eNews October 29

In the News

October 29, 2020

	I. Here's Our Take on Election 2020
	II. Strategies to Reduce the Impact of the New SBA Procedural Notice on the Rights of a Secured Lender

	III. Stepping into Leadership: Crafting a New Generation of Leaders
	IV. Credit Groups More Important Than Ever During Pandemic

One week before the election, and with more than 25 million votes already cast, we are in the final stretch of the 2020 election cycle. In the past month, Democrats have continued to widen their lead, with former Vice President Joe Biden generally leading by double-digits in national polls and Democrats predicted to have a significant chance of securing a majority in the Senate. NACM’s lobbyist, PACE LLP, offers its breakdown on current expectations, although as with any election, things can change very quickly.

Presidential Race

Biden is currently projected to win the presidency by a comfortable popular vote margin, as well as an Electoral College margin. Based strictly on current polling, Biden is projected to win the Electoral College by a 347-191 margin, and it would take an eight-point flip (in President Trump’s favor) in polling to see the former VP dip below the 270 electoral votes needed to win, whereas just a two-point swing in the other direction (in Biden’s favor) would bring Biden’s total votes above 400.

The main question is how the significant increase in absentee/mail-in voting might impact turnout. Expectations are that it will be difficult to determine the winner of the election on election night because of how many mail-in ballots will need to be counted. The actual results of the election may not become official until as long as two weeks after Nov. 3.

There is a small possibility that legal challenges against the validity of some mail-in ballots may result in a large number being declared invalid, due to minor technical errors or other issues caused by improperly filling out the ballot. This is an outcome that Democrats especially are concerned about because the majority of early votes and absentee ballots in the past have leaned Democratic. While this is a very unlikely outcome, it is one that would invite significant controversy, and is being frequently covered by news outlets.

U.S. Senate

In the past month, Democratic Senate candidates have held their leads and increased it in many states, and as a result, are projected to secure a majority in the Senate. Republicans currently hold a 53-47 majority in the Senate. Polling averages show this flipping to a 51-49 or 52-48 Democratic majority. The seats considered most likely to shift to Democratic representation include:

• Sen. Cory Gardner (R-CO)
• Sen. Martha McSally (R-AZ)
• Sen. Thom Tillis (R-NC)
• Sen. Susan Collins (R-ME)

Many of these races are close, within several points, so the final result is likely to be less predictable than the presidential race, where margins are significantly wider.

U.S. House

Democrats took the House in 2018, and 2020 is not expected to significantly change the current 233-202 makeup. Since August, polls have indicated Democrats may net another three to four seats. Because of the highly polarized nature of many congressional districts, these results are very unlikely to differ much from the polls, making it extremely unlikely that Republicans will regain control of the House in 2020.

Legislative Outlook for the Year

The Republican-controlled Senate confirmed Supreme Court Nominee Amy Coney Barrett on Monday night, wrapping up the legislative session before the election. After the election, if Biden wins, it is most likely that Congress will act on the next COVID relief package after he takes office on Jan. 20, 2021. The last major items that Congress must pass before the end of the year are:

• A government funding bill prior to Dec. 11 (we are anticipating another continuing resolution)
• The 2020 National Defense Authorization Act
• The 2020 Water Resources Development Act (not a must-pass, but already has significant bipartisan support)

If Democrats take control of the Senate and the White House, we can expect additional scrutiny and action on collections issues, with a focus on protecting consumers. With that said, even with Democrats in control, there are many Democrats who understand the need to balance business-to-business debt collection needs and act carefully in this area. We will continue to educate Members and Senators in this area to protect the ability for NACM members to recoup losses.

In the SBA Procedural Notice dated October 2, 2020 (the “Approval Notice”), the Small Business Administration (“SBA”) has issued mandates that may impact the ability of a recipient of a Paycheck Protection Program (“PPP”) loan to raise capital, to transfer ownership, to sell assets, or to liquidate. While the Approval Notice is strikingly broad in scope, there are ways of reducing, if not eliminating, its effect on these types of transactions.

The Approval Notice requires obtaining the lender’s approval for any change of ownership of 20% or more, including a merger, and for any sale of 50% or more of the assets. If a PPP lender is using the standard SBA form of note, such transfers likely would trigger a default absent the lender’s prior approval. Needless to say, no approval is required once the PPP Loan is forgiven or otherwise paid in full.

The Approval Notice does not require the SBA’s prior approval for a change of ownership when (1) the change of ownership is 50% or less; or (2) the forgiveness application has been filed and the balance, if any, owed on the PPP Loan is “escrowed” in an interest bearing account controlled by the PPP lender, for the benefit of the SBA and the PPP lender. For a sale of 50% or more of the assets, the SBA’s prior approval is required unless the forgiveness application has been filed and the balance, if any, owed on the PPP Loan is escrowed in an interest bearing account controlled by the PPP lender. These escrows are for purposes of paying the unforgiven balance on the PPP Loan.

In all other cases, the SBA’s prior approval is required. The Approval Notice states that the SBA will provide a determination within 60 calendar days of receipt of the request for approval. However, the Approval Notice does not say what happens if the SBA does not respond within the 60 calendar days, and there is no reason to assume that a lack of a timely response is the same as an approval.

The requirement for SBA approval for a borrower change of ownership is odd, as the borrower remains obligated for the PPP Loan regardless, and a PPP Loan does not require either a personal guaranty or collateral. Even odder, with a sale of 50% or more of the assets, the Approval Notice requires the buyer of the assets to assume the PPP Loan obligation; again on a loan that that has no collateral and no personal guaranty.

The Approval Notice effectively elevates the SBA from an unsecured creditor to a priority creditor, and perhaps to a super priority creditor. Assume the PPP lender is also the secured lender to the PPP borrower, and that the PPP borrower is unable to continue in business and needs to liquidate. In order for the PPP borrower to sell its assets, it must obtain the SBA’s approval. In that situation, the Approval Notice also mandates that the buyer assume the balance owed on the PPP loan. The buyer will not do this out of the goodness of its heart. Rather, the buyer will reduce the purchase price by the amount of the PPP loan obligation. This means that other unsecured creditors will have less to share. It also might mean that a secured lender will take a loss; solely to allow the SBA to do what Congress did not mandate – to become a secured, priority lender.

What to do to avoid the SBA from inserting itself into what should be a routine transaction for a distressed loan? There are some strategies that should be considered.

When liquidation of assets is needed, the PPP borrower can allow the secured lender to repossess the assets, and the secured lender can liquidate the assets. Alternatively, a receiver can be appointed over the assets of the PPP borrower, either voluntarily or involuntarily, to allow for the orderly liquidation of the assets. The PPP borrower can file a bankruptcy case, either a Chapter 7 or a liquidating 11. Indeed, the Small Business Reorganization Act might be used as a form of a liquidating 11. Other alternatives to consider are a dissolution proceeding or perhaps an Assignment for Benefit of Creditors. These alternatives merit further exploration in a distressed credit setting.

While there may be ways to mitigate the impact of the Approval Notice, it is clear that the Approval Notice will disrupt a number of transactions, increase the cost and burden to PPP lenders, and further overwhelm the SBA staff.

Jonathan S. Green represents clients in debtor-in-possession financings, supply protection negotiations and Chapter 11 restructurings and asset acquisitions.

Steven A. Roach brings more than 30 years of commercial transaction and litigation experience in restructuring lending relationships and enforcing loan transactions. He applies this experience to provide a unique perspective as both a trial and transactional lawyer when representing and counselling the firm's financial institution clients.

Trent Taylor represents national, regional and local financial institutions in real estate, construction, working capital, equipment and vessel financing, including syndicated transactions, letter of credit-backed bond financings, tax credit and other government supported financings and asset-based lending.

There are several elements required to craft new credit leaders and one particular group has the best instructions: veteran credit professionals. Make no mistake, credit leaders-to-be must initiate interest and complete the legwork to achieve leadership roles in the industry, but it is today’s current leaders who can share their tips, tricks, trials and tribulations to create leaders for future generations.

Universities do not offer degrees in credit management, so credit skills are taught through more of an apprentice model, said Kevin Chandler, CCE, a director of customer financial services. If veteran credit managers are not using this apprentice model, then they are not passing down the necessary skillsets to the next leaders. Chandler said he has had mentors for various aspects of his career, including credit, collections, financial statement analysis, business writing, negotiations, enterprise risk, contract language, and more. His mentors not only provided advice and knowledge, but also gave Chandler a leader’s perspective that he couldn’t achieve on his own.

“[As a leader], you have to teach all aspects of the role—not only how to do it, but why to do it,” he said. “You have to actively engage individuals and create a two-way learning environment. Enlist people in more than daily work assignments, including special projects and rotational responsibilities.”

Regional Credit Manager Melinda Kilonsky said she has worked with different mentors for over a decade, studying their management styles and adapting them to create her own. Finding mentors is about looking for someone who has the knowledge leaders-to-be want/need and learning from them. Kilonsky said it never hurts to ask others within the company if they are willing to work with leaders-to-be to improve skills where the latter feels they need improvement.

“A very intelligent person once told me ‘You can’t move on until you have trained someone to take your place. Life is constantly changing and you have to be learning and teaching every day,’” Kilonsky said. “I’m a very open person and try my best to help everyone. Although I’ve been burned by several people—and by burned, I mean that I tried my best to guide them, but they really did not want to learn and kept saying I was holding back on what they needed to know to do their job—I never give up trying to assist someone to expand their knowledge base.”

Current leaders must try not to feel threatened by someone looking to learn, she added.

“Everyone should take the time to help the next generation, regardless of their position or skills,” Kilonsky said. “Other team members could have skills you don’t have even if they report to you. Keep trying to learn new skills and keep your mind fresh.”

 

The business world has changed rapidly overnight. Adapting to change isn’t always easy, but in the case of the COVID-19 pandemic, there wasn’t much of a choice. Companies have gone from using little to no technology to using it on an exponential level compared to just seven or eight months ago. The challenge: gathering credit professionals together while being unable to be in the same room. This is where technology companies like Zoom and Microsoft thrived, giving businesses and employees a platform to be together.

Industry trade credit groups are one of the many victims of not being able to be in one place at the same time except virtually. “I attend credit group meetings to put myself in the best position possible to make great credit decisions for my company,” said Mike Hill, CCE, director of credit with MiTek USA, Inc. “Knowing what my fellow group members were seeing during such an uncertain economic climate was essential to doing my job well.”

Kevin Stinner, CCE, CCRA, credit manager Simplot AB Retail Sub, Inc., said his biggest takeaway is that he was still able to get the information he needed. Members were able to go review and discuss trade lines despite not meeting in person. “Part of the reason you belong and participate in an industry group is to build up your credit network,” Stinner said. “I was able to discuss individual customers and AR issues that others were having, which was a positive.” Another benefit Stinner pointed to was not having to travel. It is possible to have to commit two or three out of the office days for one in-person meeting depending on where the group was meeting. “Three-hour meetings are a lot better use of time than having to be out of the office for three days.”

In-person or virtual, the foundation of a credit group is customer information. Stinner said he uses information gathered at credit groups in conjunction with his regular credit review process. “Knowing that there are some customers someone else might be having issues with creates a benefit for me.” Belonging to and participating in an NACM credit group has saved Stinner and his companies in the millions of dollars.

However, groups aren’t only about customer information during this uncertain economic climate. One piece of information Hill learned from his building materials group had nothing to do with customer information. Hill was able to speak with peers about how to setup and run a credit department from home. “I was a sponge soaking up advice from my fellow group members who had experience with allowing employees to work from home. Armed with that knowledge, my department was able to quickly transition to working from home and full-time when the COVID-19 pandemic hit.”

For a more in-depth look at virtual trade credit groups, pick up the November/December issue of Business Credit magazine.