Robert F. Carbonell Executive Vice President & Chief Credit Officer Bernard Sands Credit Consultants

Part 7 of our 12 part series

CT: Next up is Bob Carbonell of Bernard Sands. Bob is one of the nation's foremost retail experts, with 40 years in credit reporting. Robert, I mean Bob, you are up.

Bob Carbonell, Bernard Sands: Only my wife when she is mad at me calls me Robert. I thank Dan (Meder, of Experian) for laying the groundwork for some of what I want to talk about. You don't need to follow my Comp Store data. We are not going to talk about that a lot. We all know it is in the toilet, and we all know why. We've discussed it for the last two and a half hours. Why should consumers spend money that they don't have? Maybe they are waking up and realizing that it is time.

Robert F. Carbonell Bio Executive Vice President & Chief Credit Officer Bernard Sands Credit Consultants One of the nation's leading credit reporting experts, Carbonell has 40 years of reporting and analytical experience. His background includes experience at: National Credit Office (NCO) Division of Dun & Bradstreet, serving the computer & electronics industries. Credit Clearing House Division of D&B (serving the apparel industry) D&B's Credit Interchange - managed over fifty DUNSCITE credit groups Bernard Sands Credit

Just a few things. Credit Today asked, "What are you seeing right now? What do you foresee down the road? What are our specific recommendations for credit managers?"

On Dan's (Meder, of Experian) data, we are seeing more and more proprietorships just walking away, no Chapter 11, no Chapter 7. You are getting a letter from some business consultant. "I am sorry. I represent Mary's Dress Shop. After 50 years, she has no money to pay you. Thanks for your support. See you around."

It is gone. Another business that disappears and doesn't get into anybody's statistics because they didn't file. They just closed the doors and walked away.

Getting to some of Jerry's (Flum, of CreditRiskMonitor) data, I wanted to add when you are talking about credit departments cutting back, and CFOs not realizing just how important they are to them and protecting their most important asset.

In recent months, our consultants are getting more and more phone calls from CFOs, not from Mary, the credit department, or Joe, the credit manager.

The CFO wants to hear from us firsthand because they are being squeezed by an asset-based lender who just came in and said, "I have 100% bonds on reserve. I am not going to lend you a nickel on it. I want 100% of this company, that company, and this company. I want you to reserve it all, and I am not going to make it part of your borrowing base because I think it is that risky."

Sue Hinton, Coface, Bob Carbonell, Dan Meder, Experian

I mean, what are we seeing right now? We are seeing that the home segment is obviously the worst. If you go back six or seven months and read the Comp Store reports from people who were still doing monthly Comp Store reports, and "Gee, Women's apparel is great, but the home segment is just horrible."

Then you look at who is reporting: Beall's in Florida who reports privately to us and other agencies. California, Nevada, Arizona, Florida, and it all ties into your data. The consumer there was squeezed hardest first.

I believe Northern California had five of the Wall Street Journal's top ten cities in the sub-prime mortgage crisis, and it showed. We saw the result.

What no one talks about in Comp Store results from the national players such as Penney's, Sears, Wal-mart, Home Depot, and Lowe's is that in California in July and August the comps were down 25%, but they don't put that in their notice.

They tell you what the whole company did, and they are big enough to absorb it. But we were hearing from retailers out there on the side that said, "Hey, mine were down 17, and I had to tell you because I am California."

Here is what I hear from Home Depot, Lowe's and Penney's: "we are all suffering." We all have the same customer who doesn't have any money and has lost the equity in their home.

Here is what I hear from Home Depot, Lowe's and Penney's: 'we are all suffering.' We all have the same customer who doesn't have any money and has lost the equity in their home. The dominos are starting to fall. -- Bob Carbonell, Bernard Sands

The dominos are starting to fall. When you look at Mark's (Wagman, of Smyth Trade Credit) hockey stick effect, when the August numbers came out, and as we say here, September was no fluke. Yeah, Comp Stores started to go down, and it continues to go down.

Department stores, to me, are right under the home industry. When you finish with Linens N Things, and Pier One and those kinds of guys, and then you come down from Macy's on down, it is scary.

What recommendations do we have for our clients? Deal order-to-order with everybody except about a dozen companies, and I am not approving a thing for January for anyone other than 12 to 20 companies, the Wal-marts of the world.

Costco, TJ Maxx, BJs, and people who know how to run a business in good times and bad and saw some of this coming and took hard moves back in January.

What recommendations do we have for our clients? Deal order-to-order with everybody except about a dozen companies, and I am not approving a thing for January for anyone other than 12 to 20 companies, the Wal-marts of the world. -- Bob Carbonell, Bernard Sands

We have some interesting things developing that I wanted to ask the insurance people at the table. We are getting a lot of clients coming to us and saying, "Hey, Bob, you are supporting this leveraged buyout, and my insurer just pulled coverage on me."

I said, "Well, why are they doing that?"

"They can't get the financials."

Well, I have got them. Phil's people have them. Credit International has them. So I asked a couple of the buyout guys: "We feel that it is not important to give them to credit and insurance companies."

Mark Wagman, Smyth: What about the factors?

Carbonell: Yes, the factors have the confidentiality to bring this. We have them, Global has them.

Wagman: And all of the Sun Capital companies and so forth?

Carbonell: Yes. I get monthly numbers from Sun Capital companies, but I look at the rest of the buyouts out there from the biggest, from Nieman Marcus on down to Burlington Coat Factory.

Let's go back to the beginning of the year. Mervyn's, LNT, Goody's, and now pressure from some factors. The factors are squeezing the NRDC buyouts. Hudson's Bay won't give anybody financials, and then the domino...

CT: NRDC buyouts?

Carbonell: NRDC bought Hudson's Bay. The factors are just squeezing to force a decision by the folks in Canada to give them financials. I don't blame them. Why should you be in for $50 million dollars and have nothing to base it on?

(Editors' note: following the meeting, we understand that negotiations for financials are now underway and the status of this may change by press time)

Wagman: Why should you be in it for seven figures?

Participant: Why would you be in it at all in this environment?

Carbonell: Yes, Jerry Zucker started that when he bought it. He said, "No more numbers," but because of the way he structured his deal, people were comfortable. He borrowed all of the money to buy the shares in a public transaction, so he had all the debt, not the Bay.

Ken Moyle, Coface: Yes, and no. He remortgaged all of the real estate, he sold the credit part, so the conclusion was they had a year, they have two years if the economy holds out.

Marc Wagman, Smyth; Ken Moyle, Coface; Phil Gootee, Global Credit; Bob Carbonell, Bernard Sands; Dan Meder, Experian

We are well past that horizon now, and we know it was a struggling enterprise prior to the buyout. They have a cavalier attitude. "Well, I won't give you anything, or maybe I will tell you what my bank availability is." That just doesn't cut it.

Carbonell: I asked a factor once, "What do you base your credit line for Hudson's Bay on?"

He said, "Well, our parent company is part of the lending group, and they said not to worry about it." [Laughter]

Then I asked them, "What kind of information do you get from Ken Wong, I think is the treasurer?"

He said, "He told me the new shopping bags are going over great. That is it. I can't tell you anything else."

Jerry Flum, CreditRiskMonitor: I spent 40 years in the investment business, and I am watching it get whacked in your story, and it is true. My heart breaks. The disconnect between the investment guys and credit guys is night and day.

There is such a different attitude. The investment guys are stuck under the concept of fair disclosure which the SEC enforces. A CFO can't say anything because if he does, he needs to get a press release out in an hour.

What happens is CFOs or CEOs are assuming that nobody is talking or can't talk, not realizing that the credit guys are saying, "We don't give a damn. We're just not going to ship. We can say no and put you out of business, so you'll either have to talk to us, or we are not shipping."

Investment guys disconnect on it. I gave a lecture up at the New York Society of Security Analysts on Amazon because the equity and bond investment guys do not understand the needs of the credit guys. The New York Society of Security Analysts said, "At least you've worn a hat in a couple of different areas," and it was such a disconnect.

The attitudes are very different, but I think that is now going to change though. It is clear to me now that the investment guys have been so pummeled they are going to have to ask the really hard questions.

If you ask an investment guy, and for me this is always a shocker, "Do you really think that company X knows their total credit risk with company Y?" They will say, "Of course! How could they possibly do business and not understand what their total receivable risk is?"

Investment analysts can't conceptualize how difficult it is for the CFO or the credit manager to even understand what his total risk is with a business. I am only using Boeing as an example, with a hundred different divisions and different names. You know all the problems that everybody runs into, knowing how much trade credit is actually extended to say, a Boeing.

Investment analysts don't even focus on that. They just can't believe it is so obvious that they would have to even know it. It is such a disconnect.

Carbonell: When selling to retailers, many people in the investment community just don't understand: "We're a 60-day business. Can I ship it today and get my money within 60 days? That is all I care about. This is me, the credit manager of the manufacturer or wholesaler. That is all I care about; when do I get paid?"

My client wants to know, 'Can I ship today and get paid in the next 30 days?' If your terms are net 30, yeah, there is a pretty good chance. If your terms are net 60, all bets are off. -- Bob Carbonell, Bernard Sands

"If there is a risk to it, what can I do to help alleviate that risk? Should I get half in advance or should I just cover my margin. Should I go seek credit insurance from people if there is any left? Will a factor do single invoice factoring for me?"

Flum: I think it would be great if we could speak directly with the bond and equity traders who are on 30 or 60 day plays as opposed to security analysts who are on six month to two year plays. It is just, what's your frame of reference?

Carbonell: Again, that is the issue here with many of us; we all have a different frame of reference. My client wants to know, "Can I ship today and get paid in the next 30 days?" If your terms are net 30, yeah, there is a pretty good chance. If your terms are net 60, all bets are off.

The factoring community as a whole around next week starts to hold January approvals pretty much across the board. They will not say it is okay to ship X, Y, and Z because you are not going to get paid until after Christmas.

Suppose there is no Christmas? Suppose it doesn't materialize? Then on December 29th when they have those discussions with the retailer, "How was Christmas?" and they don't like the answers, they pull all of their approvals and no goods flow, and everybody runs to the courthouse.

Well, you don't have to run any more. You can do it from your PC. If you have noticed, the recent Chapter 11s are filed at 3 a.m. on a Sunday. You don't have to go to the courthouse any more.

It is probably the scariest time we have ever had. None of us is 80 or 90 years old. The late '80s and early '90s, the bankruptcies we had in retail were caused by junk bonds and ego.

Now it is oversimplifying, but it is the economy, stupid. That is the answer to give the people in Washington. "Hey, raising taxes is ridiculous. Your consumer is scared to death. Your consumer is starting to listen. 'I don't need all of these things. I need to put money away. Where should I put it? Do I want CDs? Do I want to stick in a mattress? I sure as hell don't want to give it to Merrill Lynch to invest for me.'"

It is going to probably be the most troublesome 60 days of my career, and I just finished 40 years in the business, honestly. I don't know what to do on a lot of these accounts. I have a responsibility to the retailer, and I have to balance that. -- Bob Carbonell, Bernard Sands

It is going to probably be the most troublesome 60 days of my career, and I just finished 40 years in the business, honestly. I don't know what to do on a lot of these accounts. I have a responsibility to the retailer, and I have to balance that.

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People say, "Can't you pull the line?" I said, "His numbers come out Thursday. Give me two days. I've got to have a reason. I can't just panic and cause a panic." This is the time to shut up, and you shouldn't see my name in the newspapers in the next month and a half. I don't want it there.

One other trend I just wanted to bring up. If you've noticed, some of the major retailers don't trust their banks. They have drawn down their revolvers and put it into money markets or treasuries. Okay, go ahead. If you've got a problem down the road, I've already got mine. I am going to sit on it.

I have retailers who are not public who have done the same thing.

With regard to National Wholesale Liquidators, GE cut their availability so much that they couldn't continue.

One other trend I just wanted to bring up. If you've noticed, some of the major retailers don't trust their banks. They have drawn down an alliance and put it into money markets or treasuries. -- Bob Carbonell, Bernard Sands

When a liquidator gets liquidated, that tells you how bad things are.

Doug Collins, Atradius: That is not just unique to retailers either. There are a number of different corporations that are doing pre-emptive draw downs basically because they are worried their banks are going to yank their lines, and that is across the economy now.

Carbonell: When do we start losing car dealerships? This month? Next month?

Collins: Soon.

Carbonell: How many thousands do we have to get rid of? I heard yesterday that GM has 7,000 dealers. Toyota has 1,500.

Participant: That's already started.

Participant: They are withholding rebates owed to the car dealers because they need the cash.

CT: A figure we've heard is that one out of five car dealers will go under.

Flum: I think that is optimistic.

CT: Could be.

Editor's Note: This is part 7 in our 12 part series.

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Next up in part 8:
Our panel discusses why excessive government intervention might be forestalling the inevitable... Why one former senior credit exec told his troops that if he didn't know about a bankruptcy 6 months in advance, their jobs were at risk... Increasing use of trade credit lines as if they were bank lines causing DSO to rise, while sales in some instances are already falling... A secret method of getting credit insurers' help even when they won't underwrite insurance on your accounts... Why it's more important than ever to pay close attention to your customer's bank agreements... New trends in bank loan agreements and how they're impacting trade creditors... How (and why) one small bank in a lending group might have the power to disrupt an entire loan...

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