CREDIT GETS TIGHTER ... AND TIGHTER ... AND.
Some lenders, faced with higher levels of uncollectible debt, are warning of lower profits for the fourth quarter. And companies on both the supply side and the retail side of the home furnishings business have been hashing out stricter repayment schedules with their lenders.
As a result, this tighter credit environment is expected to make financing growth trickier for retailers as well as suppliers, and many will seek out the services of factors and asset-based lenders. Still, there are some retailers and suppliers that are capable of self-financing their growth. Either way, companies are facing greater fiscal hurdles ahead.
Richard V. Romer, executive vice president at CIT Commercial Services, New York, said the business climate has definitely changed.
"Banks have tightened and credit has tightened," Romer said, adding that as credit gets tight, many companies turn to factoring.
"In these times, unsecured loans at banks become secured loans at factors," Romer said. "So it's a good time to be in the factoring business."
However, Romer sees the home furnishings business stronger than other industries. But segments within it, such as housewares, are being negatively impacted by current conditions, he said.
Jerry Sandak, executive vice president of Rosenthal & Rosenthal, New York, also said it's a good time to use factoring companies.
"Right now, these are the times that try men's souls," Sandak said. "Business is not so wonderful."
Sandak said companies are looking for the most beneficial financial deal possible. "And you can't blame them," he said. "Everyone is putting the squeeze on everyone because we have too much availability of product for even this growing consumer audience."
Sandak said he expects to see an increased trend toward "split factoring," in which the supplier signs on a second or third factor to share the risk. It's a common strategy among textile suppliers.
"There will also be people who never factored before who will consider factoring because they, too, feel this softness in the economy, and will want to hedge their bets," Sandak said. "There are people who had one factor who may now need two factors because they are going to need larger credit lines for that same customer base they had before."
Driving most of these trends is sagging retail sales, which thrust merchants into heavy-promotion mode.
"It's putting a lot of pressure on our clients, who are mostly suppliers, for additional support from their financial institution, be it their bank or a factor, because they are being squeezed," Sandak explained.
Two weeks ago, Bank of America Corp., Charlotte, N.C., warned of lower fourth-quarter profits due to about $1 billion of uncollectible debt. That news sent investors scurrying from the financial services sector, which ended up spooking investors in other sectors as well, including retail stocks.
Even the largest players are being hurt by current conditions. In a Securities and Exchange Commission filing last month, Bank of America said a loan on its books to an unnamed company is nonperforming, which means it is not paying interest. Some industry analysts said they believe the company is Sunbeam Corp., which has a $500 million loan with the lender as well as one with First Union.
Meanwhile, asset-based lenders who serve the retail industry have been busy, but the reins have tightened. Fleet Retail Finance, Boston, posted year-to-date commitments totaling $1 billion, which is down from $3.5 billion in retail commitments underwritten in 1999. This year's tally includes a $600 million debtor-in-possession (DIP) facility to Service Merchandise, a $270 million working capital facility to Bradlees and a $200 million DIP facility to Heilig-Meyers.
For fiscally strong retailers, there are financial challenges ahead. This is especially true for companies unable to self-finance growth. In his research note last week, Dan Wewer, analyst with Deutsche Banc Alex. Brown, Atlanta, said Lowe's completion of a $500 million sale last week of five-year notes is in line with the retailer's need to raise about that much in debt to finance its 18 percent yearly square-footage growth plan.
Wewer contends that Lowe's debt-to-capitalization ratio could rise to 35 percent "due to additional borrowing needs to fund their growth." And with Lowe's free cash flow running negative, he said, "the company should consider slowing its expansion rate in light of its disappointing financial trends."
"In contrast," Wewer added, "Home Depot is self-financing its 21 percent square foot growth, which could become an important competitive advantage in our view."
The Facts About Factoring
In times of tighter credit, companies, mostly suppliers, often seek the services of factors. Factors provide operating capital to businesses by purchasing their accounts receivable.
The challenges retailers face include stricter borrowing terms and higher debt-to-capitalization ratios.
According to the Federal Reserve, 44 percent of banks in the United States have tightened standards for corporate loans over the past three months.