Steven Mo is not a career banker. In fact, his original training was as an engineer, obtaining his degree from the University of Waterloo and his Masters from the University of Toronto. He spent much of the 1990s specializing in environmental site assessments but made his first career change late in the decade, moving into construction engineering which saw him assist with the design and construction of civil infrastructure for mines in B.C. and around the world.
Photo above: TD’s Andrew Kostiw, Director, Treasury Management Pacific Region and Steven Mo, Vice President, Commercial National Accounts provided insights into commercial lending at a recent shipping industry luncheon.
The early 2000s were pivotal years for Mo — in 2000, he started the MBA program at the University of British Columbia, majoring in Finance. In 2002, he joined TD’s commercial banking team in Vancouver where he held a variety of positions, working his way up to relationship manager based in Toronto, “In that role, I was representing my clients to the bank — it was my job to tell their story as it relates to establishing themselves, building the relationship and having their financial needs met.”
Another experience-building position for Mo was at JP Morgan from 2007 to 2009. “It was one of the most volatile periods in the financial market and to a certain extent JP Morgan was at the epicentre when Bear Stearns failed. Working at an Investment Bank was not sustainable from a work-life balance perspective,” he said, adding that he and his wife jumped at the opportunity to return to the West Coast.
Rejoining TD, Mo first managed the Mid-Market Sales team in the Fraser Valley before moving on to other positions, and ultimately becoming an executive in 2012. Mo assumed his current role in 2015 leading the B.C. team.
At the Commercial National Accounts here in Vancouver, Mo and his full service team of nine manage loans and financial instruments starting at $25 million providing analysis, underwriting, origination, servicing, administration and adjudication under a standalone profit and loss centre — essentially running a business within a business with relative autonomy. “In contrast to some other banks that look at the account from a revenue perspective, we look at it from the borrowing or lending perspective,” he said, explaining that loans under $25 million fall into the mid-market segment of commercial banking. When asked about the upper limit for a single bank deal, Mo noted that while it can reach into the hundreds of millions for a very well-rated entity, it was more likely that anything over $50 million would involve multiple banks depending on the credit risk profile. “We’ll work with our client to facilitate the process. They might already have an existing relationship with another bank or it could be a complete syndication so we’ll end up managing the bank-to-bank relationships on behalf of our client and in this way, the business can focus on what they do best: manage their business vs managing a group of banks.”
The three Cs of lending
“This is a relationship business,” Mo said when asked about factors considered in making a commercial loan. “Every deal is unique and fully customized for loan instruments, financial covenants, rates and terms of payback. Ultimately, the key is communication. You generally want to operate in a world of no surprises. It’s better to be up front about bad news rather than hold it back. Good news should also be shared expeditiously. It’s almost like a marriage.”
Mo went on to note how the communication aspect speaks to management’s character and credibility. “There are a lot of numbers involved in banking,” he said. “While I can look at financial statements and assess a business’ creditworthiness, I can also ask four or five tailored qualitative questions to provide a strong sense of the financial situation of the company without even seeing the numbers: what is the industry? What is your competitive advantage? How many years have you been in business? What is your experience? It’s all about assessing the character of management and the vibe you get from them. There is a science to it — yes, absolutely, we have models that spit out a number — but there is art to the science. A lot of information comes through building the relationship.”
At the end of the day, Mo estimated that, while reliance on financial statements and information will drive pricing (e.g., interest rates), evaluations of management and the industry will also be a significant driver. Referring back to the marriage analogy, Mo says that “when we make a decision, we’ve made that decision for the long term — generally through thick and thin. Part of the decision is based on science (i.e., the financial statements) but we look at other aspects — ownership, management, the quality of staff, etc. There are a lot of different factors, but the most integral pervasive factor is communication.” Taking the marriage analogy one step further, Mo notes that the odd case ends up in divorce. “Sometimes you just can’t reconcile and for long-term relationship reasons, it’s best for both businesses to move on.”
Summing up how Mo and his team will make a decision from a lending perspective, he cited the “three Cs of lending: character, capacity and collateral. Character assesses the strength of the management; capacity tells us about the cash flow and the ability of the business to repay the loan; and collateral is the ‘rainy day’ fund that rounds out the financial picture,” adding that capacity or cash flow are the main consideration because that is how loans are repaid.
Moving beyond the decision, the next step for the Commercial National Accounts Group is to work with the business to determine the best financing solutions for them. “Options can range from revolving lines of credit, mortgages, short to long-term loans, cash management or even derivative facilities,” Mo said. “Each situation is unique and solutions must be tailored to the business’ needs. We’ll also bring in third-party specialists — marine appraiser, structural engineers, real estate appraisers, lawyers, etc. — to help with due diligence.”
The question that is most often asked in banking is: what is the interest rate? Major factors that drive the rate include the probability of default and security. “Loans fully secured by hard, tangible assets like inventory or accounts receivable generally garner a better interest rate than those secured by the cash flow-generating capacity of the business,” Mo said while explaining the formula to come up with a competitive rate. Those companies that consistently grow, maintain liquidity and manage their debt while continuing to invest in their business will also be able to negotiate a better interest rate.
Supporting the marine industry
As noted previously, Mo and TD’s Commercial National Accounts Group has shown strong support for the marine industry. In addition to exposure in industries like food and beverage and long-term care, the group has significant marine exposure — ships in the water, terminals and ports. “It’s a growing industry throughout the province. Prince Rupert Port, for example, is well-positioned for access to the U.S. mid-west and the movement of goods to and from Asia. And the Port of Vancouver has major growth plans,” he said, adding that Vancouver Island is also a source of keen interest for his group.
From a marine perspective, Mo described the services he and his team offer as a “financial supermarket.” Whether the requirement is for a revolving loan, a construction loan (i.e., an interim loan to complete a construction project and then, at the end of that period, payback is made over a determined period of time) or even foreign exchange, Mo sees the potential for TD to assist. “Marine businesses will often require large capital expenditure loans to cover expansions or the acquisition of equipment. From a banking perspective, our experience with this type of financing serves us well,” referring to both his experience with existing clients as well as his engineering background that provides for greater understanding of the goals of an industrial company.
Mo also sees initiatives like the Vancouver International Maritime Centre as having a major influence on their support. “We have seen a trend of head offices exiting Vancouver in a number of industries and the VIMC is addressing that issue for the marine industry.”
More than just numbers
Contrary to popular belief and as the above interview highlights, intuition and relationship development are significant factors in the decision-making process for lending. “I really can’t stress enough how important it is to develop a working relationship that is based on communication, transparency and trust for both parties,” Mo said. “For us here in Commercial National Accounts, our collective knowledge and experience with both the financing side and the marine business side allow us to work very well with clients to identify the financing instruments that will serve their needs best. It isn’t always just about the numbers.”