Retailers face credit crisis
— -- Some struggling retailers are likely to face a tightening of the short-term credit that carries them through the holiday season, and they could have trouble renewing long-term financing unless creditors ease their loan terms or the retailers pay a lot more.
"If you're a company that already has credit lined up and are in a strong financial position, you have very little to worry about," says David Bolotsky, a former head of retail research for Goldman Sachs and now an online retailer who founded the gift site, UncommonGoods. "But those that need to borrow the most don't have the prettiest balance sheets."
Retailers typically fund their businesses with short-term lines of credit and long-term loans that usually require the company to meet certain financial conditions. If they don't meet them, the banks can call in the loans. Retailers also can borrow for the short term against money due from customers or against their inventory, or for the long term by issuing bonds.
"A credit crisis is the last thing retailers need facing this already grim holiday season," says Carol Levenson, co-founder and director of research at the bond research firm Gimme Credit.
The retailers that need to ask their banks to waive the requirements they must meet will be most at risk, says Levenson, because "the banks might be less lenient in the future."
Midlevel retailers, many of whose customers are cutting back on discretionary purchases and trading down to discounters, will likely be in the toughest spot, says Michael Dart, a strategist with the retail consulting firm Kurt Salmon Associates.
As those retailers lose business, it will cause a "ripple effect as to how banks think about how much credit they are willing to give based on the strength of the individual retailer." That, in turn, will determine whether the stores get loans, how much they get and how costly it is to borrow, says Dart, who heads Kurt Salmon's private equity practice.
Credit has already put a few retailers in a crunch this year:
