Hilco Global Podcast Series: Leveraging Completed and WIP Inventory to Maximize Accounts Receivable
Adam Evans, Executive Vice President of Business Development at Hilco Receivables, joins the Hilco Global Smarter Perspectives Podcast Series to talk about how both completed and work in progress inventory can be leveraged to more effectively collect receivables during a liquidation.
Steve Katz 0:11
Hello again, and welcome to the Hilco Global Smarter Perspectives Podcast Series. I’m your host, Steve Katz. Today we’re speaking with Adam Evans, Executive Vice President of Business Development at Hilco Receivables, about how leveraging the power of inventory in combination with a thorough understanding of retailer holdbacks can help to ensure maximum return for accounts receivable during liquidation. In addition to that, we’re also going to talk about the importance of being able to leverage all asset classes in ensuring the delivery of maximum monetization value. Just as a little quick background, Adam and the team at Hilco Receivables are leaders in the accounts receivable industry, delivering portfolio recovery solutions across all sectors. Their innovative and successful collections techniques focus on commercial trade receivables and include performing retail and non-performing commercial debt portfolios. With that said, welcome to the podcast, Adam.
Adam Evans 1:05
Hi Steve, thanks for the great introduction. It’s really nice to be here with you today.
Steve Katz 1:09
Well, we’re glad to have you on. Adam, we’ve seen some businesses able to pivot quickly and adapt to the disruptive business environment that COVID has created. But clearly, based on what looks to be a roughly a doubling or maybe even more of corporate bankruptcies among companies with over $100 million in assets during 2020 versus 2019, others really haven’t been able to make this happen. Survival obviously requires balance sheet strength. So from your and Hilco’s perspective, how did so many of these companies end up in this position? And what types of decisions are they not facing?
Adam Evans 1:45
Sure, you know, the COVID pandemic has certainly been additive to the head was coming a lot of companies were already facing. I mean, for example, you could have a retail business that was already having a transition from brick and mortar stores to more of an e-commerce platform that was hit then with all their stores being closed in the shutdown. It could be a company that was in the oil and gas space that was hit with increased pressure, international pressure, and that whether its oil prices drop, or natural gas prices drop, and it’s just changes there. It could be a company that is a manufacturer that has seen changes in technology or changes in manufacturing processes that they’re not able to adapt with. It could also be companies that took on excessive levels of debt over the last several years and are not able to kind of cope with that when you add on the pressures from COVID. Why did some companies go into bankruptcy and some companies are able to weather through it? There’s a lot of different circumstances that could come into play there. It could be as I said, things that are directly tied to the level of debt or their company’s balance sheet in these situations there. It could be the company’s or maybe in a product category or sector that dropped off significantly; they could be servicing the hospitality industry or movie theaters or something that was immediately shut down and not even selling online. So, there’s a lots of different things there.
Steve Katz 3:04
Absolutely. I mean, companies are faced with tough decisions right now, particularly when, just six or nine months ago, in the absence of COVID, things might really have turned around quite differently for these businesses. Right? So the question now is what happens under these circumstances? What specific expertise should companies in this position be seeking out to ensure that they can get maximum value returned on their unique combination of assets? I think that’s really the next thing we should talk about. And one last thing here, too, does that expertise come from multiple sources? A single source? What thoughts can you share on that?
Adam Evans 3:39
Yeah, absolutely. I mean, the tough choices that companies are going to have to make, and it’s not only in improving their performance. We’re talking about companies that are in significant levels of stress and likely going into a liquidation. And you know, they could look to having a third-party advisor. And this could be directed by the company. It could be directed by their lenders. It could be directed by their equity holders or advisors, that would say, “Hey, this is not going to end well so we have to go now into a liquidation mode.” And they can say we’re gonna hire one company to look at the inventory; one company to look at the accounts receivable; one company to look at the real estate or fixed assets. And there’s companies out there that can do all of those that are proficient in all of those asset classes. But, you know, really, it’s important to look to kind of implement the strategic business plans. You know, even in a wind-down scenario or liquidation scenario, to have a company that really understands every asset on the balance sheet. I mean, listen, there might be companies out there that are great at selling you know, or liquidating distressed real estate or distressed machinery and equipment, but to have groups that can work together and say, “Okay, if we’re selling this machinery equipment, would it sell better coupled with the IP? Or if we’re selling this as machinery equipment, should it stay in place and be sold with a real estate?” To have a firm that really understands the workings of all of those different asset classes under one roof, that’s a very important decision. And it’s a way to help maximize the recovery for the lenders for the equity holders and just kind of maximize the efficiency of the process of winding down a business or liquidating assets.
Steve Katz 5:10
Okay, good. The next thing is, as I’m thinking about it, we were talking a little bit before the podcast about the interplay between various asset classes in delivering maximum value for distressed companies. And you specifically referenced the strong connection between inventories and account receivables, which stood out to me. So what can you tell the audience about that?
Adam Evans 5:31
Sure, if you boil it down, I mean, manufacturers’ jobs are to make a product, converted it to a receivable, and then convert that receivable to cash. So that’s significantly important to look at if you’re selling your customers this product, whatever it is, you want to make sure that you get paid for that product, right? So, now let’s say you’re a company that’s selling to a big box retailer, some type of manufactured product. And if you sell them a certain amount of inventory, they get discounts. They get rebates. They get allowances for things like marketing. Allowances for things like return privileges and warranty claims, for example though they’ll hold that back. When you’re in a wind-down or liquidation scenario, and you’re selling through the inventory and trying to get paid for existing accounts receivable and you’re generating new receivables, you want to make sure that you can get paid the maximum amount for those claims. I mean, listen, companies are going to have these rebates from their customers, right? These things in a normal scenario will get paid monthly, or they’ll get paid quarterly, or they’ll true up annually. But when you’re in a liquidation, right, those things are all going to come due immediately. So the customers, you know, whether you’re in bankruptcy or not, are going to know that there’s an impending liquidation crisis. And they’re going to make sure that all those things get pushed back as offsets who are receivable. So having people that are experts in liquidating the inventory at the same time having professional collectors and people who have done this for 30 years and who can run this collection program, at the same time talking to the people that on a daily basis are selling the inventory to make sure you’re maximizing not only the margin that you can get if any on the inventory that you’re currently selling but to make sure you can really get the maximum amount for the receivable that you’re collecting.
Steve Katz 7:22
Makes sense. Okay, next, I’d like to discuss the idea that oftentimes, customers have businesses that are undergoing a liquidation event are still very anxious to acquire more inventory from those businesses, right? Even though they might be going out of business and they know in the future, they may not have access that could drive their interest in obtaining that sort of inventory. Or they might be trying to meet certain peak selling seasons. So in cases like that, there’s bound to be not only completed inventory that can be sold, but also work in progress inventory as well. How do you and the team at Hilco work through those types of issues?
Adam Evans 8:05
Yeah. So if you’re selling into the retail channel, retailers are going to have planograms and forecasted sales, and they’re going to merchandise their stores according to having a certain amount of inventory in the stores and on the shelves and, you know, on the website at a certain period of time. So even if you’re liquidating while they’re taking that time to potentially resource that inventory through another vendor, or if they’re looking to replace that inventory with another product, they’re going to want to keep those planograms full. They’re going to want to keep the shelves stocked for as long as possible because they don’t want to have empty shelf space in a retail environment. It just doesn’t look good; customers don’t like it. They also don’t want to have the items that customers want, if they’re not available on the website or something. So when we’re involved in situations like this, we’ll take a deep dive and look at the company’s inventory that they have on hand. You know, the finished goods inventory, that’s probably the easiest one to sell, right. Of course, you’re gonna say, okay, you know, they’re getting a margin on this, they have an existing customer base, but then really understanding the mix of both the work in process inventory or web, and then the raw materials inventory that’s needed to complete that work in process inventory. I mean, it’s, if you think of in terms of an automobile, right, so let’s say your company is building a car, and you’ve got the engine, you have the transmission, you’ve got the seats, the doors, the whole thing, but you’ve got three out of four wheels, right. So you really need you know, in order to sell that car to roll it off the line, to roll it off the lot, you need to have all the components and pieces for it. So when we’re looking at a company’s inventory, whether as an appraiser of the inventory or as a liquidator of the inventory, we’re saying okay, do the raw materials that they have on hand does it allow you to build out this work in process inventory and convert it to a finished goods state so that way you can sell through? Are there outside services that may have to be done to the work in process inventory? Does it have to go out for heat treating or does it have to go out for paint or are there other services that you have to account for when you’re when you’re going through this inventory? Because I mean, we do a calculation in saying, okay, we want to maximize the recovery for this inventory. In some cases, it makes sense to examine building out the inventory to complete it to a finished goods state. Sometimes it’s cost prohibitive to do so in the term of the liquidation. There may be other factors; maybe your supply chain is so fractured that you’re not able to get the appropriate raw materials to finish the goods to make them salable. So, I mean, there’s a lot of factors that are in play there. So it’s not just a one size fits all; or you’re like, okay, if they’ve got work in process inventory, just go finish it. It’s now finished good, boom, done. There’s there’s a lot of interplay that goes on there.
Steve Katz 10:45
Yeah. Great explanation. Great. Thank you for simplifying that, very helpful. It seems to me the next logical question would be how have collections on receivables been holding up in liquidation scenarios during COVID? Are you seeing those numbers match up well with lenders current borrowing base practices?
Adam Evans 11:03
You know Steve, I would say that asset-based lenders or lenders will lend to a formula, and they’ve been doing so for however long they’ve been lending 100 years, let’s just say that, right. They look at a company’s eligible receivables, and then they lend, you know, based on market for that, those are could be as high as 85%, that they’re lending against eligible receivables. And that’s when times are good and when the company is operating. And, you know, you’re gonna collect that on those receivables, you’re gonna have certain offsets that are going to get applied, but you’re going to be getting a margin, you’re going to be able to, you’ll be able to collect on that in a kind of normal course scenario. I don’t think it’s unique to the last 12 months COVID to say that in a liquidation scenario, the receivables are typically not going to collect as high as they would in a going concern. I mean, anytime you have a severely distressed company, a liquidation, or a wind-down of a company, there’s a pretty good chance that the receivables are somewhat in disarray, right? They could be getting aged because of maybe they’re missing orders. Maybe they’re not shipping full orders so the customers are not paying their invoices fully. I think it’s depending on who they’re selling to. We’ve seen some receivables that could be with a large, big box retailer, for example, recover at zero. We’ve seen some of them recover at 25% in a liquidation scenario. Going through, I would say that in a liquidation you’re seeing more of the kind of 45-55% recovery. It’s an offset or a discount from what asset-based lenders are looking at, when they’re booking a new loan. Right? For example, they’re setting up a borrowing base. They’re not doing it to necessarily a liquidation value of what those receivables would bring in a liquidation.
Steve Katz 12:42
Make sense. All right, believe it or not time to start wrapping it up. So given that, are there any final thoughts that you can share on what we’re likely to be seeing in the months ahead?
Adam Evans 12:51
Yeah, I mean, I think you’re still gonna see an increased number of bankruptcies, restructurings, liquidations, and it’s not just going to be sector-related, it’s not just going to be all tied to oil and gas. It’s not going to be tied to retail. I mean, there’s been so much economic trauma that has gone on from companies being shut down; from supply chains being broken, from people being out of work and not being able to. You know, companies have not been able to produce goods for several months last year. I think that possibly this year of Q2, Q3, you know, you’re gonna see that kind of taper off, maybe the vaccine will be more widely distributed, there could be other things that could take place as far as stimulus that can help stem the tide a little bit. But I mean, listen, there’s companies that are in significant distress over the next several months, you’re going to continue to see this wave of bankruptcies.
Steve Katz 13:39
I would expect so. Well, listen, I know your team has been very busy in this area over the past several months. Adam and clearly, you guys are getting a tremendous amount of valuable hands-on insight and data that I’m sure our audience has benefited from today through this conversation, so thanks for that. And for those of you listening in, if your business or a business in your portfolio is in distress or likely headed in that direction during COVID-19, I would really encourage you to reach out to Adam and the team at Hilco Receivables, whether just for a qualified third-party perspective on your particular situation or to discuss the potential for getting them more involved in your upcoming efforts. With that in mind, Adam’s email is [email protected] that’s [email protected]. Adam, these are difficult times for a lot of companies and a lot of people within those companies so, thanks again for sharing your expertise with them and with me today. I know you’re a busy guy right now, and it’s really appreciated.
Adam Evans 14:37
My pleasure, Steve. Be well. Thank you.
Steve Katz 14:41
Absolutely-you too. And listeners, we hope that today’s Hilco Global Smarter Perspective Podcast provided you with at least one key takeaway that you can put to good use in your business or share with a colleague or client to help make them that much more successful moving forward. Until next time for Hilco Global, I’m Steve Katz.
Transcribed by https://otter.ai