Matthijs: So thanks, everyone, for joining. We're just seeing the Zoom call just opened so we're going to give everyone about two minutes to join the call before we start the formal seminar series. We're just going to get started in a couple of minutes. Just roughly at two minutes after 12:00 we're going to start the formal presentation.
I'm just going to start off with some introductory remarks and then we'll begin the formal session with our two guests. So thank you so much for joining our next installment of our Practical Legal Essentials for Commercial Bankers series. This has been going on now for about two years. I am Matthijs van Gaalen, a banking and financing lawyer at Gowling WGL and my practice is unique in that we aggressively use technology and effective staffing to advance financing transactions for banks. This seminar series follows a number of other seminars that we've put on, including Security 101, Real Estate Lending, Financing Real Estate Acquisitions, Financing Share Purchase and Asset Acquisitions and Cross-Border Lending. But today we're going to turn the page to when deals don't exactly go as planned. Long before a loan is given to the special loans group, bankers who once were asked to bring on the transactions and then manage the loan, are now confronted with events of default and possible gaps in reporting and they need to navigate that all with a mind to help the borrower of this troubled financial situation. When a loan is moved to the special accounts group, the approach towards administration and collection will vary greatly between institutions. Some banks will aggressively seek to immediately collect as much as possible while others may look to promote a turnaround. No matter the approach, bankers must frequently contend with events of default, reservation of rights letters, waivers, forbearance agreements and restructurings, all with a mind to not aggravate the lender's and the borrower's troubled situation. With a view to helping the bankers prepare for the tough conversations around such events this webinar will cover several key topics including, identifying when a company is in trouble, key terminology, the consequences of failure to issue waiver of rights letters, gaps in reporting, when and what it looks like to transfer a loan to special loans and how does a bank business turn things around.
To chat through these really relevant topics I'm joined by two guests. First, David Cohen. David Cohen is the National Leader of Gowling's Financial Services group in Canada and is a senior partner in our Toronto office. He practices in the areas of corporate and commercial financing and restructuring and insolvency, in both the domestic and the cross-border context. David is also the head of the firm's Distressed M&A practice and he's consistently recognized by Chambers Global as a world's leading lawyer for business in the Chambers Canada. David is both the past Global Chair and past Global President of the Turnaround Management Association. My second guest is Scott Sinclair. Scott Sinclair is a very seasoned turnaround investor, advisor, interim executive, CRO and is the owner and President of Sinclair Range and its portfolio of companies including Roofers World, Novanni Stainless, Ekip Innovations, Interim Finance and Globex Extraction. Scott has over 30 years of experience helping troubled companies in over 27 countries and has worked in all areas of investment and merchant banking and has led corporate finance transactions including, financing, mergers, acquisitions, divestitures and informal and formal restructurings exceeding $25 billion dollars in value. Scott is the founder and the host of the popular podcast, The Winning Momentum. This can be found everywhere. We're going to put both David and Scott's contact information in the chat. So thank you, everyone, for joining us. Just one housekeeping note. This is a webinar format so you can submit your questions, as they come up, in the chat and I'll try to insert them into the conversations, or if we have time we'll address them at the very end. But to start things off, let me start with a question to Scott. When is a company in trouble?
Scott: Well first, thank you very much to the Gowling team for having me here today and for organizing this terrific event. I'm excited for our discussion today and, Matthijs, thank you for asking me such a difficult, open-ended question right off the bat to warm us up. You know, if you were to ask David first when is a company in trouble he might, as a proper lawyer ought to, refer to legal agreements and in those legal agreements would be covenants, and those covenants would act as triggers and that would be a sign or a direction that things are going bad, and it's time to have a conversation with your borrower. For me, as a non-legal turnaround person, it's always been a difficult question and I would actually start, if you don't mind, by talking about this backwards. When is a company, if we all agree a company is in trouble, when is it no longer in trouble? In my world that's a really difficult question I have to think about a lot. As you mentioned, I have a podcast called The Winning Momentum Podcast. The reason for that is me thinking about this exact issue. When is a business not troubled? If I stepped in as an advisor, as a CRO, as a chief restructuring officer, as an interim executive, what is success? How do I define what success is? What is the objective measure? Is there even an objective measure and is that objective measure consistent throughout the stakeholders of that company? Obviously the answer is, no. If I become president, which I have at one point in my career of a drilling company in Alberta in the middle of an oil crash, and I use insolvency, an NOI and then a sales investment solicitation process in a receivership to create a new company and to clean up the balance sheet, am I a failure? Well not according to the senior lender who benefited from that transaction and we saved the jobs and we saved the company, but if you are an unsecured creditor or a formal shareholder, you might consider that a failure. So in turnarounds, everything is fluid and you need to define your own success.
So here's a couple of things that I have learned in my 30 years of working with troubled companies. The first one, I just talked about, that you need to define your own success and declare when a turnaround is over because everybody, every stakeholder will have a different context and different definitions for when things are getting better. Right? I remember once, my very first painful lesson, David, way back in 1997 I bought a control block of TSX public company, Applied Carbon back then I believe, and it had a wholly owned USA subsidiary which was the second largest processor of graphite flake back in the day and it had a dormant mine in Northern Ontario. As a young fellow who was really on my first foray into owning a company and restructuring a company, as principal as opposed to an advisor, first bunch of unsecured creditors all sort of Northern Ontario companies and families, and I worked my butt off to pay these people as much as I thought we possibly could. Which as I recall was about 20 cents on the dollar and I worked for six months and we got them their money. We communicated well. We were honest, we had integrity, we did it on a timely basis and do you think any of those people were thankful and said, "Way to go, Scott. Thanks for jumping in and getting us that 20 cents on the dollar.", no. None of them. I was failing in their mind because their definition of success is different and that was my first painful lesson in restructuring and turnarounds. You need to define your own success.
The second thing that I learned, may be more important to your question, Matthijs, is that success is not an objective calculation. How do you know when a turnaround is over? Well I focus on direction. I focus on momentum and that's why that podcast is called The Winning Momentum Podcast and when people ask me, when my employees ask me, "What does that mean? What is winning momentum?", and I tell them it is when you wake up this morning you know that today is going to be a little bit better than yesterday. If you have that positive direction it's amazing. You attract resources. You attract financial resources and you attract human resources. People want to come work with you. People want to invest in you and to me, momentum, positive direction is everything. I don't care if I'm still losing money. I don't care if I'm still offside with my covenants. If I have a plan, and I have positive direction, I feel like I'm winning and that is when a company is no longer in trouble in my books, by my definition. So when is trouble starting? What are the red flags is what you were asking? It's the exact opposite. When do you have negative direction? Negative momentum? Because negative momentum repels resources. People start quitting. They don't want to be there. They're not doing a good job. Lenders and stakeholders don't want to support you anymore. The supplier base is not supportive. They're looking for cash in advance. They're looking for all those sorts of things. So for me it's exactly the opposite, and for me, when I step into a company it's really easy to see when culture and morale are defeated and things are going downhill. That's very easy for me. But our audience today, for the most part I think are lenders, and they don't have that same context and the ability to step into a company, and just hang out there for a week, and see what's going on. If I might, I think it's useful is, what would I do if I were a banker to see if a company was in trouble and I would do three things in particular.
I would try to understand the three to five key performance indicators, KPIs, that drive every business and I would track them religiously. Now what is a KPI in this context? If there's any investment bankers on the call, I noted that there were some financial people and accountants, you build what we would call in our business a monthly rolling financial projection. So you would have a spreadsheet and it would have your balance sheet, your income statement, your cashflow statement. It would have some historical statements on there that match your audited statements and then it would project out three to five years on a monthly basis, and if you're building those as the analyst, associate, investment banker, what you always learn 100% of the time is that the entire model boils down to three to five assumptions. There's a lot of nuance and details in every business, in every industry, in every company but it boils down to three to five assumptions to that business and to every business. You need to understand what those are and you need to also understand that you're probably not getting reporting of those. Okay? So this is going to require a discussion with your borrower and try to really understand the business. I stepped into a turnaround a few years ago in Toronto. I won't give names and numbers but this company at the EBITDA level was losing a lot of money. In the double digits. For a mid-size company it was losing at the EBITDA level in the double digits, millions of dollars. In one year we were positive, a little bit, in the millions and in year two we were back to where we ought to be, which was positive double digits EBITDA, millions of dollars, in a two year turnaround and we did that by focusing on the three key KPIs that we determined. One was direct margin to sales as a percentage which is a shortcut for me to contribution margin. Two was fill rates and if you're not from that sort of industry, a fill rate is if a customer orders some product today and your policy is to deliver that in two weeks, well you either did or you didn't deliver it within two weeks, and you can create a percentage off of that. The third was availability, working capital availability because they were in special accounts at one of the banks, and they were limited. So when they grew it actually became worse for them. So as a lender, what reporting are you getting on those three KPIs? The answer is you could track your availability, obviously, but you don't know what your direct materials to sales are because you're getting reporting on a gross margin basis, not on a variable contribution margin basis and you don't know what your fill rates are and so you really need to dive in, try to understand what's driving this business beyond the reporting that you're getting. I promise you, it's three to five key assumptions and if they start moving in the wrong direction, you have trouble. So I would do that.
I would, number two, get onsite. Get onsite if you can. Visit people there, and I know that that's not practical for some lenders and it's absolutely the operating policy of other lenders, but when you do get onsite what you get to do is you get to see the environmental factors. There's a 100% correlation between chaotic rundown environments and troubled companies. 100% correlation all of the time. If you can talk to people, not the supervisors, not the middle management, not senior management, if you can walk around and talk to the people working the machines or doing whatever is that that business does, you're going to get a real feel for the culture and motivation and the direction of that company.
The third thing I would do, and David's going to like this one, he's going to talk about it a bunch more today I bet, the third thing I would do is when you see something obvious; revenue's down 10%, we used to be making much money now we're breaking even or we're starting to lose money, I would have that discussion with my borrower, with the senior management team, and gauge their reaction to it. Do they have a plan? Do they even acknowledge that the problem exists? If they are making less money, have they changed their behaviours? Have they changed their actions? Have they cutback? If the company's making less money, are they taking less money? Are they taking responsibility for this and the key to this point is remember this; different results require different actions. Different results requires different actions and different actions require different thinking. 100% of the time. Are they willing to change what they think, to change their understanding of the situation, to change their role in the business. David, it's like that old Mark Twain quote that I love so much. It's not the things that you don't know that get you. It's the things that you know for sure that just ain't true.
David: This issue of what a banker gets to see in first instance, because of the traditional pattern of covenants in a credit agreement is a real issue, which is covenant tripwires are usually after the fact indicators of some financial stress. Right? There are other indicators that are red flags, and this is more for the bankers, and Scott, I'm going to sort of tender a list of things that actually bankers can see happening.
Scott: Yup.
David: Simple ones. Like the obvious one. A payment default or an increasing in the accounts payable list. If you're an ABL lender you're going to know what the AP list is. It's going to be part of the reporting package. Increases in the AP. Cross defaults with other lenders. So if you get notice of a default of a higher rate lower priority lender than you if you're the senior lender, those are all things that feed into that. But then there are a couple of others. Turnover in the C suite. Scott, I don't know how many times I've seen this. I know you've seen it a lot. The CFO quits. Usually if there's a problem in a company, CFOs who are in conflict with leadership in the company, with the CEO, will often not wish to compromise their professional designation and they will actually find a better job, because they are the canary in the mine. They know when there's gas that's going to kill them. They know the company is in trouble and they're already looking for a better gig, some of them. So if you see turnover in the CFO who is not then replaced, when the CEO says, "Hey, I'm going to be the CFO for a while.", to you as the banker alarm bells should be going off in the back of your head. That's a person, he or she, that is taking too much control, spreading themselves too thin and maybe deliberately trying to conceal their actual circumstance from the bank because they're afraid of the conversation with the bank.
Scott: It's more than that, David. You should think about, or don't underestimate I guess, the stress put on the controller and the CFO. They are the lightening rod. They're just not carrying the coal mine. The lightening rod. I always think a good controller in a truly troubled situation has about six months to 12 months before they're going to be done. Because they're the ones picking up the phone call with all the angry creditors. They're the ones trying to explain this to all stakeholders and be on the front lines. It's a tremendously stressful environment and that creates the turnover as well. Just in addition to what you were saying.
David: I agree. I agree. One of the first things to give in the lender/borrower relationship is reporting. Now often at the commercial lending level in any institution, reports are late it's okay. Right? Reports are late. Reports are not exactly the way they should be. Sometimes they're getting restated later because you've caught something, or they caught something, or it becomes impossible to hide something. But late reporting is another leading indicator, for me, of a problem. Actually probably a lagging indicator. By the time they're reporting late it's because they're trying to conceal something from you. I don't know if you analogize what you do at a bank as driving a vehicle, a failure to get reporting is driving like this. Okay? If you don't know what the financial circumstances in the company are, if they're withholding the reporting, or saying it's delayed maybe it's because of the chaos that Scott refers to, but that reporting default is actually a big default. It should be taken more seriously than it generally is. You'll see as we discuss later, when this moves to a more strident relationship with the borrower, the tone taken by the part of the bank or the institution, the lender, that is charged with getting the money back, is we want more information and we want a circumstantial guarantee of trustworthiness on that information. But it starts with the failure to report.
Being out of margin, there's problems with the margin certificate, you get the borrowing base and something is supposed to be excluded and it's not been properly excluded. Something's been padded. Something's been put in. In the worse case scenarios, if you've got related companies, you've got a kiting going on between the companies that inflates the receivables in a company, as an example. All of these games get played, and you have to understand, these are not necessarily bad people. These are people under stress trying to figure out how to present the rosiest picture to keep their stakeholders as happy as they possibly can. For the longest time that they can. In so doing they're doing something really simple. We call it lying. So from my perspective, too often I see the CFO resign and not get replaced, and it hamstrings a lender's ability to get proper reporting and to trust anything that's coming out of the company after that date.
Matthijs: David, either you've identified that there's a breach, or you're concerned about it. You've had this default taking place. Now the bank has to figure out what they've got to do and I think there's some key terminology that I think everyone would appreciate you chatting through with us. I'll just read off a couple that comes up regularly. Reservations of rights letters. Events of default letters. Demand letters. Waivers. Forbearance agreements. Can you just take second and share with us what all those are maybe when you'd use them? Why a bank should use them?
David: Let's just say that you're sitting at your desk and you get your latest certificate that shows that they're offside a variety of covenants. The borrower's offside a variety of covenants in your credit agreement. What do you do? I want to talk about all of this is going to be wrapped up in a concept called course of conduct. That's a legal concept. We're going to go to law school for a few people here. I apologize for that but it's part of what we do. A course of conduct is if you're document says you are to have the following covenants below these levels and it's an event of default if you don't have the following covenants. Right? At these levels. Discretionary basis as a lender, decide that you're not going to note the default, and you're not going to point out the default, and you're not going to reserve your rights, and we'll get into what that language means. You can develop something called a course of conduct defense which is if your contract says one thing but you behave a different way, because you're the big, bad financial institution and they're the little borrower, you can actually set a course of conduct that can be used to say that you modified their obligations under their agreement in some fashion. Right? Now there's lots of arguments about why that doesn't hold water but why have the argument? The point is that you start with what's your default? Is it a material default or is it one we're concerned about? Yes. Then you should probably note the default and you can actually say we're not triggering an event of default under our credit agreement, we're just notifying you that the circumstances has arisen that if not cured we would have the right to note it as an event of default. That's the softest conversation you can have. By the way, we reserve our rights to note the formal event of default and to take any proceedings that we're entitled to under our documentation with respect to protecting our interests and enforcing our rights. That's a big of a combination of a notice of default and a pre-notice of default and a reservation of rights. They sort of get mashed together a little bit.
Generally we start with a reservation of rights letter that says, these things are in default. We're not calling the default today but nonetheless we're reserving our right to call a default later. If things progress worse, and they don't solve the problem, then you actually go one step further and you say, now we're going to actually issue a formal notice of default. What that does is it triggers certain rights under your credit agreement, usually. I'm not going to go into too much detail about that but one of the rights is to charge higher interest. The default interest rate. Commercial bankers are loathe to charge a higher interest rate because they are in a customer facing, we're here to help, positive relationship but the truth is, in 30 years of doing this, you charge them more interest, they fix the default. It's a funny thing. It's a funny thing. It's a stimulus response. If you say you're in default. Your interest rates going up another 200 base points. That starts a conversation, or you can initiate the default and you reserve the right to increase the interest rate, and then start the conversation. The conversation leads to what Scott's talking about and what's so important which is getting to the KPIs. So that starts a conversation between you and the borrower but what's really going on? One of the most important qualities as a lender to have is actually empathy. You have to listen to what they're saying, and you don't take everything they say as truth, but you have to listen to what they're saying and then you have to verify it. How do you verify it? Well, in the early stage of an insolvency you just ask them whether they can share information with you. So you ask them for a report showing what their ... is. You ask them the question, what are the three things that really drive your business and how are they faring? How are you faring on those three things? You are in the early stage and
Scott: ... and you giving me more money.
David: What?
Scott: Revenue and you giving me more money.
David: Okay, well the more money doesn't come until we're convinced that an interim bulge is necessary or whatever. But yes, what is the problem? Sometimes they'll ask for a waiver of the default. Right? I'm not a big fan of waivers. Waivers are if you are supposed to hit this leverage ratio and you hit lower than that ratio, or higher than that ratio that you're supposed to hit, we're going to waive it for a period of time. What does a waiver fix? A waiver fixes nothing. All it is sweeping dirt under a rug. Right? All it is putting off until tomorrow what you could address today. I prefer, Scott prefers, most people in our turnaround industry prefer, a plan. I'm not going to waive your default. I will temporarily reduce the covenant, or relax the covenant, and then I will provide a slow step-up back to normal based on a plan. Isn't that better than a waiver? Scott, what do you think? You love waivers as a debtor advisor but don't you want the plan and don't you want people to actually perform back to? And you might not even be measuring the right thing. It might be cashflow.
Scott: I think the most important question in a troubled business when they come to a bank, or they've been summoned to a bank, and here's our issue. You have to ask why now? What is going to change and why now? It needs to be really specific and it needs to be done. Personally, I wouldn't be waiving anything until you have an answer to that question, because the idea that the big contract that was supposed to come in six months ago will be coming in every week, any now and that will create a receivable or interim draw, and it's going to bring my borrowing base back on side, you have to answer the question, why now? What's changing? Something has to change. Different results need different actions and therefore you need different thinking? What is going to change or why is it going to change right now? To me, a waiver that lacks a plan and answers the question, why now, is a lost opportunity.
David: Right.
Scott: If I'm on the lending side.
David: Every trigger is an opportunity for a conversation and an exploration of the underlying issue. Don't miss the opportunity. If you take nothing else from today's presentation, that single piece of advice will save you grief over your entire career. No question. Forbearance agreements, this is just a terminology summary for you guys A forbearance agreement is basically a loan agreement. Amendment. It's just an amendment which relaxes covenants, gives them some time to build a plan. Maybe depending on the circumstances it can include selling a division of the company to raise capital. It could be a plan to replace you as a lender with another lender that might be at a higher rate, that is prepared to take a different risk profile than you're prepared to take. Those things often come more into play when special loans is involved than it does at the commercial bank level. What you'll be doing is an amending agreement that might include some kind of a covenant adjustment for a short period of time to allow them to get over a temporary problem. If the problem is deeper, we're going to have that conversation a little later, but what happens when this thing slips towards your special accounts management. Your special loans units. Your troubled loans unit, whatever your institution wants to call the man or woman who handles troubled situations. So all of that is wrapped around course of conduct and as a lender, one of the things that you have to remember is that everything you do and say, today particularly, gets recorded in some fashion or confirmed in an email. The way that you speak matters. It is important for you to, sorry, somebody just walked in my office, it is important for you to think before you speak a little bit. To be a little careful with what you say. You're there to help. You're not a partner in the business. You're a stakeholder. There's a distinction between partnership and stakeholder. Borrowers who talk about course of conduct will say, you told me you were my partner in this business and now I'm in trouble and you're not willing to help me out. The response to that is, is to always use the tone as we're your lender and we're a stakeholder in your business. We're interested in supporting your success, absolutely, but we're not a partner. I actually recommend people not use the word 'we're you're partner', ever. From a marketing standpoint, when you're trying to develop business as a lender, you want your potential customer to feel that you are going to be their partner. But you're a capital provider and you're a stakeholder with rights at a table. You're making an investment, and it's not an insignificant amount of money, and you're not a commodity. The more that you commoditize yourself, and the more that you align yourself to be totally there to just help management do whatever management wants to do without a critical eye, leads to the course of conduct argument that makes it harder later on for you to get tough with the borrower, if you need to.
Matthijs: David, ... reservation rights, side waivers, some forbearance, event of default letters, let me give you a couple of situations. Just two quick ones that come up, I think, quite often for bankers. So obviously we have when they're meeting missing their financial covenants. Reservation of rights letter, waivers, all these things. What about lesser breaches, for example, you look at the financial statements and the shareholder wasn't supposed to send money out of the company to paydown a shareholder debt, and they have. What do you do then? Should a banker still send the reservation of rights letter? What should they do in a situation like that? And then, also a default like gaps of reporting. When you just haven't received reporting and you start getting suspicious about that something might be behind there.
David: Yeah. Okay, a couple of things. First of all, those two, very close to home. It happens all the time. I have a really good example of a company that actually was required to repay a shareholder loan pursuant to another agreement and they did it. They didn't tell the lender that they did it and then, you know, the $500,000.00, or million dollars, or two million dollars, or whatever the number is shows up and you can't hide it. It's sort of a big number. You can't hide it. Small stuff bleeds through you're not ever going to know about. Big stuff shows up. The problem is that, and this is advice to borrowers, so when I was actually acting for the borrower on that, they came in and they said, we repaid this shareholder loan, and my response was, you did What?! With a little huff in my voice and a little bit of anxiety and I said, how much was it and when was it done, and do the lenders know about it yet, and do you have a plan to get the money back into the company? Because they were also in the middle of a bit of a liquidity crisis. So kind of bad but ... the door to a related party during a liquidity crisis. So I looked at them and said, crow is best served to oneself warm. We know the saying, you eat crow, meaning you take accountability for the mistakes that you've made. So it's best to take that accountability fast and for you to do it yourself. Not for them to find it out. I asked the client to tell the banks that this occurred, the financial institution, it wasn't a bank actually, to tell the lender that this had occurred and to give them a plan for when exactly the money would come back in, and how it would come back in and to be forthright, and to say that they made a mistake. Trust. Scott, we talk about this all the time, and you can chime in on this in a second, more than happy. Trust is like money in a bank. We all know how hard it is to save money. We all know how hard it is to build trust. But the minute the money goes out the door, it's easy to spend just like it's easy to spend trust. So borrowers can make that mistake and the response of the bank is, in my opinion, to be firm. You don't have to be angry. You don't have to be chastising. You can understand why it was done. If it's bad people, it's bad people and you're going to chase them. But you want to be firm and you want to note the default, 100%, charge them the interest rate and tell them they've got to repatriate the money tomorrow and then see what they do to react. If it persists you really ought to be thinking about freezing the line because these people are stealing money from the company, in breach of a covenant with you, and that's a big deal. The bigger amount and the more concealed it is, the bigger the deal is.
Matthijs: You said trust and I said what about when the trust seems to be lacking? The banker has a feeling that either the reporting's late or it might be ... inaccurate.
David: On the reporting, that's just a it needs to be here by this date or we're going to notice an event of default and we're going to charge a higher interest rate. The last thing people want to do is be charged default interest rate. It's an amazing tool. It's an amazing hammer. It focuses their attention on you and you alone as a stakeholder. If they're bad people they're not going to care because they don't intend to pay you back anyway. That you're going to come to eventually. You're not even going to notice it.
Scott: Right. If there's any level of sophistication, and you're not in special loans yet, and this is just your monthly reporting on a non-ABL basis, where are you going to hide that stuff? You're going to hide it in inventory. You're going to over-value your inventory and the other side to that entry is direct materials, which means you've overstated your gross margin and your profitability, you're not going to see that. You're not going to see that. So this reporting issue is not as simple as it's late and some things are a little bit wrong and will be restated later. If somebody is conducting their affairs on the financial side in appropriately, you need a deeper dive than that.
David: You're not going to get to the deeper dive, Scott. In a financial institution, in my experience, you're not going to get to the deeper dive until you've got a different type of officer at the bank dealing with the transaction with the customer. Until it moves to special loans.
Scott: Right.
David: It's very hard and we'll talk about that a little more.
Scott: Unless you're on an ABL. Unless you're ABL reporting which they'll find everything.
David: ABLs don't even slide into special loans often because they manage their own compliance.
Scott: Hmhmm. So the late reporting to me is not always a sign of shenanigans or something that should break trust. It's probably more likely a sign that you're borrower doesn't respect you and doesn't care about your agreements. They're just not a priority for them. They're off doing other things. That in and of itself is a serious problem but I think it's a different problem from what we're talking about.
David: That issue of getting their attention is what I speak to.
Scott: Yeah.
David: I used to call it the what's yours is mine and what's mine is mine. There's a bunch of other indicators. If I do a private seminar for people sometimes on this when they first join a special loans group at a bank. I do it for a number of lenders. When you have this kind of reporting default, it's often something wrong with the actual relationship. So I'll give you an example. Borrowers, and this sounds really self-serving, and I apologize to everybody on the podcast here, but this sounds self-serving but it's not. When borrowers start to complain about the legal counsel's fees for doing the due diligence around the loan, or following up on an event of default, and they start to moan about that and they start to challenge the fees and give you a really hard time about it. That's another canary that they're just using that cost argument to actually put handcuffs on you. There's an attitude in some borrowers that banking is a commodity. That lending is a commodity business. That the competitiveness is so intense that it's a commodity business. What they say is the old adage; the borrower says to themselves, what's yours (you the bank) is mine and what's mine is mine. In other words, you don't matter. You're just a commodity and we're going to ignore you a little bit.
Scott: You can't reinforce that enough for you, David. I've never really thought about the commodity side of it before the attitude of many of very troubled borrower is they don't understand the concept of the stakeholder. You're just a lender. You're just somewhere on my balance sheet and my job is to manipulate you as best I can for my own benefit.
David: Scott, when I talked about that whole issue of you're a stakeholder not a partner, I'm getting to that you always set the table so that you're respected in the process. I know in 30 years I've met so many really amazing commercial lenders across all of the institutions that my firm services, and I've worked at the same firm, or successor, for the entire 30 years. So with the same clients. There are lenders who just get that. Who know that when they sit down at the table that this is still a business relationship and that, yes, I'm trying to sell our lending package to you but at the same time I'm an investor in your business which makes me a stakeholder. So please treat me as such.
Scott: You need to set up that relationship from day one.
David: From day one.
Scott: So that six years from now, when it's hit the fan.
David: It's interesting because if I'm a borrower, and I'm acting for a borrower, I want a lender who has discipline. Who approaches the loan transaction professionally. I want a relationship that's professional. I want a relationship where they're going to come to the table when they need to come to the table to help me, because I persuade them to do that because I've got a good case for it, not because I'm lying to them because I know the lies catch up. Inevitably I've got a right hand drawer at my desk full of receivership orders of lies. So we know where that goes. So from a borrower's perspective they want that healthy relationship, and if they don't, I think you've got to be a little suspicious. Honestly.
Matthijs: David, we had a couple of good questions come in that I just wanted to address. So the first one is, you mentioned a higher default rate, and a lot of the lenders on the call will be doing real estate lending, so the question came in, I thought you couldn't have a higher default rate when it's a real estate back ...
David: Right. Yeah.
Scott: If you just want to verify that.
David: Correct.
Scott: ... apply to non-real estate lending transactions.
David: Non-real estate lending.
Scott: If backed by real estate there's no higher default rate.
David: What happens in a real estate loan, is availability is curtailed. Particularly if you're in construction finance. If you're in construction finance, and you don't have the right reporting and you don't have the quality surveyor telling you that the project is at the right stage for the right advance, the liquidity of the construction just drives up. Just ask anybody in the condo industry in Southwest Ontario right now. The liquidity is dried up because they don't have the funding for the cost of complete and the cost to complete is far in excess of what he original budgets were. So they need a reset of the budgets and they need new working capital and it's not necessarily coming from the lenders. The lenders then freeze the line so the construction project stops or slows or dies.
Matthijs: That actually leads us nicely into the next question, which was, can a lender be responsible for freezing a line and stopping the availability of the line? Either pre or post sending a default notice.
David: Alright. This is a simple one. It's complicated but it's simple. The answer is, read your loan agreement. Get your lawyer to read your loan agreement and your lawyer will tell you exactly when you can freeze the line or not. If you've got an event of default, and you ... an event of default, and if there's a no cure period, if it's a payment default you can make a choice to freeze the line. There are consequences to doing that with respect to you collateral. You have to remember that if you freeze the line, you potentially are stopping payroll. If you stop payroll, you're letting the world know that the company is in trouble. So it's not something you do without the help and supervision of people inside of your organization who are used to do doing that and the circumstances in which that is done. I'm referring to special loans. Like I said, we're going to get to the special loans a little later, so I don't want to pre-empt that conversation by having it now but all I would tell you is, is it's a very serious decision to freeze the line. It has to be done with every t crossed and every i dotted. It is not an emotional response. It is a serious response and it is to be carefully managed at the time.
Scott: David, would you advise lenders that it ought to be done only, well not only, but it ought to be done, preferably, in the context of a turnaround plan or lack thereof. So often I see when we're working with troubled company and we have a turnaround plan in place but we can't hit the mark because we have a cap, an artificial cap on availability that was put there before we showed up and came up with the turnaround plan. How would you advise lenders to handle that situation?
David: It depends on the type of loan. If it's a construction loan stick to the conditions precedent to your advances. If the quality survey, the QFs or the QA, whatever they want to call it, if that's off and there's a serious problem with the construction project, you're going to turn off the tap. Now the consequence of that is, is the contractor, the builder, the owner, has to either find liquidity from shareholder loans or whatever to keep to pay the trades so the liens don't start racking up. When you get into lien issues, advancing into lien environments is very complicated and fraught with hazards for lenders. It's a whole separate conversation beyond the scope of this presentation.
Matthijs: Last question.
David: Sorry, I want to finish this. If you've got an ABL lender, they have an advance right. They can just turn it down. They can put an availability block in. Usually ABL credit agreements have the ability to be an availability block in as they see fit or turn the advance rate down as they see fit, on notice. So they're receiving money back in on the ABL, on one hand, and then they're advancing out less than the same amount that they brought in because they've changed the availability, the margin, against which they're lending on the assets. Or they've put a block up because they haven't paid their GST and you see $300,000.00 so they put up a $300,000.00 block to force their hand. There's a lot of reasons that it goes. In straight commercial lending transactions, choosing when to shutoff a line of credit is the most complicated situation, Scott, and you try not to do it blindly but if nobody's answering your calls, sometimes the only way to get attention is to stop the money flow.
Scott: For sure. For sure it's more the other side of that. You've got the attention. They've hired the turnaround advisor. They turnaround advisor comes in with a plan. Almost never do you see the financial institution then remove that cap to facilitate the exit. Whatever that exit may be.
David: On the deals that I do it happens. On the deals that I do, what we do is we create an environment with a cash flow. The cash flow is premised on a 13 week cash flow, I know you don't like those Scott, the 13 week cash flow is premised on a certain spend rate with a certain revenue rate, a certain expense rate and a certain borrowing rate and you're monitoring all three very carefully. You're getting very granular about what's inside of each of those, and you have variances on that, and as long as they're performing inside of the criteria, and by the way, at this point the company has a financial advisor. The bank has a financial advisor. Those two are talking with each other. A plan is being developed and only on the execution of a plan that the bank agrees to will that funding be freed up, if there's a temporary cap put on the line. Cap keeps everybody at the table.
Scott: And you said the reason that happens on your deals, I'm going to say the reason for that is because you do see that there's a balance. If the institution, at the end of the day, wants to exit, they want to get their money back, they are stakeholders. Stakeholders go two ways and so you need to, at some point, buy into the plan and participate or not participate. But to me, as a lender and a stakeholder, you need to be clear about that. What are your conditions for participating in this plan?
David: Scott, with or without the cooperation of the borrower, the lender is holding a scale, a balance, and they're watching to see how much stress does their withdrawal from the relationship cause and what will be the harm done to the collateral that they're relying on for their exit. They're looking at the net order liquidation value or the going concern sale value of the asset and they're quite worried that if they turn the tap off too much they actually hurt themselves. They don't want to shoot themselves in the face.
Scott: There's a balance there.
David: Right.
Matthijs: So we're just going to turn the page in one second, which is going to be what does transferring a loan to special loans look like. One last question in this section which is, the question came in, late reporting can often be caused by an audit firm taking their time. How does a banker balance the need to hold a client accountable for on time reporting but that might be delayed by third parties and the accounting firm making unreasonable requests?
David: Probably only at year end and the amount of time that is given, in most credit agreements for year end reporting, is more than enough for the audit firm to get their shit together.
Scott: Not these days it's not. It depends on the size of the company. If you're a large sophisticated publicly traded company, and you've got internal controls in your internal reporting, your systems and documentation is bulletproof, and so the auditors just going to do their sampling and go through all of that, like maybe that's going to be done. Obviously if they're public it has to be done. But for mid-market smaller companies, look at my own companies, David, last year to get review engagements took nine months. It was insane how long it took throughout our portfolio and it caused me a real problem. Now I don't have lenders so I'm not reporting to lenders, but we have our own NAV calculations that we need to do, and we just couldn't get statements out of the auditors because they're mid-market and smaller businesses, we're larger when you put it all together, but audit farms, when they're doing substantive audits these days, they're just way behind. I would suggest to you that if you have a three month or a four month covenant for an audited or reviewed engagement and there's a problem getting that out of the auditor, talk to the auditor. Talk to the auditor with the client on the phone and say, hey what's going on?
David: But, Scott, if the company has trustworthy reporting on a monthly basis the audit could have a surprise in it, I suppose, but even if you have unaudited year end financial statements on an interim basis, you could provide it to your lender to give them some comfort. Then those get audited.
Scott: Sure. You do a draft. But, again, we talked about this inaccurate reporting before and the difference between being late and not treating the stakeholders with respect and just being malicious, with your reporting.
David: It doesn't have to be malicious. It can also be incompetence or outside forces.
Scott: But it could be and I think people need to know that. I bought a company out of a sales process, closed on it October 1, last year. This is a company that never, ever, ever, ever, ever reported its financial reports on time or accurately. Just never did it. In the, I'm going to make up a number, 4, 5 years before I met the company this business had been through nine financial institutions at various levels on the balance sheet and in various jurisdictions, well two jurisdictions in particular. The financial institutions just let them get away with never reporting. With audits being late. With all of these things that we're talking about. Then one day a new auditor showed up because they didn't pay the old auditors, obviously, a new auditor showed up and that auditor put in a huge material reserve on inventory as a one time item because they just weren't buying the carrying value of the inventory. The beauty of double entry accounting is if you don't buy inventory that means that you overstated your profitability. That's the other side of that entry. Then it all hit the fan at the bank and it went into special accounts because of that auditor move, which by the way, was a year, delivered a year after it was supposed to be due. That's how long it took them to do that and the bank let them get away with that. When I learned, we bought it out of assist so we didn't buy the shares but we had access to the books and records, what I learned is that there was a bunch of fictious receivables between inter-company related parties masquerading as not being that, as you had suggested, that the inventory was overstated by like three-fold. Not a little bit but like three-fold and there's warehouses of crap, on an ABL, that people are valuating and counting. It's insane and then they took machines. They took heavy duty manufacturing equipment. There's clean spots on the manufacturing floor where they ripped these machines out and sent them to another company that had a different lender so it was removed out of the security package. That's malicious and not getting reporting on time can be a trigger for that. In that situation I'd be calling the auditor directly, with or without my client on the phone saying, hey. What are you experiencing? Why couldn't this be done in four months?
David: Well auditors get sued so often now for errors in their statements. They take their time because they're being stalled by the borrower, in terms of getting proper information, or they're having an internal disagreement with the borrower.
Scott: But they also get sued by the company. They also get sued by their client for not doing the job on time and causing a default with the lender.
David: Matthijs, I don't know if we answered your question. We went a long way sideways on that one. I'm not sure we answered the question. The short answer is if the auditors are delayed you need to find out why they're delayed and in the meantime you should be asking are there financial statements that you can give us that provide us with insight and comfort and can we have a conversation with the auditor, please. I think that would be a reasonable summary of what we just talked about.
Matthijs: Why don't I just give people kind of an idea of where we're going. So the next couple of sessions are going to be talking about what a transfer looks like to special loans. We're going to talk about how to turnaround a business and how banks might help and then actually the enforcement and the possible loss that comes up with that. So a lot of good topics coming up. So just kind of turning the page, and I see there's some questions, which I think will be best covered in one of these sessions so I'm going to hold them for when we talk about the relevant topic. So, David, a lot of people on the phone, listening in right now, are bankers. They may not have been in the special loans team before. They may not have ever transferred a file to special loans. What does a transfer to special loans look like? What do they have to do when that happens? Can you walk us through a little of that process?
David: Sure. I'm going to start by saying it's different at every bank. I've seen it at maybe 15 different institutions, banks and non-bank lenders. It can be as much as walking down the hall to Sally and saying to Sally, who's the person who's responsible for special loans in a small institution, listen I need your eyes on something. Generally speaking, major financial institutions, as everybody on this call will already know, have risk ratings and then you've got a credit function. You've got your risk management, or your credit management, that assesses the risk of any given loan and assigns a risk rating to it. All sort of in the background supervised by OSFI, the Superintendent of Banking and the auditors from OSFI and Basel III and how do you classify a bad debt. All of that sort of trickles down to a risk rating. If the risk rating goes over a certain level it's pretty much an automatic transfer into special loans. Before the risk rating hits that level they hit something called the watchlist, normally. The watchlist is the risk management people are sitting down with the head of special loans and they've got a list of under performing loans that have issues with payments, or issues with covenants, or issues with particular information and sometimes the line people will either reach out to the special loans people, or the special loans people will reach out and touch them on the shoulder and say, you know what? Can we have a conversation about that loan and can we help you? Then they'll, in the background because they don't want to scare the borrower because it's early days, they'll manage it from behind a shield, a wall, and they'll talk to the line person, they'll coach the line person on the questions to ask, and then eventually they might be introduced in the background to a call but it hasn't been transferred. The speed from with which something gets transferred into special loans depends on the nature of the crisis. If somebody sees kiting and fraud and something else going on with the loan then the speed with which it's transferred will break your neck. It's very fast. There's a point when they actually help you. If it does get transferred, if the risk criteria are met that it should be transferred and the decision is made at credit to transfer it, then there's a negotiation or a discussion about what the reservation should be, if there should be a reservation on the loan because it's a risk of loss, so they'll take the reservation up front coming into special loans and then they might revise the reservation at a later date. This is all in a very generic sense. Every bank has a different way of dealing with this specifically. I'm probably over generalizing.
At some point special loans is in charge. Unless it's an ABL facility, and some of the banks have ABLs run their own workouts because of the nature of the ratchet down of the availability on an ABL, and their ability to basically turn the tap off and collect receivables and be out. Before it gets transferred, when they're shadowing, it's a great opportunity to learn from the special loans folks. So I tell you that if you've got that opportunity it's important. You want to be really mindful that you should let them know if you've got an course of conduct concerns. Remember that crow I talked about? You know feeding it to one's self warm. You as a lending officer, if you hide the fact that you've been cutting these borrowers huge slack, and you've been doing it and not noting defaults and not doing other stuff, and that there hasn't been the rigor because you trusted these people and you were riffing off the relationship, it was going really well, you need to explain that to the special loans people. Again, better that you point out that you're concerned about it than they see it and ask you questions, like the Inquisition, later. The Spanish Inquisition. This is a little bit of career advice for lending officers at institutions, the reason to be prudent is so that you can't be criticized later. It doesn't mean that you don't do things that are right for the borrower. You don't appease the borrower when it's entirely appropriate and in the institution's interest, but it does mean that you have to be mindful all the way along from day one about how you manage the relationship, and how close you are with the borrower and whether you're managing it as a stakeholder or always in a sale mode. So then it comes into special loans, and you've gotten through that interim period of maybe a watchlist and they've actually decided, and what they'll do is the special loans people will say, we'd like you to introduce us formally to the borrower. So now what's going to happen is you're going to have two teams from the bank dealing with the borrower. One is going to be more market focusing. They're friendlier. They've known them longer. They're there to keep everybody calm and then the special loans officers are there to sort of do the deeper dive and be helpful. Depending on the institution that dive can be soft and empathetic or it can be like a visit to the proctologist. You've got a choice. It's one or the other. Generally speaking, what works best is the polite but forceful dive. The one where special loans comes in. They're introduced. You are there in the meeting as a loans officer. You can count on the fact that eventually you're going to fall away and it's just going to be special loans. It's very rare that the loan officer stays up front in the relationship right through to an exit from special loans. Whether that's a return to the commercial bank, or the lending arm of the bank out of special loans, or it's an exit from the loan or it's an enforcement or realization.
All of that said, it's a huge career learning opportunity. It's a credit learning opportunity. It's a risk management learning opportunity. It's a negotiation learning opportunity. You can get a ton out of it in your career. I highly recommend that if you get the opportunity that you stick to it as closely as possible. You pay a great deal of attention and you listen to the people who've done this for a long, long time. That's to newer bankers. Bankers who have been around the block, they already know all this. I don't have to say anything to them.
Matthijs: You said, I think we were chatting before, you said to me when it gets transferred to special loans the special loans officer needs to learn the deal. They need to understand the financial status and accuracy of the financial status. They need to make a decision. Are they keeping this? Are they going to turn this around? Are they letting it go? They also have to take a look at their security package. Kind of figure out, first of all, what security do we have? Is it good? Is there any defaults? Like you said, course of conduct.
David: There's a standard operating procedure. It's forbear, fix or exit. It used to be called forbear, fix or flush. I changed flush to exit. Look, when it arrives at special loans, you've hit on a key point which is, it's a reset moment in the relationship with the borrower. So special loans will do a security review and if there's any deficiencies in the security, before they enter into that forbearance that we talked about, that indulgence to allow the borrower to recover or sell itself, or shutdown in an orderly way, or whatever the plan is, whatever that plan is the special loans want to be in. They may need a financial advisor put in. I want Scott to talk a little bit about that because the bank's financial advisor usually follows really closely on the heels of the special loans appointment.
Matthijs: The next two subjects are, you pretty much led us into it, which is a bank will choose is this a turnaround and how could a bank help, and they other one is, we're going out of this loan. So, Scott, what does a turnaround look like? A lot of people say once it's in special loans it's out. That might be the case with some banker's policies but it doesn't necessarily mean the business is out. What does a turnaround look like?
Scott: Under the institution?
Matthijs: Under the institution but like what does a business turnaround look like and how might a banker help?
Scott: If the institution wants out what are the practical ways to accomplish that? What are the practical ways to remedy the default and the problems that exist? David, correct if me I'm wrong, but to me there's only really three. One is to actually turnaround the business so it's cash flowing, and over time it comes back onside with it's covenants and makes the bank comfortable, and it can move to another group. I've literally never seen that happen. I've had businesses that we've refinanced, which is another option, and done the turnaround and then two years later have been refinanced by the exact same institution that headed its special loans before. So it left the bank and then came back to the bank. But, just hypothetically speaking, one of the three options would be to rehabilitate the company and its cash flow. Number two is refinance it with some other institution. So there's a take out of the bank, either in whole or in part. Number three is to sell something like the whole business or, as David said earlier in this webinar, a division of the business, sufficient to paydown the bank and, really, that's it. So a turnaround plan is that. What is the end game here? What do we do to improve this business between here and there? Just remember, as we talked about at the beginning, that the objective and the definition of success for a stakeholder such as the senior lender, is different from some of the other stakeholders. It's different from the definition of success for an unsecured lender. It's different from the definition of success for the shareholders, for management and the employees. Everybody has a different definition of success in this and not everybody's going to be happy. That's the very definition of a troubled company and so a turnaround plan finds that balance and that balance, by the way, it's not a negotiation. It's kind of math. Here's our value today and the turnaround plan is going to not make that worse, in the first instance, and then it's going to try to make that better and then it's going to execute the ultimate solution for each stakeholder, and if you're the senior lender that means getting you out, or rehabilitating that loan. To me that's what a turnaround plan is and, Matthijs, I've been talking, I actually forgot your question, but so I don't know if I answered.
Matthijs: Let me ask you a slightly different question. When you're encountering different borrowers there's a mindset that you might encounter, in terms of these are people in power, what mindset does the borrower have and what mindset ... ...
Scott: Here's the most important thing, and David, you talk about the stages of grief. Denial, I forget what they are.
David: Denial, anger, sorrow, acceptance.
Scott: Will the first one is denial. What I'm going to do is I'm going to tell you from my perspective when I step into a company that has nothing to do with the other stakeholders. Just when I step into a company and then I'm going to tell you how a bank could help with that problem that I see. The most important thing to me is confirmation of bias. This is the denial part of what David just said. If you don't understand confirmation of bias. The human brain is a pattern recognition machine and what it does is we don't look at facts and then make a decision. We make a decision and then we look for facts to support our decision. If we find facts that don't support our decision, that triggers a cognitive dissonance which is an anxious and horrible state for your brain to be in, so what your brain does is it completely ignores those facts, or, it rationalizes those facts to fit your decision. So David, and anybody in the insolvency business, will see this over and over and over and over again. You sit down with a borrower and the borrower just isn't seeing. They're literally not seeing the same problems that you're seeing. They're looking at facts and yeah, yeah, but that's not really a problem because of this. There's the rationalization part of this. I walked into a, I mentioned a company before that we had a really, really successful turnaround on, and the first day that I walked in is there extraordinarily high priced CRO. I walked into this company and you had six key individuals. One was the owner/manager/CEO who was a super sophisticated Bay Street type fellow and he was the guy in trouble. He was 100% owner. The guy on the personal guarantees. Then you had five key executives. When I walked into the meeting, one of the key executives, at 1:00pm, was really drunk. Not a little bit drunk. Really drunk. Another one was the most awful person I've ever met in my life. Unprofessional, nasty, backstabbing, obviously not truthful. Another one was completely incompetent in his role. A really nice fellow. Probably great in a structured non-chaotic environment but in the chaos that this company was in it was just totally out of his depth. Another one, the CFO, was great but was so terrified of everything else going on he was just hiding in the back and not participating at all. The fifth fellow took a lot of money out and nobody actually knew what he did. That was the entire management team and when you challenge the sophisticated owner/manager about this, he doesn't see it. He's blind to the problem and he's rationalized it all and, frankly, the turnaround was just breaking through that and fixing that problem.
One of the first things that I do when I step into a troubled situation, I call it, this is such a common 100% of the time phenomenon, that I do what I call a listening tour. So I buy a company, or I'm an advising company, or CRO, interim president, and I go in there and I don't talk to the senior management. I don't talk to middle management. I don't even talk to the supervisors. I go to the people, one by one, that are on the floor, are making the money or doing the work, whatever that type of company is, and I have an hour with each one of them, or 15 minutes, or with as many people as I possibly can. It's one on one and I say, help me fix this company. We're in the Maxwell Smart code of silence here. This is not going to get out. What do you see that's wrong? They always know the answer. They always know the answer. If I talked to four people I'll get some commonality. I don't have to believe it all but I'll get some really low hanging fruit that I can fix immediately and I'll set up a work plan for myself for the next six to 12 months. Everybody knows except for the people leading the company. Because they have confirmation bias and they have blindness, and David could pipe in, but he'd tell us that he sees that all the time. Like every borrower that's in trouble, you see that. Why is that important to a lender, to a banker, to a stakeholder? Because you can help break through that blindness and you can do that through encouragement. You can do it through agitating. I know, Matthijs, you said in one of your opening remarks you need to do something without agitating the borrower. I completely disagree. You need to agitate your borrower for this specific reason. You need to wake them up. It's a wake up call. Now you need to do that with the advice of your lawyer and you need to do it in a way that's not going to prejudice your position. But think of it as a takeaway for business. Think of an individual that's an addict. He's got a substance abuse problem. What are their options to survive? One is to hit rock bottom and wake up themselves and start changing their lives. Or an intervention. The lender can do the intervention and the can bring in a financial advisor that can force whatever they need to force, whatever they're able to do on the advice of their counsel, to change that thinking. Hopefully that speaks to mindset.
Matthijs: What's the behaviour and mindset of someone who is going to turnaround? What's the mindset that you want to see in a borrower?
David: Maybe I can pipe up because that's on my scale of denial, anger, sorrow. Denial, we don't have a problem. We just need a couple of quarters. That big order's going to come in any day. Anger, you loaned us too much money. You're a bunch of jerks. This is everybody else's problem. If you were just more patient. I thought you said I was your partner. I can go on with a 30 year list of that. Sorrow, oh God, there's nothing I can do. The business is over. My wife's going to lose her car. I'm going to lose my car. Or my husband's going to lose his car. My kids are not going to have jobs. I'm not going to be able to put my kids through private school. All of my employees are going to be out of work. What am I going to do for them? I feel terrible. And then acceptance. Okay. And acceptance is really this simple. Okay. It's like going to AA. I've got a problem and I need to address it. That's what acceptance is. So what I look for on the other side of the table is acceptance. Now we haven't talked about this but you go into one of these environments where you have your first meetings with the borrower and the banker, and the special loans usually does this, it's not the line banker. They'll say, it's great that you've got an auditor and they're sitting in the room with you or a person from the accounting firm that's your advisor, but have they ever down a turnaround? Are they the right people on your team to do the turnaround? I hear bankers regularly say that the borrower is not in acceptance because he's got a bunch of people behind him, or her, pandering to them in terms of what that group think is, or that confirmation bias. Reaffirming the confirmation bias. Yeah, the bank is just being difficult. No. You need to bring fresh eyes to the problem. That's my sales pitch for hiring somebody like Scott. It is that they come in and Scott's there to help the company. Scott's not normally hired by a bank. The borrower's told you need to get somebody to help you and they give him a list, which might include Scott's name, and then you get to pick the one from the bank's list. Or if you've got another one that's acceptable they'll look at that too. But it's a person who's going to have a reality check with you. That person's going to have that tough conversation with you and move you from denial to acceptance and hold you there, right through an incredibly difficult, exhausting process that will ultimately result, hopefully, in saving your business. Scott, I want to make one point. I actually have seen a loan repatriated to the bank.
Scott: I am just saying I haven't. I know it exists.
David: I have. I've been involved in them. I had one that was an 85 million dollar exposure on the first senior. They added another 85 million dollars on notes and we did actually see it get repatriated. That was a business that faced an external, existential crisis that was none of management's fault and it wasn't to do with their industry, it was a tort and we worked our way through the tort. Through the challenge.
Scott: To your point, David if I may, the number one thing that I say to my staff, and to my team, or to clients when I'm speaking, is the number one step in a turnaround is acceptance. You have to accept, you have to embrace the need to change. This comes back to my important question of, why now? What's going to be different? Because when you're doing a restructuring, or when you're doing a turnaround, so a balance sheet or operations and you're fixing the problem, you're faced by definition with scarcity which means you need to pick and choose priorities. You're going to leave things behind. If you don't admit to yourself that you're in trouble, you can't make those decisions, and what you do
David: Scott, we're in the business of slaughtering sacred cows. I've said this before.
Scott: But once you've decided that, once you've truly admitted and internalized that if I don't do something right now and change what I'm doing and make those hard decisions, I'm dead. This business is dead. My personal guarantee's going to get called on. All these employees are gone. Then all of a sudden, working that lease isn't such a hard decision. Getting rid of that high salary person that's really not doing very much, but you're hoping that they perform on a sales contract or whatever, that all of a sudden is not a really hard decision. Cutting back this expense or raising my prices that I was angst about, is no longer a hard decision because I've truly admitted that I need to change. That I'm in trouble.
David: Matthijs, before you jump to the next topic, I want to actually dig down on this because, to be honest we've got on our list of things to do to talk about enforcement, but the reality is most of those people on this call, I mean I could do enforcement in five minutes because most of the people on this call don't ever want to have to face that and it's going to be in special loans anyway if you're in a real enforcement stage.
Matthijs: But one thing that I was going to do, just so you know so you can fit it in, is there's two fact situations.
David: I want to dig into what something that Scott and I, we bounce this back and forth between each other a lot. On other podcasts that we've done and just in over dinner. Bankers don't solve the problem. Borrowers have to come with a plan. That's why I advocate for borrowers hiring somebody that speaks bank and can help them develop a plan that has the highest likelihood of acceptance by its stakeholders, including its financial institution or its lenders. You have to create an environment where the borrower is in charge of the solution. The debtor in possession is always the better party to do a restructuring. If you're dealing with honest people who are willing to try hard. So if you get people to acceptance then you're talking about who develops the game plan. It can be the bank's financial advisor can be involved in it. The company's financial advisor can be involved in it. The CRO, if they hire a CRO, can be involved in it, or as a financial advisor, Scott. But what it's not is, it's not the bank making suggestions. So what do you do? You can restructure existing credit facilities. You can do a capital restructure with a refinancing, with subordinated debt, with an equity injection. You can do a debt to equity conversion and convert some of the senior debt into equity and give a lender upside on the recovery of the business in a plan. You can do a sale or a merger. You can do a full sale of the entire business or a merger of just a few of the assets. You can do an operational or management restructuring and Scott digs in hard in companies all the time to do operational. Like what is really broken? That's that listening tour that Scott does. What's broken in this business? Can be something as simple as the production line doesn't work because you've got six people that don't know what their jobs are. They overlap. It's insufficient. Whatever it is. You might have to bring all of your stakeholders together for a solution. So you've got three different levels of lenders. You might have to have them all at the table, preferably not at once, but sometimes that's necessary. Then solutions can actually come not just from, this is why the borrower has to do it because they're the only one with the tentacles and all of the stakeholders. Customers can be a solution. Suppliers can be a solution. The owners of the business can be a solution. Then you have to decide whether, because of the upside down nature of the balance sheet, is a formal restructuring required or can it be done informally? We always work towards staying the hell out of court, and doing it informally, because that keeps costs down and reduces conflict and reduces the risks associated with throwing the dice on litigation, because litigation inherently has some significant risks associated with the outcome. We talked about the forbearance agreement. The forbearance agreement is the amending agreement to the loan agreement. That becomes the wrapper that doesn't just amend the credit, it also sets out a plan for the recovery of the business. Scott will contribute to that. The lawyers on both sides will contribute it but the borrower has to run it. It has to be the borrower's plan. What do you think, Scott?
Scott: 100%. One of my recurring frustrations in what you said is that the lender and each stakeholder has to participate and acknowledge that plan. There's a role for a stakeholder in that and how often, maybe you don't because you're the advisor to the financial institution in your situation so you have coached them out of this, but often I find stakeholders that are coy, negotiating, non-responsive, taking things under advisement in a dire, rapidly moving situation rather than participating in being clear and concise in what they need to see ahead of a plan. To me I'm always, the best thing I can do, I think for senior lender in that type of situation, is not make the recovery and cash flow worse than it already is and then build towards an exit or a recovery of the loan through the options that we've discussed about a couple of times here. To me that's it. But often, David, I sit in front of a lender and there's a lot of just nodding of the head. Then a key decision that I would need to execute a turnaround plan could take three weeks. It's just too late. It could take a month. It could take a long time. So the turnaround plan has to come from the borrower but the lender is a stakeholder and they have to participate in that throughout. They just can't wash their hands of it and say, so how often do you see David propose forbearance agreement? Is just simply, okay we're going to waive this. We're going to charge you more. We're going to staple a 13 week cash flow on to the back and we're going to give you another three months, and by the way, the exit is your either going to put in some equity or refinance. Thank you very much. It's not a dialogue. It's not a monitoring of the KPIs as you go forward. It's not a participation in that turnaround.
David: Scott, my approach, generally speaking, is to get a quick forbearance in to hold everybody in place while you have a deeper dive. I gravitate toward hiring and recommending institutions hire financial advisors who I know are creative, and who are there to get a deal done, and get a recovery. But at some point a financial institution can also make a decision and just say, you know what? Fix, forbear. I think everyday our collateral position gets worse. If they come to that decision then it's going to be exit, and it's going to be a quick exit, and it's going to cause stress and it's going to come to a head in the form of a receivership or a debtor initiated filing for protection.
Scott: As well as ... which is why I say I think my number one job is to not make things worse, starting day one.
David: Go ahead, Matthijs. Sorry.
Matthijs: Just before we get to enforcement which we're going to get to probably in like five minutes, can I just give you a couple situations that you might have seen? They're pretty common. It was in the chat. A company's been doing well for years and then a succession of life events comes up that prevents the person, who's the key person from operating the business effectively, and they're now, for months, delinquent on their loans. You've both spoken about the practical sides of things. How would you apply your thinking to this situation? How would you approach it?
Scott: If I might, David, the premise of that question tells me that the business is mid-market or smaller business because it's highly reliant on a key individual who is distracted or otherwise absent for whatever reason. I would say this, here is my mantra up to about two and half years ago, pre the global pandemic, that in mid-market and smaller troubled companies, 100% of the time, is a failing in management. It's 100% of the time a failing in management. Almost never, well I used to say never until some sort of global event come and wipe out this company, that's clearly not true. I've been schooled on that but it's a management issue and therefore management needs to change. Change doesn't mean fired necessarily. It could mean augmented. There needs to be somebody in to help with this situation as David has been discussing. But it doesn't matter to me whether this is a temporary, personal issue that is keeping this manager away, or if the circumstance of their business and competitive pressures have changed and they've just failed to recognize that. Through this confirmation bias, this denial thing. It's all the same thing. You have a problem with management, and you need to fix that problem with management, and if it can't be done by the person who's in charge right now, then either that person needs to change or there needs to be additional resources brought to the company to surround that person, to support that person, even if just for a transition interim period.
Matthijs: What about the second fact situation with COVID? Very typical. Declining performance during COVID. How long do you consider that to be temporary in terms of sticking with a company? What's your approach to a company like that? For example, this specific situation was a restaurant business in the downtown path.
Scott: Let's remove it from the restaurant for a minute. We did a million webinars and speeches and talks at the beginning of COVID, and my message was always the same, which is you have by definition uncertainty and scarcity. When you have that you've lost your abundance mindset. When you have scarcity you're only option is to prioritize, be super clear on your priorities, and to focus on those. Mine, I told everybody that wanted to listen to me, my priorities were the well-being of my employees in terms of them being able to eat and pay their rent, which didn't have to be from me, it could be from a government program. Remember we're talking sort of way back at the beginning of this when we didn't know what was going on. But the well-being of my employees, the mental health of my employees, number two, which mean trying to remove as much of the uncertainty as I possibly could. Through communication, here's where we're going, here's how we're dealing with this. Number three was to be aggressive and leapfrog my competition without everybody else's freaked out with negativity and scared, that's what I was trying to do. I bought three companies during COVID, during the middle of that, and so I think we were really truly successful. So that was my messaging in March, April, May of that year, but my messaging in September of that year was, if you haven't figured this out by now, this is on you. This isn't on the global pandemic. If you're just sitting around waiting for things to get better, then that's on you. You need to know that this is the new operating environment. You need to have done whatever you needed to do. Restructured your financial affairs and change your operations, one or the other or both, to deal with that new reality. You just can't sit around forever until the landlord takes your lease away and gives your leasehold to somebody else. David and I have a mutual friend in the US, in the restaurant business, and he did a bunch of things during the early part, let's call it the first nine months, of COVID. One is he went through a process and broke his lease and moved and restructured his fixed costs into a better location. He was in the meat business. He created a butcher and had a bunch of online sales. David, I forget what else he did, but he used it as an opportunity to restructure his business. David, in the city that you are in, I won't drop a name but we go to a steakhouse sometimes for dinner that I'm known to love, I know for a fact that those people never lost a dollar, ever, during COVID. They were really proactive. Really creative. I mean they're amazing business people, that family, but they were on it and they came up with creative solutions and so there was a way. There was a way to do that.
David: Solutions that endured past COVID.
Scott: They're a better business today because of COVID.
David: Yeah, exactly. Exactly. I'd like to talk really briefly about where your line of sight is. Scott, you and I have discussed this before, and if anybody's ever taken a race driving course you will know that if you're entering a turn, if you're looking straight ahead at the turn you're going to go off the turn. You just are because you drive where you're looking. So same thing in business. If you are at the bottom, or on your way down, if you're just looking at the bottom you are guaranteed to hit it and not bounce back. You need to be looking up and to the side where you think you're going to end up, or where you'd like yourself to end up. You have to have a vision for where you want to end up and then everything that you do has to be accreted to that plan. That idea, so in car racing it's looking around the corner where you're exiting. You look at your exit as you enter because that's where you want to be and your eye takes the car to where you want to go. It's the safest way to drive. That's the same in business. If you're caught in that sorrow phase that I talked about, that's looking pretty hard at the bottom, and you're about to faceplant. It's just a natural human thing to do. As lenders you need to be able to assess the person on the opposite side of the table with you, at the borrower, to know whether they've got the chops to do this or not. So you talked about a restaurant situation. Look, my view is and Scott I think would agree with this is, if you're number 1, 2, or 3 in your industry and you hit COVID, you probably heard a little bit on revenue. You had to do a lot of belt tightening but you didn't fail. You didn't fail. If you're in that industry 7, 8, 9, or 10 and you're already in a precarious situation going into COVID, coming out of it you're not in any better situation. If you haven't fundamentally changed the way you run your business, if you're 7, 8, 9 or 10 in the industry, you're going to have a hard time exiting. If your business was troubled before you entered COVID, it's going to be troubled when you exit COVID and, frankly, the government assistance is actually spackle over the hole in the wall that was already there. When the government assistance goes away, the hole is still there.
Scott: I agree with that although I would say that what you just said really depends on your definition of fail. What does that mean?
David: I'm thinking closed doors.
Matthijs: Yeah. You've got a number of restaurants in your city and restaurant corporations with a bunch of different locations that went through an insolvency process. For instance, CCAA or some other process, but with a view to coming out the other side with a restructured, cost structure and balance sheet so that they're stronger going forward. Now is that a failure? I don't think so because what it was, was an external force that created an immediate trigger, and a management team and a ... group that was able to look at that and turn that into making a stronger business coming out the other side. I would just add that to your comment, David.
David: I'm not going to disagree with you on that. It's obvious. I do think that there's, to a certain extent, if you went in bad and you haven't done anything to change that, you're going to come out bad.
Scott: That's guaranteed.
Matthijs: So, David, we're coming 18 minutes away from the hour. So just changing the topic to the last topic, which is an enforcement. What does an enforcement look like? And what drives losses at a bank? Can you walk us through that?
David: Okay this is going to be, and I apologize folks, this is going to be a 70,000 foot view of the world. If you finally just can't take it anymore and the company doesn't have prospects, or you're not prepared to support the company any longer and you're into the scenario where you've decided that the company's not going to find a replacement financier, they're not going to find a white knight with money to do an LBO. To fund an LBO or to fund a third party acquisition. A private equity is not interested in your business because you're fifth in a field of five companies in that sector, or whatever, then a demand letter's going to get issued. The demand letter is going to give the company 10 days, minimum because of the provisions of the Bankruptcy and Insolvency Act with respect to notice of enforcement to enforce, notice of enforcement of security, notice of enforcement of a line, and they're going to start the clock running. The company has a choice. It can try and defend itself or it can throw the keys on the ground. If it defends itself it'll file for protection under the proposal provisions of the Bankruptcy and Insolvency Act, or it will file a more sophisticated proceeding under the Company's Creditors Agreement Act. I'm not going to go into detail on this. Those are designed to allow a borrower the breathing room to deal with what they believe is an obstreperous lender, or other stakeholders, that they need to hold at bay because they couldn't negotiate the hold at bay privately. Or, because there's a run on the bank in terms of customers wanting deposits back or suppliers not being prepared to go out past the 90 day mark, or the 120 day mark, on receivables. So they want to put a stay down around everybody to calm everybody down. If a bank is deciding, or the financial institution, the lender is deciding to enforce it's likely going to go to receivership if there isn't a pre-arranged sort of a pre-agreed declaration using a CCAA or a BIA proceeding, a debtor filing. The receivership is a court appointed officer is appointed and the management of the company is usurped, they're gone, the board doesn't have the authority to deal with the assets of the company, the court has authorized an officer to run the business, generally speaking. There are nuances in this. There are monitors and CCAA proceedings call super monitors that can run a business. There are receivers that don't touch the property, who just sell it by a drive-by because they're afraid of environmental liability, and there are receivers that will actually operate the business while they seek a going concern sale. There are receivers who will shut the business down, put a for sale sign and then run an auction. It really depends on the specific nature of the assets that you're dealing with. You can appreciate that that's a nuance that there is as many turnarounds or enforcements as there are debtors. But that's a generalization. I think the more interesting question that we're asking ourselves here is, what causes the losses for banks? I could facetiously say when the assets are less than the liabilities, there's going to be a loss. But that's what it is. If the collateral underlying the loan is not sufficient, if it's been allowed to deteriorate because of lack of attention, if it's a catastrophic loss to the business, and the bank forces an enforcement under a realization and they sell an asset for 10 million dollars then they had loaned secured debt up of 20 million dollars, they're going to suffer a 10 million dollar loss. It really isn't rocket science how the losses occur. Why the losses occur you could write a book about. It would be, I think, sometimes losses occur because lenders are too aggressive. Sometimes losses occur because borrower's are fraudulent. Sometimes losses occur because a sector is in decline. If you're making buggy whips and the automobile has just been introduced, and all of your money is financing buggy whip manufacturing, then you might actually have a loss because of a change in the sector. If you were lending money to a company that was mining for Bitcoin that was profitable at $54,000.00 US per coin, and now you're at $32,000.00 of coin, your collateral value for collateralizing on the Bitcoin has gone down by 40%. So if you don't have the right margin, but the idea is when the margin you've allowed on the assets for the advance rate on an ABL or for the borrowing base of a loan is not accurate and you don't have the buffer, then you suffer a loss. Scott, is there anything you'd add to that? There's a lot to add because there's a hundred situations.
Scott: I think you're absolutely right. You focused on asset value where, of course, for many lenders there's an enterprise value issue. Which is more complicated to track and understand and is there a market at all? As much as I said from the borrower's perspective, it's 100% of the time a management failing. There are situations, from a lending side, where you can just sideswiped and I think through a couple of drilling companies that I worked with back in the blow up, the original, when was that? Feels like eight years ago now, blow up in the energy sector in Alberta I had one company in the tubing sector for fracking and we were bidding on jobs at a 90% discount on our price and we were losing to price. The whole enterprise value of this thing just disappeared. The rigs were fine but the enterprise value disappeared. I was working on another one simultaneously and it was effectively, although it was disguised as an ABL on a revolver, it was for the most part a term on equipment and you could go to Gordon Brothers or Hilco all you wanted and get new appraisals that had a 10% decline and 10% incline, but the truth was there was no bid. Nobody wanted this stuff. There was zero bids on a liquidation of this. I think, as a lender, you can be sideswiped and so that would lead to a loss, maybe in addition to a gradual decline that you weren't paying attention to.
David: We've got a question posted.
Matthijs: I was going to cover that question.
David: Yeah, go ahead.
Matthijs: So the question is, I've answered this question from the lending perspective many times but from an insolvency perspective, when have you practically seen the benefit of a pledge of shares versus a general security agreement?
David: I'm pausing. I'm pausing because I've got stories I can't tell.
Scott: Ahh. Part of my problem.
David: So share pledges are an effective way to take control of an enterprise and sell it's shares rather than the underlying assets. To do so requires the receiver to be appointed over the shares, as an example, and then the shares to be marketed. If you are only selling the shares and you've left officers and directors in the company, over which the share pledge has been taken, then the debtor is still running the business. So to effectively, really use a share pledge in a restructuring you need to then take control of the shares using the voting proxy that you have in a share pledge, and you have to change the board of directors, appoint somebody who's willing to go into the board of an insolvent company to take control of the business, fire the employees you do not want to be running the company any longer and find somebody to replace them. A phrase that I will use, better to have the debtor in possession than the lender in liability. When lenders exercise share pledges the exposure to potential liability for operating the business, and the deep pockets that are presented behind the company then as the lender exercises those rights, vis a vis other stakeholders, customer shareholders, employees and everybody else, it makes you a target. So I like the threat of the share pledge and taking shares away from the family holding company and taking the wealth out from under their legs, but as a practical tool for a restructuring, it's not that great. If you want to know how hard it actually is to enforce one of those things, you need only look at the Supreme Court of Canada decision in Blueberry.
Scott: In Blueberry?
David: Yeah, it started with an exercise of rights under a pledge.
Scott: Before the CCAA.
David: Before the CCAA. They didn't have authority in Blueberry. If the lender was correct, which the court found it wasn't, if the lender was correct the board had been changed, and they couldn't have passed the resolution for the CCAA because the authority had been stripped pursuant to a document that gave authority to the lender to strip the board of those rights, and the stripping had occurred before the CCAA filing. The court completely ignored that in first instance.
Scott: If I could ask a question on that. I've seen a couple of times, to great effect, in a share pledge where it segregates the fast to right where the voting rights from the actual ownership of the shares, and so the lender was able to not take the shares but to take the voting rights to change the board and appoint me.
David: That's the proxy I'm talking about.
Scott: Right. In both of those cases, David, the lender swamped the balance sheet so it was really just them. But of course they didn't want to put their own people in and so they exercised that right. They appoint me.
David: I know who the lenders were in that circumstance and that lender uses that effectively but it's prepared to assume the risk associated with having its agent go to run a business.
Scott: Yeah. But if you want to put it through the expense of a formal restructuring because you are the balance sheet anyways, I've seen it work to great effect.
David: Look, if the company is utterly underwater on a secured basis, and the lender does not want to enforce to realize on the value today but rather wants to put a new team in and run the business, the share pledge helps in that situation. That's probably one in a hundred situations. Right? Like it's not that frequent and it often happens with lenders who are lending at higher interest rates who are taking warrants and more aggressive postures. It often happens with lenders who know that they're swamping the balance sheet or are prepared to take that risk because they see the enterprise value behind it and sometimes, arguably, that would be called a toe-hold lender in those circumstances.
Matthijs: I know we only have five minutes so I'm going to try to bring us to a close but one of the things I want to mention is also important for lenders to be aware of things that can be their security. One of things I see from a lending perspective is when you have a company that changes its name and the PPSA registrations aren't updated with the new name, for years. When there's an amalgamation or a change of name, the lender has to remember that the PPSA has to be updated within 15 or 30 days from the change of name, from when it becomes aware of it. David, to put you on the hot seat, is there anything else you'd quickly comment, in a minute or two.
Scott: Be aware of this. Be careful.
David: Undocumented bulges. Like verbal agreements that you'll raise the limit on the loan temporarily to allow them to make a payroll, because you're backed into a corner and you can't take the time to do a two page document to document it, so it's undocumented. It might be approved by credit or it might not. I will tell you that undocumented bulges are a career limiting move, especially if they haven't been approved by credit in advance. So that's one. You sort of say, why would anybody ever do that? Well, in 30 years I've probably seen it eight or nine times and it's career ending. That's one that's hard to cure. The other one is not having the right guarantee from the right party or not having the right piece of security over the right asset. Not having done your due diligence in the first instance. So you didn't get that. You found out that all the IP in the company was licenced to it by an Irish company, that's owned by the parent, by one of the shareholders, that they were doing transfer pricing out to the enterprise on the IP and that when you actually go to enforce, they strip the IP out of the company and say, enforce against what?
Matthijs: Yeah, so just to push people to another seminar that we did, Taking Security 101. Know your client. Know who owns the assets. Know there's limits of corporate responsibility in the sense that a shareholder isn't responsible for a company's debt. If you want to take a look at our Taking Security 101 seminar, we spent quite a bit of time on that subject.
David: If I could tell people the one thing is sometimes the best deal you do is the one you don't do. I'll give you a really tangible example. I did a deal years, and years, and years ago for a major financial institution where on the eve of the first advance on the loan we found out that we were taking out the loan from another bank's special loan situation. It hadn't been disclosed previously that the takeout was actually in special loans. In fact, we figured it out because of somebody who was copied in an email. We were told that they had to close on Friday because the other bank was now going to shutdown their facility and they wouldn't make payroll on Friday so we had to close. So all of that sort mess, the chaos that Scott referred to, hovered around the first advance on the loan. Friday night, 11:00 o'clock at night, talking to senior executives at one of the institutions and said, you guys shouldn't do this loan. These people are liars. If you still want to do the loan you need to go and get a full explanation and you should go and speak to them. So over the weekend they went and spoke to them. They got sold a complete bill of goods. I was still of the view that they were dealing with crooks. They decided to close the deal. They closed the deal. In six months they sold their debt for 50 cents on the dollar to a related party shareholder of the company because they were crooks. Sometimes the deal you do is too good. The concept of deal lust is an important learning exercise for every new lender. It catches up to you. So sometimes you shouldn't do that deal if you're Spidey sense says, don't trust these people.
Matthijs: What I would also say is, it's a little bit a self-serving comment, it's very important who your legal counsel in that situation is because you want a lawyer like you, David, who made that call.
David: It didn't matter.
Matthijs: It didn't matter but you want to receive the call. So it's good to have people who've seen a lot of transactions. We're reaching the end of this seminar. So I want to thank David and Scott for this really interesting topic. It's close to the heart of a lot of people. Very interesting for all of us. I think some of the key takeaways are to learn the red flags. Know how to spot it, see it, when a company's going bad. Make sure you document it. David said that a number of times through the seminar. Don't do the verbal waivers. Reservation of rights, document them. Waivers, document them. Forbearance agreements, document them. Otherwise you might lose the rights associated with not calling a default later. You might get that course of conduct claim. Bring in special loans early. Bring in a transfer but at least have someone who's done this before, looking over a shoulder, and start the conversation. Then at the end of the day a successful turnaround is in the hands of the borrower. It's their ability to define success and you can just help them along with the process but they do need to take some responsibility. As I said at the outset, this seminar is part of a series that we've been doing for about three years. Our next seminar in the series will be taking place on October 2022 and you should get an invite in late summer, so around September, to that. Make sure you're on the lookout for it. If there's any topics you'd like us to cover, sometimes we have four topics in one, over two hours. Sometimes we do one topic for two hours. So send me an email on what topics you'd like to see addressed and we'll consider them for that October seminar. Thank you for joining us so much and we appreciate you taking the time to spend two hours with us.
David: Thank you all.