With almost 30 years of combined ABL, commercial banking, factoring and auditing experience under his belt — including a number of liquidation scenarios — Albert Perez was ready for the next step. “You reach a point in your career where you know the transition to the CRO position is the next natural progression,” he says. “I felt that I was at a crossroads.”

When Hana Financial launched a new ABL group, Hana Business Capital, Perez was eager to get on board. “As we started to discuss things early on when I was interviewing, we felt that there was a grossly underserved market of lower middle-market companies,” he says, adding that companies within Hana’s target market have borrowing needs up to $5 million.

Due to the increase in regulatory requirements on commercial banks, Perez says he and Clark Griffith, president and senior managing director of Hana Business Capital, were attracted to the opportunity to start up an ABL shop. “We credit Sunnie Kim, our parent’s CEO, for having the foresight to support this initiative,” he adds.

Perez believes non-regulated lenders in Hana’s target market have a number of advantages. “Most commercial banks prefer ABL deals in the $10 million and above range and view anything less as too small for the costs involved,” he explains. “Non-regulated lenders very seldom require personal guarantees, contrary to commercial banking policy, and do not burden borrowers with a large number of financial covenants.

“We believe in the next five to ten years, the smaller middle market segment will continue to be grossly underserved as the economics — cost and time invested — of managing these credits become less worthwhile for commercial lenders,” he continues. “Even some of our competitors believe the economics makes more sense to pursue the middle and larger middle market segments. With pressure to meet loan goals and increase their books either through new business generation or portfolio acquisitions, this trend to up-market is expected to continue.”

Threefold Path of Pursuit

Hana plans to utilize a threefold process to pursue its underserved target market. “First of all, we’re going to leverage our factoring division relationships,” Perez says. “They’ve got access to thousands of customers and hundreds of clients, so quite a number of them are under tri-party arrangements with other banks but to try to consolidate that and keep it under one house.”

Second, Hana plans to maximize relationships with commercial banks to finance deals that have increased perceived risk that preclude the banks from pursuit. “Due to heavy regulatory requirements, they are very conservative,” Perez explains. “If there is even a little bit of a blip or a slight loss that results in covenant defaults, commercial banking ratings will likely deem these companies as ‘not a good fit’, so they’ll refer those over to us.”

And third, Hana intends to leverage long standing relationships with industry referral sources — boutique investment banking, private equity, appraisal and law firms. “We look upon these more as personal friendships in the community rather than mutually beneficial business partners,” Perez says. “They’ll let us know transactions that are in our target market.”

To really stand out from the crowd, Hana plans to differentiate itself through its ability to provide timely responses to prospects as all of thecredit committee members, including Perez, are located in the same office. “We don’t have a bureaucratic process where it’s back and forth between business development officer and a credit officer. We have unified roles within our group and so that kind of hands-on approach and the speed in which we can respond to the market will help us, more so than our competitors,” he says.

However, timely decision making is not the only differentiator. Perez says Hana’s depth of knowledge and experience enable a true understanding of a prospect’s business model and thus, its borrowing needs. “More often than not, lenders generally get caught up in pitching loans based on a borrower’s responses and structure accordingly,” he explains. “We instead pride ourselves on our ability to understand a business owner’s concerns and history better than our contemporaries to arrive at solutions that meet the borrower’s true working capital needs.”

There is one additional differentiator, and that is the culture at Hana, which is a lender with global perspective. Sunnie S. Kim, who founded Hana Business Capital’s parent 21 years ago, is of South Korean descent. Many of Hana’s borrowers, of which approximately half are of Korean origin, can be assured that they are working with a lender that is culturally sensitive. Additionaly, Griffith lived over 12 years in Japan and travelled several years back and forth to Spain. Hana brings this global perspective to lending and understands the importance of international trade.

Mitigating Risks

As chief risk officer, Perez’s primary responsibility is to structure, analyze and manage the credit underwriting process for each transaction. “Clark and I will take a look at a company’s financial statements, look at their collateral pool, and I have the authority to determine whether or not this would be a worthwhile relationship,” he explains. “Then we will discuss it with the other credit committee members if we indeed feel it’s worthwhile to proceed.”

This approach allows Hana to respond to prospect requests quickly. “We’re not wasting a client’s time,” he says. “It adds to our ability to provide a timely response and, with regard to our factoring division, to try to enhance opportunities there.”

Another aspect of Perez’s role includes informing his factoring and SBA colleagues about solid leads for the division. Since the ABL factoring and SBA divisions analyze credit differently, this approach enables Hana to leverage opportunities. To ensure fiduciary duty and remain objective, Perez says third party field exams are required to independently assess a prospect’s books, records and inventory to determine the liquidation value of the asset pool in the event that Hana is exposed to the collateral.

“Obviously we are looking at companies that are a little bit more volatile in earnings but we can’t afford to make too many mistakes,” he says, before adding. “Mistakes do happen, and I think that’s inherent in any opportunity or potential borrower that you analyze. If you want to move forward with it, our job is to try to mitigate those risks by clearly identifying them based on common mistakes made in the past.”

Focus on Factoring

Perez began his career in factoring, as a credit analyst with Heller Financial, before transitioning to ABL later in his career. He says that he is able to utilize what he learned at Heller with what Hana Business Capital is trying to accomplish today. “From my perspective, factoring made the transition to ABL much smoother and enabled me to pay closer attention to detail as a result of learning the minutia of receivable management inherent in factoring,” he explains. “Those skills and discipline have naturally carried over to the minutia of ABL, particularly in interpreting field exam results with regard to receivable roll-forwards and inventory tracking.”

When asked to describe an underwriting situation that was both memorable and instructional, Perez points to a transaction that was referred by Hana’s factoring group, which exhibited all the classic warning signs of a problem factoring relationship. “After discussing details of a contemplated ABL loan structure and the company’s financial performance, we discovered the company was not in any serious trouble but needed additional capital in the form of inventory advances,” he says. “We are in the process of transferring this relationship over to the ABL division while maintaining our factoring volume. I think this really demonstrated the synergy that our ABL group will have with our factoring group.”

Rate Hikes & Regulation Ahead

Looking ahead at the possibility of increases interest rates, Perez says the net effect would be neutral for Hana, provided it matches funds. “From a practical standpoint, Hana Business Capital will be sourcing capital/debt on a floating rate and in turn, will redeploy capital based on floating rates such as LIBOR and WSJ Prime,” he explains.

On the positive side, Perez says increased interest rates would improve risk returns for the ABL industry. “The cons are overall cost of funds may also increase for lenders like Hana, which will experience tighter margins with existing transactions that may be priced lower than the newer higher priced deals in the market,” he adds.

Perez sees regulation as both an opportunity and a concern for the ABL industry’s future. “The non-bank financial ABL lender space should strengthen and grow as regulations increase,” he explains. “This means that overall returns can grow, which over time will allow lenders to take more risk and allow entrepreneurs and business owners to have more access to capital.” Perez believes this could enable the industry to return to its roots, as a non-bank financial space, with rates that offer lenders increased returns and borrowers their desired capital.

“The greatest concern is that regulations that have been enacted continue to focus on financial performance metrics and not facility risk, most of which ignore the benefits of the ABL structure and its protections,” he explains. “This would conceivably reduce the number of commercial banks that would offer a conforming ABL product. While this may be a boom for non-regulated lenders, the volume will far exceed the available capital to satisfy the demand.”