Posts Tagged debtor credit

Debtor Credit Trends: A Year for More.

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.

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Plan Accordingly: We haven’t hit bottom yet

After reviewing a prior blog, A Bumpy Ride: Plan Accordingly, Hold on Tight, I realized so much has happened since that time so long ago… yes, that whole less than six months ago. But, have we really planned accordingly? I don’t think many of us realized at the time just how bumpy this ride would be, especially for the factoring industry. Yes, for many factors a silver lining radiates from the economic cloud as new opportunities arise and as deal flow tends to increase during a recession. For some, however, tough times lie ahead with the ever changing credit markets expected to continue through much of 2009.

For one, what do factors typically rely most heavily upon when determining extending credit facilities to prospective clients? Their customers’ credit: the debtor credit. And, what is currently happening around us? Is there anything you read anymore without seeing businesses of all sizes filing for bankruptcy, restructuring or losing their financing lines? Probably not…

A recent article that came out on The Secured Lender’s email updates further expanded on this theme, focusing on certain industries.  Their take and others: we haven’t neared the bottom yet.

For a factoring company, continued vigilance on reviewing customer (debtor) credit must remain a priority. Further, special attention should be adhered in carefully looking at the underlying documentation supporting the sales made to these debtors (the receivables). If a debtor begins struggling with cash flow and a reason exists allowing for discounts, returns, credits or other offsets, then factors and their clients may begin experiencing more challenges in collecting on those receivables.  

Hence, the importance of sticking with the basics of factoring: continued focus on the debtor credit and underlying documentation supporting that sale.

Then two, it did happen; Prime went lower than LIBOR. But that’s not the big news. As Paula Cole sang, “Where have all the [lenders] gone?” After significant layoffs, even institutions such as Textron Financial Corporation ceased providing credit facilities to finance companies in late 2008. More and more banks and financial institutions are restructuring as well, causing a delayed effect on the small factor and their ability to finance their clients. And, what about the hedge funds who financed factors? Or, are we no longer allowed to talk about them… did they ever even exist?

With all these changes occurring, where is the factoring industry headed? Does anyone really know? Many factors with prudent monitoring procedures, a solid capital structure, and flexibility within their organization to contend with the new credit landscape will continue to grow, maybe even more during 2009 with the influx of new opportunities also resulting from the current credit market and conditions.  The question remains, however, have we really planned enough? Have you?

“A man who does not think and plan long ahead will find trouble right at his door.” ~ Confucius

Wishing you success through 2009. The Factor Guru.

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What Happens Tomorrow?

For those avid ABF Journal readers, look for an article soon on “The Perfect Storm,” that stemmed from a recent panel discussion hosted by the Finance Forum. Several analogies arose during this meeting that related to that movie and the current economic credit climate (or credit crunch). Those analogies were symbolic in a certain sense. They illustrated how we got here… where we are today.

During another meeting this week, one of the board members of the Finance Forum, Josh Steele of Euler Hermes, noted another movie, The Day After Tomorrow, which held other similarities. He described it by saying, “In the movie, the ice age is the Earth’s way of cleansing itself. In a way, this [crisis] is a way of getting rid of less stable companies.” The Perfect Storm was about how we got here; however, what happens after the storm? What happens tomorrow?

This credit tsunami, as Greenspan noted, evolved after years of overextending credit. This occurrence also fits within the factoring space with the number of factoring companies aggressively competing in a marketplace where working capital was abundant, where mitigating concerns and overextending credit was not the exception, but a way of doing business. Now, take a look around. The landscape has changed, and tomorrow is a long ways away.

If you recall, after the storm first hit, New York residents and visitors were running, seeking shelter. Respectively, factors have been looking harder at credit and how to better structure deals, yes. Some factors believe that this is all that needs to be done, just a little more structure, just a little more due diligence. All is fine, right?

The factoring world is entering a new era that will probably continue over the next few years. Its presence will unfold even more through 2009. How factors react to this credit crunch may be telling in how and, more importantly, who will come out of this storm intact. Will we all learn from each other’s mistakes?

In The Day After Tomorrow, some people [factors] decided to go outside, venture back out into the streets where they believed everything was safe once again… it was back to normal… or so they thought. But, this was only the beginning. It was then that the landscape changed, even more. The freeze hit. Do not construe this as a credit freeze. Even though it is a credit freeze for many traditional lenders, it is not for many factors… necessarily.

What it is, however, is more due diligence than originally contemplated, more monitoring on existing clients and for client customers (debtors) than was initially planned, and more focus on staying the course through this storm. It’s a time to review and assess our new environment and the players within it. Not all of them have survived; not all of them will survive. The landscape has definitely changed, and it is not over yet.

So, again, as Jason Evans [Dash Mihok] asked in the movie, “What’s going to happen to us?” Jack Hall [Dennis Quaid] replied, “What do you mean?” Jason expanded, “I mean us? Civilization? Everyone?” Well, what do you think the answer was… Jack summed it up with, “Mankind survived the last ice age. We’re certainly capable of surviving this one. The only question is will we be able to learn from our mistakes?”

Wishing you success. The Factor Guru.

 

 

 

 

 

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