A week of yo-yoing stock markets has so far had little impact on the world of business credit.
Factors, which pay vendors up front for shipments to retailers, said they have yet to tighten credit terms and Moody’s Investors Service noted that upgrades in inventory management systems have reduced the chances of defaults on retail junk bonds.
Even so, chains could find credit drying up quickly if markets continue to gyrate and consumers start to take the wild swings to heart.
On Tuesday, the S&P Retail Index gained 4.8 percent, or 22.19 points, to 487.55 — gaining back much of the ground lost in its 6.1 percent plunge Monday. Retail shares are still 12.9 percent below their all-time high set July 7.
The Dow Jones Industrial Average increased 4 percent, or 429.92 points, to 11,239.77. The market briefly dipped into negative territory Tuesday afternoon when the Federal Reserve said it would likely keep its benchmark interest rate “exceptionally low” until at least mid 2013, but did not, as hoped, offer specifics on what it might do to prop up the economy. The Fed, led by chairman Ben S. Bernanke, acknowledged that U.S. economic growth has been “considerably slower” than expected and that household spending had “flattened out.” Earlier, the FTSE 100 gained 1.8 percent in London and the CAC 40 rose 1.6 percent in Paris. The Hang Seng Index fell 5.7 percent in Hong Kong and the Nikkei 225 slipped 1.7 percent in Tokyo.
Executives at key factoring firms said Tuesday that they have been watchful of the market’s gyrations, but so far are sticking to their knitting.
“We basically have maintained our same attitude toward lending because it’s what we do,” said Stanley Officina, chief executive officer of Ultimate Financial Solutions. “If we stop lending, we stop earning.”
Officina said the factor tries to keep its portfolio as “clean as possible” and has in the past imposed more stringent lending standards. “We are out there lending to our clients and trying to deal with stronger clients than in the past,” he said.
The market turmoil has likewise not prompted any changes in lending requirements at Hilldun Factors, according to president Gary Wassner.
“Our client base is so focused on the luxury end of the market that up to now has been performing relatively well,” he said. “Fluctuations in the stock market — when those days occur and the market drops precipitously — are worrisome because it affects discretionary spending in the luxury market. Right now the luxury market is still strong.”
Europe, which is in the midst of a sovereign debt crisis, is more of an immediate concern.
“The timing is worrisome,” Wassner said. “We do a tremendous amount of business in Europe because our American designers export to Europe. If the situation there consistently deteriorates, we would be concerned about retail stores in Italy and Spain, and might need to strengthen our collection efforts and look more closely at the credit lines for the European retailers.”
J. Michael Stanley, managing director at Rosenthal & Rosenthal, which is also holding lending standards steady, said factors have control over collateral, which helps them navigate downturns.
“We are continuing to fund existing clients adequately,” he said.
Stanley said the second half could be “more challenging,” but so far the ebb and flow of sales has been typical, with July relatively slow and August gaining a bit of steam. “The new business backlog is as strong as ever,” he said.
The retail sector, which has spent years modernizing, at least appears to be better prepared to financially deal with sudden downturns in consumer spending. Companies also have some practice given the 2008 financial crisis and the recession.
Moody’s Investors Service projected the default rate for retailers with a speculative or “junk” debt rating would slow from 6.5 percent last year to 2.5 percent in the fourth quarter and 1.9 percent a year from now.
The projections for fewer defaults shows an evolution in the debt watchdog’s thinking on the sector.
Moody’s projected that retail junk bonds would default at a rate of 14.6 percent in 2009 — in keeping with 14.8 percent default rate in the 2001 recession and the 19.9 percent rate in the 1990-91 downturn. But junk-rated retailers fared much better than expected, failing to meet their obligations at a rate of just 5.1 percent in 2009.
There were several reasons for the lower default rate — the Fed sought to prop up the bond market in the wake of the financial crisis and lending terms were very favorable before the recession — but the rating agency singled out retailers’ investments in inventory management technology as an important factor.
Moody’s cited Nordstrom Inc., which has an inventory system that allows it to ship purchases made online from stores or its fulfillment center, optimizing gross margins and helping reduce the amount of inventory needed.
“More-disciplined inventory control, supported by improved technology, helped retailers boost free cash flow and react more quickly to unexpected sales declines during the latest recession,” Moody’s said. With more cash flowing through their businesses, retailers were able to cut their debt load.
This leap forward in inventory management bodes well for retailers now facing an uncertain future. But it’s not a cure for all margin ills during a slowdown. “While retailers can use technology to more quickly react to falling sales by scaling back inventory orders, they still have only one way to take the sales pain away: markdowns,” Moody’s said.
Moody’s said several of the retailers it rates face a “high probability of default” at their current debt ratings. Among them are Barneys New York, rated “Caa3,” Rite Aid Corp., “Caa2,” and Claire’s, “Caa2.” Bonds with a “Caa” rating are deemed to be of “poor standing” and “subject to very high credit risk” under Moody’s rating system.
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