The retailing industry remains uncharted territory for most banks. But at BankBoston Retail Finance Inc., lending to retailers is always in fashion.
"Banks have never liked lending against inventory, whether it be in a warehouse or God forbid, fifty stores all across America," said Ward K. Mooney, president of BankBoston Retail Finance.
"We decided that there just has to be a way, since it (retailing) is 34% of our gross national product, for an intelligent niche to be carved out," he added.
Mr. Mooney and 23 other professionals came to BankBoston Corp. in October 1996 through its $40 million acquisition of GBFC Inc., a unit of Boston-based Gordon Brothers, a firm specializing in restructuring for the retail industry.
The group has since hired eight people and plans to hire up to ten more this year, primarily in relationship management and operations. It originated over $1.2 billion in loans last year to retailers with between $15 million and $1.5 billion in annual sales.
The unit makes BankBoston somewhat unique among banks, which have historically shunned lending to midsize retailers. Indeed, lenders ranked retail as their least popular industry for the last nine quarters in surveys conducted by Phoenix Management Corp., based in Chadds Ford, Pa.
The problem for most banks is that midsize retailers use inventory for collateral. In most cases, lenders have to turn to outside vendors to help them value that collateral. And that can cause problems for lenders and borrowers alike.
"You really don't have much of a relationship or interaction" with the third party, said R. Carter Pate, a managing partner of Price Waterhouse LLP and interim chairman and chief executive officer of Sun Television and Appliance Inc. The third party "is not going to be loaning you the money, but is valuing your inventory," he added.
Groveport, Ohio-based Sun, a retailer of consumer electronics and appliances, turned to BankBoston Retail Finance late last year, closing a three-year, $125 million secured credit facility in December.
"They impressed us with their depth of knowledge as to our specific needs in the industry," said Mr. Pate. "They were very competitive on the price, and instead of telling us they would come back to us in three or four weeks with a proposal, they came back in three days and it shocked everybody."
Observers said BankBoston's retail subsidiary is not expected to be a major contributor to its parent's bottom line. But the bank's approach to lending through independent, specialized units has been profitable in the past.
"Niche operations at BankBoston tend to do very well. They have a very unique orientation. It's very entrepreneurial in many ways and they tend to respect these businesses," said Nancy Bush, a bank analyst with Brown Brothers Harriman.
In the bank's acquisition of subprime auto finance company Fidelity Acceptance Corp. in 1993, the bank "left Fidelity management in place. They bought the management, and that's what they're doing with these guys. They're not going to come in there and reinvent the wheel," she added.
If BankBoston Retail Finance's strategy continues on its current track, analysts added, the bank can be expected to pour more capital into the operation.
"BankBoston has dynamic capital allocation, so to the extent that this operation shows additional promise, chances are it will receive more resources," said Michael Mayo, bank analyst with Credit Suisse First Boston.
