Where were you during the great recession and where are you now?
Nick Gibbens: I was a business unit manager with Bank of the West Equipment Finance where I was in charge of an industrial equipment finance group called Diversified Equipment Solutions. I also managed the third-party originations group, which was the broker and discounter team in San Francisco. I’m currently vice president of business development with Wintrust Specialty Finance, focusing on developing vendor programs, funding independent leasing companies and working with banks providing portfolio purchase services as well as one-off transaction funding to the equipment leasing industry.
Jourdan Saegusa: In 2008, I was with Popular Leasing, a subsidiary of Banco Popular, which was one of the many banks that had trouble in their mortgage portfolios. They decided to monetize and sell the leasing portfolio. So, I helped to sell the business and spent most of the recession working for the purchasing bank which was very well-capitalized bank. I spent the next four years waiting for the recession to end, purchasing small-ticket portfolios in a variety of different markets for that bank. I then left to join Scottrade Bank as COO of Scottrade Bank Equipment Finance a subsidiary of Scottrade Inc. a major financial firm in St. Louis. That company was sold to TD Ameritrade in 2017. Currently, I’m with Midland States Bank, as COO of the Equipment Finance Division. Our team started the group for the bank in January of 2018 and our focus is small- to mid-ticket, that application only type business. We source our equipment leases and loans primarily through vendors and dealers, manufacturers, and a select group of brokers and captive finance companies. We also support the bank’s relationship managers by providing equipment finance product to existing and new bank customers.
John Sinodis: I am the Managing Partner of a midsize law firm in Phoenix, Arizona. For the majority of my career, and certainly at the beginning of the great recession, I would have been representing the same type of clients I represent today. Community and local banks, national banks, equipment finance companies and asset-based lenders in all aspects of a finance transaction. Our firm represents institutional clients in actions involving the recovery of equipment and other collateral, workouts and bankruptcy. We also prepare loan and lease transactions, loan modification agreements, forbearance agreements and settlement agreements. We handle judicial and non-judicial foreclosure proceedings. In the period of time when the economy started to suffer, we were quite busy.
Tony Sedlacek: During the great recession I was with a bank-owned lessor out of Indianapolis, Irwin Commercial Finance, owned by Irwin bank. We had about 600 million in our portfolio, that was primarily originated through vendors, with some from a smaller community of brokers. Like Jourdan’s experience, our bank had a significant amount of its wealth in home equity loans that were greatly impacted by the negative housing market. Almost overnight the market event put capital pressure on them and required a sell of the portfolio. Today, I’m with Orion First and we are a portfolio servicer to many banks and independent lenders, supporting their portfolios by providing billing, collecting tax and asset management and collections.
What trends are you currently seeing in the market and are any of these a warning sign of something to come?
Gibbens: We are seeing continued rate compression combined with a loosening of credit standards. Companies with aggressive growth targets are buying deeper credit profiles without the requisite price premium you would want to see for sufficient reserves. A lot of pressure for growth, particularly in the fourth quarter we just came out of. I had some candid conversations with partners who told me that they were getting prices 50 to 35 basis points below what we consider acceptable just to drive volume. I don’t think this is unique to 2020, but it’s a trend we’ve seen other times in this industry as we’ve gone through these cycles.
This reminds me of other times where we’ve been on the precipice of something bad. Although we continue to wait; we are probably three or four years into this discussion about when it’s coming. So, that’s probably my biggest point —this continued trend towards aggressive lending.
Sinodis: As a lawyer, I’m not sure that I’m in a position to see the same trends as my other panelists. In terms of my practice and the clients that I have represented for decades, I am seeing an increase in file referral. I’m getting more calls from clients inquiring about issues they are experiencing in their portfolios. This is typical of what you start to see at the beginning of an economic downturn. I think many of our clients have enjoyed a healthy run for several years but most expect that to change over the next few quarters.
Sedlacek: I think Nick and John have done a pretty good job of setting up my comments., Like Nick, Orion has the benefit of supporting a good mix of clients, which is very interesting to watch today. This provides us with a broad view of the lending environment from which we can monitor and respond to weakness.
Like John’s experience of seeing an increase in calls to his practice for help, in the last quarter Orion has seen a steady increase in delinquencies across the board. While I’m not hearing much about any particularly big problems, it’s steady. We see delinquencies slowly rising, and the talk offs with our collections groups have become more about people saying they’re not getting paid by their customers
What I remember from the last recession, is it felt very sudden. Although it was not as ridiculous as I’m going to make it sound, it almost felt like I walked into the office back in 2007 and suddenly, we had trouble brewing. Today it is more gradual. And as John pointed out, I think in the next few quarters, Orion is going to be extremely busy.
Saegusa: We are seeing some softening in the market, but it is relatively concentrated, and it’s primarily in the transportation industry. It’s not all that surprising when you read the ACT research transportation outlook. 2018 was a great year for the transportation industry but trucking, like all industries, is cyclical. I think we are entering into what I would call to be more of a real economy. And as a result, I think that we see some “market right-sizing”. I don’t expect it to get out of hand. All industries go through peaks and valleys, and I think we’re moving towards the valley in some of the core industries that many of us serve.
So which industries and asset classes do you think are vulnerable to a downturn? And conversely, which industries performed better in the last downturn?
Sedlacek: In July, we started to see transportation showing stress, and manufacturing shortly followed. The trouble that we’re seeing today is these industries have continued showing all sorts of stress, and I see transportation and manufacturing remaining vulnerable going into the future. What we saw a lot of in the last recession was construction trouble; business types like smaller contractors that were impacted by the housing market. But we’re not seeing significant impact to this industry today as the housing market is doing okay.
Sinodis: I would agree. We are seeing an increase in transportation related-contract defaults. The last recession seemed to be more real estate driven and then everything kind of tumbled from the declining real estate market. We don’t see that happening again. So, we don’t think that we’re going to see a repeat of the 2008 recession in terms of severity. As Tony pointed out, there is plenty of construction activity in the Arizona market. It is very difficult to get quality labor, and there are multifamily units going up all over Phoenix.
What did you learn from the last economic cycle that has helped you to prepare for the next downturn? Are there any lessons you can carry with you from the downturn that may not be as obvious?
Tony Sedlacek: As I mentioned in previous comments, the onset of the last recession was sudden and impactful. At the time, we didn’t have the staff. So, we’re currently in a hiring spurt right now, and that is occupying a lot of my time. For us, staffing up is required as we start to watch delinquencies rise. We know the way to best serve our clients is to get out in front of it, and the bottom line is we need enough people here to handle the work.
Jourdan Saegusa: My perspective is a little different than Tony’s, being that he’s on the “cleanup side” of the business. Our team has been through a couple of downturns and what we’ve learned is being over staffed is very challenging when you the economic conditions get tough. What we’ve learned is that, if we can run leaner and meaner, we will be able to sustain any type of downturn much better than if we’re staffed to capacity.
When we started the business at Midland, our key focus was working on efficiencies. In doing so, we’ve leveraged cloud-based software and outsourced a lot of our back-office services. And we rely a lot more heavily on third parties than we did in the past where we built everything in the infrastructure ourselves.
John Sinodis: Similar to Tony’s comments, the key to providing quality service to our clients is to be responsive to their needs and to act promptly. All lawyers that provide legal services to the finance industry understand that creditors that act swiftly and shore up their position either through a structured agreement or litigation will come out better than others that sit on their rights.
And so, we try to remind ourselves that in order to be a quality partner to our clients, we need to understand our client’s needs. We attempt to reach out to our clients on a regular basis and try to understand how their businesses operate and what their legal needs might be in the future. Our law firm is a mid-sized firm and we practice in multiple states. Even though we are smaller in size, we make sure that we have the right people in place that can handle the needs of our clients.
What were the biggest mistakes independent finance companies made before the global financial crisis?
Nick Gibbens: At the time, I was working for a large bank, and I was managing the third-party group, which supported independent finance companies through discounting and lending relationships. So I have some opinions, but I don’t know what is was like in that seat looking out from an independent management group to tell you what their perspective was. . I saw lack of diversification in lending relationships and not having strong interpersonal relationships with key lenders. When times are good, you tend to travel a little less, get out and see people a little less, you’re busy, and you’re funding deals. When we had to make tough decisions about relationships we intended to keep, it was often the people that we knew better that were likely to get the nod. Having the discipline to spend time with your lenders, schedule regular meetings, have them know your business and have them know you I think that’s very important. This is from a funder’s perspective again, so there could be lots of things that independents could have done to be better prepared. But for me, it was how little many of them attempted to diversify. They had one good A lender and that was it. Or they would only see somebody at a conference and glad-hand at the bar, but you didn’t really know the person. So that’s an area that should continue to get focus. If you’re an independent, make sure your lenders are well aware of your business and how they can help you grow and understand your markets.
How often did you find yourself working in tandem with other creditors on a troubled loan or lease and was it wise to work in tandem or fend for yourself?
John Sinodis: Because we represent such a large number of institutional lenders, we sometimes find ourselves in a position where several of our clients contact us and ask for our assistance in the same matter. Sometimes these creditors decide to work in tandem and, when it can be structured correctly, it can be very successful. The relationships that we develop with our clients, and that our clients develop with each other, make that possible. It’s not always the case. Sometimes there are conflicts and you can’t resolve them but when you can, it can work to the benefit of multiple clients.
Nick Gibbens: Yes, that’s a good point and I think John has a good perspective on that. My experiences were limited to getting vendor and/or manufacturer relationships that I had originated to participate with us in securing assets. And I remember a few calls where we had a number of banks on a conference call, and we all had a plan, and the next day, everyone threw the agreed to plan out the door and were at the lessee with their trucks trying to get their collateral. So, I think it depends on the situation. But certainly, knowing as much as you can and gathering intel from others can help you make the right decision. The first loss is sometimes the best loss, but we didn’t have a lot of good opportunities where we found that working in tandem helped us.
Jourdan Saegusa: Our business is not too dissimilar from Nick’s smaller-ticket vendor/dealer base. Most of our deals when they do go bad, they burn hot and fast. So, when a customer gets in trouble, they’re often willing just to return the equipment. And whenever we can, we just leverage the partnership with our vendors and dealers. But in the rare case where a customer’s not cooperating, if we know who the other lenders are, we’ve been in the industry long enough where we’re comfortable reaching out just to see if they are having the same experience with that customer or if it’s any different, before we take any action, just to kind of see the lay of the land. We didn’t really have too much experience during the Great Recession, but in the downturn of 2014 with the oil and gas industry, we were involved in some larger exposures through purchase transactions, and we did work in tandem with the lead lenders and other participants in the credits. I can’t say that in every instance it resulted in our favor, but I think that, overall, the collaboration amongst the creditors was really beneficial. At a minimum, it gave us better insight direction for the during the workout process.
Tony Sedlacek: I side with Nick on this one—that it always seems like a good idea initially. You get everybody on the phone, and everybody feels like you go away with a pretty good plan. Sure, we all have some information to share and you can gain a lot of good insight into the troubles and issues at hand. But at the end of the day, everybody always seems to run out, get their own truck and go pick up their stuff. I found that this process did not work very well.
How do you think about portfolio risk going into a downturn?
Saegusa: Obviously, there’s always portfolio risk, whether in good times or bad. Lending is a risk-based business. But that is our job, to evaluate the risks and mitigants in our lending decisions. This is fundamental to running the business whether or not there is a threat of a market downturn.
I think that portfolio risk can be managed in a number of different ways. I think lack of diversification is a true risk with any lender. A well-balanced portfolio with diverse customer industries, geographies and asset classes is always going to withstand a downturn much better than a highly concentrated portfolio. And portfolio monitoring is also critical. We as lenders have to understand and react to whatever the trends are doing. When we see softening in certain credit profiles, we need to tweak our criteria and our pricing to ensure that we’re lending to the right customers and getting paid for the risk that we’re taking.
So how do you think about portfolio performance volatility in a recession environment?
Saegusa: This is kind of an overlap on the previous question. Just to add something to that, it’s the portfolio monitoring and being able to make changes, but not to have knee jerk reactions. I think that as you start to see spikes in the portfolio, there are some independents that made some sweeping changes back in the Great Recession, and they left a lot of their partners hanging. It caused a lot of riff in the industry. If there is volatility in your portfolio and in the environment, obviously, you don’t shut a blind eye to it. I think it’s important job to not make knee jerk decisions, but to definitely monitor and make sure that you are making logical decisions so that you’re not caught off guard.
What are you doing to prepare for a recession?
Saegusa: Honestly, barring any major policy changes, global disasters or acts of war, I really think that we will enjoy a steady economy for the unforeseen future. Our originations are strong, and our delinquency is well below the ELFA MLFI-25 numbers, so still very manageable. Our plan is really to stay the course. We’re going to continue to monitor areas of weakness, make the appropriate credit adjustments and pricing adjustments and continue to pursue well-diversified portfolio of customer industries, geographies and asset classes.
Sinodis: It all goes back to relationships. In order for lawyers to effectively represent our clients, we must maintain good relationships with the court, with opposing counsel and with service providers. Solid relationships will allow you to represent your clients in an expeditious and preferable way. As an example, I was general counsel for a leasing company early in my career and we had a branch office in San Diego. I received a call one morning from a branch manager who told me that our leased equipment was headed down the highway towards Mexico. It was going to be stored in a holding yard at the border for 24 hours before being transported into Mexico and we needed to act quickly. Because of our relationships, we obtained a court order within hours and had the equipment in our possession before the end of that day. So that experience very early in my career taught me that relationship building is key to being able to provide your clients with the service they want and demand. And so, that is where we focus our efforts.
Sedlacek: As I mentioned earlier, at Orion, we continue to make our staff a top priority. Additionally, Orion is well networked throughout the country with law firms, remarketers of assets and other service providers that help us reach good outcomes for our clients.
It’s during times of uncertainty, or preparation, that I notice a lot more of my conversations revolving around what ifs, and “are we prepared?”, and “what are you guys doing about it?” So we’re also nurturing our relationships to be sure we are ready if it gets more exciting than it is today.
The other piece that we are working on, and investing heavily in, is technology. We believe that technology will help us create efficiencies and continue to provide a more positive experience for our client’s customers, even if an economic downturn does occur.
Sinodis: Relationship building also extends to relationships with lawyers in other jurisdictions. Following up on Tony’s comments, one of Orion’s most valuable attributes is the broad network of lawyers they work with around the country. Orion built those relationships over a very, very long period of time. Many of us also work with each other and refer clients to attorneys in other jurisdictions that can meet the client’s needs.
Gibbens: I would say having management in line with realistic goals for growth, not pushing undisciplined credit methodology out to grow at a time when it seems like a good time. Staying diversified is key but also just not overextending the ability to manage a portfolio and having the reserves associated with that risk.
What opportunities arise from a downturn and which industries changed as a result of the last one?
Nick Gibbens: I was fortunate to work for a well-capitalized bank with a strong parent that was not involved in mortgage lending and came out of the recession pretty good shape. We saw a lot of our competitors struggle and we actually took on a number of large program opportunities that arose as a result of others having to leave them or strategically unable to support them. So, we lifted out teams from a number of different, other competitor departments to, generally with the support and permission if you will of the manufacturer and the other lender, they needed something and the company couldn’t provide it. It wasn’t an ugly transition, but it was, we were only able to do it because we could spend the money to do it. We added a lot of people who came out of layoffs from other groups within the industry that were affected by the downsizing. We were able to pick up people that would otherwise not have been available. There are small bright spots. Obviously, the overall result wasn’t great, but we were able to build a stronger organization as a result of being in a better position to take advantage of some other companies misfortune.
