As featured in The Secured Lender
The “New Normal” Roundtable
By Michele Ocejo
It 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.
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 fi rm 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 fi rm and the transaction carefully.
HOEFLER: A key part of any relationship is communication, and relationships are the key to business success. Working from home and the resulting lack of face-to-face meetings with prospects, customers and team 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 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!
POLINSKY: We are inundated with PPE Purchase Order funding requests right now. This is a high risk 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.
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.
POLINSKY: A small amount of POs were in 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 already struggling 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.
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-from home 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.
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 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.
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.
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.
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 culture. We realize that this has been a challenge for many companies. However, given our presence across the western, southern and midwestern regions, Republic has easily adapted to a virtual 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 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-to work 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 COVID- 19’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.
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.
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 debtor in- 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.
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 age-old 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.
About the Author
Michele Ocejo is Director of Communications for the Secured Finance Network and editor-in-chief of The Secured Lender.