Canadian Equipment Finance Magazine SeptOct 2015

Sept/Oct 2015 • volume 3 • issue 5 | www.canadianequipmentfinance.com

LEGAL REPORT:

Managing the legalities of complex transactions Credit & Collections: New Strategies for 2016 and Beyond Economics: Divergence Between the U.S. and Canadian Economies

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contents September/October 2015 Volume 3 Number 5 Publisher and Editor-in-Chief Steve Lloyd steve@canadianequipmentfinance.com Editor Karen Treml karen@canadianequipmentfinance.com Creative Direction / Production Jennifer O’Neill jennifer@canadianequipmentfinance.com Photographer Gary Tannyan Advertising Sales Mark Henry mark@canadianequipmentfinance.com For subscription, circulation and change of address information, contact

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ELFA REPORT: The equipment finance market is expected to surpass $1 trillion in 2015, for the first time ever. The ELFA reports cautious optimism in the finance market, with continued new business volume growth for the fifth-straight year The Class of 2015 inductees to the Equipment Finance Hall of Fame have been announced. »4

FEATURES Legal Report Digital Transaction Management in the Equipment Finance Industry »10 Canadian Bankruptcy Considerations in Factoring Transactions »12

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Navigating Transactions: Understanding the Legalities »14

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Credit & Collections:

Analytics for Credit and Collections: New Strategies for 2016 and Beyond »16

NEWS »7 Events:

Where to go. What to see. »20

Economics:

Divergence Between the U.S. and Canadian Economies »21

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canadianequipmentfinance.com | SEptember/October 2015 | CANADIAN EQUIPMENT FINANCE

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ELFA Report

Cautious optimism in finance market For the first time ever, the equipment finance market is expected to surpass $1 trillion in 2015, according to the ‘2015 State of the Equipment Finance Industry Report’ released at the 54th Annual Convention of the Equipment Leasing and Finance Association. The study, published by the Equipment Leasing & Finance Foundation and authored by Keybridge Research, provides a unique look at trends in the equipment finance industry over the past year, identifies key drivers for future growth, and explores emerging opportunities and risks that could shape the industry over the next three to five years.

“There is cautious optimism among industry participants as the equipment finance industry seems to be entering a new phase of solid albeit slower growth,” Richard Gumbrecht, Chairman of the Equipment Leasing & Finance Foundation and Chief Growth Officer, EverBank Commercial Finance, Inc. “There are a number of shifts underway, including evolving customer preferences, the growing popularity of alternative financing, volatility in global commodity markets, the prospect of rising interest rates, and new lease accounting standards that, while challenging, also present equipment finance companies with new opportunities for growth.”

Key findings from the 2015 State of the Equipment Finance Industry report include: ◉◉ The equipment finance market is projected to reach $1.046 trillion in 2015: A slowly improving U.S. economy contributed to moderate equipment and software investment growth of 6.0 per cent in 2014. Amidst this backdrop of moderate investment growth, equipment finance new business volume grew 6.7 per cent in 2014—still remaining above the 10-year average of 4.4 per cent, and driving the industry size to $946 billion. The equipment finance industry is exhibiting stable expansion so far in 2015. Although overall investment in equipment and software has been modest over the first half of the year due to the waning replacement cycle and businesses’ continued hesitancy to expand their operations, businesses are likely to finance these investments. ◉◉ Equipment finance companies maintained stellar portfolios, solid financials and improved productivity in 2014: Record-level portfolio strength has defined the equipment finance industry in recent years, and a healthier economy and rising corporate profits allowed companies to maintain strong portfolios in 2014. On the financial side, profitability was stable in 2014, as operating profits ticked up from 35.2 per cent to 36.2 per cent. Return on equity dipped, return on assets was unchanged, and earnings before taxes increased, while low interest rates kept costs low. New business volume per sales full-time equivalent employee increased nearly 4.0 per cent as competition drove companies to maximize productivity and efficiency, and pursue competitive advantages. ◉◉ The propensity to finance steadily increased in 2014. The trend in the Foundation-Keybridge Propensity to Finance Equipment Index suggests that companies’ tendency to finance has increased steadily since hitting a postrecession low in late 2010. A combination of low interest rates and rising corporate profits has enabled private companies to take on more debt, and leasing remained an attractive way for businesses to replace equipment and expand operations. ◉◉ Uncertainties ahead provide threats and opportunities: The equipment finance industry faces several unknowns, both in the U.S. and abroad. Regulation is an ongoing concern, particularly for banks, and government dysfunction, including threatened government shutdowns and debt ceiling disputes, remain threats on the horizon. Turmoil in the global economy could hurt growth in the U.S. and dampen business investment, but a solid labor market and strengthening housing market provide reasons for optimism.

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CANADIAN EQUIPMENT FINANCE | September/October 2015 | canadianequipmentfinance.com

New business continues to grow year-over-year New business volume grew by 6.7 per cent in the equipment finance industry in 2014, according to the ‘2015 Survey of Equipment Finance Activity’ from the Equipment Leasing and Finance Association. It marks the fifth consecutive year that business increased spending on capital equipment.

“The data shows that the equipment finance industry is healthy and growing, continuing an upward trend since the end of the Great Recession,” said ELFA president and CEO William G. Sutton. “More recent data collected in 2015 indicates that positive momentum is continuing, with member companies reporting solid new business growth and portfolio performance. We remain cautiously optimistic that demand for capital equipment will continue to drive positive growth for the equipment finance industry.”

The 6.7 per cent growth rate was below the previous three years, including the high water mark of 16.5 per cent set in 2011, but it still outpaced the growth rate of the U.S. economy (2.4 per cent). The equipment finance industry has not had a year of contraction since 2009, when it declined by 30.3 per cent.

The survey also showed that independent equipment finance firms led the industry in new business volume growth for the third straight year, with a 17.6 per cent boost. Banks had growth of 7.4 per cent and captives experienced a meager 1.3 per cent increase.

In addition, the 2015 Small-Ticket Survey of Equipment Finance Activity, which focuses on smaller equipment transactions, also showed an increase in new business volume in 2014 of 7.1 per cent.

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ELFA Report

ELFA announces 2015 inductees to Equipment Finance Hall of Fame volunteer ◉◉ James D. McGrane (1954–2014) – Inspirational leader, relationship builder and multitalented entrepreneur ◉◉ Bernard J. McKenna (1933–2010) – Tireless industry supporter and active philanthropist ◉◉ William J. Montgomery – Captive and vendor finance visionary and founder of numerous leasing entities, including Xerox Credit Corporation ◉◉ Henry B. Schoenfeld (1916–1976) – Founder and first President of US Leasing, the first equipment leasing company

The Equipment Leasing and Finance Association (ELFA) has named seven industry leaders to the 2015 Class of the Equipment Finance Hall of Fame.

ELFA Chairman Robert Rinaldi, Chief Executive Officer of Commercial Industrial Finance, Inc., announced the honorees this morning at the General Session of the 54th ELFA Annual Convention in San Antonio, Texas.

The 2015 inductees are: ◉◉ Ian J. Berg (1941–2009) – Founder of Copelco Financial Services Group and innovator of healthcare, copier and high-tech leasing ◉◉ Joseph C. Lane – Technology financing pioneer and devoted champion of equipment finance ◉◉ P.A. (Paul) Larkins – Industry trailblazer, mentor and dedicated

“We are thrilled to recognize the distinguished group of individuals who make up the 2015 Class of the

Fasten your seatbelts. Roll up your shirtsleeves. And prepare yourself for an information packed day.

The

Equipment Finance Hall of Fame,” said ELFA President and CEO William G. Sutton, CAE. “These industry pioneers have contributed so much to our industry and our association.

Their accomplishments—from blazing new trails in equipment finance, to mentoring the next generation, to serving our association—leave a lasting legacy that will inspire generations to come.”

The ELFA Board of Directors established the Equipment Finance Hall of Fame in 2014 to annually recognize individuals who have made unique, significant or lasting contributions to the equipment finance industry throughout their careers.

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For breaking news and in depth new features, visit our website at www. canadianequipmentfinance.com

News

Patriot Equipment Finance expands into Canada

Consortium to acquire LeasePlan

Patriot Equipment Finance, LLC. is expanding and opening their first of several offices in Canada. This office will allow PEF to better serve existing and future clients in a market where they already had many existing relationships.

“This is an important move for PEF as it demonstrates our commitment to serving North America and it will ensure that PEF is committed to providing an infield relationship to our Canadian clients,” said Anthony Salm, president and managing director of Patriot. “PEF is committed to our core belief that our company will be a trusted advisor in the industries we serve when it comes to providing tailored equipment finance solutions.”

In conjunction with the new office opening, PEF is announcing Claudio Mancuso as the new Managing Director, Canada, based out of the new Toronto operation. “Claudio is a former CEO, CFO and Vice President, Treasurer of public companies and has raised billions of dollars in the open credit markets. He has overseen both lease and debt financing, and understands the challenges a Financial Manager/CFO faces each and every day. His extensive capital markets experience gives us valuable insight on how our solutions can better serve our clients especially in the construction and mining markets,” explains Mr. Salm. “Claudio will be responsible for building a staff in Canada and growing and building on our existing relationships to better serve the equipment finance needs of Canadian domiciled companies”.

PEF has built a formidable business in a very short time starting in January of 2015. Clients benefit from PEF’s expertise in structuring highly complicated equipment lease solutions that allow customers to benefit from both funding transactions from its private equity, as well as its expertise in matching wholesale capital to credit quality in the vertical markets they serve.

LeasePlan Corporation N.V. has been informed by its current 100 per cent shareholder Global Mobility Holding B.V. (a joint venture of Volkswagen Aktiengesellschaft and Fleet Investments B.V.) that it has reached an agreement with a consortium of long-term investors to acquire full ownership of LeasePlan.

The total value of the transaction amounts to about EUR 3.7 billion. The Consortium plans to maintain LeasePlan’s diversified funding strategy going forward, supported by its investment grade rating.

The agreement is subject to approval by the relevant regulatory and anti-trust authorities including the European Central Bank in consultation with the Dutch Central Bank. Closing is expected by the end of 2015 and is subject to obtaining these regulatory and anti-trust approvals.

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T EAM

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News

Leaseurope/Invigors Leasing Survey predicts strong second half for 2015 Leaseurope, the representative body of the European leasing and automotive rental industry, together with Invigors EMEA, the specialist international equipment leasing and asset finance consultancy, have just published the results of the Leaseurope/ Invigors European Business Confidence Survey, which was conducted in June 2015.

The latest June findings highlight an overall optimistic outlook for the European leasing business in the second half of 2015, with most of the survey’s measures maintaining the positive sentiment identified in the previous survey conducted in December 2014.

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The outlook for new business volumes over the second half of 2015 remains positive, with 79 per cent of those surveyed expecting new business volumes to increase, while just four per cent anticipate a decline. Expectations on the level of bad debt remain stable and in line with previous surveys, with the majority of participants (79 per cent) forecasting that bad debt will remain unchanged over the coming six months. Similarly, 51 per cent expect no change in margins, although 33 per cent predict that margins will decrease in their organizations, slightly above the percentage

CANADIAN EQUIPMENT FINANCE | July/August September/October 2015 | canadianequipmentfinance.com 2015 | canadianequipmentfinance.com

recorded in the previous survey.

Nonetheless, 62 per cent of respondents anticipate that net profit in their organization will increase over the next six months, while only 17 per cent believe that this will fall.

Over 40 per cent of those surveyed thought that competition from new entrants was more likely in their home market with the percentage of those perceiving new entrants as a competitive threat increasing steadily over the past three surveys. Also expectations of merger and acquisition activity are changing with 41 per cent predicting this will increase over the rest of the year, a marked rise on the 28 per cent recorded in the previous survey.

Industry expectations on a number of other key indicators covering service levels, expenditure and staffing show little change for the second half of 2015.

Invigors EMEA Partner Richard Ryan adds, “This latest Business Confidence Survey suggests that 2015 is likely to be another good year for the European leasing industry.

Growth is forecast to continue for the remainder of the year, while the balance of opinion on other KPIs is generally favourable. Nearly 60 per cent of respondents in the June survey are more optimistic about the prospects for their business in the second half of this year, while only six per cent thought that their business prospects would worsen.”

SpendTrend report released First Data has released its August 2015 SpendTrend report, a macro-economic indicator based on aggregate same store sales activity in the First Data Point of Sale Network.

Some of the most significant findings include slowed spending in August; spending growth in August was 0.4 per cent, a significant decrease from last month’s 2.2 per cent.

The slowdown was driven by decreased retail dollar volume growth and the continued drop in gasoline prices. Gas Station dollar volume growth was -15.3 per cent, a decline from last month’s -13.8 per cent, as worries of a global economic slowdown contributed to the drop.

Additionally, retail spending growth was at its slowest all year. Retail dollar volume growth was 1.2 per cent in August, a decline from last month’s 3.7 per cent, marking the slowest retail growth all year. Labor Day fell a week later than last year, which may have shifted Labor Day spending into September.

Meanwhile, spending growth in categories such as Food Services & Drinking Places and Building Material & Garden Equipment & Supply remained healthy at 5.7 per cent and 8.3 per cent, although slowed slightly from July.

News

ThetaRay launches credit risk detection model for online lending industry ThetaRay, a provider of big data analytics solutions for advanced cybersecurity, financial risk detection, and operational efficiencies, has unveiled a credit risk detection model for online lending banks.

The model helps lenders increase revenue by identifying viable loan applications that have been wrongly rejected by the banks’ automated credit risk assessments.

determined that more than 30 per cent had been excluded due to the limitation of the existing tools. The lender is now implementing the ThetaRay model on a long-term basis in order to increase its approved loan rates, grow its client base and boost revenues.

To send press announcements, please direct them to Karen Treml, Editor, at karen@canadianequipmentfinance.com

The problem Credit scoring models are used during the loan approval process to predict the likelihood of borrower delinquency. Online lending banks receive thousands of loan applications per day, and use automated assessments to approve or reject them in real time. Because these models are based on limited applicant data and subject to strict discretionary measures to keep risk levels manageable, a significant number of applications are usually rejected.

The solution When integrated into a bank’s automated assessment, ThetaRay’s multi-source hyper-dimensional detection system automatically identifies the potential customers with relatively low credit risk while collecting and analyzing additional data on each rejected loan applicant, including credit score, historical loan performance and personal information from government databases. These insights empower lenders to convert many rejected loan requests into approved loans while maintaining acceptable risk levels.

“This system is based on the same sophisticated algorithms that enable our fraud detection solution to so effectively catch the bad guys; they are now proving equally adept at identifying the good guys,” said ThetaRay CEO Mark Gazit. “We have built our reputation on our ability to produce solutions detecting risks and threats that companies wish to avoid. But with our new solution, we can help them discover untapped business opportunities as well.”

ThetaRay recently tested the model with a large online lending bank. After examining massive amounts of rejected loan applications over the course of a week and a half, ThetaRay

canadianequipmentfinance.com | SEptember/October 2015 | CANADIAN EQUIPMENT FINANCE

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Digital Transaction Management in the Equipment Finance Industry

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CANADIAN EQUIPMENT FINANCE | September/October 2015 | canadianequipmentfinance.com

LEGAL REPORT

By Roxana Safranek

oday’s customers elect to do business with companies that can offer a first-rate customer experience. Customers are looking for streamlined, efficient processes and the companies who want to remain competitive need to find ways to meet these growing requirements.

One way businesses are responding to this requirement is through Digital Transaction Management (DTM). In fact, Jim Lundy of Aragon Research states, “digital transaction management is so powerful for driving business benefits that this isn’t a matter of whether enterprises will embrace it, but when.”

Lundy continues: “The most innovative and progressive organizations have already implemented DTM and are now expanding use cases beyond their initial deployments. We predict DTM will be a strategic imperative for the vast majority of organizations large and small.”

DTM allows companies to better manage documents and informationdriven transactions in a more efficient, accurate and secure fashion. To implement a successful DTM requires more than offering secure, trustworthy electronic signing capabilities, though.

Businesses must also be able to implement a digital documentation process that includes secure repositories and vaulting, necessary data, and streamlined processes that add efficiency and visibility.

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Keys to implementing a successful DTM system Since electronic data is at the centre of a successful DTM system, companies need to eliminate paper and the manual input of data. This can be tricky because companies receive information in various formats and mediums. To address this, many companies are turning to Enterprise Content Management systems.

Companies also need to incorporate workflow automation as a way to streamline their end-to-end processes.

These workflows need to go beyond the signing process to include all business processes. By automating processes and digitalizing data, companies can

connect disparate databases into a single repository, providing transparency into the engagement lifecycle of a customer.

This empowers companies to respond to customers more quickly and provide a more meaningful experience.

Another important piece in the DTM process is the electronic management of documents. Creating, managing, and delivering documents in an electronic format provides an opportunity to offer interactive, personalized forms and to have better control of documentation and compliance concerns. When executed correctly, this area offers a tremendous upside for the equipment finance industry.

In the equipment finance industry, many documents are considered a financial asset and actually create a revenue stream for the company. Because of their value, these documents have to be closely tracked post execution and have specific requirements that must be met. For example, there has to be a defined authoritative copy. The authoritative copy is a verifiable version of the contract that all vested parties can agree represents the value of the deal. Another requirement is the ability to secure, manage and transfer the authoritative copy to protect the value of the digital assets, and provide a detailed audit trail that tracks the activity and the ownership of the authoritative copy.

The DTM process should also include robust vaulting capabilities that keep the authoritative copy of the document in a safe, controlled environment. At a minimum, the vaulting service should offer encryption, a tamper seal, secure storage, and an audit trail. Auditors will be looking for an authenticated authoritative copy, a guarantee the document has not been altered, reports detailing anyone that has been granted access to the document and anyone who has accessed the document, and verification of the final disposition of the document. In addition, if financial assets are transferable, the DTM process needs to meet the standards outlined in the Uniform Electronic Transaction Act (UETA), the Federal Electronic Signatures in Global and National Commerce Act (ESIGN) and the

Uniform Commercial Code (UCC).

An end-to-end DTM process will also include transaction services. These services help manage the authoritative copy. They include the ability to export the original assets to paper, print a copy of the document that is acceptable for presentation in court, manage privileges amongst all stakeholders involved in post signature activities of the document, collateralize assets, and Transfer of Location of Electronic Contracts.

The benefits of implementation Equipment finance companies that implement a DTM system will add operational efficiencies, lower operating costs, and reduce errors that in turn will help sales meet their objectives, while offering a superior customer experience.

Some of the benefits equipment finance companies experience include: ◉◉ Faster turnaround time on documents — automation and workflow controls eliminate missing information and the need to chase down contracts, resulting in faster turnaround times that have led to higher conversion rates; ◉◉ Faster credit decisioning and time to funding; ◉◉ The ability to offer a better customer experience, leading to an increase in repeat business; ◉◉ Increased capacity per employee, allowing for growth without a headcount increase; and ◉◉ Improved operating margins by eliminating shipping costs and streamlining processes.

Ultimately, DTM provides multiple options for executing contract activity, including transfers, sales, securitizations, syndications, participations, etc., with the originals housed in a UCC Article9 – 1-5 compliant vault. This provides the organization the peace of mind in knowing original contracts are safe, secure and protected over the entire lifecycle of the transaction.

Roxana Safranek is Director of Marketing for LeaseTeam, Inc. She has more than 18 years of marketing and business development experience with 14 of those years being in the software industry. Roxana is responsible for marketing, communication, and business development for LeaseTeam.

LeaseTeam provides solutions that flexibly manage the entire lifecycle of equipment finance contracts, for an array of business types, portfolio and ticket sizes, and financial products (www.leaseteam.com).

canadianequipmentfinance.com | SEptember/October 2015 | CANADIAN EQUIPMENT FINANCE

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LEGAL REPORT

Bankruptcy and Non-Bank Financial Institutions Canadian bankruptcy considerations in factoring transactions

By Lisa S. Corne, Mark S. Redinger, Kim Asnani

actoring transactions, in which a buyer purchases outright or acquires an interest in a seller’s accounts receivable, are becoming increasingly common. Initially, the buyer must determine whether the transaction is to be recourse or non-recourse to the seller. In other words, can the buyer seek a remedy against the seller if the receivable is bad, or doesn’t pay, or does the buyer bear the entire credit risk of the deal, irrespective of whether the receivable is good? Both recourse and non-recourse transactions raise a handful of interesting considerations in bankruptcy situations. What happens if the seller in a factoring transaction goes

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bankrupt? Can creditors of the seller look to the third party purchaser for recovery?

Factors are at risk under the Bankruptcy and Insolvency Act (BIA) and the Companies’ Creditors Arrangement Act (CCAA), which allow for such recovery in certain circumstances.

Canadian legislation empowers courts to declare a ‘transfer-at-undervalue’ void during specific ‘look-back periods’. As well, a trustee in bankruptcy may apply to a court for payment by a transferee of the difference between the actual consideration given and the fair market value of the assets transferred.

A transfer-at-undervalue is defined as a disposition of property for which no consideration is received or for which the

CANADIAN EQUIPMENT FINANCE | September/October 2015 | canadianequipmentfinance.com

consideration received is conspicuously less than the fair market value.

Where a transfer-at-undervalue occurs between parties dealing at arm’s length, a transfer may be set aside if (1) it occurred in the year prior to the date of the initial bankruptcy; (2) the debtor was insolvent at the time or rendered insolvent by it; and (3) the debtor intended to defraud, defeat or delay a creditor.

Where a transfer-at-undervalue occurs between parties not dealing at arm’s length, a transfer may be set aside if (1) the transfer occurred in the 12 months prior to the initial bankruptcy event; or (2) the transfer occurred within the five years prior to the initial bankruptcy event and the debtor was: (i) insolvent at

LEGAL REPORT the time, or rendered insolvent by it and (ii) the debtor intended to defraud, defeat or delay a creditor.

What does ‘conspicuously less’ mean?

The phrase ‘conspicuously less’ is not defined in either the BIA or the CCAA. Canadian jurisprudence, while providing some guidance, does not explicitly set out the percentage at which a discount will render the consideration received to be ‘conspicuously less’ than fair market value.

The Supreme Court of Canada in Peoples Department Stores Inc. (Trustee of) v. Wise, commenting on s.100 of the BIA as it was written at the time, stated that the ‘conspicuously less’ test is not “whether the [difference] is conspicuous to the parties at the time of the transaction, but whether it is conspicuous to the court having regard to all the relevant factors.” It went on to say that “there is no particular percentage that definitively sets the threshold for a conspicuous difference, [but that] the percentage difference is a factor [to be taken into consideration].”

In that case, the SCC held that a disparity of slightly more than six per cent between the fair-market value and the consideration received by the bankrupt corporation did not constitute a conspicuous difference within the meaning of the BIA. Similarly, in Re Mendenhall, which involved a disparity of 6.67 per cent, the Ontario Superior Court (Bankruptcy and Insolvency Division) held that the conspicuous difference threshold was not met.

Canadian courts have, in some cases, held discounts to be conspicuous. The British Columbia Court of Appeal in Skalbania (Trustee of) v. Wedgewood Village Estates Ltd. held that a discount of 17.5 per cent resulted in a conspicuous difference. The Court explained that a decision as to whether a difference is conspicuous should be made in light of an examination of the particular circumstances in the case. It went on the say that the word ‘conspicuous’ should be considered in its plain and ordinary meaning, namely, “plainly evident, attracting notice; hence eminent, remarkable, [or] noteworthy.” In 2013,

the Alberta Court of Queen’s Bench in Re Mihalich held that discounts of 55 per cent, 71 per cent, 77 per cent and 82 per cent on the transfer of certain chattels between common law spouses did result in a conspicuous discount.

What should factors be aware of?

Due diligence of potential sellers and transactions should result in a detailed understanding of a seller’s corporate structure and who is originating the receivable.

A buyer’s underwriting team needs to be sensitive to the seller’s financial condition and its corporate-related parties, other creditors and the seller’s overall ability to pay its obligations as they fall due. In particular, buyers should be aware of the definition of “insolvency” as it may be applied to a seller or its related parties. Buyers should not merely rely on the business condition of the seller, where affiliates and related parties may affect any potential claw back.

Finally, buyers of accounts receivable dealing with Canadian businesses should avoid discounts that are disproportionate to the fair-market value of the receivables being acquired, or market practice generally. To avoid negative consequences, factors should use a discount rate that is generally accepted as standard practice in the industry.

This client alert is published by Dickinson Wright LLP to inform our clients and friends of important developments in the field of bankruptcy law. The content is informational only and does not constitute legal or professional advice.

We encourage you to consult a Dickinson Wright lawyer if you have specific questions or concerns relating to any of the topics covered in here.

Mark S. Redinger is a partner in Dickinson Wright’s Toronto Office and can be reached at 416.646.4601 or mredinger@dickinsonwright.com

Lisa S. Corne is a partner in Dickinson Wright’s Toronto Office and can be reached at 416.646.4608 or lcorne@dickinsonwright.com

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Please contact Jason Bonneville • jason@advantleasing.com 905-335-3301 ext 224 • www.advantleasing.com canadianequipmentfinance.com | SEptember/October 2015 | CANADIAN EQUIPMENT FINANCE

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LEGAL REPORT

Navigating Transactions: Understanding the Legalities

By Stan Prokop

ot so fast Bill! I’m referring to William Shakespeare in Henry VI, wherein Dick the Butcher utters his famous line: “The first thing we do, let’s kill all the lawyers!”

With apologies to Dick, we maintain that whether you’re the lessee or a lessor, borrower or lender, the legal implications around successful leasing and financing can make or break a sound financing strategy. The ability to understand legalities around the essential elements of lease and finance documents is key to

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success for both borrowers and lenders.

The various financing alternatives all require their own specific actions, and the ability to interpret the importance of the issues and the ramifications is critical. As such, borrowers are encouraged to solicit experienced help on lease and finance transactions that will generate real value in their financing endeavors.

Problems can and do arise For financial executives and companies that only require minimal or occasional financing, it can be hard for them to comprehend that problems can arise.

CANADIAN EQUIPMENT FINANCE | September/October 2015 | canadianequipmentfinance.com

But, when they do, the problems typically revolve around the actual lease or deal structure and the implications that documentation brings. While the role of legal is to provide interpretation and direction in those issues, it is naturally incumbent on the borrower to ensure that the firm’s business goals and strategies are clear.

It is interesting to note that borrowers often view the role of a legal advisor as a potential ‘deal breaker’ in lease financing and other corporate financing endeavors.

That mentality has the ability to derail transactions which otherwise could be completed, if only for the reason that

LEGAL REPORT company management is uncomfortable in discussing the various issues around the finance goal and strategy of the business.

So how does the legal advisor create a sense of ‘deal making’ versus ‘deal breaking’? As well as strong and diplomatic negotiating skills, the ability to balance the interests of the borrower and lender is important. The time to ‘close’ and/or ‘fund’ is often top of mind with lessees and other corporate borrowers and any last minute change in terms or other external conditions can generate a high level of stress for borrowers.

If you’re looking for a guaranteed way to consume time and costs as a lessee, we suggest asking your lawyer to renegotiate the ‘hell and high water’ provision in capital leases with your lessor! The reality is that not everything is negotiable.

In many cases, firms in the SME sector do not have onsite internal counsel and must, therefore, solicit and depend on legal advice that is considered ‘value added’ when it comes to time, cost, and specific knowledge of financing law.

Renegotiation The bane of any borrower is when a massive renegotiation of financing terms creates a longer time to close that brings both costs and emotions to an unacceptable level. Many lessees and other corporate borrowers make a key mistake when they utilize a firm

or lawyer that specializes in property or estate issues as an example. While they might be the right counsel for those matters, corporate finance issues demand players that don’t require time to ‘get up to speed’ in key legal issues. The potential result can be failed closings or deals that portend future problems.

It is safe to say that from the borrower’s perspective their ability to balance legal financing advice within their own industry dynamics helps to lead to financing success.

The actual cost of legal financing advice is often top of mind with borrowers. Successful borrowers with ongoing legal needs are encouraged to manage and understand their costs upfront and on an ongoing basis.

While ‘mega’ transactions in leasing and finance often come with back end rewards to legal partners, this doesn’t cover the thousands of transactions in the SME marketplace that occur daily that still require some level of informed counsel. Simply speaking getting paid ‘by the pound’ for lease or loan documentation no longer works.

When it comes to ‘main street’ financing transactions there is no question that, for example in equipment financing, many transactions require little or no external legal advice. The complexity and documentation in these market segments are often very manageable by both the borrower and the lender/lessor. Standard industry forms up to and including master leases

are the selling point of the lease finance industry.

Mid-market and large transactions require a solid understanding of such issues as payment and lease terms, representations, warranties, and those dreaded ‘covenants’.

It should be noted that if a borrower or lender is subject to some form of public disclosure, legal issues will always come with a bit more of burden to the firm.

The rise of online finance in lease and loan offerings has only tended to make paperwork/documentation more simple, and the smaller size of these transactions eliminates those pounds of paper we associate with large complex financings that require a large amount of change and negotiation.

Bottom line is, I think Shakespeare misspoke when he alleged that all lawyers do is to “shuffle parchments back and forth.” In today’s highly competitive and robust finance environment speed in completing transactions is the cornerstone for both borrowers and lenders alike. Time to close with minimum costs and maximum fast closing is often a key benchmark for borrowers and lenders alike.

Stan Prokop is principal at 7 Park Avenue Financial and specializes in business financing for Canadian firms, such as working capital, cash flow, asset based financing, equipment leasing, franchise finance and Canadian tax credit finance. Founded in 2004, the company has completed in excess of $90 million of financing for Canadian corporations. www.7parkavenuefinancial.com

Creating an optimized branch of the future.

During this interactive discussion you will gain insight into creating a more efficient, optimized operating model for your “Branch of the Future”.

Financial Operations invites you to a Free Breakfast Briefing Oct 29, 2015 • 7:30-10am

Twenty Toronto Street Conference Centre, 20 Toronto Street, Toronto

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You must be registered in advance to attend.

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15

CREDIT AND COLLECTIONS

Jennifer O’Neill

Analytics for Credit and Collections: New Strategies for 2016 and Beyond

By David M. Wallace

he business of lending has changed a lot since its depiction in the classic movie It’s a Wonderful Life. The evil Mr. Potter evaluates main character George Bailey’s request for a loan using the Five Cs of credit (character, capacity, capital, collateral and conditions) and turns him down because he lacks sufficient collateral. Instead, lending today is a reflection of the digitization of financial services. Increasing numbers of digitalonly customers who research and apply for loans online may never be seen in person by lending officers or finance departments.

The business of lending itself, once primarily owned by banks, has also become fragmented with new digitalonly FinTech (financial technology)

T

16

firms, often called alternative lenders, which seek to remake both consumer and business lending into online-only, peer-to-peer businesses. In one recent survey of global credit experts, 75 per cent of respondents reported that alternative lenders pose a real threat to banks and traditional lenders. In the same survey, 73 per cent voiced concern over the lending methods being used by alternative lenders.1 What should banks and other lenders focus on as they move into 2016?

Credit scoring: Which comes first, analytics or data?

Credit scoring is the set of decision models and underlying techniques that aid banks and other lenders in granting credit. These models, which rely on predictive techniques like logistic regression and decision trees, describe who gets credit, how much credit they

CANADIAN EQUIPMENT FINANCE | September/October 2015 | canadianequipmentfinance.com

should receive, and the likelihood loans will be repaid. Credit scoring models use data to score borrowers based on the credit policies determined by banks and other lenders. The data includes loan application information, credit bureau data, and internal transactional data from credit cards, mortgages and deposit accounts.

Banks and other lenders often lack a complete picture and understanding of a customer’s creditworthiness by relying on traditional credit scoring tools with long development and deployment cycles.

Modern credit scoring software can reduce these cycles through automated development tools, prebuilt end-to-end workflows, model management and deployment directly into data warehouse appliances.

One large South American bank using modern credit scoring software reduced modeling dataset development time from

2016 ISSUES & EDITORIAL THEMES Issue  January-February Industry Report

Kick off the year with our Industry Report, which provides insights on the state of the leasing and financing market in Canada and across North America. We feature contributions from industry and association leaders who provide exclusive, personal viewpoints that our readers will use to shape their planning and strategy for 2015 and beyond. EDITORIAL DEADLINE: February 12th

Issue  March-April Lending Report

The Lending Report is where our readers will get the word on the availability of capital from each of the significant sectors which provide funding—leasing companies, bank subsidiaries, credit unions, captives, third party and independent lenders. EDITORIAL DEADLINE: April 1st

Issue  May-June Technology Report

There’s two ways that our Technology Report helps our readers manage their key software, systems and hardware decisions. We look at a range of key IT developments which companies are managing while taking the plunge to upgrade, enhance and expand their IT operations. Readers will read exclusive articles that show the way to best practices in cloud computing, analytics, and more. EDITORIAL DEADLINE: May 13th

Issue  July-August Services Report

This issue is our Services Report, which looks at Remarketing, Aftermarket, Appraisals and Auctions. Readers will learn what they need to know to take full advantage of the offerings and opportunities in these key services.

We feature contributions from the leaders of each area to provide advice on strategy, tactics and processes.

EDITORIAL DEADLINE: July 29th

Issue  September-October Legal Report

Our Legal Report, which provides an extensive report on the legislation, statutes, law and ongoing government changes in Canada and across North America. We feature contributions from a wide range of legal experts who provide exclusive, fully vetted opinions that our readers will use to shape their deals, contracts, agreements and structure for 2015 and beyond. EDITORIAL DEADLINE: August 26th

Issue  November-December Market Report

With a new year on the horizon, our Market Report includes our convention issue and detailed industry forecasts. The issue focuses on hard decisions affecting our readers’ ability to fund their projects. Also features a series of industry leader interviews in a one-on-one format. EDITORIAL DEADLINE: October 7th

Plus…

Each issue includes Regular Editorial Columns which look at funding sources …business management…real world case studies…vertical market insights …technological developments…major news stories…events and more.

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CREDIT AND COLLECTIONS 75 days to under one hour, and total model deployment time from 18 months to three months for a customer base of more than 100 million accounts.

Credit scoring data: What’s new?

Using unstructured external data from social networking platforms and modeling that data using text analytics can predict character (one of the five Cs). Analyzing the customer’s number of connections, memberships in professional organizations and related data points may provide improved predictions about creditworthiness as well as potential for fraud.

Unstructured data can be analyzed by modern text mining software, with the results incorporated into credit scoring models. An often-cited McKinsey study identified external data sources from telecom providers, retailers and wholesale suppliers as valuable proxies for judging a customer’s ability and willingness to repay and for confirming identity and income. McKinsey also highlighted the value of the financial services providers’ own, often unused, internal data. Their report stated that “many large banks still do not take into account information as simple as the balances and transaction patterns of their own customers’ checking and savings accounts when assessing creditworthiness.”2

Credit scoring modeling: What’s new?

Interest in machine learning, a computer-intensive method of data analysis that automates model building, has risen recently for credit scoring and other areas of financial services. Part of the interest comes from the availability of increased and cost-effective computing power along with large amounts of available memory. Industry research is focused on the use of neural networks, decision trees and random forest techniques for credit scoring.

Today, most production users of credit scoring software use logistic regression techniques because they deliver excellent results and are well understood. Since credit scoring models are typically “regulated” models, banks and other 18

lenders must be able to explain, validate efficacy and defend usage to regulatory authorities. Machine learning models can become so complex that modeling staff cannot explain “why the model does what it does” to regulators. Modern credit scoring software provides a wide choice of predictive modeling techniques, including machine learning, so that firms can identify the techniques with the highest “lift” (predictive power) and then determine what technique should be used in production scoring.

Real-time decisioning The use of credit scoring models began decades ago when computing was almost exclusively batch processing. Today, banks want to accelerate the opportunity for profitable lending revenue through real-time credit authorization decisioning for many types of loans, including credit cards, personal and automobile loans. Modern credit scoring software can integrate with real-time decision management tools to provide this capability.

An eastern European bank interested in growing its small-amount credit business by focusing on lower-income segments combined modern credit scoring, real-time decisioning and marketing automation software to increase loans by 25 per cent and achieve ROI of over 175 per cent.

Collections It may seem strange to view collections as a competitive activity. However, all borrowers have a personal payments hierarchy for determining which bills to pay first in times of financial stress. Collections can be thought of as competing for “share of wallet,” similar to the sale of new financial products and services. A best practice for collections is to start as early as possible in the delinquency cycle, given the likelihood of recovery will decrease over time.

Collections scoring models can help identify the likelihood for delinquent customers to “cure” across various communications methods. These methods could include contact centre phone calls, automated IVR, emails, SMS messages or “watchful waiting”

CANADIAN EQUIPMENT FINANCE | September/October 2015 | canadianequipmentfinance.com

(self-cure) by the next billing cycle.

Banks have to balance the use of these communications methods with capacity constraints and costs. Mathematical optimization, which seeks to maximize or minimize an objective while considering real-world constraints, is an excellent method to obtain the “best” answer to the collections problem. All collections customers and their propensity to cure using various communications channels can be analyzed together with capacity and cost constraints to arrive at the “best” or optimal communication channel for each customer.

A large Asia Pacific bank used modern optimization software to significantly increase the cure rate (reducing outstanding delinquent debt), delivering a 300 per cent ROI and a payback on their software investment in less than six months.

Wrapping up Modern credit scoring software lets banks speed up the model development and deployment cycle, leading to faster credit quality assessment; the end result of which is increased revenue from lending and reduced credit risk.

New types and sources of data can be incorporated into the scoring process, and new modeling techniques are also available. Credit decisioning can now be real-time, and collections can increase while minimizing costs. Implemented together, these new capabilities can modernize a financial institution’s more traditional credit and collection processes to compete with the flashy new tactics from FinTechs. As 2016 begins, consider how a modernized credit and collections program can garner more customers, more revenue and more profits.

David M. Wallace is global financial services marketing manager for SAS with responsibility for defining industry strategy for banking and capital markets. He has over 30 years’ experience in the application of information technology to solve client needs, including a focus on financial services for over 20 years. Wallace holds a Bachelor of Science in economics from the University of North Carolina Wilmington and a MBA from East Carolina University. He is a member of GARP, PRMIA, and SIFMA Compliance & Legal Society, and is also the chair of BAI’s Solution Provider Executive Council.

1 University of Edinburgh Business School, Biennial Credit Risk and Credit Scoring Conference, survey of 200 delegates from 40 countries, August 2015.

2 McKinsey and Company, New Credit-Risk Models for the Unbanked, April 2013

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EVENTS

WHERE TO GO. WHAT TO SEE. Find out more about the conferences, exhibitions, seminars and meetings in your industry

2015 September 16-18 Equipment Leasing & Finance Association ELFA Operations & Technology Conference Philadelphia, PA www.elfaonline.org

September 16-18 Equipment Leasing & Finance Association Lease & Finance Accountants Conference Philadelphia, PA www.elfaonline.org

September 16-18 Canadian Finance & Leasing Association CFLA Annual Conference 2015 Gatineau, QC www.cfla-acfl.ca

September 26-29 Sibos Annual Conference 2016 Geneva, Switzerland www.sibos.com

September TBA

October TBA

March 2-4

Members Meeting Smart Card Alliance Phoenix, AZ www.smartcardalliance.org

National Equipment Finance Association NEFA 2016 National Equipment Finance Summit New Orleans, LA www.nefassociation.org

October TBA Smartcard Alliance NFC Solutions Summit 2015 Phoenix, AZ www.smartcardalliance.org

October TBA Association of Financial Professionals AFP Annual Conference 2016 Orlando, FL www.afponline.org

November TBA Comexposium CARTES & Identification Exhibition 2016 Paris, FR www.cartes.com

2016 February 21-22

March 6-8 Equipment Leasing & Finance Association ELFA Executive Roundtable Coral Gables, FL www.elfaonline.org

March 22 Equipment Leasing & Finance Association 14th Annual IMN/ELFA Investors Conference New York, NY www.elfaonline.org

March 29-31 20TH Annual AFSA Vehicle Finance Conference & Exposition Las Vegas, NV www.vehiclefinanceconference.com

Equipment Leasing & Finance Association ELFA Equipment Management Conference Scottsdale, AZ www.elfaonline.org

April 13-16

IFO Canada Annual Canadian Financial Operations Symposium Vancouver, BC www.financialops.org/canada2015

October 13-15

February 28-March 2

BAI BAI Retail Delivery Conference 2016 Las Vegas, NV www.BAI.org

IMN (Information Management Network) ABS Vegas 2015 Last Vegas, NV www.imn.org

Equipment Leasing & Finance Association National Funding Conference Chicago, IL www.elfaonline.org

October 25-27 Equipment Leasing & Finance Association ELFA 54rd Annual Convention San Antonio, TX www.elfaonline.org

March TBA National Heavy Equipment Show (NHES) Toronto, ON www.nhes.ca

Factoring Association 22nd Annual Factoring Conference Scottsdale, AZ www.factoring.org

April 19-21

April 28-30 Nat’l Assoc of Equip Leasing Brokers NAELB 2016 Annual Conference Las Vegas, NV www.naelb.org

Visit us online www.canadianequipmentfinance.com/events.html 20

CANADIAN EQUIPMENT FINANCE | September/October 2015 | canadianequipmentfinance.com

ECONOMICS

Divergence Between the U.S. and Canadian Economies

By John Landry

s Canadian treasurers work to navigate the choppy waters of today’s economy, their outlook and plans are defined by many variables from the core strength of their firm’s finances to risk tolerance and the desire to pursue growth opportunities. One important external variable that is not easily understood is the play between the Canadian and U.S. economies.

Underlying economic activity and outlook are core considerations for Canadian treasurers. But an additional lens can be applied which influences the resources available to the corporate treasury as well as the tools treasurers might use to achieve their goals. That lens is the potential for economic divergence between Canada and the United States. With ~75% of Canadian exports bound for the U.S. in 2014 according to Export Development Canada, relativity, rather than absolute economic measures, may be the most important to a treasurer.

Currently, there is no clear consensus on Canada’s economic prospects relative to those of the U.S. One scenario sees the U.S. and Canadian economies diverging across a number of measures, particularly GDP, inflation, and manufacturing input costs. The magnitude and type of that divergence will determine the impact of the suggested considerations below.

“The outlook for the Canadian economy remains poor given a variety of externally and domestically focused downside risks,” says Dana Peterson,

A

an economist with Citi Research in New York. “We look for the economy to expand in a range of ¾–1¾ per cent yearon-year over the next few years instead of a range of 1-2 per cent.”

This outlook differs from the U.S., where a recent employment report “reestablished that the labor market is improving on a trend basis and takes the Federal Reserve (“the Fed”) a giant step closer to the first rate hike,” says Peterson.

Trying to navigate relative economic factors while in the dark on exactly what the future will hold is a challenge.

However, by undertaking an analysis of a treasurer’s organization, it is possible to determine where specific challenges and opportunities lie. Whether the U.S. economy outpaces the Canadian economy on its continued growth trajectory, or if both economies grow or contract with differing slopes, the strategy for being prepared is the same.

The dynamics at play Core revenues & expenses

A relatively accelerating U.S. economy should be broadly positive for Canadian companies. Certainly there are exceptions, but the majority of Canadian manufacturing and services companies will see a marginal improvement from increased demand driven by U.S. growth.

For many Canadian treasurers, an improving U.S. economy will likely mean an enhancement in revenues through increased demand, directly or indirectly.

However this is not the whole story. An acceleration in the U.S. economy may see a continued relative devaluation in the Canadian dollar. That again may accelerate revenues to a Canadian

exporter supporting a rosy outlook for those companies. Despite the debate about whether the weaker Canadian dollar (CAD) has had the expected positive impact on exporters in 2015, most economic models predict a benefit.

Treasurers also need to anticipate the same impacts on their cost of inputs.

As Canadian firms source almost half of their raw and intermediate materials from the U.S., a rising U.S. dollar (USD) will also increase their costs and put pressure on profit margins. The balance between potentially enhanced revenues and a firm’s exposure to a stronger U.S. dollar can be complex, but it is important to understand.

The same pressures apply all the way down companies’ supply chains.

Suppliers are often a homogenous group and the viability of important partners may be highlighted by a challenging economic environment. Partners’ U.S. vs. Canada sales, revenue, working capital and expense mix may differ from that of your firm, making it even more important to understand your supply chain’s financial health in relatively challenging economic times. The same thorough understanding should be applied to a firm’s client base.

Interest rates

The impact of a potentially widening currency valuation is linked to a potential widening of interest rates between the U.S. and Canada. It is important to understand how one drives the other and to anticipate the stresses or opportunities that might bring about.

The Fed raising rates may further strengthen the USD relative to the CAD.

canadianequipmentfinance.com | SEptember/October 2015 | CANADIAN EQUIPMENT FINANCE

21

ECONOMICS The widening of the measures in Canada vs. the U.S. is most important to this part of the discussion. The dynamics surrounding currency valuations on both sides of the border will likely impact customers’ and companies’ supply chains and both merit consideration when planning and executing treasury functions.

What can be done?

These unique and dynamic variables suggest a call to action, specifically regarding the possibility the U.S. and Canadian economies do in fact diverge. Without a crystal ball, some thoughtfulness and detailed planning for this possibility is merited. There are specific tools within the treasurer’s tactical scope separate from a firm’s fundamental capitalization and debt structure that can help to build an understanding of a firm’s risks and opportunities in this diverging economic scenario.

Consider the following questions when undertaking this analysis (see chart).

The probability that the U.S. and Canadian economies grow or contract at differing rates is a likely scenario in 2016. While there are additional considerations, hopefully this outline has provided some clarity on the dynamics at play and what steps Canadian treasurers can take to prepare. In this situation as with all others, having a trusted banking partner who can bring experience, share trends and support your planning process

with research, analysis and tools is an invaluable asset towards ensuring the calmest seas possible in today’s economic climate.

John Landry is the Head of Citi’s Treasury and Trade Solutions business in Canada.

Understand Core USD/CAD Revenue and Expense Volatility

Planning for Interest Rate Divergence

Banking Infrastructure

◉◉ What proportion of your sales are directly or indirectly into the U.S.?

◉◉ Can you easily divert excess funds to USD and CAD investments?

Can you readily switch between the two?

◉◉ Does your banking partner offer you ready access and transparency across USD, CAD and other currencies driving your firms’ revenues and expenses?

◉◉ What are your currency payment terms for those U.S. sales? Can you designate USD or CAD? ◉◉ How much of your inputs are directly or indirectly linked to the U.S.?

◉◉ If your working capital plan depends on shortterm borrowing, do you have access to both currencies? Can you readily switch between the two currencies?

◉◉ What are your currency payment terms for your suppliers? Can you designate CAD? Can your firm adjust those terms or switch your supplier mix? ◉◉ Do you have a currency hedging strategy and if so, does it contemplate those potential changing revenue/expense mixes in this scenario?

◉◉ Do you have a consolidated view of your cash forecasting across your currencies? ◉◉ Does your banking partner allow you direct access to payment initiation, investment booking and receivables reconciliation across currencies? ◉◉ Have you investigated cross-currency pooling, sweeping or target balancing to optimize your positions?

Is Your Contact Centre Mature Enough for Today’s Customer?

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CANADIAN EQUIPMENT FINANCE | September/October 2015 | canadianequipmentfinance.com

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