Retail Financing Outlook for 2012

Recognizing that aggressive promotion and extended hours drove higher top-lines this holiday season, many retailers and investors are concerned about profitability. Retail remains subject to uncertainty given factors like the tenacious unemployment rate, rising input costs, political gridlock, stock market volatility and competitive challenges from shoppers expecting enhanced experiences.

However, by most accounts, the 2011 holiday season garnered positive results across most retail sectors. The National Retail Federation reported a holiday season up 4.1 percent over 2010, a sales increase well above the 10-year average of 2.6 percent. As in 2010, high-end and discount sellers garnered most of the benefits. Affluent customers seemed more willing to spend in 2011 than in 2010 with high-end chains. Likewise, lower-income shoppers continued to seek value with discounters. Retailers in the middle, however, face ongoing struggles.

While the outlook for 2012 is cautiously optimistic, lenders to retailers, particularly regulated institutions, remain highly sensitive to risk. As summarized by the Office of the Comptroller of the Currency (OCC) last year, 20% of the reporting lenders eased underwriting standards, but 80% either tightened or left standards unchanged. Many traditional asset-based lenders, the mainstay of credit for retailers, nevertheless maintain they are ready, willing and able to lend to good customers and prospects. Presumably, these are the retailers emerging from the ‘Great Recession’ leaner and smarter, with higher liquidity, lowered inventory levels, reigned-in expenses and operational agility. These are also the credit customers that can meet traditional lenders’ underwriting criteria (typically including financials demonstrating two or more years of historic positive earnings and otherwise unblemished credit).

Retailers in the sweet spot can expect lowered pricing and loosened structure as decreased line usage and institutional directives to deploy capital drive traditional lenders to compete like it’s 2007. However, retailers with less than stellar credit metrics, but who demonstrate an abundance of collateral/availability, may also “slip under the gate” of bank asset based groups, although possibly with higher prices and tighter structures.

Retailers who don’t fit these criteria will continue to struggle to find financing to bridge to the next up-cycle. There are, however, there may be non-traditional lenders with abundant capital to deploy, but credit from these alternative sources may require higher pricing and stricter covenants and reporting.

Retailers seeking financing in 2012 have cause for optimism, and those with top tier financials can expect competitive pricing and friendly structures. Given accelerating industry competition, retailers with less than stellar credentials can also expect to locate financing, though on terms commensurate with lenders’ lingering sensitivity to risk. Challenged retailers may have to look beyond traditional bank financing to finance companies with more of an appetite for risk, but should be prepared to pay the price.

Related topics: Finance