This is re-posted from a recent article in the Commercial Factor…see the full edition in the January edition of the Commercial Factor…
Predicting the trends for tomorrow is not always as easy as it may appear. Today, we live in an environment where companies are working on predictive models for how we shop, what we buy, where we buy, how businesses can gain a marketing advantage, and of course which companies will prevail where others may fail. Historical patterns can drive these trends. Further, when evaluating debtor credit, these trends can be helpful. Staying on top of the current data and statistics still remains essential though.
I would equate this to the underwriting versus the ongoing credit monitoring process. They are both necessary to appropriately set and manage credit risk and exposure. Debtor credit begins on the front end but never ends. Successfully reviewing the risks up front is part of a factor’s business model, even more so in today’s economic environment. As Tolbert Marks, owner of Dallas based Landry Marks Partners, LP, noted, “This is no different than any other business cycle experienced – good or bad. I believe that diversification and diligent underwriting can overcome any of the conditions that exist today.”
As we discussed last year, staying on top of debtor credit more frequently is necessary. The days of evaluating debtor credit are no longer limited to an annual or semi-annual review. Many factors are and continue to identify new methods to receive and review data almost instantly. Factoring companies are looking to broaden their available data resources and credit tools. They are not just relying on one credit reporting resource, or even one type of credit resource. For example, we are looking at credit reports from multiple credit reporting agencies (i.e., Ansonia, Cortera, Dunn & Bradstreet, Experian, and Smyyth just to name a few) in addition to credit insurance recommendations and credit rating agency briefings. More credit tools equates to more data availability.
This is one of the reasons more and more commercial finance companies are also reporting their own data to credit providers. These credit reporting companies will provide email updates on customer credits and offer discounted costs for those factors who report their own information. It also adds value to understand where the actual data stems from when reviewing credit reports. Some credit companies allow debtors to self report credit and trade information. Others do not. In a time when we are all looking to gain access to more data while also looking to reduce our costs, understanding the reporting and gaining access to more information more often can be invaluable.
Factors have also been seeking new ways to create trend models, not just for clients but also for debtors. How are debtors paying now compared to how they historically paid, are we seeing changes in their payment patterns, are they requiring longer payment terms, etc.?
Gaining access to more resources and getting this data faster, especially in today’s technology-driven environment, will continue to help credit departments better manage their portfolios. And, fully understanding the data is critical. These trends will continue in 2012. More tools. More data. More monitoring. More of the time.
Finding more efficient ways to review debtor credit and predict trends seems to be becoming the norm, as many factors and lenders continue to streamline their administrative functions to reduce costs as price compression occurs within the marketplace.
What else have we been seeing and what do we expect to see in the next year? Well, in my discussions with other factors out there, we all have seen a general slowdown in payments over the past year. Mr. Marks shared these remarks, “We were fortunate during 2011 that we did not have to deal with any significant debtor bankruptcies. The challenge we did experience, however, was a general, across the board, slowdown in payments. We spent more time chasing payments than any year I can recall. From a risk management perspective, a slow paying debtor does not always indicate a credit problem, but it can, and often does, alter the yield on a factoring relationship and it almost always increases the factor’s capital needs. We dealt with both of these issues last year.”
Stewart Chesters, Managing Member and COO of Louisiana based Republic Business Credit, also saw a slowdown in debtor payments over the past year but did note that the last few months of 2011 remained steady. One of the challenges they faced, as many of us, was evaluating the outcome for certain household names such as American Airlines, Hostess, and the continuing review and determination on Sears. As credit became more rigid and scarce for these types of credits, more vigilance was needed in evaluating the overall risk associated with the debtors and the clients. Chesters went on to say, “For each of these [situations], we saw the usual facilities with high concentrations being presented… Catching these debtor credits at underwriting and protecting our portfolio has been the key.”
As we have all seen more of these concentrations within our portfolios overall or within individual debtors for a particular client, this has prompted an increase in participations as well as credit insurance requests or reliance. Sometimes, this information from the credit insurance company is utilized just to help evaluate the credit being extended. However, when these insurance companies hit capacity levels for certain debtors, there are still puts and other credit guarantees that can be purchased from third parties to help mitigate credit or concentration exposure.
Yet, the economy is expected to improve. With this slight recovery, many believe credit demand is sure to increase as well, making monitoring just as important if not more for this next year. Rob Flowers, Partner at New York based Atalaya Capital Management, LP, noted this same trend stating, “… Overall, credit quality has held although credit demand has been muted. We believe debtor credit will be relatively stable, but we would not be surprised to see credit demand pickup to the extent that the economy becomes more robust. Businesses have mostly gone through the deleveraging process. Once the economy and sales pickup, loan demand should follow.”
As noted above, though the economy is expected to improve, many feel that it will be at a gradual pace and not much better than 2011. However, even with this minor improvement, many also believe that the payment patterns will not reduce back to prior levels. Debtors will continue to pay more slowly than years’ past, as they look to utilize their own capital more efficiently. As Chesters said (and I liked the analogy), “The psyche of ‘cash is king’ and credit lines being protected like a hoard of Mayan treasure will not recede quickly…”
So, what are the takeaways for what we should expect to see for 2012?
- Concentrations are still a big deal.
- More tools and resources will be critical to stay on top of debtor credit management.
- We need to review credit more often and using technology can help.
- We are all looking for more ways to improve our capital positions, reduce costs and get more ‘bang for our buck’ essentially – factors and debtors alike.
- The slowdown in debtor payments we saw in 2011 is not likely to reverse as the economy only somewhat improves in 2012.
We are all trying to do more with a variety tools and resources but for less money, all in an effort to reduce risk while maximizing revenue.
Of course, not many of us can truly predict where we will be or what we will see. Uncertainty still exists which is one of the causes for the slower recovery. Part of this may be political since it is an election year as well. In any case, predicting trends for the next year is much like evaluating credit itself. It is based on reviewing our own historical data and trends and trying to stay on top of new information as it arises.
Welcome to 2012. The year for more.