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An Interview with Sonita Horvitch
Challenges and Opportunities of 2008-2009
Sonita Horvitch, a well-known Canadian financial journalist
recently led a discussion with Ken Hitzig, Accord Financial
Corp.’s President, and Stuart Adair, the Company’s Chief
Financial Officer, to discuss the Company’s 2008 results and
the outlook for 2009. Ms. Horvitch has been reporting on the
financial services industry, including factoring, for over
thirty years.
Sonita:
How would you summarize the 2008 results in
a nutshell?
Ken:
We did not come near our best year of 2004
when we made $7.6 million, but we did earn
$5.0 million which was not all that shabby in
the current environment.
Sonita:
Can you give me an overview of what happened?
Ken:
The economy declined for the first three quarters
of 2008, but really nose-dived in the fourth
quarter. The quality of our loan portfolio softened
which caused increased write-offs and higher
reserves at year-end.
Stuart:
Our provision for credit and loan losses
amounted to $3.8 million in 2008, a sixty
percent increase over the comparable amount
the previous year.
Sonita:
We have all read about the high-profile problems at
many banks and insurance companies. The biggest
factoring company in North America, CIT Group,
Inc., reported huge losses, and a double-digit
decline in factoring revenue. Tell me about Accord’s
experience.
Ken:
Pricing was quite competitive last year and we
sharpened our rate structure as required. Our
volume actually climbed to a record of almost
$1.6 billion in 2008. But we sacrificed some
yield in the process.
Stuart:
Our revenue at $28 million was virtually
unchanged in 2008 when compared with 2007.
But we have always worked with substantial
margins so that, even with our loss experience,
we were able to show pre-tax earnings of $7.7
million which was 27% of our gross revenue.
Sonita:
Let’s look at 2008. Was the experience in Canada
the same as the U.S.? Or was it more challenging
south of the border?
Ken:
The economy certainly hit the skids sooner
and fell further in the U.S. But our results did not
mirror that. Our revenue and earnings fell in
Canada while revenue and earnings were up
significantly in the U.S.
Stuart:
There were several reasons for this. Firstly, there
was a much greater provision for credit and loan
losses in Canada than the U.S. Secondly, our
American business was narrowly focused and
while it faced competition for most of the year,
that competition eased in the fourth quarter
when many lenders including banks had liquidity
problems. Canadian banks were in better shape;
all have survived so far, and continue to be
competitive. Very few Canadian factors and
finance companies had liquidity issues to deal
with last year and competition remains intense.
Sonita:
What were the comparable results?
Stuart:
Our Canadian operations represented 54% of
total assets at year-end 2008 and posted net
earnings of $2.4 million, or 47% of total earnings.
Our U.S. operations represented 46% of total
assets and posted net earnings of $2.6 million,
or 53% of total earnings.
Sonita:
It appears your U.S. business is becoming your
dominant geographical segment. Would you agree?
Ken:
Not quite. The Canadian results for 2008 were
adversely impacted by unusually high write-offs;
hopefully these will not recur. Our U.S. results
benefitted from having no write-offs although
the likelihood of sustaining that performance
is quite low. However, that said, I would agree
that it’s only a matter of time before our earnings
in the U.S. will consistently exceed those in
Canada. And that’s a good thing.
Sonita:
Why do you say that?
Ken:
We already have a substantial market share in
Canada. The United States represents a good
growth opportunity for us, given the size of
that market.
Sonita:
Let me move on to the issue of credit controls and
leverage. Many financial institutions in the U.S. have
been brought down in the last twelve months because
of loose credit policies and high leverage such as
Lehman Brothers and Washington Mutual. What
has Accord done to minimize the damage that could
be caused by client and customer failures?
Ken:
We have always had a well-defined credit system
with strict credit limits on amounts that could be
loaned, or credit granted, to any one name. As
a rule, any substantial loan or credit requires one
or more credit officers or loan officers to sign off,
and anything over $1 million requires approval
from the Board of Directors. With the weakening
in the economy towards the end of 2007 we
formed a Risk Management Committee to oversee the system and fix any leaks.
Stuart:
Ken and I became the face of the Risk
Management Committee and we began to review
the loan portfolios on a quarterly basis. By the
fourth quarter of 2008 we had found a number
of credit policy weaknesses, some of which
had led to write-offs. Needless to say, we are
correcting these problems so there is a much
lower possibility of repeats.
Sonita:
Let’s discuss the issue of leverage. Some companies
can get so highly leveraged that that alone can topple
their company. I don't suppose you feel Accord is
too leveraged?
Stuart:
Not at all; if anything, we’re quite underleveraged.
If you look at our balance sheet at Dec. 31, 2008
you will note that there is bank indebtedness of
$35.9 million. The banks are the only secured
creditors that we have, and we have $100 million
of receivables and loans to protect them; that
is $2.79 of collateral for every one dollar of
borrowing. Another way to look at it is this: our
shareholders' equity is $48.2 million which
supports the $35.9 million bank debt. That's a
leverage ratio of only 0.74 to one. Most
companies in our industry have leverage ratios
of three, or four to one, or even higher. I think
Accord must be unique.
Sonita:
Accord’s been around for a long time. Surely, this
is not the first recession you've had to cope with.
Ken:
We’re in our fourth decade now, and, yes, we’ve
been through tough times before, several times.
Obviously, we’ve survived them all, but I must
say the current economic conditions are the
most challenging that I can recall.
Sonita:
Let’s look forward now. By any measure, 2009 looks
to be a tough year. Some analysts forecast an
economic turnaround before the year is out, but
most of them feel it will be 2010 before we see
any meaningful recovery. What is your guidance
for 2009?
Ken:
Accord has a long-standing policy of refraining
from making earnings forecasts. We know we
have challenges ahead, and our work is cut out
for us. Our overall strategy consists of ensuring
tight underwriting standards, constant monitoring
of our portfolios, and, to the extent possible,
growing our outstandings by taking advantage
of our strong financial position in a market
place of turmoil.
Stuart:
Our credit standards are now higher than they
have ever been. Inevitably, we will take some write-offs; we’re in the risk business after all.
But we have done our homework; we should
survive this challenging period.
Ken:
We might even do well. If we don’t, it won’t
be for lack of trying.
Sonita:
Accord’s U.S. operation seems to be going from
success to success. And this in spite of the worst
economic conditions in a long time. Tell me what
makes Accord different in that market.
Ken:
As Stuart mentioned earlier, our U.S. operation
has become very narrowly focused. They know
precisely what kind of potential client would
meet our standards and they target those
prospects.
Stuart:
They have a great mailing program, a monthly
mailer that is sent to people who are likely
deal originators such as business consultants,
bank loan officers in charge of distressed loans,
bankruptcy attorneys, and so on. Accord is also
prominent in the Turnaround Management
Association, which is a good source of new deals.
Ken:
We have to mention the fact that our U.S.
company has a great leader. Tom Henderson,
who is President of Accord Financial, Inc.,
brought decades of commercial finance
experience to the job. He inherited the position
at the end of 2001 and our bottom line in the
U.S. has been straight up ever since. Tom has
developed and nurtured both a good
management team and dedicated staff.
Sonita:
He sounds like a find. Where did he come from?
Ken:
He was with Heller Financial, Inc., one of the
world’s largest factoring and finance houses. He
rose through the ranks there to become a senior
executive. But after more than thirty years with
the company he tired of Chicago winters and
moved to North Carolina. He joined us shortly
thereafter. It is also important to emphasize that
our Canadian operations are ably headed up by
two industry veterans and long-time executives
at the Company. They are Mark Perna, who is
President of Accord Business Credit Inc., which
operates as an "old-line" factor, and Fred Moss,
President of Montcap Financial Corp., which
is Accord’s Canadian recourse factoring and
asset-based lending company.
Sonita:
Your comments have been most enlightening to me.
I expect that they will be to your investors as well.
Thank you, gentlemen, and good luck with your
challenges for 2009.
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