Ian Mac: Thanks very much. So good morning, everyone. Welcome
to the 1045 session. My name is Ian Mac. I'm a partner with
McCarthy Tetro. We're a full service law firm, with offices
across Canada and also New York and London. I'll be your
moderator for this panel. And the topic for this morning
lending to lenders, strategies and insights for alternative
lenders to consider when raising capital to fund their book and
we've assembled a very excellent and knowledgeable panel from the
industry with tremendous knowledge. So I think it'll be a
very insightful discussion. So some very quick introductions of
our panelists, starting on my right, Lyla Kanji head of
specialty finance with BMO Financial Group. Next we have
Kevin Westfall, Vice President Accord Financial, we have Wayne
Pommen, President and CEO of Paybright. And last but not
least, we have Tyler Meyrick, Vice President corporate
strategy for Purpose Financial. So I'm gonna throw it over to
our panelists to give a brief overview discussion about their
organization and how they're involved with specialty finance.
So we'll start with Lyla.
Lyla Kanji: Thank you, Ian. So one of the key strategies that's
been driving growth for our commercial banking platform over
the last few years has been industry specializations. So as
part of that initiative, we rolled out a specialty finance
dedicated team early on in the year to focus on this important
important and growing segment. And while the launch has been
this year, as an institution, BMO has been lending, Hannah has
been active in the space for over 10 years, through our BMO
Harris platform. So we were actually very fortunate to
leverage their skill set and their knowledge base when we
rolled it out here in Canada. But we do recognize that Canada
and US are two different markets, especially in terms of
scale of the borrowers and maturity of the segment. So as
we are rolling out our vertical here, we are taking into account
those those no answers. So so yes, we're now ready in the
market actively speaking to borrowers and doing
Kevin Westfall: We were established in 1978. And then
transactions.
listed on the TSX, originally as asset based lenders, so kind of
just providing our own capital to mid market companies, and
really about 15 years ago started to grow in the lender
space. So kind of understanding from ourselves as lenders, how
do we kind of accommodate and lend to other financial
institutions, we've worked with merchant cash advance
businesses, those in the kind of small loan space, subprime auto
loans, personal loans, so we've got about 15, 20 years of
experience kind of lending to other lenders.
Wayne Pommen: So Paybright is a so called buy now pay later
company, we run the point of sale financing model, which
means we partner with merchants and retailers of various kinds,
and allow them to offer installment payments to their
consumers at the point of sale. We work with about 5000
different retailers across the country. Some of the bigger ones
tend to be in the E commerce space, like a Wayfair, or
Samsung or eBay or some of our partners. And we're a team of
about 110 in downtown Toronto. And I'll stop there.
Tyler Meyrick: Purpose Financial, you may know us from
our mutual fund and ETF business are ads on Air Canada, but we
also run a large small business lending business under the
thinking capital brand. So we lend up to 500,000 to two small
business borrowers across the country. We've deployed about a
billion dollars to Canadian entrepreneurs since 2006.
Ian Mac: Excellent, thank you very much. So we'll kick off the
discussion to talk about how to attract funding. So what do you
need to look like in order to attract funding? And what are
some important factors to consider in that vein? And I'll,
I'll throw it over to Wayne to kick off the discussion.
Wayne Pommen: Sure. So I think one of the main things in our
industry is when you're a small company or a startup, you need
to attract so much more capital than a small company of the same
size in another industry, because you have to fund the
portfolio. And what that means, I think is you kind of need to
have your act together in a whole bunch of ways, much
earlier than you otherwise would have. Before I was was with
paybright. I was with a private equity firm. And we spent a
bunch of time looking at specialty finance companies from
an equity standpoint. And there were many, many times where we
go into a meeting and we would know in about 10 minutes that it
was never going to happen because the company didn't have
a handle on, you know their data, their loan tape. They
didn't have Paula Cs written down that were in good shape,
they couldn't articulate different aspects of how their
book was performing, they didn't have the right metrics,
financial reporting wasn't there. At an early stage, you
really have to have all this stuff locked down. Because if a,
if a lender or an equity provider comes in and feels like
they need to teach you this stuff, that's really bad. I
would also make a pitch, for example, that it makes sense to
get your statements audited almost right from the get go,
and just start building that rigorous track record. And if
you're at an early stage, and you, you don't have these things
in place, you want to find someone who's been there and
done it before to help you put those things in place. That's
really what separates the good from the great at the early
stage.
Ian Mac: Tyler, any thoughts on that?
Tyler Meyrick: Yeah, I think that's absolutely right. I
think, you know, in the FinTech side, there's a tendency to
focus on the fin, or rather, on the tech, not the fin. And in
sourcing capital, they care much more about the fin. So as Wayne
said, you know, having policies, procedures and the data so that
when when a lender walks in, you're able to provide them with
a pretty robust set of procedures that you're
following. They care much more about that than they do about
your growth trajectory over the next little while, you know,
obviously, every lender would like to grow with you and wants
to see your growth, but being able to demonstrate robust
internal policies and procedures, being able to show
that you know how to service loans, you know how to collect
on loans, not just how to grow volume is, is really critical.
And so I think what what we've found is having all of that in
written documents, and in kind of institutionalized form, as
opposed to trying to explain it every time on a one off basis.
One, make sure that you're you're actually adhering to them
internally. And that, that, you know, you've got kind of robust
policies that are being followed. And to it simplifies
your life when you're trying to deal with a whole bunch of
different lenders, which is typically how you source
capital, because you're just able to send them a bunch of
documents.
Ian Mac: Kevin, any from the perspective of a lender or
funder, any any thoughts on those comments?
Kevin Westfall: Yeah, I agree with all of the above. I mean,
we're kind of at the earlier stage, guys. So we talked
earlier about barriers to entry, and how to, again, financing and
so on. And so we work with kind of a lot of earlier stage
companies and kind of to Wayne and Tyler's points of, you know,
first and foremost, who are we learning to? Do you understand
your processes, procedures, and again, us being you know,
lenders by background, we know what we would like and how we
would underwrite deals, and so not necessarily in the same
aspects as what an MCA or small business loan provider might be
providin, but what you know, who is it that we're lending to? And
then kind of, for our perspective, is the company
trading profitably? So we can kind of take a look at those
kind of couple of aspects on who are we lending to? Is there some
profitability? You know, we provide some pretty significant
leverage. So we're kind of at the earlier stage, guys, so it's
not always cut and dry. You know, I've got this process
nailed down, I've got this procedure nailed down. There
should be something you know, in writing, key process controls,
management controls, and so on how you're managing cash and,
and kind of dealing with loans and adjudications. But aside
from that, we can be pretty flexible in providing solutions.
Ian Mac: And Lyla, I think, perhaps, your BMO is a bit more
focused on later stage funding. So any comments from from that
perspective, or anything else that was said?
Lyla Kanji: Sure. So for more established borrowers, there are
a couple of things that we look at. And the first and the most
important thing and wouldn't come as a surprise is a track
record and the ability to demonstrate a track record track
record of not just financial profitability, but being able to
grow and sustain a business that is at a certain scale, and then
the track record of navigating through economic cycles. And
then that's becoming harder and harder to test given that we've
been in such a bull market over the last few years. But, but
that, to me, is probably the most fundamental thing.
Secondly, a defined product or a market niche, because as lending
to as lenders to lenders, we really relying on your
underwriting standards. And for us, we place a strong emphasis
on the consistency of that, and then the resulting portfolio
that data. And lastly, I would say, stable and tenured
management teams, who don't just have financial services
experience, but really experience with the asset class,
because when the downturn does happen, we are really relying on
these management teams to just steer the ship and protect our
collateral. So that's, that's yeah, that's the perspective
from our end.
Ian Mac: Excellent. Let's get a little more granular on the
actual portfolio mix. How did the considerations change based
on the asset class? So if we're talking about consumer loans,
versus auto loans, consumer finance, how does that inform
where you seek sources of capital and I'll throw that one
out to Wayne as well that to kick it off.
Wayne Pommen: I think our observation has been that
different lenders have different preferences and different asset
classes and different experience based on what's worked for them
in the past or how they they structure their deals, I think
one of the biggest considerations that would affect
more folks in this room is the distinction between prime and
non prime, whether that's consumer or commercial. And
there are, frankly, just a bunch of lenders who have trouble
getting their head around the non prime side. And so if you're
a non prime lender, you tend to have a smaller number of
options, or at least a different type of potential lenders to
your business, or at least that will give you capital at a
reasonable scale at a reasonable price. So that's always
something to keep in mind. And you have to kind of pound the
pavement harder sooner to fund a non prime book than a prime
book. That's just one, one dimension.
Tyler Meyrick: Yeah, I would echo that for sure. The other
thing I would add, that I think informs what type of lender you
talk to is, is your track record in the asset. And we see this
all the time where, you know, we're looking to add a product
in an adjacent vertical or, or that even just looks slightly
different than what we do today. And quite often, that informs
who we go to, you know, we've got good relations with some of
the banks, but they're often not your first call on a new
product. You know, I think a lot of people in this room will
understand that, that the Canadian banks have a great
appetite for mortgages, for credit cards, and for auto
loans, because they've got very well established securitization
conduits for those. You know, when it comes to small business,
particularly non prime small business, you sometimes talk to
alternative lenders first, and as you build a track record,
then you can, you can educate the banks a little bit more,
maybe start with a smaller bank, and then move to to the vimos of
the world. Once you've you've got a track record, because I
think, you know, every bank is looking for something different.
There is capital out there for all different types of assets.
And for all different types of track records, I think it's
really just a question of where you start and having realistic
expectations. I think if you're a FinTech, that's built a
business case on having a scat, one bank, lend you at a 90%
advance rate from from day one, but your your business plan, you
know, may need a little bit of refinement. But I think if
you've got reasonable expectations of equity
contribution, sort of, of taking time to build a track record,
there is capital out there, I think you just need to
understand the landscape and understand to Wayne's point, you
know, who's got interest in what.
Kevin Westfall: Our focus is primarily kind of a subprime
space, but we're fairly agnostic, loan wise, and again,
to kind of underwriting to the management team and kind of the
acumen of the business as long as you're kind of strong and
your asset class and got it, you know, built your team and your
management systems and so on and reporting around those circles
and cycles, we'd be fairly agnostic and an industry.
Lyla Kanji: Yeah, I would just add, when we're looking at
consumer finance company, the additional diligence that we
would do is, is the framework or the controls that these
companies have over all the regulatory stuff, right, like
stuff on the consumer protection. And we do place a
ton of emphasis on that, as well as looking at the AML KYC. That
will be the key difference when we look at these different asset
classes. In terms of sourcing capital from different sources,
I personally think it's more driven by scale, a smaller
company, that's a plus or minus 50 million of assets, what we're
seeing, they are initially relying on alternative lenders,
and as the scale happens, then that's where the commercial
banks should step in, or if it's a new product, it does take
time, and I will completely agree it does take time for the
commercial banks to understand, but it helps when there's enough
diversification in the portfolio.
Ian Mac: Excellent. Now, sort of continuing on this theme of
evolution of the life cycle when when a boar scales when their
book scales, how do the loan terms actually changed? Just
getting a bit more granular on on types of terms of the loans,
covenants, etc. Once the bore scales, how do you see that
changing? Maybe I'll I'll ask Lyla first on that one.
Lyla Kanji: Sure. So so what we've seen as a fast growing
originator, or as a start up, companies are really relying on
asset specific financing or what we call SBB, bankruptcy remote
kind of financings. And that doesn't make a ton of sense from
a borrower perspective, because there's not much equity
requirements there. But those do come with additional cost of
capital and very restrictive performance governance, because
of lenders are really relying on the recourse against those
assets. As the company does grow in scale it there's definitely
an advantage in looking at more corporate style financing, more
borrowing, base balance sheet financing, because there's
enough equity buffer for the for the lenders to to get
comfortable, because at that point in time, we're really
relying on and we look we do have performance governance as
as the company scales, but we are really relying on the
financial wherewithal of the company. And we're also looking
at their ability to attract more institutional type of capital or
more private equity or public equity type of capital, as well
as looking at the business as a going concern. So so it's more
movement from an acid pure acid lender to a more corporate
facility.
Ian Mac: Sure.
Kevin Westfall: Yeah, we're kind of that that initial layer. So
we're, you're generally the first step provider, after that
layer of equity, business starts building some scale and kind of
started to burn through some of that equity and are hindered by
growth. So we're generally in there on the earlier stages,
providing higher leverage, you know, less covenants, a little
bit more flexibility. And as as they start to scale and so on.
That's generally where they kind of exit from us and more
introductions to Lyla and her group and at the bank, and it's
just, it's like anything, it's kind of at that cycle, that
lifecycle that we play in and more alternative space than the
more traditional space.
Ian Mac: Any comments from from Wayne, from a perspective of an
originator on the actual loan terms?
Wayne Pommen: Well, I think just generally, if you're scaling,
that means you're probably doing reasonably well, you're you're
building the track record, you have larger amounts of assets
and add all of that means you can bring more potential vendors
to the table as you grow into their size range. As you prove
that you maybe know what you're doing, you can tend to get sort
of schedule one, you know, balance sheets, or large
institutions involved. And all of that tends to improve most of
the terms, particularly the cost of capital, yes, there may be
trade offs with advanced rates and other and other covenants.
But you should be able to, if everything's going well optimize
your, your sort of capital structure over time, based on
your scale and your track record. And so we've we've been
able to sort of move down that path in our business over the
past few years.
Tyler Meyrick: Yeah, and I would even add to what Lyla said, I
think you can start with with asset specific facilities that
you don't have uptight performance covenants on on the
assets, because you've got, you know, less equity or less
earnings built up in your corporate business, you then
moved to the corporate facilities, as was noted, and I
think, you know, at some point, you can actually look to make a
transition back, where you start doing public securitizations,
and you start building kind of a more robust diversified
financial structure like like what was talked about with Go
Easy, and, and some of the OnDeck US business as well,
where you actually eventually pretty much fully off balance
sheet into only asset specific facilities, which is, which is
sort of the kind of end state for most specialty finance
companies, many years down the road once they've scaled.
Ian Mac: Excellent. So maybe just getting a little bit more.
And I think I heard you, you actually said KYC, Lyla earlier,
but just on due diligence around structuring, especially finance
transaction, what are some thoughts on common pitfalls that
you might think about at the outset of a transaction that you
think both borrowers and funders should be aware of any thoughts
from the panel on that question? Sure. Lyla.
Lyla Kanji: So I think when we do our due diligence, we really
get deep into the portfolio. And I think that is essentially key
to to specialty finance lending is slicing and dicing the the
loan data across so many different levels. Because at the
end of the day, when we do end up lending, we always have
certain advanced rates, which are fairly common across the
industry. But we we do a lot of work in our stress case
scenarios, to make sure that the business and our loan is
protected in that sense.
Ian Mac: Sure.
Kevin Westfall: I think kind of leveraging off of some of
Wayne's earlier comments on being organized and having
access to information. And again, I mean, we're happy to
lend against, you know, certain businesses and different asset
classes, kind of, you know, make the joke about inventory, we're
happy to lend against inventory, you don't have to tell us what
it is. So, again, access to the data and information is, is
really kind of key for us. And again, we kind of come in on the
early stages. So we see all kinds of different venues,
things like, you know, review engagement, or audited financial
statements are a huge plus. And we know kind of in small or
medium sized businesses that want to avoid the cost for the
initial couple of years. But, you know, from a lender's
perspective, incurring that cost early on, just kind of show us,
you know, that organization and commitment to the business sort
of thing. So and again, we're probably similar to live is that
we're slicing and dicing the the the loan data and information
and, you know, it's access to that information. That's the
key.
Wayne Pommen: And I think maybe just on a slightly different but
related topic. The one thing that I've seen over the years is
people getting tripped up on the relationship of equity and debt,
right, the equity side of the portfolio side, and thinking
about what has to be in place when you guys probably see this
all the time. And so, you know, what are the our thought process
at paybright is, if we're going quickly, we need to have the
portfolio funding in place now for the volumes we want to have
a year from now. And we probably needed to have our equity in
good shape like six months ago. So yeah, we always try to have
the equity running like 18 months so ahead of where it
needs to be and the portfolio funding a year ahead ahead of
where it needs to be and It's very easy to kind of get the
order backwards and then everything gets stalled. And
that it's up, it's obviously challenging to execute. But it's
it's important not to have a situation where, you know, the
the portfolio funders say, okay, where's the equity? And then the
equity guys say, okay, well, you know, how are you going to fund
all this? And so there's kind of a dance that goes on. And I
think a lot of small originators over the years have been had
their growth slowed by trying to figure that out sort of in a
timely way.
Tyler Meyrick: Yeah, I would absolutely agree. I think that
that's probably the most common downfall for lenders in this
space, you know, because Because alternative lenders typically
are not regulated by OSPI, or someone that forces you to hold
regulatory capital, you the equity, debt balance can be
sometimes more more subjective. And I think, you know, you're
prudent to carry as much equity as you can afford. Because it
allows you to plan for losses that may be higher than you
might expect. You know, whereas in a Saskatchewan bank, they're,
they're regulated, and they're told how much equity they need
to hold, we're really not. So making sure that you've got that
that dance right, as Wayne said, and that your equity is probably
planned in advance that the debt will allow you to better manage
for credit downturns, it'll allow you to better manage for
surprises. And to the point, it's generally harder to find
that equity when you need it, than it will be to find the debt
that you need to grow and good times.
Ian Mac: Excellent. And just on, maybe this one's for both Kevin
and Lila, on the actual investment guidelines for the
investment criteria of that particular portfolio. So you're
looking at a MIC, what is, walk us through or talk a little bit
about how critically you're looking at that and what the
process looks like, from a lender perspective, when you're
looking at the investment guidelines.
Kevin Westfall: I'll kick it off, because I'm sure there's
going to be a little bit lighter than than Leila. Really, it's
it, we're kind of storybook lenders, it's, you know, Where
could the business be with the right capital. So again, kind of
that that probably initial debt and early stage kind of coming
to a business after that layer of equity. It really is kind of,
you know, covenant light, and, and a lot going on. So it's,
it's fairly simple for us to provide kind of that initial
facility, as long as we've got that management team, and the
company has achieved profitability, we can provide
the capital in a lot of instances and situations.
Ian Mac: Sure.
Lyla Kanji: Ours is a bit more structured, to that. So we will
look at a couple of years of positive operating
profitability, we will look at a level of equity base, and then
underwrite to that equity base. And in terms of the of the
structure, the covenant packages are very standard, but there
will be around debt to equity, there'll be loan to value that
we will look at. So it's those critical things. And again, I
think one point is of critical importance is the
diversification in the book. I can't stress enough, how much do
we look at diversification on the book in terms of the
underlying loans or the borrower's?
Ian Mac: No, that's helpful. So we had an entire panel earlier
this morning on market readiness. So we have a little
bit of time left. So maybe just from the where we are in the the
economic cycle, a lot of people using the R word recession,
where we are in terms of specialty finance itself, just
from the panelists, where do you see the industry going in the
medium term in terms in the context of of of this impending
downturn that everybody seems to be talking about? How does that
are there particular asset classes that might be relevant,
or from an underwriting perspective is getting tighter?
So any thoughts on the trend as we move forward in the next part
of the cycle? And I'll invite anybody to start. Wayne?
Wayne Pommen: Yeah, I think it's, it's gonna be really
interesting, because this has been such a long expansion. And
we have had such a long, benign credit cycle now. And so many
specialty finance companies, FinTech lenders, etc. in Canada,
but especially the US and other countries have all grown up
since the last credit cycle. And probably 85% of their employees
weren't even in the workforce during the credit crisis. And so
it will be really, really interesting to see who's got a
bunch of this stuff figured out and are ready for it and who
isn't. And so I've always been predicting a big washout. But
we'll see. I can just tell you that a paybright. We are at
paybright. We're just watching very closely sort of week to
week to see what's changing. And what we're absolutely trying not
to do is create is repeat the classic mistake of chasing
growth late in the cycle by loosening various credit
parameters, well, convincing ourselves the whole time that
it's actually fine. So we're trying not to repeat that cycle
and we're trying to be ready to respond to going to Jason's
comments in the earlier panel to respond if we need to, to sort
of protect the performance?
Tyler Meyrick: Yeah, I would absolutely echo that. I think,
you know, as much as we'd like to think the growth will sustain
forever, I think, you know, we all know it won't. The small
business space has gotten quite a bit more competitive, since
thinking capital was was founded in 2006, is basically the only
one. And so I think we see the market getting competitive, we
see people chasing growth. And I think it's important to want to
make sure you've got a diversified portfolio, as we
said earlier, to as, as we just talked about, make sure you've
got that that kind of financial dry powder in case you need it,
and three to make sure that you stay disciplined around your
credit policies, and that you're not chasing growth that at the
expense of potential long term profitability.
Kevin Westfall: I think that'll be the key I think, for most in
this room, we'll call it, it may be a little downturn, more than
than a recession, because we're not really from our perspective,
not expecting recession, but we see a lot of opportunity opening
up. So for a lot of the alternative lenders in this
space, I think the opportunities that you will start to see will
actually improve, you'll get some of the more traditionals
that will kind of start to move up market a little bit, making
more room for for better credits and availability in the
alternative side. So as long as you've kind of stayed true to
your practice and your process, you know, what is your existing
portfolio look like today? So it's not necessarily a matter of
we're gonna get a what's your, your prospect for new business
going to be because I think it's gonna be excellent. As long as
you stay true to your process and your procedures and kind of
you got your existing book intact, then you can kind of be
successful through the through transition.
Lyla Kanji: Yeah, similar to Kevin's point at BMO, not just
with specialty finance, we are very patient lenders, we are
relationship based lenders. So I think that will follow through
to the cycle. But when we are getting into each and every
transaction, what we do is we do doomsday scenarios, if let's
say, the borrower defaults, the credit cycle completely turns,
we do those scenarios, and we see how long will it take us to
get out. So we're already doing all the work on on that when we
get into the transaction. On the other side, we are looking at
the portfolio data and the reporting. at a very granular
level, we've got triggers, we've got played a covenant structures
in place that should give us an early warning, and help us
modify the structure if needed. So we are getting prepared for
it for sure.
Tyler Meyrick: Excellent. And I think for for those that are
well prepared, there will be huge opportunity, you know, to
Kevin's point, I think for those that can can handle the downturn
well and can can maintain the quality of their book through
it, though, there'll be those that won't. And I think that
there'll be a lot of business to pick up for those that are well
prepared. That'll look a lot better than the business that's
that's probably being chased around the margins today toward
the end of the cycle in a more competitive market.
Ian Mac: That's great. Thank you very much. Now, we have one
minute and I wanted to throw to the audience for one question,
but it better not. But thank you very much to our panelists for
sharing their insights today that I think that's very
helpful. And I'm sure a lot of the the audience members got a
lot out of that. And we probably scratched the surface on a lot
of the things we were talking about. So that probably bodes
well for the the networking and reception of that's later on
today. And thank you very much