Less Asset-based Loans Being Made To Retailers

In yet another example of the credit crisis migrating down the food chain, lenders are now giving out smaller and more expensive lines of credit to retailers than they were just last year (see Financial Week article). Not surprisingly, retailers are securing less asset-based loans, which traditionally used real estate, inventory, and other assets as collateral. By the end of August of this year, major retailers had received 16 loans valued at $4.6 billion, compared to 40 loans worth about $8.8 billion during the first eight months of 2007. Why the falloff? For one, less retailers have been taken private, thereby lowering the number of retailers and firms that are seeking out asset-based loans for leveraged buyouts. The rates charged have also increased, going from 125 bps over Libor to 225 bps over Libor on the low end. Finally, advanced rates, or the percentage of collateral that is advanced to the borrower, have been cut. Previously, advanced rate were between 95-100 percent. The rates are now closer to 85 percent as real estate and inventory values have declined.

Of interest is that the rise in borrowing costs and lower advanced rates have changed the types of companies that are seeking out and getting loans. Stronger companies that previously may have taken advantage of lower rates and the tax advantages of borrowing are shying away from asset-based loans. Now, on average, the companies that appear to be taking out such loans are those that are often being forced to secure financing, and may themselves be in a less stable situation. Given recent weak retail sales data, not to mention lower consumer borrowing (and subsequently lower consumer spending - see Bloomberg article), the number of companies (especially the speciality retailers) that need to agree to less friendly loan terms may be on the rise. Credit terms, and even the need to secure financing itself, may be one more indicator that traders and investors can use to identify those companies that are most likely to weather the current credit storm.