Conversation With A Debtor


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Presentation by Al Artis, VP of Finance, Sharper Image at CMA's Annual Meeting 2008.

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Conversation With A Debtor

  1. 1. Conversation with a Debtor Alfred Artis
  2. 2. Agenda <ul><li>Genesis of this topic </li></ul><ul><li>Change versus Decline </li></ul><ul><li>What it takes to know the difference </li></ul><ul><li>What the vendor knows that you don’t know </li></ul><ul><li>Questions Credit Managers should ask themselves </li></ul><ul><li>Questions Credit Managers should ask the customer </li></ul><ul><li>Actual Questions and Comments from Credit Professionals </li></ul>
  3. 3. Why this Topic? <ul><li>Experience as a Credit Professional who constantly ponders the role of the Credit Professional </li></ul><ul><li>Learnings from being a Banker </li></ul><ul><li>Current real-time experience </li></ul><ul><li>Mike didn’t like other topics I proposed, such as “Credit as a Tool of Revenge”; “Remove your Heart and Improve Collections”; or “Taking a Security Interest in First-Born Children” </li></ul>
  4. 4. Change versus Decline <ul><li>Change: Decisions and actions made and taken by management that yield financial results different from prior periods </li></ul><ul><li>Examples: Selling strategy, product mix, staffing, IT platform, executive changes, M&A, payment policies </li></ul><ul><li>Note: Change is not a guarantee of success or failure. It is the impetus to review the situation, not make a final decision. </li></ul>
  5. 5. Change versus Decline <ul><li>Irreversible Decline: Negative revenue, profit, or liquidity that was caused by change or inaction and that cannot be reversed due to lack of liquidity </li></ul><ul><li>Example: Revenue decline due to loss of customer base, margin decline due to competition, failed acquisition, overspending on wrong inventory or capital assets </li></ul>
  6. 6. Change versus Decline <ul><li>Reversible Decline: Negative results that left the company with enough cash or financing to continue operations for another fiscal year </li></ul><ul><li>Note: This is Alfred’s definition (patent pending) </li></ul><ul><li>The key for the credit professional is to assess change versus decline accurately… </li></ul>
  7. 7. What Credit Professionals Need to Know—a Debtor’s view <ul><li>The origin of the change in results from prior period, even if the results are good </li></ul><ul><li>Whether Management knows if the company is undergoing change or a decline (I can’t stress this enough!) </li></ul><ul><li>Management’s plan </li></ul><ul><li>Real-time balance sheet information </li></ul><ul><li>plus… </li></ul>
  8. 8. What Credit Professionals Need to Know—a Debtor’s view <ul><li>The debtor’s access to capital—in real, verifiable dollars and not hopes and dreams; no cash and no access means no reversal </li></ul><ul><li>How long the debtor can last—not a simple cash burn test, but cash burn plus access as defined above </li></ul><ul><li>Note: I personally guarantee that you will always make the wrong decision if you do not consider the above bullets. Why? </li></ul>
  9. 9. What the Customer Knows that You don’t Know <ul><li>The set-in of change long before you do </li></ul><ul><li>Conditions under which change becomes irreversible decline—this is the key to all risk analysis </li></ul><ul><li>Its realistic access to capital </li></ul><ul><li>Its own payment priorities—you will be surprised at how high up the priority chain a vendor can be </li></ul>
  10. 10. What the Customer Knows that You don’t Know <ul><li>How he or she assesses your behavior and collections patterns: supportive or harmful or -- God forbid-- ignorant </li></ul><ul><li>Whether your questions are germane to the situation </li></ul><ul><li>Whether he or she intends to do business with you in the future—this can be driven by behavior and collections patterns </li></ul><ul><li>The complete list of supportive and harmful vendors </li></ul><ul><li>So what is the Credit Professional to do? Ask a bunch of questions first… </li></ul>
  11. 11. Questions Credit Professionals Should Ask Themselves <ul><li>Am I here to avoid risk or manage risk? </li></ul><ul><li>Do I even want to know whether my customer is undergoing change or decline? Refreshingly, some creditors don’t want to know, and they are still supportive. </li></ul><ul><li>Am I willing to take the time to try to understand the situation? </li></ul><ul><li>and… </li></ul>
  12. 12. Questions Credit Professionals Should Ask Themselves <ul><li>Do I want this company to want to do business with me in the future if their situation is undergoing change and not decline? </li></ul><ul><li>Do I have an exit strategy? </li></ul><ul><li>What information do I need in order to make my decision? Note: If all the information you need is on a message board, then please proceed to the “Cash In Advance as a Credit Tool” session. </li></ul><ul><li>But where do I go to get the information? </li></ul>
  13. 13. Questions Credit Managers Should Ask the Customer <ul><li>May we enter into a Confidentiality Agreement? This opens up a world of information to you, but don’t ask for it if you have already made up your mind. All questions that follow can only truly be answered under confidentiality. </li></ul><ul><li>Why shouldn’t I be concerned about the information in front of me? </li></ul><ul><li>What is your Plan B? </li></ul><ul><li>plus… </li></ul>
  14. 14. Questions Credit Managers Should Ask the Customer <ul><li>What is your current liquidity situation? </li></ul><ul><li>Are you in compliance with your debt agreement? </li></ul><ul><li>What is your current A/P aging profile? </li></ul><ul><li>Am I an important vendor to you? </li></ul><ul><li>Is there anything you want to propose? </li></ul>
  15. 15. Actual Credit comments and questions <ul><li>I placed you on credit hold because I heard you are filing bankruptcy in three weeks. </li></ul><ul><li>Yes, I agree that you have never paid late and that you presently owe us nothing, but you could go out of business. </li></ul><ul><li>My credit insurer won’t let me extend credit to you. </li></ul><ul><li>Wait, there’s more… </li></ul>
  16. 16. Actual Credit comments and questions <ul><li>I will give you a credit line if you wire me the payment when the order is ready to ship. </li></ul><ul><li>I will extend you credit if you issue me a standby letter of credit. </li></ul><ul><li>I called to talk to you, but my mind is already made up. </li></ul><ul><li>And more…but that make sense… </li></ul>
  17. 17. Actual Credit comments and questions <ul><li>I believe the risk situation has changed, so I want to see if you can stretch out your orders. </li></ul><ul><li>Can we review your inventory levels before we release more orders? </li></ul><ul><li>This recent press release concerns me. Can someone help me understand how this is going to affect your company? </li></ul><ul><li>plus… </li></ul>
  18. 18. Actual Credit comments and questions <ul><li>How about if we keep terms on all existing orders, but go cash-in-advance on new orders? </li></ul><ul><li>I believe I understand your situation, but our risk appetite is not there, so we respectfully ask for some type of credit support. </li></ul><ul><li>If you can bring your account current now, then it will show me that you have liquidity and we can keep the terms. </li></ul><ul><li>Do you have a payment plan that you want to propose? </li></ul><ul><li>Two more: One prepetition and the other postpetition </li></ul>
  19. 19. Actual Credit comments and questions <ul><li>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. </li></ul><ul><li>Postpetition Actual E-mail: </li></ul><ul><li>Alfred, we received notice of receipt of the 87K wire as promised during our discussion last week.  I would like to thank you for honoring all agreements we have made in our many conversations over the last month.  Our Nashville office is advising the local Sharper Image staff that per the agreement we made that your 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 Image stays within the terms as we agreed.  We will be as flexible as possible in making sure your business is handled without interruption.   </li></ul><ul><li>Head of Finance South Area </li></ul>
  20. 20. Conclusion <ul><li>A change in results does not mean irreversible decline. Knowing the difference is what distinguishes the credit professional from the stereotype of a non-thinking, negative-attitude employee who does not support the growth goals of the company. </li></ul><ul><li>Credit professionals who ask the right questions of themselves and of the customer always get good results. </li></ul><ul><li>Two-way communication is the key if creditors honestly want to work with vendors undergoing change. Go under NDA! </li></ul><ul><li>Now, let’s talk… </li></ul>