Posts Tagged ‘liquidity’

Is Sears Really In Trouble?

Tuesday, February 14th, 2012

Sears is trading at its lowest level levels since John Kerry won the Iowa Caucus and New Hampshire Primary in 2004 — and that’s not good news for one of America’s oldest retailers. The retailer, which owns Kmart as well as the Kenmore, Craftsman and Lands’ End brands, announced  after Christmas that it would close between 100 and 120 Seas and K Mart stores. Unfortunately, the news just appears to be worsening.

Sears shares declined after CIT Group halted lending to Sears suppliers — without comment — out of fear those vendors will not get paid.  The news seemed to confirm it was true without actually saying so.  A Sears’ spokesperson said the firm disagreed with CIT’s actions and that CIT payables affected less than five percent of Sears’ inventories.

“Sears Holdings has more than adequate liquidity and ample resources at our disposal which give us significant financial flexibility,” the spokesperson said, noting that it is “important to separate disappointing operating performance with liquidity.”  The Sears spokesperson said that the company closed out December with $4.2 billion in liquidity.

Paul Swinand, an analyst with Morningstar in Chicago, said CIT may not be the start of a trend. He noted that the company now run by former Merrill Lynch head John Thain may be acting overly conservative because it went bankrupt in 2009.  It can be forgiven for being more risk averse than other lenders.  Swinand did note that Sears has to turn its fortunes around or suppliers could become reluctant to continue selling goods through Sears and Kmart stores. Sears is expected to report massive losses for the fiscal year and analysts are forecasting a decline in sales. Vendors could run out of patience.  “When people talk about a retail death spiral, it starts when vendors start tightening shipments because you could lose the ability to get the best merchandise,” he said. “The worry is that if Sears keeps piling up losses, you have to wonder what companies like Electrolux or Whirlpool might do.”

One risk when a factoring company pulls credit to suppliers is that others may do the same thing. Some factors already have become reluctant to take on shipments to Sears, while others are demanding a “substantial” premium,  Bobby Cohen, CEO of Lochem Capital, said, “There’s so much low-hanging fruit out there that they say to themselves, ‘I don’t need to have a dog in this fight,’” said Cohen, whose Roslyn, NY-based company serves as a broker between buyers and suppliers. The upheaval likely will be temporary, he said.

Sears has adequate liquidity that it will pull through the current situation, said Matthew McGinley, managing director at International Strategy & Investment Group in New York.  “Even with Sears’ deteriorating financial condition, it is pretty unlikely that a vendor shouldn’t ship over the near term,” he said.

“We disagree with their action” and “point out that other factors are approving shipments to Sears,” Chris Brathwaite, a Sears spokesman, said.  “It’s important to note that Sears Holdings has more than adequate liquidity and ample resources at our disposal.”

Despite Brathwaite’s optimism, losing CIT’s financing could ultimately set off a chain reaction among other backers, where they also stop backing Sears.  Even though Sears has been making its payments on time, CIT has not been given some financial projections it requested, said Jack Hendler, president of Net Worth Solutions, a merger and acquisition advisory firm.  Other factors — those who provide loans or lines of credit to suppliers to tide them over until retailers make payments — are still approving orders, he said, but are also waiting for similar information and have been wary. “CIT decided not to wait and get their attention,” Hendler said.

According to analysts, Sears will survive in the short term.  Just the same, credit actions usually lead to more credit actions.  Try maxing out a credit card and see what happens to your credit.

Basel III Could Slightly Impact Economic Growth

Wednesday, January 5th, 2011

Basel III Could Slightly Impact Economic GrowthThe Basel Committee on Banking Supervision overhaul of bank capital rules may cut global economic growth by 0.22 percent, which is seen as a reasonable amount.  This will occur over an eight-year transitional period during which the rules are put into place, according to the Basel committee and Financial Stability Board (FSB).  According to the FSB and the Basel committee, “The transition to stronger capital standards is likely to have a modest impact on aggregate output.”

Regulators are reassuring lenders and companies that the Basel III overhaul may force banks to cut back on lending, thus hurting the economic recovery.  According to the Institute of International Finance, an earlier version of the plan would have cut economic output by 3.1 percent in the eurozone, the United States and Japan from 2011 through 2015.  Etay Katz, a partner at the London-based law firm of Allen & Overy LLP, thinks the report “leaves quite a lot more to be desired.  I think bankers, when they see this, will be skeptical of the rigor with which this analysis has been conducted.”  Katz thinks the impact of Basel liquidity rules was not taken into account.

According to the new numbers, yearly growth could be as much as 0.03 percentage points below the baseline scenario – and that assumes that banks won’t have to comply with the revised regulations – over eight years.  Regulators are overhauling bank capital and liquidity prerequisites because the Basel II rules did not protect lenders during the financial crisis.  The Basel III rules have been approved by the G20 nations.

Ginnie Mae Taking the Lead on Backing New Mortgages

Tuesday, May 26th, 2009

At a time when the CMBS market has contracted by 60 percent, a story that hasn’t gotten much attention is that fact that one slice of the securitized real estate market is doing phenomenally well.

Ginnie Mae (the Government National Mortgage Association) has provided $124.18 billion of liquidity to the secondary mortgage-backed securities market during the first four months of 2009.  $34.5 billion of that was issued during April alone.  By contrast, the government agency provided just $58 billion during the same time frame of 2008.h_sold1

Ginnie Mae helps American families own homes by securing government-insured loans to the Federal Housing Administration, the Department of Veterans Affairs, the Department of Agriculture’s Rural Development Program and the Department of Housing and Urban Development’s Office of Public and Indian Housing.

“We are stable, secure and steadily growing,” said Joseph Murin, Ginnie Mae’s president.  “Our issuance growth represents the trust that our issuers and investors continue to have in Ginnie Mae securities.  Providing a secure secondary market outlet for government-backed loans is absolutely critical as the economy continues to stabilize.”

Rebuilding the mortgage market is likely to start at the conservative end with investors looking for T-bill-type places for their money.  Ginnie Mae has become the blue chip of real estate securities.  We have to get over being a society of instant gratification because normality will return – in the words of Ginnie Mae’s Murin, “one deal at a time.”

Construction-Loan Delinquencies on the Rise

Monday, June 30th, 2008

The surge in the construction-loan delinquency rate – both residential and commercial – suggests that lenders will remain reluctant to make loans for new construction.

Developers usually finance projects through short-term construction loans.  Once the project has stabilized, the developer seeks long-term debt.  With the current economic downturn, developers are finding it difficult to obtain capital.  This is compounded by a lack of liquidity in the mortgage market.  As a result, projects are worth less than they were a year or two ago.  Lenders also are more stringent in their underwriting standards, preferring highly stabilized projects with significant pre-leasing.

Short-term, the outlook is negative, as maturing loans may have problems refinancing if liquidity is non-existent.

The silver lining is that seasoned developers with strong lending relationships and leased portfolios are better positioned to develop product on an “as-needed-and-warranted” basis.