Cash Remains King for Credit Ratings

Fitch study finds outside funding harder to come by.

Forget bank loans and public debt — the financing of fashion is increasingly about cash.

This story first appeared in the January 27, 2009 issue of WWD.  Subscribe Today.

Fitch Ratings said its debt scores on retailers and consumer products firms are placing greater emphasis on internal sources of funding, such as cash reserves and cash from operations. Companies selling goods that are “wants” more than “needs,” including several apparel retailers, are expected to be especially challenged by the harsh retail environment.

“The credit crunch has continued to impact bank balance sheets and behavior, thus affecting the ability of corporations that rely on bank debt to access capital,” Fitch said in a report titled “Liquidity Focus: U.S. Retail and Consumer Products.”

The report essentially advises companies that they’re on their own. Most retailers have already gotten that message and have been in a protective crouch for months, closing stores and reducing expenditures.

“In the face of declining sales and escalating costs, companies are working to preserve cash and maximize cash flow,” according to the Fitch report. “Stable, predictable cash flow generation leads to strong liquidity while more volatile cash flow generation can lead to a weakened position.”

The 41 retailers and consumer product companies tracked by Fitch generally pass muster. Twenty-six were considered to have strong liquidity, and seven received a moderate score.

Eight firms, however, were considered to have “weak liquidity,” meaning there is some doubt if they will be able to renew bank facilities or find new sources of financing over the next two years, Fitch said.

Neiman Marcus Inc. and Sears Holdings Corp. are included in this latter group because they have committed bank facilities that will expire this year or next. Banks, while revisiting some agreements, are still in the midst of major restructuring and other challenges.

The Bon-Ton Stores Inc., Burlington Coat Factory and Saks Inc. also are considered to be in a weakened liquidity position. Their status could be pressured further over the next two years, either because they aren’t generating cash, they face vendor financing issues or they could violate covenants in their bank agreements. With funding in doubt, vendors may increasingly serve as a last resort for struggling retailers.

“Vendor financing provides an important source of liquidity for retailers to fund inventory purchases,” Fitch said. “Vendor tightening of terms can precipitate distress at a company, as it did for Linens-N-Things Inc.”

On an earnings call last week, Alexander Mason, president and chief operating officer at factoring giant CIT Group Inc., said, “We plan to continue to price commensurate with risk and therefore would expect our average commission rates to increase.”

Mason added, “I’m comfortable with our largest retail exposures. The smaller retail names on our credit watch list continue to grow, however, and these are the names we are proactively watching and managing down.”