A credit professional would have to be somewhat asleep at the switch to have missed the often negative news coverage in business publications and mainstream media about the struggles of Best Buy and JCPenny (JCP). The problems faced by the two companies and others like them, albeit to a lesser extent, warrant inclusion of department stores and “big box” retailers as industries to watch. As such, creditors are going to need to be mindful of warning signs coming from companies therein.

JCP’s business model, which featured a failed gamble on a campaign that ended faux discounting and coupons in favor of “real” pricing, and Best Buy’s struggle to overcome powerhouse online retailers like Amazon, and brick-and-mortar competitors like Walmart for market share are the source for their struggles. But an even bigger storm for retailers of this size and profile, as suggested by Bruce Nathan, Esq. of Lowenstein Sandler LLP, potentially looms in the not-too-distant future: rate hikes. Let’s face it, rock-bottom interest rates, and the economic malaise inspiring them, won’t last forever. “If your business model is troubled and you have a lot of debt, that’s going to be one big issue,” said Nathan. “When interest rates go up, the debt has to be refinanced. But a lot of these retail businesses are also badly overleveraged.”

And potential financial problems with such stores could have a domino effect as many of them serve as anchor stores designed to drive more foot traffic to other retailers in malls and shopping centers. Nathan noted that such a domino effect could also impact a commercial real estate sector that has already seen its share of hardships over the last half-decade. “You need to look for the warnings to be able to mitigate your risk,” said Nathan. “You want to be able to anticipate a bankruptcy well before the filing. And there’s so much more information out there now that wasn’t 20 years ago.”

- Brian Shappell, CBA, NACM staff writer
 
Catch Nathan in Bankruptcy Rumblings: Identifying and Mitigating Risk of a Financially Troubled Customer Headed toward Bankruptcy at Credit Congress on May 22. For more information on the event or to register, visit http://creditcongress.nacm.org/. 

The Federal Reserve’s periodical roundup of economic activity in its 12 regions sang a familiar song about conditions over the last six or so weeks: that there is modest to moderate growth, but little that can be considered exceptional, let alone exciting. Perhaps the only notable exception is the bounce-back, primarily in the Philadelphia and New York regions, following Hurricane/“Super Storm” Sandy.

The Beige Book said noticably improved growth was apparent in Sandy-affected as well as regions including Boston, Richmond and Atlanta; though some deterioration existed in St. Louis. Still, it appears better results were expect for the period that included the peak of 2012 holiday season shopping even though sales were “modestly higher” than the previous year. Sales categories were bolstered somewhat, yet again, by steady or stronger auto sales in 10 Fed districts.

In the ever-important manufacturing category, conditions were mixed. It was about an even split between districts growing in manufacturing and a combination of those contracting or remaining mostly unchanged. Boston (bolstered by industries including aerospace and chemicals) and Chicago (auto) appeared to be doing best among the expanding regions. Also, more than half of the regions are optimistic about growth prospects for the rest of 2013, with Philadelphia and Atlanta having a particular surge in confidence.

Long downtrodden residential real estate contacts reported to the Fed of expansion, albeit from low levels, in all regions thanks in no small part to historically low interest rates and home prices. Commercial real estate also was strong, though not as much as residential.

Few regions – New York, Atlanta, Chicago, Dallas – reported a noticeable increase in loan demand in recent weeks. Several, mostly northern districts, reported improvements in asset quality, said Beige Book. There has also, finally, been some loosening in long-high credit standards, according to contacts.

As was the case in much of 2012, agriculture reports to the Fed were mixed, largely on inconsistent and unhelpful weather patterns. Ongoing drought conditions hurt in regions such as Kansas City and Dallas. However, such conditions ceded a bit in parts of Richmond and Atlanta.

Meanwhile, Beige Book noted input prices appeared to hold steady, overall, in the waning days of 2012 into 2013. There were, however, some food and constructing-material costs that rose in a few districts.

-Brian Shappell, CBA, NACM staff writer
 

The Federal Reserve’s latest of roundup of economic conditions in the nation’s 12 regions sings a familiar tune to reports from the last three or more months: that growth is still occurring in the U.S. economy, but at a noticeably slower pace.

Slow and modest growth is the name of the game, said the latest edition of the Federal Reserve's Beige Book, unveiled Wednesday. Part of the reasoning for the lasted moderation of the growth pace, especially in the middle of the country, was concern over political disruptions in the run-up of the debt ceiling debate and shutdowns of some governments entirely, particularly Minnesota. Also in play in many of the central region is wrench that unpredictable weather has thrown into matters in the agricultural sector.  Those in the agriculture industry who did see their crops survive did enjoy high prices for their commodities. However, such higher costs because of weather-related supply reductions and the aftermath of the previous six-week period’s gas price spike, mean businesses around the nation had to contend with higher costs of doing business. One light at the end of the tunnel, however, is the belief/hope among Fed contacts that falling gas/oil prices during the latest six-week tracking period will continue in the coming months, providing a boost for growth.

Manufacturing remained steady in most districts, though some slowing of growth levels was reported. An uptick in auto production returned as Japanese supply-chain disruptions finally started easing. Granted, auto producers still are playing from behind, so to speak, and the back-up could lead to slower automotive and auto-parts sales for a bit longer.

Credit conditions have changed little, through there were some reports of the cost of capital dropping amid inter-bank competition for well-regarded business borrowers (Richmond, Atlanta, Chicago, Dallas, San Francisco). Commercial real estate was about split down the middle between the have’s reporting improvement and the have not’s continuing to report weak conditions.

To view the full 12-region Fed Beige Book report, click here.

Brian Shappell, NACM staff writer

(Updated 6/10/11 -- hyperlinks to district breakdowns at bottom) Though the Federal Reserve’s newly released Beige Book economic summary found an economy still slowly growing on aggregate over the last six weeks, the pace continues to decelerate in key bank regions including New York, Philadelphia and Chicago.

Even the once mighty manufacturing sector, responsible for much of the growth measured in the last year, is starting to see its expansion rate slip in several areas and concern creep in, according to Beige Book. Part of the problem is the aftermath the Japan earthquake/tsunami/nuclear crisis is having on the supply line of automotive parts. It’s an especially notable problem in districts including Cleveland and Richmond, among others.

Conditions deteriorated for most districts in the areas of agriculture and materials prices, as well. However, overall, commercial real estate and banking seem to be about on part with recent Beige Book reports with some scattered signs of tepid improvement on the horizon.
One of few districts reporting a noticeable ramp-up in the pace of overall growth, perhaps partly because of its ties to the oil industry, is the Dallas district that encompasses all of Texas.

For analysis from each of the 12 individual Federal Reserve districts, click here.

Brian Shappell, NACM staff writer

As Federal Reserve Chairman Ben Bernanke carried a message of cautious optimism to Congress on Wednesday on strong manufacturing gains, exporting activity and rising business confidence; the Beige Book economic conditions roundup of the 12 Fed districts told a similar tale.

The March-released Fed Beige Book, summarizing district-by-district economic conditions eight times annually, noted retail sales and manufacturing increases in all districts, except for St. Louis, even as crippling snowstorms blanketed much of the nation during portions of February. The Cleveland, Atlanta, Minneapolis and Kansas City district noted especially "sold expansion" for manufacturing. However, Chicago noted that its rise was more moderate than in past periods.

Meanwhile, about half the districts reported the long-wounded commercial real estate sector "showing signs of gaining traction." Commercial loan demand also was mixed, though financial institutions reported widespread improvements in all other loan segments. Credit standards, however, continued to be tight even as credit quality has improved, the Beige Book indicated.

Agriculture, in the areas of crop yields and production, may have suffered the worst because of the cold and snowy weather conditions. There were, however, some exceptions in areas like in the strong-performing St. Louis district. Additionally, high prices of Ag commodities such as cotton, corn, soybean and wheat, among others, continued to hold firm or improve.

First District - Boston
Manufacturing contacts appeared to start 2011 in celebratory fashion as sales and outlooks demonstrate continued strength. One auto components manufacturer called 2010 his best year to date. Semi-conductor and pharmaceutical industry contacts also did particularly well, the Fed noted. Commercial real estate fundamentals are stable in many areas (Hartford, Boston) or improving. Retail sales remained positive though inventories remain tight.

Second District - New York
Sectors like those in automotive sales reported better ordering and inventory activity. Upstate New Yorkers saw 10% to 20% increases compared to January 2010, for example. Commercial real estate continued to struggle with high office vacancy levels, but stability is creeping in. Even the much-maligned condominium market appears to have steadied, the Fed said. Business lending standards tightened even as commercial delinquency rates continued to show improvement.

Third District - Philadelphia
Strong shipping and new order increases were realized in the district between January and February. Eleven of the largest manufacturing sub-sectors all had positive things to say about demand, the Fed noted. Contacts pontificated that exporting was behind the high demand and will continue to drive it in 2011. Business loan volume reportedly increased slightly though companies largely "are not looking to borrow." Commercial real estate activity hasn't much changed. One contact predicted it will take some office markets "several years to recover the loss of occupancy caused by the recession."

Fourth District - Cleveland
New orders and production were generally up though there were a few expected seasonal declines. Manufacturers expect moderate growth throughout 2011, with particular strength in the energy-related, auto and heavy equipment industries. The district is among those still reporting weaker commercial real estate activity. Commercial lending requests held stable, edging toward slight growth since late 2010. Credit quality of businesses was seen as "stable to improving," said Fed contacts.

Fifth District - Richmond
Manufacturing continues to perform well in the region, though there is concern with raw materials prices because of extreme demand in nations like China and India. Most business loans are coming from larger area businesses in the process or mergers/acquisitions. It appears business confidence is improving, according to Fed contacts' reports; so expect an uptick in lending in the near-term. Commercial real estate saw "broad-based, but moderate improvement. Though vacancy rates remain high, pricing and leasing rates have stabilized for the most part. Agriculture contacts rued cold temperatures that limited crop development and profits alike.

Sixth District - Atlanta
Growth is the name of the game in manufacturing, but more so in new orders than production levels. Shipping experienced particularly high demand though that area faced weather problems in January and could face fuel cost issues in the coming Fed tracking period. Credit conditions are a mixed bag in the district: improving for those outside of commercial real estate, and worsening for those in it. Cold temperatures and drought conditions have hit Ag businesses in the district, particularly Florida, hard. The spot of optimism comes in global demand elevating prices of commodities such as cotton and soybeans.

Seventh District - Chicago
While manufacturing continued to expand, Fed contacts quipped that they were surprised that the gains were more moderate than in previous months. The worry might be unfounded though, as new orders and backlogs continued to rise at strong levels. Steel, automotive and heavy equipment continue to lead the pack in the sector. Rental vacancy rates stabilized, though pressure on pricing remained. Businesses, especially in agriculture and energy, again appeared more free to spend and invest here than in other districts. Credit availability and use of lines showed improvement.

Eighth District - St. Louis
Dubiously, the district was the only one to show a decrease in manufacturing activity, with many plants planning to close up shop or reduce operations (employment) soon. This includes the wood products, auto, aircraft and primary metal industries. Commercial property demand remained anemic. Like District Six, credit availability depended on the industry, with commercial real estate drawing the short straw, so to speak. Agriculture saw total production on the rise, though there were certainly yield winners (cotton) and losers (corn, soybeans).

Ninth District - Minneapolis
Manufacturing increased, notably in the less populated markets. One of the areas with reports of production weakness was Minneapolis. Still, certain industries there (metal fabricators, semiconductor chip producers) continue to expect significant production gains in 2011. Commercial construction permits rose noticeably, giving hope to those in the industry despite flat vacancy rates. Agriculture conditions improved on the strength of commodities prices. Recent Department of Agriculture rulings on using certain genetically modified products proved helpful to some.

Tenth District - Kansas City
Though slowing was noted in the high-tech and transportation sectors, overall manufacturing grew. Concern did grow over input, raw materials costs though. Commercial real estate has stabilized; but credit conditions for the sector still were considered "constrained" and worsening. Credit conditions were stable for other industries, said Fed contacts. Weather and supply issues hurt crops badly, but lifted prices considerably for those whose yields survived the double-whammy.

Eleventh District - Dallas
Manufacturing's growth in the district depended on the industry: growth in orders for high-tech, petrochemical, food and aviations products but less so for those in the construction game. Agriculture had a virtual horror show on its hands as "exceptionally dry conditions along with extended periods of below-freezing temperatures adversely affected the vegetable crop in Texas [and] greatly stressed livestock..." Commercial and industrial loan activity was mixed, though credit quality improved in many cases.

Twelfth District - San Francisco
The manufacturing rebound continued with strength in areas including technology, semiconductor, commercial aircraft and petroleum refinery production. Commercial real estate was generally weak, but vacancy levels have stopped rising for now. This is tied to a recent increase in commercial rental space demand. Unlike most districts, District 12 did not experience much extreme weather, so most crop production was solid, and "robust" demand continued.

Brian Shappell, NACM staff writer, can be reached at brians@nacm.org