FACTORS: MORE BUSINESS, MORE RISK
Byline: Sidney Rutberg
NEW YORK — Battered by a barrage of bankruptcies in 1995, factoring executives are looking forward to some relief in 1996, but they are not convinced the shakeout is over.
This year the market was hit by such blockbuster bankruptcies as Bradlees, Caldor, Edison Bros., Petrie Retail and Elder Beerman, to mention some of the most prominent. Looking ahead, factoring executives continue to worry about a host of problematic situations, and even though they may not be as plentiful as in 1995, they could still add up to a daunting 1996. They see retailers continuing to struggle, with more bankruptcies likely. The problems at retail are expected to back up into the apparel manufacturing and mill levels, creating a tough environment for suppliers. As always, some companies with the right merchandise will do well, but manufacturers overall will be cutting back on production and seeking to cut costs by sourcing abroad. Survival rather than growth will be the top priority among suppliers.
For their part, factors are expecting increased volume as the troubled economy expands the market for the credit protection and financing that the factors provide. While there will be more business available, the risks will be greater.
But, commented Michael J. Roche, president of Heller Financial’s factoring business, “That’s our role — managing risk.”
Credit losses in 1995 were generally at tolerable levels for the factors, even with the spate of large retail bankruptcies. Some said the ability to sell their claims quickly for cash helped cushion the losses. Others cited careful management of exposures and the lack of client failures.
As for credit losses in 1996, some saw them increasing while others expect losses to trend downward next year. There was also a difference of opinion on whether there will be more or fewer bankruptcies than this year, but all agree that 1995 will not be bankruptcy-free.
Lawrence A. Marsiello, president and chief executive officer of CIT Group/Commercial Services, the nation’s largest factoring firm, said clients will require extra financing for working capital to carry inventory to service demanding retailers. “There will be a continuing growth of 807 sourcing and the migration of production offshore. The U.S. textile business will be under pressure to maintain margin and volume. Consolidation will continue in the textile and apparel business at every level — mill, converting and manufacturing. Manufacturers will have to be larger to meet the demands of retailers who have become larger and more powerful.”
Marsiello forecast that retail insolvencies will continue “as chains seek quick reductions in operating costs and the rejection of unprofitable leases,” adding, “A great number of store locations will go dark.”
Turning to the factoring industry, Marsiello predicted a “challenging year with increasing lending opportunities that will put pressure on credit standards. Many soft goods companies will finish the year with thinner profits and will need additional financing, but the loans will be riskier.”
A number of factoring executives said they expect 1996 to be very much like 1995. Jerome Kenyon, president of Congress Talcott Corp., says that for the first half, at least, 1996 will just be more of the same. “I’m not looking for any upsurges in business in the first half of the year. Manufacturers are writing spring orders, but I don’t see any of them jumping for joy. Mostly they’re just looking up to avoid the falling bodies or to seek divine inspiration.
“I don’t see any improvement before next fall and that is based more on hope than conviction. I think there will be a shakeout in the spring, and probably some of our manufacturing clients won’t make it.”
Kenyon said Congress Talcott is budgeting “a very small increase in volume, and while I hope credit losses won’t go up much, I’m afraid that they will.”
John W. Kiefer, president of Capital Factors, based in Fort Lauderdale, also said next year will be very much like 1995: “Some companies with hot items are doing well, while the rest are just struggling to hold their own. I think we’ll have a decent Christmas but not a terrific one. Bookings for spring are not sensational, but they’re not terrible, either. I think 1996 will be a repeat of 1995, with some apparel companies falling by the wayside.”
Kiefer added that he hoped most of the problem retailers “have been flushed out,” and that there won’t be any more national names going into bankruptcy in 1996.
Capital Factors will do very well in 1995, according to Kiefer, with volume hitting $2 billion against $1.5 billion in 1994.
“We’re targeting $2.5 billion for 1996. Volume growth has been fueled by new business from our New York and California offices along with stronger-than-anticipated volume from our Charlotte office.
“Despite the retail bankruptcies so far this year, our credit losses have been the lowest on a percentage basis in the history of the company. We managed to duck some of the bankruptcies, and those that we were caught in we were able to get substantial returns by selling our claims. For 1996, we’re budgeting bad debt losses higher than 1995, because it’s unreasonable to expect a repeat of the unusually low level of losses this year.”
Andrew H. Tananbaum, president of Century Business Credit, is yet another executive looking for 1996 to be essentially a repeat of 1995. “Bankruptcies will continue and, as usual after a rash of bankruptcies, apparel manufacturers will be looking to protect their receivables with factors. “This year has been a difficult year, and 1996 will be another difficult year, but I don’t expect it to be worse than 1995,” Tananbaum concluded.
Another vote for a tough 1996 comes from Heller’s Roche.
“I don’t see retail doing any better next year than in 1995. I just don’t see any reason to expect any dramatic improvement, but I do see growth in the factoring business as continuing problems at retail will cause more people to look for protection,” Roche said. “Our credit losses in 1995 were…well within the range of acceptable losses. We sold our claims twice in 1995. Everything trades at a price, and we look at each situation separately and decide if we can do better holding our claims or selling them,” he noted.
“There probably will be more retail bankruptcies in 1996. It think next year will be very similar to 1995. We’re budgeting for increased volume next year, as more people will be looking for factoring, and we think we’re doing a good job of marketing our services.”
Another executive who expects 1996 to be a “challenging year” is John M. Heffer, president of Republic Factors.
“There will be tremendous pressure on pricing, so sourcing will be very important to keep prices down. Manufacturers will also have to adapt to the suddenness of change at some of its retail customers. A solvent company can turn into a bankruptcy in just a few months. “I think there will be a planned decrease in sales by vendors,” Heffer continued. “They won’t be looking for growth but rather for survival. In 1995, sales dropped but manufacturers didn’t plan for it. There was a lot of goods available and fewer places to unload it, so prices went down. Next year, I think the manufacturers will do a better job of keeping inventory under control. The risks of holding inventory are just too high.”
Heffer noted that with volume of existing clients flat or down, factors will have to count on new business for growth.
“Factoring is essentially a vehicle for outsourcing receivables management, and I think outsourcing is very much in vogue. Also, because of the volatility of the market, vendors are looking for the comfort of someone to talk to, and a factor, dealing with a cross-section of the industry on a day-to-day basis, fills that need,” Heffer said.
Republic had its share of credit losses in 1995, because many of its clients sell to the discounters.
“I think there will be fewer bankruptcies in 1996,” Heffer said. “Overall, I’m reasonably optimistic about the factoring business next year, while for the apparel industry, I think 1995 will be just more of the same.”
In Atlanta, Austin Broadwell, senior vice president and manager of the factoring division of Trust Co. Bank, forecast a “very volatile environment” next year.
“Consumer buying patterns and sense of priorities change faster than ever,” he said. “This year they were buying computer software instead of blouses. The apparel industry will have to come up with a strategy to get the consumer back.
“In this environment,” Broadwell noted, “at every level of the distribution chain — retail, manufacturing, converting, mill or yarn level — only those companies that are well capitalized, with up-to-date technology that can operate efficiently, will survive.”
He added that factors will have more opportunities to lend, but the loans will be riskier “and the factors will have to operate with a sharper crystal ball.”
Trust Co. Bank is budgeting a volume increase for 1996 because of new business signed up. “But this year, we’ll be down a little because the volume at some of our large clients was down dramatically. Credit losses in 1995 were higher than last year but still at acceptable levels. We’re expecting some increase in credit losses in 1996, but they should also remain within an acceptable range,” Broadwell said.
Also in Atlanta, Stewart M. Long, president of NationsBanc Commercial Corp., said he expects the apparel industry will continue to be challenged by the retail restructuring. “Our clients will have to look through the distribution channels down to the consumer to determine what will sell and how to market. Those that are nimble enough to assess the market accurately will be the winners,” Long predicted.
For NationsBanc’s factoring business, Long expects strong growth internationally but sluggish domestic growth.
“Although 1995 has been a rough year, we’ve managed our risks well in the face of all the retail bankruptcies, supported our major clients and kept our credit losses within acceptable levels. Fortunately, our clients were pretty stable, so that offset some of the bankruptcy losses,” Long said.
He said NationsBanc sold some claims last year, but its policy is to assess each situation individually. “We sell our claims only if we think the price is right. We expect credit losses next year to be a couple of notches below 1995,” Long said.
— Fairchild News Service