Two of the nation's largest banking companies announced exits from the factoring business over the past week; they are selling to nonbanks and leaving a consolidating industry where size and specialized expertise are gaining in importance.
Regions Financial Corp. of Birmingham, Ala., said Tuesday that it has agreed to sell its Capital Factors Inc. of Boca Raton, Fla., to Perry Capital LLC, an $11 billion-asset New York hedge fund. Regions did not say how much Perry would pay.
That announcement came five days after CIT Group Inc. of New York agreed to buy the assets of Receivables Capital Management, the factoring unit of SunTrust Banks Inc. of Atlanta. CIT did not say how much it would pay.
Factoring is a business in which companies make loans backed by borrowers' accounts receivable. It traditionally has been a key source of working capital and growth financing for companies in the furniture, textile, and apparel industries. But it has grown in recent years as the lenders, known as "factors," have expanded into industries such as electronics, temporary staffing, and even limousine services.
Besides its headquarters in Boca Raton, Capital Factors has offices in Fort Lauderdale, Charlotte, Los Angeles, and New York.
When the two deals close, CIT would remain the largest factor. General Motors Acceptance Corp., Wells Fargo Century Inc. (a New York division of Wells Fargo & Co.), and Capital Factors would round out the top 4.
Both SunTrust and Regions are among the top five players in factoring, but analysts said Tuesday that both companies were having trouble making money in the business.
"Companies are increasingly scrutinizing how they're allocating capital, especially companies that are going through merger integrations," said Kevin Fitzsimmons, an analyst at Sandler O'Neill & Partners LP, who follows both companies.
Richard X. Bove, a Florida analyst with Punk, Ziegel & Co. of New York, said that the business may have been moderately profitable for SunTrust and Regions, but returns may not have been high enough to justify a continued investment. He compared their exit plans to decisions by other banking companies to get out of auto leasing in recent years as a result of consistently low returns.
Capital Factors was founded in 1984 and became part of Union Planters Corp. of Memphis when it bought Capital Bank in 1997. Union Planters struggled with the business, and industry experts say it suffered a string of losses, including to the giant retailer Kmart Holding Corp.
In the second quarter of last year Union Planters took a $40 million charge to restructure Capital Factors and said it was paring back loans not related to its main business of factoring.
Regions acquired Union Planters on July 1 and immediately began seeking a buyer for Capital Factors. "Regions elected not to have factoring as a part of its core strategy," said Bobby Doxey, Union Planters' former chief financial officer, who is now a senior executive vice president at Regions.
On Tuesday, Regions said the sale would let it focus on "our customers and our core business."
SunTrust, meanwhile, is integrating the operations of National Commerce Financial Corp. of Memphis, which it acquired Oct. 1. On Monday, Mike McCoy, a SunTrust spokesman, gave reasons similar to Regions' for its decision to get out of the business.
"Although we've been historically successful in the factoring business, the competitive landscape and financial dynamics of it have changed in the past few years," Mr. McCoy said.
The deal for the SunTrust business would continue an industry consolidation CIT has been leading since the late 1990s. Over the past two years it has acquired several other factoring companies, including those owned by HSBC Holdings PLC and General Electric Co.
Perry Capital said it plans keep all 200 Capital Factors employees. It has brought in a longtime factoring industry veteran, Andrew H. Tananbaum, to run the business, to be called Capital Factors LLC, and he is making "a significant investment" in it.
Mr. Tananbaum was the chief executive officer at Century Business Credit Corp. from 1982 until 1998, when it became Wells Fargo Century; he remained the CEO there until 2000. He said Perry Capital plans to make at least $100 million of investments in Capital Factors, for "bolt-on acquisitions" as well as internal growth.
Mr. Doxey said Regions realized that the factoring business is a relationship-based one that requires a more "entrepreneurial environment" than that of a large bank. "Somebody that really understands the industry, like Andy Tananbaum, will do very well."
Mr. Tananbaum echoed that, saying Capital Factors "is a very good company, but what we need to do is reposition it as something more of an entrepreneurial platform."
