Credit worries on rise
Loans more costly, harder to find
By Clint Engel -- Furniture Today, May 5, 2008
High Point — By many accounts the furniture industry has become as much a victim of the credit squeeze as consumers who can no longer afford their mortgage payments.
Sources say some factors and lenders have significantly tightened the screws, requiring suppliers to take on more risk or severely limiting the credit dollars available to many furniture stores.
GE Capital Solutions confirmed to Furniture/Today last week that it is cutting back on its unsecured inventory financing program for the industry.
CIT Group, which has faced its own liquidity problems, was cited by two former customers — importers AICO and Coaster — as growing harder to work with in recent months and more risk averse, while also attempting to raise its fees.
A CIT official responded that the company isn't pulling back from the furniture industry, although it continually reassesses the "risk profiles" of its clients — many of which have grown riskier in today's environment.
Howard Tolsky, president of DSA Factors, a small factoring company in Chicago, said it is hearing from furniture companies shopping around for a new factor after GE's move.
Some retailers, meanwhile, call the credit tightening brutal. One told Furniture/Today, "There are a lot of people at the mercy of the banks because no one is lending any money."
Another retailer with a single store in Ohio, who declined to be named, said he had a bad experience with credit after falling behind on payments to a supplier. He chipped away at the balance due, getting it down to $2,800 from the $14,000 originally owed, but the supplier still turned to a collection agency that resorted to scare tactics, the retailer said.
A collection agent told him over the phone, "You're going to have to liquidate your business right away and tell everyone to find another job." The retailer has since paid off the balance with interest and fees and has no intention of doing business with that factory again.
7,000 stores could close
In a recent segment on National Public Radio's "Morning Edition," retail consultant Howard Davidowitz projected a record 7,000 stores (all retail, not just furniture) will close their doors this year compared with about 4,500 in 2007. "This is a terrible time to be dependent on bank debt and be in trouble, because the banks will be unmerciful," he said.
The future of CIT, believed to be the biggest name in furniture factoring, has been the subject of speculation. Its stock was pummeled recently as it drew down a $7.3 billion line of credit to fund operations, sold $1.5 billion in stock to raise capital and said it hopes to sell off $5 billion to $7 billion in assets.
In the bankruptcy filing of Wheeling, Ill.-based Wickes earlier this year, CIT was noted as a party in unsecured claims of four top suppliers — claims totaling almost $2.9 million.
AICO Executive Vice President Martin Ploy said he believes that CIT had moved to raise its rates "to offset their bad decisions," and added that the factor became "very, very conservative on issuing credit to people who had a good credit history."
Terry Oelschlaeger, executive vice president and Southeast regional manager of CIT Commercial Services in Charlotte, N.C., wouldn't comment on specific clients. But he said AICO's concerns are "not representative of the level of service I think the clients receive in the rest of the CIT furniture portfolio."
Oelschlaeger's office handles the majority of furniture accounts for CIT and is not stepping back from the industry, he said.
"This company and its predecessors has been supplying factoring and asset-based lending services for the home furnishings industry since 1946, and furniture is the largest industry representation we have in the Southeast office," he said. "We have been committed to it, are committed to it and we will continue to be committed to it."
Given several high-profile bankruptcies in the furniture industry, he said, CIT actually has seen an increase in demand for its services. He debated the use of the phrase "credit tightening," suggesting CIT isn't changing its practices and that his business division "is under no constraints as it relates to providing factoring services and asset-based loans to the home furnishings industry."
CIT and all lenders, he said, use a broad set of credit criteria to evaluate risk, including balance sheet strength, operating trends and liquidity.
"If those things change, it changes the risk profile and at some level you get to a risk profile where its means less credit or no credit. We really didn't change the standards. The business inputs change," he said.
For the past 18 months CIT in certain cases has seen "some decline in credit quality related to the retail furniture industry," Oelschlaeger said. "And in cases where we observe a change in risk profile, since we do risk-based pricing we attempt to adjust pricing where the market will allow us to."
He also said there is "continuing new business interest in our services. We seem to provide credit in an adequate amount and at a price that is consistent with our competitors."
AICO now factors through Wells Fargo and BB&T, Ploy said. Coaster brought in GMAC. Both sources say they're happy with their new arrangements.
Credit remains an issue
But the credit issue hasn't gone away for this industry and isn't expected to anytime soon.
"Because of the condition of the home furnishings industry, it's only natural that people who are going to lend money are going to be more conservative, and frankly, I think the companies that have good credit, that pay their bills on time and look after the integrity of their reputations really don't have a problem," Ploy said.
"But once a retailer starts to slow pay or puts itself in a position of falling behind constantly, their credit line is going to get shorter," he said.
Ploy and Coaster Executive Vice President Charlie Nobile said the credit crunch for the industry starts with the consumer, who sees all the economic problems and is afraid to buy big ticket items such as furniture.
"All of those combined forces mean less retail sales, which means less cash flow," he said. "Less cash flow means higher credit." And that draw on credit leads lenders to take a closer look at the retailers' bottom lines.
Jim Ziozis, president of ready-to-assemble furniture supplier Linon Home Décor, defended CIT. He said Linon has worked with CIT for 15 years and that he has always found it to be flexible, competitive and "first class."
"It's obvious any small move by them gets telegraphed," said Ziozis, who disagrees with those who believe the lender has taken a step back from this industry. He said CIT's moves are no different from those of other lenders today in evaluating their risk and adjusting to market conditions.
"Anybody who thinks that risk hasn't been re-priced has his head in the sand.... Credit extension and credit protection have gotten more restrictive and more expensive — period. The days of cheap, free-flowing carefree money are gone," he said.
What does this mean for furniture retailers? Nobile said it's more important than ever that they watch their expenses.
"They should be buying the things that create the sales," he said. Unfortunately, he added, a lot of retailers load up on what seems like incredible deals and end up tying up their cash flow in inventory.
For manufacturers, the higher cost of credit will mean less inventory build-up, Ziozis said.
"The silver lining might be certain manufacturers and importers will not have the credit available to them to potentially get into trouble with excess inventory," he said. "Those that stay prudent and balanced will come out stronger through all of this."
