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Reflections of PhiladelphiaThe 60th Anniversary Convention for the Commercial Finance Association, 3-5 November 2004It was early – too early. Monday morning, 4am taxi to Heathrow (the time a seasoned asset-based lending professional is just getting in after a networking event). The plane to Chicago was leaving at 9.15, and a heavy schedule was waiting in the USA. This year though, we were going to be smart – get the focused presentations and meetings done before the convention, and concentrate on meeting new contacts there. We had very definite reasons to be in the USA. Firstly, after months of marketing, presentations and education, we had just closed our first cross-border deal with our colleagues from LaSalle Business Credit (LBC) (a division of ABN-Amro which owns both companies). Secondly, LBC’s CEO, Mike Sharkey was the president of the CFA for 2004 and the convention was the pinnacle of a hard working year in the chair… and we wanted to support him. So, first we headed to Chicago, for a series of meetings with LBC and other divisions of LaSalle Bank and Standard Federal Bank (another ABN-Amro subsidiary), before heading onwards to Philadelphia. Flying in over the city there is a sense of an old economy city – heavy industry, steel and chemical plants, smokestacks – no Kyoto treaty here then! It was also election day, and upon checking into the convention hotel, a number of the staff were excited about the prospect of change – Pennsylvania being a possible Kerry state. We drifted to a local micro-brewery bar, with multiple televisions, and settled in for an evening of beer tasting (summary: not bad, to be encouraged, but will be all the better with the benefit of a few hundred years more experience of making real beer) and watching the early exit polls and declarations. As the evening wore on, a sense of gloom pervaded as the prospect of change faded and the reality of four more years of Bush loomed. Isn’t there something about getting the politicians you deserve? Still, we were determined to be positive, and the whole convention was ahead of us. The opening reception was held in the National Constitution Center, which we were bussed to. This was a very interesting location, with an excellent interactive presentation on the founding of the Constitution of the United States, and the numerous subsequent amendments. It was profoundly unsettling to look at news reels, on the civil rights marches and segregation issues – and to think that this was only 40 years ago. The reception was a good opportunity to check out how many Brits had made the trip, and to catch up on what we were all up to. It was noticeable just how many of the tourists had actually been working hard – with real agendas, real meetings and real business to be obtained. Damn, and I thought it was just us! Also, the players had changed – it was not just the Americans, (Bank of America were the only US bank/institution from the UK), but the UK/European ABLs and banks – Rothschilds/Five Arrows, Lloyds TSB (now with a New York ABL office – way to go Herrington!!), as well as Venture. The legal profession was well represented by Hammonds, Barlow Lyde & Gilbert and Jones Day, as were the valuers by Edward Symmons and Bache Treharne. However, there were fewer IPs – only KPMG and Tenon, perhaps reflecting the superiority of lawyers in the USA bankruptcy process? On to Thursday and the start of the convention proper. The opening address by Mike Sharkey was notable for the commentary of the progress of the CFA over 60 years – with the consolidation of the banking sector a recurrent theme. It was also worth contrasting the CFA and FDA conferences. The CFA is all about content and meeting the varying needs of the disparate membership, from small entrepreneurial factors to the largest investment banks – there are generally three concurrent events per session, with everyone congregating for breakfast and lunch. The FDA has much higher production values, music, lighting, professional presenters and entertainers, but much lower industry content. Following the opening address, was an upbeat speech by Arthur D Laffer – father of supply side economics and economic advisor to Ronald Reagan. Remember ‘Reaganomics’? Arthur is a keen advocate of tax cuts and limited social spending, and relentlessly positive about the USA’s economic prospects. You may not agree with him, but his speech was delivered in an engaging and entertaining way. Next for me was a session on ‘Junior Lien Issues’. This was a good early read on the progress of ABL in the USA. As there is huge domestic competition, and the sector is becoming commoditised, players have been looking at product evolution. The junior, or silent second, lien is a secondary line of credit-secured debt, but which is generally cheaper than mezzanine, with less use of options and warrants. To say this has gained momentum is an understatement – consider these statistics: $100m in 2001, $76bn in the seven months of 2004!! The late afternoon was given over to the CFA exposition for exhibitors and sponsors, with wine tasting as a draw for the punters. In the evening, I was treated to dinner with Hilco – I was the only non-Bank of America guest, but it was a fun evening, and all the in-jokes were carefully explained. Friday, and some of the Brits were flagging after a tough week’s networking, but the first session (8am – what were they thinking of?), was a must attendevent, and I think all of the Brits showed up. The title was: “China – An Overview of the Marketplace and Opportunity for Financing Asian Export Sales”. This was the highlight of the convention for me – the key presenter was David Hale, founder of Hale Advisors and China Online. The sheer scale of the statistics should be ample warning that this is an economic opportunity not to be missed. In 2004, China exported $400bn, of which 60% is foreign owned. Public debt is only 15% of GDP – compared to the USA at 50%, Italy 100%, and Japan at 150%. Its investment as a percentage of GDP is 46%, the highest investment rate in the world, but it also has the highest savings rate in the world, and runs a massive current account surplus! China is now in the WTO, which should improve the embryonic legal infrastructure and commercial code. But there are problems – bank lending is 140% of GDP – and there are issues with bad loans, which will be compounded by the recent decision to increase interest rates. The overall message from both David Hale and his co-presenter Paul Simpson from JP Morgan Chase was that you have to be physically there to do business. Many fi rms now have offi ces in China, and have had for several years. The last session I attended was on the state of the market, and included both commentary of the syndication market in the USA, and the general economic prospects for the USA. Again, this was a warning on the over-capacity, with many lenders chasing too few deals (hmm…anything resonate with the current UK market dynamics?). The economic presentation was again hugely positive – I found myself thinking, but what about the US dollar, the balance of payments, the budget deficit, the amount of US government debt, what about China? Apparently none of these are a concern! I didn’t stay for the evening entertainment, but rather enjoyed an excellent lunch with our chums from Hammonds, Jones Day, Bank Of America and Lloyds TSB – who says competitors can’t get along? Overall, I enjoyed the trip and the convention – I came away with the strong view that the Americans are an irrepressible bunch, you might not always agree with them, but ignore them at your peril! Paul Beveridge, Managing Director, Venture Structured Finance
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