Will boom in loans at re­tail­ers, man­u­fac­tur­ers turn to bust?

Daily Local News (West Chester, PA) - - BUSINESS - By Bernard Condon AP Busi­ness Writer

NEW YORK » They sell di­a­mond rings in malls and used cars at deal­er­ships, make wrench sets for me­chan­ics and gi­ant com­bines for farm­ers.

Not one has “bank” in its name, but they are all big lenders, and get­ting big­ger by the day.

If you’re won­der­ing how com­pa­nies can get peo­ple to buy things when wages have been barely ris­ing, check out the fi­nan­cial state­ments of some of the na­tion’s re­tail­ers and man­u­fac­tur­ers. Money lent out at Signet Jewel­ers, CarMax and tool maker Snap-on has jumped more than 50 per­cent in four years at each of these com­pa­nies, 2.5 times the growth of loans at banks. Fi­nanc­ing at Deere & Co., which leases much of its farm and con­struc­tion equip­ment, has risen 27 per­cent.

Com­pa­nies see the loans as a use­ful, safe way to drum up busi­ness. Cus­tomers seem to love them, too. What’s not to like? If you lis­ten to short sell­ers, plenty. Short sell­ers are in­vestors who place bets that pay off when stocks drop, and they say that is go­ing to hap­pen with stocks of some of these non­tra­di­tional lenders. They say com­pa­nies have got­ten sloppy in pick­ing who to lend to af­ter seven years of su­per low in­ter­est rates and easy-money mone­tary pol­icy, and de­faults are com­ing.

“The longer the en­vi­ron­ment lasts, the more risk in the sys­tem builds,” says Brad La­mens­dorf, co-man­ager of the Ad­vi­sorShares Ranger Eq­uity Bear fund, which has bet against Signet and Snap-on. “The losses are not go­ing to be at the banks, it’s go­ing to be share­hold­ers of these com­pa­nies.”

The loans un­der at­tack are a tiny frac­tion of the to­tal in the

U.S., but the is­sues these short sell­ers raise about the role of debt in boost­ing sales has im­pli­ca­tions for the broader econ­omy. A Fed­eral Re­serve re­port pub­lished ear­lier this month showed that U.S. com­pa­nies, gov­ern­ments and house­holds have $13 tril­lion more debt than they did be­fore the 2008 fi­nan­cial cri­sis, a 39 per­cent in­crease. As­sum­ing some of the money has helped fuel spend­ing and the econ­omy re­cover, how much longer can the boost be ex­pected to last?

In­vestors in some of the com­pa­nies un­der fire are start­ing to worry. Stock in Signet, for in­stance, has plunged 38 per­cent since the start of the year.

The re­tailer, which owns Zales and other jew­elry chains, has been tar­geted by Marc Co­hodes, a famed short seller for three decades. Ear­lier this year, he turned to a tech­nique he used years ago to an­tic­i­pate trou­ble at mort­gage lender No­vaS­tar Fi­nan­cial, which even­tu­ally failed: sift through per­sonal

bank­ruptcy fil­ings to see if a com­pany shows up as cred­i­tor.

Co­hodes says that 3,274 peo­ple across the coun­try who went bust in the first three months this year said they owed money to Signet, up 72 per­cent from a year ear­lier.

In an emailed re­sponse, Signet says that its ap­pear­ance in bank­ruptcy fil­ings has held steady com­pared to to­tal fil­ings. It also says its loan port­fo­lio, which is up 60 per­cent in four years, fol­lows “strict risk tol­er­ance” stan­dards. “Sug­ges­tions that Signet’s sales are driven by loos­en­ing stan­dards are sim­ply wrong,” it says.

The lend­ing busi­ness is grow­ing fast at Snap-on, too. The com­pany, which sells wrench sets to car me­chan­ics, has $1.3 bil­lion in loans out to cus­tomers now, up from $770 mil­lion four years ago.

So far, the me­chan­ics have been pay­ing back what they owe. The com­pany says it’s got things un­der con­trol, and notes that it has been lend­ing since the 1930s and is no rube when it comes to judg­ing credit risk.

Still, many of the me­chan­ics that buy its tools

are in iffy fi­nan­cial shape, a fact not de­nied by the com­pany. The av­er­age rate that Snap-on charges cus­tomers re­flects the high risk: 18 per­cent. Its stock has fallen 11 per­cent since the start of the year.

Prob­lems may also be brew­ing at Deere & Co., whose leas­ing busi­ness has boomed as crop prices have fallen and farm­ers be­come re­luc­tant to buy. The com­pany ad­justs the rate it charges farm­ers based in part on what it es­ti­mates the equip­ment will be worth when re­turned. If it as­sumes a high value, it can charge farm­ers less.

Jim Grant, pub­lisher of Grant’s In­ter­est Rate Ob­server, smells trou­ble.

Es­ti­mat­ing the likely value of equip­ment upon its re­turn in­volves a lot guess­work, Grant says, and get­ting the fig­ure wrong could cost the com­pany big now that its leas­ing busi­ness has grown. Deere’s fi­nanc­ing unit is ex­pect­ing to even­tu­ally get back $4.2 bil­lion worth of farm­ing and con­struc­tion equip­ment it has leased out. That fig­ure has bal­looned 60 per­cent in less than two years.

Deere did not re­spond to re­quests for com­ment.


John Deere lawn trac­tors are on dis­play at a Home De­pot in Robin­son Town­ship, Pa. Fi­nanc­ing at Deere & Co., which leases much of its farm and con­struc­tion equip­ment, has risen in re­cent years.

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