The Ebb and Flow of Credit and Collections During the COVID-19 Pandemic
Evaluating credit and securing payments are rarely simple tasks, but during the first two years of the COVID-19 pandemic, these areas have become fraught with challenges. Emma Hart outlines how the credit and collections game has shifted and how factors and asset-based lenders like Sallyport Commercial Finance have adapted.
BY EMMA HART, SALLYPORT COMMERCIAL FINANCE
Let’s face it, evaluating credit will never be an exact science. We refer to multiple sources and make educated guesses as to how each credit will perform in our portfolios. Most times, that strategy is perfectly fine, especially if you are looking at strong performing companies with solid financials. However, the COVID-19 pandemic has turned everything upside down.
During the early days of the pandemic, traditionally solid industries were side-swiped with work-from-home edicts and mandatory shutdowns while governments tried to stop the spread of the virus. Some companies failed completely due to lockdowns, limited patronage and social distancing protocols. There were, however, some ‘winners’ who were able to take full advantage, particularly those in the home delivery sector or those who provided essentials like hand sanitizer and toilet paper.
With personal protective equipment in high demand, many businesses pivoted to this area, but this led to a huge amount of fraud, with multi-million-dollar purchase orders abruptly cancelled by federal, state and local governments due to violations of child labor laws, poor working conditions overseas, counterfeit products or just because the massive influx of PPE meant it couldn’t be distributed fast enough.
If all of that wasn’t enough, the U.S. presidential administration changed hands less than a year into the pandemic and green energy became a focus. As such, private equity began to migrate from the traditional oil and gas sector to focus more on renewables, traditional energy companies merged and there was some industry consolidation, all of which contributed to mass layoffs.
The energy sector wasn’t alone, but despite unemployment spiking, the tidal wave of bankruptcies many expected at the beginning of the pandemic has yet to materialize, even in the hospitality and retail sectors, which have been two of the most impacted industries. Staving off the bankruptcy wave was in large part a product of initiatives like the Main Street Lending Program and the Paycheck Protection Program, as well as the support of investors. However, as government money has been used and the programs have ended, we are starting to see the true impact of the pandemic in the actual trading performances, net of PPP forgiveness.
Challenges with Traditional Credit Information
Factors and asset-based lenders have begun to once again see energy and chemical companies in their pipelines looking for financing. These debtors are not always well rated by credit rating bureaus such as D&B or Experian, and certainly not for the exposure generally. For public companies, factors and lenders can review 10-Qs or 10-Ks and look at publicly available information in the financial markets and information available from the SEC. In addition, credit insurers are gradually coming back into the space after seemingly exiting energy. At Sallyport Commercial Finance, we have moved forward with a credit put option in place with one of our concentrated exposures. Additionally, with a very well-connected, traditionally energy-focused investor backing Sallyport, we lean on this investor for any information or personal connections it has that could give us an inside track on performance of some of these businesses. This has proved to be invaluable in determining credits, performance and collections.
Monitoring public bond yields and ratings can give factors and lenders some indication of market confidence, and while historic trends are not always indicative of future performance, you can also look at payment performance, verification and debtor concentration. Invariably, it is the strength (or lack thereof) of a client that determines risk. Determining each client’s ability to perform while being reticent due to the concentration of a particular account debtor is always a challenge, as is remaining acutely aware of the contractual nature of the businesses’ relationships.
The Collections Undercurrent
It has certainly been an interesting two years for collections. Collections have always been a focus of mine, as that is where my career started many decades ago, and even in my current role, I still get excited to see collections hit our bank accounts daily. I still scan the deposits first thing every morning and am the first to communicate when a payment we’ve been waiting for comes in.
As the pandemic hit and nonessential businesses were forced to close or offer work-from-home options, an interesting dynamic developed. Collections slowed down dramatically, as accounts payable departments were no longer easy to contact because they were also working from home. It took time for some businesses to fully equip employees with the tools they needed to effectively work, especially for those who had to juggle their daily routines along with babysitting and teaching (sometimes multiple) children.
For industries like retail and restaurants that were ordered to close completely early in the pandemic, how were they expected to pay their bills? Huge swathes of companies moved their payment terms to 90, 120 and even 180 days due to the uncertainty of the immediate future, and many also put a hold on releasing any payments. It was a perfect storm for delaying payments, as check signatories were not in the office and cash flow was squeezed.
For a factor and asset-based lender, this was not a sustainable business model. Portfolios were aging out and clients’ volumes were down, but their need for funds had not waned as they tried to keep their businesses open and staff paid. The knock-on effect of clients getting out of formula and drifting into an over-advanced position is it puts them at risk of falling out of a factor or lender’s senior line’s borrowing base. This meant factors and lenders had to get collections back to normal levels and quickly.
As an essential business, Sallyport made the decision to bring our operations people back to the office on a full-time basis as soon as possible. We implemented safety protocols and weekly COVID-19 testing, and we focused on reaching the accounts payable departments wherever they were to get to the top of their payments lists. We have lived by the adages of “he who shouts loudest, gets paid” and being the “squeaky wheel.” We have made concessions where appropriate, but this has been a matter of our own business survival as well as that of our clients. Money flowing just one way out of our business is not a long-term strategy, and we have been able to very quickly turn that around.
Early on, our account executives engaged with customers to explain the potentially dire consequences and inequity of withholding payments (which were payable and, in some cases, past due) from small business clients who had already provided the goods and services for which they sought payment. We made payment plans with customers and utilized all methods of receiving payments available, and I may have sent the odd sarcasm-laced email to a couple of CFOs and CEOs of very large public companies that had the wherewithal to pay but were instead choosing to exploit the situation. It was survival of the fittest!
As a result, our portfolio effectively self-liquidated, which is exactly what it should do when you have a collectible portfolio. Our borrowing bases were not compromised, and volume began to return to our clients’ businesses.
Through it all, if there’s one thing the pandemic has highlighted, it’s the virtue of making collection calls. Having a dialogue with a person is far more likely to result in a payment, even if its only a partial payment, than liaising by email.
Emma Hart is the executive vice president of operations and senior credit officer of Sallyport Commercial Finance. Hart has a tenure of more than 30 years in the commercial finance industry. Prior to helping to set up Sallyport Commercial Finance, she held the role of executive vice president of operations with Bibby Financial Services (CA), Inc. from 2008 to 2014. Prior to joining Bibby, Hart spent 20 years with Lloyds TSB Commercial Finance in the UK. She can be reached at 832-939-9450 or at ehart@sallyportcf.com.