta and Michael Gaffney

16 Credit Risk Mitigation, Capital Relief & Insurance Guarantees Jerry Paulson of Lockton Companies discusses the effects of Basel III on unfunded credit risk; the rules and techniques of using credit insurance as a qualified guarantee for transfer of bank risk. By Jerry Paulson

12 20 Supply Chain Finance Accounting Myths and Reality Supply chain finance has helped industry leaders significantly improve working capital efficiency, with individual companies generating over one billion dollars in operating cash flow gains. However, despite the success stories, many companies fall far short of expected results. This article explores one particular issue. By Robert Kramer

20

24 From the Garage to the High-Rise to the Garage: Entrepreneurs and Their Avoidable Demise Part 2 This is the second part of a two-part article discussing how entrepreneurs can be their own worst enemy. The first part appeared in the October issue.

By Bayard Hollingsworth

24

28 TSL Interview Stuart Brister: Leading Wells Fargo Commercial Services Group into the Future Stuart Brister leads the Commercial Services Group of Wells Fargo and is based in Atlanta, GA. In this role, he oversees domestic and international accounts receivable financing activities including specialties in areas such as consumer, government, transportation, staffing and international factoring. By Michele Ocejo

28

DEPARTMENTS 6

Letter From Richard D. Gumbrecht, Interim CEO of CFA, discusses how CFA is engaging the next generation of commercial finance leaders.

8

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

31

What Would You Do? In this edition of What Would You Do?, the Chief Credit Officer of Overadvance Bank considers his options when a struggling borrower informs the Bank that it intends to discontinue operations imminently. By Dan Fiorillo and Jim Cretella

33

The CFA Brief 33 39 41 43

Among CFA Members Among CFA Education Foundation Members CFA Chapter News CFA Calendar

43

Advertisers Index

45

Legal Notes The case we have selected for this issue addresses the applicability of makewhole premiums after the automatic acceleration of debt triggered by the commencement of a bankruptcy case. By Jonathan Helfat and Richard Kohn, CFA Co-General Counsel

48

Revolver Jo Bennett-Coles of FGI discusses the future of cross-border asset-based lending.

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

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

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

The Commercial Finance Association is the trade group for the asset-based lending arms of domestic and foreign commercial banks, small and large independent finance companies, floor plan financing organizations, factoring organizations and financing subsidiaries of major industrial corporations.

The objectives of the Association are to provide, through discussion and publication, a forum for the consideration of inter- and intra-industry ideas and opportunities; to make available current information on legislation and court decisions relating to asset-based financial services; to improve legal and operational procedures employed by the industry; to furnish to the general public information on the function and significance of the industry in the credit structure of the country; to encourage the Association’s members, and their personnel, in the performance of their social and community responsibilities; and to promote, through education, the sound development of asset-based financial services.

The opinions and views expressed by The Secured Lender’s contributing editors and authors are their own and do not necessarily express the magazine’s viewpoint or position. Reprinting of any material is prohibited without the express written permission of The Secured Lender.

The Secured Lender, magazine of the assetbased financial services industry (ISSN 0888255X), is published 8 times per year (Jan/Feb, March, April, May, July, September, October and November) $65 per year non-member rate, and $100 for two years non-member rate, CFA members are complimentary, by Commercial Finance Association, 370 Seventh Avenue, New York, NY 10001. Periodicals postage paid at New York, NY, and at additional mailing offices. Postmaster, send address changes to The Secured Lender, c/o Commercial Finance Association, 370 Seventh Avenue, New York, NY 10001.

w

letter from THOUGHTS FROM CFA AND TSL STAFF

elcome to this month’s edition of The Secured Lender. In my brief time as your interim CEO I have been impressed by the depth and breadth of engagement of our members and volunteers. No group exemplifies this commitment more than our up-and-coming professionals, as evidenced by the 40 Under 40 winners in attendance at CFA’s Asset Based Capital Conference in Las Vegas, January 31-February 1.

Several of the winners and their mentors participated in a lunch panel presented by the CFA Women in Commercial Finance Committee, CFA 40 Under 40: Perspectives on Leadership Development, which showcased their rich talents while highlighting the importance of mentorship and a culture of learning and development to our community.

There is no better reflection of the vitality of an organization than its future leaders.

In June, we will host our second Leadership Program in Atlanta. This program was designed to complement and supplement the in-house programs of our members and provide tools and insights to strengthen leadership capabilities that prepare participants for the challenges of tomorrow.

2016 saw the expansion of the CFA’s YoPro outreach at both the national and chapter levels, with many young professionals participating in sponsored events and now serving on committees across a spectrum of initiatives. 2016 was also the year we launched our 40 Under 40 Awards program, which was a huge success and concluded with a celebration at the Waldorf Astoria in New York City, with over 350 attending. Nominations are now open for the 2017 class.

The energy of these groups is contagious.

Coupled with the success of our Women in Commercial Finance Committee, which now boasts over 90 members, we continue to demonstrate our commitment to diversity and inclusiveness as we shape the future of our industry. Two initiatives that embody this commitment are the first CFA Women in Commercial Finance Conference to be held in New York in late September and The Secured Lender’s Women in Commercial Finance June issue.

Another key way we engage both young professionals and the industry’s most seasoned executives is through the pages of this magazine and this issue certainly has its share of relevant and insightful articles.

It seems you can’t attend an industry event without hearing the word “blockchain.” In The Blockchain Moves Fast; The Law Less So on page 12, three attorneys from Mayer Brown discuss how this technology offers a potentially revolutionary way for investors to track ownership and other interests in invoices and reduce information risk. However, they caution that the full potential of this technology will not be achieved until its use is fully incorporated into the law.

Jerry Paulson of Lockton Companies discusses the effects of Basel III on unfunded credit risk in Credit Risk Mitigation, Capital Relief and Insurance Guarantees on page 16.

On page 20, Robert Kramer of Capgenta explains how supply chain finance has helped industry leaders significantly improve working capital efficiency. However, despite the success stories, many companies fall far short of expected results. This article explores one particular issue that has delayed SCF implementations and negatively impacted results - trade payables accounting.

This issue’s TSL Interview, on page 28, features Stuart Brister who leads the Commercial Services Groups of Wells Fargo In this role, he oversees domestic and international accounts receivable financing activities including specialties in areas such as consumer, government, transportation, staffing and international factoring. With more than 31 years in the industry, Brister has held various senior management positions in the commercial finance, capital markets and banking sectors. He joined Wells Fargo in 2005, was named Trade Capital division president in 2007 and Commercial Services division president in 2013.

In From the Garage to the High-Rise to the Garage: Entrepreneurs and Their Avoidable Demise Part 2, on page 24, Bayard Hollingsworth of Phoenix Management discusses how entrepreneurs can be their own worst enemy.

Enjoy this month’s issue. And thanks for everything you do to make your Association a thriving, learning community of professionals dedicated to your success.

“2016 was also the year we launched our 40 Under 40 Awards program, which was a huge success and concluded with a celebration at the Waldorf Astoria in New York City, with over 350 attending. Nominations are now open for the 2017 class.”

6

NOMINATIONS ARE OPEN FOR CFA’S 2017 40 UNDER 40 AWARDS WWW.CFA.COM/40UNDER40

Richard D. Gumbrecht CFA Interim CEO

Want Your Potential Customers To Find You? J O I N T HE CFA S E RVICE P R O V IDE R DIRE CTORY

20,000 Visits Per Month!

Share information about your business and tell commercial finance professionals how you can help them solve problems and grow their business on CFA’s Online Service Provider Directory. Business leaders will be able to read about the services and products you provide, then reach out to your key contacts for more information.

CFA’s Service Provider Directory will allow you to easily find and contact the industry partners you need to optimize your company’s success.

We have over 75 service providers at your fingertips with current contact information to ensure you do not waste any time finding what you need when you need it.

CFA/ SP D

communit y. cf a. com/ communities /s p d

Contact James Kravitz Business Development Director Commercial Finance Association Tel:(646)839-6080 | jkravitz@cfa.com

collateral INDUSTRY NEWS

THE INDUSTRY IN BRIEF

8

Rita Cook Named A Managing Director and Head of the Midwest Middle-Market Region for Global Commercial Banking (GCB) at Bank of America Merrill Lynch.

Based in Chicago, Cook, a 20-year veteran of the Bank, will lead a team of bankers in Illinois, Indiana, Iowa, Michigan, Minnesota, North Dakota, Ohio and Wisconsin, who serve clients with annual revenues of $50 million to $2 billion. Her team provides commercial credit, treasury management solutions, international banking, and investment banking and retirement products to help clients meet their financial goals.

Cook is a managing director and head of the Midwest Middle-market region for Global Commercial Banking (GCB) at Bank of America Merrill Lynch. Based in Chicago, she leads a team of bankers in Illinois, Indiana, Iowa, Michigan, Minnesota, North Dakota, Ohio and Wisconsin, who serve clients with annual revenues of $50 million to $2 billion. Her team provides commercial credit, treasury management solutions, international banking, investment banking and retirement products to help clients meet their financial goals.

Throughout nearly 20 years with Bank of America and its predecessors, she has held various management positions in finance, product management and sales.

Prior to assuming her current role in 2016, Cook was the chief operating officer for GCB with responsibility for managing strategic initiative implementation, identifying and monitoring key business risks, regulatory compliance and sales enablement.

Cook has also served as head of International Treasury Sales for GCB where she managed a team of global treasury experts who structured multi-regional treasury deals to meet clients’ global cash management needs while enhancing visibility and

access to cash. Based on her knowledge of the market, she assisted in driving the strategy and tactics to compliment clients’ expansion plans outside North America.

Cook joined Bank of America predecessor firm LaSalle Bank in 1997.

A graduate of Governors State University with a bachelor’s degree in accounting, Cook is a Certified Treasury Professional (CTP) and is a Series 7 and 63 licensed securities professional. She is also actively involved in the Global Commercial Banking Power of 10, a member of the Bank of America Merrill Lynch Women’s Leadership Council, and is active in military and veteran’s affairs.

Citizens Bank Hires Brian K. Peters as Southeast Regional Executive Brian K. Peters was hired as regional executive and head of the Southeast.

Peters is a 25-year banking industry veteran and former managing director at SunTrust.

“Brian is a senior leader who brings an impressive track record of establishing and growing Corporate Banking businesses through a thought leadership approach.”

“The Southeast region represents an area where we have an attractive opportunity to grow our business,” said Donald H. McCree, vice chairman and head of commercial banking at Citizens. “Brian is a senior leader who brings an impressive track record of establishing and growing corporate banking businesses through a thought leadership approach.”

Peters joins Citizens following a successful 20-year career at SunTrust, where he most recently served as Head of National Corporate Banking, leading a geographic expansion that

NOMINATIONS ARE OPEN FOR CFA’S 2017 40 UNDER 40 AWARDS WWW.CFA.COM/40UNDER40

included the opening of seven new offices.

Peters has a bachelor of arts in mathematics from Western Kentucky University and a master of business administration (Finance) from Indiana University. He will be based in Atlanta, where he has served clients and the community since 1991.

Citizens is positioned as a strategic and financial partner, offering deep expertise, great ideas and seamless deal execution. The Citizens Commercial Banking approach puts clients first, and offers solutions that help clients make the best decisions throughout the life cycle of their business.

About Citizens Financial Group, Inc. Citizens Financial Group, Inc. is one of the nation’s oldest and largest financial institutions, with $147 billion in assets as of September 30, 2016.

Headquartered in Providence, Rhode Island, Citizens offers a broad range of retail and commercial banking products and services to individuals, small businesses, middle-market companies, large corporations and institutions. In Consumer Banking, Citizens helps its retail customers “bank better” with mobile and online banking, a 24/7 customer contact center and the convenience of approximately 3,200 ATMs and approximately 1,200 Citizens Bank branches in 11 states in the New England, Mid-Atlantic and Midwest regions. Citizens also provides wealth management, mortgage lending, auto lending, student lending and commercial banking services in select markets nationwide. In Commercial Banking, Citizens offers corporate, institutional and not-for-profit clients a full range of wholesale banking products and services including lending and deposits, capital markets, treasury services, foreign exchange and inter-

Crestmark’s Board of Directors Names Barry Essig Vice Chairman Emeritus; Essig to Retire Crestmark chairman and CEO Dave Tull announced that vice chairman Barry Essig retired in December 2016.

In recognition of his outstanding contributions to Crestmark and to the financial services industry, over a long and impressive career, Crestmark’s Board of Directors has named Essig vice chairman emeritus.

“Barry’s contributions to Crestmark’s success are many,” Tull said.”

“Chief among them is that he cares deeply about Crestmark’s clients and employees, and about a great workplace culture. He provided invaluable insight and expertise. I am deeply grateful to Barry for all that he helped Crestmark achieve, and also for his wisdom and friendship,” Tull added.

Essig joined Crestmark in 2001 with the company’s acquisition of Spectrum Financial Corporation, an established traditional factoring company with expertise in the apparel, footwear, and home furnishings industries. Essig was the president and CEO of Spectrum, which was a wholly owned subsidiary of Wachovia Bank.

Essig’s career in finance and banking includes the following: senior vice president of The CIT Group/Commercial Services, where he was responsible for the unit’s northeast tradi-

tional factoring portfolio; senior vice president and manager of Barclays Commercial Corporation in New York, the factoring subsidiary of Barclays Bank; and director, executive vice president and chief operating officer of National Westminster Bank’s factoring operation in the United States.

Active in the industry, Essig served as a director of the Commercial Finance Association, and was a member of its Executive Committee, and is a past chairperson of The Entrepreneurial Finance and Factoring Committee, The International Trade Services Committee, and the Factoring Committee.

Essig attended the College of the City of New York and the Graduate School of Credit and Financial Management at Dartmouth College.

He is a frequent speaker at industry events on a variety of finance-related subjects, and he has been a contributor to industry publications on the topics of domestic and international factoring and finance.

Crestmark is an FDIC-insured bank that provides innovative financial solutions for businesses nationwide. Financing solutions include asset-based lending, accounts receivable financing, lines of credit, term loans, factoring, machinery/equipment financing and equipment leasing. Crestmark has extensive experience in helping many industries, including transportation, manufacturing, staffing, petrochemical, government contractors, apparel/ footwear/furniture distribution/ manufacturing, hospitality/hotels, insurance agencies, and technology hardware/software. Headquartered in Michigan, with additional offices in California, Florida, Louisiana, Tennessee, New York, and Illinois; and representatives nationwide. http:// www.crestmark.com

Three Experienced Bankers Join PNC’s Senior Secured Financing Team PNC Bank, N.A. announced the addition of Daniel Morihiro, senior vice president; Patrick Simpson, senior vice president, and Graham Holding, vice president, to the senior secured financing team. All will be responsible for business development and loan origination sourced from middlemarket companies and private equity groups.

Morihiro joins PNC’s senior secured financing team based in Pasadena, CA. Morihiro is a 20-year veteran of banking and finance, most recently serving as senior vice president with BBVA Compass, originating cash flow and asset-based loans for middle-market companies in southern California. He earned a bachelor’s degree in mechanical engineering from The University of California at Los Angeles, and an MBA from the Marshall School of Business at the University of Southern California. Morihiro also holds a Chartered Financial Analyst (CFA) designation from the CFA Institute, the global association of investment professionals.

Based in New York, Simpson joins PNC with more than a dozen years of commercial banking experience with Wells Fargo Capital Finance, most recently as a business development officer responsible for middle-market loan originations. He earned his master of business administration and a bachelor of business administration in international business from the University of Florida. Simpson also served with honor in the United States Marine Corp.

Since joining the Corporate Banking team at PNC in 2007, Holding has held a variety of positions in field examination and portfolio management, managing relationships with middle-

INDUSTRY NEWS

est hedging, leasing and asset finance, specialty finance and trade finance.

Citizens operates through its subsidiaries, Citizens Bank, N.A., and Citizens Bank of Pennsylvania as Citizens Bank, Citizens Commercial Banking and Citizens One. Additional information about Citizens and its full line of products and services can be found at www.citizensbank.com.

THE SECURED LENDER MARCH 2017 9

INDUSTRY NEWS

collateral

market clients. He transitions to the senior secured financing team based in Boston. Holding earned a dual bachelor of arts/bachelor of science degree in finance & economics from Villanova University. Holding also earned CFA charterholder designation from the CFA Institute, and is a member of the Association for Corporate Growth (ACG) and the Commercial Finance Association (CFA).

The senior secured financing team is part of PNC’s Corporate & Institutional Banking, a leading national and global provider of products and services for middle-market customers.

PNC’s team of trusted professionals bring deep industry knowledge to corporate customers.

PNC Bank, National Association, is a member of The PNC Financial Services Group, Inc. (NYSE: PNC). PNC is one of the largest diversified financial services institutions in the United States, organized around its customers and communities for strong relationships and local delivery of retail and business banking; residential mortgage banking, specialized services for corporations and government entities, including corporate banking, real estate finance and asset-based lending, wealth management and asset management. www.pnc.com.

Scargo Hill Capital Launches Asset Management Platform Plat is focused on Senior Direct Lending to the Retail and Consumer Product Sectors; Newly Formed Capital Solutions Provider to Support the Financing Needs of Lower MiddleMarket Companies Scargo Hill Capital, LLC, announced its formation to provide senior secured capital solutions in the lowermiddle market across retail, consum-

10

er products and the broader supply chain. The firm boasts a partnership of retail industry, commercial finance and asset management leadership with significant domain expertise and experience spanning multiple credit cycles. Scargo Hill is led by cofounders Andrew H. Moser, managing partner and chief executive officer, Thomas J. Lynch, managing partner and chief risk officer, and Mark E. Gallivan, principal. The firm’s partnership also includes strategic and lead investors, Schottenstein affiliate SB Capital Group and Stephen G. Miller, CEO of 360 Merchant Solutions.

“The ongoing credit challenges and widening gap across lower middlemarket companies has made it very challenging for them to access adequate liquidity,” said Moser. “Scargo Hill has been created to provide a full range of senior secured capital solutions to a sector that our management team has been dedicated to serving for nearly 25 years.”

Scargo Hill was formed as an institutional asset management platform focused on providing investors with access to senior secured private debt that addresses a uniquely identified credit market dislocation in the industry’s lower-middle market, especially among emerging growth retail companies and consumer wholesale brands.

“Scargo Hill combines the lending capabilities of a commercial finance company with the investment management capabilities of an institutional asset management platform to bring a truly differentiated offering to the market,” said Morten Kucey, managing director of SB Capital Group. “We’ve operated in the retail sector for over 80 years, and one constant has been the need for capital to fuel growth. Scargo Hill will serve as an innovative capital solu-

NOMINATIONS ARE OPEN FOR CFA’S 2017 40 UNDER 40 AWARDS WWW.CFA.COM/40UNDER40

tions provider and partner to help its borrowers and investors achieve their goals.”

“Historically, asset-based lending has been most closely associated with financing for troubled companies, but Scargo Hill’s primary focus will be on providing transition capital to fuel ’turn-ups’, emerging companies and consumer brands,” Moser added. “With the retail and consumer sector changing dramatically before our eyes, Scargo Hill is asset-based lending reinvented.”

Scargo Hill employs a rigorous underwriting process supported by in-depth collateral monitoring and financial analytic tools and resources rooted in sound credit disciplines and decades of relevant asset disposition experience, techniques and strategies.

“The Scargo Hill team has unprecedented historical experience valuing merchandise as it moves through the supply chain and is uniquely qualified to provide optimal yield and enhanced availability to its borrowers,” said Stephen G. Miller, CEO of 360 Merchant Solutions. “360 is privileged to be a vital part of the future of this specialized lending group.”

“Traditional sources of capital have become extremely burdensome and challenging to access for companies seeking growth capital or for those in transition,” said Moser. “For emerging growth companies seeking increased liquidity to manage through transitional business cycles while still building brand value, inventory continues to be a largely untapped form of collateral to secure non-dilutive capital solutions.”

Access to capital will increasingly come from non-traditional or alternative sources to bank capital where borrowers can find timely, relevant solutions, and investors can find strong risk

Wells Fargo Capital Finance Announced Ryan Chin As Managing Director For Loan Originations Wells Fargo Capital Finance, part of Wells Fargo & Company (NYSE: WFC), has announced Ryan Chin as managing director for loan originations.

Based in Santa Monica, CA, Chin will be focused on originating loans for the Western U.S. region.

“We’re excited to leverage Ryan’s breadth of experience and expertise in this industry.” stated Scott Glassberg, managing director and head

of Western region loan originations, Wells Fargo Capital Finance.

Prior to his new role, Chin was managing director for the capital markets group at Wells Fargo Capital Finance, where he was responsible for structuring and underwriting capital solutions that included senior bank debt, ABL FILO tranches, 2nd lien loans, mezzanine debt and unitranche facilities. Prior to joining Wells Fargo, Chin was a director in leverage finance at The Royal Bank of Scotland and an associate in Global Corporate and Investment Banking at Bank of America.

Chin graduated from University of California at Davis and holds an MBA from Columbia University.

Wells Fargo Capital Finance is the trade name for certain asset-based lending services, senior secured lending services, accounts receivable and purchase order finance services, and channel finance services of Wells Fargo & Company and its subsidiaries, and provides traditional asset-based lending, specialized senior and junior secured financing, accounts receivable financing, purchase order financing and channel finance to companies across the United States and internationally. Dedicated teams within Wells Fargo Capital Finance provide financing solutions for companies in specific industries such as retail, software and hi-tech, healthcare, commercial finance, staffing, government contracting and others. wellsfargocapitalfinance.com Wells Fargo & Company (NYSE: WFC) is a diversified, communitybased financial services company with $1.9 trillion in assets. Founded in 1852 and headquartered in San Francisco, Wells Fargo provides banking, insurance, investments, mortgage, and consumer and commercial finance through more than 8,600 locations, 13,000 ATMs, the internet

(wellsfargo.com) and mobile banking, and has offices in 42 countries and territories to support customers who conduct business in the global economy. With approximately 269,000 team members, Wells Fargo serves one in three households in the United States.

Wells Fargo & Company was ranked No. 27 on Fortune’s 2016 rankings of America’s largest corporations. Wells Fargo’s vision is to satisfy its customers’ financial needs and help them succeed financially. News, insights and perspectives from Wells Fargo are also available at Wells Fargo Stories.

INDUSTRY NEWS

adjusted returns, and low correlations to traditional asset classes.

“In the years since the financial crisis, private debt has further emerged from a niche market to become a significant institutional asset class and the demand from both investors and borrowers continues to grow,” said Lynch. “The persistent dislocation in the credit market for lower-middle market companies has created a compelling investment opportunity. Scargo Hill’s portfolios will be constructed utilizing a manufacturing versus selection process, meaning we will source, underwrite, monitor, and intervene proactively when necessary to protect and safeguard invested capital.”

Scargo Hill Capital is an institutional asset management platform focused on providing senior secured direct lending to lower-middle market companies across retail, consumer products and the broader supply chain.

Scargo Hill offers working capital solutions that provide maximum liquidity and flexibility with the goal to help its borrowers and investors achieve their goals. The firm ideally targets transaction sizes under $25 million but will consider larger, value-add transactions. www.scargohillcapital.com

THE SECURED LENDER MARCH 2017 11

THE BLOCKCHAIN MOVES FAST;

THE LAW LESS SO

12

NOMINATIONS ARE OPEN FOR CFA’S 2017 40 UNDER 40 AWARDS WWW.CFA.COM/40UNDER40

While distributed ledger technology offers a potentially revolutionary way for investors to track ownership and other interests in invoices and reduce information risk, the full potential of this technology will not be achieved until its use is fully incorporated into the law.

BY JASON KRAVITT, MASSIMO CAPRETTA AND MICHAEL GAFFNEY

THE SECURED LENDER MARCH 2017 13

i

f an investor wants to purchase an account receivable from a company relating to goods or services provided by the company to a third party, how does the investor obtain accurate records with respect to the underlying receivable and verify that the company has not already intentionally or unintentionally sold the receivable to someone else? In domestic transactions, a purchaser of accounts receivable is able to diligence if a company has previously sold a receivable by running a Uniform Commercial Code (UCC) lien search under the state in the United States in which the company is organized. A sale of receivables will not be perfected (i.e., enforceable) against third parties under the laws of each state in the United States until a UCC-1 financing statement describing the relevant receivable has been filed by the purchasing party against the seller. Unlike the United States, many foreign jurisdictions do not require sales of receivables to be registered under a central filing system in order for the sale to be enforceable against third parties. In these jurisdictions, it is difficult for purchasers of receivables to protect themselves against the risk of a company’s intentionally or unintentionally selling the same receivable to multiple parties or a company’s failing to clearly and unambiguously identify a transferred receivable. Even in the United States, the UCC filing system is not always capable of accurately identifying specific receivables or confirming that a receivable has not previously been transferred as financing statements generally contain broad and generic descriptions of receivables and take several days (and possibly weeks) to be recorded by the appropriate governmental authority.

14

Investors have recently focused on distributed ledger technology (e.g. “blockchain”) as a way of creating accurate and uniform records of receivables and transfers of receivables. Distributed ledger technology generally provides for the creation of an electronic shared ledger that is continuously updated to record newly verified transactions. Each party that is authorized to view the shared ledger (which, in the case of a public shared ledger, would be everyone) would have access to a copy of the shared ledger at all times. This technology differs from a central filing system (like the Uniform Commercial Code filing system) in two main ways. First, each copy of the shared ledger would be automatically updated to reflect each newly verified transaction that is added to the shared ledger, which means that each authorized party’s copy of the shared ledger would be identical and would contain accurate and up-to-date information.

Second, it is much more difficult to corrupt or hack a shared ledger as opposed to a central filing system. In order to hack or corrupt the information in a central filing system, only the main database would need to be hacked or corrupted. On the other hand, the only way someone can hack or corrupt the information in a shared ledger is if each copy of the shared ledger is hacked or corrupted. Transactions can be verified and added to the shared ledger in a variety of ways. They can be verified and added to the shared ledger by the consensus of the parties who participate in the shared ledger, by a subset of the parties who participate in the database or by the owners of the shared ledger.1 A popular example of blockchain technology (a form of distributed ledger technology) currently in effect is bitcoin, a digital currency. Ownership of, and transfers of ownership in, bitcoin is recorded in a shared ledger that is available to the general public.

Each transfer of a bitcoin is recorded in the shared ledger chronologically once it has been verified by third-party “miners” who use special software to

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confirm each transaction. Each copy of the shared ledger is automatically updated to add the verified transaction and, once a transaction has been added to the shared ledger, the shared ledger cannot be subsequently altered to remove or otherwise alter the transaction.

Many investors are excited about the possibility of creating a shared ledger, similar to bitcoin, that would maintain accurate and uniform records of invoices and transfers of receivables arising under invoices. The general idea is that a group of investors will join together to create a shared ledger that is available to the general public. The shared ledger would include certain identifying information for each receivable and invoice included in the shared ledger (e.g., a specific invoice number, account debtor, date of maturity, amount and payee) and a process would be established to verify and record transfers of interests in receivables (whether pure ownership interests, participations or liens). Each copy of the shared ledger would contain an accurate and uniform description of each invoice added to the shared ledger and once a transfer of an interest in a receivable relating to an invoice is verified and, recorded in the shared ledger, the copy of the shared ledger maintained by each participating investor would be automatically updated to reflect the transfer.

The benefits of a shared ledger similar to the one described above are readily apparent. Knowledge is power and each participating investor that maintains a copy of the shared ledger would theoretically possess up-to-date, accurate and uniform information not only with respect to each receivable that it owns, but also with respect to each receivable owned by each of the other participating investors. By reviewing the shared ledger prior to purchasing an interest in a receivable, a participating investor would theoretically be able to confirm the specific invoice to which a receivable relates and, if any other participating investor owns an interest in the receivable, which would reduce

the likelihood of multiple participating investors unknowingly purchasing the same interest in a receivable.

While the creation and maintenance of a shared ledger would certainly benefit investors, the type of shared ledger described above will not, by itself, eliminate the possibility of a participating investor’s purchasing a receivable that the seller has intentionally or unintentionally sold to a third party. There is one main reason for this.

There is a major difference between the shared ledger concept described above and the legal requirement that a transfer of accounts receivable be recorded in a central filing system (like the UCC filing system) in order for the transfer to be enforceable against third parties. Each of the investors that choose to participate in creating and maintaining a shared ledger would be entering into this arrangement on a voluntary basis. Except as would be contractually agreed to by the participating investors, there would be no legal consequences to a participating investor’s failing to update the shared ledger to reflect its purchase or sale of receivables or its granting of a lien in a receivable to a third party. Additionally, a third party that did not participate in the maintenance of the shared ledger would be under no legal or contractual obligation to ensure that the shared ledger would be updated to reflect its acquisition of an interest in a receivable that is included in the shared ledger. The information contained in the shared ledger could, therefore, not be relied upon to notify a participating investor that a non-participating investor acquired an interest in a receivable.

The issue highlighted above can only be fully resolved to the extent laws are enacted that require the transfer of an interest in an accounts receivable to be recorded in a shared ledger. The best possible scenario for how the issue can be resolved is if an agreement is reached by the international community to require transfers of accounts receivables to be recorded in a universal shared ledger. If the international

community agrees to replace any filing or registration requirements that an individual country may possess with the requirement that no transfer of an interest in an account receivable will be valid and enforceable unless the transfer is recorded in a universal shared ledger, an investor would be legally entitled to rely on the records contained in the universal shared ledger and participating investors would no longer be required to enter into contractual agreements to govern the maintenance of a shared ledger. The creation of a universal shared ledger and uniform filing requirements would also reduce transaction costs, increase efficiency and increase the number of counterparts from whom an investor would be willing to purchase invoices, as investors would no longer have to diligence and become comfortable with the filing requirements of each jurisdiction that may be relevant to a transaction.

Fraud and mistake risk are very real concerns for investors that purchase receivables from companies, as there are limited ways in which an investor can obtain uniform and accurate information related to a receivable or verify that a company has not previously transferred an interest in a receivable to a third party. Distributed ledger technology and the creation of a shared ledger by investors offers a promising way for investors to reduce this risk. By providing participating investors with access to an identical and up-to-date shared ledger that maintains accurate and uniform information with respect to invoices and interests in receivables, participating investors should theoretically be able to confirm the accuracy of information relating to an invoice and that a receivable has not been previously transferred to another participating investor. It is currently unclear as to how large a role distributed ledger technology will play in trade finance and how much of a benefit distributed ledger technology will provide. Until countries or the international community enact laws to require transfers of interests in accounts receivable to be

recorded in a shared ledger, the amount by which fraud and mistake risk can be reduced by distributed ledger technology will be directly tied to the number of investors that participate in the shared ledger and the severity of the consequences in the event a participating investor fails to record the transfer of an interest in a receivable. TSL Jason Kravitt is a partner in Mayer Brown’s New York office and a member of the firm’s banking and finance practice. He has held multiple leadership positions at Mayer Brown including serving as co-chairman of the firm’s management committee. Jason was the founder of the firm’s market-leading securitization practice and has helped the firm’s clients to create some of the most significant structured finance products used in the market today.

Massimo Capretta is a partner in Mayer Brown’s Chicago and New York offices and a member of the firm’s banking and finance practice. He has extensive experience with domestic and cross-border trade receivables securitization, asset-based finance, factoring, supply chain/vendor finance, trade finance and other receivables monetization strategies. Capretta regularly advises clients on the creation and management of bespoke receivables financing transactions.

Michael Gaffney is an associate in Mayer Brown’s Charlotte office and a member of the firm’s banking and finance practice. He is heavily involved in the firm’s receivables finance practice.

1

The 2016 thefts of approximately $68 million of bitcoins

from Bitfinex and approximately $50 million of ether tokens from Ethereum’s platform illustrate that blockchain technology can be hacked. In each of these instances, hackers were able to able to steal bitcoins and ether tokens from customers’ accounts by causing the shared ledgers for each of these digital currencies to be updated to reflect the hackers’ fraudulent acquisition of the digital currency. Each of these hacks highlight the issue with the irreversible nature of shared ledgers. Once each of these fraudulent transactions were verified in the applicable shared ledger, there was nothing that could be done to undo the transactions. Ethereum has subsequently altered its shared ledger to permit fraudulent transactions to be voided; however, bitcoin has yet to make any changes to its platform to address this issue.

THE SECURED LENDER MARCH 2017 15

Credit Risk Mitigation, Capital Relief & Insurance Guarantees

BY JERRY PAULSON Jerry Paulson of Lockton Companies discusses the effects of Basel III on unfunded credit risk; the rules and techniques of using credit insurance as a qualified guarantee for transfer of bank risk.

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CHART 1

The Basel Effect Headquartered at the Bank for International Settlements, the BCBS was formed in 1974 by the Group of Ten (G10) countries, aiming to improve financial stability and establish worldwide banking cooperation and supervision. Today, the Committee’s membership has grown to 45 members, including central banks and those with formal authority for supervising banking business ( www.bis.org/ bcbs/history.htm). Meeting throughout the year, the BCBS actively engages CHART 3 B A S E L I I I I M P L E M E N TAT I O N on relevant topics aiming to improve and preserve the global Phases 2011 2012 banking system. The culmiSupervisory monitoring Leverage Ratio nation of this results in the Common Equity ratification of an accord, local Conservation adoption and implementation Buffer

by Committee members in their Deductions from local jurisdiction over a phased Common Equity Tier 1 period. To date, there have been Tier 1 Capital three: Basel I, primarily taking place Phase-out of capital Instruments in the 1980s, created a weighted Liquidity Coverage Ratio approach to measure both onStable Funding and-off balance sheet bank risk. Net Ratio Then a minimum 8% of capital

2013

2014

Parallel run 3.5%

Market Risk

Operational

Internal Ratings to risk-weightBased (IRB) ed assets (RWA) ratio Standardized Foundation IRB Advanced IRB Approach Approach (FIRB) Approach (AIRB) was agreed. A PD Substitution PD Substitution method, was RW Substitution There are 4 mitigation Double Default LGD Adjustment developed methodologies available Double Default in the 1990s whereby an inthan $10 billion in assets (chart 3). ternal ratingsThe Basel III chart indicates the general based model, following strict quantitative framework, land marking completion checkand qualitative standards, was permitted to points, while identifying observation period measure RWAs.B (chart 1) and phased, gradual implementation.

Basel II, incubated in the late 1990s and However, each country’s local jurisdiction born into full existence in 2004, revised (or in the United States the local regulator’s the Basel framework into three pillars: interpretation) makes its specific effects Minimum Capital Requirements, Supervichallenging to predict – more on that later. sory and Market Discipline (chart 2). Low quality capital, excessive leverage, CHART 2 insufficient liquidity, contagion THREE PILLARS OF THE BASEL FRAMEWORK and deficient disclosures were PILLAR ONE PILLAR TWO PILLAR THREE specifically called out. The new rules endeavored to improve the way capital requirements reflect the underlying risk and encourSupervisory Market Discipline age constant improvement in risk Capital Requirements control.

Regardless, all trends point to higher capital Basel III, a direct response to the 2008 requirements encouraging banks to transglobal financial crisis, began its implefer credit risk to other parties. mentation in 2013 and continues through 2019. Stricter quality of capital, leverage Credit Risk Mitigation ratios and liquidity standards were issued, A minimum 8% capital requirement exespecially for those classified as Systematiists for banks, before buffers, on the Risk cally Important Banks (SIBs). There was also Weighted Average (RWA) for both on-andsubstantial scrutiny for off- balance sheet off balance sheet exposure. Credit Risk vehicles, securitization and derivatives.

Mitigation (CRM) reduces the risk weight Non-payment insurance was introduced (RW) applied to the covered exposures or reas a qualified risk mitigation methodology. duces the probability of default (PD) or loss These new rules apply to all banks greater

Credit Risk

It is impossible to attend an industry event without the mention of increased regulation imposed on banks. Regulatory capital constraints are a primary concern for financial institutions. Not only does this put pressure on raising more regulatory capital, it makes regulatory capital a more precious reserve.

Most of the fanfare in the United States surrounds the Dodd-Frank Act of 2010; however, the genesis of current regulation begins in the little town of Basel, Switzerland, constructed by the Basel Committee on Banking Supervision (BCBS). For 30 years, the decisions made by the BCBS have been affecting the global banking system. Locally implemented and enforced by the Federal Reserve Board and Federal Reserve Bank, their effects have been considered relatively benign on our banking system, except perhaps to those directly responsible for bank capital and compliance.

Feeling the pain of the global financial crisis of 2008, the formation of Basel III asserted the Committee’s global might. Today those actions have profound impact affecting the everyday business of banking.

2015

2016

4.0%

2018

2019

 Migration to Pillar I

4.5% 0.625%

4.5%

2017

 Disclosure

20%

40%

5.5%

6.0%

60%

1.25%

80%

1.875%

2.5%

100%

 Beginning 2013 for 10 years  Introduce minimum standards

Observation period Observation period

Introduce minimum  standards

THE SECURED LENDER MARCH 2017 17

CHART 4

Eligibility Criteria for Guarantees

Direct

Incontrovertible

Unconditional

Irrevocable Clauses within Bank’s control Direct recourse to guarantor

given default (LGD) used to calculate the RWA (chart 4). There are two types of CRM, funded and unfunded. Funded CRM takes the form of financial collateral, other collateral and netting arrangements. Unfunded CRM may be guarantees, credit derivatives or insurance. Each must be enforceable in all relevant jurisdictions evidenced by a legal opinion, internal or external. Protection must be provided by an eligible rated provider, inclusive of a corporate obligor, and written as an eligible agreement in the form of a guarantee or credit derivative.

Guarantees and credit derivatives must be direct to the risk, incontrovertible (clearly defined) and have no clause outside the bank’s control. Therefore, they must be unconditional (non-cancellable) and irrevocable (unambiguous, no ability to reduce obligation). Unlike credit derivatives, guarantees further require the right to directly pursue the guarantor for moneys due, without having to first pursue the obligor.

CHART 5

Assumptions:     

8% capital ratio 0.5% original obligor PD 45% original obligor LGD 0.05% AA- Insurer PD 90% indemnity level

1000 800

EAD

Today’s View and Practical Application The implementation of a CRM insurance guarantee for capital relief is new to the United States, but early indications point to a favorable regulatory view because insurance products are highly regulated compared to their credit derivative alternative.

There is a growing implementation of credit insurance for single debtor risks, supply chain finance and receivable portfolios within trade finance. It is viewed as a credit 1000

$1,000k RWA

EAD $1,000k

800

$799k

600

400

400

0 RWA—Risk-weighted Assets

CRM and Securitization Securitization is the pooling of contractual

credit risk and making payments to thirdparty investors based on the performance of the pool with the subordinated tranches absorbing the losses during the transaction life (chart 6).

Securitization can benefit from CRM in two scenarios. One is where CRM applies to a “traditional” existing liquidity facility or an interest rate swap that a bank provides to an SPV. The other is when CRM applies to a tranche of the credit risk and creates a “synthetic” securitization (chart 7).

Securitization requires all the elements of CRM plus the guarantor must have no less than A- external credit rating (or internal equivalent) at the onset of the transaction and maintain at least a BBB+ throughout. The CRM effect is risk weight substitution applied to the covered portion, adjusted for any differences in maturity versus exposure term.

The Basel framework emphasizes the most important element is “significant credit risk transfer” from the bank to third parties. In general, the bank must retain less than half of the mezzanine tranche and less than 20% of any tranche having a 1250% risk weight.

600

200

EAD—Exposure at Default

CRM, Insurance and Capital Relief Credit Risk Mitigation can be a potent tool to reduce bank capital requirements only if precise conditions are met. The Basel text does not refer to insurance policies as eligible for CRM; however, banking regulators in Europe and the United States have accepted credit insurance policies so long as they replicate the substance of guarantees.

The benefit of an insurance guarantee varies depending on how each book within a bank is accounted. For a standardized book, a bank may apply a risk weight substitution benefit whereby the corporate counterparty risk assumes the rating of the insurance guarantor, thus dramatically reducing the bank’s risk weighted asset (RWA) exposure.

In chart 5 below, an example of a single risk exposure may apply to a counterparty credit risk in a trading book or a large underlying approaching the bank’s maximum exposure limit. There is significant risk transfer effect on the individual risk.

For bank books utilizing the internal ratings-based approach, they may apply only a probability of default, loss given default or double default benefit to the bank’s risk weighted assets. These have a lessor impact than risk weight substitution.

One notable advantage of the IRB approach is the ability to apply an LGD benefit to the book when the bank’s borrower purchases credit insurance and names the bank as loss payee. One U.S. global bank has successfully applied a 20% increase to their LGD benefit in this scenario.

K $64k

200 0

Capital requirements drop from $64k to $24k.

K—Capital Requirement The data shown in this diagram is only an example.

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RWA $294k K $24k

CHART 6

Noteholders Floating Rate Coupon

Bank A

Floating Rate

SPV

Liquidity Facility

Fixed Rate Coupon

Insurance Policy

A+ Rated Insurer

Bank B

Insurance Rate Swap

Insurance Policy

Fixed Rate

A+ Rated Insurer

Loans

Insurance reduces the capital held by the Bank by up to 96%.

enhancement to mitigate concentration risk, lend on troubled industry portfolios and even shore up a borrower’s shaky internal credit management. Interestingly, banks have successfully introduced the value of credit insurance to their regulator, leveraging the credit knowledge of insurance limit underwriters such as Atradius, Coface and Euler Hermes to bolster “know your customer” (KYC) practices.

Practically speaking, most U.S. banks do not have a strategy to implement insurance guarantees to secure capital relief across their entire book. One exception is securitization, particularly synthetic. For those who have dipped their toe, it’s important to note that it is the responsibility of the bank to defend, with a legal opinion, the appropriate benefit they elect to apply to their

book if a regulator inquires. Caution, this doesn’t mean that every bank’s application of benefit is automatically accepted by the regulator.

Anecdotally, in 2015, one global bank was not challenged by their regulator when they applied substitution to their trading book and, additionally, LGD benefits to their trade finance book primarily comprised of trade receivables where credit insurance was implemented. In 2016, a competitor global bank appropriately applied an LGD benefit and the regulator disallowed its application due to “greater priorities the bank needed to address” during their annual Comprehensive Capital Analysis and Review (CCAR), commonly known as “stress tests.”

CHART 7

Pre Synthetic Securitization

Post Synthetic Securitization

$1,000m Assets EL 0.8% p.a. (3 years)

$1,000m Assets EL 0.8% p.a. (3 years) 100%

RW 7%

RW 130%

15%

RW 30% RW 1250%

5% 0% Assets ($m)

Risk Weighting

RWA ($m)

Capital

$1,000

130%

$1,300

$104

$1,300

$104

TOTAL

Bank

A+ Insurer Bank

Assets ($m)

Risk Weighting

RWA ($m)

Capital ($m)

$50

1250%

$625

$50

$100

30%

$30

$2.4

$850

7%

TOTAL

$59.5

$4.76

$714.5

$57.16

Reduction of the average Risk Weight of the pool from 130% to 72% with a reduction in capital of 45%.

Challenges and a Look Ahead It’s important to remember what a Basel compliant credit insurance guarantee is, and isn’t. As a credit risk mitigation tool, it doesn’t cover commercial disputes or fraud.

Protection against insolvency, slow pay, political risks and now capital relief are its cornerstones.

One of the biggest challenges is securing sufficient insurance capacity on transactions for which a bank wants to employ an insurance guarantee. Often it is difficult for one well-rated insurer to provide the necessary capacity for single exposure or portfolio of exposures which leads to greater frequency of insurance syndications. Excess of loss (XoL) underwriters such as AIG, Allied World, Beazley, Chubb and Tokio Marine HCC tend to have greater appetite for large limit approvals and syndicate well with one another. Further, most underwriters are reluctant to modify policy wording for Basel compliance without prodding from a knowledgeable and persistent source. For both capacity and Basel compliant policy wording needs, it’s important to access the London Lloyds markets to achieve bank objectives. A skilled credit insurance broker can help navigate through these challenges.

From the insurance guarantor perspective, the insurer seeks greater disclosure from banks to aid in the underwriting process. The sharing of financial statements, credit memorandums and overall spirit of cooperation makes for a mutually beneficial partnership.

Basel regulation has had a profound impact on the United States and global banking system. It’s not going away and now is the time to educate oneself on how best to ensure compliance without sacrificing achievement of commercial budgets. When considering methods of risk distribution, perhaps a bank-owned Basel compliant insurance guarantee is in your future? TSL Jerry Paulson is senior vice president, Trade Credit and Political Risk, Lockton Companies.

More than 6,000 professionals at Lockton provide 50,000 clients around the world with insurance, benefits, surety and risk management services that improve their businesses. Lockton has grown to become the largest privately held insurance broker in the world and 9th largest overall. jerry.paulson@lockton.com +1 312.669.6734

THE SECURED LENDER MARCH 2017 19

Supply Chain Finance Accounting

Myths and Re

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O

ality

BY ROBERT KRAMER Supply chain finance has helped industry leaders significantly improve working capital efficiency, with individual companies generating over one billion dollars in operating cash flow gains. However, despite the success stores, many companies fall far short of expected results.

This article explores one particular issue that has delayed SCF implementations and negatively impacted results - trade payables accounting.

ver the last decade, a virtual who’s who of industry leaders have generated billions of dollars in operating cash flow by implemented supply chain finance (SCF) as part of a program to optimize supplier payment terms. These results are eye-catching, with several companies generating over $1 billion in incremental cash flow each, including companies such as Lowe’s, P&G, Unilever, Nestle, Honeywell, Volvo, Caterpillar, Whirlpool, Electrolux, and DuPont.

Looking to replicate these results, many companies are incorporating supply chain finance into their payables efficiency and working capital management programs. Unfortunately, many of these programs will fall far short of their objectives. For a $5 billion revenue company, the difference between top 10% and average performance is over $125 million in lost operating cash flow, a gap which swells to over $275 million for bottom 10% performance. With such significant performance disparities, it’s not surprising that there is no single reason for disappointing results nor a magic bullet that ensures success. While the most significant problem area is poor implementation practices, there is also a seemingly innocuous consideration that has occasionally had a negative impact -- trade payables accounting.

When supplier payment terms are “optimized,” they are extended, ideally based on benchmarking with an eye towards supplier risk and supplier relationship management. When supply chain finance is implemented as part of this effort, it may change the underlying economics of the buyer’s liabilities to its suppliers, requiring a reclassification from trade payables

to financial debt on the balance sheet and shifting the resulting cash flow from operating activities to financing activities. Uncertainty around this issue remains due to: ◗ An overreliance on rules and checklists ◗ A misunderstanding of the underlying economics, in some cases due to the messaging of SCF providers ◗ Poor implementation practices ◗ Poor accounting review practices.

For more than a decade I’ve helped companies implement working capital management programs which include Supply Chain Finance and have spent a significant amount of time supporting those companies through the accounting review process. I’ve worked with over a hundred companies and all four major audit firms under both US GAAP and IFRS. I’ve also met with the US Securities and Exchange Commission (SEC) on the issue and helped clients through the SEC’s pre-filing submission process. Over that period of time I’ve seen the many ways SCF can be implemented and it is clearly more than boilerplate to say that each situation must be evaluated based on the fact patterns involved and that all companies should consult their independent auditors. These programs can, and have, been implemented in ways that require reclassification of trade payables to financial debt. However, the level of uncertainty that exists today is unnecessary.

How Did We Get Here?

In a landmark 2003 report which emerged in the wake of the accounting scandals of the previous two years, the SEC outlined its view that financial reporting should shift from a reliance on “bright-line” rules to judgment based on the underlying economics of each transaction.

At the time, supply chain finance was in its infancy and key features bore little resemblance to today’s SCF. Back then, SCF was implemented as an “early settlement” program where banks paid suppliers early on behalf of

THE SECURED LENDER MARCH 2017 21

the buyer. The underlying agreements clearly created obligations from the buyer to the bank that were more representative of financial debt than trade payables, including payment terms determined through buyer-bank negotiations and financial incentives which flowed from the funder to the buyer.

These conditions set the stage for speeches in 2003 and 2004 by Robert Comerford, then with the SEC’s Office of the Chief Accountant. Comerford described transactions where “typically a financial institution or one of its affiliates, pays trade payables on behalf of the purchaser.” As discussed above, supply chain finance programs do not typically operate this way today. Further, Comerford did not intend to establish a reclassification checklist. As he said in his 2004 speech, “It seems that some perceived last year’s discussion of two troubling transactions as the equivalent of a Staff roll-out of a “model” for determining when trade payables should be classified as short term borrowings. I’d like to confirm once and for all that this is not the case. As a general rule, the OCA Staff does not believe that it is possible to determine the appropriate accounting for structured transactions simply via reference to checklists and templates.”

But checklists did not go away gently into that good night. They began to re-emerge several years later based largely on Comerford’s speeches, often without fully considering the context in which they were given.

The Underlying Economics of Trade Payables Only after understanding the underlying economics of trade payables can we determine if they have changed.

When investors look at trade payables on the balance sheet, they expect them to have the following characteristics: ◗ Based on the provision of goods or services ◗ Documented in an agreement be-

22

tween buyer and supplier ◗ Contain a wide range of obligations and benefits which flow between buyer and supplier ◗ Unsecured, other than by the goods underlying the transaction ◗ Non-priority claims in bankruptcy proceedings.

Keep in mind that we need to do more than simply determine if the underlying economics of the original liability have changed. We also need to determine if they more closely resemble financial debt or trade payables. As the SEC said in its 2003 report, “We see the optimal scope of a standard as being established by identifying assets or liabilities that, by virtue of their economic similarity, render a standard the most meaningful”.

Misconceptions About the Underlying Economics There are several misconceptions about the underlying economics associated with optimized payables and supply chain finance. Some originate with the providers of SCF solutions themselves, while others result from inexperience with procurement processes and buyersupplier negotiations.

Properly implemented, supply chain finance can play a useful role supporting payables optimization programs; however, SCF providers occasionally overemphasize this role. You can see this when they describe extending payment terms with SCF as a “winwin” for both buyer and supplier.

Buyers win because they can pay later.

Suppliers “win” because low-cost bank funding provided through SCF reduces financing costs, even with longer payment terms. To some, this implies that the buyer was able to pay later because of bank financing which makes the underlying economics more representative of financial debt than trade payables.

I’ve analyzed nearly $2 trillion in spend and the reality is, for most supplier spend, supplier financing costs are not lower with the combination of SCF and longer payment terms. SCF

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is no substitute for effective execution by the procurement team, which includes the use of commercial leverage, trade-offs and working capital management best practices.

Retaining Trade Payables Classification – It’s All About Implementation It is important to recognize that supply chain finance as a “product” does nothing to extend supplier payment terms. SCF provides an online portal where suppliers can view their approved receivables and then, at their discretion, sell them at a discount to funders prior to invoice maturity date. Extended payment terms are achieved through buyersupplier negotiations and success is driven by best- in- class implementation practices. The issues around trade payables classification therefore have nothing to do with the SCF product per se and everything to do with how it is implemented. Implementation practices which should be utilized include: ◗ The payables optimization program should be a permanent effort to improve working capital efficiency, not a short-term project to implement SCF. The implementation of various business process improvements demonstrates that the program seeks to achieve longer payment terms through sound business practices, not financing. SCF is simply a tool made available to suppliers, primarily for the benefit of small and mediumsized businesses as well as diversity suppliers. ◗ New supplier payment terms should be determined through a multifaceted supplier analysis and benchmarking process, not based on suppliers’ use of SCF. ◗ The buyer’s negotiation approach with suppliers should be based on business reasons, not SCF. This doesn’t mean SCF can never be mentioned, but SCF should not be traded for extended payment terms. This is supported through procurement training combined with the supplier

analysis referenced above. ◗ Payment terms, and all other aspects of the buyer’s obligations, must be contained in the buyer-supplier agreement, not a buyer-funder agreement. These obligations should not change based on the use of SCF. The Accounting Review Process It is important to keep in mind that under an accounting framework that emphasizes the use of judgment over rules, the documentation and processes used to make accounting determinations are critical. Even after understanding the underlying economics and incorporating best practices, companies still stumble if they do not follow an effective accounting review process. As the SEC said in its 2003 report, “There is a premium for preparers and auditors to demonstrate that they made reasonable, good-faith judgments at the time in accounting for transactions and events.” The process should begin with the buyer’s internal accounting team who should drive a process where they: ◗ Form their opinion on the appropriate accounting classification. ◗ Create the appropriate documentation explaining the underlying economics and fact patterns of the entire payables optimization initiative. ◗ Finally, the buyer should send the documentation to their independent auditors and ask for the auditor’s view of the buyer’s judgment.

The Tyranny of Litmus Tests As the SEC has stated, we should avoid relying on checklists when making accounting determinations. Unfortunately, they occasionally find their way into the accounting review process and are used as a litmus test for accounting classification. The risk of becoming mired in these checklists is greatly reduced, however, if the buyer follows the proper accounting review process. Fail to follow such a process and you may find yourself subject to the tyranny of litmus tests.

I’ll skip the review of the many “rules” I’ve seen, but there is one rule that deserves special attention because it is so widely referenced. When using SCF as part of a payables optimization program, the “industry standard” rule stipulates that trade payables should be reclassified to financial debt if a buyer attempts to extend payment terms beyond “industry standards”. This rule is difficult to apply correctly and has little probative value around the underlying economics of the buyer’s liabilities. Let’s look at just a few of the problems with this bright-line rule.

The first is the methodology used to determine industry standard payment terms. This is usually based on Days Payable Outstanding (DPO) within the buyer’s industry. Unfortunately, DPO is ill-suited to this task because it’s an average across many commodities and geographies and does not take into account various commercial considerations. I wouldn’t expect payment terms for utilities and railroad shipping to look the same as those for castings or palm oil.

In addition, a company’s DPO relative to its industry tells us nothing about the underlying economics of its liabilities. It leads to the rather odd proposition that the underlying economics of a company’s trade payables are determined, not by a company’s agreements and supplier relationships, but by the payment terms of its competitors. There are industries where a plan to extend payment terms to 90 days would require reclassification one year and not the next, solely because average and best-in-class DPO in the industry changed.

Let’s look at some companies that did not reclassify their trade payables, but would have if their auditors used the industry standard litmus test. Nestle’s DPO was about 66 days when it began its payables efficiency initiative, already well above the industry average of about 45 days for global food companies. Their DPO is now 144 days, more than double the average of their competitors. It’s entirely possible, if not probable, that Nestle could leverage procurement best practices, like its commercial leverage

or pricing, to negotiate best in class payment terms without changing the underlying economics of their trade payables.

Similarly, DuPont increased its DPO from 49 days to 91 days when the average DPO in its industry was less than 45 days and none of their large competitors had DPO greater than 60 days. Both PWC (DuPont) and KPMG (Nestle) also apparently agreed that these payables should not be reclassified despite being far longer than the “industry standard.”

There are many tactics that can be employed by both large and small companies to achieve best-in-class supplier payment terms without changing the underlying economics of their trade payables, both with and without the presence of SCF. Back to Basics In our understandable desire for the comfort of checklists over judgment we’ve lost sight of the most important elements of accounting determination – professional judgment about the underlying economics of trade payables combined with an effective accounting review process. By getting back to these basics and combining them with implementation best practices, we can move beyond any accounting uncertainty that may persist, allowing payables optimization programs and supply chain finance to help companies meaningfully improve working capital efficiency and operating cash flow. TSL Robert Kramer is the managing partner of Capgenta, LLC. He has more than a decade of experience selling, designing and implementing working capital and supply chain finance solutions, including working with over 100 Global 2000 companies and their independent auditors on accounting issues related to trade payables and supply chain finance.

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From the Garage to the High-Rise to the Garage:

Entrepreneurs and Their Avoidable Demise Part 2

BY BAYARD HOLLINGSWORTH This is the second part of a two-part article discussing how entrepreneurs can be their own worst enemy. The first part appeared in the October issue.

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T

he first step in a turnaround is for the founder to embrace the fact that there is, or will soon be, an existential crisis confronting the company. Once a crisis is acknowledged, the founder (and the company’s financial constituents) have a responsibility to ask difficult, invasive questions and to ruthlessly analyze and evaluate the answers for accuracy and completeness. More importantly, the entrepreneurial founder has a responsibility to accurately self-assess, and to hear and act upon well-intended, yet often unwelcome, input.

This ability to be open-minded to difficult truths concerning one’s self and the state of the company, to listen to tangential or opposing points of view, and participate positively in the development of a decisive, understandable, and actionable turnaround plan is usually the difference between success and failure. All the cash forecasts and financial models in the world will not be able to overcome a founder who will not acknowledge the depth of a crisis and his inability to manage through it. It all boils down to one person, the entrepreneurial founder, actively and continually embracing one positive personality characteristic – the ability to reject the destructive emotions of pride and fear and to carefully listen to well-informed, wellintended advice.

The following questions are ones that I have found encircle the key issues confronting a troubled business still managed by its entrepreneurial founder. Answered honestly, these questions can provide direction to the founder and the company’s constituents in laying a foundation for

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recovery.

Is the business model irreparably broken? Founder Translation: “Is your business idea a failure?” What has changed since the company was founded that has weakened or destroyed the business model? What destructive factors and risks were missed in the initial conceptualization of the business and the capital due diligence? What signals and clues to the possibility of a negative outcome were missed along the way?

If the business model is not irreparably broken, is the founder capable of identifying the issues and making the decisions necessary to turn the company around? Founder Translation: “Are you the right person to lead a turnaround of your company?” If not, what role should the founder play?

What strengths does the founder have that are valuable to the turnaround process? What weaknesses does the founder have that need to be acknowledged and remediated or removed from the turnaround process?

Who serves on the senior leadership team and why? Founder Translation: “Have you merely created an enabling culture based on your own ‘cult of personality’ or does the culture encourage healthy debate on important issues”?

At what stage of decline is the company? Founder Translation: “How quickly do you have to act to avert disaster or have you waited too long to achieve a successful outcome?” If the decline is in its early stages, it may be difficult for a founder to embrace changes that can significantly shorten the company’s period of decline. If the decline is in its later stages, there may not be enough time to design and implement a plan sufficient to remediate the extreme problems the company is now experiencing.

How can I communicate controversial views in a fashion that the founder and his or her financial constituents can hear, internalize and act upon?

Founder Translation: “Are you strong enough to hear what well-meaning

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people are trying to tell you?” What are the impediments to this communication and how can these hurdles be minimized or eliminated? Are internal relationships too close and protected to enable open discussion and necessary change?

Objectivity as a Requirement In answering the questions above, the first requirement of any approach to a successful turnaround is complete objectivity. This is often very hard to achieve, and an entrepreneurial founder should realize this from the start. Even the most successful self-assessment, or the founder’s assessment of a company he built, will likely never be 100% objective. A self-assessment is, by definition, subject to the quality of the lens of the assessor, and, therefore, subjective to some degree.

A founder can increase the chances of achieving complete objectivity by establishing a circle of confidential, trusted, independent advisors – a board of directors, an advisory council or an external consultant. These are critical resources for not only the CEO, but possibly senior leaders as well.

The advisors to the founder should, as part of their duties, be able to discuss any issues openly. In addition, it’s a commendable practice to have the CFO report not only to the CEO, but to the board of directors as well.

These resources should be convened on a regular basis and have a standing agenda of delving into difficult areas for discussion. Clues to problems will be provided by the willingness and readiness of the founder and senior leaders to discuss the downsides and the dark aspects of the organization. Is our team functioning well? Who and what are the weak links? Who has misbehaved, based on our policies and values, and is there risk to the company in this behavior?

Should we upgrade any functional leaders based on where we are as an enterprise? How are our customers continuing to respond to our core products? How are we doing devel-

oping new products? Who has sued us and why? What about employee complaints? Are we becoming more efficient or less? What customers has the CEO met with recently and what was the feedback? What is the bank saying to or about us?

The Role of the Senior Leadership Team In almost all of my consulting engagements, I have found that the senior management team usually knows the truth about the company’s status including (1) the source, nature and scope of the problem; (2) the ability of the founder to lead the company through the crisis; (3) what needs to be done to solve the problem; and (4) the likelihood and nature of their future role in the organization. This is despite all attempts by the founder (and possibly the CFO) to control the content and flow of information. These leaders’ relationships within the organization are simply too well entrenched and their lines of communication too direct and unfiltered for a campaign of secrecy to be successful. However, for fear of harming relationships or of losing their influence (or even their job,) team members will often simply keep quiet, engaging in politically acceptable behavior to appease the founder.

Bringing the senior management team “into the tent” can be a sensitive process, requiring diplomacy and careful decision-making. However, once done, it will shorten the recovery timeframe. Working with the founder to acknowledge the issues confronting the company to key team members, bringing their insights into the open and involving them in the turnaround planning, can actually serve to bring the team closer together. Acting decisively on restructuring the team is also very important. However, this should be done with an exceptionally clear-eyed realism, as areas such as customer retention, operating efficiency, and quality financial reporting are key components of any turnaround process. Ultimately, the

decisions should be based upon the simple fact that the senior management team is usually hungry for realism and honesty.

A word of caution concerning the senior management team: Paradoxically and despite their situational awareness and hunger for applied realism, members of the senior management team will also tend to enable the destructive behavior of the founder.

This behavior tends to vary, based on the likelihood that the situation can be turned around. The more dire the situation, the less the team will tend to enable the founder’s destructive behavior. This is often because an entrepreneurial founder has certain compelling personality characteristics that draw people “into the cult.” In private, a team member will openly admit to problems and support curative viewpoints, strategies and planning.

In the presence of the founder, this same person will often espouse a completely opposite position, fearful of offending or hurting their “friend” or putting their position at risk. Her direct reports are concerned as to what will happen to them if she is successful and they are not supportive. They have seen her “pull a rabbit out of a hat” before, and they are focused on determining whether or not she can do it again.

Conclusion If a company is in crisis, or if a crisis can be seen on the horizon, there are several specific and very difficult questions that a founder, CEO, owner, board or lender must ask. ◗ Can the founder objectively assess his or her own talents and capabilities? ◗ Are these abilities sufficient to respond the crisis at hand? ◗ If not, is the founder willing to not only bring in outside assistance, but to actively support and augment the turnaround process? ◗ Has the company been victimized by taking on too much risk due to

the optimism of the founder? ◗ Is the founder willing to reconstitute the leadership team, including his or her own CEO role, in a fashion that will provide an adequate response to the crisis? ◗ Is the company burdened by unproductive nepotism that will inhibit success?

The answers to these questions must be honest and objective. These answers will provide insight into the risks and threats facing the company, the continuing suitability for their roles of the founder and members of the senior leadership team, and any instances of nepotism or other potentially hazardous hiring behavior.

The process of answering these questions can be difficult and fraught with emotion and there is often a tendency to delay confronting the issues. To combat this hesitation or hindrance, a conscious and overt process sponsored by the founder, to openly discuss these issues with the senior management team as well as an external consultant, the board of directors or an advisory council is a must.

With the support of the founder, the buy-in of the senior management team, the involvement of objective third parties, and objective evaluation of the both the challenges confronting the company and the resources available to support a response, a successful turnaround can be enabled and achieved. TSL Bayard Hollingsworth is a managing director with Phoenix Management and has more than 20 years of experience managing and advising clients in complex situations. He has extensive experience in the areas of turnaround and restructuring, operational and profit improvement, strategic and bankruptcy advisory as well as sourcing and executing M&A opportunities. Hollingsworth can be reached at bhollingsworth@phoenixmanagement.com.

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TSL INTERVIEW

Stuart Brister:

Leading Wells Fargo Commercial Services Group into the Future Stuart Brister leads the Commercial Services Group of Wells Fargo and is based in Atlanta, GA. In this role, he oversees domestic and international accounts receivable financing activities including specialties in areas such as consumer, government, transportation, staffing and international factoring. With more than 31 years in the industry, Brister has held various senior management positions in the commercial finance, capital markets and banking sectors. He joined Wells Fargo in 2005, was named Trade Capital division president in 2007 and Commercial Services division president in 2013. Prior to Wells Fargo, he was president of GMAC Commercial Services, manag-ing director of strategic investment at Bank of America, and president of Bank of America Commercial Corporation.

BY MICHELE OCEJO

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Stuart Brister Lead, Commercial Services Group, Wells Fargo

W

hat key industries is Wells Fargo’s factoring services focusing on and what industries are you seeing the most challenges in? Also, which are providing the greatest opportunities?

Last year, we made a concerted effort to reduce our exposure in the oil and gas sector. Currently our five primary sectors are retail, government, staffing, transportation, and international factoring. The energy sector has been very challenging the last several years, and, therefore, we decided the most prudent options were to strategically reduce our exposure there.

We continue to finance the service providers that surround the oil and gas business, and are working closely with the Energy Group in Wells Fargo’s Commercial and Corporate Banking Groups.

As far as which ones create the greatest opportunities and challenges is very dependent on the economy and which part of the cycle we are in. Our four domestic businesses are very closely correlated to the GDP, and whether or not the economy is expanding or contracting. In our Consumer Products business (Trade Capital), we move in lock step with retail and the consumers spend in the U.S. This is not dissimilar to both our government contractor business, and staffing services

business (funding staffing companies), which move directly with economic volatility and government spend at the federal, state and local municipality level. Finally, as you might expect, the transportation business replicates this trend as well. We are seeing growth in all four sectors under a pro-growth economic agenda coupled with a low interest rate environment.

We believe that the domestic outsourcing trend will continue to allow companies to meet both peak and seasonal needs, while additionally meeting the demands of the workforce, who in many cases don’t want to work 40-hour weeks, and prefer a more flexible lifestyle. For example, we finance one of the largest staffing providers to Amazon’s distribution centers. As you can imagine, not only is it extremely seasonal, but, as Amazon continues to grow, so do their staffing needs, and in return so does our client. Likewise, both transportation and retail are very similar.

One category that I think is more challenging for us is the retail consumer products segment. We are seeing both direct and indirect forces that are having an immense effect on the whole sector.

There will be significant winners and, unfortunately, significant losers. Let me explain. Currently the retail landscape is widely “over-retailed” and “over-stored”.

Meaning that there is too much inventory relative to demand, creating this massive markdown phenomenon, as well as just too many retailers and store locations. The whole traditional model is being turned upside down, and the need to understand the “Omni-channel” distribution model is imperative. And it’s not enough to just understand it, but to be able to seek both the balance of consumer wants (in-store, on-line, popup stores, kiosks, catalog, etc.), and that of the financial structure to support it to make a return on your investment. Think about the idea that 30% of holiday sales this year were done online.

Just 10 years ago many of these online companies did not even exist. If you hold onto the traditional brick-and-mortar strategy, you are feeling enormous sales and profitability pressure. Every day you read about more and more store closings and employee layoffs. This reality coupled with

the “over-stored” trend, has put malls, strip sites, and outlet owners reworking their models. Many are closing, repurposing, or upscaling in order to survive.

We are just starting to see the broad implications of this structural change.

We are working closely with our clients to strategize and help finance their new strategies and to be winners in the “new” economy.

Factoring, as we all know, has traditionally carried an unwarranted stigma due to a lack of knowledge about the service.

Do you find this perception has changed in recent years and what can the industry do to increase the visibility of factoring and to educate prospective borrowers about it?

I’ve been doing this for 31 years, and this issue seems to remain. My view is that you’ve got two different kinds of business models within the “factoring business.”

You have the factors that focus on the “million-and-under” businesses, which, in most cases, are predominantly privately held finance companies, who are dealing with smaller early-stage companies, that might be marginally capitalized, levered, and or with limited track records. They fill a niche that the traditional banks have historically not targeted. These finance companies tend to be entrepreneurial, but quite manual in their processes. This has opened the door to the FinTech movement, who are applying significant technology to the scoring and origination process, to target this customer base. It is in this sector where I think the higher rates and tougher collateral structures give the “stigma” that you referenced.

For our groups, we do deals that are predominantly over the $5MM level and don’t target same-profile. Our deals in terms of pricing and structure mirror that of a commercial bank and adhere to the same credit standards. Yet, because the term “factoring” gets thrown around to encompass all of us, I think the stigma also gets attached. When I tell people that our average loans are in the $10-40MM level, they cannot believe it. We see our group as specialty lenders to verticals that we have deep knowledge in, by providing senior se-

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cured revolvers, outsourcing capabilities and credit guaranties, to assure that their customers pay to avoid any insolvency risk.

The factoring world needs to do a better job of bifurcating the “millionand-under” type of factors, and those that are the larger specialty finance businesses. The bank divisions are complementary to the rest of their supply chain, securitization, and channel finance-type programs. By having this specialty, you complement the offering to your mid-tier, large-tier customers.

Early last year, Wells Fargo Capital Finance announced the expansion of the commercial services group and mentioned the growth of the factoring business as a part of that spurred that decision. Can you share with us how the expansion has increased your ability to serve customers and any plans to expand your reach in the near future?

Last year we formed the Global Capital Solutions Group, headed by Scott Diehl, which included the Commercial Services Group, Supply Chain Group, and the Receivable Securitization Group. The expansion focused on the receivables and supply chain businesses within Wells Fargo Capital Finance. We brought them all together to strategically expand the product offerings to our customers.

As it relates to the Commercial Services Group, last year we merged our Trade Capital Group and our Specialty Service factoring companies together, to come under the “Commercial Services Group” umbrella. In doing so, we provided clarity both internally and externally in the marketplace, and we made it clear, that we are the “One” Factoring Company for Wells Fargo.

We can provide a suite of services within the consumer products, government contracting, staffing services, and transportation arena, both domestically and abroad. We wanted to bring that clarity, have one system, and we wanted to make sure that we provided

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best-in-class services to all the sectors we service.

You also asked how this has increased our ability to serve customers and expand our reach in the near future. In Global Capital Solutions we wanted to be product-agnostic and have the ability to finance any part of the global supply chain. By bringing all three groups together under the one banner, we could seamlessly offer factoring, supply chain financing, and securitization to all our customers.

What initiatives do you have planned for 2017? And what do you see for the industry as a whole?

I’m going to break this into three parts and address what we see at Commercial Services. The first one is that we are looking to try to expand our truesale product. We see many opportunities to leverage our bank contacts in the middle market who want to sell AR for both liquidity and financial presentation purposes. This differs from our Receivable Securitization Group that deals primarily to large corporates and is an ongoing tool to their senior debt structure.

The second thing that we are doing right now is researching the whole new online market place paradigm.

The growth in many of these platforms globally cannot be ignored, and has us interested in how we can provide financing and credit insurance to improve liquidity and assure payment to these providers. This is imperative in this “new world” not to get disintermediated between you and your ultimate customer. This is requiring us to think differently about whom the players are and where we can play an integral role.

Finally, we are looking into block chain technology. We think that this could be a real “disrupter” to trade finance by providing a new technology platform and the means to finance the global supply chain. In essence, you have a fully opaque public ledger (distributed database) that has the ability to provide full visibility into the

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supply chain, and offer participants a new means to finance different legs of the process. It does this by creating and showing sequential steps that are irrefutable and build on each other.

Hence the term “blocks”. Think of the distributed model being a decentralized platform of information that certifies each step in the process and cannot be altered. This would start with the purchase order, inspection, title and shipping documents, customs and warehouse receipts, through shipping, delivery, and ultimately conformation by the buyer. This end-to-end model is on an open platform and fully transparent. It is not limited to B2B, B2C, and C2C. It reminds me of how in the early days Napster changed the music business with a P2P platform that essentially cut out the middlemen in the music business, and caused rise to all the new music platforms we have today.

In conclusion, the marketplace and the customers that serve it will continue to evolve. At Wells Fargo we want to continue to service and advise our customers for their current needs and those that we both see in the future. And while the retail landscape will no doubt continue to change, we are excited about the future, staying on top of current trends, and being accretive to our customers. TSL Michele Ocejo is editor-in-chief of The Secured Lender.

what

i

WOULD YOU DO?

n this edition of What Would You Do?, the Chief Credit Officer of Overadvance Bank considers his options when a struggling borrower informs the Bank that it intends to discontinue operations imminently.

There Is Whining in Wind-Downs A few years ago, Overadvance Bank closed a $10 million senior secured revolving credit facility to Middle Man Electronics Inc., a regional wholesaler of electronic component parts. Over the past year, Middle Man has seen its revenue drop considerably, as its customer base increasingly elects to purchase direct from the manufacturer. Unable to retain or replace these customers, and without sufficient liquidity or future prospects to service its debt, Middle Man advises the Bank that it has no alternatives but to shut its doors within the next week or so, and wants to discuss with the Bank how Middle Man’s assets and business will be wound down.

The Bank’s collateral consists primarily of receivables and inventory.

Based on the most recent inventory appraisals and collateral reports, the forced liquidation value of the Bank’s collateral is less than the outstanding loan balance. So, if Middle Man were to shut its doors today and “throw

the keys on the table” (i.e., give the Bank peaceful possession of its collateral), it would result in a forced liquidation of the collateral, and a likely shortfall on the Bank’s loan recovery. As such, the Chief Credit Officer wonders whether there might be a better alternative for Middle Man and the Bank than an immediate shutdown and forced liquidation of the business.

For the last several months, Middle Man explored the potential for a going concern sale, and in fact hired a financial consultant and investment banker for that purpose, but did not find anyone willing to purchase Middle Man on a going concern basis. Apparently, with retailers of electronic component parts increasingly buying direct from the manufacturer, there is just very little interest in purchasing Middle Man as a going concern.

The owner of Middle Man, the grandson of the company’s founder, personally guaranteed Middle Man’s loan from the Bank. He advised the Bank that he can probably sell off the inventory in bulk or piecemeal at better than forced liquidation values to one or more customers with whom he has long-standing relationships.

In addition, the owner believes his relationships with Middle Man’s customers will help with the collection of the outstanding accounts receivable.

While the Chief Credit Officer believes that Middle Man and its owner will be very helpful to the orderly liquidation of the collateral, the Bank is in this position, in part, because the owner and management of Middle Man mismanaged the business. Also, when winding down a distressed borrower, the Chief Credit Officer typically prefers that the borrower engage a Chief Restructuring Officer

(“CRO”) to lead the wind-down-someone with considerable workout experience and with whom the Bank is comfortable from prior workout experiences.

The Chief Credit Officer tells Middle Man’s owner that, while the Bank appreciates his offer to lead the collection and wind-down efforts, the Bank prefers that Middle Man engage a CRO for this purpose.

The Bank provides Middle Man with a list of three candidates to consider and explains that, in addition to locating buyers for the inventory and collecting receivables, an experienced CRO can help the company prepare a wind-down budget that will minimize and prioritize the payment of wind-down expenses.

The Chief Credit Officer reminds the owner that minimizing expenses, while maximizing recovery, not only benefits the Bank but also benefits the owner, who guarantied the Bank’s loan.

The owner of Middle Man is reluctant to engage a workout officer. He complains to the Bank that he, and not some third party, is in the best position to wind-down the business.

He knows the business and its customers better than anyone. Further, because the Bank will likely have a collateral shortfall and he guarantied the loan, the owner says he is more incentivized than any third party to minimize the expenses and maximize the recovery.

The Chief Credit Officer is in a bind. He is unwilling to allow the owner to liquidate the Bank’s collateral without the assistance and supervision of an experienced winddown professional. Yet, the Bank cannot force Middle Man to engage a CRO to oversee the liquidation and, as a practical matter, it would be much more difficult for the Bank

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what would you do?

The Chief Credit Officer decides to offer the owner of Middle Man some relief under his guaranty if he will agree to engage a CRO acceptable to the Bank, assist the CRO in the liquidation of the collateral, and agree to an acceptable form of forbearance or restructuring agreement and budget pursuant to which the wind-down of Middle Man would be governed.

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to repossess its collateral without Middle Man’s cooperation, and the Bank would not realize the same collateral recovery values without the cooperation of Middle Man. If you were the Chief Credit Officer, what would you do?

The Chief Credit Officer decides to offer the owner of Middle Man some relief under his guaranty if he will agree to engage a CRO acceptable to the Bank, assist the CRO in the liquidation of the collateral, and agree to an acceptable form of forbearance or restructuring agreement and budget pursuant to which the wind-down of Middle Man would be governed. The Chief Credit Officer reasons that this accommodation on the owner’s guaranty will ultimately cost the Bank far less than if the Bank had to repossess its collateral from an uncooperative borrower and then liquidate that collateral on its own.

As time is of the essence, the Chief Creditor Officer knows he will need to reach an agreement with Middle Man quickly so that Middle Man can engage the CRO as soon as possible.

One of the first tasks for the CRO will be to prepare a wind-down budget that is acceptable to the Bank. The terms of the CRO’s engagement should also be vetted by the Bank and its counsel to ensure that the CRO is properly authorized by Middle Man to supervise and implement the wind-down process.

Of course, there are several other issues the Chief Credit Officer will need to consider as part of the wind-down. For example, he will want to conduct a full file review to confirm that the loan documents are complete and that UCC financing statements have been properly filed.

He will also want to review any third party documents, such as landlord waivers or collateral access agree-

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ments, and update the Bank’s UCC, judgment and tax lien searches.

We hope you enjoyed the column and, of course, are always interested in your feedback. As such, if you have any scenarios you would like to see discussed in a future column, please let us know at Dfiorillo@ otterbourg.com or Jcretella@otterbourg.com TSL Dan Fiorillo and Jim Cretella are Members of the law firm Otterbourg P.C.

the cfa brief AMONG CFA MEMBERS

CFA NEWS IN PRINT

Aegis Business Credit: Michael Fussell has joined the company as senior credit officer. His primary responsibilities include oversight of the company’s credit and portfolio management functions.

Fussell’s background includes corporate banking, credit and restructuring experience with RBC, PNC and, most recently, Wells Fargo. He is a graduate of Wake Forest University.

Bibby Financial Services (BFS) North America announced the additions of Jeff Guldner, as chief credit officer, and Bret Hill as chief finance officer, along with the appointment of Jeff Morse to chief operations officer. These new roles round out the company’s executive team, positioning Bibby Financial Services for strategic expansion and continued growth in 2017.

Prior to joining BFS, Guldner served as senior vice president and director of loan administration at Presidential Financial Corporation, underwriting transactions between $3 and $15 million.

With almost 40 years in the lending business, Guldner has the right mix of hands-on experience and industry familiarity to lead the company’s credit department, where he will manage all functions surrounding underwriting and due diligence for new business in the company’s asset-based lending (ABL) group.

A seasoned finance professional, Hill has almost 20 years of experience in the industry and most recently served

as division CFO for DR Horton, where he was responsible for managing all financial operations for the division as well as developing and implementing strategy and business plans. As CFO for Bibby Financial Services, Hill will lead all financial operations efforts for the company, providing strategy and growth recommendations to improve overall financial and operational performance.

Since joining BFS in 2013, Morse has successfully managed the company’s risk portfolio for small- to mid-market lending as director of risk. A skilled leader with more than 35 years of experience supporting businesses in a variety of risk management roles, he will now take on a more strategic role for BFS as COO. Morse will be responsible for providing strategic operational direction to executive management as the company expands its operations and processes to meet the needs of its growing client base. Morse is known for finding creative solutions to complex funding situations, a skill which will play a vital role in helping the company realize its long-term growth strategy.

The appointments of these three executives help round out BFS’s well-qualified leadership team as the company further expands its asset-based lending, factoring and transportation finance services. The wealth of experience and industry knowledge these new executives provide will ensure BFS is on target to meet its strategic plans for continued growth in the coming year.

Capital Business Credit (CBC): Robert Grbic was appointed to president and chief executive officer and Michael Fortino to chief operating officer, in addition to his current role as chief financial officer, effective immediately. The announcement comes shortly after the acquisition of Capital Business Credit

by White Oak Global Advisors, LLC, a leading global alternative asset manager

specializing in originating and providing financing solutions to facilitate the growth, refinancing and recapitalization of small and medium enterprises.

“This is an exciting time at CBC. For nearly 30 years, CBC has focused on serving small and middle-market companies, and now under the White Oak umbrella, we have the wherewithal to fund larger transactions and expand our productreach nation-wide,” said Andrew Tananbaum, executive chairman, CBC. “With our strong management team in place, CBC has the opportunity to accelerate our growth by providing companies with financial solutions that traditional banks aren’t able to offer.”

Grbic, previously CBC’s chief credit officer and chief operation officer, succeeds Andrew Tananbaum, CBC’s executive chairman, who served as the interim CEO. Grbic has more than 35 years of commercial lending experience, and has been with CBC since 2005. In his previous roles, he oversaw the company’s operations, expanding its client portfolio and managed credit decisions to maintain CBC’s leadership position in providing financing facilities to small- and mediumsized businesses across the U.S. Prior to joining CBC, Grbic was managing director at Morris Anderson & Associates LTD, a turnaround consulting firm.

He also co-founded MetSource Capital, LLC, a restructuring and corporate finance firm specializing in working with small- and medium-sized companies. In addition, he served as an executive vice president at GMAC Commercial Credit, LLC and BNY Financial Corp.

Grbic is a member of the New York Society of Financial Analysts and the Association for Investment Management and Research. He has served as an instructor for the finance, tax and law department at the NYU School of Continuing Education. He holds master and bachelor degrees in business administration from Pace University.

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the cfa brief

Grbic added, “I look forward to working with the White Oak team, Andrew Tananbaum and the other executives at Capital Business Credit to support the Company’s growth and provide muchneeded financing to a critical sector of the U.S. economy.”

Fortino, in addition to his new role as chief operating officer, will continue to serve as the company’s chief financial officer, a position he has held since 2011. Previously, Fortino served as CBC’s general manager, overseeing the finance and IT departments, and has been with the company since 2006.

Before joining CBC, Fortino was chief financial officer at Levenger Co., a multichannel retailer of high-end writing instruments and organizational products.

He holds master and bachelor degrees in business administration from Temple University.

CIT Group Inc.: Gina Proia was appointed as executive vice president and chief marketing and communications officer.

Proia will serve on the company’s executive management committee and report directly to chief executive officer Ellen R. Alemany.

Proia is responsible for overseeing the company’s branding, marketing, and advertising strategies as well as ensuring they support CIT’s strategic priorities. She is also responsible for advancing strategies and programs to help promote a corporate culture that aligns employees with CIT’s business goals, facilitates sustained growth, and complies with regulatory requirements.

Proia joins CIT following 10 years at Ally Financial, where she served most recently as chief communications officer.

She has served as a board member of Jump$tart Coalition, a national nonprofit organization advancing financial education for young people. She is also a member of the Arthur W. Page Society.

In 2010, Proia was recognized on PR

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Week’s 40 Under 40 List, and in 2015, she received the Aiming High Award from Legal Momentum—The Women’s Legal Defense and Education Fund, which recognizes the accomplishments of women in business.

Crestmark: Ray Morandell was promoted to executive vice president, national sales director. Since joining Crestmark in 2008 as senior vice president, sales manager for the Midwest region, Morandell continues to strengthen the company’s nationwide presence. In 2011, he was named to Crestmark’s executive committee and in 2013, he was promoted to senior vice president, national sales director. He oversees a national sales team that provides diverse funding solutions to businesses in manufacturing, staffing, oil and gas well servicing, food manufacturing and distribution, among many others.

Morandell has more than 35 years of experience in banking and finance.

He began his career as an investment associate for FNB of Pennsylvania. Since then, his career includes vice president of corporate banking and structured finance for PNC Bank; vice president of business development for GE Capital Corporation; and senior vice president, national sales manager for Textron Financial Corporation.

Morandell has a bachelor of science in economics from Allegheny College, an M.S. in applied economics and finance from the University of Delaware, and a graduate degree in banking and credit from Stonier Graduate School of Banking.

Morandell is a member of the Commercial Finance Association, Turnaround Management Association, and Association for Corporate Growth.

Charles N. McQueen, president of McQueen Financial Advisors, Inc., has been named to the board of directors of Crestmark. McQueen joins the six-mem-

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ber board effective December 19, 2016.

“We are pleased to add Charley to Crestmark’s board,” said W. David Tull, Crestmark chairman and CEO. “Charley’s firm, McQueen Financial Advisors, has been providing investment and consulting services to financial institutions for more than 20 years, and he is well-known and respected by Crestmark.

His insight and extensive knowledge of financial organizations will be a great benefit in assisting Crestmark’s future strategic direction.”

McQueen founded his investment and consulting services company, McQueen Financial Advisors, in 1999. The company provides specialized investment and consulting services to financial institutions across the United States, and manages an investment portfolio of more than $4 billion.

McQueen joins current Crestmark board members William P. Baer, president of The Crown Group, Inc.; Raymond T. Deegan, executive vice president of Imperial Marketing; Thomas W. Cross, Jay Alix & Assoc. (retired); Patricia E. Mooradian, president of The Henry Ford; Albert R. Pender, professor (retired); and W. David Tull, chairman of Crestmark Bank.

Steven Turkish, John Trendell II, Lisa Beattie and Troy Myers were promoted.

Turkish was promoted to senior vice president, director of Crestmark Trade Services Division, from first vice president, director of Trade Services.

Turkish joined Crestmark in February 2013 as vice president, senior account executive when Crestmark acquired Ultimate Financial Solutions. In 2015, he was promoted to first vice president, senior account executive of Crestmark’s Trade Services Division, followed by a promotion to director of the division.

Since taking the role, the division has seen solid growth in both sales and client retention. Turkish’s career in finance, banking, and factoring spans nearly 35 years, and includes the following roles:

executive vice president at Ultimate Financial Solutions for more than seven years; executive vice president and general credit manager at Sterling Factors, a subsidiary of Sterling National Bank, for more than seven years; and assistant vice president at CIT Group for 14 years.

Turkish has a bachelor of science in education from the City University of New York – Brooklyn College. Based in New York City, Turkish reports to Steve Tomasello, executive vice president, East Division president.

Trendell II was promoted to senior vice president, underwriting manager for Crestmark’s East Division, from first vice president, underwriting manager, East Division. Trendell joined Crestmark in May 2013 as vice president, underwriter for the East Division; and in 2014, he was promoted to first vice president, underwriting manager.

Trendell has increased the department’s efficiency of underwriting completions and close rate, and has decreased days to approval and funding. Trendell has nearly 16 years’ experience working in asset-based lending and factoring, and his career includes the following: Great Lakes Business Credit as managing director; La Salle Business Credit as assistant vice president, relationship manager; and Greenfield Commercial Credit as collateral analyst, auditor, and audit manager. Trendell has a B.B.A. in finance from Walsh College, where he is currently pursuing a master of science in accountancy. Based in Troy, Trendell reports to Steve Tomasello, executive vice president, East Division president.

Beattie was promoted to senior vice president, marketing and communications director, from first vice president, marketing and communications director.

Beattie has been a part of Crestmark since 2006, and has led successful efforts to build Crestmark’s brand nationally, and to increase the effectiveness of Crestmark’s communications internally

and externally. In 2011, she was named vice president, marketing and communications director; and in 2013, she was promoted to first vice president.

Crestmark has received numerous national awards for marketing initiatives and graphic design created and led by Beattie. Her career in design, marketing, and communications spans more than two decades, and includes positions with BBDO Detroit, where she was vice president, design director; FCB Detroit, where she was senior graphic designer; and SF Design, where she was a graphic designer. Beattie has a B.A. from Oakland University. In addition, she studied advertising design at College for Creative Studies. Based in Troy, Beattie reports to Marty Blake, executive vice president, marketing/banks and financial organizations manager.

Troy Myers was promoted to first vice president, assistant field examination manager, from vice president, assistant field examination manager. In addition to assisting the company with field examinations, his role includes the training and mentoring of new staff.

Myers joined Crestmark in 2004 as a field examiner. Later, he was promoted to senior field examiner, followed by a promotion in 2012 to vice president, assistant field examination manager. Prior to joining Crestmark, Myers worked for Bank One as vice president, senior field examiner; and, while working for Jenkins & Co, he obtained his certified public accountant (CPA) license. Myers is also a certified fraud examiner (CFE), and has a master degree in accounting from Walsh College. Based in Troy, Myers reports to Andrew Swanson, senior vice president, field examination manager.

Crestmark Equipment Finance (CEF): Chris Emge was promoted to Western Division sales manager. In his new role, Emge oversees a team of experienced business development officers, and is

responsible for growing CEF’s business west of the Mississippi. Based in the San Francisco Bay area, Emge reports to Grady, and becomes a member of Crestmark’s management committee.

Emge came to Crestmark in October 2014 with the company’s acquisition of TIP Capital, a leading equipment finance and leasing company. He had been with TIP Capital since 2010, and had a similar role at both companies: regional vice president of equipment leasing sales, responsible for growing business in San Francisco and the Pacific Northwest territories.

Emge has more than 23 years of experience in equipment leasing. His work history includes positions at U.S. Bancorp Oliver-Allen Technology Leasing, where he was a senior vice president.

Scott Grady, president of Crestmark Equipment Finance, said, “Chris is an important member of the Crestmark Equipment Finance team, and I am pleased to announce that he will now be leading our sales initiatives in the western part of the country. He will work closely with our talented sales team to develop new initiatives, and to expand our equipment financing and leasing business.”

Emge has a bachelor degree in business administration from the University of San Diego.

Eastern Bank: Sujata Yadav was appointed as senior vice president and head of Consumer Lending. She will report directly to Quincy Miller, vice chairman and president of Eastern Bank.

Yadav, who most recently served as senior vice president, head of sales growth at Citi Cards North America, brings more than 13 years of experience in financial services marketing, product management and business development to Eastern Bank.

Yadav spent the majority of her career working at Citibank in New York, NY and Mumbai, India in a variety of capaci-

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ties where she consistently achieved growth and profitability through integrated multi-channel marketing, product development and portfolio optimization strategies.

At Citi, Yadav saw her roles and responsibilities rapidly increase as she spent time working in leadership roles in consumer banking and small business banking. Prior to joining Citi, Yadav spent two years working in sales and marketing for a luxury jewelry retail chain in Bangalore, India.

Yadav earned a bachelor degree of commerce in business administration from the University of Rajasthan in Jaipur, India and her master degree of business administration in marketing and systems from the Indian Institute of Management in Lucknow, India.

ExWorks Capital, LLC: Bruce Sim joined ExWorks Capital, LLC with over 25 years international lending, trade finance, and cross-border lending experience.

Sim has lived and worked in Canada (TD Bank); Singapore (GE); and the Caribbean (Trinidad & Tobago, with Royal Bank of Canada) and has held business development and senior management roles in the US with Wells Fargo, FINOVA Capital and GlassRatner Advisory & Capital Group. Sim was most recently head of business development with an international factoring, supply chain, and assetbased lending firm with operations in the US, Canada, and the UK. Sim will be based in Miami, FL, developing new business for the firm in the US, with an added focus on Canada, Caribbean, and UK markets. Sim can be reached at: 20801 Biscayne Blvd., Suite 403; Miami, FL 33180; Tel.: 404-430-9255; E-mail: bsim@exworkscapital.com.

ENGS Commercial Finance Co.: Tania Daniel has joined the company as the managing director of its newly launched factoring division. In this role, Daniel will

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be responsible to develop ENGS’s factoring division into a nationally recognized market leader in the Factoring space.

Daniel brings 17 years’ experience in the factoring space with Porter Capital Corp. and LSQ Funding Group, where she held various roles of increasing responsibility, and where she was instrumental in helping create factoring platforms and growing them into market leaders.

Most recently, Daniel was the chief operating officer for Porter Capital. Daniel and the ENGS factoring business will be headquartered in Birmingham, Alabama.

Craig Weinewuth, president & CEO of ENGS Commercial Finance, commented, “This new factoring product offering will allow us to expand our lending products to our 10,000+ customers in our transportation and industrial divisions, as well as the market as a whole.

This factoring product along with our recently launched ENGS Insurance Agency, advances our long term strategy to develop ENGS into a well-diversified and leading independent commercial finance company providing a wide range of product offerings.” Weinewuth continued, “We are very excited to add Tania to our excellent team of Executives and to have her lead this Factoring Division for ENGS. Tania has an excellent reputation in the Factoring space and her experience will help us expand beyond our current verticals and into all factoring markets.”

“I am thrilled to be part of the ENGS team and honored to lead the new factoring division, added Daniel. “This is an exciting time to join ENGS as it continues to expand its footprint and diversify its product offerings in a meaningful way. The synergy between the existing ENGS customer base and our factoring product, as well as our cohesive vision to partner with our clients to offer a complete working capital solution, positions the factoring division for success.”

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Gibraltar Business Capital: Dave Meier has joined as business development officer. Based in the company’s Northbrook headquarters, Meier will focus on the Midwest region – including Ohio, Indiana, Michigan, Illinois, Wisconsin, Missouri, Nebraska, Kansas, Iowa, Minnesota, North Dakota and South Dakota.

Recently, Meier worked for nearly 10 years in business development at The Gladstone Companies as managing director, focusing on sponsored and non-sponsored junior debt investments in the Midwest. He also served as a vice president at Wells Fargo in the Specialty Finance division, at FINOVA Capital, as well as 4 years with Heller Financial.

Meier brings much experience and expertise in originating and underwriting senior loans in a variety of industries.

Meier attended Washington University in St. Louis, received a BS in finance from Western Illinois University, and obtained a master of science in finance from the University of Illinois.

IDB Bank: Stephen Leavenworth joined as a senior vice president and market manager for staffing services. Leavenworth will lead IDB Bank’s effort to deliver innovative financing and banking solutions to staffing firms, information technology consultants, and government contractors across the United States.

Most recently, Leavenworth was division president of the payroll finance division at Sterling National Bank where he lead a team that specialized in financing staffing firms, information technology consultants, and government contractors nationally. An experienced banker with over 25 years in the financial services industry, Leavenworth previously lead the middle-market asset-based lending business for The CIT Group. Prior affiliations include Fleet Bank.

“We’re happy to welcome Stephen to IDB Bank. His dedication to servicing the

staffing industry, his leadership and operational expertise, and his abundance of financial experience are invaluable,” said IDB Bank’s chief lending officer, Lissa Baum. “I am confident that he will thrive in this position and make a positive contribution as a key member of our lending team at IDB.” Marquette Business Credit: Stephen Shelton has joined its business development team. Shelton joins Marquette as a senior vice president, business development officer and will work out of Marquette’s newest location in New York City covering the Northeast. With his extensive origination experience throughout the New York metropolitan area, Stephen is the perfect addition for Marquette to broaden its national calling efforts in the city.

Shelton brings more than 33 years of professional experience in the banking and financial industry. His extensive background includes experience from several companies such as BBVA, PNC Business Credit and GE Capital. Stephen received his bachelor of business administration from Baylor University. Shelton can be contacted at Stephen.Shelton@ Marquette.com.

Sallyport Commercial Finance: James Bartel joined the sales team to expand Sallyport’s footprint into the Pacific Northwest. Bartel has extensive experience of the factoring and asset-based lending Industries, working at a number of banks as a commercial loan officer, and for the last six years serving as business development officer at Summit Financial Resources.

At Sallyport, Bartel will be continuing in the role of business development officer, covering the Pacific Northwest with an expanded range of finance products. He brings with him his expertise and knowledge of the industry, strong interpersonal and communication skills,

as well as his experience providing cash flow solutions to a wide variety of industries.

“I am delighted that James has decided to join Sallyport. With his experience and gravitas in this sector and our range of cash flow solutions, James will be the “go to” professional in the North West.” – Nick Hart, president of Sallyport Commercial Finance.

Sterling National Bank: Lindy Baldwin has joined the bank’s franchise finance team as managing director, franchise finance and vice president. She will report to Keith Smith, senior managing director of the Equipment Finance Division and SVP at Sterling.

Baldwin will drive a comprehensive business development plan, targeting franchise finance lending opportunities across the U.S. market. She will be responsible for contributing to the team’s growth and profitability by strengthening relationships with franchisors and franchisees. Baldwin’s product focus will encompass real estate, fee and leasehold mortgage, equipment, business value, acquisition refinance, recapitalization, interim development, remodeling, permanent and capital loan.

Baldwin brings a wealth of experience in franchise financing and a proven ability to build strong customer relationships to drive sales. She was most recently an account manager with Pacific Premier Bank, where she was responsible for conducting cash flow analysis to review opportunities, presenting financing options to franchisees and delivering loan proposals. Prior to Pacific Premier Bank, she held positions with Infinity Franchise Capital and First Franchise Capital Corporation.

SunTrust Robinson Humphrey (STRH): Michael Lincoln has joined managing director and group head to lead its Midwest Corporate Banking coverage

team based in Chicago. The corporate banking group provides sophisticated capital markets solutions and balance sheet management services to mid to large size corporations through a team of bankers based nationwide.

“Mike brings more than 28 years of deep financial services expertise to our team, and his addition is a reflection of our commitment to helping our corporate banking clients realize smart growth. He will be a valuable contributor to the success of STRH in the Midwest and across our robust platform,” said Matthew Gelber, head of Corporate Banking for STRH. Most recently, Lincoln served as co-head of business development at MB Real Estate Services. Previously, he spent seven years as executive vice president of marketing & business development with Lillibridge Healthcare (a subsidiary of Ventas) and spent six years at GE Capital where he helped create an enterprise-wide strategic account management team focused on the healthcare industry. Lincoln’s professional experience also includes four years in investment banking at SG Cowen, leading the paper and packaging group, as well as 10 years with Bank of America in the derivatives and forest products coverage group.

Synovus Bank/Bank of North Georgia: Brian Cuttic has joined Synovus/Bank of North Georgia as senior director of asset-based lending (ABL). Cuttic was previously with Veritas, First Capital, and Capital Business Credit, where he led ABL originations, marketing, and underwriting for clients across the United States. Cuttic has more than 25 years of financial services experience, including underwriting, portfolio management, and production with Bank of America in Richmond and Atlanta. He is based in Atlanta.

Webster Bank: Debra Drapalla, senior

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TOTAL TEAM

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EXPERIENCED

LOCAL LENDERS $9 BILLION STRONG

ONE DIRECT

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SHARON BENDER, SVP | 732.590.9380

www.Provident.Bank vice president, senior relationship manager, commercial banking, has been promoted to Boston regional president.

She succeeds Paul Mollica, who will be retiring, but who will continue to serve as an ambassador for Webster. Drapalla joined Webster seven years ago in the middle-market Lending Group in Boston.

“Deb brings more than 30 years of commercial banking experience to the role,” said Christopher Motl, executive vice president, head of commercial banking. “She has been a strong contributor to Boston’s success and has been equally involved in the Boston community.”

Drapalla serves as the co-chair of the Dana-Farber Cancer Institute Leadership Council, which supports DanaFarber’s mission of eradicating cancer and providing compassionate patience care; a member of the Advisory Board of

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the Family Business Association, which provides educational seminars, networking opportunities and recognition for outstanding family businesses; and an active member of the Association of Growth, sitting on the Women’s Committee Board.

A resident of Mansfield, MA, Drapalla is a graduate of Boston University.

Webster Bank is a leading regional bank living up to consumers, businesses, and the community since 1935.

Wells Fargo: Mike Emenhiser, Cristy Grieb and Robin Wenzel have joined the north coast middle-market banking team, serving Sonoma, Marin, Mendocino, Humboldt and Napa counties.

Emenhiser brings 10 years of middlemarket banking experience in California to his new role as senior vice president

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and loan team manager. Grieb, a 12-year veteran of financial services, now oversees Wells Fargo treasury management for the north coast. Wenzel brings more than 23 years’ middle-market and corporate banking experience to her new role as senior vice president and senior relationship manager.

“Mike, Cristy, and Robin represent the very best of banking in the North Bay,” said Fred Vela, regional manager of middle-market banking for Wells Fargo in North Bay. “Mike and Cristy have a history of developing strong relationships with clients, and Robin’s wine industry expertise will be invaluable as Wells Fargo continues to expand across the north coast.”

In 1985, Wells Fargo opened its doors to middle-market companies in the North Bay area, bringing substantial

local-lending authority. Over the past five years, the bank’s middle-market portfolio has enjoyed consistent doubledigit growth, Vela said. “Having Mike, Cristy, and Robin join our team is testament to Wells Fargo’s ability to foster and promote best-in-class bankers ready to help our customers reach their financial goals.”

Since 2011, Emenhiser had served as a relationship manager with Wells Fargo’s Los Angeles south middle-market banking team. An active member in his community, Emenhiser volunteered with the Fred Jordan Mission in Los Angeles to help working poor and homeless families. Emenhiser earned a bachelor degree in business administration, with an emphasis in finance, real estate, and law from California State University in Long Beach.

Grieb most recently served as assistant vice president and relationship associate for Wells Fargo middle-market banking. She joined Wells Fargo in 2005.

Prior to joining the middle-market group in 2012, Grieb was a service manager for local branches compliance operations.

Grieb is earning her bachelor’s degree in sociology from Sonoma State University in Rohnert Park, California. For the past seven years, Grieb volunteered with the Leukemia & Lymphoma Society’s Light the Night Walk annual fundraiser to bring help and hope to those affected by cancer.

New to Wells Fargo, Wenzel brings extensive middle-market and corporate specialized lending experience to the bank. Wenzel has spent more than 12 years lending to wineries, growers and businesses ancillary to the wine industry. Most recently, she worked for six years at Bank of the West where she was instrumental in the growth of the bank’s regional wine industry portfolio. Wenzel also managed the global wine portfolio shared with BNP Paribas. She holds a bachelor degree in business administra-

tion from University of San Francisco.

Wenzel actively supports many organizations, including the Napa Valley Grapegrowers, where she serves on the STOMP auction and finance committees. She also is a designated Family Resource for University of California San Francisco’s Pediatric Bone Marrow Transplant Team, and Co-Founder of the Wiskott-Aldrich Foundation, a nonprofit that provides global medical research, education, and financial support.

Wells Fargo (WFC): Nick Salomone was named to head middle-market banking operations in the Fort Worth and surrounding West Texas area. As regional vice president, Salomone leads a team of 18 financial service professionals based at the bank’s Fort Worth middle-market banking group.

Texas is home to more than 10,000 mid-size businesses that do more than $505 billion in annual revenue, according to the National Center for the middlemarket. Top-grossing among them include manufacturing, wholesale trade, construction, and retail.

“We are reinforcing our Texas leadership with finance professionals who have a track record of meeting our customers’ needs,” said Cecil Edwards, group head for Wells Fargo middle-market banking in Dallas/Fort Worth. “Our growing Fort Worth team understands the cyclical nature of key business sectors in this region and is dedicated to helping local companies succeed.”

Salomone joined Wells Fargo in 2010 and, most recently, led business development for Wells Fargo in Fort Worth and West Texas. Previously, he spent the majority of his banking career as a relationship manager for the middle-market and corporate banking groups at a regional bank. Salomone earned a bachelor degree in finance from Rawls College of Business at Texas Tech University.

Joining Salomone’s Fort Worth team

is Ryan Merz and David Self. Merz was recently named business development officer for the region. A seasoned finance professional, he most recently served as business development officer for Wells Fargo Supply Chain Finance group, where he supported retail, energy services, industrials, technology, and engineering clients. Before joining Wells Fargo in 2013, Merz worked as a financial consultant advisor for Dell, Inc. He holds a bachelor degree in finance and accounting from Michigan State University.

Self joined Wells Fargo’s middle market banking group in Fort Worth on Dec. 7. He most recently served as principal relationship manager for its business banking group, managing client relationships with a focus on health care, investment real estate, commercial and industrial, and professional and executive lending. Self previously served as a commercial banker for a regional bank before joining Wells Fargo in 2013.

He holds a bachelor degree in marketing from Indiana University.

Wells Fargo has eight middle-market banking offices throughout Texas that primarily serve privately-held, familyowned companies with annual revenues of greater than $20 million across a spectrum of industries, including manufacturing, wholesale, retail, distribution, real estate and energy.

AMONG CFA EDUCATION FOUNDATION MEMBERS Focus Management Group (Focus): Thomas “Tom” McCabe has joined the managing director of Focus’ Transaction & Advisory Services; a new division of services being offered by the firm. He will concentrate his efforts on marketing this new sector of services which include buy-side due diligence (quality of earnings assessments), interim C-level services and mentoring, balance sheet restructuring/fresh start accounting,

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and sell-side due diligence and preparation.

“We are eager to welcome Tom to our team and for the new expansion of services that he is going to spearhead at Focus,” said J. Tim Pruban, Focus president. “Tom’s solid interim C-level management experience along with his vast network of contacts make him a vital asset to the Focus team. I am confident that he will accelerate our new transaction & advisory services offering to the marketplace.”

Before joining Focus, McCabe spent over three years at Forest View Capital/ Consulting where he served as a managing director and was responsible for leading interim CFO engagements and transaction advisory services. His immense experience also includes providing business strategy and viability analysis for a variety of clients and industries.

McCabe holds a Bachelor of Business Administration in accounting from the University of Notre Dame and a master of business administration in finance and business strategy from the University of Chicago Booth School of Business.

He can be reached at (847) 651-6565 or via email at t.mccabe@focusmg.com.

Greenberg Traurig, LLP: Kevin P. Ray, of counsel at global law firm Greenberg Traurig, LLP, has authored the book Art & Business Law: Transactions in Art & Cultural Property.

Published by American Bar Association Press in November 2016, this book discusses how art can affect the world of business. As art has gained greater acceptance as an investment, art is appearing in a variety of transactions that expand the traditional dealergallery-auction house sale form. Art transactions increasingly include many art-secured lending, securitization, and commercial transactions. Topics covered include culture, fakes and forgeries, questions of titles, restrictions on mate-

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rials, forms of art-secured transactions, express and implied warranties on art, and copyright.

Ray’s practice is focused in the areas of art and cultural heritage law and financial services. He represents and advises artists, art galleries, art collectors, museums, and cultural institutions in a variety of transactions, including consignments, questions of title, provenance, and compliance with national and international law. He also advises lenders and debtors on issues unique to art, antiquities and other cultural property in a variety of lending and commercial transactions.

Jones Day: Richard M. (Rick) Martinez has joined the firm’s Minneapolis office as a partner in its cybersecurity, privacy & data protection practice.

Martinez has established an extensive record of representing Fortune 100 companies, educational institutions, startup and early-stage tech companies, and individuals in a wide range of data privacy, cybersecurity, and intellectual property matters. He has deep experience in various technological fields and computer-implemented technologies, including hardware and software programs, and network and web-based communications. Martinez’s significant client matters have included internet and cloud technologies, flash memory, automated systems, and consumer electronic devices.

“Cybersecurity and data privacy issues have become increasingly important as business information technologies have expanded and evolved,” said Brian Easley, partner-in-charge of Jones Day’s Minneapolis office. “Rick brings a wealth of experience in data privacy and business technology issues that will enhance the firm’s ability to represent our clients in complex legal matters relating to cybersecurity. We are very pleased that he is joining us.”

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An accomplished litigator, Martinez has assumed first-chair responsibility in high-stakes intellectual property litigation in state and federal courts, representing both plaintiffs and defendants, and has been involved in patent licensing campaigns generating substantial eight- and nine-figure settlements. He has also represented clients before the International Trade Commission.

“Rick brings a great combination of experience across a number of technical areas,” said Dan McLoon, who leads Jones Day’s global cybersecurity, privacy & data protection practice. “He has developed a well-deserved reputation as a prominent lawyer in these areas, and he further expands Jones Day’s capabilities to offer clients a full range of data protection-related services in Minneapolis and throughout the firm’s client base.”

Admitted to practice in Minnesota and New York, and a member of the International Association of Privacy Professionals and American Intellectual Property Law Association, Martinez was named to the National Law Journal’s inaugural “Cyber Security and Data Privacy Trailblazers” in 2015.

CHAPTER NEWS Atlanta The Chapter held a Member Appreciation Night at Capital City Club in Brookhaven on February 16. On April 6, there will be a Masters Party at King & Spalding’s offices.

On May 4, the Chapter will hold its Atlanta Braves vs. New York Mets baseball outing at SunTrust Park.

For more information visit community.cfa.com/atlantachapter.

California The Chapter held a “Trends in the Debt and Equity Markets” event on January 24 at The Jonathan Club in downtown Los Angeles.

The event was a joint symposium between the Chapter, ACG Los Angeles and the Turnaround Management Association. (TMA).

Speakers included: Stephen Krawchuk, managing director, Crystal Financial, who provided opening remarks; Barry Bobrow, managing director, head of Loan Sales & Syndications at Wells Fargo, as moderator, and panelists Rahul Aggarwal, partner, Brentwood Associates; Ryan Chin, managing director, business development, Wells Fargo Bank; Steven Fleenor, managing director & co-head, acquisition finance group, ING; Sean V. Madnani, senior managing director - Guggenheim Partners and Amy Rice, senior vice president - Oaktree Capital Management.

On March 29, the Chapter will hold a Women of CFCC Event (location TBD), while on April 5, the Chapter will hold its Split SPONSOR Panel at The Omni - Downtown Los Angeles For more information visit community.cfa.com/californiachapter.

Charlotte The Chapter held “Consumer Mood PostTrump,” presented by Richard Hastings on January 31 at The Palm Restaurant in Charlotte. The Trump election victory triggered some of the most unusual outbreaks in positive sentiment ever measured in recent decades of consumer research. Trends were dug into to discover its variations among age groups and other demographics during this lively interactive session. Implications across demand for credit, and into major portions of the US economy were also explored.

For more information, visit community.cfa.com/charlottechapte.

Europe The Chapter held an event in Frankfurt, Germany on January 26 hosted by Mayer Brown, LLP and in partnership with ACG Germany. The topic was on asset-based lending & private equity deals in Germany.

A moderated interactive two-panel event looked at ABL deal opportunities in Germany using private equity-backed lending.

The Legal Panel: Acquisition Finance Through Asset Based Lending – Opportunities and Challenges, addressed the opportunities the German acquisition finance market offers in terms of adding asset-based lending elements to the traditional sources of acquisition finance. It looked into typical transaction structures and recent transactions featuring these structures. It also discussed how asset-based lending elements can help sponsors to grow the business of portfolio companies and look into how the particular requirements of asset-based lending are dealt with efficiently. Panelists included: Birgit Hübscher-Alt, Mayer Brown; Martin Heuber, Mayer Brown; and Alex Dell, Mayer Brown.

The Private Equity Panel: The Power of ABL & PE Deals in Germany: Theories & Lessons Learned, asked how can ABL and private equity work together to ensure the best outcome on a deal? Panelists, who included: Joerg Tybussek, partner,

Alteri Investors; Ricardo Martis, ABN AMRO and Chris Hart, BNP Paribas, shared their experiences of PE-backed ABL deals from a lenders view. The event concluded with a reception allowing attendees to network with their deal-making peers.

For more information, visit community.cfa.com/cfaeurope.

Florida The Chapter’s Tampa Luncheon was held January 25 at The Center Club in Tampa, FL. The speaker was Emery Ellinger of Aberdeen Advisors who discussed Expectations of the Trump Economy: Mergers & Acquisitions in Florida. Ellinger provided a recap of the 2016 M&A market, expectations of the 2017 M&A market, a look at how the Trump Presidency will affect the M&A market and expectations for the Florida market.

On January 31, the Chapter held a CFA - TMA Networking and Hockey Night with the Florida Panthers at BB&T Center in Sunrise, FL. The event was held at the Corona Beach House on Club Level of BB&T Center.

The CFA - Orlando Chapter held a Members Only Speed Networking Social on February 9 at the Akerman office in Orlando. Three rooms were set up where each member had the opportunity to network with one another in a round robin setting.

The Chapter held a FinTech and Merchant Cash Advance luncheon panel discussion on the landscape, issues, and future on February 22 at the Lauderdale Yacht Club in Ft. Lauderdale, FL. For more information visit community.cfa.com/floridachapte.

Houston The CFA Houston Chapter held its Annual Economic Forecast on January 25 at La Colombe d’ Or Restaurant - Le Grand Salon in Houston, TX. For more information, visit community.cfa.com/houstonchapte.

MidWest The Chapter held a Young Professionals

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Group (YPG) Educational Panel, “Middle Market Deal Trends: Recap of 2016, Outlook for 2017” on February 8 at Grant Thornton LLP in Chicago. The event was open to all members and guests and the panel recapped trends from middle-market lending deals to a forecast of what to expect for 2017.

The Chapter held a Charitable Event & Networking Reception on February 15 at Roanoke Restaurant, hosted by the Midwest Chapter Women in Commercial Finance. The Midwest Chapters Women in Commercial Finance partnered with the Chicago Metropolitan Battered Women’s Network for this event. The Battered Women’s Network will host its In Her Shoes community education and experiential learning program. In Her Shoes is designed for learning about domestic violence.

Participants move, do, think and experience the lives of battered women and have a chance to see how decisions made in a similar situation may affect you. The goal of the exercise was to build a better understanding of the challenges these women face on a day-to-day basis.

The Chapter will hold its 5th Annual Blackhawks Outing on March 23 at the United Center Super Suite West C&D. Save the date for the Chapter’s 23rd Annual Cubs Outing that will be held on Monday, May 22. Chapter attendees will watch from the Budweiser Patio at Wrigley Field.

For more information, visit community.cfa.com/midwestchapter.

Minnesota The Chapter held its Annual Post Holiday Party on January 26 at The Stand Gastro Bistro in Birmingham, MI. For more information, visit community.cfa.com/michiganchapter.

Minnesota The Chapter held a Lunch and Learn on Proactively Handling Workout Issues in a Pre-litigation Context on January 25 at Hellmuth & Johnson PLLC in Minneapolis, MN.

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The presentation covered a series of “do’s” and “don’ts” for commercial/agricultural lenders once they have identified preliminary weaknesses in their borrowers, but before a default has necessarily occurred. The presentation offered a very practical, non-alarmist approach to handling workout issues.

The Chapter also held a social on February 8 at Eat Street Social in Minneapolis, MN. A private mixologist showed guests how they create their magic. The Chapter will hold a Lunch and Learn on March 15 at Fox Rothschild LLP in Minneapolis.

For more information visit community.cfa.com/minnesotachapter.

New Jersey The Chapter held its Joint Super Networking Party, in conjunction with the New Jersey TMA and New York Institute of Credit on January 25, 2017 at The Metropolitan Room at The Newark Club in Newark, NJ. The event gathered members from: 475 Credit Club; Association for Corporate Growth (ACG) - New Jersey Chapter; American Bankruptcy Institute (ABI); Association of Insolvency & Restructuring Advisors (AIRA); Commercial Finance Association (CFA) New Jersey; Commercial Finance League (CFL); Financial Executives International (FEI) - New York City Chapter; FEI - New Jersey Chapter; International Factoring Association (IFA); IFA - Northeast Chapter; IWIRC New Jersey; IWIRC Philly; Turnaround Management Association (TMA) – Chesapeake; TMA – Connecticut; TMA - New York City; TMA – Northeast; TMA – Philadelphia and TMA - Upstate NY. The event was preceded by a Complimentary and Optional Mentor Meet and Greet, hosted by the NYIC Future Leaders for Future Leaders.

On March 9, the Chapter will hold a TopGolf Event in Edison, NJ. There will be a three-hour open bar, appetizers and food and three hours of game play.

For more information, visit community.cfa.com/newjerseychapter.

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New York The Chapter held its Intercreditor Agreements: What’s in Your Agreement? Panel on February 15 at The Yale Club of New York City in New York. The event was co-hosted by NYCFA in conjunction with ACFA (Association of Commercial Finance Attorneys).

The program, presented by Otterbourg P.C. attorneys David Morse and Michael Barocas, looked at critical intercreditor issues through the lens of these cases, to spell out what lenders and their counsel should be careful of when they draft and negotiate intercreditor agreements so as to make sure that a lender gets what it thinks it has. A cocktail reception followed the presentation.

For more information, visit community.cfa.com/newyorkchapter.

Philadelphia The Chapter will hold its 10th Annual Education & Networking Conference on March 30, 2017 at the Union League of Philadelphia in Philadelphia, PA. The joint event is held in conjunction with the ABF Journal, the New York Institute of Credit, and the Philadelphia Chapter of the Commercial Finance Association.

This half-day conference affords a unique opportunity to be with asset-based lenders, turnaround professionals, legal practitioners, bankruptcy court judges and other members for the commercial finance community.

Panels will include: Lender’s Panel: Where is the Money? We Have It!; Executive Women Leaders: Breaking Through the Glass Ceiling...

Leading the Way and Views from the Bench followed by a cocktail reception.

For more information, visit community.cfa.com/philadelphiachapter.

Southwest The Chapter will hold an event on April 3 for the Texas Rangers opening day.

For more information, visit www.cfasw.org.

For more information on CFA Chapters, please visit community.cfa.com/chaptersmain

CALENDAR March 1 - April 5, 2017 CFA’s 2017 Spring Factoring Fundamentals Virtual Workshops March 7 - 9, 2017 CFA’s Spring What’s It Worth? All You Need to Know About Inventory Morgan, Lewis & Bockius Los Angeles, CA March 7 - 10, 2017 CFA’s Spring Field Examiner School Morgan, Lewis & Bockius Los Angeles, CA March 8, 2017 CFA’s New Jersey Chapter – Save the date for Topgolf Topgolf Edison Edison, NJ March 15, 2017 CFA’s Minnesota Chapter - Lunch and Learn Fox Rothschild Minneapolis, MN March 23, 2017 CFA’s Midwest Chapter – 5th Annual Blackhawks Outing United Center - Super Suite West C&D Chicago, IL March 28 - 29, 2017 CFA’s Spring Foundations of Account Management Holland & Knight Dallas, TX

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March 28 - 29, 2017 CFA’s Spring ABL & Factoring Basics Workshop Holland & Knight Dallas, TX March 30, 2017 CFA’s Philadelphia Chapter Joint Event: 10th Annual Education & Networking Conference Union League of Philadelphia Philadelphia, PA April 6, 2017 CFA’s Philadelphia Chapter – Day One at the Masters Networking Event Location TBA Philadelphia, PA April 18 - 20, 2017 CFA’s Spring Advanced Field Examiner School Greenberg Traurig Atlanta, GA April 18 - 20, 2017 CFA’s Spring Fraud Awareness Workshop Greenberg Traurig Atlanta, GA April 25 – 27, 2017 CFA’s Workouts & Bankruptcy Workshop Location TBD New York, NY May 2, 2017 CFA’s Europe Chapter – pre-ILC Meeting and Panel Aon Risk Solutions London, England

May 2017 CFA’s FinTech Forum New York, NY May 3 – June 7, 2017 CFA’s Spring Operations Fundamentals Virtual Workshops May 8 – 10, 2017 Advanced Legal Issues Workshop Location TBD New York, NY May 11, 18 and 25, 2017 Essentials of UCC - Three intensive workshops at your desk May 2017 CFA’s International Lending Conference Mayer Brown Offices London, UK May 15, 2017 CFA’s Philadelphia Chapter – 23rd Annual Golf Outing Cedarbrook Country Club Blue Bell, PA May 17 – 19, 2017 CFA’s Independent Finance & Factoring Roundtable Driskill Hotel Austin, TX May 22, 2017 CFA’s Midwest Chapter – Annual Cubs Outing Budweiser Patio, Wrigley Field Chicago, IL

THE SECURED LENDER MARCH 2017 43

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May 23 – 25, 2017 CFA’s Operations Bootcamp Location TBD Chicago, IL May 23 – 26, 2017 CFA’s Field Examiner School Location TBD Chicago, IL May 30, 2017 CFA’s New Jersey Chapter and New Jersey TMA: Golf and Tennis Outing GOLF & Essex County Country Club West Orange, NJ June 2017 CFA/ACG Joint Event New York, NY June 7 – 8, 2017 CFA’s 2017 Leadership Program Greenberg Traurig 9 Atlanta, GA

October 4, 2017 CFA’s California Chapter - Hot Topic Panel Discussion Luxe Summit Hotel Los Angeles, CA November 8 – 10, 2017 CFA’s 73rd Annual Convention Sheraton Chicago Hotel & Towers Chicago, IL November 15, 2017 Sponsor Panel Center Club - Orange County Costa Mesa, CA

December 13, 2017 CFA’s California Chapter - Holiday Party Sheraton Universal Universal City, CA

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t

legal notes

he case we have selected for this issue addresses the applicability of makewhole premiums after the automatic acceleration of debt triggered by the commencement of a bankruptcy case.

JONATHAN HELFAT AND RICHARD KOHN CFA CO-GENERAL COUNSEL In re Energy Future Holdings Corp., 842 F.3d 247 (3d Cir. 2016) (Automatic acceleration of debt caused by a bankruptcy filing did not terminate the debtors’ obligation to pay a make-whole premium upon the post-acceleration redemption of secured notes.) (“EFH II”) In July 2015, we published a legal note in The Secured Lender regarding a previous decision in the Energy Future Holdings Corp. bankruptcy case. In that decision, the Delaware bankruptcy court joined the Southern District of New York’s decision in Momentive (In re MPM Silicones, LLC, No. 14-22503-RDD, 2014 WL 4436335 (Bankr. S.D.N.Y. Sept. 9, 2014), aff’d, 531 B.R. 321 (S.D.N.Y. 2015)) in holding that, absent express language to the contrary, an automatic acceleration of debt caused by a bankruptcy filing supersedes a contractual “makewhole” premium that would have been payable in the event of a redemption of indebtedness had such acceleration not occurred. See In re Energy Future Hold-

THE LEGAL SIDE OF ABL & FACTORING

ings Corp., 527 B.R. 178, 202 (Bankr. D. Del. 2015), aff’d, No. CV 15-620 RGA, 2016 WL 627343 (D. Del. Feb. 16, 2016), rev’d and remanded, 842 F.3d 247 (3d Cir. 2016) (“EFH I”).

Since then, the United States District Court for the District of Delaware affirmed the ruling in EFH I, and the First and Second Lien Trustees (on behalf of the First Lien Noteholders and Second Lien Noteholders, respectively) appealed this decision to the Third Circuit Court of Appeals. The Third Circuit reversed the ruling in EFH I in a decision that may be viewed as a victory for creditors’ rights and that could mark the beginning of a broader move away from Momentive.

Background In 2010, Energy Future Intermediate Holding Company LLC and EFIH Finance Inc. (the “Debtors”) issued a series of 10% First Lien Notes pursuant to an Indenture. The First Lien Indenture required payment of a make-whole premium upon the optional redemption of the First Lien Notes before December 1, 2015. The First Lien Indenture also, however, provided that it would be an Event of Default if the Debtors were to “[commence] proceedings to be adjudicated bankrupt or insolvent,” and that the occurrence of such an Event of Default would accelerate the maturity of the Notes, causing them to become immediately due and payable without further action or notice.

Over the course of 2011 and 2012, the Debtors issued two rounds of Second Lien Notes pursuant to a Second Lien Indenture on terms nearly identical to the First Lien Indenture. Like the First Lien Indenture, the Second Lien Indenture included an automatic acceleration provision triggered by a bankruptcy filing as well as language requiring payment of a make-whole premium upon the optional redemption of the Second Lien Notes before a date certain for each round of

Second Lien Notes (May 15, 2016 and March 1, 2017, respectively).

The Debtors filed petitions for relief under Chapter 11 of the Bankruptcy Code on April 29, 2014, triggering the automatic acceleration of the First and Second Lien Notes. With the Bankruptcy Court’s approval, the Debtors refinanced the First Lien Notes in full on June 19, 2014 but did not pay the make-whole premium of approximately $431 million payable under the optional redemption provision in the First Lien Indenture. On March 10, 2015, the Debtors refinanced a portion of the Second Lien Notes and paid no make-whole premium to the Second Lien Noteholders either. The First and Second Lien Trustees (on behalf of the First and Second Lien Noteholders) objected to the Debtors’ failure to pay the make-whole premiums on the Notes and sought declaratory judgments that the Debtors’ refinancing of the Notes constituted an optional redemption under the terms of each of the Indentures and therefore required payment of make-whole premiums to the First and Second Lien Noteholders.

In EFH I and subsequent litigation, the Bankruptcy Court rejected the Trustees’ arguments and held that the refinancings did not constitute optional early redemptions of the Notes under the terms of the Indentures and that, as a result, no make-whole premiums were owing to any of the First Lien or Second Lien Noteholders. As noted above, the District Court for the District of Delaware affirmed the Bankruptcy Court’s decision, and the First and Second Lien Trustees appealed to the Third Circuit Court of Appeals.

EFH II In its rejection of the decision in EFH I, the Third Circuit emphasized its duty under New York law to construe and enforce the New York law-governed Indentures (both governed by New York

THE SECURED LENDER MARCH 2017 45

legal notes

law) in accordance with the parties’ intent. The Court explained that “’’[t]he best evidence of what parties to a written agreement intend is what they say in their writing.’” EFH II, 842 F.3d at 254 (quoting Greenfield v. Philles Records, Inc., 780 N.E.2d 166, 170 (N.Y. 2002)). With this standard in mind, the Third Circuit looked to the plain language of the automatic acceleration and optional redemption provisions in the Indentures as the starting point for its analysis.

The Third Circuit asked three questions with respect to the optional redemption provision of each Indenture: Had a redemption of the Notes taken place? If so, was such redemption optional? And, if an optional redemption had taken place, did it occur before the applicable cut-off date? In each case, the Court answered “yes.” The Debtors argued that the meaning of redemption should be limited to repayments of debt occurring before maturity, but the Court found that both New York and federal courts generally deem the term “redemption” to include repayments of debt occurring both before and after maturity. See 842 F.3d at 255. The Court also found that the Debtors’ redemption of the Notes was optional: the Debtors had announced their plan to redeem the Notes before stated maturity in an 8-K before filing for bankruptcy protection, the Debtors had the option under their plan of reorganization in bankruptcy to either pay off the Notes or reinstate the Notes’ original maturity dates, and the Debtors chose to take advantage of the option to refinance the Notes on more favorable terms in bankruptcy. Finally, in each case, the optional redemption of the Notes took place before the applicable cut-off date specified in the optional redemption provision. As a result, the Court concluded that the optional redemption provision of each Indenture requires, on its face, that the Debtors pay the Noteholders a make-

46

whole premium. See 842 F.3d at 255-56 (3d Cir. 2016).

The Court next considered whether the optional redemption provision found in each Indenture had been annulled by the automatic acceleration of the Notes. The Debtors argued that the automatic acceleration provision, as the more specifically applicable of the two provisions, should take precedence over the optional redemption provision, that the automatic acceleration provision’s silence on the applicability of the makewhole premium indicates that it does not apply, and in the alternative, that the two provisions are in conflict and therefore only one should apply. The Court quickly disposed of each of these arguments. First, the Court read the automatic acceleration and optional redemption provisions as addressing two separate matters rather than addressing the same matter with more or less specificity. “[T]ogether”, the Court explained, “they form the map to guide the parties through a post-acceleration redemption [, and the optional redemption provision] is the only provision that specifically addresses redemptions.” 842 F.3d at 256. Second, the Court clarified that the parties could have expressly stated in the Indentures that the make-whole premiums would cease to apply after an automatic acceleration triggered by a bankruptcy filing, but since they did not, the Court must abide by its “duty to ‘give full meaning and effect to all of [the Indenture’s] provisions.’” 842 F.3d at 256 (quoting Chesapeake Energy Corp. v.

Bank of N.Y. Mellon, 773 F.3d 110, 113–14).

Lastly, the Court referred to the supposed “conflict” between the automatic acceleration and optional redemption provisions (described by the Debtors as stemming from the notice requirements included in the optional redemption provision versus the automatic effect of the acceleration provision) as “illusory” and pointed out that the Debtors

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provided no reason why they could not have satisfied the notice requirements of the optional redemption provision.

Based on the above, the Court concluded that both the automatic acceleration provision and the optional redemption provision “plainly apply” and the latter was not annulled by the former. See 842 F.3d at 257.

Finally, the Court turned to two cases that were influential in EFH I: Momentive and a New York trial court’s decision in Nw. Mut. Life Ins. Co. v. Uniondale Realty Assocs., 816 N.Y.S.2d 831 (N.Y. Sup. Ct. 2006) (“Northwestern”). Citing Northwestern, the Debtors argued that makewhole premiums should be ignored once a debt’s maturity has been accelerated because prepayment is impossible after a debt has become due and payable. See 842 F.3d at 258. In response, the Third Circuit explained that it is obligated to look to New York’s highest court on questions of New York law (rather than New York trial courts), and that the New York Court of Appeals has stated that it is “unaware of any rule of New York law declaring that other terms of the contract not necessarily impacted by acceleration . . . automatically cease to be enforceable after acceleration.”

Id. (quoting NML Capital v. Republic of Argentina, 952 N.E.2d 482, 492 (2011)).

Based on the foregoing, the Third Circuit concluded that the optional redemption provision in each Indenture continued to apply after the Notes were accelerated. See id. at 259. The Court also distinguished between the prepayment at issue in Northwestern and the redemption at issue in this case. Prepayments, the Court explained, can only be made prior to a debt’s maturity; redemptions, on the other hand, “may occur ‘at or before maturity.’ Thus, while a premium contingent on ‘prepayment’ could not take effect after the debt’s maturity, a premium tied to a ‘redemption’ would be unaffected by acceleration of a debt’s

maturity.” 842 F.3d at 259 (quoting Chesapeake Energy Corp., 773 F.3d at 116).

Momentive, in the Court’s view, ignored this distinction and extended the rule regarding prepayment premiums from Northwestern to make-whole premiums.

The Court saw this as “push[ing] the Northwestern rule beyond its language and underlying policy concerns” because while “[t]he Northwestern Judge was concerned that lenders should not be able to seek immediate repayment and pile on by also receiving a premium”, “[h]ere, by contrast, the Noteholders did not seek immediate payment. [The Debtors] voluntarily redeemed the Notes over the Noteholders’ objection.”

842 F.3d at 260.

Finally concluding that the burden resided with the Debtors to keep the rule from Northwestern in mind and negoti-

ate for language expressly stating that acceleration overrides application of the make-whole premium, the Court held that “[r]edemptions, not prepayments, occurred here, they were at the election of EFIH, and they occurred before the respective [cut-off] dates noted. . . . [The Debtors] must pay the make-whole per the Indenture language before us.” 842 F.3d at 261.

The Third Circuit’s reversal of EFH I marks a clear departure from the reasoning and interpretation of New York law in Momentive and suggests that other courts, where they are not bound by other precedent, may choose to follow the Third Circuit’s treatment of make-whole premiums. On the other hand, because the Third Circuit’s decision in EFH II and the decision in Momentive both interpret but reach different conclusions on

New York law, further litigation on the issue seems likely. For now, though the Third Circuit’s decision may be viewed as a win for creditors’ rights, it may be wise for creditors to adopt a practice of negotiating for language clarifying that optional redemption provisions and make-whole premiums remain applicable even after acceleration. TSL Jonathan N. Helfat, partner, Otterbourg P.C., and Richard M. Kohn, partner, Goldberg Kohn, are CFA co-general counsel.

Make Connections With Commercial Finance Leaders VISIT community.cfa.com/events FOR A CFA EVENT NEAR YOU

THE SECURED LENDER MARCH 2017 47

revolver

j

TSL OPINION COLUMN

o Bennett-Coles of FGI discusses the future of cross-border asset-based lending.

According to a 2015 study by Euler Hermes, 85% of UK companies felt exporting helped them grow faster than they thought possible, while two-thirds of American SMEs felt that exporting had contributed to their business growth. Furthermore, a 2015 study by Industry Canada found that exporting companies, on average, have over double the annual revenue of non-exporting companies ($3.4M compared to $1.6M).

Clearly, doing business internationally is not only lucrative, but a key to success in today’s increasingly globalized world.

While global expansion is profitable, it requires large amounts of capital.

Conventional banks are often unwilling to fund cross-border deals due to regulatory differences and political risk across jurisdictions. Additionally, many domestic banks do not have mandates to do business outside of a certain area – for example, many domestic UK banks may only do business in specific European nations or the U.S., meaning most of the world is off-limits. Even with these mandates, often only minimal resources are directed to these areas, as domestic business takes priority.

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As such, an increasing number of companies are turning to independent, boutique asset-based lenders to help them expand into foreign markets. These independent lenders are more flexible – they make their living going where others will not. They possess the specialized knowledge needed to overcome the challenges associated with international asset-based lending.

For example, one might wrongly assume that EU countries would have similar regulations regarding assetbased lending or inventory financing. In fact, Napoleonic, Roman, and AngloSaxon laws, further complicated by local minutiae, mingle together in Europe, making it difficult for lenders to keep up.

In addition, some jurisdictions require licenses, and not all institutions are licensed to do business everywhere, further complicating matters. Cultural and linguistic differences should also be considered. Language barriers can undermine communication and make deals difficult, while cultural differences can make them near-impossible. For example, getting a deal done in the United Arab Emirates during Ramadan would be very difficult, as would trying to get deals done during the summer months in many parts of Europe.

The new generation of boutique lenders are often able to operate on a more granular level than their larger peers and have developed systems to deal with the many challenges associated with the execution of cross-border assetbased lending.

The flexibility of boutique lenders allows them to partner with local entities, providing them with a better understanding of local regulations and eccentricities. This can not only improve deal speed and efficiency, but can also alert the lender to obscure pitfalls. However, that is not to say that a thorough analysis of legal and regulatory differences is not necessary.

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Another tactic utilized by boutique lenders is the adoption of EDI (Electronic Data Interchange) technology. This can help increase the transparency and efficiency of deals, as EDI platforms allow users to easily and instantly access information, lending a greater level of awareness and security to all parties involved in a given deal.

As international deals come with a higher degree of uncertainty and risk, many asset-based lenders are utilizing credit insurance policies to hedge that risk. In addition, credit insurance management technologies make the policies easy to manage, ensuring compliance and making claim payment more likely, if necessary. This provides a lender with a level of security otherwise not afforded to them.

International asset-based lending requires creative problem-solving, and boutique asset-based lenders are wellequipped to deal with the challenges involved in cross-border deals. Many of the challenges that boutique lenders still face revolve around standardization.

Currently, there is a lack of standard documentation across countries and across lenders. A push toward uniform documentation should be made by boutique lenders and other institutions.

This kind of worldwide, inter-lender standardization would be invaluable to all parties, as it would bring greater clarity to deals, improving speed and efficiency. TSL Jo Bennett-Coles is the managing director of FGI. She is responsible for overseeing marketing for FGI’s UK and Greater European operations, generating deal flow, and sustaining relationships with clients and industry professionals. Bennett-Coles holds an LL.B. (Hons) from the University of Essex and is a member of several organizations, including the Ancient City of London Guild, The Worshipful Company of Loriners, and The Law Society.

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The 2nd Annual 40 Under 40 Awards will celebrate the achievements of young professionals in the commercial finance industry — movers and shakers who exemplify true excellence in their careers and who bring a strong voice and commitment to the industry at large.

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