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How We Help North American Business Grow
"…fifty competitors in Canada and Accord holds a 26% market share…"
Excerpts from a recent management meeting in preparation for the Annual Report. Present were:
Ken Hitzig, President of Accord Financial Corp.; Stuart Adair, Chief Financial Officer of Accord
Financial Corp.; Mark Perna and Peter Wong, President and Vice-President, respectively, of Accord
Business Credit Inc.; Fred Moss and Cynthia Aboud, President and Senior Vice-President, respectively,
of Montcap Financial Corp.; and Tom Henderson and Matthew Panosian, President and Senior Vice-
President, respectively, of Accord Financial, Inc.
Ken:
We embarked on a new format last
year for our Roundtable Discussion by
focusing less on the operating results
and more on what we do that impacts
the numbers, as well as our corporate
strategy. You might say that our
Roundtable Discussion is an informal
MD&A. Before we begin, Stuart, can
you summarize the financial highlights
of 2007 for us?
Stuart:
We had a good year, not as good as
we wanted it to be perhaps, but we
did earn a return a notch over
16% on our average equity in 2007,
our target range having been between
15% and 20%.
Ken:
We ended the year with a strong finish,
which is to say, our outstanding funds
employed, grew by 30% compared with
the year earlier. We’ve never experienced
growth like this before. How do you
account for this?
Fred:
Our asset growth in Canada, year-over-year was 22%. There are a number
of reasons for this. To begin with, we
entered the second half of the year
with more business development
officers than ever before. We also put
a lot of effort into promotional work
and marketing initiatives and we have
high visibility in the professional
community. In addition, we’ve become a leader in the recourse factoring field
since 1990 and we are now a very
recognized establishment in the
financial community. We are, by far,
the largest recourse factor in Canada.
Cynthia:
I think it should be mentioned that
we broadened our product base in
the past few years. We’ve expanded
our asset-based lending service by
offering inventory financing to small
and medium-sized retailers. We also
do purchase order financing. We
recently started a re-financing program
for a company which finances credit
card clients and this has very big
potential.
Ken:
Tom, you saw our U.S. outstandings
grow by 81% last year. Was your
experience the same as the one in
Canada?
Tom:
Not really. We made two strategic
decisions that had a significant impact. First, we decided to concentrate on
larger loans, loans of one million
dollars and up, and we have distanced
ourselves from small deals. We now
have a somewhat lower yield in our
portfolios, but our cost of servicing
each client is much lower.
Matthew: We now operate with half the
number of staff we had six years ago.
Tom:
The second strategic decision we
made was to work closely with
professionals, especially the
turnaround management people.
Stuart:
Didn’t you run up against the "big boys",
the asset-based lenders that lend in the
"over one million dollar category"?
You are booking deals with limits of ten
million dollars – that’s their territory.
They can undercut your rates any time
they want.
Tom:
They can. GE Capital, CIT, Bank of America, Wachovia, they all have
lower rates than Accord. But we have
one big edge: speed. We can go from
first inquiry, to letter-of-intent, to due
diligence, to credit approval, to
documentation, to funding in a
matter of weeks. The big boys are
structurally incapable of doing that.
Matthew:
We have experienced a number of
situations where the large finance
companies, recognizing that they
could not deliver their financing in a
timely manner, referred the prospects
to Accord. I don’t think we can get a
better endorsement than that.
Ken:
What’s the competition like in Canada?
Cynthia:
Pretty intense.
Peter:
Very intense.
Cynthia:
At our end of the business, recourse
factoring and asset-based lending, there are dozens of competitors and
many of them compete on rate and
dangerous credit. We let them "win"
some of those deals. We usually
compete on rate, but we’re not
interested in high risk credit.
Mark:
We are the second-largest non-recourse
factor in Canada. We have
to fight for every new piece of
business, and we have to fight to
retain what we have. One large
competitor withdrew from Canada
last year, but some of their senior
managers were hired by two new
start-ups.
Peter:
In addition to these factors, we have
several credit insurance companies
to contend with. They market low
rates and, sometimes, reckless credit.
But we counter with superior and
comprehensive service and we win
our share of the business.
Ken:
Mark, we know Accord does a fair
amount of business of an international
nature. Can you elaborate on this?
What, exactly, is "international"?
Mark:
We have clients in Canada who ship
to customers in the U.S. and overseas.
We also have clients outside Canada
shipping to customers in Canada. In
addition, Accord is a long-time
member of Factors Chain International
("FCI"). This is an association of
factors located in countries around
the world who act as correspondents
for one another. We get a good chunk
of business destined for Canada, but
we aren’t the only ones competing for
it – there is one other Canadian
member and several U.S. members
who are in the fray. When we add it
all up, about 30% of Accord Business
Credit’s volume is international.
Ken:
This doesn’t mean that 30% of your
revenue is international, does it?
Mark:
I’m afraid not. The commission rates
we get on FCI referred volume are
usually much lower than our usual
domestic rates. Our biggest
correspondent volume comes from
China, Hong Kong and Taiwan; this
is a fiercely competitive market and
the rates tend to be very low. The
flip side of this coin is that the credit
risk is also very low. I don’t recall us
ever sustaining any credit losses from
this trade. Of the two Canadian
factors in this sector, Accord garnered
82% of the total incoming volume.
Ken:
I presume you don’t know how much
Canadian-destined volume was captured
by the U.S. factors?
Mark:
No, we don’t. But the two largest
U.S. factors probably got a good slice
of it. Parenthetically, I might add, in
a survey conducted annually by FCI,
Accord scored the best service record
on response time for all factors in the Western Hemisphere by providing
credit approvals in an average of
3.2 days from date of credit request.
No one else came close.
Stuart:
A survey summarizing the size of the
factoring industry in Canada in 2007
showed that Accord, non-recourse and
recourse, held the largest market share
at 26%. Considering that there are
about fifty competitors in the field,
that’s a pretty good showing.
Mark:
There’s been a profound change in
the factoring industry in the last ten
years. Whereas the non-recourse
sector dominated ten years ago, the
recourse sector has shown significant
growth to the point where it is now
bigger than the non-recourse sector.
I don’t know if Ken or Fred should
get the credit, but Fred joined Accord
fifteen years ago to build a presence
in the recourse factoring business.
Fred has built the largest player in Canada in that field, and the most
profitable. Was Ken prescient or
Fred talented?
Ken:
I wasn’t prescient. But I did know Fred
for many years when we decided to
bring him on board at the end of 1992,
and I was convinced he could take us
into a new area successfully. He didn’t
disappoint.
Fred:
You can stop patting me on the back
now. The truth is we built a good team
and their contribution to our growth
and success is greater than mine.
Mark:
There was definitely a softening of
the economy in the fourth quarter
and we got hit pretty hard with
write-offs of almost $500,000 between
October and December. We had only
$275,000 in the first nine months.
As you can imagine, we will be
watching credit and collections with
increased scrutiny in 2008.
Matthew:
Our write-offs were over $700,000
in 2006 so we were extra vigilant in
2007. We actually had more recoveries
in ’07 than write-offs.
Stuart:
You folks had such a run-up in
outstandings that you had to set aside
an extra $300,000 in allowance for
doubtful accounts at Dec. 31, 2007
compared to a year earlier. Were there
problems in the portfolio?
Matthew:
We review our portfolio every month.
The portfolio was clean at year-end.
Our allowance for losses account
doubled from the previous year-end
to well over a half-million dollars.
It’s nice to have that cushion.
Ken:
There is much talk of a "credit crunch"
in the U.S. This must have an impact
on your operation, does it not?
Matthew:
The biggest impact has been in the
housing sector, but we have very little involvement in construction.
Tom:
I believe the "credit crunch", if you
can call it that, has resulted in a
reflex reaction by the banks; they
have tightened their credit standards
to the point that many marginal
borrowers are being turned out or
turned away, and, of course, that
benefits us. Many of the banks have
big problems with their involvement
in the sub-prime mortgage market
and that pushes them to be more
conservative than ever.
Stuart:
Is there really a shortage of liquidity?
Tom
Not really. Interest rates have dropped
a lot since year-end and there is
plenty of money in the system for
qualified borrowers.
Ken:
What’s your experience in Canada?
Mark:
We haven’t had the mortgage meltdown
that the U.S. has experienced.
However, the automotive sector in
Canada is very integrated with the
American industry, and this area has
been under increasing competitive
pressure in 2007. As I mentioned
earlier, the overall economy was
quite strong until the fourth quarter
when it weakened considerably. The
retail sector flattened out and the
bankruptcy rate rose quickly. And
this happened at the time of the year
when we usually have our best quarter.
Stuart:
You were still profitable in the
fourth quarter.
Mark:
We were, but not to the extent we
usually are.
Ken:
With strong growth in our lending
business, do we have enough liquidity
to carry us through 2008?
Stuart:
We have lines of credit of close to
$90 million of which slightly more
than half was in use at year-end. We
should be okay.
Ken:
Five years ago we reported to our
shareholders how an investment of
$10,000 in Accord shares had grown
over the years. We are now at the
thirty year mark. Stuart, where do we
stand now?
Stuart:
The total return on a $10,000
investment, including share price
appreciation and dividends, came to
$657,920 at Dec. 31, 2007. This does
not include dividend re-investment.
The compound rate of return comes
to 15% per annum.
Ken:
Thank you all for your participation.
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