Remembering Jerry Maguire

There’s a great scene in the movie “Jerry Maguire” in which Tom Cruise is pleading with a prospective client. He says, again and again:

“Help me help you. Help ME help YOU!”

Without Cruise’s inflection it sounds a little flat but he was really PLEADING.

Suspend disbelief for a moment and let some of that pleading tone seep into your reading of this post!

In my June 30 post I complimented the TRE management on the job they’ve been doing at getting Sellers to post updated financial statements in a more timely manner (as required, by the way, in their program agreements). It’s an issue that I and others, I know, have been concerned about and things are moving in the right direction.

Now I’d like to make another suggestion. I can’t communicate directly with TRE Sellers. That’s not allowed. So I’ll make it in this forum and hope that it somehow gets transmitted through other channels.

Here’s the issue…..

As I sit here, there is a live auction on the platform that I might well be interested in, EXCEPT that the updated financial statements show what is to me a serious and inexplicable trend in the ratio of accounts receivable to gross sales. The number is so far out of the ordinary and the trend is so definite that, without some explanation, I just can’t bid.

The Seller MUST recognize that this is a red-flag item.

Absent some other explanation I have to assume that there is an unappealing reason why receivables are such an unusual percentage of sales. But maybe there IS another explanation. If the Seller were encouraged to post an explanatory note that solved the riddle, there might be a greater level of interest in its auction.

So.....“XYZ Corp, help US help YOU!”

Give the community of Buyers SOMETHING to explain the weird numbers!

I met the other day with a colleague and, among other things; we discussed some of the companies on my “bid vs. no-bid” list. In scanning my list he saw a name that I had categorized as “no bid”.

My colleague happens to know this company and its background. He told me that, while he is aware that they’ve had a history of very substantial losses and have a current a balance sheet that ”must look horrible”, he suspected the company’s backers were quite willing to continue funding it.

That’s information that is not available from the material provided on the TRE platform, from the credit information I had obtained on the company or from the data available from a quick online search. (I admit that, given the looks of the financial statements, I did not spend a great deal of time trying to find reasons to qualify the Seller.)

But in this case, too, some explanatory notes from management could be made available on the TRE platform to help Buyers understand in a more nuanced way the financial situation of the company.

And helping Buyers understand the Seller’s situation will ultimately help the Seller.

One more example and I’ll leave this alone.

There are several Sellers that have very substantial, unexplained, Intangible Asset entries on their balance sheets. In some cases the only net equity on the balance sheet results from these intangibles.

With no explanation of the nature of the intangible it’s hard to give its stated value any significant credence. A note of explanation COULD make the difference between having many interested Buyers vs. few and an attractive pricing vs. one less attractive.

The nature of the relationship between TRE Buyer and Seller is unusual. We can’t pick up the phone and ask the Seller questions. But the answers to some obvious questions could be of real benefit to all parties.

So, while I have no standing to make a request on behalf of all Buyers, I’ll say to both the Sellers and to TRE:

"Help us help you!”

Added clarity on financial statement items that are obvious red flags can only benefit the Sellers.

Caveat Emptor # 2

In our post of June 20: “Blanket Security vs a Security Blanket” we discussed the fact that a Buyer of invoices on The Receivables Exchange obtains, via TRE, a lien on the receivables purchased and on any excess cash that might be available in the Seller’s lock-box account.

This is in contrast to the blanket lien on all of a Seller’s receivables that is often acquired as security by a factor or invoice purchaser; or, short of that, to the lien on all receivables due from one or more named Account Debtors.

The actual collateral providing security to a TRE Buyer is minimal relative to the industry norm.

The TRE Seller does provide an unconditional guaranty to repurchase a receivable sold on the Exchange if payment is not made to the Buyer by a date certain, which provides additional security to the Buyer. But that security is only as good as the Seller’s ability to perform.

So the importance of an accurate assessment of the Seller’s financial capacity actually increases in the context of a TRE transaction; because the specific collateral provided is more narrowly defined.

We’ve noted that the Exchange requires certain financial information to be provided by the Seller and that the TRE trading platform makes access to that information convenient. The Exchange itself, however, takes no responsibility for the accuracy or adequacy of the information provided and makes it clear that Buyers are responsible for their own due diligence and decisions.

As I’ve said before---that's fair enough, as long as we know the rules.

Those who have been in the business of buying receivables for any period of time will probably have had experience with transactions “gone bad”. Most would agree that more can be learned from one bad deal than from dozens of deals with which there have been no problems.

One of the things that I’ve learned is the importance of knowing whether I’ve really got a good, clear lien on an asset, and who else might pop up to make a claim on assets if things go bad for the debtor.

Not long ago an auction was posted on TRE by a first-time Seller. Besides financial statements, TRE makes available on its Seller Profile pages, a record of a UCC lien search. This tells us what claims have been recorded against the assets of the company and so has direct bearing on the strength of a Buyer’s collateral position.

In the case of this Seller, the prior UCC filings ran to 78 pages!

Now that, in itself, doesn’t mean that the position of the Buyer in the specific receivable being posted for sale is jeopardized.

It DOES mean, however, that the Buyer CANNOT know that its position is NOT jeopardized without devoting some significant time and attention to analyzing the prior filings. This is especially true because, in this case, there was no separate release of lien or subordination document provided for Buyer review.

A Buyer might have thought: “well let’s see if the financials are really strong and maybe I can take a chance making a bid even before I have the time to analyze the UCC filings”.

In this case it happened that the Seller’s most recent financials were noted as “internally prepared for use by management”. OK, that’s not really unusual, especially for interim accounting periods.

But in this case it happens that there is a single, large, intangible asset on the balance sheet that is roughly double the size of the company’s net worth. So, without that intangible asset, the net worth of the company would be negative rather than positive.

What’s my point?

I am NOT saying that this Seller shouldn’t be selling receivables on TRE.

I am NOT saying that TRE has failed in any way to provide what it has committed to provide to Buyers.

I AM saying, however, that TRE has made it clear that it is the BUYER’S responsibility to analyze the potential transaction and determine whether it has enough information to bid.

TRE has said “Caveat Emptor!”

I am willing to bet that in the period of time between the posting of the first auction by this new Seller and the time the first bid was recorded, no Buyer would have had time to analyze the 78 pages of UCC filings provided and determine whether or not the collateral provided was likely impaired by prior claims.

I am relatively sure that TRE will do all it can at this point in its life to try to work out any problems that arise with transactions on its platform.

But when TRE says, as it clearly does, that the Buyers and not TRE are responsible; it just makes sense to believe them.

The Buyer's first recourse is to the Seller, no matter who the Account Debtor might be and no matter what TRE might be willing to do to help out at this point.

So, indeed, let the Buyer beware!

Caveat Emptor #1

In our post of November 3 we urged The Receivables Exchange to adhere to its policy of requiring quarterly updated financial statements from TRE Sellers and posting those statements to the TRE Platform.

In early posts on this blog (see particularly those in June and July) we made the point that TRE, itself, takes no responsibility for the accuracy or adequacy of the information provided to Buyers. It is the Buyer’s responsibility to perform whatever due diligence it considers appropriate.

Caveat Emptor: “Let the Buyer Beware”; is the position taken in the TRE documents.

Fair enough--as long as we know the rules.

On the other hand, while I stand by my compliment to the TRE Seller-sales staff in our last post. And, while I understand that bringing more product to the market is a critical TRE objective at this point. It is also in the long-run best interests of the Exchange to balance its attention between the interests of the Seller community and those of the Buyers.

Providing updated financials would be one way to illustrate that balance. The basic point I made on November 3 was that it is important to Buyers to track changes in the financial condition of Sellers after their initial qualification.

I had a reminder of that this morning.

One of my disciplines as a Buyer is to get third-party credit information on all Sellers that make it through my initial analytic filters. Some providers of credit information send out “alerts” to those who purchase information, communicating subsequent changes.

I received such an alert this morning on a company that is a TRE Seller.

This company has completed a number of transactions on TRE since the spring, apparently without problem. The financial statements made available at the time of its first transaction were as of April 30. No updates have been provided.

As a Buyer, I would hope that the Seller’s use of TRE would have allowed it to better its financial position over the course of its experience with the Exchange. But I got an alert this morning that it’s rating for “risk of late payment” has deteriorated and that a state tax lien had been filed against it.

Now, neither of these alerts constitutes a “life threatening” event. But both convey information that is important to me.

If an auction by that Seller is posted today I will have to approach it more cautiously than I would have last week. Until I can see updated financial statements I will have to assume that they would be weaker than those I have in hand.

That might be fair, or it might not. But that’s the position that “caveat emptor” requires.

Let's See the Numbers!

Companies that sell their invoices on The Receivables Exchange are required to provide two years of financial statements as a part of the Seller qualification process. Once approved as Sellers they are also supposed to provide quarterly updates to their financials.

Those updated financials are supposed to be posted to the Seller Profile pages, allowing Buyers to update their due diligence analysis.

As we approach the anniversary of the first TRE transaction I think it is appropriate to point out that the Exchange does not appear to be enforcing the requirement to update financial statements.

If it IS enforcing the requirement, it is NOT posting the updates to the Seller Profile pages.

The most recent financial information available, in many cases, is still as of year-end 2008. In nearly every case, the statements provided at the time a Seller posted its first auction are still the only ones available.

Given that the great majority of Sellers provide only internally-generated statements, it can hardly be argued that there hasn’t been time to update statements through at least the second calendar quarter.

As important as I think it is to Buyers to be able to make decisions on the basis of appropriately current information, the Exchange itself should also be looking closely at the changes in Sellers’ financials.

TRE has a significant stake in the impact of Seller use of the Exchange on Seller financial health.

I would hope, in fact, that the management of the Exchange has already made an arrangement with a credible third-party; perhaps a well-known business school, for instance; to study the impact of TRE’s unique platform on the subsequent financial health of its Sellers.

The job of attracting good-quality Sellers has been difficult. TRE does a good job of quantifying the theoretical value of accelerating cash receipts in its marketing efforts. If the theory is borne out we should be approaching the time when some ACTUAL value-added can be empirically demonstrated.

It would be a shame if the experience of the first TRE Sellers was not used to make the job of attracting subsequent Sellers easier.

Ultimately, proof of the value of TRE to its Sellers should be apparent in the analysis of subsequent financial results. If subsequent statements are not obtained by TRE and made available for analysis, not only will TRE Buyers be inappropriately under-informed, but a key analytical and marketing tool will be lost to TRE management and marketers.

The transparency of the auction process should be matched by transparency in the information flow.

So, let's see the numbers!