Conversation with a Conversation with a DebtorDebtor

Alfred ArtisAlfred Artis

AgendaAgenda

Genesis of this topicGenesis of this topic Change versus DeclineChange versus Decline What it takes to know the differenceWhat it takes to know the difference What the vendor knows that you don’t knowWhat the vendor knows that you don’t know Questions Credit Managers should ask Questions Credit Managers should ask

themselvesthemselves Questions Credit Managers should ask the Questions Credit Managers should ask the

customercustomer Actual Questions and Comments from Credit Actual Questions and Comments from Credit

ProfessionalsProfessionals

Why this Topic?Why this Topic?

Experience as a Credit Professional who Experience as a Credit Professional who constantly ponders the role of the Credit constantly ponders the role of the Credit ProfessionalProfessional

Learnings from being a BankerLearnings from being a Banker Current real-time experienceCurrent real-time experience Mike didn’t like other topics I proposed, Mike didn’t like other topics I proposed,

such as “Credit as a Tool of Revenge”; such as “Credit as a Tool of Revenge”; “Remove your Heart and Improve “Remove your Heart and Improve Collections”; or “Taking a Security Interest Collections”; or “Taking a Security Interest in First-Born Children”in First-Born Children”

Change versus DeclineChange versus Decline

Change: Decisions and actions made and taken Change: Decisions and actions made and taken by management that yield financial results by management that yield financial results different from prior periodsdifferent from prior periods

Examples: Selling strategy, product mix, Examples: Selling strategy, product mix, staffing, IT platform, executive changes, M&A, staffing, IT platform, executive changes, M&A, payment policiespayment policies

Note: Change is not a guarantee of success or Note: Change is not a guarantee of success or failure. It is the impetus to review the situation, failure. It is the impetus to review the situation, not make a final decision.not make a final decision.

Change versus DeclineChange versus Decline

Irreversible Decline: Negative revenue, profit, Irreversible Decline: Negative revenue, profit, or liquidity that was caused by change or or liquidity that was caused by change or inaction and that cannot be reversed due to lack inaction and that cannot be reversed due to lack of liquidityof liquidity

Example: Revenue decline due to loss of Example: Revenue decline due to loss of customer base, margin decline due to customer base, margin decline due to competition, failed acquisition, overspending on competition, failed acquisition, overspending on wrong inventory or capital assetswrong inventory or capital assets

Change versus DeclineChange versus Decline

Reversible Decline: Negative results that Reversible Decline: Negative results that left the company with enough cash or left the company with enough cash or financing to continue operations for financing to continue operations for another fiscal yearanother fiscal year

Note: This is Alfred’s definition (patent pending)Note: This is Alfred’s definition (patent pending)

The key for the credit professional is to The key for the credit professional is to assess change versus decline accurately…assess change versus decline accurately…

What Credit Professionals Need to What Credit Professionals Need to Know—a Debtor’s viewKnow—a Debtor’s view

The origin of the The origin of the change in resultschange in results from from prior period, even if the results are goodprior period, even if the results are good

Whether Management knows if the Whether Management knows if the company is undergoing change or a company is undergoing change or a decline decline (I can’t stress this enough!)(I can’t stress this enough!)

Management’s planManagement’s plan Real-time balance sheet informationReal-time balance sheet informationplus…plus…

What Credit Professionals Need to What Credit Professionals Need to Know—a Debtor’s viewKnow—a Debtor’s view

The debtor’s access to capital—in real, verifiable The debtor’s access to capital—in real, verifiable dollars and not hopes and dreams; no cash and dollars and not hopes and dreams; no cash and no access means no reversalno access means no reversal

How long the debtor can last—not a simple cash How long the debtor can last—not a simple cash burn test, but cash burn plus access as defined burn test, but cash burn plus access as defined aboveabove

Note: I personally guarantee that you will always Note: I personally guarantee that you will always make the wrong decision if you do not consider make the wrong decision if you do not consider the above bullets. Why?the above bullets. Why?

What the Customer Knows that What the Customer Knows that You don’t KnowYou don’t Know

The set-in of change long before you doThe set-in of change long before you do Conditions under which change becomes Conditions under which change becomes

irreversible decline—this is the key to all irreversible decline—this is the key to all risk analysisrisk analysis

Its realistic access to capital Its realistic access to capital Its own payment priorities—you will be Its own payment priorities—you will be

surprised at how high up the priority chain surprised at how high up the priority chain a vendor can bea vendor can be

What the Customer Knows that What the Customer Knows that You don’t KnowYou don’t Know

How he or she assesses your behavior and collections How he or she assesses your behavior and collections patterns: supportive or harmful or -- God forbid-- patterns: supportive or harmful or -- God forbid-- ignorantignorant

Whether your questions are germane to the situationWhether your questions are germane to the situation Whether he or she intends to do business with you in the Whether he or she intends to do business with you in the

future—this can be driven by behavior and collections future—this can be driven by behavior and collections patternspatterns

The complete list of supportive and harmful vendorsThe complete list of supportive and harmful vendorsSo what is the Credit Professional to do? Ask a bunch of So what is the Credit Professional to do? Ask a bunch of

questions first…questions first…

Questions Credit Professionals Questions Credit Professionals Should Ask ThemselvesShould Ask Themselves

Am I here to avoid risk or manage risk?Am I here to avoid risk or manage risk? Do I even want to know whether my customer is Do I even want to know whether my customer is

undergoing change or decline? Refreshingly, undergoing change or decline? Refreshingly, some creditors don’t want to know, and they are some creditors don’t want to know, and they are still supportive.still supportive.

Am I willing to take the time to try to Am I willing to take the time to try to understand the situation?understand the situation?

and…and…

Questions Credit Professionals Questions Credit Professionals Should Ask ThemselvesShould Ask Themselves

Do I want this company to want to do business Do I want this company to want to do business with me in the future if their situation is with me in the future if their situation is undergoing change and not decline?undergoing change and not decline?

Do I have an exit strategy?Do I have an exit strategy? What information do I need in order to make my What information do I need in order to make my

decision? decision? Note: If all the information you need is on a message Note: If all the information you need is on a message board, then please proceed to the “Cash In Advance as a Credit Tool” board, then please proceed to the “Cash In Advance as a Credit Tool” session.session.

But where do I go to get the information?But where do I go to get the information?

Questions Credit Managers Should Questions Credit Managers Should Ask the CustomerAsk the Customer

May we enter into a Confidentiality Agreement? This May we enter into a Confidentiality Agreement? This opens up a world of information to you, but don’t ask for opens up a world of information to you, but don’t ask for it if you have already made up your mind. All questions it if you have already made up your mind. All questions that follow can only truly be answered under that follow can only truly be answered under confidentiality.confidentiality.

Why shouldn’t I be concerned about the information in Why shouldn’t I be concerned about the information in front of me?front of me?

What is your Plan B?What is your Plan B?plus…plus…

Questions Credit Managers Should Questions Credit Managers Should Ask the CustomerAsk the Customer

What is your current liquidity situation?What is your current liquidity situation? Are you in compliance with your debt Are you in compliance with your debt

agreement?agreement? What is your current A/P aging profile?What is your current A/P aging profile? Am I an important vendor to you?Am I an important vendor to you? Is there anything you want to propose?Is there anything you want to propose?

Actual Credit comments and Actual Credit comments and questionsquestions

I placed you on credit hold because I heard you I placed you on credit hold because I heard you are filing bankruptcy in three weeks.are filing bankruptcy in three weeks.

Yes, I agree that you have never paid late and Yes, I agree that you have never paid late and that you presently owe us nothing, but you that you presently owe us nothing, but you could go out of business.could go out of business.

My credit insurer won’t let me extend credit to My credit insurer won’t let me extend credit to you.you.

Wait, there’s more…Wait, there’s more…

Actual Credit comments and Actual Credit comments and questionsquestions

I will give you a credit line if you wire me I will give you a credit line if you wire me the payment when the order is ready to the payment when the order is ready to ship.ship.

I will extend you credit if you issue me a I will extend you credit if you issue me a standby letter of credit.standby letter of credit.

I called to talk to you, but my mind is I called to talk to you, but my mind is already made up.already made up.

And more…but that make sense…And more…but that make sense…

Actual Credit comments and Actual Credit comments and questionsquestions

I believe the risk situation has changed, so I I believe the risk situation has changed, so I want to see if you can stretch out your orders.want to see if you can stretch out your orders.

Can we review your inventory levels before we Can we review your inventory levels before we release more orders?release more orders?

This recent press release concerns me. Can This recent press release concerns me. Can someone help me understand how this is going someone help me understand how this is going to affect your company?to affect your company?

plus…plus…

Actual Credit comments and Actual Credit comments and questionsquestions

How about if we keep terms on all existing How about if we keep terms on all existing orders, but go cash-in-advance on new orders?orders, but go cash-in-advance on new orders?

I believe I understand your situation, but our I believe I understand your situation, but our risk appetite is not there, so we respectfully ask risk appetite is not there, so we respectfully ask for some type of credit support.for some type of credit support.

If you can bring your account current now, then If you can bring your account current now, then it will show me that you have liquidity and we it will show me that you have liquidity and we can keep the terms.can keep the terms.

Do you have a payment plan that you want to Do you have a payment plan that you want to propose?propose?

Two more: One prepetition and the other Two more: One prepetition and the other postpetitionpostpetition

Actual Credit comments and Actual Credit comments and questionsquestions

Prepetition:Am I going to get paid? If you are telling me that we Prepetition:Am I going to get paid? If you are telling me that we are going to get paid, then I don’t have a problem.are going to get paid, then I don’t have a problem.

Postpetition Actual E-mail:Postpetition Actual E-mail: Alfred, we received notice of receipt of the 87K wire as promised Alfred, we received notice of receipt of the 87K wire as promised

during our discussion last week. I would like to thank you for during our discussion last week. I would like to thank you for honoring all agreements we have made in our many conversations honoring all agreements we have made in our many conversations over the last month. Our Nashville office is advising the local over the last month. Our Nashville office is advising the local Sharper Image staff that per the agreement we made that your Sharper Image staff that per the agreement we made that your account will now be handled as normal, funds will be advanced as account will now be handled as normal, funds will be advanced as needed .and that product will no longer be held as long as Sharper needed .and that product will no longer be held as long as Sharper Image stays within the terms as we agreed. We will be as flexible Image stays within the terms as we agreed. We will be as flexible as possible in making sure your business is handled without as possible in making sure your business is handled without interruption. interruption.

Head of Finance South AreaHead of Finance South Area

ConclusionConclusion

A change in results does not mean irreversible A change in results does not mean irreversible decline. Knowing the difference is what decline. Knowing the difference is what distinguishes the credit professional from the distinguishes the credit professional from the stereotype of a non-thinking, negative-attitude stereotype of a non-thinking, negative-attitude employee who does not support the growth goals of employee who does not support the growth goals of the company.the company.

Credit professionals who ask the right questions of Credit professionals who ask the right questions of themselves and of the customer always get good themselves and of the customer always get good results.results.

Two-way communication is the key if creditors Two-way communication is the key if creditors honestly want to work with vendors undergoing honestly want to work with vendors undergoing change. Go under NDA!change. Go under NDA!

Now, let’s talk… Now, let’s talk…