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Suppliers See More Risk, Less Reward

Brent Felgner, Carole Sloan -- Home Textiles Today, October 20, 2008

Even months before the current nationwide economic crisis, home textiles suppliers were feeling the pinch of rapidly tightening credit markets fueled by a spate of retail bankruptcies, including the likes of Linens 'n Things, Mervyns, and Boscov's.

Like many small-to-medium size mercantile companies, particularly those that are seasonal, home fashion suppliers depend on financing on both ends of their businesses. They are routinely factoring and buying credit insurance against their retailers and receivables, while seeking production-side credit, such as purchase-order financing to move their orders into and through the factories.

"There's a lack of confidence across the board. Everyone is in a hunkered down, skittish mode," said Pamela Martin, vp of regulatory affairs for the Risk Management Association. "Credit is being re-priced. Credit had become too cheap; that's why there was so much out there on too-loose terms. That's a healthy part of the credit cycle itself. Terms will probably be tighter and stricter."

It's also true that a significant number of suppliers are largely self-funded, perhaps influenced to some extent by the industry's broadening ventures into global markets. But for most companies, the credit crisis has created new management challenges as they attempt to balance risk and cash flows across a broad range of variables. What seems undeniable is that vendors will be forced to carry more risk for their customers at sometimes considerable peril to themselves.

Indeed, some retailers have even blamed their problems on what they claimed was their credit insurers' issues obtaining financing.

Last May, Mervyns ceo John Goodman circulated a letter to suppliers in which he argued that CIT stopped issuing credit insurance for the retailer because of its own financial crisis.

"We believe CIT's decision was primarily driven by their exposure to the recent difficulties in the credit markets," Goodman wrote in a copy of the letter supplied to HTT. "Nevertheless, this decision had a detrimental impact on some of our valued vendors."

There was truth to Goodman's complaint. CIT did run into its own liquidity issues. However, it's generally regarded that Mervyns' longstanding operational and financial issues were what drove it into bankruptcy. Late last week there were multiple reports it would decide to liquidate instead of attempt reorganization. CIT is currently in a quiet period and declined to be interviewed for this article.

Tightening credit is largely tied to the challenged economy and, certainly the subprime meltdown.

"I think this recession is pretty interesting," offered Jeff Hollander, ceo of Hollander Home Fashions. "We have the housing market and the biggest meltdown we've had at least since you and I have been alive. What's really interesting to me, is that in the '90s and the early part of 2000s — maybe through 9/11 — the U.S. economy was the world's engine. Now you see the American economy stagnating, basically."

It is clearly a spiral with credit underwriting requirements becoming drastically tougher and the resulting cash even scarcer.

"Lines of credit have become very difficult to get," offered Trevor Rabkin of GTT International. "There's been a tremendous tightening up of cash all the way around, from the front side of the purchasing to the back side of the receivables. Under normal circumstances you would try to put pressure on your own vendors for additional terms, but you can't even do that anymore. A lot of people have been going to P.O. funding."

P.O., or purchase order funding, is a more creative source of financing where a supplier may approach a lender with an order from a major retailer to get front end cash, so as to go into production. The purchase order itself would win half the amount straight up; another 30% would commonly be paid on shipping, Rabkin explained.

But even that is not as readily obtainable anymore.

"When we look at the banks, clearly the credit markets are frozen; they are not lending right now, the rates have gone through the roof, especially when you look at LIBOR [the London Inter-Bank Overnight Rate], so the cost of capital is really rising," said Andrej Suskavcevic, president of the Commercial Finance Association. "When is comes to the entrepreneurial lenders that aren't regulated, all the deal flow that the banks are rejecting or ignoring right now is flowing down to the middle market."

"But not knowing where the economy is going, they're being selective," Suskavcevic said. "Quite naturally, they're being as risk-averse as possible and really looking to lend to companies that have some solid collateral to lend against, that seem to be a little bit better managed."

Underwriting and collateral requirements have also changed in some cases.

"They're also taking into consideration consumer confidence and the lack of buying by consumers for these items," Suskavcevic added. "They're looking at it as: If the loan goes sideways and I have to liquidate, do I have a market to liquidate this at. So they're constantly risk adjusting."

But that risk is already flowing backward, as supplier companies determine to assume it more directly, said Sy Sadinoff, ceo of Beacon Looms.