BANKBOSTON BUILDS RETAIL NICHE
Byline: Melanie Kletter
NEW YORK — When Mati Weiderpass, founder and chief executive of the fast-growing Watch World International retail chain, went looking for funds at the beginning of last year to build his business, he knew what he wanted.
He sought a financing source that was well-established, had experience in the retail business and did not expect exorbitant returns on investments. After meeting with some established players, his company signed a three-year working capital facility with BankBoston Retail Finance Inc., a subsidiary of Bank Boston that in recent years has quickly become a major lender to retailers.
Watch World, which started in 1994 with one unit, had 55 stores when it signed with BBRF and now has 103.
BBRF, which focuses exclusively on financing the retail trade, has found a niche in funding distressed companies and startup operations.
“The retail industry is a large user of loans, and they use loan products fairly consistently,” said Edward J. Siskin, BBRF’s chief operating officer. “Part of the reason is that over the years, the factoring community has become less aggressive and more conservative.”
Siskin conceded that the retail industry could be a volatile place for financial institutions, but his company feels the risk is balanced by the strong demand for its services, which run the gamut from inventory-based working capital loans to turnaround financing, emergence facilities and advice on mergers and acquisitions. Inventory is the core asset on which it lends.
According to Siskin, other financial lenders are deeply involved in lending to the retail industry, but they are not pursuing distressed firms and debtor-in-possession, or DIP, financing as aggressively as BankBoston.
About 50 percent of BBRF’s activity is with large retailers in trouble and in need of money to attempt a turnaround. Within this category, about 20 percent of BBRF’s loans are debtor-in-possession to companies in bankruptcy and 30 percent are to firms in some kind of turnaround mode.
Another 25 percent of its loans are to midsize retailers with general financing needs.
The remaining 25 percent are with fast-growing retail firms with more than 10 stores that need an injection of cash to expand. In addition to Watch World, BBRF has worked with such chains as Cosmetics Center and Lids, a baseball hat and accessories chain.
During the first half, BBRF completed such deals as a $50 million working capital facility with Cosmetics Center, a $200 million working capital facility with Sports Authority and a $270 million emergence financing facility with Bradlees.
Weiderpass said he was attracted to BBRF because of its comprehensive knowledge of retailing.
“BBRF spent time learning about us and understanding our business,” Weiderpass said. “They wanted to get comfortable with our growth plans and with our inventories. Sometimes you work with a banker, and they stare you in the face and you wonder what they are thinking. [BBRF has] been very forthcoming and pleasant to work with.”
He added, “Because they use inventory as collateral, once we started working with them, they instill discipline in the way you manage inventory. It works to our benefit because it keeps us on track with inventory.”
Siskin said BBRF — which was a subsidiary of Gordon Bros. before being acquired by BankBoston in 1996 — feels comfortable with riskier deals because 30 percent of its staff consists of former retailers and retail executives who have specialties in areas such as finance, merchandising and information systems. “We think having former retailers on hand gives us a competitive edge in understanding business plans,” Siskin said. “They help us understand the right way to look at companies, and they understand the risks involved.”
This also helps, of course, when dealing with fledgling retailers. “For early-stage companies who might not have the infrastructure, we can patchwork around things because we have people who know how to patchwork,” he said.
When determining whether to make a loan, Siskin said his team looks primarily at management and infrastructure.
“We don’t claim to be experts or decide whether a concept is valid,” Siskin noted. “We try to understand if the management is good, and if the infrastructure is good and whether they can create a borrowing base.”
A key ingredient to approving a loan is gaining good information, and BBRF employs a number of techniques, including background checks, audits, and the use of appraisal firms to affirm the value of inventory and to insure it is getting proper information. It also sends mystery shoppers out to determine whether a company is discounting at the level it claims it is.
“The thing that concerns any lender, particularly if you are lending on inventory, is the integrity of information,” Siskin said.
Still, lending to a distressed company generally means living on the edge. “You are not certain if the company will be successful or not,” he noted.
And to be sure, things don’t always work out. County Seat, which earlier this year went out of business, was one difficult deal BBRF has worked on. Despite receiving DIP financing from BBRF, County Seat was unable to restructure after encountering significant problems, including merchandise miscues and a poor infrastructure.
But lending to a healthy retailer brings up other issues. For example, there are more players in the company’s capital structure that can have impact and control over the company’s financial situation. If a company is in bankruptcy, typically the burden of responsibility for providing cash falls on the shoulders of the DIP lender.
In addition to his work at BBRF, Siskin is founder and president of Back Bay Capital, a venture capital firm in which BBRF is a participant. It provides secured-term and revolving loans for middle-market companies. Acting as a fund, it is involved in riskier deals and makes secured loans of $5 million and more.
The group was formed to meet the growing need for alternative types of finance, according to Siskin.
Looking ahead, Siskin foresees some bumpy times for the retail industry.
“The retail environment has been very strong, but despite all that, there are still a lot of retailers who have problems,” he notes. “The economy is overstored. In addition, there has been a lot of consolidation in the department store industry, which is giving regional competitors much more difficult times.”
There is a lot of consumer debt right now, and he noted retail may be more exposed if consumer spending slows due to a perceived recession.