NEW YORK — Retail bankruptcies might be scarce these days, but that doesn’t help credit managers sleep any easier at night.

That’s because lately when a bankruptcy does happen, it’s often a doozy.

In January, Kmart Corp. became the largest retail bankruptcy in U.S. history, with $10.3 billion in liabilities, beating out Montgomery Ward for that dubious distinction. A bankruptcy by one of these monster chains can devastate a vendor or factor left with a sizeable unpaid bill. "These are not tens of thousands of dollars; they’re millions," said Stanley Officina, president at Sterling Factors.

Overall, credit experts say the business of credit checking has become more sophisticated as they deal increasingly with highly leveraged chains in an intensely competitive retail climate. As a result, credit checkers are paying closer attention to cash flow, interest coverage and the overall competitive landscape than ever before. Wall Street’s recent accounting scandals have only complicated matters further, with credit managers now looking out for rumors of Securities and Exchange Commission investigations as well as other signs of fiscal distress.

"You’re relying on audited statements and when you have to question how they realized their audited statements, that’s a whole new wrinkle that wasn’t there before," said Jim Rice, chief credit officer at Sands Credit, a division of Cyber Business Credit.

All that adds up to a changing dynamic in credit checking that many see as easier in some ways and harder in others. On the positive side, the ongoing consolidation weeded out a number of weaker retailers in a steady stream of bankruptcies in the last few decades, and most of the survivors are unquestionable credits. On the negative side, when one of these bigger retailers does fall, it leads to bigger bad debt losses.

"You have fewer retailers, but much bigger exposures," Tom Pizzo, president at Century Business Credit, said in summation.

"It’s different," said Jerry Sandak, senior executive vice president at Rosenthal & Rosenthal. "It’s easier to check Wal-Mart and Kohl’s. It’s almost automatic. But then you have these big credits."

Dave Arnold, vice president of shared services at Kellwood Corp., said retail credits have probably become riskier because of fewer retailers. He likened it to a mutual fund, in which an investor looks to spread risks across a number of stocks to offset the chance of one disappointing."You look to diversify your customer base so you can mitigate the chances of one going bad," said Arnold. "So on the one hand, it’s easier because you have fewer people to watch. But when you do have a large customer that’s a bit shaky, you spend a lot of time tracking the situation."

John Daly, president of CIT Commercial Services, said credit checking is still the number one reason people come to a factor and he believes, in the current economic downturn, many are turning to factors for their expertise.

"Credit protection is not something that should be taken lightly," said Daly. "People in the apparel business take risks on product, sales and marketing that they’re very good at and experts on. But one credit person trying to figure out everything can’t replicate a company like ours that has well over 100 people analyzing credits all day long. It’s like doing your own financial planning versus Morgan Stanley."

Factors and insurance companies are the two principal credit protection vehicles. Both typically ask to insure a basket of receivables rather than one chain to spread out the risks. Besides buying receivables and guaranteeing credit, factoring also includes collection and bookkeeping, as well as the option to make over-advances during peak shipping seasons. Credit insurers are typically used by those who don’t factor. Like any insurance, it requires a deductible if an event occurs, and prices and coverage vary depending on the credit risks.

When protection isn’t available, vendors often bear the risk on their own using their own internal credit staff as well credit agencies such as D&B (formerly Dun & Bradstreet), Sands Credit, Global Credit or Solo Credit.

Bob Livote, managing director for retail credit at Solo Credit, said some vendors often wait until a serious credit issue arises before they seek protection only to find it’s no longer available. "They’re looking for insurance or factoring, but now they can’t get it. If they had it all along, they’d be covered," noted Livote.

More expensive options include spot factoring, which provides quick cash against a single receivable. Another costly option is a bankruptcy-triggered put, a financial device typically sold by brokers of distressed securities, claims and receivables. The put acts as an insurance policy by guaranteeing a minimum payment for receivables in the event of a bankruptcy."We’re the insurer of last resort," said Brian Jarmain, managing director at M.J. Whitman, which had an active market in Kmart.

Timing when to extend credit and when to pull back has become harder, credit managers agreed. Sands’ Rice believes the chore of credit checking became a lot more sophisticated during the Eighties, when many chains underwent leveraged buyouts. Traditionally, the decision to check credit involved seeing how long the chain had been in business and whether they were up to date on payments, Rice said. Now, credit managers are asked to analyze cash flow to determine whether it can meet interest payments. That requires absorbing information on revolver capacity often on a weekly basis from banks whereas credit decisions in the past were often made based on annual financial statements.

"It has become more analytical than in the past," said Rice.

Solo Credit’s Livote said the credit decision is now often based on a number of ancillary factors, including expansion strategy, changes in merchandising strategy, inventory turns and management turnover. "It’s not just numbers anymore. You have to go beyond the numbers," said Livote.

Technological advances, particularly e-mail and the Internet, have proved important allies, giving credit managers nearly instantaneous access to loads of information. "It used to be the check was in the mail, but the availability and speed with which information can be transmitted has really quickened the decision-making process," said Nathan Lubow, senior consultant at Mahoney Cohen.

Despite fewer retail bankruptcies, credit experts say recent filings by Kmart, Montgomery Ward, Bradlees and Caldor have more vendors looking for better credit protection. "This all put the fear of God into suppliers who would rather sleep at night," said Sandak.

Livote said he’s getting more calls as concerns have grown due to Kmart, as well as the collapses of Enron, Global Crossing, WorldCom and others: "Everybody’s got a little cold feet and second guessing themselves."

Added Sterling’s Officina: "You are dealing with a fragile psychology now. It doesn’t matter if it’s the retailer, wholesaler or housewife. Everybody’s looking around their world and realizing that many icons are not living up to the way they once thought of them."

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