Commercial lenders are growing increasingly uneasy with their exposure to the retail sector, a survey has found.
The percentage of lenders scaling back their retail exposure increased to 54% in April, from 36% at the end of October, according to a survey of 126 lenders conducted by Phoenix Management Services Inc. The survey was released early this month.
"It looks like lenders are running from retail," said E. Talbot "Tal" Briddell, president of Chadds Ford, Pa.-based Phoenix, which specializes in turnarounds of distressed companies.
Lending experts said that relatively lackluster Christmas season sales and rising bankruptcy filings led to the retail sector's fall from favor.
Nine out of 10 lenders planned to decrease their exposure to women's fashion, 59% to small chain specialty stores, 52% to discount chains, and 50% to department stores, according to the survey.
To be sure, some bankers pointed to signs that the market is regaining its appetite for strong names and well-structured deals.
For instance, a $3.7 billion loan for K Mart Corp. was successfully syndicated last month. And the price on loans traded in the secondary market for TJ Maxx - a retailer that is emerging from financial woes - increased from the first quarter to the second, one trader noted. Secondary market prices are considered a leading indicator of how a company is perceived by investors.
Bruce Ling, head of loan syndications at Credit Suisse, called Phoenix's semiannual survey a lagging indicator. "I think the market has turned the corner," he said. "There's plenty of evidence that the market is selective at a time like this, as opposed to turning off and on."
Nonetheless, the market appeared particularly selective in the first few months of 1996.
Indeed, the volume of deals for retailers plummeted in the first quarter, with department stores and general merchandisers borrowing only $1.7 billion, well off the full-year pace of $16.5 billion for 1995 and $11.8 billion for 1994, according to data from Loan Pricing Corp.
Similarly, among discount and variety stores, the total dollar volume plunged to $360 million, down from $4.8 billion in 1995 and $8.2 billion in 1994, also according to data from Loan Pricing Corp.
"In March and April, investors took a wait-and-see approach to retail," said Michael H. Rushmore, a vice president in the loan syndications and trading research department of BA Securities Inc., a unit of BankAmerica Corp. The reason: a number of high-profile retail companies had undergone considerable financial duress, including Bradlees Inc., Caldor Corp., Jamesway Corp., Petrie Stores, Camelot Music, and Barneys Inc.
The successful deals have shared certain themes.
Mr. Rushmore pointed to the importance of a strong borrower, a conservative capital structure, strong existing lending relationships, attractive pricing, and a reasonable size.
"You don't need to meet all five to be successful, but you do have to have at least three," he said.
