SPECIALTY LENDING SHOP
Specialty Lending Forecast 2012:
Sectors Offer a Mixed Bag of Opportunity
BY JAMES J. OCCHIOGROSSO
To launch the new year, we asked Rosenthal & Rosenthal’s James Occhiogrosso to take a look at borrower
sectors that rely on factoring and asset-based financing in this, ABF Journal’s first ever Specialty Lending
Forecast. While certain sectors offer opportunity, all require diligence and, in some cases, patience.
JAMES J. OCCHIOGROSSO
EVP, Head of Asset-Based Lending, Rosenthal
& Rosenthal, Inc.
Although the American economy, as with the economies of other nations, is down over the past several years, the commercial finance sector has seen ample opportunities to make deals and
transactions because banks, private equity and capital concerns have
not been as aggressive in these market conditions. Although 2012 may
offer more of the same, these mainstream traditional sources of funding
appear to be coming back into the market. That being said, the non-bank commercial finance sector, factors and asset-based lenders, will
still have a fair share of the market in the coming year.
Continuing the trend of the last several years, American wholesalers have been drawing down more from their warehoused goods to
meet, what appears to have been, a slight rise in demand and sales.
This is symptomatic of the overall improved efficiencies by many
businesses in the management of inventory. Sales appeared to have
stayed consistent, perhaps even with slight improvement through the
end of 2011. So there should be a resulting ramp-up of production
in the first half of 2012.
The lower end has done well as manufacturers are offering more
perceived value by putting diamonds and colored stones on silver instead
of gold. Gold is so expensive now that it is really not used in mainstream
jewelry other than as an accent. There is a continuing trend at the low
end with the use of alternatives like titanium and industrial metals, often
marketed and sold using brand names and themes. The jewelry sector is
becoming more Internet and non-traditional outlet driven, with Amazon,
the warehouse clubs and home shopping networks all gaining market
share. Jewelry counters at department stores appear to be stable.
To compete, the independent small retail store needs to sell high-end or unique, specialty jewelry that has limited availability and
provide a high level of service. Generally, many factors and ABLs
avoid the jewelry sector, but for those that are in it, 2012 appears to
offer some opportunities on either side of the spectrum.
There has been some increased stability exhibited by the car manufacturers in more volume of cars produced and the hiring of employees.
The ancillary parts vendors also are doing well. This sector is seeing
even greater activity because vehicle owners now keep their cars and
trucks longer. This extended lifecycle greatly benefits suppliers and
service businesses (i.e., brakes, transmissions, mufflers).
The Japan disaster of nearly a year ago has clearly slowed the
supply chain for certain new and replacement automotive products, so
there’s a scramble for alternative sources. Overall, I would continue to
welcome ABL and factoring opportunities in this sector going forward.
Brand name manufacturers, suppliers and distributors were okay in
2011 and are optimistic about some improvement in 2012. If they
survived the past several tough years and continue to market their
brand and source it properly, 2012 offers good potential. Again,
the Internet has had some game-changing effects on pricing and
sales because of the ease of comparison shopping. This has had less
impact on the designer brand names than on the generic or house
brands of the retailers. The apparel sector continues to be a traditional source of transactions for factors and ABLs.
As 2011 closed, both the high-end and low-end retailers and respective
manufacturers appear to be doing well. There is improvement at the high
end where wealthy and affluent customers are returning to the luxury and
designer markets. The middle market has all but disappeared.
More specialty retailing outlets have opened as evidenced by stand-alone Marshall’s shoe stores and big name retailers carving out space
for larger and larger shoe departments. Federated recently announced
the creation of “the world’s largest shoe store” for its flagship Macy’s
store in Manhattan. Recession, or no recession, women’s shoes are a
staple and a feel-good purchase. Commercial finance companies will
continue to support this market but will need to be vigilant with the
inventory piece of the funding.