FACTORS: THINGS ARE GOOD; VOLUME UP, LOSSES DOWN

Byline: Sidney Rutberg

NEW YORK — Reflecting improvement in the apparel business, the factoring industry had a strong first half and is expecting an even stronger second half.
It was almost the best of all possible worlds for the factors. Volume was up, there was still a fairly active new business market and for the first time in a couple of years, sales of the existing client base began to show improvement. A number of factoring executives also cited the upbeat mood at the MAGIC and WWDMagic shows last month in Las Vegas as an indicator of a strong fall season. Also, there did not appear to be any major bankruptcies waiting in the wings.
But in an imperfect world, there are always some blemishes. One was Montgomery Ward, which the factoring community was watching carefully for months before the bankruptcy last July, but the bankruptcy still caught a number of factors for big numbers. But as one executive commented, “It could have been much worse,” and noted factors had been cutting back on some of their huge exposures before the bankruptcy hit.
Another blotch is rate-cutting. This is a subject factors are reluctant to talk about on the record, but it is out there and becoming more intense.
“The biggest problem,” said an executive of a medium-sized firm, “is the strong competition from other factors. Since new business has slowed down and factors have set large quotas [for new business] for themselves, there has been a lot of rate-cutting. We have had to make some concessions to clients to meet competition.”
With so much emphasis on building volume even at the expense of profits, two of the largest factoring firms, CIT Group/Commercial Services and NationsBanc Commercial, declined to disclose their first-half volume figures. The figures for those two firms in the chart accompanying this article are WWD estimates.
Lawrence A. Marsiello, president and chief executive officer of the CIT factoring operation, complained there is a “lack of comparability” in the reported numbers. He noted there should be some standard to define factoring, which he defines as the purchase of accounts receivable and acceptance of the credit risk. Unless there is a standard, the numbers may be greatly inflated, Marsiello added. However, he did say that first-half factoring volume at CIT is ahead of last year’s and the third quarter will be even better. But he would not give the numbers.
Stewart M. Long Jr., president of NationsBanc Commercial, based in Charlotte, N.C., noted there has been too much emphasis on volume rather than profits and that some of the figures reported by other factors are not all old-line factoring volume. Nevertheless, he said business at NationsBanc was up and “the credit environment was good.” He added that the rest of the year looks to be holding steady and NationsBanc expects to continue to expand its efforts internationally.
But there were still lots of factoring executives prepared to cite numbers and trends.
John W. Kiefer, president and ceo of Capital Factors Inc., said his first-half volume was up 25 percent and he’s looking forward to double-digit increases for the full year.
Capital Factors, which went public last year, is being taken over by Union Planters Corp., a $15 billion bank holding company based in Memphis, Tenn. The deal is expected to be completed at the end of this year or early next year.
Kiefer said the new owners would mean lower costs and increased funding. In addition, the bank has 428 branches in seven states clustered around Tennessee, which could be a source of new business.
In the meantime, Capital is doing very well. “Our clients are growing and new business, while not as strong as last year when we put on $1 billion in new volume, is still on budget. Growth in our regional offices — Charlotte, N.C.; New York, and Los Angeles — has been strong, while credit losses are running at the lowest rate in our history, just about 0.04 percent of sales.
“We’re not getting hit by all those mom-and-pop retailers going broke. The shift in retailing has gone more and more to the majors. On the wholesale side, the accounts are also consolidating and getting bigger. The economy is strong, and I’m expecting a very strong second quarter.”
Joseph A. Grimaldi, president of BNY Financial Corp., was upbeat in reporting first-half volume up 18.2 percent to $6.5 billion. This total probably put BNY at the top of the volume derby, ahead of the CIT factoring group.
Grimaldi attributed the gains to a full six months of volume from Midlantic Commercial, acquired last year, as well as new business and the continued diversification of the BNY portfolio.
“I would say that about 50 percent of the gain came from nontraditional industries and the other half from the apparel-textile companies. We still have about 40 percent of our volume in traditional industries, but the diversification has been working very well for us. We are now factoring industries ranging from airlines to advertising agencies to gas distributors. Our new business is still very strong.
“Credit losses, with the exception of our exposure in the Montgomery Ward bankruptcy, have been modest, about 0.10 percentage points. And we may still get a good return when we decide to sell our claim against Ward’s. We’re not ready to sell yet. We can wait until we think the price is right. We don’t have a cash flow problem.
” The development of a market for claims has been very helpful for us. Sometimes we can get 70 cents on the dollar pretty quickly instead of waiting for years until a bankruptcy is resolved and then wind up getting 5 cents up front and maybe another 5 cents sometime in the distant future.”
Michael J. Roche, president of Heller Financial’s factoring operation, one of the larger players, cited the upbeat mood at the MAGIC and the WWDMagic shows. “I’ve been going for the past three years and there was more optimism at this show than I had seen in the past. I think the spring ’98 season is going to be gangbusters.”
First-half volume at Heller was up 6.25 percent to $3.4 billion, with gains principally from new business. “More important than volume for the bottom line was a 14 percent increase in funds employed. We started an inventory loan program about two years ago and now about 10 percent of our clients have inventory facilities.
“August was a good month. and I expect that we’ll do about $7.5 billion for the year. I’m expecting the second half at retail to be fairly strong, but not a blowout.”
Congress Talcott Corp.’s president, Jerome M. Kenyon, was also encouraged by MAGIC. “The tone at the shows this year was much better than a year ago. Business was strong in both men’s and women’s wear, and vendors were able to get rid of a lot of excess goods. The last half of the year looks good.”
After three years of declining volume, Congress Talcott was ahead 6 percent for the half to $1.88 billion. Kenyon said there was no spurt of business among existing clients in the first half, “but in July, August and so far in September, business has been strong. Fall business has picked up for our clients and it looks like in the full year we should be ahead by more than 5 percent.”
He added the credit losses have been “less than anticipated, even with the Montgomery Ward bankruptcy,” but added, “Losses are a part of our business.” Kenyon noted there are still problem retailers being watched, “but not too many are expected to go under before the end of the year.”
Another Montgomery Ward victim, Leonard Milberg, chairman of Milberg Factors, still had a very strong first half, gaining 17.9 percent and heading for a $2 billion-plus year.
“Business has been good,” said Milberg, “and I expect it to get better in the second half, which is traditionally a stronger period for us. August was the best month in the history of our company.
“For the past couple of years, volume of most of our existing clients has been flat and we had to grow by signing up new business. There were also a number of old-timers who just closed up and left the business. That phase seems to be over, and our clients are showing significant sales increases. We expect our volume for the full year to be up about 20 percent. As far as credit losses are concerned, except for Montgomery Ward, they have been low.”
Milberg Factors is celebrating its 60th anniversary this year, and remains one of just three independently owned major factoring firms.
David Finkelstein, senior executive vice president of Century Business Credit, another independent, reported volume up 13 percent.
“Our business has been very strong across the board, ” said Finkelstein, “and the outlook is for accelerating gains for the second half of the year. Our clients are mostly importers. Credit losses have been well-controlled.”
The third independent, Rosenthal & Rosenthal, is having a “bang-up year,” according to Jerry Sandak, executive vice president.
First-half volume is up 15.6 percent to $890 million, Sandak said, and for the year “we should come in darn close to $2 billion.”
He pointed out that the first half has been strong with both new business and client gains, adding, “We’re expecting the second half to be even stronger because deliveries of orders by many of our clients have been pushed back. The retailers will be taking in the goods, but later than originally scheduled. This should result in some first-half volume being pushed into the second half.”
Credit losses, even with Montgomery Ward, “were below the acceptable level of 0.1 percent of sales,” Sandak said.
At Republic Business Credit, the first three months of the year were very strong, but business slowed down in the last three months of the period, according to John Heffer, president. “August was a good month, however,” Heffer said, “and I think fall should be better than last year. Credit losses were in line, except for Montgomery Ward, where we took a calculated risk. It could have been much worse.”
Overall, first-half volume at Republic increased 2 percent to $2.750 billion.
Arguably the most aggressive growth company in factoring is Finova Capital Corp. For the first half, Thomas C. Parrinello, group vice president, reported a volume gain of 27.8 percent to $1.68 billion. This comes on top of a 66.5 percent gain the firm reported for the first half of 1996.
Parrinello said business was good for Finova’s apparel clients and the West Coast office signed up a lot of business. He pointed out there is still some softness in the converting business, “but so many have gone out of business that the supply-demand equation should eventually come into balance.”
Another fast-growing factoring firm, but from a much smaller base, is Sterling Factors. For the half, Sterling’s volume jumped 35.3 percent, but at $230 million, it is still a small player. Stanley Officina, president, attributed most of the gain to new business, but noted existing clients are also doing pretty well.
Strongest product areas for women’s apparel are sportswear, denim and sweaters.
For the full year, Officina expects to maintain the 35 percent growth pace.
Only one company on the list, Atlanta-based SunTrust Bank, showed a decline and that was due to special circumstances.
Austin Broadwell, factoring head at SunTrust, said the 4.5 percent decline was because of the loss of two large clients.
One large privately owned mill went out of business because of foreign competition and another discontinued factoring services, Broadwell said.
“Excluding those figures, our core business, existing clients and new business were running ahead about 10 percent for the first half,” Broadwell said. “Our core business was good in the first half and is getting stronger in the second half. Credit losses so far have been very reasonable and I don’t see anything major on the horizon for the rest of the year. It should be a good, profitable year, although, because of the two lost clients, our volume will probably be down about $100 million for the year. But in 1998, we expect to be about 10 percent ahead.”

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