LOANS UNDER ATTACK
Will boom in loans at retailers, manufacturers turn to bust?
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.