“Trust but verify,” said Rob Miller, executive vice president and head of asset-based lending at Rosenthal & Rosenthal.
He was discussing his approach to extending loans and it seems rigorous. “We do field exams. We get financial statements. We do background checks. This type of lending is very labor intensive.”
But there’s more to it than just the numbers. Simply put, he’s got to like the client’s story.
“I have 100 loans here. Everyone has a story. At the end of the day, you can have all the numbers in the world, but you are lending money to people. That’s my philosophy,” Miller said.
That’s also a guiding principal at Rosenthal & Rosenthal, where Miller has had two stints working at the family-run firm.
From 1999 to 2001, he was an account executive in the asset-based lending group, handling 15 accounts. He worked with James J. Occhiogrosso, who was running the ABL group at the time and is currently chief financial officer.
Miller left Rosenthal in 2001 to join GE Capital to work on large deals and subsequently joined a regional bank in Connecticut. Through the years, he maintained a friendship with Occhiogrosso and would have lunch with him occasionally. Three a half years ago, over one fateful lunch, Occhiogrosso told Miller that he was becoming the cfo at Rosenthal and that he wanted to hire Miller as his successor to head the ABL group and grow it. That’s been his charge and he’s got the group on an upward trajectory. Key members of his team are Rob Martucci, senior vice president who has been with Rosenthal nearly 30 years and has been instrumental in growing new business as well as acting as senior underwriter, and Bob Schnitzer, a veteran in the space who recently joined the group.
In the following Q&A, Miller discusses his motivations for returning to Rosenthal, how the firm’s ABL group operates, and his business philosophies.
WWD: Why did you decide to return to Rosenthal?
Rob Miller: My reason for coming back is that factoring as an industry is shrinking. Obviously, the Rosenthal factoring business is not shrinking because of our recent acquisition [of the factoring portfolio of BB&T last month]. But the whole totality of factoring and the retail world, all of that is changing. The family wants asset-based lending to grow, to be a bigger percentage of the total. But also, it helps diversify the risk. When you think about the company before BB&T, the majority of our factoring was textiles and apparel. So there was a huge industry risk concentration. The family was excited about my coming back and I was excited, too. I’m a credit guy. I am a risk manager. That’s my focus. What I do is, I am a lender. Generally, it’s longer term, I am doing capital lines of credit although I am not doing a lot of term loans and mortgage lending. I am doing lending for the asset-based product. So where do we fit within the asset based world? The asset-based world is a multibillion dollar industry, whereas in factoring you can name on one hand the top five factors that dominate 80 percent of the market. Asset-based lending is very different from factoring. It’s much more diversified. That’s what the family was excited about, to really help move that needle.
WWD: How important is asset-based lending as a piece of the Rosenthal pie?
R.M.: From what I’m told, the very first loan that Rosenthal & Rosenthal made was an asset-based loan. The story I heard is that it was with the chicken farmer. The joke is, we almost bought the farm because the loan almost went bad, but they worked it out. So you could argue the roots of Rosenthal & Rosenthal were asset-based lending. As it stands today, approximately 80 percent of our business is factoring and I’m about 20 percent of the business. Call it 79 percent factoring, 19 percent asset-based lending and two percent purchase order financing. I have approximately a $400 million portfolio of commitments and approximately 100 accounts. I’m one-tenth of 1 percent of the industry. I can’t tell you how big the industry is but it’s hundreds of billions of dollars in lending.
WWD: Why would a company go to Rosenthal for a loan, versus a bank?
R.M.: We are not a bank. We are privately owned and we have no regulatory oversight. I would argue that is our biggest competitive advantage. We answer to the Rosenthal family. The family has basically delegated the credit authority to me. So if I like the deal, a decision can be made in 30 seconds. I don’t have to go to a committee. I don’t need a 15-page memo. I don’t have to talk to the regulators. I don’t have to talk to our lenders to see if it’s going to fit into [certain] parameters. I’m free to go. It’s the company criteria. From a credit philosophy perspective, quite honestly, that’s the reason why Jim wanted me to come back because I understood that credit culture. We have a credit culture here, which is different from our competitors. There is obviously a reason why I have 100 customers who borrow money from us. We must be doing something right. We had our most successful new business year last year. It was about $100 million in new commitments. The value proposition of dealing with Rosenthal & Rosenthal is resonating with the marketplace. We are a little bit more expensive than our bank competitors because we don’t have deposits to lend out that are interest free. We borrow all our money. So we leverage the family capital, we borrow with lines of credit from 40 lender banks, which charge us money. So I have to charge a little bit more than that so we make our profit. As a rule of thumb, we use prime as our cost of funds. I have to charge more than that. Because we are more expensive than a bank, obviously the deals we do are riskier.
WWD: Who are your clients?
R.M.: Twenty-five percent of my portfolio is in the jewelry industry; approximately 12.5 percent is in the food and wine industry; 10 percent is in textile and apparel, 22 percent is in services — staffing, black car limousine, technology. We have one company that does consulting, for instance, when Verizon has an IT project, these guys do the work. The rest is miscellaneous. We are primarily a working capital lender. So if a company needs working capital to finance its growth or its working capital for receivables and inventory, we are going to lend a percentage on those receivables and inventory. Typically, it’s very formula-based. It’s very collateral specific. Collateral would be receivables, inventory, machinery, real estate. We could also look at a royalty income stream.…Our perfect client in the asset-based lending group is someone who loses a $100,000 a year. Why do I say that? If a company can legitimately show a loss based on general accepted accounting principals and not show a profit, we don’t care. They won’t pay taxes when they lose money. They won’t mind paying our higher rate of interest.
WWD: Under what circumstance do companies approach Rosenthal for assistance?
R.M.: It’s when that company historically lost money. They violated a financial covenant at the bank. And the deal goes to a “workout.” Typically a bank is going to have a fixed charge coverage ratio, which requires a company to show a certain amount of profit relative to its debt. We don’t have that.
Or it could be when the client can’t get it [the loan] from a bank. It could be because of the industry they’re in, or maybe it’s taking too long [for the loan to happen]. Perhaps the company has shown losses for the last several years. It could be a very seasonal company. There could be a whole host of reasons.
We have to be a little bit smarter. We have to look at the collateral on the deal and the credit. We want to understand why the company is not performing well. Maybe it’s by design. Maybe it’s not. Maybe they had a one-year blip and lost their biggest customer. Or they had a price increase. Or perhaps the price of oil changed. There is an issue. There is a story. So if someone tells me that their sales are growing, and life is good, but they’re not making any money, well, what’s missing? Is it your costs? Your gross profit? Typically, your working capital is out of whack. So perhaps you can be profitable but not have any cash. It can be tied up in your receivables. It can be tied up in your inventory. Profits don’t pay me back. Cash pays me back. So as you collect your receivables, that’s cash. That’s what pays me back. I could care less about profits. It’s cash.
WWD: Is there a typical day on the job for Rob Miller?
R.M.: The only thing typical is that it’s not typical. I am responsible for this portfolio of 100 accounts. I am responsible for approving new business. I have to put out fires. And I have a staff of 10 people who I have to manage. So you tell me what’s a typical day. I love it.
WWD: As a lender, it must be difficult sometimes when you’ve got to deal with decisions that could adversely affect the fate of companies and their employees.
R.M.: When people don’t play nice in the sandbox, I got to do what I’ve got to do. I’ve got to protect the Rosenthal family and their capital. That’s the number-one priority. It’s the preservation of capital. That’s the hard part of the job sometimes. Sometimes you are putting people out of work. You are costing people their livelihood. I have liquidated dozens and dozens of companies over my career and that’s not the fun part. Here, there’s been none so far. Generally what happens is the company gets sold. That’s what we strive for, to find a buyer for the business because that is a better outcome for everybody. If I have to liquidate a company, every other alternative I have explored doesn’t work. That’s the last option, to actually close a company down and liquidate. We are working with an investor banker right now to help sell a company.…Sometimes, you increase your exposure before you get out. The fundamental question that I have to answer is, is there fundamentally a viable business? Is there a reason for this company to exist? If the answer to that is yes, I’ll work with you. If the answer is no, then let’s come up with a plan on how do we get out. The other fundamental question you ask yourself a lot in this business is “Are you dealing with honest people?” If you are not dealing with honest people, it’s game over.
WWD: Can you give some examples of where Rosenthal helped stabilize a company?
R.M.: Three years ago, I met with Creative Apparel, a textile company in Minneapolis making whimsical T-shirts, sleepwear, sports licensing and showing some losses. They were with a bank. They violated their covenants. The bank was pushing them out. When we met with Creative Apparel we saw they had a very credible story. The reasons for their losses and the future for growth made sense to me. They trimmed their operations, cut expenses, turned profitable. After we lent them some money, they went from years of losses to years of profits. We have lent them more money. They are expanding, profits are exploding. We could not be happier with the relationship. It was the very first deal I approved, around April 2015, a $6 million credit facility. It’s a revolver. Ninety-five percent of my loans are revolvers, though I have some term loans.
Another deal we did was in the food business, with Brooklyn Brands, a commercial bakery, in December 2016. They make a lot of kosher products for Passover. We came in with a line of credit to support the working capital. Just think about it, for Passover, you’ve got to start building that inventory in December, January and February. This year Passover is the end of March. All that inventory has to be sold by the last week in March, and then it will collect out from Trader Joe’s or whomever they sell it to, and then they will pay down the loan. During those off months, when they don’t have the sales, they are effectively losing money, but that’s what we are funding. They have a kosher bakery and a non-kosher bakery. They bought a former 50,000-square-foot Crumbs bakery location in the Bronx and relocated from a very inefficient location in Brooklyn to a much more efficient location in the Bronx. We are financing their working capital and a little bit of their capital expenditures for the move. They needed some new mixers, some other packaging machines.
WWD: How do you see your group evolving?
R.M.: As a percentage of the total, my personal goal is for the asset-based lending to become a bigger piece of the pie. The factoring volume is stable. One [additional] area for growth is international business. Historically, an asset-based lender would never lend on foreign receivables because every country has its own laws, but there is credit insurance. There are international banks you can deal with and there are companies that specialize in dealing with international businesses and we are partnering up with them and trying to expand there. We’ve got a client now, headquartered in Miami, which is in the marine supply business, providing various maritime services in foreign countries. Probably 40 percent of their receivables are from foreign entities.…One of my roles at Rosenthal is to train some of the junior people. It’s mentoring. I am going to age out at some point and we need the next Rob Miller. The next Michael Stanley. We need the next Paul Schuldiner. I’m 61. This is the last job I want to have. I love this place. It’s a great company.