Banks not bailing out retailers

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Banks not bailing out retailers
Banks not bailing out retailers

Some banks are displaying a lack of confidence in catalog and multichannel retail operations. Several multichannel merchants have closed or warned that they may have to cease operations after financing has dried up.

In the most recent example, cata­loger Red Envelope said in a filing with the Securities and Exchange Commission on March 31 that it had been informed by Wells Fargo Retail Finance LLC that the bank would no longer provide the multichannel merchant with the ability to draw on its credit line. As a result, the nine-year-old gifts cataloger said it has insufficient funds to continue operations as a going concern and is currently engaged in discussions with two potential acquirers.

“Banks are getting very skittish, particularly with retail consumer businesses that did not perform very well last year in the fourth quarter,” said Claire Gruppo, managing director at Gruppo, Levey & Co, an investment bank serving the marketing industry.

Cataloger Lillian Vernon also recently suffered in light of this trend when private investment firm and owner Sun Capital said it would no longer fund the compa­ny. Soon after, Lillian Vernon filed for Chapter 11 bankruptcy protec­tion and was sold to Taylor Corp. at an auction earlier this month. A similar situation reportedly hap­pened at BlueSky Brands, with its bank refusing to continue to fund the company shortly before it abruptly shut down operations, according to industry sources.

Meanwhile, overall investment in the direct marketing industry was strong in the first quarter of 2008, with a transactional value year-over-year increase of 46%, according to invest­ment firm Petsky Prunier LLC. This was driven in part by businesses' strong interest in mobile and online marketing, as well as content management.

The investment bank reports a total of 193 transactions involving the marketing, advertising and digital media industries in the first quarter of 2008, compared to 156 transactions during the same period last year. With an estimated aggregate transac­tion value of $11.4 billion. Petsky Prunier's Q1 deal notes do not cover investment activity in the catalog marketplace, a sector currently grappling with postal rate and paper price increases and continuing to struggle financially.

“We will see banks simply bail on situ­ations that look more dire and will see them pull back on situations that are more marginal,” Gruppo said.

Typically, when a company finds that it is beginning to run out of money, a debtor-in-possession lender will step in to provide financing while a company tries to regain solvency under Chapter 11 bankruptcy protection. However, because of the cur­rent economic environment, these lenders “are being somewhat reticent to step in,” Gruppo said.

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