Byline: Vicki M. Young

NEW YORK — So far, so good, but credit could get a bit crunchy in the near term.

Some movers and shakers from different sectors say the signs are already in place.

In recent months, there’s been a rise in consumer debt and an increase in personal bankruptcies. Private equity companies — many of which helped fund the wave of new economy dot-coms — have watched their investments nearly evaporate. The now busted dot-coms were the first to feel the financial pinch.

Moreover, at least one major commercial bank this month acknowledged that it has a problem with bad loans.
If there’s further tightening, how crunchy could it get?

Financial professionals told WWD that in a best-case scenario, the crunchiness will resemble a touch of the flu, lasting only one or two quarters. However, the severity and duration of the flu is likely to depend on how well retailers do this holiday season.

To be sure, no one is expecting the economy to tank next year, but a slower rate of growth is projected. Credit sources said that the weakest period will be in the early winter months, due in part to high home-heating costs and a possible letdown in retail sales during the post-holiday period.

In the meantime, there seems little doubt that the atrophied state of retail — as demonstrated by last month’s Montgomery Ward and Bradlees bankruptcies — will put additional pressure on manufacturers to help their retail accounts shore up profit margins with any number of allowances and credits.

Jay Indyke, bankruptcy partner at the law firm Kronish Lieb Weiner & Hellman, observed, “We hear that those of us in the bankruptcy business will be busy, based on a slowdown in the economy. There’s always speculation about some retailer being in trouble. Right now, I don’t see any slowdown in credit, but what could be a trigger is a bad Christmas sales season.”

We’ll know soon enough. Retailers — in spite of lackluster earnings posted by some chains — don’t yet seem to be on anyone’s short list of troubled sectors that bear intense scrutiny. It is the telecommunications industry that has caught the attention of restructuring experts. While many retailers aren’t doing as well as they would like, most equity and credit sources don’t expect any dramatic surprises.

Lissa Baum, first vice president, Israel Discount Bank, predicts that there will be a shakeout in the retail sector, but more along the lines of closing unprofitable sites than deleting entire companies. An executive of a once-bankrupt chain told WWD, “Retailers have been there, done that. They now know how to navigate the waters.”

The executive was referring to the different forms of pricing and margin protections retailers seek to build into their relations with their suppliers.

Bob Carbonell, director of credit for Bernard Sands, a credit-reporting firm, said, “It will depend on Christmas and the fickle American consumer. The stores are jammed with people, but you wonder — how badly do retailers have to give away the store just to get customers in? Come January the retailers will be hitting on vendors for markdown money. Vendors have become a great source of interest-free money.”

Carol Lapidus, managing director in the textiles and apparel section at American Express Tax and Business Services Inc., observed, “I expect there might be a tightening of credit. It all stems back to what’s been happening to the fall and holiday seasons. Some companies are doing OK, but a lot of others are tentative.”

Because designers and wholesalers will get hit with markdown money at the end of the season, she pointed out, those concessions will have an impact on their fiscal 2000 numbers, causing bankers and other lenders to scrutinize the balance sheets more closely as the numbers won’t be so good. Lapidus said she’s heard of a few retailers canceling some of their holiday orders because of the weak fall season. She added that while coupon discounts are typically used by retailers to push clearance merchandise, this year is the first that she’s seen so many in December to promote holiday sales.

While retailers may have learned how to help their bottom lines, suppliers tend not to have that option and some say they are already feeling the pinch.

An executive at a New York-based accessories firm selling to second-tier department stores said that this year is the first that its retail customers are hinting that they will be asking for markdown money. The advance warnings began last month, and the executive isn’t sure how the firm — which has an annual volume of close to $100 million in wholesale sales — will handle the requests because “margins are so slim to begin with.”

The news isn’t any better on the West Coast. According to Dov Charney, senior partner at American Apparel, a manufacturer of blank T-shirts for imprinting, “Domestic contract sewing firms normally start their spring cuts now, but many retailers have been late in making commitments. In Los Angeles, five knitters [recently] have gone bankrupt.”

Charney said that there’s a feeling on the West Coast that a shakedown might be in the works. “Factors are tightening up,” he observed, speaking from personal experience.

“They never once asked me which receivables I think are at risk to find out whether it’s my risk or theirs. Their position has changed to where they are beginning to advance less money to receivables that are not credit guaranteed by them.” He added that companies exploring options for new financing are finding that institutions that had expressed interest in June are now “no longer as ecstatic” about doing the financial deals.

Adam D. Winters, vice president, business development, Merchant Factors Corp., said, “I hear from many in the trade that the outlook’s been a little dim across all markets. There absolutely will be a slight crunch in the first quarter.

Some banks have made bad loans when everyone was still exuberant about the [stock] markets, but they’ve been tightening up in the last few months.”

Ethan Schwartz, vice president at Credit Research and Trading in Connecticut, noted that the credit outlook near-term could get tighter. “The credit market in general has had a very difficult three months, beginning at about the same time as the back-to-school selling season.”

He explained that the current credit conditions have been affected by several negative trends. “Companies from the old and new economy have been announcing earnings shortfalls, there’s the consequent equity-market crash, and key banks and other lenders have been stretched because of bad loans, whether to textile or telecommunications companies. On the macroeconomic side, there is no doubt that the economy is weakening.”

One key question he posed is how much of the financial market turbulence will spill over to consumers in terms of actual consumption. “Whether we get just a mild economic slowdown or a real recession coupled with a longer-term credit crunch for apparel and textile companies will depend on the next few weeks. Will this be a tepid Christmas or will things get better? If consumption doesn’t slow down that much, financial conditions could improve. However, if we truly have an absolutely atrocious Christmas season — and a few retailers and manufacturers start to look as if they are going into the tank — you could see a continuing downward spiral that could effect some of the major apparel companies.”

David Spector, managing director at GB Retail Funding, the unit within Gordon Brothers that provides financing to retailers, observed, “One of the key themes among members of the investment community involves credit-quality concerns at banks and financial institutions. There’s been an increase in loan losses, with the portfolio quality at some banks starting to deteriorate.” If there are continued loan losses, he pointed out, banks may begin to tighten credit standards for borrowers, with the tightening becoming a “rapidly increasing theme among banks.”

Bank of America on Dec. 6 said in an earnings guidance announcement that the company was experiencing “higher credit costs.” The bank in November disclosed that one large loan had been placed on non-performing status and that a significant portion will be charged off. The bank also said it is experiencing “continuing deterioration in credit quality” and that it is budgeting for “significantly higher loan losses and credit costs in 2001.”

According to Spector, it’s difficult to predict what kind of impact a credit decline or economic decline could have on financing in the retail industry. “Ten years ago, the credit crunch in this country was severe. The big difference between now and then is that the large banks have gotten better at risk management in terms of credit quality, portfolio limits and the ability to syndicate loans.”

“Where a problem could surface is when a retailer is doing poorly. In an environment where credit is loose, a company can obtain credit and keep itself going with the financing. The same retailer in a tight credit environment is unlikely to get the money it needs to keep going,” he concluded.

Like many others, Arnold Aronson, managing director of retail strategies, Kurt Salmon Associates, expects a huge shakeout among the dot-coms because “they have been so far out on the limb. Many don’t have either the right business model or the staying power and they’ll be abandoned by their original financiers. I see a slowdown in 2001, with a tough year ahead for retailers with very low single-digit comps at least for the first half and maybe even the first three quarters. For those who really are having tough times, there could be a credit crunch going into 2001.”

Even if some companies do file for bankruptcy soon after the holiday season, that won’t necessarily indicate that there will be a rash of such filings.

According to Jay Silverberg of the law firm Silverberg, Stonehill & Goldsmith, “In terms of apparel and textiles, the sense that I have is that the problems that exist in terms of collecting accounts receivables, markdowns and allowances will continue and possibly get worse. There continues to be a steady stream of insolvencies that are not reflected in the actual number of bankruptcy filings. We’ve helped many firms work out an arrangement with their creditors without the need for court intervention in some cases.”

Even if there’s cause for concern near- term, long-term the U.S. economy should be OK for the year.

Philip F. Bleser, senior vice-president, mid-market banking at Chase Manhattan Bank, said, “We’re expecting the economy to grow by 3 to 3.5 percent. We may get a choppy first or second quarter, but we don’t see any doom or gloom. The bank-funding market got tight in the fourth quarter because everyone paused to take a look at the economy and try to get some idea where it was going.

There was the election issue and rising gas prices. Toward the end of each year, banks tend to be conservative. We’re doing business in the same consistent basis as in the past and we’re not changing our underwriting standards at all.”
So what can companies do to keep their eyes on the ball and make sure they stay afloat?

Erwin Isman, managing director at Marketing Management Group, a consulting firm specializing in the apparel industry, observed, “The good companies have already taken care of any problems that they had because they knew that they couldn’t live on the edge. While I don’t see any major bankruptcy push in soft goods, companies will be making less money in 2001. One factor that could cause a problem, perhaps a triggering sign to keep on the alert for, is if the stock market keeps going down. If that happens, consumers won’t feel as wealthy and might want to cut down on consumer spending.”

Victor Wahba, partner in the apparel and textile services group at the accounting firm M.R. Weiser & Co., noted that companies can help themselves by putting together top talent and structure to drive top-line growth, as well as ensuring that they have the proper technological systems in place.

He explained, “The death spiral continues for a lot of older established companies still using old economy tactics. The reason why there is a credit crunch for them is because the industry is demanding a player with a new skill set, one that has grasped the formula of the new economy. The new breed is neither survival of the fittest nor survival of even the largest. It is survival of the logistically fit.”

Alan Cohen, chairman of Alco Capital Group, a liquidation firm, advises companies to stay focused on their management teams. “The smart ones, when they see issues, don’t defer them, they attack the problems. Companies need to become more proactive; they should have more confidence to take the steps to right what they think is wrong.”

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