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:

•Late last month, Bank of America agreed to give beleaguered Sears only $5 million when it tried to renew a $1 billion secured facility.

•Two banks canceled letters of credit to women's clothier Talbots in April. Aeon, Talbots' majority shareholder, agreed to provide a $50 million credit line.

•GE Capital Solutions earlier this year said it was cutting back on its unsecured inventory financing in the furniture business, offering no new credit lines and giving existing customers a "reasonable" amount of time to find other options.

"Even before the credit crisis, there were a number of (furniture) retailers hanging on by their fingernails," says Ray Allegrezza, editor in chief of trade magazine Furniture Today. "Now, more than ever, the survivors at retail are going to be the ones who either have cash or have access to it."

Still, while "credit is tight at an unprecedented level," Larry Mondry, former CEO of CompUSA, says, "All of this will come back into balance at some point. It will get better."