TSL June 2020

THE PANDEMIC’S EFFECT ON THE INDUSTRY ISSUE

THE SECURED

JUNE/JULY 2020 WWW.SFNET.COM

Putting Capital To Work

COVER STORY

COVID-19 is Popularizing ABL EDWARD GATELY OF MUFG DISCUSSES THE REASONS FOR ABL’S RISE IN POPULARITY AS A RESULT OF THE PANDEMIC.

A publication of

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TOUCHING BASE THIS WAY FORWARD

SFNet Community Rises to Meet Challenges of the New Normal

As we begin to emerge from the various stay-at-home orders put in place around the country and discover our “new normal”, it is more important than ever that the SFNet community works together for the betterment of both the industry and the myriad businesses, from wellknown retailers to small manufacturers, that rely upon us for capital essential to their recovery. ABL and factoring will no doubt see a jump in borrowers as the market increasingly favors these forms of financing.

RICHARD D. GUMBRECHT SFNet Chief Executive Officer

n Higher-profile speakers (not constrained by travel plans) n More diverse attendance (companies can send colleagues from different disciplines and career levels within their organizations who may not have been able to participate before) n Richer, broader and more highly interactive content (not restrained by the hours in a day or available space, that may be consumed in live group formats or at your leisure)

On page 16, in The “New Normal” Roundtable, industry executives discuss the challenges they have been up against since the pandemic hit as well as what kind of future they envision for the industry.

n Greater exhibitor and sponsor accessibility (leveraging multi-media, data capture and novel formats)

Another sector of our industry being significantly affected by the pandemic is business development. William Kemp of Republic Business Credit interviewed several business developments executives to find out how they are overcoming the challenges COVID-19 has thrown their way, on page 40.

THE SECURED LENDER JUNE/JULY 2020

SFNet has been investing heavily in new technologies and design concepts to make these experiences rewarding and fulfilling. We are confident we can produce dynamic live online events that will open up exciting new possibilities that can exceed your expectations. The capabilities of our new and

enhanced digital platform are impressive. These experiences will include:

In fact, this increase in new borrowers kicks off this issue with an article by Edward Gately of MUFG. Turn to page 12 to read COVID-19 is Popularizing Asset-Based Lending…Here’s Why.

There is no question that field exams have been severely disrupted by COVID-19 and the resulting lockdown. SFNet’s chief value officer, Morten Kucey, posed several questions to external field exam professionals to discover the extent of the impact as well as ideas for moving forward. Turn to page 22 for Field Exam Roundtable: Where We Are and Where We’re Going. On page 44, Jan Tammen of PNC offers the internal field examiner’s perspective in Field Exam in a Post-COVID-19 World.

2

disappointing that we won’t be together in person, we are excited about the possibilities this new format offers.

On page 48, MUFG’s chief financial economist, Christopher Rupkey, offers insights into the “strangest recession we have ever witnessed.”

This issue is filled with the information you need to move ahead in this challenging new world. SFNet is here to enable this success in many ways, including our newly launched live online events. As we announced in early June, SFNet and our Management Committee have made the difficult decision to shift our Annual Convention, November 17-19, from our planned venue in New Orleans to a live, online event.

Our Women in Secured Finance Conference, YoPro Summit and Cross-Border Lending Conference will also be held virtually. While it’s

n Unique opportunities to network (artificial intelligence matching and enhanced one-on-one video may actually make it easier to target specific individuals and connect than at live events) n Surprises to entertain, engage and inform you in new and compelling ways We will be sharing much more about the Convention program including new pricing options. Registration is scheduled to open August 3. The WISF Conference is open now and I encourage to you to register today in order to take full advantage of the pre-meeting networking tools offered by the platform. Be sure to check www.sfnet.com and be on the lookout for email updates.

The important work we do in building and sustaining our economies has never been needed more. This industry has proven its agility, flexibility and value again and again and this crisis will be no different.

I wish you all a happy and healthy summer and look forward to connecting with you during our upcoming events.

SECURE OUR CUSTOMERS’ SUCCESS AND EXPERIENCE YOUR OWN

FIELD EXAMINERS

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PNC is focused on providing customers with the financial resources they need to achieve their business objectives. We’re also committed to offering you the opportunity, support and empowerment you need to realize your professional goals. If you’re passionate about turning your business acumen into real rules, join us.

Our consistent growth enables us to offer a wide variety of outstanding opportunities. We currently have openings for Field Examiners in these locations, click below to learn more:

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Our Business Credit organization enables customers to secure credit through strategic asset leverage. We help customers find value in accounts receivable, inventory, machinery and equipment, trademarks and patents and intellectual property.

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As a Field Examiner, you’ll perform in-depth analysis on borrower’s collateral records and financial reports in order to determine the quality of their credit and help them secure loans. You will lead critical, complex and high-profile examinations on existing and prospective borrowers, including recurring examinations on work out credits. You will also perform new business surveys and prefund field examinations on prospective borrowers. While we’re actively recruiting for Field Examiners, any candidates with an Asset Based Lending background is encouraged to submit their interest.

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At PNC, you’ll enjoy an excellent compensation and benefits package that includes health and life insurance, generous paid time off, retirement and investment programs and much more. Click on the locations to the right to learn more about these exceptional careers and to apply online.

To find out more about a career with the right balance, visit www.pnc.jobs PNC provides equal opportunity to qualified persons regardless of race, color, sex, reli gion, national origin, age, sexual orientation, gender identity, disability, veteran status, or other categories protected by law. © 2020 The PNC Financial Services Group, Inc. All rights reserved. PNC Bank, National Association. Member FDIC

Work with meaning.

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TABLE OF CONTENTS. JUNE/JULY 2020 VOL. 76 ISSUE 5

COVER STORY COVID-19 IS POPULARIZING ASSETBASED LENDING P.12

COVID-19 is popularizing asset-based lending. Here’s why.

Edward Gately of MUFG discusses the reasons for ABLs rise in popularity as a result of the pandemic. 12

BY EDWARD GATELY FEATURE STORIES

The “New Normal” Roundtable What challenges have industry executives been up against since the pandemic hit and what kind of future do they envision for the industry?

TSL spoke with several SFNet members. 16

BY MICHELE OCEJO

Field Exam Roundtable: Where We Are and Where We’re Going It is safe to say that COVID-19 has altered the ABL landscape tremendously and has become an existential threat to the way we do business. There is no question that field exams have been severely disrupted

by COVID-19 and the resulting lockdown.

SFNet’s chief value officer, Morten Kucey, posed several questions to field exam professionals. 22

BY MORTEN KUCEY

4

THE SECURED LENDER JUNE/JULY 2020

FEATURED STORY THE “NEW NORMAL” ROUNDTABLE P16

Knowns and Unknowns: The Effects of COVID-19 on Politics and Policy Geopolitical advisor David Chmiel assesses what the international political and regulatory environment may look like in the wake of the global COVID-19 health crisis. 26 DAVID J. E. CHMIEL

Retail Finance in the Age of COVID-19 Retail has taken a serious punch from the pandemic and subsequent store closings, even those that were doing well pre-COVID. 30

BY HOWARD BROD BROWNSTEIN

Articles

VALUATION INSIGHTS

Intellectual Property Value in the COVID-19 Era A strong brand can be an invaluable asset during challenging times, especially during the current economic environment created by the COVID-19 crisis. 36

BY CAMERON COOK, ASA, CIA, CDB FRAUD INSIGHTS

Collaboration and Flexibility Key to Workouts The financial hardship resulting from the COVID-19 pandemic is causing multiple issues for traditional and non-traditional asset-based lenders (ABLs). 36

BY JEFFREY BRANDLIN SALES INSIGHTS

Impact of the COVID-19 Virus on Business Development Business Development executives discuss the challenges brought on by the pandemic.. 40

BY WILLIAM KEMP EXAMINER TRENDS

Field Exam in a Post COVID-19 World PNC Business Credit’s national recurring field exam manager discusses the effects of COVID on the profession, both long and short term. 44

BY JAN TAMMEN

ECONOMIC TRENDS

COVID-19’s Economic Effects The world is in recession, the U.S. is in the world, but if this is a recession, it will be the shortest American recession in history. The decline in business activity has been steep; however, the worst downturn since the Great Depression a century ago, and we hope there will be no permanent damage to the economy as the climb back to normalcy has a long way to go. 46

BY CHRISTOPHER RUPKEY

Departments TOUCHING BASE 2 INDUSTRY DEALS 8 NETWORK NOTES 14 SFNET MEMBER PROFILE Riveron, a business advisory firm specializing in accounting, finance, and operations, partners with its clients to successfully prepare for and execute change across the transaction and business lifecycle. 34

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

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

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

The Secured Lender, magazine of the asset-based financial services industry (ISSN 0888-255X), is published 8 times per year (Jan/Feb, March, April, May, June, September, October and November) $65 per year non-member rate, and $105 for two years non-member rate, SFNet members are complimentary.

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

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

www.SFNet.com Periodicals postage paid at New York, NY, and at additional mailing offices. Postmaster, send address changes to The Secured Lender, c/o Secured Finance Network, 370 Seventh Avenue, New York, NY 10001 Editorial Staff Michele Ocejo Editor-in-Chief and SFNet Communications Director Eileen Wubbe Senior Editor Aydan Savaser Art Director Advertising Contact: James Kravitz Business Development Director T: 646-839-6080 jkravitz@sfnet.com

5

THE SECURED LENDER JUNE/JULY 2020

DEPARTMENT DEPARTMENT NETWORK INDUSTRY NOTES MOVES Ares Commercial Finance Adds Partner to its Investment and Executive Committees Mitch Drucker has joined as partner from Garrison Investment Group and will be a part of the ACF leadership team. He will sit on the Investment Committee for ACF and be involved in all aspects of the business from origination to portfolio management.

Drucker joins ACF from Garrison Investment Group.

Gil Karni to Head US Operations of Bank Hapoalim Bank Hapoalim announced the appointment of Gil Karni as CEO of BHI USA, the bank’s operations in the United States. Karni has nearly three decades of extensive executive, corporate and commercial banking experience with Bank Leumi, serving most recently as CEO of the bank’s UK operations.

BNP Paribas Appoints Florence Pourchet Head of CIB Latin America BNP Paribas, a premier global bank, continues to develop its presence in Latin America with the appointment of Florence Pourchet as head of CIB Latin America, effective immediately. In this new role, Florence will help drive BNP Paribas’ Latin America strategy, as well as provide oversight and support to the various countries in the region where the bank has a presence.

CIT Adds Regional Community Association Banking Executives in Florida Market Stacy Crowley and Sal Salvatierra, both veteran banking professionals, have joined CIT’s Community Association Banking team to serve the West Coast and Southeast regions of Southern Florida, respectively.

Clear Thinking Group Promotes Brian Allen to Senior Managing Director Brian Allen has over 25 years of experience serving in controller and CFO positions with

both public and private companies. Over the past 12 years, Allen has been engaged by numerous companies in the consumer product, retail, and manufacturing industries to improve financial operations and performance with strategic and financial alternatives, and to serve in interim senior financial positions.

Crestmark’s Healthcare Financial Services Group Marks First Quarter Growth, Adds Chad Kerr to Team Chad Kerr first joined Crestmark in 2005 as vice president, underwriting for Crestmark’s East Division, and subsequently was promoted to first vice president, team lead.

Gibraltar Announces Three Executive Promotions Jeremy DeBoer has been promoted to senior vice president and account executive team leader. Stan Scott was promoted to a senior vice president position. Sam Marder has been promoted to assistant vice president.

Gordon Brothers Names Kyle C. Shonak as Managing Director in Retail Division

TRANSACTION CONFIRMED. CONFIDENCE SECURED. Michael A. Boeheim, CIA, CFE Director, Practice Leader ABL Services

David L. Mancuso, CPA Director, Practice Leader Transaction Advisory Services

Industry experience, proactive scheduling and rapid deployment that top lenders and private equity groups demand.

TRANSACTION ADVISORY SERVICES

ASSET BASED LENDING

6

THE SECURED LENDER JUNE/JULY 2020

Pre-loan surveys & rotational inspections Fraud investigations Portfolio reviews Mark Stebbins, Director Freed Maxick CPAs

Due diligence Quality of earnings Structuring Paul Ciminelli, President & CEO Ciminelli Real Estate Corporation

Remote field exams & due diligence available.

716.847.2651 or FREEDMAXICK.COM

Kyle Shonak will have many responsibilities, including managing retail client engagements and working with the team to enhance the group’s retail growth strategy.

Dennis Bolton Joins Gordon Brothers’ Commercial & Industrial Division as Managing Director Dennis Bolton will assist clients in evaluating remarketing methods for various types of commercial and industrial assets as well as sourcing and facilitating large equipment deals in a multitude of sectors including construction, mining, energy and aviation industries.

Marc Pressler Joins Monroe Credit Advisors Team Marc Pressler has joined the firm as a managing director in its Chicago office. He will be responsible for originating middlemarket debt and lease transactions for the firm. Prior to Monroe Credit, he was the

commercial banking segment leader at Associated Bank.

MUFG Continues Expansion of Leveraged Finance Business with New Hires for U.S. Sales Mitsubishi UFJ Financial Group (MUFG) has hired Marc Lavine and Diane Wright as directors in MUFG’s Leveraged Finance Sales group. Both will be based in New York and report to Timothy Fischer, head of Leveraged Finance Sales in the Americas, who joined the company in January.

Sidley’s Pamela Martinson Named President of the American College of Commercial Finance Lawyers for 2020 – 2021 The American College of Commercial Finance Lawyers (the College) elected Pamela Martinson of Sidley as president for the 2020 – 2021 year. Pam has been a Fellow in the College since 2007, a member of its Executive Committee since 2016 and previously served as a Regent and as Chair of its Fellows Nominating Committee.

Solar Capital Partners Adds Senior Professionals

Wells Fargo Names Lester Owens as New Head of Operations Wells Fargo & Company announced that Lester Owens will join the company in the newly created role of head of operations, responsible for building a more unified, more integrated approach to Wells Fargo’s business operations functions.

White Oak Commercial Finance Appoints Martin F. Efron Senior Portfolio Manager for Northeast Region

investment manager White Oak Global Advisors, LLC, announced Andy McGhee, Susan Hall and Neal Mulford have joined the firm to further expand its assetbased lending (ABL) and lender finance capabilities. McGhee, Hall and Mulford together bring over 100 years of combined experience to WOCF, after most recently originating, deploying and managing a multibillion-dollar ABL portfolio at AloStar Capital Finance.

Martin F. Efron has joined the firm in New York, reporting to Bob Grbic, CEO and president of White Oak Commercial Finance. Efron previously served as partner and SVP at Milberg Factors for 10 years, and has notable experience in textiles, apparel, and furniture industries in New York, North Carolina and Mexico.

White Oak Commercial Finance Expands Asset-Based Lending and Lender Finance Team with New Hires White Oak Commercial Finance, an affiliate of San Francisco-based alternative

Experience a whole new

Gary Lembo joined the investment team as a partner, senior underwriter, and originator.

Lembo has 25 years of experience originating and underwriting investments in middle-market companies.

Eric Meyers joined as a partner and business development professional. Meyers has nearly 20 years of experience in investment banking, focused on originating, structuring and distributing private credit to institutional investors.

Robert Burns joined as a principal focused on origination across SCP’s multicredit strategy platform. Burns has 11 years of financial services experience.

Nandan Munshi joined as a principal and senior investment professional focused on originations as a member of SCP’s Life Science Lending team. Munshi has 12 years of experience, most recently working at JPMorgan Chase & Co. as an executive director in Commercial Banking.

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7

THE SECURED LENDER JUNE/JULY 2020

DEPARTMENT INDUSTRY DEALS

8

Lender/Participant (Role)

Lender Type

Amount

Industry

Borrower

Structure

Advanced Flower Capital Management, LLC (AFC)

Non-bank

$42 Million

Cannabis

Nature's Medicines

Credit facility consisting of a first-lien term loan

ABN AMRO Bank N.V.

Bank

$52.885 Million

Shipping

Diana Shipping Inc., a global shipping company specializing in the ownership of dry bulk vessels

Term loan facility

Allied Affiliated Funding

Bank

$1.5 Million

Manufacturing

Pet wash manufacturing company that sells primarily dog washing stations to national pet retailers, New Jersey

Receivables financing

Allied Affiliated Funding

Bank

$300,000

Manufacturing

Manufacturer for lead and steel-based specialty items for the industrial, roofing, plumbing and medical industries, Texas

Debtor-in-procession receivables financing

Amerisource Business Capital

Non-bank

$1 Million

Staffing

Nurse staffing and software firm based in Tennessee

Credit facility

Apollo Global Management, Inc.

Non-bank

$250 Million

Energy

NGL Energy Partners LP

Term loan facility. TD Securities (USA) LLC acted as debt advisor to NGL. Paul Hastings LLP acted as legal counsel to NGL, and Vinson & Elkins LLP acted as legal counsel to Apollo Funds

Austin Financial Services, Inc. (AFS)

Non-bank

$1.5 Million

Manufacturing

Manufacturer of precision machine components for the aerospace and defense industries

Revolving A/R and inventory facility

Bank of America

Bank

$3.15 Billion

Retail

Macy's

Asset-based credit agreement that includes a short-term facility of $300 million and an accordion feature that will enable the company to request increases in the size of the facility up to an additional aggregate principal amount of $750 million.

Bay Point Advisors

Non-bank

$7.5 Million

Mining

VC Mining Enterprises Inc., Godby DC-5 LLC, Godby DC-4 LLC, Hemphill Avenue LLC, and Virtual Citadel LLC

Senior secured debtorin-possession (DIP) financing agreement

N/A

N/A

$41.9 Million

Transportation

Blue Bird Corporation, Fort Valley, GA

Additional capacity on its revolving credit facility.

This brings the total revolving commitments to $141.9 million.

THE SECURED LENDER JUNE/JULY 2020

Lender/Participant (Role)

Lender Type

Amount

Industry

Borrower

Structure

BNP-Paribas, Groupe Crédit Agricole, Commerzbank, HSBC, Société Générale, as well as BECM and La Banque Postale

Bank

€245 Million

Retail

Tarkett, La Défense, France

Consisting of a €175 million short term revolving credit facility and a €70 million loan

BRF Finance Co., LLC, an affiliate of B. Riley Financial, Inc.

Non-bank

$25 Million

Retail

Tuesday Morning Corporation, Dallas, TX

Debtor-in-possession financing

B. Riley Financial, Inc.

Non-bank

$30 Million

Industrial Manufacturing

Babcock & Wilcox Enterprises, Inc., Charlotte, NC

Tranche A last-out term loans and has committed to provide $35 million of additional incremental last-out term loans through the maturity date.

Bank of Montreal (BMO)

Bank

$140 Million

Cannabis

Organigram Holdings Inc., Moncton, New Brunswick, Canada

Amended its credit agreement

Celtic Capital Corporation

Non-bank

$2.425 Million

Packaging products

Manufacturer of packaging products primarily used in the healthcare, cosmetics, pharmaceutical and food industries

Accounts receivable and inventory lines of credit

CIT Group Inc.

Bank

$225 Million

Energy

8minute Solar Energy, Los Angeles, CA a leading developer of renewable energy projects nationwide

Letter of credit facility

Change Capital

Non-bank

$350,000

Contracting

Specialty A/V contractor, Texas

2nd lien tranche of capital

CIBC Innovation Banking

Bank

$6 Million

Technology

Vbrick Systems Inc., Virginia

Revolving credit facility

Crestmark - Asset-Based Lending Division

Bank

$1.75 Million

Transportation

FAK transportation company, Washington

Accounts receivable purchase facility

Crestmark - Asset-Based Lending Division

Bank

$5.5 Million

Telecommunications

Wireless accessories distributor, California

Asset-based line of credit facility

Crestmark - Asset-Based Lending Division

Bank

$250,000

Transportation

Flatbed trucking company, Massachusetts

Accounts receivable purchase facility

Crestmark - Asset-Based Lending Division

Bank

$150,000

Transportation

Regional FAK transportation company, Oregon

Accounts receivable purchase facility

Crestmark - Asset-Based Lending Division

Bank

$100,000

Transportation

Regional FAK transportation company, Texas

Accounts receivable purchase facility

Crestmark - Asset-Based Lending Division

Bank

$12,000,000

Transportation

Air transport support and services company, Texas

Ledgered line of credit facility

First Business Growth Funding

Bank

$5 Million

Transportation

Logistics and transportation company

Accounts receivable purchase facility

Gibraltar

Non-bank

$6 Million

Manufacturing

Bentek, a manufacturer of power distribution solutions, San Jose, CA

Refinance a working capital loan

Gibraltar Business Capital

Non-bank

$18 Million

Manufacturing

Manufacturer of a full line Line of credit of refrigerated cabinets and walk-ins for use in food service, restaurants, grocery stores, and other retail end markets.

9

THE SECURED LENDER JUNE/JULY 2020

DEPARTMENT INDUSTRY DEALS

10

THE SECURED LENDER JUNE/JULY 2020

Lender/Participant (Role)

Lender Type

Amount

Industry

Borrower

Structure

GoTrade, a trading arm of Drip Capital, Inc.

Non-bank

$4 Million

Seafood

Seafood importer, New Jersey

Line of credit

Huntington Business Credit

Non-bank

$11.5 Million

Manufacturing

Robinson Fans Holdings, Inc., a designer and manufacturer of industrial fans and air moving equipment, Zelienople, PA

Credit facilities

Huntington Business Credit

Non-bank

$21.815 Million

Electrical parts

Advance Electrical Supply Company LLC, Chicago, IL

Credit facilities

J D Factors

Non-bank

$100,000

Transportation

Transportation company, British Columbia

Factoring facilities

J D Factors

Non-bank

$200,000

Transportation

Transportation company, Arizona

Factoring facilities

J D Factors

Non-bank

$300,000

Transportation

Transportation company, Quebec

Factoring facilities

JPMorgan Chase Bank, N.A.

Bank

$90.8 Million

Entertainment

The Marcus Corporation, Milwaukee, WI

Senior term loan A

Marathon Asset Management

Non-bank

$50 Million

Pharmaceutical

Baudax Bio, Inc., a pharmaceutical company focused on therapeutics for acute care settings

Five-year term loan

MPIC Fund I, LP

Non-bank

$150,000

Turnaround

Premier Diversified Holdings Inc.

Loan

North Mill Capital

Non-bank

$1.75 Million

Food

Wholesaler and distributor of pure maple syrup, Wisconsin

Asset-based revolving line of credit

North Mill Capital

Non-bank

$500,000

Manufacturing

Manufacturer of springs and metal stamping for the automotive industry, Illinois

Accounts receivable credit facility

Prestige Capital Funding, LLC

Non-bank

$2.5 Million

Healthcare

Designer and distributor of vascular tubing, catheters, and pediatric intravenous kits for sale to institutional medical concerns, Florida

Factoring arrangement

Rosenthal & Rosenthal, Inc.

Non-bank

$750,000

Automotive

Importer and distributor of new passenger car and light truck tires, Alabama

Purchase order finance facility

Rosenthal & Rosenthal, Inc.

Non-bank

$10 Million

Retail: Mattresses

Mattress company, Tennessee Non-recourse collection factoring engagement

Regions Bank

Bank

$20 Million

Construction

Orion Group Holdings, Inc. a leading specialty construction company, Houston, TX

Revolving credit facility

Republic Business Credit

Non-bank

$1.75 Million

Apparel

Privately owned apparel manufacturer, West Coast

Non-recourse factoring facility

Republic Business Credit

Non-bank

$3.5 Million

ManufacturingFurniture

Family-owned furniture manufacturer, West Coast

Non-recourse factoring facility

Sallyport Commercial Finance

Non-bank

$1.75 Million

Staffing

Group of staffing companies that provide flexible recruiting services to Canada and the U.S.

Accounts receivable facility

Lender/Participant (Role)

Lender Type

Amount

Industry

Borrower

Structure

TAB Bank

Non-bank

$2.5 Million

Energy

Energy company, West Virginia

Revolving credit facility

TAB Bank

Non-bank

$8 Million

Energy

Consumer lighting products company, Utah

Asset-based revolving credit facility

Leading global medical technology company

N/A

$1.5 Million

Healthcare

Titan Medical Inc., a medical device company focused on the design and development of a single-port robotic surgical system

Senior secured loan facility

TradeCap Partners

Non-bank

$9 Million

Manufacturing

Industrial safety gear manufacturer, West Coast

Purchase order facility

Tradewind Finance

Non-bank

$650,000

Manufacturing: Mobile Accessories

Manufacturer of mobile chargers and other consumer electronic accessories, Hong Kong

Credit facility

N/A

N/A

$275 Million

Gaming

Twin River Worldwide Holdings, Inc.

Syndicated an expansion to the term loan facility in its existing bank credit agreement

N/A

N/A

$36 Million

Energy

Unit Corporation

Debtor-in-possession

Wells Fargo Bank, National Association

Bank

N/A

Crude Oil and Natural Gas

QEP Resources, Inc., an independent natural gas, oil exploration, and production company

An amendment to its existing credit agreement

Wells Fargo Commercial Distribution Finance and includes the following lending partners: M&T Bank, Bank of the West and Truist Bank

Bank

$440 Million

Retail: Boat

MarineMax, Inc., the nation’s largest recreational boat and yacht retailer

Credit facility

WhiteHorse Capital, the direct lending affiliate of H.I.G. Capital

Non-bank

N/A

E-commerce

Connexity, Inc. to support its acquisition of SkimLinks.

Connexity is the leading independent provider of new e-commerce customer prospecting across the U.S. and Europe, serving the retail performance marketing industry.

Senior secured term loan facility

Zions Bancorporation, N.A. dba Amegy Bank

Bank

$230 Million

BDC Finance

Stellus Capital Investment Corporation, Houston, TX

Increased commitments under its revolving credit facility

11

THE SECURED LENDER JUNE/JULY 2020

FEATURE STORY

12

THE SECURED LENDER JUNE/JULY 2020

COVID-19 is popularizing asset-based lending. Here’s why.

BY EDWARD GATELY

Edward Gately of MUFG discusses the reasons for ABL’s rise in popularity as a result of the pandemic.

Takeaways

A

public health crisis is projecting a seemingly unlikely spotlight on an area of corporate finance that used to carry a negative association, yet is now the option of choice for many borrowers. I’m talking, of course, about asset-based lending (ABL).

1

The COVID-19 crisis is triggering conversions to asset-based credit revolvers.

2

Reasons include fear of covenant violation and need for liquidity.

3

Asset-based lending terms are evolving toward lower appraisals, higher loan pricing and anti-cash-hoarding provisions.

rather than traditional financial metrics (such as multiples of EBITDA or leverage ratios), which are only used in the case of ABL to determine creditworthiness—not borrowing limits.

EDWARD GATELY Managing Director Mitsubishi UFJ Financial Group (MUFG)

According to what we’re seeing at MUFG, the financial hardship resulting from the COVID-19 pandemic is driving some companies to convert their revolving credit facilities from secured cash-flow-based to asset-based lines of credit, which are applicable to businesses in retail, wholesale (such as equipment-rental and food-and-beverage companies), and general distribution, where large quantities of inventory are more common.

ABL was once stigmatized as an option of last resort for corporate borrowers that found it difficult to qualify for a traditional bank loan or line of credit, or companies undergoing operational challenges, experiencing declines in sales or lost customers, or wishing to take on more leverage in order to pursue acquisitions. This is no longer the case. ABL has become more mainstream for consideration nowadays—even among some investment-grade borrowers—because of its accommodative structures that require little or no covenants.

And the coronavirus has only fanned its popularity amid the uncertainty afflicting the business sector right now.

The reasons for current conversions to ABL Why are conversions to asset-based credit facilities taking place? We observe two reasons.

The first is the fear of running afoul of covenants. When a company’s EBITDA (or earnings before interest, taxes, depreciation and amortization) drops below a certain level, it risks violating the terms of its cash-flow-based revolving line of credit. We’re seeing companies take a proactive approach by converting to asset-based lending revolvers upfront rather than waiting until they’re close to breaching their covenants.

The second reason for the conversion to asset-based credit facilities is companies’ need for liquidity. ABL facilities commonly provide access to greater liquidity because borrowing limits are based upon margined collateral values

Typical ABL advance rates (i.e., the maximum percentage of the value of collateral that a lender is willing to extend as the loan amount) are roughly 85% of the net orderly liquidation value of inventory. Using that kind of methodology provides much more liquidity. As an aside, for this very reason, ABL facilities are also popular among companies experiencing high growth that need to fund their expansion.

We believe there will be more conversions to asset-based facilities for some time—possibly over the next 12 to 18 months—until conditions normalize. Shelter-in-place orders have the potential to shape longer-term patterns, and even after those orders are lifted, we don’t think people will return so quickly to their old consumption habits in terms of what they buy, where they buy it, and how much they spend. Until businesses are able to fully rebound, we foresee more of them pursuing facility conversions.

Of note, companies with asset-based revolvers are already drawing down on their credit facilities, borrowing to add cash to their balance sheets in order to make sure they have access to sufficient liquidity to weather this crisis.

But the story doesn’t end here. In conjunction with companies’ migration to ABL, we’re also witnessing an evolution in loan terms.

The evolving terms of asset-based lending The physical and economic consequences of the pandemic are making it difficult to conduct in-person inventory appraisals in order to assess the value of companies’ loan collateral, and ABL terms are evolving as a result.

After all, it’s an unsafe environment for appraisers to perform physical assessments of inventory and make decisions 13 based on real-time appraisals. Moreover, the liquidation market THE is disrupted because retail distribution channels are closed.

SECURED There’s also the question of timing: How do you appraise LENDER merchandise meant to be sold during a given season if it needs JUNE/JULY 2020 to be replaced with inventory for a subsequent season by the time you reopen for business?

Apparel is one example of merchandise affected by seasonality, though other types of merchandise, such as

FEATURE STORY technology products and home appliances, are not exempt from seasonal and other considerations. Ultimately, the monetary assessment of inventory is based on the price at which the appraiser believes the retailer can liquidate the inventory.

What’s more, we are still at the early stages of this crisis, and we haven’t yet seen the full financial implications of this pandemic for most companies.

Current levels of unemployment will affect consumer demand for some time and, until the economy normalizes, liquidation values could be impacted.

to pursue ABL conversions proactively, given economic uncertainty and the poor visibility into the future of their business.

These companies see potential covenant violations with their cash-flow-based lending facilities, having no clear picture of how the pandemic will affect sales or whether they’ll be able to operate at all if their current facilities are closed. Companies anticipate having more runway to ride out this difficult time if they can put their assets to use as collateral—whether inventory, receivables, real estate or other fixed assets.

Historically, it has not been uncommon to witness movements between cash-flow-based funding to ABL and back every so often as companies’ preferences shift with changing financial circumstances. But it’s clear to us that COVID-19 is driving companies to pursue ABL conversions proactively given economic uncertainty and the poor visibility into the future of their business.

There are three ways in which we see ABL terms evolve. First, and most naturally, is a gradual shift toward lower appraisals.

We expect monetary assessments of inventories— from consumer products to rental equipment—to decline across the board and reflect more conservative estimates.

The second evolution we see is toward higher loan pricing: Interest rates on asset-based lending have already risen by 75–100 basis points since the COVID-19 outbreak to reflect the current liquidity environment and increased credit risk.

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THE SECURED LENDER JUNE/JULY 2020

The third and final change we discern is that lenders are beginning to incorporate anti-cash-hoarding provisions into their asset-based lending agreements. These provisions are designed to preserve banks’ liquidity by ensuring that borrowers only draw funds for a need and deploy them accordingly.

Looking ahead Historically, it’s been common to witness back-and-forth movements between cash-flow-based funding and ABL every so often as companies’ preferences shift with changing financial circumstances.

But it’s clear to us that COVID-19 is driving companies

Since ABL can be an attractive option to companies of all sizes—from middlemarket companies with revenues as low as $100 million to large corporate borrowers that generate billions—we expect more conversions among businesses across the board.

These conversions might have a longer-term effect on companies’ financing preferences well beyond this crisis.

Our experience has shown that, once a company gets accustomed to the financial reporting conventions of an asset-based facility, such as field examinations of collateral and inventory assessments, it usually becomes comfortable with ABL as a more lasting solution to its financing needs, especially since it’s a solution that provides maximum liquidity.

What a long way ABL has come. Once a less-than-popular financing strategy, it is now an overbanked market that will, we believe, only get bigger.

Ed Gately is a managing director and head of AssetBased Finance at Mitsubishi UFJ Financial Group (MUFG). He specializes in formula-driven revolving lines of credit and term loans based on eligible assets including accounts receivable, inventory, equipment, and owner-occupied real estate.

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FEATURE STORY

The “New Normal� Roundtable

BY MICHELE OCEJO

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THE SECURED LENDER JUNE/JULY 2020

What challenges have industry executives been up against since the pandemic hit and what kind of future do they envision for the industry? TSL spoke with several SFNet members: Jason Hoefler, managing director/asset-based lending, BMO Harris Bank; Candice Hubert, senior vice president of business development, Republic Business Credit; Mark Polinsky, executive vice president and co-founder of Gateway Trade Funding; Georgia Quenby, partner, Morgan Lewis & Bockius; Stuart Rosenthal of Prestige Capital; and Dan Tortoriello, executive vice president/chief operating officer of North Mill Capital.

I

t seems the entire world has changed since March.

What has been your company’s biggest challenge during this time and how are you working to overcome it?

TORTORIELLO: Every aspect of our business has been affected. It starts with our clients. We have been in touch with each of them regularly to help them through the PPP process and understand how it will affect their working capital position going forward. We are also assisting them on who to call and any other information we could share. From a new business standpoint, we have always prided ourselves in sitting across the table from an owner to learn their business and financial needs. This has now become a Zoom call. We still have the same focus, but adjusting with the situation. Our staff is now all working from home. We went from three full-service offices with 10 BDOs to 48 people operating from their homes. We needed to have this completed over a weekend. I cannot say enough about how we all worked together not to miss an advance request or cash application. Again, it took a lot of Zoom calls, but we did get it done (we also learned a lot about how people decorate their homes). Also, field exams are now being done remotely.

Roundtable Participants

JASON HOEFLER

CANDICE HUBERT

BMO Harris Bank

Republic Business Credit

MARK POLINSKY

GEORGIA QUENBY

Gateway Trade Funding

Morgan Lewis & Bockius

I believe this will change how we do business going forward. The influx of stimulus money has reduced our outstanding and has put our clients in a more favorable loan-to-collateral position to get through this situation. Bottom line: we needed to over-communicate with each other to get these changes in place and to fully utilize the technology available to us to do it.

HUBERT: The world is unquestionably evolving rapidly. Managing ever-changing information about the impacts of COVID- 19 has been perplexing. However, we have taken a “people first” approach. Our firm is one of a kind in that our home office is located in one of the focal points of this pandemic, New Orleans, Louisiana. We have supporting workplaces in Los Angeles, Houston, Nashville and Chicago. Each city, depending upon area, has been affected in different ways. Republic has taken measures to guarantee all employees are safe by ordering a “work from home course of action.” While urban areas start to open up, Republic has conceived an arrangement to relocate back to an office domain in stages. As we step by step return back to an “ordinary” office setting, our phases of return are guided by CDC, OSHA, State Health Department and all pertinent office rules, alongside Federal, State, County, Parish, City and all other material administrative organizations.

ROSENTHAL: The biggest challenge is finding transactions that are legitimate. There has been an influx in deals in the PPE space with many newly formed entities all trying to jump on the bandwagon in what they deem to be a “gold rush.” Many of these deals are fraudulent. Recently, The New York Times Styles section ran an article on how even Bethany Frankel, the creator of SkinnyGirl, was defrauded on PPE purchases when she tried to be helpful during these challenging times. That being said, we did provide a $2,500,000 facility for a company in this sector; however, they were not new in this industry, and we vetted the firm and the transaction carefully.

STUART ROSENTHAL

DAN TORTORIELLO

Prestige Capital

North Mill Capital

17 HOEFLER: A key part of any relationship is communication, and THE relationships are the key to business success. Working from home and the SECURED LENDER resulting lack of face-to-face meetings with prospects, customers and team JUNE/JULY 2020 members has its own unique challenges. Face-to-face meetings are more impactful and valuable than a phone call for the same reasons a phone call is more impactful than an email. Meeting in person allows you to establish a connection, read body language, capture audience attention and pivot the conversation more easily. Difficult conversations are much harder to

FEATURE STORY do over the phone or on video. There tends to be less dogs barking and microphone issues during a face-to-face meeting. There is no White House press conference or laptop in front of you to distract you during a face-to-face meeting. Overcoming these challenges requires a little creativity (virtual Happy Hour!) and ensuring engagement of the audience by asking more questions.

QUENBY: It has changed!

And trends have accelerated and intensified. As a law firm we shifted to working from home, and while a lot of that has been very smooth, we had to almost completely rethink how we approach new business generation and maintaining and building client relationships.

We’ve been doing lots of video catch-ups with clients, often with a specific topic to discuss, and have built an entire advice center for COVID-related matters with free information on our website. Our banking industry team has set up a special “lender matters” COVID task force and we’re tracking all the new legal changes and challenges with the aim of providing insightful, useful materials to all our clients. We’re also running our summer associate program as an entirely remote program, which has taken some doing by our teams!

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THE SECURED LENDER JUNE/JULY 2020

What challenges have been specific to your area?

ROSENTHAL: It has been harder to credit-approve account debtors when so many companies have their doors shuttered. We pride ourselves on offering non-recourse factoring, but right now, we cannot take the credit risk, although we still can provide our clients a deep dive into their customers’ creditworthiness, which allows them to make good decisions when choosing who to do business with.

It has changed! And trends have accelerated and intensified. As a law firm we shifted to working from home, and while a lot of that has been very smooth, we had to almost completely rethink how we approach new business generation and maintaining and building client relationships. We’ve been doing lots of video catch-ups with clients, often with a specific topic to discuss, and have built an entire advice center for COVID-related matters with free information on our website.

POLINSKY: We are inundated with PPE Purchase Order funding requests right now. This is a highrisk product that requires a lot of diligence. We are seeing startup companies with little financial backing that need funds to fulfill large purchase orders. To support this, we have managed to get customers to take fewer supplies over a period of time, spreading out the order and requiring fewer funds at any one time. Additionally, we are helping to ensure the right product gets delivered as per the customer’s expectations.

Many of the Chinese suppliers require payments upfront, so we are overcoming this with a letter of credit procedure, but even then, cash is king. Although some suppliers agree to the LC, many are refusing the orders unless deposits are paid.

POLINSKY: A small amount of POs were en route to customers when the pandemic began and have been suspended because they have temporarily closed their doors. We expected this and understand. Many are long-term clients and we know the inventory will eventually be taken once things open back up. The inventory is being held in warehouses until the order comes back or will be sold to other customers.

Requests for POs in the retail industry come with problems. The crisis has not helped this alreadystruggling industry. Credit insurance is no longer a reliable back-up tool as credit levels are being reduced daily, and we are seeing bankruptcies increasing. Thankfully, some of our clients are supplying to big box stores such as Walmart, Costco and Home Depot. However, other clients were supplying to the airlines and restaurants and have seen their revenue dramatically reduced.

In order to speed up payments, some clients are withholding products for new orders until payment is received. Alternatively, where we have received communication that payment will be delayed, but will be forthcoming, we are continuing to support our clients with funding.

TORTORIELLO: We have a very flat organization, meaning that there is an open door for anyone to discuss a problem or issue. It is not a blame game. If someone has an issue, we all have an issue. If someone needs help, you just need to make it known. As an example, our account executives do both underwriting of new deals and handle a portfolio of accounts. This helps when a prospect is able to talk to

the person underwriting the deal and that person is familiar with the industry. Our operations people work directly with account executives.

Many of our account executives have done field exams, operations and underwriting. This was our practice before the pandemic and we continue it today. The people you work with are the most important.

You must count on the person next to you to do their job in order for you to do yours. Having excellent people around you to help support the team is more critical than ever. Most important is keeping the team focused and motivated when the workload increases and the process changes. That only happens when all are working as a team.

vengeance. Getting infected with computer/software viruses is high on the list of concerns for us. Before the stay-at-home order, we had seen email accounts being mirrored by cybercriminals trying to move payments to different accounts. Thankfully, our processes ensure that all changes to account requests are called and checked through ways other than email. However, as secure as we may be, we cannot be confident that our clients/suppliers or other third parties are so vigilant.

HOEFLER: Managing a team of people remotely has its challenges.

Things like the natural camaraderie that comes with being together in-person, the impromptu lunchroom discussion, the ability to ask the person next to you a quick question, are all lost in a work-fromhome environment. For a seasoned veteran who largely operates independently, these challenges are less impactful than someone new in their career who has much to be gained from learning from those physically nearby. To combat this, we have found discussing specific situations on team calls to be very beneficial.

QUENBY: Our staff members are all working remotely and we will be cautious in a return to our many offices worldwide. We are very aware of the need to maintain client confidentiality even when WFH and many of us are saving papers for shredding when we do go back to the office.

HUBERT: As an asset-based lender, our operations, underwriting and business development teams have all seen a vast impact on their respective lines of business. However, I have been amazed at our ability to react swiftly in the midst of this pandemic. In fact, our New Orleans office is more than privy to natural disasters, hurricane preparedness, and disruption that sometimes drives remote and virtual work environments. However, my role has definitely changed.

I have worked for Republic for a total of eight years as a business development representative interfacing with many clients frequently.

Due to social distancing mandates, our once-multiple weekly meetings, frequent travel, networking events, and frequent luncheons have all become exclusively virtual. I am embracing new ways to have interpersonal connections with groups of individuals via virtual meeting tools like Zoom and Google Meets. Sometimes I use family pictures as a background for my virtual meetings. I find that this helps to break the ice and create a connection with people. I know over time virtual engagement will become easier as more and more corporations and individuals adapt.

QUENBY: There has been a deluge of new laws affecting lenders and borrowers in both the UK and the US, so we’ve been advising and commenting on them as they are developed, and helping clients navigate a whole new legal landscape. All our teams have been incredibly busy writing updates and talking clients through the changes. We’ve had more changes in three months than we probably had in the last ten years altogether in some areas.

Are there any security and/or HR concerns around staff working remotely? Is your staff still working remotely? If not, how is social distancing being addressed?

POLINSKY: I am grateful that we invested in IT security before the crisis. During a crisis, hackers seem to increase their attacks with a

All of our staff are working remotely, and it has been a complete success. Teams and Zoom meetings have ensured we can easily keep in touch regularly with both our staff and clients.

ROSENTHAL: Yes, all of our staff are working remotely. As a warm, collegial team, it was hard to transition to remote work. Some of our staff needed training in working in this way. We were patient in getting them, up to speed, as this is now the new normal; and, when they were hired who would have expected that they would now have to juggle home life and work life simultaneously? We are fortunate that everyone was able to get up to speed quickly and it is now seamless. However, we do miss the face-to-face interaction and camaraderie.

TORTORIELLO: With any major change over in operations there is always a concern. We have experienced this before with Super Storm Sandy (although this is much longer in duration) and other events, which helped us prepare for this one. Having three operating locations throughout the country has been a positive, allowing us to maintain full service if one of the locations is down for any reason. We will continue to work from home until we feel it is safe to return to the office. We continue to monitor the situation at each of our locations, each of which is at a different point in the process. The return to the office safely is paramount for all of us. The pandemic has definitely been a game changer for how we can be more efficient in our process. We also need to address the potential request of employees wanting to work from home permanently.

We have had one or two employees in the office for specific projects. Upon return we are addressing the need for masks, hand sanitizers, employees that are considered in the ‘high-risk’ category and will continue to modify our procedures as we move forward. We also continue to follow the policy of the local authorities.

HUBERT: Working remotely has always been a part of Republic’s 19 culture. We realize that this has been a challenge for many THE SECURED companies. However, given our presence across the western, southern LENDER and midwestern regions, Republic has easily adapted to a virtual JUNE/JULY 2020 internal communication engagement. Human resource concerns have been minimal as we have taken measures over the years to convert to a complete cloud-based system. We have also created internal chat groups for our sales, operations, and underwriting teams which allows us to communicate frequently. Communication is

FEATURE STORY consistent, thus human resource concerns are minimal. Management has implemented frequent virtual meetings to assist with training, development and overall support. This has been a positive turn for us as an organization. Frequent Zoom meetings have allowed us to connect more often with internal partners. A companywide return-towork process is currently being comprised. This process includes three stages: voluntary, broad, and total participation. Our goal is to ensure all employees transition back to a work setting safely and efficiently.

Are you seeing or do you expect to see an increase in clients due to companies transitioning to ABL/factoring?

HUBERT: I believe the ABL industry will see an uptick in new business.

As a result of COVID19’s economic impact, banks are transitioning to tighter credit parameters.

Conventional bank lenders are now focusing on managing existing portfolio companies that have experienced disruption in cash flow due to forceable shutdown orders, decreased demand for products or services coupled with, in some cases, employees contracting COVID-19.

Banking institutions will begin to assess their risk tolerance in what many experts are expecting to be a recession.

Asset-based lending oftentimes acts as a bridge to capital in recoverable distressed situations like these. ABL lenders will be an unequivocal resource for companies that may not be able to get the working capital they need from their existing financial institutions. Republic has already seen a vast influx of new business opportunities as a result of more stringent lending parameters placed by banking institutions.

QUENBY: One-word answer: yes.

ROSENTHAL: Yes, we expect to see an increase in business opportunities. As many banks, ABL firms and factors are reviewing their portfolios, we expect that they will be asking more clients to find alternative funding sources due to the crisis and its impact on their sales and profitability. Since Prestige funds based on a client’s receivables, we DO NOT underwrite a company’s financials; therefore, we can fund companies in turnaround and also provide debtorin-possession financing.

We expect many more prospective clients and account debtors to file bankruptcy. We hope to be a valued resource for these transactions, if and when that time comes.

Our strength is the speed in which we can process and close a deal, typically in 5-7 business days.

We currently have 10 individuals in business development throughout the country. Each is very actively looking for new business. Each has over 10 years’ experience, but continue to find new ways that work for them. They all bring more to the table than just money. They all offer a value-added solution that we hope is a win/win for NMC and the prospect. Some started doing field exams, then credit underwriting, handled a portfolio, and workout.

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THE SECURED LENDER JUNE/JULY 2020

HOEFLER: Yes, I do expect to see a migration of traditionally financed loans to ABL and we have already seen examples. Sources of the deals will largely be industry-related such as retailers that were not already in an ABL structure and ABL-lite structures done with traditional commercial lenders.

POLINSKY: Absolutely; our pipeline has already increased dramatically since mid-March. Many businesses are changing in preparation for the “new normal”, with that comes uncertainty, so I believe that banks with a smaller risk appetite may not be able to provide the working capital that is needed like we can.

TORTORIELLO: We currently have 10 individuals in business development throughout the country. Each is very actively looking for new business. Each has over 10 years’ experience, but continue to find new ways that work for them. They all bring more to the table than just money. They all offer a value-added solution that we hope is a win/win for NMC and the prospect.

Some started doing field exams, then credit underwriting, handled a portfolio, and workout. The experience gained from each of these roles is helping them in the current environment.

We also have the advantage to offer both a factoring and ABL product which allows for a prospect and current clients flexibility based on their current need and financial performance.

How do you see the industry being affected by the crisis over the next six months and what are you doing to for prepare it?

POLINSKY: We are setting up for more growth. It is apparent that even as stay-at-home orders are slowly being pulled back, the virus is not going away. PPE will still be required, and social distancing will be part of our world until vaccines are widely available. E-commerce has experienced substantial growth, and we are helping suppliers provide goods to online retailers.

There is more entrepreneurial spirit than ever before. We will be there to assist new startups and those looking to grow where traditional finance options will not be viable.

HUBERT: No one could have predicted what has been one of the most impactful periods in our history. COVID-19 has driven unemployment to an all-time high. The oil and gas industry may never rebound to what it once was, and the need to buy a plane ticket to travel to meet your next prospective client has come to a complete halt. As many states begin to reopen, in the next few months we will see vast amounts of companies in distress, experiencing rapid growth, or in a start-up position. I anticipate banks will have limitations on extending credit due to market volatility; thus, asset-based lenders will be a capital vehicle that many industries will begin to utilize. Cohesively, banks will begin to search for ABL lenders to intercept distressed credits. Additionally, restructuring firms will seek to find lending vehicles to recapitalize distressed or unappetizing bank credits. Congruently, industries like consumer package goods, food, apparel, and logistics to name a few are positively, yet aggressively, growing due to the increase in demand for American-made products. Future industries will require liquidity and working capital. Republic has experience and is ready to support new business opportunities especially in fast growth, start-up, or distressed situations.

TORTORIELLO: Determining the proper valuation of assets will be the focus going forward. The basis of our type of lending is collateral performance and value. Under current conditions, both are difficult to determine. Appraisers are having a difficult time placing a value on machinery, equipment and inventory. In certain sectors, the liquidation scenario has changed immensely. A/R turnover, dilution, reporting requirements are all being affected in real time. All of this puts more emphasis on not just collateral performance, but financial performance.

QUENBY: We all need to get educated on the new legal frameworks that will certainly affect underwriting decisions and potential exits.

The credit and underwriting teams are going to continue to be very busy with the liquidity issues facing vast numbers of borrowers, so allowing the new business pipelines to be fed and watered with good support from credit and underwriting teams will be important. During the quieter time on the new business front (which I think is very much temporary) we are working with the BDOs from our clients to make sure term sheets and documentation are really fresh and user-friendly.

ROSENTHAL: We anticipate many changes. Several lenders and/ or factors have already started downsizing their operations as they restructure. Others, like Prestige, are adapting to the “new normal” and will find opportunities for new business growth. Our portfolio, like many, has been negatively affected overall. However, we have seen an uptick with our clients in the food and beverage industry, as they sell to retailers that are open for business. We pride ourselves on helping businesses in times of need. There may not be another time where businesses have a greater need than now. We expect to see an influx in opportunities to provide much-needed cash flow to keep their businesses growing and thriving and have the financial and human resources to handle it.

HOEFLER: The ABL industry will be affected in several impactful ways over the next six months. Consider the following: How and where we work is evolving in the blink of an eye, the industry changed from a monolithic, stodgy workplace replete with ageold mores and customs to a bustling, fast-paced work from home environment more typically associated with new age companies.

Suddenly, the industry can compete for employees demanding more flexibility.

As the economic backdraft of the COVID-19 shutdowns works its way through the financial statements and borrowing bases of our customers, I expect a significant negative risk rating migration. This will, in turn, lead to higher capital costs which may result in continued upward pressure on spreads.

The economy is poised for a significant increase in bankruptcies.

We have already seen prominent cases such as Neiman Marcus, J.C. Penney and Exide file for Chapter 11 protection. These cases demand significant attention and the workloads of the portfolio managers with customers in bankruptcy increases substantially, given the pull from senior management, credit partners, workout, field exam, attorneys and other constituents.

As the economy moves from a rapid downsizing to a recovery mode, the gyrations of working capital and their subsequent manifestation on borrowing bases have been and will continue to be profound. This will require significant resources to stay on top of the client’s availability and we will help them navigate through these troubled times.

I believe the industry remains poised for growth but not without its challenges given the impact this crisis has had on companies.

Structures and pricing have tightened already, but the market continues to evolve during the crisis. Overall, it’s business as usual, though done differently and constantly evolving. Our business development officers are actively speaking with prospects and referral sources and we continue to close transactions during the crisis. To prepare, you must be proactive in everything that you are doing and stay ahead of issues.

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

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FEATURE STORY

Field Exam Roundtable: Where We Are and Where We’re Going

BY MORTEN KUCEY

It is safe to say that COVID-19 has altered the ABL landscape tremendously and has become an existential threat to the way we do business. There is no question that field exams have been severely disrupted by COVID-19 and the resulting lockdown.

SFNet’s chief value officer, Morten Kucey, posed several questions to field exam professionals to discover the extent of the impact as well as ideas for moving forward. Participants include: Donald F 22 Clarke, president, Asset Based Lending Consultants; Paul Epstein, THE SECURED managing partner, LCG Advisors; and Richard Hawkins, CEO, LENDER JUNE/JULY 2020 Atlantic Risk Management Services.

H

How do field examiners assess the “collateral” damage ABL lenders have sustained as a result of the pandemic?

EPSTEIN: Time is of the essence as the testing and the trend analysis already exists. There will be some modifications to both; however, the challenge that lenders face today is the postponing or deferring of field examinations. A non-performing credit/workout is obviously heavily monitored over time and, in many cases, the lender is more than prepared with how to proceed. In today’s world, we are seeing collateral levels and collateral quality deteriorating for healthy portfolios by the day. Lenders have done a fine job of cooperating with their borrowers and showing compassion, especially when many of these borrowers’ key personnel are now working from home. They need time to get situated with their new environment, both personally and professionally.

Lenders have a job to do and they can only defer for so long as the unknown could be fatal.

Roundtable Participants

DONALD F CLARKE

PAUL EPSTEIN

Asset Based Lending Consultants

LCG Advisors

CLARKE: In the ABL space, where we depend on quality and timely data-driven information from our borrowers because of the way we lend money, our rhythm and way of monitoring clients, including performing field examinations, has been altered tremendously since the social distancing rules were established by our government.

Along with the social distancing protocol came almost a global cessation and/or slowdown of businesses except for those considered “essential” for people to survive.

I believe that COVID-19 has posed an existential threat to the way business is conducted in the ABL community.

Our global business model was built on being able to visit the borrower several times annually to see, feel, socialize, scrutinize, and read body language.

I think we can say the effects of COVID-19 on ABL will be substantial and we can safely stipulate the following: There will be loan over-advances everywhere; there will be degraded collateral, both accounts receivable and inventory; and there will be bankruptcies and liquidations of remaining collateral at a pace we have never before experienced.

This process of assessing the damage will require not only a deep dive into inventory, for example dealing with things like shelf-life issues, but also with the health of accounts receivable debtors that make up the lender’s collateral. How many of them are still alive, wounded in action or DOA? Do we, as the field examiners, suggest an attempt to resuscitate or liquidate the borrower based on our findings? Do we get a 13-week cash-flow plan to look at sustainability and should we evaluate and critique?

HAWKINS: The first base is a detailed understanding of the business, its sector, customer base and supply chain. We must understand the damage the business has sustained as well as

RICHARD HAWKINS

Atlantic Risk Management Services the state of its dependencies: suppliers, raw materials, human resources.

How do field examiners triage the dying and dead and look for exit ramps?

CLARKE: Needless to say, there will be a rush, once this is over, to assess where each borrower stands. This is going to require some strategic planning by the lender, some of which should be happening as we speak.

We should triage the portfolio based on what we knew prior to COVID-19. We would have known those that were problematic versus those that were strong and obviously try and see the former first.

We can also look at the borrowing bases coming in during COVID-19 to see which ones were fully utilized or overadvanced.

Once we determine this category then the field examiner must be sure to obtain, for example, a complete name and address listing for debtor’s accounts receivable demand letters

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FEATURE STORY for the lender to begin the process seamlessly. Some concerns to look for: Are rents past due and need to be paid for the lender to have access to inventory? What mechanisms need to be engaged to start the exit process? Any insight from the examiner will be priceless to the process.

HAWKINS: We must apply a solvency test, taking into account the actual recovery value of the assets and specifically accounts receivable, inventory, plant and equipment. It may not in all circumstances be possible to get up-to-date valuations and appraisals. We may also need to make general assumptions based on historic value. We will also have to analyze the accounts receivable in the context of present conditions, not historical data. We need to utilize our field examination programs such as contingency planning reviews and high-risk special circumstances reviews.

How do field examiners prop up those borrowers showing signs of life to bring them back to health?

HAWKINS: Short-term cash flows have never been more important to be able to make judgments as to whether the borrower can sustain operations based on existing working capital capacity or if additional capital needs to be introduced and where new capital can be resourced, if at all.

CLARKE: In this space the credit might have to be reunderwritten with input from the field examination team. In their opinion, based on the numbers and what they observed, does this business have a vibrant pulse?

What will be the new field exam scheduling paradigm?

EPSTEIN: For the vast majority of the TSL readers, there will always be some component of an on-site requirement for most field examinations. I do think we will see more virtual examinations for “ABL-lite” transactions for the commercial banks that are more credit-focused. However, as COVID-related restrictions ease, we expect traditional ABL lenders to be laser-focused on collateral quality and will continue to require a significant portion of the process to be on-site work. After all, there is no substitute for face-to-face contact when so much money is on the line.

CLARKE: As we discussed during the May 7, 2020 field exam roundtable, most of our loan and security agreements limit the number of examinations that the borrower has agreed to pay 24 THE for. But I think that the lender needs to now do more rather SECURED than less, even if it is at a cost. We cannot afford to be “pennyLENDER JUNE/JULY 2020 wise and pound foolish”! The frequency of exams should be predicated on the fiscal condition of the borrower, with those in critical care getting the most attention.

HAWKINS: Lenders will need to move to a case of need as

opposed to a time-based program. Categorizing borrowers based on risk and exposure is paramount.

Discuss staffing needs and requirements post-pandemic and the “new” skill set that will be required.

CLARKE: The new field examination skillset will require experience in doing difficult exams, as I suspect most of what we do will fit that description. The examiner will have to understand cash-flow projections and be able to calculate things like breakeven sales and analyzing below-the-line expenses to determine sustainability. A strong accounting background is paramount here.

HAWKINS: Lenders need to consider what is relevant and ask if the existing field exam template makes sense in this new world. Scopes will need to cover the circumstances of the borrower, its collateral and survival prospects opposed to building exam reports based on data that may not be relevant.

There are many field examiners, loan officers and relationship managers that will not have experienced a deep recession, let alone the challenges that this will bring. There is a shortage of risk skills as organizations have scaled down operations whilst focusing on head count. There is a reliance on external field exam firms, but many of these firms are in the business-as-usual world.

EPSTEIN: Staffing needs were a challenge prior to the pandemic but, like we experienced during the Great Recession, field examination firms will have a larger pool of candidates to hire from in the next several months as many financial services firms reduce their workforce. We have already seen an uptick in the number of highly skilled candidates, not necessarily with direct field examination experience, but with transferable skills and experience that will allow them to quickly transition into field exam with proper training. The required skills are evolving as well as technology proficiencies and data analytics are playing a larger role in the exam process, but in our opinion communication skills are every bit as important. Field examinations are physically structured differently now, the banks are on high alert with regard to borrower updates, and borrowers are struggling to keep up information requests and in many instances are uncooperative. None of these challenges are insurmountable with fluid communication from not just the field examiners, but the lenders as well.

How will field examiners build new databases post-COVID19 as the information prior to and post will have no meaningful basis for comparison?

EPSTEIN: Compiling and charting data points beginning immediately and continuing for the next several years will be critical. We will see trend analysis expand by company and by portfolio, and eventually determine what the new “acceptable” will look like over time. Field examination templates will likely also have a macro component to them to where historical data will be a key driver in helping lenders to determine the new normal. Unfortunately, it appears the goal posts

will be continually moving for the foreseeable future.

field examination being virtual going forward.

HAWKINS: Future trend analysis will, for some time, show a huge distortion; from March until whenever! It will not be difficult for firms like ours to change templates to smooth out the distortion, some of the old technology formats may have more difficulty.

Our suggestions would be:

CLARKE: For those who have made it to the other side of COVID-19 how do we now determine the “new normal”? Given that ABL is a datadriven applied science and we use such data to establish advance rates and eligibility on collateral, what do we now use? Do we start anew? Are prior data and metrics pre-COVID-19 considered irrelevant and not useful? Do we start building a new data base?

If inventory is a part of the equation, we can use Facetime or WhatsApp to communicate with warehouse personnel as we attempt to “see” and test count inventory. In this process we should obtain still shots of the warehouse before we count, so we get a panoramic look at the inventory globally.

How do we begin formalizing operating standards around conducting “virtual” field exams or field exams with virtual components?

HAWKINS: We have been conducting desktop field exams for many years and we have now extended this service and have introduced: n Desktop fact sheet n Simplified scoping documents n Offsite information request lists n Project management tools n Secured data room technology

Establish a secure Data-room for uploads from borrower. This data room must be secured, as we will be accepting privileged information electronically and we must ensure against data breach by opportunistic bad players.

How to keep data flowing and avoid the “out-of-sight, out-of-mind”, dilemma? Field examination means being in the field and when the examiner is not present, they tend to get forgotten. So, I recommend constant email reminders of outstanding documents needed. We keep the list organic and strike off things as we get them and send a daily list of outstanding items. It is important to keep the account manager in the loop, so they know the status of documents and challenges being faced by the analyst.

Field examiners must archive data for future use once the process is over. This is crucial and so we will not allow the borrower to be able to delete files once uploaded into the Data room. Archiving this data is key for future reference and becomes vital evidence in the event of legal challenges down the road.

n Online meetings n Remote inventory counts How lenders approach this subject will mean the difference between survival and failure, not just in respect of their portfolio of borrowers, but for many commercial finance businesses.

EPSTEIN: Practically speaking, I believe the first place to begin is to look at the pain points, which will be information-flow challenges, and how or when to invoice. There will most likely be a shift in billing to focus more on a range in fees or hours based on the scope, rather than a single daily rate. The more stopping and starting, which is inevitable in virtual exams, the more difficult it is to quantify what a billable day is. In addition, the standards or process for billing an exam may need to change to where exam firms invoice on a progress basis if the lender is requesting to keep the exam open for an extended period of time. With exam volumes and length increasing across the board, requiring outsource firms to go unpaid for extended periods of time only hinders our ability to meet demand and provide high quality work.

For lenders to get the most value out of the exam process, the exam firms and the lenders will need to be more collaborative and more flexible with the process. The partnership needs to become stronger than ever.

CLARKE: This is important, as I believe, and so did some of the esteemed panelists that served with me on the SFNET field exam roundtable in May, that the new normal will call for some portion of the

Morten Kucey is chief value officer at Secured Finance Network.

Prior to joining the SFNet team, Morten served as Senior Managing Director, head of corporate development for SB360 Capital Partners, LLC. He previously held the title of managing director, Business Development for one of the predecessor companies, SB Capital Group. Morten started his career with SB Capital Group in the Toronto, Canada office in January of 2000 and came to the U.S. in 2002 to help implement and oversee business development functions for the company. Prior to joining SB Capital Group, Morten worked as a merchant banker in the venture capital area of Hill & Gertner Capital Group in Toronto. Morten has also held senior consulting positions with two of the largest fundraising consulting firms in New York and Toronto.

Morten has a Master of Science in International Business and Marketing from the University of Strathclyde in Glasgow, Scotland and a BBA from Bishop’s University in 25 Lennoxville, Quebec. Morten also holds designations THE SECURED from Canadian Institute of Certified Business Valuators LENDER in Toronto, Canada and The Chartered Institute of JUNE/JULY 2020 Marketing in London, England. He is a founding member of Capital for Children, a non-profit in Washington, DC.

FEATURE STORY

Knowns and Unknowns: The Effects of COVID-19 on Politics and Policy DAVID J. E. CHMIEL

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Geopolitical advisor David Chmiel assesses what the international political and regulatory environment may look like in the wake of the global COVID-19 health crisis.

I

n February 2002, thenUS Defense Secretary Donald Rumsfeld famously spoke about “known knowns”, “known unknowns” and “unknown unknowns” in the context of Iraq’s weapons of mass destruction. His critics DAVID J. E. CHMIEL cited this as obfuscation,

Managing Director, but he was actually

Global Torchlight describing an established categorization used in both scientific research and intelligence analysis that recognizes limits to knowledge at any given time. Rumsfeld’s soundbite resurfaces from time to time as a historical curiosity, but it takes on new relevance amid the current COVID-19 crisis.

Business and society both now confront a host of known and unknown unknowns about the future course of this pandemic and its economic, social and political consequences.

The simple reality is that we are both fully aware of limits to our current knowledge about this virus and recognize that ensuing events may yet develop in unforeseen ways. As the world takes its first tentative steps out of lockdown, significant questions remain unanswered. How quickly will national economies regain lost momentum and correct worrying levels of unemployment and corporate distress? Will the virus burn itself out naturally or will we see increases in infection rates and renewed pressure on healthcare resources later this year?

How sustainable are the colossal deficits being accrued by governments as they seek to maintain social and economic stability? Can scientists develop an effective COVID-19 vaccine and how will societies adjust if no such remedy is available?

It will take months or years to gain clarity on these and other present challenges. However, domestic and international politics are already changing fundamentally and that, in turn, has immediate consequences for businesses and those who lend to them.

This article gives an overview of some of the key changes that COVID-19 may have on the political landscape affecting global businesses. Current events are contributing to longstanding debates about the merits of trade and globalization. They are also impacting pre-existing cleavages in the domestic politics of some of the world’s largest economies and giving rise to potentially fundamental shifts in economic policy. Finally, this pandemic is affecting a geopolitical balance of power that was already in a state of flux. While there may

be no defined path from here, understanding these political dynamics will help businesses prepare for the uncertainty that lies ahead.

Whither the global supply chain?

Free trade and globalization were already contentious political topics prior to the current pandemic. Businesses were adjusting to uncertainties created by trade wars, Brexit and public disquiet around offshoring of manufacturing. Nevertheless, there was reason to believe that advocates for free trade were winning many of these debates.

Polls of populations around the world showed a solid base of support for comparatively open global trading relationships. In the United States, for example, an increasing majority of Americans saw free trade as a net good – even as the Trump administration waged trade wars with China, the European Union and others. This debate was not over, but a return to autarky was certainly not envisaged.

The current pandemic may alter that direction of travel – at least in respect to certain aspects of global trade and investment flows. Recent events have revealed considerable gaps in the capacity of existing supply chains to provide the essential tools necessary to fight a large-scale health emergency. Countries around the world reported shortages of pharmaceuticals, personal protective equipment and critical devices such as ventilators. Many lacked immediate domestic manufacturing capacity to rectify these shortfalls. The fact that China was the first country to go into lockdown also highlighted systemic weaknesses in a modern global supply chain characterized by just-in-time production and a high concentration of manufacturing in one country – or even parts of that country. Even if the pandemic had been contained to Hubei Province, where it first apparently gained hold, there would still have been material consequences for the global economy given the importance of that region to China’s manufacturing capacity.

This renewed debate may also impact cross-border investment. The crisis has depressed asset values, weakened currencies and heightened public sensitivity around supplies of critical goods. There is concern that opportunistic foreign investors may take advantage of these circumstances to acquire assets in strategic sectors. As a result, a number of governments have implemented restrictions on inbound foreign investment – often couching these measures in the language of protecting national security. This framing takes on additional gravity when placed in the context of the geopolitical changes considered later in this article.

27 Only when we see polling data on attitudes to free trade in THE the wake of COVID-19 will we see if it has shifted the ground SECURED in debates around the merits of globalization. Nevertheless, LENDER JUNE/JULY 2020 political leaders who were previously staunch champions of minimal barriers to trade and investment are already sounding notes of caution. In April, French President Emmanuel Macron stated in an interview with The Financial Times that “[COVID-19] will change the nature of globalisation…We had

FEATURE STORY the impression there were no more borders. It was all about faster and faster circulation and accumulation…it was clear this kind of globalisation was reaching the end of its cycle. It was undermining democracy.”

There is every reason to believe, therefore, that businesses face stronger political headwinds on trade than may have been the case pre-crisis. That is not likely to affect every aspect of trade, but it does translate into specific areas of policy risk that warrant further consideration: n There will be particular focus on sectors most critical to public health. Many governments have imposed export bans on critical goods and plan to ensure greater self-sufficiency in production of things like personal protective equipment and pharmaceuticals. In addition, cross-border investment in healthcare-related industries is likely to remain under considerable scrutiny. There may even be efforts to nationalize critical healthcarerelated businesses. In Canada, for example, some political leaders have already called for the abolition of private ownership in the long-term care sector in light of the fact that the overwhelming majority of that country’s COVID-19-related deaths occurred in those facilities. n The effects of the crisis on global manufacturing generally may lead to efforts to discourage further offshoring of production and to encourage companies to “reshore” closer to home. Such measures cannot be achieved overnight and they will need to be counterbalanced against the fact that offshoring was driven by goals of reducing costs and providing goods to consumers at lower prices. At the very least, it may prompt businesses to investigate shifts to lower-cost jurisdictions closer to home – taking advantage of regional trade blocs – or to greater use of automation in higher-cost jurisdictions.

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n The geopolitical dimension to these events will also likely lead to more frequent categorization of economic sectors as critical to national security and, therefore, in need of additional protection from competition and outside investment. President Trump set precedent for this by seeking to invoke national security as justification for tariffs on imports of steel and automobiles. The current pandemic has heightened public sensitivities around this issue and may give governments the political capital to “securitize” much broader swaths of national economies. Australia, Canada and New Zealand are now subjecting investment in healthcare and other sectors to more heightened scrutiny on national security grounds. In time, it’s possible that other sectors, such as food and agriculture, may also get brought within these definitions. That, in turn, will generate new uncertainties and challenges for cross-border trading and investment activities.

COVID-19, populism and economic policy Domestic politics in the UK, the US and many European Union countries were already in the throes of heated debates over longstanding political principles long before COVID-19 entered public awareness. The rise of populist, anti-establishment parties and politicians was shattering assumptions about the limits public policy would take. Current circumstances are likely to amplify that volatility. Of course, great national crises can serve as opportunities for cross-party collaboration; however, history is replete with examples of circumstances in which significant economic and social dislocation brought about fundamental political change.

It remains too early to tell what the lasting policy effects of this crisis may be given uncertainty about the future course of the virus itself. Stringent lockdown conditions remain in place with sectors such as travel, aviation and hospitality particularly badly afflicted. Emergency government support measures have focused on preventing immediate, catastrophic damage to national economies. However, those supports are not permanently sustainable and the prospect of widespread business failure remains very real. Nevertheless, there are some glimmers of hope in all this gloom. The lifting of lockdown restrictions in countries such as Australia, China and South Korea has prompted a flurry of so-called “revenge spending” on consumer goods. But polling in other countries reveals that populations may be reluctant to emerge from lockdown cocoons too quickly and that a resurgence in infection rates could quash any nascent recovery.

These events have rendered obsolete any goals of fiscal austerity in national budgets – at least for the foreseeable future – as governments now forecast record budget deficits and increases in national debt. In fairness, fiscal conservatives were already increasingly rare in politics in the US and elsewhere. This reflects an emerging willingness among voters to contemplate more government involvement in economic activity overall. One of the lasting economic effects of the current pandemic may be that it cements a more interventionist, government-centered approach to policy making in countries that, in recent decades, embraced more laissezfaire philosophies.

As with the debate on globalization discussed above, this leads to speculation as to how these shifting political dynamics may alter the policy environment affecting businesses and their lenders. Some possible points of contention include the following: n For now, most governments are focusing on the immediate economic crisis, rather than longer-term consequences of ballooning national debts. While this is understandable, there will come a point at which those concerns also need to be addressed. Governments will need to increase revenues and that means that tax policy is very likely to become a heated issue. Not only may businesses confront higher tax rates overall, but there is likely to be a renewed and more intensive

regulatory focus on tax structuring, particularly in cases of businesses that received government support to weather the immediate effects of the pandemic. n Those support schemes are, themselves, capable of becoming politicized. In the US, for example, the public outcry over large, listed companies receiving funds under the Paycheck Protection Program led to some recipients repaying funds amid threats of audits and lawsuits. In addition, any business opting to make employees redundant while maintaining payments such as dividends to shareholders or bonuses to senior executives is also at risk of both political and media opprobrium in these challenging times. n As lockdowns ease, businesses will also face a host of new risks associated with the implementation of measures such as regular employee testing and strict social distancing rules. Not only will this likely require fundamental changes in business processes and operations, but a failure to implement such measures fully will have financial and reputational consequences.

The geopolitics of COVID-19 COVID-19 may also prove to be a critical event in international relations.

In recent years, the global political order has been shifting from a unipolar world in which the United States was the sole hegemonic power to one of multipolarity with numerous countries becoming more assertive of their national interests. First and foremost among these has been China, which is increasingly viewed as a strategic competitor of the United States.

At the bare minimum, this pandemic is placing significant strain on a bilateral US-China relationship that was already increasingly characterized by mistrust and suspicion. Since the crisis began earlier this year, there has been a noticeable escalation in the inflammatory rhetoric passing between Washington and Beijing – at times, alarmingly so. However, other governments have also found themselves in diplomatic spats with China over the handling of the crisis. China, in turn, has shown a significant willingness to respond with threats to any comments perceived as criticisms. This has real consequences for businesses and the global economy because many of the ensuing policy responses are targeting crossborder trade and investment. President Trump has threatened to take a number of measures severing economic ties with China. When Australian Prime Minister Scott Morrison called for an international inquiry into the origins of the COVID-19 outbreak, Beijing responded by threatening to boycott Australian imports. The European Union has since made similar calls for a multinational investigation. It is difficult to see how this mistrust dissipates at any point in the immediate future and any resulting tension in international relations will only generate further uncertainty for businesses already seeking to manage a host of challenges.

Setting aside the issue of great power politics, it is also important to monitor the effect that the COVID-19 pandemic is having on developing market economies. In some cases, these countries lack the healthcare capacities and financial resources to respond to the pandemic in the same way as the largest, industrialized economies. That may make the effects harder to contain in those parts of the world. Some of these countries also face significant economic hardship as a result of collapsing commodity prices or other systemic financial weaknesses. Where democratic institutions may not be sufficiently robust or where populations do not believe that their interests are safeguarded, this could potentially give rise to civil unrest. Equally, governments in those countries may opt for more radical policy measures aimed at correcting economic shortfalls such as nationalization of assets held by foreign investors. Given COVID-19’s global reach, there can be a tendency to focus primarily on its impact in one’s own country and comparatively little attention is being paid to how it is affecting developing economies. However, the interconnected and interdependent nature of the modern world means these risks should not be ignored altogether, as their consequences could amplify existing challenges closer to home.

Conclusion The world is now confronting social, political and economic challenges on a scale not seen in many countries for decades. There are no certainties as to when business-as-usual will resume or what it will look like when it does. That collective uncertainty is compounded by the fact that there are still so many unanswered questions about the science of this current pandemic, its likely future course and the prospects of containing and controlling it. In understanding the range of political issues in play and in recognizing that the existential nature of this crisis opens many previously sacrosanct assumptions up to challenge, we can at least prepare to adapt to the “new normal” – whatever form it ultimately takes. In doing so, we may start to limit the number of “unknown unknowns” presented by this current state of affairs.

David Chmiel is managing director of Global Torchlight.

He advises companies in a range of industries on the effects of geopolitical risk on their business strategies and operations, with a particular emphasis on issues in East and South Asia, Russia and the CIS. Prior to co-founding Global Torchlight, David practised for ten years as a corporate finance lawyer in the London and Chicago offices of a major global law firm. He holds a BA in economics and history from the University of 29 THE Victoria (Canada), a Bachelor of Laws degree from SECURED University College London and an MA in intelligence LENDER JUNE/JULY 2020 and international security from the War Studies Department of King’s College London.

FEATURE STORY

Retail has taken a serious punch from the pandemic and subsequent store closings, even those that were doing well pre-COVID. What does the future hold in this “new normal” and how can lenders assist retail borrowers to weather this storm?

Retail Finance in the Age of COVID-19

BY HOWARD BROD BROWNSTEIN

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Takeaways

E

ven before the COVID-19 crisis resulted in the serious impairment of the retail economy, lending to retailers already presented challenges to asset-based lenders. While ABLs typically prefer accounts receivable collateral over HOWARD BROD inventory and, in many BROWNSTEIN cases, may limit how much President of a loan facility can be The Brownstein Corporation collateralized by inventory, retailers typically do not have any accounts receivable. So, from the outset, lending to retailers requires lenders to get comfortable with inventory as collateral, which requires them to thoroughly understand the risks involved, as described further below.

All lenders hope and plan for the credit line to be maintained by billings and collections in the normal course of business, without ever having to exercise “rights and remedies” and foreclose on their collateral. Nonetheless, secured lenders from the time they are “baby bankers” learn always to have a “second way out” for repayment, should that become necessary, by foreclosing upon the collateral. However, unlike non-retail asset-based lenders, rather than potentially collecting from a borrower’s account debtors, lenders to retailers have to deal instead with inventory. Instead of a right to payment represented by an invoice, for which the lender would just have to contact the account debtor and provide proof of right of payment, the lender has to take physical possession of inventory, possibly at multiple locations where the cooperation and support of borrower employees, landlords and others might be required.

Moreover, the value of inventory collateral is an important element of risk for lenders and is nearly always subject to change. Fashions vary from one season to the next for products that are fashion-sensitive, longer-term trends can make products more or less attractive, inventory quality may decline with age, and there is an “adverse mix” aspect as well: the more saleable inventory was likely sold prior to any foreclosure by the lender, and the inventory that remains may be less popular, deteriorated or older, etc.

Another factor for retail finance is that borrowers typically handle cash – not just the sort that shows up in a bank account following a check deposit, but actual green cash. This can be less traceable, and presents another form of risk to

1

Lending to retailers is unlike typical asset-based lending and factoring in a number of respects and requires specialized knowledge for underwriting and portfolio management.

2

The COVID-19 crisis has especially affected retailers – essentially shutting them down for months – presenting a unique challenge for lenders.

3

Retail borrowers have little or no accounts receivable, and therefore deep knowledge and understanding of inventory collateral is required.

4

Retailers often handle cash – unlike most ABL and factoring borrowers – which also presents special requirements for lenders.

5

The value of inventory collateral can be affected by fashions and trends, and also the mix of a borrower’s inventory can change quickly, especially during a borrower’s decline.

retail lenders, since that cash is part of their collateral, but is susceptible to “asportation”, i.e., theft.

For many years now, a sizeable amount of retail commerce has shifted online, and some retailers have been far more successful than others at creating an effective online presence, integrating it well with their in-store experience, and staying out in front of continuing changes in the Internet.

Retail lenders have, of course, taken note of the effects of the Internet, which have changed lenders’ tasks somewhat as inventory might be held at distribution centers – or even held by suppliers – rather than in stores. The COVID-19 crisis exposed which retailers could successfully further shift sales online, and which ones could not.

And, in addition to the above important risk considerations which retail lenders have to navigate on a “clear day”, the COVID-19 pandemic has shaken the retail economy to its core.

While lenders may have prepared for a gradual degradation of a retail borrower’s business, the possibility of a radical drop in business has historically been treated as a “black swan” event.

While distressed retailers do go out of business – the author oversaw the winding-up of Montgomery Ward, the largest retail liquidation in history – it still took many years of decline for that endpoint to arrive. However, the current crisis has put many retailers on the brink of extinction nearly overnight, and their lenders scrambling to accommodate a large number of requests for extensions, waivers and forbearance agreements, all at once.

Retail lenders that are regulated banks are also apprehensive regarding how regulators will evaluate whatever accommodations they make for their borrowers. The same government that employs the regulators has proactively pumped trillions into the economy, but it is still unclear how regulated lenders will be judged. And even nonregulated retail lenders are affected, as most of them utilize “lender finance” from regulated lenders.

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FEATURE STORY The COVID-19 crisis has therefore emphasized the importance for retail finance of effective underwriting and portfolio management and, while all of the above factors may seem like a daunting challenge for lenders, experienced retail lenders have long been successful at overcoming and successfully managing the risks involved. Such success requires an even greater focus on the value of a borrower’s inventory than that which non-retail asset-based lenders apply to their accounts receivable collateral. Here are the essential parts of that focus: n A thorough understanding of the products included in inventory, including how they may be affected by fashions and trends, age, and adverse mix; n A different set of regular reports from the borrower, as well as differently executed field exams, than non-retail asset-based lenders typically require; and n Lining up a set of outside advisors in advance, both to assist with loan underwriting and portfolio management, as well as if a borrower becomes distressed.

We will look at each of these key areas for effective retail finance in more detail.

Since a retail lender is basing loan decisions on the value of the borrower’s inventory, this requires a thorough understanding of the products that make up the inventory.

Here are just some of the questions that a lender might ask about these products, and to which it should seek answers from the borrower, both initially during the underwriting process, and along the way as part of portfolio management: n What is the nature of the products in the inventory? Are they sold to the general public, or only to a subset of consumers or users? n Is the ability to sell the products subject to any licensing requirements and/or franchise agreements? n There is typically no material concentration among a retail borrower’s customers, but it is worth asking about.

Is each customer transaction a stand-alone event, or are there longer-term sales, subscriptions, etc.? n Are the quantities of each product in inventory important, i.e., is a minimum amount of any given product required for a sale? n Are products sold individually, or in conjunction with other products, i.e., does one need to have Product A in order to sell Product B?

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n Does sale of the products require any associated services, e.g., installation? n Are the products subject to any change in value solely due to passage of time, e.g., due to fashion, seasonality, trends, deterioration due to age, “use by” dates, etc.? n What would be required if the lender had to take possession of the inventory? Would the inventory need to be stored elsewhere? Are landlord waivers in place?

n What assistance might be required by employees?

Would use of the borrower’s equipment be required, and if so, how is it financed? n Does the range of products make them susceptible to “adverse mix” as described above, i.e., that during a borrower’s decline, some products are more saleable and would leave the lenders with less saleable ones? n Are the products subject to any statutory liens like the Perishable Agricultural Commodities Act (PACA), which could prime a secured lender?

The COVID-19 crisis has caused unusual customer buying patterns, as well as disrupted supply chains. What customers are buying may not be what retailers had planned, nor what they can easily restock. Individual retailers may or may not be permitted to operate their stores vs. online-only, depending upon local shutdown regulations, reopening schedules, etc.

There is also the issue of the borrower’s landlords. The in-store retail industry has been characterized as a form of the real estate business, but with the key measure being the shelffoot. Lenders to retailers need to be aware of a borrower’s lease obligations, whether there is concentration among the landlords (e.g., mall operators), and have a plan for how to contact the landlords should it be necessary. And during the current COVID-19 crisis, many retail borrowers have been negotiating with their landlords for reduced or suspended rent payments, restructured lease terms, etc., and lenders should be aware of such efforts and any results.

The degree of disruption has been monumental. Many retail lenders have had to “double-down” on their portfolio management, as the crisis may have exposed areas of weakness in their normal procedures.

Regarding reports to be required from the borrower, these should be specified based upon the lender’s analysis of the borrower’s products as described above. This will help define the frequency and detail of reports to be required, and the lender should take into account a realistic assessment of the borrower’s ability to report in an accurate and timely fashion.

For example, if the reports to be required represent an appreciable increase over the reporting that the borrower has provided in the past, this should imply a reasonable inquiry into the borrower’s ability to provide such an increase in reporting.

There may need to be an added requirement that the borrower strengthen its financial reporting staff, or engage an outside firm to provide reporting, temporarily or permanently.

An important aspect of reports to be required from a retail borrower is the different between reports which provide a snapshot, i.e., “as of” a certain date, vs. a moving picture, i.e., “for the period ended…”. The latter are important so that the lender can discern trends, e.g., through reporting of “inventory turns” – the level of inventory of a particular product in relation to its rate of being sold. Some buildup is normal for seasonality or connected to having to order in bulk, but lenders

must be alert to a possible trend of slowing sales of particular products that might be illuminated by detailed reporting of inventory turns.

Retail lenders should also track how a borrower is doing with “the trade”, i.e., its vendors. The lender should be aware of the payment terms that the vendors provide, including any “dated terms”, i.e., extended payment terms to allow for seasonality, such as in advance of the Christmas season. Such tracking should include payment history that is corroborated by bank statements showing actual payment dates, to guard against a borrower relieving accounts payable by seeming to issue a check, but then “filing” the check in an office drawer to await sufficient credit-line availability to actually mail it.

To the degree a lender does not already require its retail borrowers to provide cash-flow projections, the current crisis is a good opportunity to start requiring them. A good format is the rolling 13-week projection, with clearly stated underlying assumptions, and updated regularly, e.g., every four weeks or even more frequently. These reports are intended to show as far in advance as possible if a borrower will “hit a wall” without some intervention.

The requirement of field exams should also be designed based upon the lender’s analysis of the borrower’s products.

Important factors to consider might be the number of locations and their ease of accessibility, the nature and complexity of the products, and how specialized a field exam needs to be in order to provide the lender with the information it will need, both for underwriting and portfolio management.

Lining up advisors should be done at the outset during the underwriting process, and they may be helpful with both defining and evaluating the borrower’s responses to the questions discussed above. Some of these advisors may not impose any fees just for “looking over the lender’s shoulder” and making comments and suggestions along the way. Of course, if the lender requires such an advisor to perform a substantial task, e.g., assist with a physical inventory, do a detailed analysis of sales, etc., then there may be some fees involved, but these would likely be both reasonable and chargeable to the borrower.

n If the loan is syndicated, a financial advisor to the lender group In addition to all of the above, the borrower’s intellectual property may also be an important consideration for retail lenders. This may include the borrower’s store brand, the brands of the products it sells, licenses from product manufacturers and/or franchisors, any proprietary methods or processes of the borrower, etc. This intellectual property may be part of the lender’s collateral, and therefore important for the lender’s underwriting and portfolio management. It should also be part of the lender’s “contingency planning”, in the event of the borrower’s distress. The selection of the advisors described above should take into account the borrower’s intellectual property.

Like all secured lending, with retail finance, “the games are won in practice.” Lending to retailers requires extensive preparation, both internally with one’s own staff, and in having advisors in place who can help identify, manage, and – hopefully – reduce risk. While it is unlikely that lenders prepared specifically for the current crisis, those that had prepared well for more normal conditions, as described above, were likely better prepared to deal with the unexpected pressures that have arisen. If nothing else, the COVID-19 crisis can be a valuable, if unwelcome, opportunity for retail lenders to “up their game” and be stronger providers of retail finance when conditions become more normal.

Howard Brod Brownstein is president of The Brownstein Corporation, a turnaround management firm headquartered in Philadelphia. He serves on the SFNet Education Committee and regularly presents SFNet webinars and in-person programs.

Having advisors become familiar with the borrower early in the process will also provide the benefit of having them be knowledgeable when questions arise along the way during portfolio management, as well as should more intensive assistance ever be needed, i.e., in the event of the borrower’s distress.

Among the advisors a lender might consider including in this process are the following: n A firm specializing in inventory appraisals and liquidations n An attorney experienced in advising lenders to the borrower’s industry n A field examiner with experience in the borrower’s industry

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THE SECURED LENDER JUNE/JULY 2020

SFNET MEMBER PROFILE

Riveron, a Business Advisory Firm with Solutions Spanning the Business Lifecycle CEO Landon Smith founded Riveron in 2006 with the goal of creating a company that broke the traditional mold of a consulting firm by infusing an entrepreneurial spirit at its core. The Dallas-based firm has grown exponentially since that time with an expanded scope of services and 13 offices around the country.

BY EILEEN WUBBE

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THE SECURED LENDER JUNE/JULY 2020

RICHARD HATLEY Managing Director Riveron Riveron serves as hands-on partners, working alongside its clients to not only guide them through the challenges they face but to take up the execution as well.

In 2019, Riveron received a major growth investment from a new capital partner, which helps support Riveron’s plans to strengthen and expand its capabilities and geographic presence.

“Riveron has experienced an impressive annual growth rate in recent years, while retaining a strong commitment to being not only a strategic advisor to its clients, but a hands-on execution partner as well,” said Richard Hatley, managing director based in Riveron’s Dallas office. “Riveron’s commitment to reinvesting in the business, finding aligned capital partners, being open to new growth initiatives, and selecting the right leaders to make bold moves is the foundation on which this growth is built.”

In December 2019, Riveron announced its acquisition of Conway MacKenzie, a consulting firm specializing in turnaround, restructuring, and operational improvement.

By acquiring Conway MacKenzie, the combined firm has an expanded national footprint and offers a full suite of services spanning mergers and acquisitions, accounting and finance transformation, performance improvement, technology enablement, and performance and operational improvement, and technology enablement for healthy and distressed

environments.

“Conway MacKenzie’s complementary services, diverse industry knowledge, and deep expertise in solving complex business problems enable us to bring more robust, end-to-end solutions to our clients,” said Hatley.

In conjunction with Conway MacKenzie, Riveron delivers a full suite of credit advisory services. The firm partners with lenders throughout the lifecycle of a credit, from origination, monitoring, and refinancing support for healthy borrowers, to turnaround and restructuring services for distressed borrowers. Riveron leverages its expertise in asset-based, cash-flow, and hybrid structures to highlight the risks and opportunities associated with the growth, working capital requirements, or underperformance of target borrowers.

Riveron provides full-scope asset-based lending field exams and credit-focused quality of earnings reviews for cash flow lending. Experienced credit professionals perform several other services, including covenant evaluation and sensitization, evaluations of forecasts and assumptions, 13-week cash flow preparation or reviews, review of key credit agreement terms and conditions to ensure diligence findings are reflected, evaluation of borrower reporting capabilities, and ongoing monitoring exams. Riveron’s credit advisory services can also be customized to provide due diligence for both cash-flow and asset-based credit products in a single engagement.

reinforces the need to communicate well with borrowers and with our lender clients and be very clear about what we’re asking for, why we’re asking for it, why we’re performing certain analysis and why we need certain answers or certain data. We can do inventory test counts virtually, if necessary; otherwise our base plan is to perform those once we’re able to travel again, which looks like that’s going to be happening soon. We also do cash flow and quality of earnings work that’s credit-focused. It’s designed and targeted for lenders, and we’re doing that work remotely as well.”

Hatley added it is possible that they’ll reevaluate what onsite field exams will look like and how data is exchanged with borrowers and lenders, but the ability to sit across from somebody, have a conversation and walk the plant and operations, should never go away.

“You get so much from that that’s intangible,” he added.

Joining as a new member of SFNet in early 2020, Hatley says he seldom comes across a lender, BDC or debt fund that doesn’t actively participate in SFNet.

Joining as a new member of SFNet in early 2020, Hatley says he seldom comes across a lender, BDC or debt fund that doesn’t actively participate in SFNet.

Riveron’s reputation of being a valued partner to its clients has been crucial for bringing in new business. This partnership goes beyond direct client work, as Riveron maintains strong channel relationships with private equity firms, investment banks, lenders, audit partners, technology firms, and other service providers. As a result, referral business is also a key part of Riveron’s growth model.

In these uncertain times, Riveron has had to take a closer look at its business and determine how best to serve clients. The firm is helping to guide its clients through the current crisis in areas such as lender services, turnaround and restructuring, distressed M&A, and broader crisis management support, in addition to its core finance and accounting services.

“We are fully remote now in our field exams and it’s actually been a smoother process than I was expecting,” said Hatley. “It certainly

“The events are fantastic resources to get in front of friends, former colleagues, potential partners in deals, and share ideas and hear about what’s going on in the market. I think if there is one thing I’m probably most excited about, now being a corporate member of SFNet, is being able to actively participate in discussions, online training, webinars, panels at events, whether it’s live or virtual, and just being able to have a bigger role in that. They’re informative, create a lot of discussion, and

make us smart as an advisor.

“I think also being able to share that access throughout Riveron, where people who were not members before, can now take advantage of the resources. I can’t begin to count how many people have reached out to me to say, ‘Okay, now that Riveron is a member, can I participate in this webinar?’ Getting the firm as involved as possible, even if they’re not part of lender services, and being actively involved in panel discussions and training is important to bring new people into the industry. It gets them connected to people that know the industry well because it makes us all smarter and a lot better at this.”

Eileen Wubbe is senior editor of The Secured Lender and TSL Express.

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THE SECURED LENDER JUNE/JULY 2020

IP VALUATIONS >> FRAUD ALERTS >> BUSINESS DEVELOPMENT >>

IP VALUATIONS

VALUATION INSIGHTS

Intellectual Property Value in the Covid-19 Era

BY CAMERON COOK, ASA, CIA, CDB

A strong brand can be an invaluable asset during challenging times, especially during the current economic environment created by the COVID-19 crisis. A well-managed brand can help a company weather an economic storm and provide value, even if the company itself is losing revenue.

The coronavirus pandemic has opened the flood gates on bankruptcies and business closures. Some of those closures will include businesses with widely recognized brands and other intellectual property (IP). Recent industry research estimates that apparel brands alone could face up to a 20-percent drop in brand value due to COVID-191. Given that business was already strained in some retail segments, the onset of a pandemic has made the struggle to survive more difficult, if not impossible for some businesses.

Despite this prediction and the perception by some that brand value deteriorates when a business experiences stress or economic conditions decline, some brands may have the potential to carry more value in a post-COVID-19 economy. A company’s brand and other IP could in fact gain value during a time of change and could even be a business’s most valuable asset going into volatility or restructuring.

When we talk about brands, we are not talking about trademarks or trade names only. While the terms “brand” and “brand name” are often used as synonyms for “trademark” and “trade name,” a trademark is, per the United States Patent and Trademark Office, “…a word, phrase, symbol, and/or design that identifies and distinguishes the source of the goods of one party from those of others.” The term “brand” is larger and typically refers to a group of complementary assets such as the trademark (or service mark) and its related trade name, formulas, copyrights, and technological expertise (which may or may not be patented). Furthermore, a brand, as used here, includes the presentation and image of a company and its products. It infers 36 the recognition and acceptance of the branded products. Brands THE include the trademarks, logos, current and past designs, copyrights, SECURED LENDER channels of distribution, design legacy, advertising concepts and JUNE/JULY 2020 masters, website, and more. A brand embodies the experience, feel, and emotional connection of the consumer to the brand.

The perception that intangible assets, such as brands, can diminish during difficult times could be the result of the financial reporting process that companies go through after an acquisition, which 1

>> ECONOMIC OUTLOOK >> FIELD EXAM >>

requires the acquisition price paid to be allocated to the total assets acquired. Although the reporting rules say otherwise, the acquisition price might be more likely allocated to financial assets and fixed assets and, if there is not “room” left in the acquisition price, little or no value may be allocated to the intangible assets. The result is that the market does not see intangible asset value reported in many stressed business acquisition transactions, even though there is, in fact, practical CAMERON COOK Gordon Brothers value in the brand. Additionally, if a company has intangible asset value on its balance sheet, it needs to be tested for impairment when a triggering event occurs, such as the economic downturn caused by COVID-19. Impairment testing may result in a brand’s “Fair Value” (as defined by ASC 820, ASC 350/360) being less than its book value, thus incurring a write-down in value. As a result, the market sees write-downs of intangible assets during challenging times even when the fair market value or highest and best use value might still be strong.

A strong brand can be an invaluable asset during challenging times, especially during the current economic environment created by the COVID-19 crisis. A well-managed brand can help a company weather an economic storm and provide value, even if the company itself is losing revenue. Consumers may be holding off on some purchases during ‘stay-at-home’ or lockdown orders, but many will remember their favorite brands when they regain the opportunity to purchase non-essential goods, making purchasing decisions easier and quicker for the consumer. Consumers also often look to their favorite brands to provide a sense of normalcy and comfort. Healthy and robust IP can help a company revive itself and push forward into the marketplace after the crippling effects of COVID-19 have subsided. Additionally, store-based businesses have been among the hardest hit, and the pandemic has accelerated the need for some companies to transition from a brick-and-mortar retail model to an e-commerce model. A strong brand can bolster the success of such a transition.

The economic downturn we are facing globally as the result of measures taken to fight the spread of COVID-19 has presented an opportunity for many companies to strengthen their brands around support of the well-being of the larger community. Some companies have mobilized their strong brand and other IP in this effort regardless of revenue declines and profit losses. These companies are strategically investing in their brand even though the pandemic is making such investments difficult. Some are using targeted advertising and marketing campaigns to connect with consumers, showing consumers that they understand the challenges the world is facing. Additionally, many businesses are sponsoring community service programs or are making donations to give back

Fashionista, April 15, 2020 https://fashionista.com/2020/04/most-valuable-apparel-brand-2020

to their respective communities. However, brand development is not inexpensive, especially when profitability has taken a hit from destabilized distribution channels and decreased revenue. Despite the costs, surveys have found that consumers look favorably upon brands that demonstrate the value of keeping consumers and employees safe, keeping employees on the job, showing empathy to communities, and supporting essential workers.

For example, Ford cut short ads for its redesigned Escape and Explorer models and redirected the airtime to inform viewers of credit programs that can temporarily suspend payment requirements and provide other forms of credit relief. Additionally, Ford informed the market that it is combining forces with others in the marketplace, even competitors, to address the needs of the community. Ford’s repurposing of some production capacity to manufacture much needed medical supplies, such as personal protective equipment and ventilators, has had a positive impact on the Ford brand. Similarly, wireless phone carrier Verizon pledged to provide an additional 15GB of highspeed data to customers with wireless plans to support families working remotely and students home schooling. Other companies, including banks, are providing extra services and benefits to help families stay connected, support the transition to schooling and working from home, and manage finances through these challenging times.

opportunities could be a great opportunity for buyers and sellers alike.

As a purchaser and manager of brands, one of the factors that Gordon Brothers looks for in an investment opportunity is a situation where a company maintains a strong brand despite less than optimal business trends. In 2018 Gordon Brothers acquired the Bench brand, finding an opportunity to reinvigorate a strong international brand. In April 2020, Gordon Brothers sold the Bench brand after breathing new life into it. Gordon Brothers also recently acquired the Laura Ashley brand and invested in the Brooks Brothers brand. Authentic Brands Group, WHP Global, and Marquee Brands are also examples of companies that look for opportunities amongst promising brands.

The survival of these businesses and their IP will depend on their ability to adapt and find new and inventive ways of building and leveraging their brand. The most successful of these brands will find partners and investors that will help them remind consumers that even though times are challenging, they can still rely on their trusted brands.

Despite the current economic challenges, synergistic and financial buyers alike are looking to engage in brand acquisitions, direct investments, partnerships, or sale-leaseback transactions of IP. Buyers are looking to find opportunity within the market by buying brands they feel are currently undervalued. With many businesses suffering financial duress, they are seeking ways to raise funds to endure this downturn. Unfortunately, many have found traditional capital to be limited, creating a need to find a less-traditional path to obtain funding to manage the current down market, creating an opportunity for solutions including taking on investors, leveraging their brand as collateral, or an outright sale. Brand transaction

Most retail businesses across the world are now facing the daunting task of reopening amidst a new norm. The survival of these businesses and their IP will depend on their ability to adapt and find new and inventive ways of building and leveraging their brand.

The most successful of these brands will find partners and investors that will help them remind consumers that, even though times are challenging, they can still rely on their trusted brands.

Cameron Cook is responsible for overseeing business valuations and intangible asset valuations at Gordon Brothers. With more than 20 years of financial valuation and consulting experience Cook has served a wide range of clients, including business owners, boards of public companies, ESOP trustees, estate and bankruptcy attorneys, hedge fund and equity fund managers, and national and international banks.

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THE SECURED LENDER JUNE/JULY 2020

IP VALUATIONS >> FRAUD ALERTS >> BUSINESS DEVELOPMENT >>

FRAUD ALERTS

FRAUD INSIGHTS

Portfolio Management and Fraud Detection/ Prevention, Amid COVID-19

BY JEFFREY BRANDLIN

The financial hardship resulting from the COVID-19 pandemic is causing multiple issues for traditional and non-traditional asset-based lenders (ABLs). As the pandemic continues, some companies are converting their revolving credit facilities from cash flow-based to secured asset-based lines of credit to increase liquidity. Should an asset-based lender play offense or defense in the existing market? How does the asset-based lender manage and balance its existing portfolio while ensuring unscrupulous borrowers do not take advantage and harm a financial institution? Answers to those questions and more are discussed below.

Undoubtedly, there is an increasing secondary market to provide bridge and rescue financing secured by assets. Credit managers and risk officers are closely reviewing transactions underwritten over the past few years and possibly adjusting their credit underwriting practices. How do ABLs react to the ever-changing environment?

Debt covenants Financial covenants will be affected. Debtors are likely to stretch their creditors while cashflow is impaired. Accounts receivable dilution, cross aging and concentration limits are all likely to be tripped.

Possible Solutions: Identify and segregate pre-and postCOVID-19 receivables and assess the customer base directly or indirectly affected by COVID-19 closures. Consider adjusting 38 the eligibility requirements for a predetermined time period to THE SECURED alleviate near-term credit default. The frequency of reporting LENDER JUNE/JULY 2020 should be increased to permit close monitoring of eligible collateral. Cash dominion should also be triggered to gain stronger control over cash receipts. Creative solutions coupled, with increased monitoring or cash controls, may warrant assisting the borrower.

>> ECONOMIC OUTLOOK >> FIELD EXAM >>

Borrowing base and eligible collateral Borrowers may have maximized their lines of credit to obtain cash to meet their liquidity needs over the coming months.

Supply chain disruption may be impacting a company’s ability to replenish inventory, resulting in a decrease of eligible inventory.

Possible Solutions: Assessment of the JEFFREY BRANDLIN borrower, its integrity, its

Brandlin & Associates credit history and industry vertical should be performed to determine if a temporary increase in the advance rate or reduction of reserves is advisable/permissible. The recent market disruption and unprecedented volatility should subside.

The efficiency of supply chains should return, and some level of normalcy is expected in the markets.

Audits and valuations Because of the shift in social behaviors and government advocation for social distancing, on a practical level ABLs and borrowers alike should consider whether it is possible for onsite audits and valuations to be undertaken.

Possible Solutions: The inability to perform onsite inspections should not deter ABLs from performing corroborative procedures to assess the reasonableness of the borrower’s reported collateral figures. Collateral rollforwards, turnover ratios, gross margin analyses, cash-torevenue reconciliation and other tests can be performed with a high degree of accuracy. On the other hand, appraisal and liquidation values are subjective amid the disruptive markets.

Logic and reasonableness should support experienced ABLs that the world is not coming to an end. Net orderly liquidation values (NOLVs) from prior appraisals should be a reasonable benchmark, assuming the industry vertical is not completely decimated by the shutdown or not expected to recover.

Debtor insolvency Undoubtedly, some industries and companies are more susceptible to the pandemic than others.

Possible Solutions: In such circumstances, the asset-based lender may consider applying pre-emptive reserves, lowering debtor concentration limits by restricting exposure to specific debtors, industries or geographical locations. The assetbased lender can also designate higher risk credits simply as ineligible for funding.

Fraud All lenders are exposed to an increased likelihood of fraud and/or misappropriation of funds at times where cashflow is affected. Lenders need to beware of Red Flags in their portfolio. Examples include: the borrower is uncooperative with requested information or inquiries, suspicious new customers added during this time period, no slow-down in results (“bucking” the trend compared to its peers), payments from non-creditors (related party or unknown source), borrower states it does not have the resources to support increased reporting requirements, unwilling to allow third-party verifications and other.

In conclusion, the pendulum of the lending business has “swung” to the conservative side to protect capital that was previously deployed.

Lenders are not interested in loosening credit standards until macro-economic conditions improve.

However, in the interim, using creative solutions, exercising sound judgment, maintaining discipline and keeping a healthy skepticism will mitigate portfolio losses.

decisions, both in advance of an investment and when a company’s performance deteriorates.

Brandlin is a frequent speaker to industry organizations, financial institutions and law firms on the topics of workouts and restructurings, fraud, forensic accounting and financial statement analysis.

All lenders are exposed to an increased likelihood of fraud and/or misappropriation of funds at times where cashflow is affected. Lenders need to beware of Red Flags in their portfolio. Examples include: the borrower is uncooperative with requested information or inquiries, suspicious new customers added during this time period, no slow-down in results (“bucking” the trend compared to its peers), payments from non-creditors (related party or unknown source), borrower states it does not have the resources to support increased reporting requirements, unwilling to allow third-party verifications and other.

Jeffrey E. Brandlin, CPA, CIRA, CFF, is president & founder of Brandlin & Associates, a boutique financial advisory firm focused on providing superior quality service in order for clients to make informed decisions in a timely manner. He is an industry-leading provider of consultative accounting and financial advisory services. Top tier banks, private equity firms, nonbank senior and mezzanine lenders and middle-market companies depend on Brandlin and his firm for the financial information they need to make intelligent

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THE SECURED LENDER JUNE/JULY 2020

IP VALUATIONS >> FRAUD ALERTS >> BUSINESS DEVELOPMENT >>

BUSINESS DEVELOPMENT

>> ECONOMIC OUTLOOK >> FIELD EXAM >>

SALES INSIGHTS

Impact of the COVID-19 Virus on Business Development

BY WILLIAM KEMP

ADAM EVANS Hilco Global

WILLIAM KEMP

Republic Business Credit

JOSEPH FOBBE

Fifth Third

Business Capital

LEIGH GUGLIELMO

Republic Business Credit

There have been numerous articles on the impact of the COVID-19 virus. Its impacts are felt across the country. Here, members of the SFNet community discuss how COVID-19 has impacted their day-to-day business development activities and how they envision networking going forward in 2020.

ADAM EVANS, SENIOR VICE PRESIDENT, HILCO GLOBAL Please provide a quick background on yourself and your involvement with SFNet. I have been at Hilco for 20 years, in business development for over 15, and have been involved with SFNet the entire time, including participating in national conferences as a speaker/ moderator. I have also been involved at the chapter level in multiple regions and attend events whenever I can.

How do you see networking changing going forward? If there is a lack of networking events, what should business development people be doing?

Assuming that there is not a vaccine or viable treatment option soon, I do not see a lot of person-to-person networking in 2020. Even if events can happen, I believe they will be lightly attended or occurring infrequently.

To a certain degree, these networking events can be replaced with phone calls or video conferencing. These tools and activities are passable for keeping in touch with established connections. One of the best things about 40 networking events and conferences is the ability to meet new THE SECURED people. So, I think people will need to leverage their closest LENDER JUNE/JULY 2020 industry contacts or even friends and ask “Hey! You know what I do; who would be a good person for me to get to know, and can you make an introduction or connect me?� Just be sure to offer the same assistance! In absence of events, it may be a good way to build an overlapping circle of contacts and strengthen relationships.

NICK MCDEARIS Monroe Capital LLC

JASON I. MILLER Otterbourg P.C.

Who is your target customer? How have you historically found these targets? What have you had to change due to the COVID-19?

At Hilco we have a very diverse offering of business solutions.

Our customers are financial institutions, debt or equity funds, the legal and advisory communities, and corporations directly. Since this started, we have had to adapt our business

activities to account for disruption in travel and the difficulty or impossibility of in-person client meetings; this includes utilizing virtual inspections and management interviews and, in some cases, postponing on-site inspections. Now that restrictions are being lifted, we are resuming inspections on a case-by-case basis.

What have you been doing to have fun, or rather stay sane, these past few months?

I grew up skateboarding and my son, who is eight, has picked it up so he and I have been doing that every chance we get. As luck would have it, I made a sourdough starter late last year, so I have been baking and my attempts have produced bread that is mostly palatable. The first few loaves, however, we could not even coax ducks into eating.

JOSEPH FOBBE, MANAGING DIRECTOR, FIFTH THIRD BUSINESS CAPITAL Please provide a quick background on yourself and your involvement with SFNet. I have been a 20-year member of SFNet and past president and board member of the Midwest Chapter (2016 to 2018).

How do you see networking changing going forward?

Well, it’s going to be different for sure in the near and intermediate term, but I have confidence that in the long term the old rules and norms will return. We can’t deny who we are, and people will always do business with people they like and trust and like and trust are built through interpersonal interaction. That’s the way it has been for a very long time and will continue. That said, in the near term there’ll be more virtual networking and marketing, and I think people should take advantage of that to stay in touch with their close relationships and also set up “networking” events to introduce others in their network to one another using this virtual forum. I think professionals should focus more on their social media initiatives as well and maybe even post more videos, including those of others in their company being interviewed or participating on panels to continue to promote their firm’s brand. And, of course, don’t underestimate the old-fashioned phone call. With e-mails, I’d recommend reaching out to individuals or at least several in your network at the same firms vs. the broad-based blast.

How do you replace the deal flow from in-person conferences and tradeshows?

Great question. I’ve always viewed these forums as ways to establish new relationships and re-connect with existing professionals so not necessarily overly reliant on the forum for direct deal flow. Deal flow comes from these relationships built, in part, through these efforts, but I’ve never thought about going to a conference to “find deals”. I do look forward

to these events coming back soon and in force and look forward to seeing everyone soon! Although it will be different this year, SFNet’s virtual conference, from what I understand, will provide networking opportunities.

Who is your target customer? How have you historically found these targets? What have you had to change due to the COVID-19?

For Fifth Third Business Capital, our target customer comes from our great referral sources who include middle-market advisors and investors of all types. More specifically, it’s folks in our network that are advising and investing in manufacturing and distribution businesses with $30 to $40 million in revenue and above that are generally asset-heavy and will benefit from our ABL stretch approach. What that means is that we’re a bit of a hybrid lender that starts with a hard underwriting of the assets securing our loans and also includes an ability to provide a cash-flow or stretch term loan against a company’s historical cash flow. I think, in terms of changes resulting in COVID, it has required us to be even more diligent about being in front of our great referral base.

What have you been doing to have fun, or rather stay sane, these past few months?

Well, I’ve honestly been busier than I’ve ever been. I do believe that “marketing/business development” is a mindset and that everyone in our role, regardless of space - large or small ABL, factor, PO financing, whatever – should really have the attitude that now is the time to work harder than ever. The markets are disrupted and many of us in our industry are well poised to perform well. It’s time to be in front of all your traditional referral sources, identify new sources, and re-connect with those that might not have been thinking about us the past few years as a result of the incredible amount of flexible capital in the market. Just remember, a form of the new normal will be back and it will be back sooner than you think.

LEIGH GUGLIELMO, BUSINESS DEVELOPMENT OFFICER, REPUBLIC BUSINESS CREDIT Please provide a quick background on yourself and your involvement with the SFNet. I’m coming up on my nine-year anniversary at Republic Business Credit. I am senior vice president of sales and cover Louisiana, North Texas/Dallas market as well as Gulf Coast states. I regularly attend SFNet events in the Louisiana and Texas markets. Republic Business Credit provides working capital solutions to small-to-medium sized businesses across the country.

How have you been doing your business development role during the COVID-19? What tools have you been using?

I think for the next several months, everything will be done

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THE SECURED LENDER JUNE/JULY 2020

BUSINESS DEVELOPMENT virtually. We have been using Zoom for one-on-one meetings and hosting happy hours with different firms. Our marketing team has created a few coffee shop and bar background photos with the Republic Business Credit logo to help add a personal touch.

We will have to find creative ways to stay in front of our referral sources and prospective borrowers, beyond “send more e-blasts!”

How do you see networking changing going forward?

I think it will be tough to have any large networking gatherings, whether it is a happy hour event or conference during 2020.

Networking may be limited to small gatherings due to social distancing guidelines.

Larger gatherings such as wine tastings or conferences are great for meeting new people and catching-up with industry friends, so finding ways to offset the loss of events will be key for business development people. I think organizations have done a great job with hosting webinars and roundtable discussions. Finding ways to leverage these educational discussions to help with their business development goals will be key in 2020. Webinars are typically educational-driven, so how do we make these a more effective tool for business development?

What have you been doing to have fun, or rather stay sane, these past few months?

I had a social distancing Jazz Fest party in my backyard - it was a beautiful day, 80 degrees, not a cloud in the sky. We spread out beach towels throughout my backyard and listened to one of the local radio stations which was broadcasting past jazz fest concerts from previous years. You just have to make the best out of situations these days.

NICK MCDEARIS, MANAGING DIRECTOR, MONROE CAPITAL LLC Please provide a quick background on yourself and your involvement with SFNet. Professionally, I started my career in 2008 during the beginning of the last financial crisis and have worked in factoring, ABL and leveraged finance / enterprise value investing for both bank and private credit platforms. I currently co-head the Southeastern office for Monroe Capital.

I’ve been involved with SFNet for 10 years now, starting with the educational programs including the field exam, THE underwriting and account management courses as a junior SECURED lender and networking programs. I was fortunate to have a LENDER JUNE/JULY 2020 mentor, John Nooney, who encouraged me to get out there and start networking early in my career.

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I’m a Georgia native, married and we have a newborn! Our daughter was born on April 2 and it’s been a blessing to be “quarantined” with her the last month.

How do you see networking changing going forward?

It’s interesting to think about…things aren’t going to get back to “normal” as we thought of it pre-March 2020. It’ll be a new normal and what exactly that looks like is anyone’s guess. I think networking and face-to-face interactions are an essential part of our business and investing in general – you want to be able to “sit across the table” from the person you’re working with, sending referrals to, or ultimately investing in and that’s never going to change. It’s an essential part of what we do, and you need to be able to read a person’s body language. That being said, I think work travel, in general, is going to be much more focused going forward. It’ll be interesting to see what happens to large networking events – are people going to want to gather in large numbers, shake hands and share food and drinks together for a while? I don’t know. I wouldn’t think so until there’s a vaccine or something of that nature.

How do you replace the deal flow from annual conferences and tradeshows?

In my experience in attending conferences and tradeshows, it’s all in the follow-up and building a relationship to see these leads and deals come to fruition. That being said, it’s hard to build a real relationship with anyone new in this environment, but it’s a great opportunity to strengthen the relationships you already have by calling to check in on your friends and hear what they’re seeing and doing.

What do you miss most about normal business development activity?

I miss seeing my friends. It’s easy to get caught up in the business development grind. Despite what people think from the outside looking in, business development is a lot of work.

The networking events require you to be “on” constantly and it’s very mentally taxing. But I’ve made a lot of true friends during my time in this business and I miss seeing them. The early morning flights and travel…not so much.

JASON I. MILLER, PARTNER, OTTERBOURG P.C. Please provide a quick background on yourself and your involvement with SFNet. I am a partner at Otterbourg, in our nationally-recognized Banking and Finance practice. I am primary national counsel for leading institutional lenders, including major national and international commercial banks, finance companies, mezzanine lenders, recurring revenue lenders, private equity groups, and independent factors. I frequently write and lecture on topics important to the commercial finance community. I am proud to be a past SFNet 40 Under 40 Award recipient and I have been recognized by Super Lawyers since 2014. I also enjoy serving on the SFNet Advocacy Committee and Data Subcommittee.

How have you been doing your business development role during the COVID-19? What tools have you been using?

Not being able to meet with clients and prospects in person is tough. Videoconferencing and FaceTime has a been a big help in staying in touch with folks and approximating that faceto-face dynamic. Utilizing the phone more often than usual is also key. Before the pandemic, I was constantly reaching out to my clients and friends in the industry to catch up about transactions and check in with them. I think it is basically more of the same now, but with a renewed sense of appreciation for how important those touchpoints are.

There is something meaningful about taking time out of your day to connect with someone. That still rings true during these difficult days.

How do you see networking changing going forward?

or enforcement scenarios, being their trusted advisor in times of urgency and crisis is always my ultimate goal and the best use of my time right now. Much of my new business comes from referrals.

Clients remember when you are there for them in the clutch.

What have you been doing to have fun, or rather stay sane, these past few months?

Zoom happy hours and get-togethers with clients and colleagues have been a nice way to stay in touch and be social. Additionally, a couple of weeks ago I got an 8-week ago puppy. He’s chewing on my slipper as we speak.

William Kemp represents Republic Business Credit in the Texas market.

William serves as a vice president of Business development where he focuses on delivering both asset-based and factoring solutions.

In William’s current role, he is responsible for building relationships with accountants, attorneys, bankers, and private equity groups throughout the state of Texas, understanding the business’s working capital needs, and assisting with the underwriting process.

Prior to Houston, William spent four years developing the Midwest region. He is currently one of the co-chairs for the programs committee in the Houston Chapter.

William is a graduate of the University of Michigan.

Not being able to meet with clients and prospects in person is tough. Videoconferencing and FaceTime has a been a big help in staying in touch with folks and approximating that face-to-face dynamic. Utilizing the phone more often than usual is also key. Before the pandemic, I was constantly reaching out to my clients and friends in the industry to catch up about transactions and check in with them. I think it is basically more of the same now, but with a renewed sense of appreciation for how important those touchpoints are.

I think you could see less large-scale events for the rest of this year, such as conferences, galas, large dinners, and holiday parties.

Hopefully, we can get back soon to networking in the same fashion to which we are accustomed. I think people may also be wary of handshakes and exchange of business cards when we come back. Time will tell.

What do you do to replace the deal flow from annual conferences?

There really is no direct substitute for those unique opportunities. However, we have remained very busy and I have spent that extra travel time being laser-focused on our existing clients and assisting them through issues they are experiencing in their portfolios. Whether their borrowers are taking out PPP or EIDL loans, or we are working together on amendments, forbearance arrangements or even workouts

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THE SECURED LENDER JUNE/JULY 2020

IP VALUATIONS >> FRAUD ALERTS >> BUSINESS DEVELOPMENT >>

FIELD EXAM

EXAMINER TRENDS

Field Exam in a Post COVID-19 World

BY JAN TAMMEN

PNC Business Credit’s national recurring field exam manager discusses the effects of COVID on the profession, both long and short term.

On Friday March 13, 2020, the ABL world – and the world in general – changed. With COVID-19 spreading throughout the U.S. and Canada, states and borders began to shut down. Borrowers found themselves in tough situations and field exam, that most eponymous of on-site banking jobs, rapidly adapted to a full-remote model, rather than the traditional and preferred on-site examination If we just use employment as our recession indicator in 2020, the recession is over after just two months. There were so many jobs lost in March and April that it is difficult to believe employment levels will fall back to the lows after bouncing back in May. This was a special recession caused by the economy shutting down to fight the coronavirus pandemic…just two months long. In contrast, the 2001 recession saw employment fall for 30 months. The Great Recession over a decade ago lasted 25 months based on the decline of payroll employment in the U.S. This is truly the strangest recession we have ever witnessed where in two months 22 million Americans lost their jobs as compared to 8.7 million jobs lost in the Great Recession and 2.6 million jobs lost in the 2001 recession.

Many lenders and firms have been working on a remote exam model for several years as a way to build flexibility, reduce expenses, and limit wear and tear on exam staff. While usually still seen as an alternative, not a model to replace on-site exams, remote exams are now the only option thanks to COVID-19, which comes with new policies, procedures and challenges to address.

From virtual test counts to document-less testing, the industry adopted a set of processes to compensate for aspects of the field exam that could no longer be performed on-site because of travel bans, furloughs or borrower technological deficiencies.

As states and federal governments begin to consider steps to re-open for business, exam groups will need to adapt again. This new THE reality will likely see some irrevocable changes as a result of COVID-19, SECURED but also reflect the more accessible pre-COVID world. What might this LENDER JUNE/JULY 2020 new world look like?

44

More remote work, at least in the short-term Even after states and borders begin to re-open, there is a strong likelihood that remote work will continue for a while. Why?

>> ECONOMIC OUTLOOK >> FIELD EXAM >>

First, continued mitigation efforts, such as social distancing and other safety measures are likely to be in place until a widely available and distributed vaccine is developed.

Second, potentially reduced travel options could severely impact the basic logistics of a field exam. Things like the potentially reduced availability of flights, hotel rooms and food options near borrowers, could all factor in.

While we continue to JAN TAMMEN manage through transition, the SVP, strategies currently in place for a

PNC Business Credit fully remote customer base will continue to be utilized. Mitigation efforts should lessen as time goes on and as we all return to a pre-COVID-19 pace, but some impacts will continue to be felt within the ABL world.

Consolidation The economic disruption from COVID-19 will likely cause the preCOVID-19 trend of consolidations to continue, as owners and investors – especially private equity firms – will seek to boost or shore up the value of their holdings.

From a field exam standpoint, consolidation could lead to more complex exams. We expect to see more multi-divisional borrowers, potentially with different business models in different entities, and, depending on the sophistication of the acquiring entity, a mix of accounting systems utilized in various divisions of the same borrower.

Field exam budgets and staffing levels would need to increase to effectively manage these larger exams, and experienced examiners will become an even more significant resource.

De-globalization or diversification of the supply chain One lesson from COVID-19 and the resulting supply chain issues is that heavy reliance on single-channel supply chains holds significant inherent risks for business. Any disruption in the supplier country, such as the shutdown of Wuhan, can leave firms critically low on necessary supplies. Such a disruption can cause a domino effect across multiple industries, hurting even firms that are only tangentially connected to the primary affected business.

As a result, governments or firms could seek to bring production closer to home where feasible, or diversify their supply chain to include alternative, low-cost providers. Either option would have differing impacts on cost, depending on labor availability, transport and energy infrastructure, and other factors.

From a field exam standpoint, this would primarily affect in-transit inventory, which would consequently originate from a more diverse set

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FIELD EXAM of suppliers. Lenders will need to understand the nuances of local laws and other effects on title. Examiners will need to be educated about potential collateral risk from documentation issues and local laws.

Investment in technology During the COVID-19 forced adaptation and, in part, due to the speed of full lockdown implementation, borrowers, lenders and examiners were challenged by companies that had not invested in the technology necessary to operate remotely and adapt to physical disruption.

Some companies, which largely operate paper-based offices and sometimes run on computer systems only accessible within the physical network, had a hard time adjusting their internal operations to a remote-work environment. Coupled with the supply- and sales-side disruption of COVID-19, this left many firms operationally crippled until provisions could be made.

One of the main effects of COVID-19 for companies that recover sufficiently to invest and, new companies that replace businesses that do not survive the crisis, may be an investment in technology. The possibilities are many, be it an update to operating and accounting systems, stronger VPN connections, or widespread adoption of connectivity and collaboration software. Payment portal systems may become more prevalent as companies adapt to a more interconnected world and seek to reduce reliance on paper and physical mail.

Warehouses may look to upgrade their stock systems to ensure better monitoring and access to real-time stock information.

Of course, these investments will depend on profitability, and not every firm will have the funds, personnel, or perceived need to update their operations. Still, from a business resilience and efficiency perspective, technology upgrades may be a worthwhile capital investment to many operators or owners.

From a field exam perspective, technology upgrades would likely result in greater efficiency in the exam process. With similar technology investment from the lender or exam firm, companies may be able to provide more data and documentation electronically, and generate this data more efficiently than currently possible. They also may be able to better parse data to provide detail on specific customer pools, billing codes, etc., allowing examiners to be better prepared when going into exams, and lessening manpower requirements and strains. These effects may in turn reduce exam costs, while also boosting company resilience and reporting capabilities.

More remote work, long-term effects Another anticipated result of the anticipated growth in borrower technology and the psychological effect of the virus is an increasing shift to a hybrid-remote field exam model. Examiners could cut field 46 time, only visiting for 1-3 days to perform critical on-site tasks (test THE SECURED counts, document reviews, verifications, etc.), completing other steps LENDER JUNE/JULY 2020 at the office.

Some exams, for well-rated and well-performing borrowers, could potentially move to a rotational remote/on-site model. On-site exams would be performed once or twice per year, with remote exams conducted in between.

Still others, especially those where the collateral is easily verifiable electronically, may move to a full-remote model, with on-site exams only necessary in the event of a default or major modification.

Always a consideration in the cost and efficiency of exams, geography could presumably become less of a factor. As reports and other data move to the cloud, and secure data rooms and other aspects of the digital-data sharing economy become more prevalent, lenders and exam firms will be able to deploy examiners to efficiently assist onsite examiners virtually. For example, an examiner from Boston with no regional assignment during that week may perform many of the on-site tasks (sampling, data entry) that do not require an on-site presence for an exam in Phoenix.

The possibility of more significant remote work would reduce recurring field exam costs on borrowers, but is not a perfect solution for the lender.

Taking to the field again While the changes wrought by COVID-19 are likely to have a lasting effect on field exam, even the latest technology can’t replace the keen senses of the examiner on the ground. While a video call displays a carefully curated background, an experienced examiner walking the halls, offices and warehouses of a borrower can yield insights that cannot be replicated with a review of data alone. This is especially essential for survey exams or exams for troubled accounts, where borrowers could have a greater propensity to conceal the less desirable aspects of their operation.

Examiners will thus take to the field again to do the job they know best. They will be equipped with new skills, new technology and new approaches to existing work. Less seasoned examiners will have experienced a downturn and be more attuned to risks. But most importantly, examiners will continue to be the professional and trusted eyes and ears of the lender, as they have always been, and always will be.

Jan Tammen is the SVP – national recurring field exam manager for PNC Business Credit. In his current position, Tammen is responsible for managing and developing a team of 7 field exam managers and, indirectly, 50 field examiners working on regional and national field exams. His role includes examiner and manager development, and the coordination of high-quality field examinations for PNC Business Credit ABL borrowers. He is also responsible for training manager for all field exam new hires across PNC Business Credit’s national footprint.

Tammen joined PNC Bank in 2011 as a senior field examiner in the Corporate Banking group, after working as an outsource field examiner. He then transitioned to Business Credit in 2014 and became a field exam manager in the Mid-Atlantic region in 2015, before transferring to Dallas in 2016 for his current role. He graduated from Elizabethtown College with a bachelor degree in international finance and marketing.

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IP VALUATIONS >> FRAUD ALERTS >> BUSINESS DEVELOPMENT >>

ECONOMIC OUTLOOK

ECONOMIC TRENDS

COVID-19’s Economic Effects

BY CHRISTOPHER RUPKEY

The world is in recession, the U.S. is in the world, but if this is a recession, it will be the shortest American recession in history. The decline in business activity has been steep; however, the worst downturn since the Great Depression a century ago, and we hope there will be no permanent damage to the economy as the climb back to normalcy has a long way to go. A group of economists at the National Bureau of Economic Research meet after an economic downturn and give the official end date for the recession. The economists have already determined the recession started, or more properly, the last month of the economic expansion was in February 2020. The recession in the early 1990s and the 2001 recessions were both 8 months long, and the Great Recession from 2007 to 2009 was 18 months in length. The economists use several metrics to gauge the peak of the economy, and its trough. But for us it is all about the labor market where the economy is either growing and creating new jobs or it is losing jobs in a recession. The public is often slow to believe the economy is back on its feet in recoveries because the job losses continue beyond the technical end of many recessions where it remains hard for people to find work or change jobs.

If we just use employment as our recession indicator in 2020, the recession is over after just two months. There were so many jobs lost in March and April that it is difficult to believe employment levels will fall back to the lows after bouncing back in May. This was a special recession caused by the economy shutting down to fight the coronavirus pandemic…just two months long. In contrast, the 2001 recession saw employment fall for 30 months. The Great Recession over a decade ago lasted 25 months, based on the decline of payroll employment in the U.S. This is truly the strangest recession we have ever witnessed where in two months 22 million Americans lost their jobs as compared to 8.7 million jobs lost in the Great Recession and 2.6 million jobs lost in the 2001 recession.

48

THE SECURED LENDER JUNE/JULY 2020

The stock market keeps rising as investors see a full economic recovery and rebound in corporate earnings. The stock market believes the politicians who say the U.S. had the best economy in 50 years at the start of 2020 before the coronavirus pandemic lockdown of the American economy starting in mid-March. That’s not the way we remember it. We’re not sure that was the best economy in 50 years.

Best in 50 years was a good sound bite for television news,

>> ECONOMIC OUTLOOK >> FIELD EXAM >>

but the reality is that the manufacturing sector of the economy had been in a recession from last August through December.

The escalation of the ongoing U.S.-China trade war last summer hurt U.S. manufacturers who had to pay the tariffs on the imports they use to produce goods in their factories here. There may have been a phase I trade agreement last December, but 25% CHRISTOPHER RUPKEY tariffs remain on $250

Chief Financial Economist, billion of goods imported MUFG from China. The U.S. already had one oil-based recession for manufacturing, where the drop in crude oil prices led to a reduction in industrial production from 2014 to 2016. Manufacturing didn’t need a second oil recession sparked by the Saudi-Russia oil price war in March this year.

Manufacturing will not bounce back quickly now that the states have begun to reopen.

It’s good news that the worst of the recession is over after a couple of short months as the states reopen after the pandemic shutdown, but the economy was already experiencing headwinds from the slowdown in manufacturing production the last year before the coronavirus pandemic struck. The road to recovery will be difficult over the next year until consumers and businesses are sure that the coronavirus will not return this fall or in the spring of 2021.

A graduate of the University of California, Berkeley, with an A.B. in economics, Christopher Rupkey then received his M.A. in economics from Columbia University in New York City. In 1991, Rupkey earned the CFA designation.

Rupkey spent his early career working for Larry Kudlow at UBS Paine Webber. From 1981 to 1985, he was Chief Economist at Cantor, Fitzgerald. In 1987, Rupkey joined MUFG and is presently managing director and chief financial economist in the Economic Research Group, focusing on financial markets, Federal Reserve policy and international economies including Japan. He has published the Financial Market Weekly for the bank for over 20 years.

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