NEW YORK — The factoring industry, still reeling from an earlier round of consolidation and the recent acquisition of GE Commercial Services’ U.S. factoring assets, could see its ranks depleted further by additional acquisitions.
Sources in the generally closed-mouthed financial community said that Capital Factors and HSBC Business Credit are the latest firms up for sale. Rumblings follow the news earlier this month that CIT Group Inc., reputed to be the largest factoring firm in the U.S., acquired a substantial portion of the U.S. factoring assets of GE Commercial Services for $446 million.
Executives at Capital and its parent, Union Planters Corp., did not return calls for comment and a spokeswoman for HSBC, citing company policy, declined to comment “on market rumors.”
While Capital has been discussed often within the financial industry as a firm open to being acquired, the reports about HSBC surfaced more recently. Several well-placed sources familiar with the situation said employees were told a few weeks ago that the business was up for sale. The HSBC spokeswoman also declined comment about internal communications to its employees.
The last wave of consolidations in the factoring industry occurred at the end of the Nineties. Century was acquired by Wells Fargo in 1999. In February of this year, Wells Fargo acquired Foothill Capital Corp. Wells Fargo Foothill, the new entity formed after the Foothill acquisition, now oversees Century’s operations.
CIT Group bought Congress Talcott in March 1999, and General Motors Acceptance Corp. acquired BNY Financial, the factoring arm of Bank of New York, just three months later.
GE Capital, the financing arm of General Electric, marked its foray into the U.S. factoring market in 1998 by buying First Factors. Also in 1998 was NationsBanc Commercial’s merger with BankAmerica Corp. in September, which led to NationsBanc’s name change to Bank of America Commercial.
Century Business Credit; its owner, Wells Fargo Bank, and American Express have surfaced as firms that may be looking to make an acquisition. At press time, the bet was on Wells Fargo as the firm to keep an eye on in the acquisitions race.
Tom Pizzo, president of Century, said, “I have not heard that. We are not doing anything.”
Spokespersons at both Wells Fargo Foothill and Wells Fargo Bank declined comment for this story.
Other names mentioned as possible bidders are American Express and UPS, through its financing arm. Executives at American Express did not return calls for comment. A UPS spokesman declined comment.
Financial sources said Capital fell upon hard times in the past year due to portfolio losses. According to a quarterly report filed by Union with the Securities and Exchange Commission for the period ended June 30, there was an increase in chargeoffs for accounts receivable, factoring, in connection with an unspecified “multinational retailer” as well as from an unidentified diamond merchant. According to bankruptcy court records, Capital was a creditor in the Kmart bankruptcy, filed in January 2002, to the tune of about $20 million.
In the case of HSBC, sources said HSBC bank never really understood the factoring business and now wants a quick exit.
Of course, last time around, merger mania hit the factoring industry for the same reasons that it has swept and continues to sweep across the retail and vendor arena: desire for growth. Raiding a competitor’s portfolio by offering lower commission rates is one way to lay claim to market share, but it’s easier to gain volume by buying a competitor outright.
This time, however, who gets bought and by whom is different from the last consolidation round. In short, factoring has become a business of scale, and the consolidation trend has several factoring executives worried.
One, who requested anonymity, said, “The factoring industry has shrunk, leaving just a few big major players. Should one of the big players decide to acquire another firm, that would create a bad scenario because of the control that could result from owning such a huge portfolio. This industry would shrink terribly.”
According to industry contacts, HSBC has an annual volume of about $7 billion. Capital’s is much less at $4 billion. Should Wells Fargo, for example, make a move to buy both, as some believe it will, the bank’s factoring presence would leap in the ranks to second or third place, behind first place CIT and battling it out with GMAC for the second and third spots. If Wells elects not to buy and just sticks with Century’s operation, its ranking will be much lower since Century’s annual volume is about $6 billion.
Financial professionals contacted observed the factoring volume in the apparel industry has shrunk from a year ago. Part of the problem is that much of the work for apparel and textile manufacturers is now done overseas, resulting in firms having business models that are more akin to those found among importers.
Trying to find new business sectors to grow in hasn’t been easy.
One factoring executive observed, “One of the problems in trying to branch out into other areas is that others outside of the apparel and textiles industry just don’t understand what factoring is all about. That is one big hurdle to trying to grow outside of apparel and textiles.”
Some financial professionals expressed concern that a decrease in players could cause a credit crunch among manufacturers in the future. This would happen as portfolio managers look to limit risk by decreasing the amount of exposure per account. The vendor in turn could find itself with limited financial options since there are fewer factors to contact.
To be sure, other factoring firms — the nonconglomerates such as Rosenthal & Rosenthal, Sterling Factors and Milberg Factors — could easily pick up the slack. And refactors, such as Merchant Factors Corp. and Hilldun Corp., could find themselves with an expanding business in the middle tiers where competitors are few, even if it means that they deal primarily with just the conglomerates. Refactors tend to deal with accounts capped at a certain dollar amount, mostly at thresholds that the big players won’t touch. But an industry with fewer players also means all firms, big and small, have to be very careful about portfolio risks. That in turn could still have a trickle-down effect and impact on the total overall dollar amounts that are available and to whom.
Right now the main concern in the factoring community is who will buy HSBC.
One factoring executive’s raised the same observation that others noted in connection with the decreasing financial community of factors: “If one of the very large players elect to buy it, that would mean basically that one factor would control the flow of merchandise to just about every retailer in this country. Why doesn’t the government see an antitrust issue here?”