Pictured: Susan Carol and Carla Harrington

The COVID-19 crisis of 2020, like a stress test for businesses and funders, created a landscape of winners and losers. For those passing the test, there are more lending options and potential buyers as M&A activity begins to sprout.

Some had a good “runway” ahead of the regional lockdowns; they were already digital companies or were well capitalized. Others enjoyed being in high-demand sectors such as groceries, technology, home goods, outdoor products, and delivery transportation.

For those companies that were well positioned or adapted quickly, business growth continues, and for those more challenged due to business restrictions, secured finance has been invaluable, along with government rescue loans. This was a repeated theme throughout the annual SFNet Convention held virtually November 17-19. This article covers many of the 34 presentations on the theme: “This Way Forward.”

In fact, in the opening session, Speaker Robert Wescott, president of Keybridge Research, said that while the economy rebounded faster than expected in Q3, bank lenders remained cautious, and the elevated uncertainty gave secured lenders a distinct advantage. He said that for the roughly 1 in 4 small businesses expecting to need financial assistance or additional capital in the next six months, secured lending may be a lifeline. 

He said there are three key areas to watch heading into 2021:

(1) Federal stimulus

(2) Consumer finances

(3) Labor market

The economic impact of the COVID-19 pandemic has not had the same impact as the 2008-‘09 recession, speakers at SFNet’s November convention said.

Keynoter Dave Brandon, chairman of  Domino’s Pizza, described the situation surrounding the pandemic as the “challenge of our lifetime.”  He noted that companies  are now  likely to become more thoughtful about their supply chains, among other long-term effects of having dealt with the COVID-19 pandemic.

View from the Top: Factoring

Pivot.

Podcasts.

Peloton.

Panelists for the “Factoring: View from the Top” session used these three “P-words”--and many more--to sum up lessons learned this year in accounts receivable financing.

As the pandemic unfolded, several panelists said they tossed aside strategic plans and pivoted to adjust to the new realities of accounts receivable financing. Jennifer Lickteig, CEO, and Hailey Benton-Thomas, COO, of TBS Factoring Services LLC, Gen Merritt-Parikh, president of Haversine Funding, Dan Karas, executive vice president of Allied Affiliated Funding, and Jay Stone, CEO of Hilco Receivables LLC, shared insights on 2020 and likely developments ahead. Panelists discussed the sectors they’ve found to have been hardest hit, how they are staying connected with clients and their workforce during the pandemic (via podcasts, for one), advice they would give themselves if they could turn back the clock (including buying a Peloton bike to keep off pandemic pounds), and their thoughts on what’s to come, including credit quality issues and instability in certain sectors.

Panelists said the coming year would bring a continued focus on technology, which has proven essential to their operations, and predictive modeling; additional efforts to help customers in challenging times by modifying rates and extending terms proactively; and partnerships and deals with other factoring companies looking for capital. Most noted a risky credit environment ahead due to the recent elections, the lack of more Paycheck Protection Program (PPP) relief in sight, and the likelihood of increased regulatory scrutiny of the factoring industry.

What are some of the sectors to consider avoiding in accounts receivables financing in 2021? According to the panelists, fracking--and with that, oil and gas in general; retail, at least at the beginning of the year; automotive; and offshore manufacturers serving big box retailers. Panelists also noted the need for heightened vigilance against fraud, as fraudsters’ tactics are becoming increasingly sophisticated.

View from the Top: Bank ABL

Sprouts of M&A activity and new deals, as well as churning of existing portfolios, are evident, according to a presentation by bank ABL executives.

However, Seth Benefield, head of Business Capital, Bank of America, said borrowers are preserving liquidity to navigate through the pandemic, and full recovery is dependent upon a vaccine. “We saw a fair number of ‘fallen angels’ in retail, but less cash flow to ABL activity in general industries,” he added. He noted more activity in asset finance models than in ABLs right now.

Kurt Marsden, group head of Wells Fargo Capital Finance, agreed with the ‘fallen angels’ analogy that the industry has seen in retail, which in many cases allowed these larger retailers to secure additional liquidity.  He also noted some smaller and midsized retailers have fared pretty well during COVID-19 due to their quick and nimble ability to adjust.

One panelist pointed out there is increased competition, particularly in middle markets.

But all agreed with Wescott on economic conditions and that COVID-19 hasn’t hit as hard as the 2008-’09 recession.  They remain in a growth mindset, focused on hiring and using technology more extensively.

Chris Esposito, managing director of CIT Asset-Based Lending, said, “It’s a fairly simple business if we adhere to our borrowing base.”

When comparing today’s pandemic to the last recession, another panelist said clients were slower to respond then. But in this crisis, response has been quicker--even in the more susceptible small-ticket sector. They reacted quickly to preserve cash and cut costs.

Benefield is also focused on hiring and plans a large summer internship class. BoA is also rotating new associates through credit training, a good starting place, he notes. 

View from the Top: Independent ABL

Imagine if the ABL industry as we know it today suddenly ceased to exist. What would be its demise? Meredith Carter, president and CEO of Context Business Lending, posed this intriguing question to fellow panelists Marc Cole, CEO of SG Credit Partners, Todd DiBenedetto, president of Big Shoulders Capital, Jeff Goldrich, president and CEO of North Mill Capital, and Scott Winicour, CEO of Gibraltar Business Capital, during the View from the Top: Independent ABL session.

Their answers? Lack of diversification, failure to evolve the ABL product while maintaining basic standards of the business, an oversupply of capital, or, perhaps, another black swan event like the COVID-19 pandemic.

Though the specter of another pandemic is stressful to even consider, the reality is the ABL product has always evolved and continues to evolve today during the pandemic, Goldrich said. In fact, “COVID-19 didn’t blow up the ABL model; it validated it,” Cole added.

The panel discussed a number of topics on the minds of independent ABL professionals on the eve of 2021, including: how companies are originating loans and forging new business relationships despite travel restrictions; bank activity in the industry; trading of collateral; efforts to boost company morale during the pandemic; whether or not some aspects of the ABL business will always require in-person meetings despite trends to the contrary; the challenges of onboarding a new employee while working remotely; and whether artificial intelligence (AI) will ever be adapted to drive underwriting and portfolio management in their entirety. On this last point, most panelists doubted AI would ever completely replace the need for humans as part of the decision-making process.

Data for Better Decisions

While supply chain pressures are expected to continue into 2021, predictive analytics and AI will drive more efficiency, strategic decisions, a better lending experience, and response to growing consumer demand to know where goods are sourced and their environmental impact. The technology panel raised the issues of limited warehouse space and reduced air freight capacity. While the technology panelists anticipate continued demand for goods and improving economic conditions, the need to manage spending is critical. 

William Villalon, president of APL Logistics, says demand should remain strong into the new year, both in terms of purchase orders and bookings. But supply chains in Asia will be tight into mid-February, and air freight capacity will be reduced because there are fewer flights and half of the supply chain is carried in the underbelly of commercial airplanes, he noted.

Technology innovation and better use of data are playing a larger role in controlling costs, creating uniformity, and managing uncertainties.

Sudheera Vanguri, product management lead of Google, said her company is automating documentation workflows, and AI is reducing the complexity of process automation while supporting regulatory and compliance requirements.

Data analytics has provided valuable inroads to expand financing possibilities.  

Lin Chua, president of InterNex Capital, said, “We are using alternative data coupled with data analytics and machine learning on our Velocity platform to better inform our financing decisions.”  

The panel also touched on Environmental, Social, and Governance (ESG) mandates to reduce the carbon footprint and respond to consumers who want to know the origin of goods.  Also noted was the growing trend of bundling services and financing based on usage.

Capital Markets and M&A Perspective 

The panel on capital markets and M&A reported on the potential for a rising tide of M&A transactions in 2021, with relatively few deals occurring this year due to the pandemic. They also reported that the asset-backed securitization market has remained remarkably efficient despite the uneven economy.

Scott Rosen, managing director of Ares Management, said companies that are well capitalized and are able to navigate the pandemic will have bank lending options. But he also said there is a lot of volatility and that raising money is a lot more complicated. “It will be important to provide more value or do something creative, especially if raising money at scale,” he said, noting companies are not only using technology to cut costs but also to change business models.

Jennifer Lickteig, CEO of TBS Factoring Services, agreed, adding, “decision logic and AI are a huge focus right now for labor intensive companies.” She said “that’s what we are looking for.”

This panel also talked about what buyers and sellers need to do to feel more comfortable, especially while meeting almost exclusively on virtual platforms.

Tim Stute, managing director and head of specialty finance of the Hovde Group, said transactions will still get done where there is a strategic reason for them to be completed. If the company has weathered the Covid crisis and has a strong team and technology, they could get reasonable premiums.

Indeed, Stewart Hayes, managing director of Wells Fargo, Capital Finance, said they often ask the question “How would they perform in an uncertain world?” Certainly, Covid is forcing that question to be answered.

Bruce Sim, head of acquisitions at eCapital Corp., said his company managed some M&A deals in the early months of the pandemic and in June during the height of the crisis. “We worked with the seller in June to get a line of site on the daily performance of the portfolio,” he said, noting that if sellers can provide such a level of detail, they can demonstrate their value even in uncertain times. He predicted an increase in M&A activity going forward.

Licktieg said it is important for shareholders to first understand what they want when all is said and done with an M&A. If they know what their goals are up front, they will have no regrets. She noted it is important to document everything through the process, because these transactions can take years.

The Evolving World of Retail

Secured lenders are keenly watching retail developments as that sector is often a major component of their portfolios. And while 2020 was dismal for many retailers, there were notable exceptions, according to the conference’s “Evolving World of Retail” session, featuring panelists Betsy Ratto, managing director of Bank of America, Keith Vercauteren, senior managing director, and Lynn Whitmore, managing director of Wells Fargo Capital Finance, Ian Fredericks, executive vice president of Hilco Global, Andy Cerussi, director of Bank of America Merrill Lynch, and Rick Edwards, president of retail at Gordon Brothers. The panel provided an overview of changes in retail finance and the retail sector.

Describing early pandemic shutdowns, panelists reminded the audience that businesses deemed “essential,” such as grocery, drug, and home improvement stores, saw an uptick in sales, while other brick-and-mortar shops, including apparel stores, went dark for weeks. Vercauteren estimated the bank’s outstandings at the time doubled, and added, “When you look at the last seven months supporting clients and mitigating risk, what was done was really remarkable.”  Whitmore commented on the high volume of front-end conversions to asset-based loans that were handled in a compressed amount of time. As stores began to reopen, sporting goods, furniture, and some apparel businesses began to rebound and did well, while others floundered.

“Tailored men’s and women’s formal wear were hit hard, with no end in sight,” remarked Fredericks. The group also described two waves of bankruptcies so far in the pandemic, with the first involving easily identifiable, distressed retailers and the second yielding some surprises, such as men’s clothier Jos. E. Bank. E-commerce was a game changer for retailers that have persevered, though supply chain and delivery issues were also noted.

In a sidebar text chat during the session, panelists were asked “What was the most bizarre development in retail finance this year?” Macy’s inventory securitization and the turnaround of some grocery chains that were previously on the verge of liquidation were among the surprises noted by the panel.

So, what’s ahead? 

Panelists predict a continued emphasis on contactless sales, perhaps to the detriment of margins, and a continuing focus on e-commerce. But they also see lean inventory and the possibility of delivery delays forcing consumers back into stores before holidays. Though noting concerns in the event of another shutdown, Vercauteren added, “I am actually optimistic. They (retailers) have learned a lot. It has been a tough six to seven months, and there are a lot of empty boxes, but I am a believer this will lead to a more stable retail sector."

Ways to Succeed in an Amazon World

Domino’s Pizza, Chewy, and other retailers are finding ways to succeed in a world dominated by online retail giant Amazon by creating digital experiences that are not just about “click and buy.” Instead, they are designing how they sell to build brand loyalty, Domino’s Chairman Dave Brandon told attendees during the convention. Brandon’s keynote discussion with Paul Cronin, head of asset-based lending for Santander Bank, also touched on supply chain challenges, the pandemic’s potential long-term impact on consumer behavior, retail and restaurants, the importance of creating a unique corporate culture, and how different retail models are--and are not--sustainable given the changes underway.

Retailers that have embraced digital shopping are in the strongest positions now, Brandon noted, and companies that use their online experience in unique ways to build customer relationships have a distinct advantage. Examples cited included Domino’s introduction of a pizza tracker, which allows customers to follow the progress of their orders in detail, and Chewy’s customer care efforts, which include personal outreach to shoppers and condolences on the loss of a pet. Not that there aren’t brick-and-mortar retailers building brand loyalty, Brandon noted, citing how customers return to T.J. Maxx stores because they enjoy exploring new shipments, treating the experience like a treasure hunt.

Looking ahead, Brandon observed that the pandemic—"the challenge of our lifetime” —will encourage companies to become more thoughtful about their supply chains, among other long-term effects. This is especially true for businesses with international supply chains. Domino’s Pizza, for example, operates in 90 countries and must consider each supplier’s distance when sourcing ingredients, due to their shelf life.

Workouts & Bankruptcies

The workouts and bankruptcies panel delved into the COVID-19 pandemic’s extensive impacts on lenders, borrowers, and the legal system. In fact, some panelists described changes that previously would have seemed counter-intuitive, including lenders proactively increasing advance rates in the early stages of the pandemic to avoid broken covenant situations. Paul Share, managing director of Conway MacKenzie, Baker Smith, managing director of BDO USA LLP, Joseph Marchese, partner of Clear Thinking Group, Marshall Stoddard, partner of Morgan Lewis, and Regina Kelbon, partner, Finance, Restructuring and Bankruptcy, of Blank Rome LLP, shared their insights as part of the panel.

Different panelists weighed in on developments underway, including how ABL lenders protected themselves from loan exposure early in the pandemic but later loosened restrictions; the return of covenant deals; whether more deals are being mothballed because there are no available buyers  (it depends on the industry, Share said); the “breathtaking” costs of bankruptcy noted by Baker, despite the fact much of the legal process has moved online; bargain hunter opportunities; how some bankruptcies are now moving along more quickly than usual; efforts to push off appraisals, but how borrowers can expect to see increased rates because of this; and sectors that are winners and losers as a result of the pandemic.

What was the panelists key advice regarding workouts and bankruptcies? In a workout, it pays to understand the collateral package and take a good look at assets, Kelbon said. Her other recommendations include insisting on the retention of a chief restructuring officer. Though some borrowers will resist, saying they already have a CFO, managing through a distressed situation requires a specialist’s expertise and guidance.

The Pandemic’s Effect on Appraisals and Liquidations

Carl Chrappa, Asset Management practice leader of The Alta Group, a global consulting firm in equipment finance, noted that equipment auction volume is increasing, “but not in spikes; it’s a gradual increase, and values are soft but not down as far as 2008 –’09.” He shared a graphic illustrating in great detail the performance of various commercial and industrial asset types. While auctions are underway virtually, for some equipment it is better to store it and wait for higher values later, he noted.

Ben Nicholson, president of Fortis Business Advisors, a turnaround and liquidation advisory firm, said greater importance is being placed on optimal inventory turnover as a metric to help quantify inventory sluggishness which helps with inventory values and recovery planning. Also, with online liquidations, the online marketplace has become fiercely competitive with challenges that need to be addressed in planning, including realistic timing and marketing investments. Finally, “Pop-Up” liquidations are becoming more prevalent and leading to higher recovery rates.

Michael Goldstein, head of Heritage Valuations, said the doom-and-gloom perspective is not what you would expect, depending on the sector as we have seen liquidations in many sectors that have generated extremely strong returns. “The big question is whether there will be another shutdown,” he said, adding there is a need now for more frequent appraisals to make sure that lenders are protected from advance rates that may be out of line with current market conditions.

The big success story was for those already in e-commerce or able to pivot quickly into it, said Rose Coyman, director of consumer product valuations for Gordon Brothers. She pointed to longer lead times from factories and longer shipping times to wholesalers as a headwind, but said retailers and distributors of essential products are generally doing well. However, she noted exceptions within certain sectors, adding, “If [distributors] sell to hotel chains, airlines, or mom and pop shops, not so good.”

Legal Scrutiny

Jordan Klein, partner of Winston & Strawn LLP, moderated a legal panel featuring Tami Barrows, SVP/loan portfolio manager of Wells Fargo Capital Finance; Ajay Jagsi, senior portfolio specialist of Bank of America Business Capital; Marilynn Tham, partner of Chapman and Cutler LLP; and Kyle Volluz, chief compliance officer and general counsel of Paceline Equity Partners, about managing emerging risks, the push and pull between borrowers and lenders in a pandemic environment, and increased scrutiny with unanticipated transaction alterations arising.

It was suggested there may be greater use of foreign subsidiary collateral to expand borrowing bases and/or collateral packages, and equity cures to bolster even established companies in situations where long-term performance projections are less predictable.

The SFNet legal session covered the subjects of “uptiering” transactions -- replacing existing debt structures with super-priority loans and the document considerations then necessary. They cited an example involving Serta in 2020 in which debt replacement led to a court case filed by minority lenders who were concerned about how the change would subordinate their interests under the terms of their existing agreements. Lenders need to be aware of these risks and have loan documentation that protects them and includes them in the consent requirements before such action is taken. The issue was addressed by several of the panelists.

The legal experts also advised greater scrutiny in documentation because various state laws are vague about “good faith and fair dealing” standards. The panel also noted that it is always important to consider the relationship implications with borrowers and sponsors that could be connected to any specific action.

Keynoter Danielle DiMartino Booth, CEO and chief strategist of Quill Intelligence, said, “The Fed is between a rock and hard place,” noting trillions in national debt and the demand for continuing federal stimulus. The author of Fed Up said the news about vaccines is tremendous for the world, but it will take the U.S. economy into 2021 to recover--noting the millions of jobs lost since the virus outbreak and companies’ reticence to hire now.

What’s needed are leaders with empathy and competence, said former secretary of defense and retired Marine general James Mattis, a convention keynoter. It is in unpredictable times that people are defined, he said, and leaders must define reality and gain trust. He was interviewed by Ayesha Rascoe, White House reporter for National Public Radio, who noted increased levels of distrust and different views of the facts among Americans.

“With everyone in their own echo channels,” Mattis said, looking at history can put things in perspective. “To go forward, we need to find common ground and be better listeners—to listen with willingness to be persuaded.” From his military experience, he also discussed the value of diversity--not just talking about inclusion, but creating it.

SFNet’s CEO, Rich Gumbrecht, said: “The format of this year’s convention allowed for a more diverse audience, including younger professionals and those from disciplines not usually represented at the Convention – which is great! It also enabled us to increase the diversity of our panelists and moderators as they were not constrained by travel demands and 2,200 members of the secured finance community registered for this event, far more than any in-person Convention.” Perhaps a silver lining in the pandemic is that virtual gatherings enable broader participation. The goal now is to see to it that the industry gathers next year in Phoenix--in person.

Attendee Thoughts

Randi Hershgordon
Senior Vice President, Gibraltar Business Capital

The SFNet 76^th Annual Convention, “This Way Forward”, provided an incredible opportunity to connect with industry colleagues and enhance our effectiveness as lenders so we can continue to provide capital to businesses around the globe.  I am truly grateful to be part of such a vibrant community of diverse professionals who so generously shared their knowledge and experience through thought-provoking and informative panels and roundtable discussions.  In the midst of a global pandemic, our ability to deliver and enable secured finance has never been more critical to our economy and the livelihoods of millions of people.  A heartfelt thank you to the SFNet staff, conference chair, and all the volunteers whose tireless efforts contributed to a meaningful and memorable experience for all the attendees.

Paul Schuldiner
Executive Vice President & Division Manager, Rosenthal Trade Capital

The SFN virtual conference was a tremendous undertaking and a challenge for all given the environment with which we are living in today. I had some doubts about whether it could be successfully implemented given that so much of the benefit of the annual conference is geared towards in-person interaction. Well, my doubts were proven wrong as the conference content and speakers were as good as they have ever been and the ability to interact with my peers and industry colleagues was not impeded at all. In fact, the ability to also have my fellow Rosenthal & Rosenthal colleagues attend due to the virtual nature of the conference was extremely beneficial to them as well. I think some combination of in person and virtual attendance may be the future of the SFN annual conference. Again, my congratulations to all involved in making this a success!

Steph Koveleski
Assistant Vice President. North Mill Capital LLC

At this year’s convention, I saw some very unique and varied perspectives from people of all industries. The topics were both engaging on a personal interest level, and useful in an informative capacity. Overall it was a great experience to attend.