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    Contact Blacksail Capital

    1 Toronto Street
    Toronto, ON M5C 2V6

    Telephone: 416.708.8746 (CANADA)
    Telephone: 512.710.6737 (US)
    Email: info@nextedgecf.com

    News & Blog

    News & Blog

    What Are We Doing to Protect Our Borrowers and Our Business?

    May 28, 2020

    What Are We Doing to Protect Our Borrowers and Our Business?

    Dear clients and partners,

    During this unprecedented moment in history, we sat down as a group and asked our credit team a few questions to get their opinion on what we are doing to protect our borrowers and our business as we navigate this pandemic. Here are a few of their thoughts.

    What steps are you taking to prepare for a distressed cycle?

    We will be extremely diligent in monitoring eligible collateral alongside our advance rates to ensure an acceptable cushion is maintained across our portfolio. We are also determining what we need in terms of staffing in order to manage the possibility of an increase in problematic loans.

    Although we are open for business and look forward to helping small and medium-size business, all new transactions will be subject to detailed due diligence processes. We tend to work with smaller, lower-end, middle-market companies that may have been turned down by a bank or a more traditional asset-based lender. Every transaction has a story – we are not just looking to deploy capital, but also to really consider the long-term effect of each decision.

    For example, the December 31, 2019 audited financials of a company will be far different than the March 31, 2020 financials of the same company with about one month of COVID- 19 baked in. Then look forward to June 30, 2020, and it will look quite different again with six months of the pandemic baked in. Since we tend to be collateral driven, we need to really look at the quality of the receivables that we are primarily lending against. It is not just about the credit quality of our borrowers, but the ability of our borrowers’ customers to pay them. The challenge is, that is something that we will not see the full impact of for another 30, 60 or 90 days.

    Those customers which are companies in an industry, sector or geographic area that has been grossly affected by COVID-19, will put pressure on the borrowers’ ability to collect on their receivables. For example, a supplier of kitchen equipment selling to a restaurant that has had to close. There is also oil and gas, which feeds so many other industries such as transportation, gas stations, airline and trucking. We have some food processors in our portfolios. While they are still selling to supermarkets, they are no longer selling to restaurants or airlines.

    What is your outlook for default rates and problem loans?

    Some of our borrowers have been able to get Paycheck Protection Program (PPP) loans in the United States and Business Credit Availability Program (BCAP) loans in Canada, which have helped them with their liquidity issues. Still, we think you will potentially see some borrowers defaulting or needing some type of accommodation, whether it is a payment or covenant default.

    Another industry that we perceive will have issues is the Subprime Auto Loans business because borrowers are likely on furlough or have lost their jobs and will struggle to make car payments. We do not see any sector that will not be affected by the pandemic.

    Which new risks could have the strongest impact on loan portfolios?

    Inflation could be an issue with the Federal Reserve and Department of Treasury injecting trillions of dollars into the economy affecting the over-all North American Market. On the other hand, one risk we do not worry about are interest rates. They are no longer the risk they used to be.

    If people cannot go back to work because their employers are no longer in businesses, this creates challenges for real estate and employment growth, and it cuts into Federal, State and Provincial sales tax revenues in both the United States and Canada. The government is getting money into the hands of small business owners and increasing unemployment assistance right now, but if that money runs out, the results could be cataclysmic.

    People have worked very efficiently remotely. So we might see more office building tenants shrinking their footprints. They might get rid of two-thirds of their space, use some form of office hoteling and then let the majority of employees work from home. That could have an impact on some of those large Class A or Class B office building loans.

    Keeping an eye on liquidity is always a top concern. Banks should be bringing in the professional community of advisors and restructuring experts. If you were doing quarterly tracking of your borrowers’ cash collection, then you should be doing it monthly or better yet, weekly now.

     

    We at Blacksail Capital Partners want you to know that we are there for our referral sources and borrowers to help them try to find financing solutions during this unprecedented moment in our history.

     

    For more information on Blacksail Capital Partners, please contact us.

     

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