1 00:00:18,440 --> 00:00:22,200 Speaker 1: Hello, and welcome to the Credit Edge, a weekly markets proadcast. 2 00:00:22,560 --> 00:00:25,920 Speaker 1: My name is Rushmebasu. I am a senior reporter at 3 00:00:25,960 --> 00:00:29,360 Speaker 1: Bloomberg and I'm Steve Flynn, a senior analyst covering media 4 00:00:29,400 --> 00:00:32,919 Speaker 1: and Telecoms at Bloomberg Intelligence. This week, we are very 5 00:00:32,960 --> 00:00:37,520 Speaker 1: pleased to welcome Holly Etlin, Managing director at Alex Partners, 6 00:00:37,640 --> 00:00:40,840 Speaker 1: the financial advisory and global consulting firm. 7 00:00:41,320 --> 00:00:44,360 Speaker 2: How are you today, Holly, I'm great, other than it's 8 00:00:44,360 --> 00:00:45,680 Speaker 2: a little rainy outside. 9 00:00:46,120 --> 00:00:49,479 Speaker 1: Holly is an experienced executive with over thirty years of 10 00:00:49,600 --> 00:00:54,560 Speaker 1: experience in providing turnaround services for companies in the retail, distribution, 11 00:00:55,160 --> 00:01:01,240 Speaker 1: consumer products, financial services, media, and hospitality industry. She's a 12 00:01:01,320 --> 00:01:05,040 Speaker 1: certified turnaround professional and has been admitted to the American 13 00:01:05,120 --> 00:01:10,440 Speaker 1: College of Bankruptcy and the International Insolvency Institute. The Turnaround 14 00:01:10,480 --> 00:01:15,040 Speaker 1: Management Association has recognized Holly several times for her deal work, 15 00:01:15,480 --> 00:01:19,800 Speaker 1: and she's also been named Women of the Year in restructuring. Holly, 16 00:01:20,000 --> 00:01:22,840 Speaker 1: it's been a crazy time for the markets because of 17 00:01:22,920 --> 00:01:26,280 Speaker 1: the kind of escalating trade war. How is this impacting 18 00:01:26,319 --> 00:01:27,319 Speaker 1: the retail space? 19 00:01:28,040 --> 00:01:30,679 Speaker 2: You know, the only way I can like in it 20 00:01:30,720 --> 00:01:34,400 Speaker 2: is it's very similar to the crisis that we had 21 00:01:34,680 --> 00:01:38,280 Speaker 2: during COVID, with the exception of the retailers are not 22 00:01:38,319 --> 00:01:42,000 Speaker 2: being forced to close, but every other element of disruption 23 00:01:43,080 --> 00:01:47,040 Speaker 2: is happening for retailers. You know, the time of the year. 24 00:01:47,480 --> 00:01:52,320 Speaker 2: Most retailers right now have to place fourth quarter orders, 25 00:01:52,360 --> 00:01:57,720 Speaker 2: I eat Christmas orders in the May time frame, and 26 00:01:57,960 --> 00:02:02,400 Speaker 2: this happening in April just couldn't be more terrible timing 27 00:02:02,440 --> 00:02:05,680 Speaker 2: from that perspective. They're trying to figure out how much 28 00:02:05,760 --> 00:02:10,840 Speaker 2: is consumer demand going to fall, whether tariffs are going 29 00:02:10,880 --> 00:02:13,440 Speaker 2: to be paused not paused. I mean, I don't even 30 00:02:13,440 --> 00:02:16,200 Speaker 2: know where we are today at this point. It's gone up, 31 00:02:16,240 --> 00:02:19,200 Speaker 2: it's gone down, it's gone sideways. And even though many 32 00:02:19,320 --> 00:02:23,280 Speaker 2: of them have diversified post COVID away from a dependence 33 00:02:23,320 --> 00:02:27,680 Speaker 2: on China, there's still are substantial components of their business there. 34 00:02:27,840 --> 00:02:32,720 Speaker 2: And then frankly, they're in They're in Vietnam, they're in Indonesia, 35 00:02:33,000 --> 00:02:38,040 Speaker 2: they're in Mexico, and all of those places are going 36 00:02:38,080 --> 00:02:43,440 Speaker 2: to have increased prices, so really difficult conversations. And you know, 37 00:02:43,960 --> 00:02:47,799 Speaker 2: and I sit in with these management teams, and you know, 38 00:02:48,040 --> 00:02:50,840 Speaker 2: the divergence of opinion, just like Frankly, we have divergence 39 00:02:50,840 --> 00:02:55,480 Speaker 2: of opinion in America today about what's going to actually 40 00:02:55,520 --> 00:02:58,399 Speaker 2: stick and what's not going to stick, and the spirited debates, 41 00:02:58,960 --> 00:03:01,240 Speaker 2: but they're they're coming at a point at which they 42 00:03:01,280 --> 00:03:04,520 Speaker 2: have to accelerate what their decision making process is. And 43 00:03:04,600 --> 00:03:09,720 Speaker 2: many retailers, particularly the very large ones, are very methodical 44 00:03:09,880 --> 00:03:14,640 Speaker 2: in their data analytics around consumer demand and what's selling, 45 00:03:14,680 --> 00:03:16,440 Speaker 2: what's not selling, What are we going to bring in 46 00:03:16,480 --> 00:03:19,520 Speaker 2: at what price point? What retail price point do we 47 00:03:19,600 --> 00:03:22,320 Speaker 2: have to hit? And so the debate is, you know, 48 00:03:23,360 --> 00:03:26,280 Speaker 2: first of all, do we order the same amount and 49 00:03:26,320 --> 00:03:28,600 Speaker 2: then second of all, how are we going to price 50 00:03:28,680 --> 00:03:32,080 Speaker 2: it to still hit the target price points that we 51 00:03:32,200 --> 00:03:36,160 Speaker 2: have known they create consumer demand, and so it's a 52 00:03:36,200 --> 00:03:41,040 Speaker 2: little crazy, you know, and retailers are canceling orders that 53 00:03:41,200 --> 00:03:44,840 Speaker 2: we've heard from some of our major clients that what 54 00:03:44,880 --> 00:03:48,600 Speaker 2: they're going to do is they're going to live with 55 00:03:48,880 --> 00:03:52,520 Speaker 2: most of the Q three inventory that they've already ordered, 56 00:03:52,560 --> 00:03:56,960 Speaker 2: that's already in work and ready to ship, and just 57 00:03:57,040 --> 00:03:59,200 Speaker 2: going to do fill in for Q four for the 58 00:03:59,240 --> 00:04:05,320 Speaker 2: holiday season. So real divergent, real crisis, everybody going nuts. 59 00:04:05,720 --> 00:04:08,680 Speaker 1: And one thing that we saw in December was we 60 00:04:08,760 --> 00:04:12,320 Speaker 1: saw a slew of retailers file for Chapter eleven protection 61 00:04:12,480 --> 00:04:15,240 Speaker 1: before the end of the holiday season. Why was that 62 00:04:15,320 --> 00:04:16,960 Speaker 1: and what does that tell us about the health of 63 00:04:17,040 --> 00:04:20,840 Speaker 1: the retail and the consumer? And then what does that 64 00:04:20,960 --> 00:04:23,360 Speaker 1: mean for twenty twenty. 65 00:04:23,120 --> 00:04:30,719 Speaker 2: Five retailers filing in either December or January? Historically is 66 00:04:31,560 --> 00:04:33,279 Speaker 2: I guess it would be We would say it's a 67 00:04:33,320 --> 00:04:36,039 Speaker 2: high frequency time for retailers to file, and it's mainly 68 00:04:36,080 --> 00:04:39,680 Speaker 2: because that's a time of the year when they have 69 00:04:40,040 --> 00:04:44,360 Speaker 2: a lot more cash. You need cash, you need liquidity 70 00:04:44,440 --> 00:04:47,880 Speaker 2: to make it through a Chapter eleven process or frankly 71 00:04:47,920 --> 00:04:51,680 Speaker 2: even to just successfully liquidate in a Chapter eleven process. 72 00:04:51,720 --> 00:04:56,240 Speaker 2: And so typically we see people file in that sort 73 00:04:56,240 --> 00:05:01,159 Speaker 2: of holiday timeframe when they haven't necessarily paid all their 74 00:05:01,200 --> 00:05:04,400 Speaker 2: bills for holiday, but they have all the cash so. 75 00:05:04,440 --> 00:05:07,880 Speaker 3: To follow up on your liquidity point there, So how 76 00:05:07,920 --> 00:05:10,960 Speaker 3: do a lot of retailers think about financing themselves? Now, 77 00:05:11,520 --> 00:05:16,080 Speaker 3: we've seen a ton of volatility underlying rates, spreads have 78 00:05:16,200 --> 00:05:19,320 Speaker 3: moved a lot in the high yield market. We're seeing 79 00:05:19,320 --> 00:05:21,800 Speaker 3: a slowdown in issuance in high yeld and levered loans. 80 00:05:22,200 --> 00:05:25,000 Speaker 3: So retails, if you're preparing for this uncertainty. What sort 81 00:05:25,000 --> 00:05:26,800 Speaker 3: of liquidity maneuvers can you do right now? 82 00:05:27,600 --> 00:05:32,760 Speaker 2: Boy, it's tough if you're distressed the lower performing retailers 83 00:05:32,880 --> 00:05:36,719 Speaker 2: while they do some of the larger people have public 84 00:05:36,800 --> 00:05:41,240 Speaker 2: data outstanding. You're also financing your business day to day 85 00:05:41,360 --> 00:05:45,559 Speaker 2: using an asset based lending facility, and those facilities are 86 00:05:45,600 --> 00:05:51,160 Speaker 2: predicated on the liquidation value of your inventory. And those 87 00:05:51,320 --> 00:05:56,000 Speaker 2: values have been moving down because we have seen in 88 00:05:56,040 --> 00:06:02,160 Speaker 2: the last few major liquidations liquidation results not be equal 89 00:06:02,240 --> 00:06:05,719 Speaker 2: to what the appraised value or the or the estimated 90 00:06:05,760 --> 00:06:09,440 Speaker 2: liquidation value was of that inventory. It's often referred to 91 00:06:09,480 --> 00:06:12,800 Speaker 2: the term of art as net orderly liquidation value or 92 00:06:12,920 --> 00:06:17,119 Speaker 2: n ol V, and that's the piece. You know, while 93 00:06:17,160 --> 00:06:20,560 Speaker 2: you may have your bonds in place, you're going to 94 00:06:20,640 --> 00:06:23,200 Speaker 2: be as someone who's underperforming, you're going to be just 95 00:06:23,320 --> 00:06:26,200 Speaker 2: making sure that you're in compliance, you don't trip a 96 00:06:26,240 --> 00:06:31,320 Speaker 2: trigger in your bonds, but you're also living with your 97 00:06:31,320 --> 00:06:36,840 Speaker 2: ABL facility, and if that starts to contract, that's going 98 00:06:36,880 --> 00:06:37,680 Speaker 2: to be problematic. 99 00:06:38,279 --> 00:06:42,120 Speaker 1: Are you seeing asset based lenders become more conservative with 100 00:06:42,560 --> 00:06:45,000 Speaker 1: providing money to companies. 101 00:06:44,839 --> 00:06:48,960 Speaker 2: Well, there's a move afoot to try to bring these 102 00:06:49,080 --> 00:06:52,760 Speaker 2: net orderly liquidation values, or these appraised values of inventory 103 00:06:53,320 --> 00:06:56,000 Speaker 2: more into line with the results that have been seen 104 00:06:56,080 --> 00:07:02,480 Speaker 2: in the last few major liquidations. And then you know, 105 00:07:02,600 --> 00:07:05,480 Speaker 2: you've got the whole issue of tariffs and what is 106 00:07:05,560 --> 00:07:08,760 Speaker 2: Terift's going to do, because again, the net orderly liquidation 107 00:07:09,000 --> 00:07:12,800 Speaker 2: value is an appraisal done by a liquidation firm. It's 108 00:07:12,880 --> 00:07:17,640 Speaker 2: really it's their stamp behind what they believe the company 109 00:07:17,680 --> 00:07:21,440 Speaker 2: will really liquidate at. And it's very sensitive to the 110 00:07:21,560 --> 00:07:27,600 Speaker 2: cost retail relationship or the net gross margin relationship. And 111 00:07:27,960 --> 00:07:32,680 Speaker 2: if the retailer, for example, takes an increase in the 112 00:07:32,720 --> 00:07:35,120 Speaker 2: cost value the inventory but doesn't pass it along to 113 00:07:35,160 --> 00:07:38,320 Speaker 2: the consumer, that's actually going to cause the net orderly 114 00:07:38,360 --> 00:07:43,480 Speaker 2: liquidation value to go down, not up, because again it's 115 00:07:43,600 --> 00:07:50,160 Speaker 2: very sensitive to that relationship. So retailers and their lenders 116 00:07:50,200 --> 00:07:53,440 Speaker 2: were already worried about what had been seen with these 117 00:07:53,680 --> 00:07:58,400 Speaker 2: major retail liquidations not coming in on value either. Because 118 00:07:59,200 --> 00:08:03,840 Speaker 2: Shrink was and shrink is. Everybody thinks of Shrink as being, 119 00:08:04,280 --> 00:08:08,080 Speaker 2: you know, theft. It's not mainly theft. What it is 120 00:08:08,080 --> 00:08:11,280 Speaker 2: is accumulated errors in the system, in the accounting system 121 00:08:11,440 --> 00:08:14,559 Speaker 2: of the company or in the inventory system. And we've 122 00:08:14,680 --> 00:08:20,040 Speaker 2: seen companies that, for example, had shrink reserves in there 123 00:08:20,360 --> 00:08:23,320 Speaker 2: NOLV that said, well, when we liquidate it, we're going 124 00:08:23,360 --> 00:08:27,480 Speaker 2: to have this much less inventory to sell. And maybe 125 00:08:27,520 --> 00:08:31,440 Speaker 2: those were estimated at three percent or four percent and 126 00:08:31,480 --> 00:08:34,720 Speaker 2: the actual came in at fifteen to twenty percent. That's 127 00:08:34,840 --> 00:08:39,040 Speaker 2: material and that reduces the recovery that the asset based 128 00:08:39,160 --> 00:08:42,840 Speaker 2: lender gets, and so that causes them to be concerned 129 00:08:43,280 --> 00:08:46,800 Speaker 2: going forward in how much of a reserve can we 130 00:08:46,840 --> 00:08:47,200 Speaker 2: have in that? 131 00:08:47,360 --> 00:08:50,120 Speaker 1: Does that mean reserve if you can explain sure. 132 00:08:50,240 --> 00:08:55,000 Speaker 2: So let's say I, you know, I'm X y Z retailer, 133 00:08:55,240 --> 00:08:59,679 Speaker 2: and I've got a billion dollars worth of inventory, and 134 00:09:00,040 --> 00:09:03,520 Speaker 2: and I want to have an asset based facility based 135 00:09:03,600 --> 00:09:07,880 Speaker 2: upon that, and there is a net orderly liquidation value, 136 00:09:08,000 --> 00:09:14,640 Speaker 2: let's say, of eighty cents on that billion. In addition 137 00:09:14,920 --> 00:09:20,640 Speaker 2: to that eighty cents, the lender will only lend eighty 138 00:09:20,679 --> 00:09:25,920 Speaker 2: five ninety ninety five percent of that eighty cents, and 139 00:09:25,960 --> 00:09:29,480 Speaker 2: then they will put in additional blocks and reserves that 140 00:09:29,640 --> 00:09:35,080 Speaker 2: either exist all the time or arise when the availability 141 00:09:35,160 --> 00:09:38,040 Speaker 2: under the loan falls below a certain value. So when 142 00:09:38,080 --> 00:09:41,400 Speaker 2: you fully drawn, let's say, so if I gave you 143 00:09:41,480 --> 00:09:45,880 Speaker 2: eight hundred million dollars of actual borrowing capability. Once you 144 00:09:45,960 --> 00:09:49,000 Speaker 2: get up to seven hundred, I might have a springing 145 00:09:49,040 --> 00:09:51,920 Speaker 2: reserve that goes in which reduces the amount that you 146 00:09:51,960 --> 00:09:58,319 Speaker 2: can borrow. And those are typically intended to, among other things, 147 00:09:58,440 --> 00:10:03,280 Speaker 2: cover the cost of a proceeding a liquidation proceeding in bankruptcy, 148 00:10:03,840 --> 00:10:07,680 Speaker 2: And of course that's the other issue. The costs of 149 00:10:07,800 --> 00:10:11,800 Speaker 2: winding down a business for those that have liquidated has 150 00:10:11,920 --> 00:10:16,240 Speaker 2: exceeded those reserves. So you've got maybe not all the 151 00:10:16,280 --> 00:10:19,080 Speaker 2: inventory is there, and it's maybe more or maybe it's 152 00:10:19,080 --> 00:10:23,080 Speaker 2: bringing in less than the appraisal, and the block or 153 00:10:23,120 --> 00:10:26,319 Speaker 2: the reserve that you had in place gets exceeded, and 154 00:10:26,360 --> 00:10:28,000 Speaker 2: now all of a sudden, the bank is having to 155 00:10:28,040 --> 00:10:33,720 Speaker 2: look to other assets in the liquidation for their recovery. 156 00:10:33,840 --> 00:10:35,840 Speaker 3: Now, when things start to move and where in periods 157 00:10:35,840 --> 00:10:38,800 Speaker 3: of stressed like we're seeing now, how willing are the 158 00:10:38,880 --> 00:10:41,680 Speaker 3: lenders to work with the company and give some sort 159 00:10:41,679 --> 00:10:44,880 Speaker 3: of relief and give them some maybe extra time to 160 00:10:44,960 --> 00:10:46,040 Speaker 3: solve some of these issues. 161 00:10:46,760 --> 00:10:49,080 Speaker 2: If the lenders believe that the company is headed in 162 00:10:49,120 --> 00:10:52,000 Speaker 2: the right direction, management's got to turn around and process 163 00:10:52,800 --> 00:10:56,160 Speaker 2: there are let's say they need to do a reset 164 00:10:56,200 --> 00:10:59,240 Speaker 2: of how their stores are configured or their merchandise. They've 165 00:10:59,240 --> 00:11:01,760 Speaker 2: got some tests doors up and running. Those are showing 166 00:11:01,840 --> 00:11:04,280 Speaker 2: great results. You know, the chain may be down by 167 00:11:04,320 --> 00:11:07,120 Speaker 2: one or two percent in sales, but the test stores 168 00:11:07,120 --> 00:11:10,679 Speaker 2: are running at a plus ten. Now, all of a sudden, 169 00:11:10,679 --> 00:11:14,600 Speaker 2: the bank can see that management really is addressing the 170 00:11:14,720 --> 00:11:16,920 Speaker 2: issues with the business and headed in the right direction. 171 00:11:17,600 --> 00:11:20,680 Speaker 2: They're going to work with them. And no asset base 172 00:11:20,760 --> 00:11:25,400 Speaker 2: lender likes to liquidate a customer. That's not what they're 173 00:11:25,440 --> 00:11:29,520 Speaker 2: there for. They're there to provide a needed line of credit. 174 00:11:29,679 --> 00:11:32,640 Speaker 2: And so if they think the company is heading in 175 00:11:32,640 --> 00:11:35,439 Speaker 2: the right direction, yes, they will work with them. If 176 00:11:35,520 --> 00:11:38,440 Speaker 2: they don't think the company is heading in the right direction, 177 00:11:39,679 --> 00:11:45,320 Speaker 2: they will be less inclined to, you know, release reserves 178 00:11:45,480 --> 00:11:48,880 Speaker 2: or do something else for some period of time. Again, 179 00:11:49,040 --> 00:11:53,880 Speaker 2: these asset based lending facilities are also very dynamic as 180 00:11:53,960 --> 00:11:58,400 Speaker 2: to advance rate. Often they have monthly or quarterly changes 181 00:11:58,440 --> 00:12:03,160 Speaker 2: depending on how seasonal particular retailer is, where they'll advance 182 00:12:03,280 --> 00:12:08,079 Speaker 2: more in the high season and less in less times 183 00:12:08,080 --> 00:12:12,800 Speaker 2: of the year. So they do want to work with them, 184 00:12:13,160 --> 00:12:16,400 Speaker 2: it's just they also want to get their money back 185 00:12:16,760 --> 00:12:20,200 Speaker 2: if things don't go well and the company liquidates, and unfortunately, 186 00:12:21,040 --> 00:12:26,199 Speaker 2: a very high percentage of distress retailers end up liquidating 187 00:12:26,240 --> 00:12:26,800 Speaker 2: these days. 188 00:12:27,280 --> 00:12:29,080 Speaker 3: Now, I know you're an expert in retail, but if 189 00:12:29,080 --> 00:12:31,400 Speaker 3: we've broughten out a little bit to either more consumer 190 00:12:31,800 --> 00:12:36,120 Speaker 3: discretionary or other sectors, what other groups you see as 191 00:12:36,240 --> 00:12:39,640 Speaker 3: exposed to the tariff uncertainty that we have now. 192 00:12:40,240 --> 00:12:44,160 Speaker 2: Well, everyone consumer producing any kind of a consumer product, 193 00:12:44,400 --> 00:12:47,520 Speaker 2: be it apparel, be it hard goods, be it furniture. 194 00:12:48,240 --> 00:12:53,520 Speaker 2: The vast majority of lower cost items are produced outside 195 00:12:53,520 --> 00:12:56,480 Speaker 2: of the United States. So it just goes to reason 196 00:12:56,559 --> 00:12:59,720 Speaker 2: that you're going to get hit with higher costs. 197 00:13:00,160 --> 00:13:02,280 Speaker 1: And who's going to take those costs? Is it up 198 00:13:02,320 --> 00:13:04,840 Speaker 1: to the retailer to eat the cost or pass it 199 00:13:04,880 --> 00:13:09,319 Speaker 1: down to the consumer? And how those the retailer and 200 00:13:09,400 --> 00:13:12,800 Speaker 1: the supplier, how those negotiations going. 201 00:13:13,240 --> 00:13:15,839 Speaker 2: There's some very tough negotiations because you've not only got 202 00:13:15,840 --> 00:13:18,880 Speaker 2: the issue around the price of the goods potentially changing, 203 00:13:19,440 --> 00:13:24,160 Speaker 2: but the quantity because again, as I mentioned, the retailers 204 00:13:24,200 --> 00:13:27,480 Speaker 2: are really looking at it it prior downturns. And let's 205 00:13:27,480 --> 00:13:29,480 Speaker 2: set COVID aside for a second, but if we look 206 00:13:29,520 --> 00:13:33,439 Speaker 2: at eighty seven. We look at the recession, we look 207 00:13:33,480 --> 00:13:36,760 Speaker 2: at some of the other blips in the economy, you 208 00:13:36,920 --> 00:13:42,840 Speaker 2: generally saw consumer demand going down by more than the 209 00:13:42,920 --> 00:13:47,080 Speaker 2: SMP average. So the S and P went down by ten, 210 00:13:47,920 --> 00:13:50,840 Speaker 2: the consumers went down by twelve, you know, And so 211 00:13:51,160 --> 00:13:53,920 Speaker 2: if you're looking at where we are today, those are 212 00:13:53,920 --> 00:13:57,120 Speaker 2: the numbers that retailers are looking at. They're looking at, 213 00:13:57,160 --> 00:13:59,160 Speaker 2: you know, where's our demand going to go? Is it 214 00:13:59,200 --> 00:14:00,880 Speaker 2: going to go down by ten? Is it going to 215 00:14:00,920 --> 00:14:04,880 Speaker 2: go down by fifteen? So not only are you negotiating 216 00:14:04,920 --> 00:14:09,440 Speaker 2: on price, because it's critical to maintain your margins, particularly 217 00:14:09,480 --> 00:14:14,760 Speaker 2: in a lower sales environment, but it's also about you're 218 00:14:14,800 --> 00:14:17,080 Speaker 2: cutting back the amount you're even going to place with 219 00:14:17,120 --> 00:14:20,400 Speaker 2: the vendor in the first place. So very very tough 220 00:14:20,440 --> 00:14:22,800 Speaker 2: negotiations going on right now and trying to figure out 221 00:14:23,320 --> 00:14:28,200 Speaker 2: which categories are continue going to continue selling. Again. We 222 00:14:28,680 --> 00:14:33,560 Speaker 2: you know, everyone's seen the consumer typically in tough economic times, 223 00:14:33,600 --> 00:14:37,840 Speaker 2: trades down, they trade down in price, they go from 224 00:14:38,160 --> 00:14:41,680 Speaker 2: shopping at a department store to shopping at a discount 225 00:14:41,760 --> 00:14:48,040 Speaker 2: store or shopping at a dollar store. So you've got 226 00:14:48,200 --> 00:14:54,120 Speaker 2: that issue going on, so huge price sensitivity, and so 227 00:14:54,240 --> 00:14:56,520 Speaker 2: what the retailers are trying to do is see how 228 00:14:56,600 --> 00:14:59,040 Speaker 2: much whether they can split it, you know, whether the 229 00:14:59,120 --> 00:15:01,920 Speaker 2: vendor can absorb some piece of it and the retailer can, 230 00:15:02,080 --> 00:15:05,240 Speaker 2: so that maybe that if it's a small enough percentage 231 00:15:05,280 --> 00:15:08,280 Speaker 2: that then they can try to hold price. And remember 232 00:15:08,320 --> 00:15:10,600 Speaker 2: a lot of the goods that they're going to be 233 00:15:10,600 --> 00:15:14,680 Speaker 2: placing orders for in May are going to be the 234 00:15:14,720 --> 00:15:17,800 Speaker 2: promotional items for the holiday season. So those are things 235 00:15:17,800 --> 00:15:21,840 Speaker 2: that are typically produced in volume at a very sharp 236 00:15:21,880 --> 00:15:24,800 Speaker 2: price point with the vendor. And so now the vendors 237 00:15:24,880 --> 00:15:27,200 Speaker 2: looking at this and going, well, can I even meet 238 00:15:27,400 --> 00:15:30,680 Speaker 2: this price point which was a stretch for me before 239 00:15:31,080 --> 00:15:33,040 Speaker 2: because I was giving you a deal because you were 240 00:15:33,080 --> 00:15:34,360 Speaker 2: given the customer a deal. 241 00:15:34,440 --> 00:15:38,480 Speaker 1: With then vtail which segments are or categories are going 242 00:15:38,520 --> 00:15:40,920 Speaker 1: to hurt the most from the tariffs. 243 00:15:41,080 --> 00:15:43,160 Speaker 2: It's kind of across the board depending on where the 244 00:15:43,200 --> 00:15:49,600 Speaker 2: goods come from. But people who traffic in smaller in 245 00:15:49,680 --> 00:15:54,120 Speaker 2: it more inexpensive items, you know, like craft stores or 246 00:15:55,960 --> 00:16:01,800 Speaker 2: small costume jewelry things like that, small all electronics, things 247 00:16:01,840 --> 00:16:04,200 Speaker 2: that you might give somebody as a stocking stuff or 248 00:16:04,280 --> 00:16:09,120 Speaker 2: you might order on Amazon. Those products are less diversified 249 00:16:09,120 --> 00:16:13,760 Speaker 2: away from China, So those kinds of products are going 250 00:16:13,800 --> 00:16:18,320 Speaker 2: to be more harder hit. And also because they're already 251 00:16:18,520 --> 00:16:22,320 Speaker 2: a very low cost item, small increases in price. The 252 00:16:22,360 --> 00:16:24,480 Speaker 2: consumer is very price sensitive. You know, if they're looking 253 00:16:24,560 --> 00:16:28,160 Speaker 2: for a five or ten dollars item to you know, 254 00:16:28,320 --> 00:16:30,840 Speaker 2: do in a gift exchange or whatever, and the price 255 00:16:30,880 --> 00:16:33,160 Speaker 2: of the item goes up to twelve or thirteen, they're 256 00:16:33,160 --> 00:16:37,800 Speaker 2: probably not going to buy it, right. So, you know, 257 00:16:37,920 --> 00:16:41,880 Speaker 2: all of the kinds of businesses or the segments of retailers, 258 00:16:42,320 --> 00:16:45,920 Speaker 2: even the stuff you know, the non food aisle at 259 00:16:45,920 --> 00:16:50,760 Speaker 2: the grocery store, those kinds of items. You know, anything 260 00:16:50,840 --> 00:16:54,080 Speaker 2: that's a lower priced item is going to be impacted. 261 00:16:54,920 --> 00:16:58,320 Speaker 3: We talked a little bit about the retailers that have 262 00:16:58,400 --> 00:17:00,960 Speaker 3: too much debt and working with their asset based lenders, 263 00:17:00,960 --> 00:17:03,760 Speaker 3: but think about companies in general that have too much debt. 264 00:17:03,760 --> 00:17:06,920 Speaker 3: A lot of high healed companies, particularly my sector, communications sector, 265 00:17:06,920 --> 00:17:09,040 Speaker 3: we've seen a ton of this and we'll probably see more. 266 00:17:09,320 --> 00:17:13,320 Speaker 3: A lot of companies will pursue liability management exercises, whereby 267 00:17:13,359 --> 00:17:18,000 Speaker 3: bondholders agree to exchange their bonds or loans for longer 268 00:17:18,080 --> 00:17:22,320 Speaker 3: dated obligations that are often better positioned than the capital structure. 269 00:17:22,720 --> 00:17:25,520 Speaker 3: Likely they'll have security if they were unsecured before, or 270 00:17:25,560 --> 00:17:27,719 Speaker 3: being a better part of the capital structure, But they 271 00:17:27,720 --> 00:17:30,240 Speaker 3: often have to take a haircut to the principle that 272 00:17:30,359 --> 00:17:36,359 Speaker 3: own companies benefit. Right, they push out debt maturities, they 273 00:17:36,760 --> 00:17:40,400 Speaker 3: lower their overall debt. But in your experience, do these 274 00:17:40,440 --> 00:17:42,960 Speaker 3: exercises really put the company in that much better of 275 00:17:43,000 --> 00:17:45,240 Speaker 3: a position. Do they solve any issues or do they 276 00:17:45,359 --> 00:17:46,520 Speaker 3: just delay the problem? 277 00:17:47,080 --> 00:17:50,879 Speaker 2: Depends on what management has planned for the company very much. 278 00:17:51,600 --> 00:17:55,720 Speaker 2: If what this is intended to do is to give 279 00:17:55,840 --> 00:17:59,639 Speaker 2: management the breathing space to finish a turnaround that's already 280 00:17:59,720 --> 00:18:05,080 Speaker 2: in progress, then it's a great thing. If, however, it's intended, 281 00:18:05,320 --> 00:18:08,280 Speaker 2: and this is obviously my personal opinion having seen a 282 00:18:08,280 --> 00:18:12,880 Speaker 2: bunch of these, it's intended to provide a substantial amount 283 00:18:13,119 --> 00:18:16,320 Speaker 2: of additional working capital of the business, a cash infusion 284 00:18:17,200 --> 00:18:21,000 Speaker 2: that rarely happens, because while the headline number may be 285 00:18:21,640 --> 00:18:24,720 Speaker 2: that you're getting an extra two hundred million dollars, by 286 00:18:24,760 --> 00:18:30,000 Speaker 2: the time everybody gets done with their sinking fund for 287 00:18:30,200 --> 00:18:34,119 Speaker 2: interest and their fee and their fee on the fee. 288 00:18:34,480 --> 00:18:38,600 Speaker 2: Oh and then there's the additional fee that all gets 289 00:18:38,640 --> 00:18:42,240 Speaker 2: added or sweeps away cash or adds to debt. What 290 00:18:42,400 --> 00:18:44,879 Speaker 2: you end up with is way less cash than what 291 00:18:45,000 --> 00:18:49,760 Speaker 2: the goal was originally and way more debt. And unless 292 00:18:49,800 --> 00:18:54,160 Speaker 2: the business is really rebounding, it just it just kicks 293 00:18:54,160 --> 00:18:55,040 Speaker 2: the cand down the road. 294 00:18:55,680 --> 00:18:58,200 Speaker 3: Gotcha. And if you're a management team this may sound 295 00:18:58,200 --> 00:19:00,320 Speaker 3: a little cynical, but do you want to drink this 296 00:19:00,920 --> 00:19:02,439 Speaker 3: right before things are turning around? 297 00:19:02,480 --> 00:19:02,640 Speaker 1: Right? 298 00:19:02,720 --> 00:19:08,360 Speaker 3: So that you're trying to incentivize debt holders to participate, right, 299 00:19:08,400 --> 00:19:10,520 Speaker 3: so you want them to move forward? So is it 300 00:19:10,520 --> 00:19:13,560 Speaker 3: best to do it when you know you've reported a 301 00:19:13,560 --> 00:19:15,920 Speaker 3: few bad results quarterly results, as you're getting ready to 302 00:19:15,960 --> 00:19:18,639 Speaker 3: turn around, but you foresee that things are about to 303 00:19:18,640 --> 00:19:20,440 Speaker 3: turn around, and now's the time to do it. 304 00:19:20,680 --> 00:19:23,679 Speaker 2: Everybody's got a theory around that, right. You know. On 305 00:19:23,720 --> 00:19:25,680 Speaker 2: the one hand, you don't want to show your cards 306 00:19:26,080 --> 00:19:27,919 Speaker 2: because then they'll say, well, why do I need to 307 00:19:27,960 --> 00:19:30,200 Speaker 2: do this at all because it looks like you're actually 308 00:19:30,240 --> 00:19:32,160 Speaker 2: going to be able to pay me in the future. 309 00:19:33,480 --> 00:19:35,680 Speaker 2: On the other hand, you may really need the money, 310 00:19:35,720 --> 00:19:38,240 Speaker 2: you really need the relief, and have no choice. You know, 311 00:19:38,320 --> 00:19:42,960 Speaker 2: every situation is unfortunately different and different in because of 312 00:19:43,040 --> 00:19:45,520 Speaker 2: the parties that are in it. It's you would like 313 00:19:45,600 --> 00:19:48,400 Speaker 2: to think that there's an empirical way to just run 314 00:19:48,440 --> 00:19:51,120 Speaker 2: the numbers. Right, we're all data people, and let's run 315 00:19:51,160 --> 00:19:53,680 Speaker 2: the numbers, and well, this will be the good time 316 00:19:53,720 --> 00:19:57,000 Speaker 2: to do it, because you know, it'll take this much 317 00:19:57,040 --> 00:19:58,600 Speaker 2: time to get the deal done and this is when 318 00:19:58,600 --> 00:20:01,679 Speaker 2: we need the money and all of that. But most 319 00:20:01,800 --> 00:20:09,280 Speaker 2: people try to paint a relative leak somewhat dire, but 320 00:20:09,520 --> 00:20:14,879 Speaker 2: not we're going to liquidate dire situation because obviously if 321 00:20:14,880 --> 00:20:17,480 Speaker 2: you're can liquidate, then why would somebody give up their position, 322 00:20:17,760 --> 00:20:21,040 Speaker 2: right or compromise their position. But it has to be 323 00:20:21,280 --> 00:20:27,199 Speaker 2: negative enough that somebody will think that at least if 324 00:20:27,240 --> 00:20:28,840 Speaker 2: they do this, then there'll be money good on that 325 00:20:28,920 --> 00:20:32,000 Speaker 2: other piece. I mean, you know, so many of these 326 00:20:32,080 --> 00:20:34,800 Speaker 2: just turn out to be somebody just not wanting to 327 00:20:34,800 --> 00:20:38,760 Speaker 2: mark down their book and what they've got in the business. 328 00:20:39,040 --> 00:20:41,600 Speaker 2: And you know, we even see that in bankruptcies. You 329 00:20:41,640 --> 00:20:45,240 Speaker 2: see things that in the past, you know, the debt 330 00:20:45,240 --> 00:20:47,760 Speaker 2: would have converted to equity, you would have left the 331 00:20:47,800 --> 00:20:51,359 Speaker 2: company highly unleveraged. And we saw a bunch of those 332 00:20:51,480 --> 00:20:56,960 Speaker 2: during COVID for consumer companies and retailers that then the 333 00:20:57,000 --> 00:20:59,880 Speaker 2: company has thrived, right because it's debt free or it's 334 00:21:00,160 --> 00:21:04,480 Speaker 2: highly deleverage. But then you see these other things where yeah, 335 00:21:04,520 --> 00:21:08,399 Speaker 2: they take equity, but they also leave the vast majority 336 00:21:08,440 --> 00:21:11,600 Speaker 2: of debt on the books because they don't want to 337 00:21:11,600 --> 00:21:14,680 Speaker 2: give up their position if there's a further downturn. They 338 00:21:14,680 --> 00:21:16,320 Speaker 2: want to be in a lender seat rather than an 339 00:21:16,359 --> 00:21:19,800 Speaker 2: equity holder seat, and that just further straps the company 340 00:21:19,840 --> 00:21:23,640 Speaker 2: and you know, basically ends up with the inevitable liquidation. 341 00:21:24,520 --> 00:21:27,400 Speaker 3: So in dealing with management teams who are working down 342 00:21:27,480 --> 00:21:29,600 Speaker 3: this road, have you seen any sort of big difference 343 00:21:29,640 --> 00:21:34,480 Speaker 3: between a management team where it's family owned or significant 344 00:21:34,520 --> 00:21:37,520 Speaker 3: stakes in the equity as opposed to a broadly held 345 00:21:37,560 --> 00:21:40,160 Speaker 3: public company, right, because there's been some articles written that 346 00:21:40,240 --> 00:21:44,600 Speaker 3: it's the family controlled companies are much tougher negotiators because 347 00:21:44,600 --> 00:21:46,359 Speaker 3: it's much tougher forget than to kind of give up 348 00:21:46,400 --> 00:21:48,560 Speaker 3: equity with regard to any sort of a structuring. 349 00:21:48,760 --> 00:21:51,400 Speaker 2: Well, you could put family owned and private equity owned 350 00:21:51,440 --> 00:21:55,520 Speaker 2: in the same boat. Yeah, you know, family owned, they 351 00:21:55,520 --> 00:21:58,040 Speaker 2: may or may not be have the same degree of 352 00:21:58,080 --> 00:22:01,480 Speaker 2: sophistication as a private equity owner. Private equity owners are 353 00:22:01,520 --> 00:22:06,560 Speaker 2: tough negotiators with regard to these lemies. You know, they're 354 00:22:06,640 --> 00:22:11,400 Speaker 2: looking to maintain their control of the business and their 355 00:22:11,720 --> 00:22:13,000 Speaker 2: investment in the business. 356 00:22:13,680 --> 00:22:17,320 Speaker 1: Do you expect to see more elemies in twenty twenty 357 00:22:17,359 --> 00:22:19,239 Speaker 1: five or do you think more companies are just going 358 00:22:19,280 --> 00:22:22,920 Speaker 1: to skip that process and go straight to chapter eleven. 359 00:22:23,359 --> 00:22:25,560 Speaker 2: You know, the problem with chapter eleven today is the 360 00:22:25,600 --> 00:22:29,359 Speaker 2: cost of the process has gotten so high that you 361 00:22:29,440 --> 00:22:33,159 Speaker 2: really do a cost benefit analysis of what are the 362 00:22:33,200 --> 00:22:35,600 Speaker 2: fees going to be? And you know, while the company 363 00:22:35,640 --> 00:22:39,359 Speaker 2: professionals may be able to control their fees to some degree, 364 00:22:39,400 --> 00:22:43,600 Speaker 2: you can't control the professionals for the various creditor groups. 365 00:22:45,000 --> 00:22:48,639 Speaker 2: And some people just go off the reservation completely and 366 00:22:48,880 --> 00:22:52,840 Speaker 2: just go out there and run up all sorts of 367 00:22:52,960 --> 00:22:58,720 Speaker 2: fees just because that's in their interest and it's not 368 00:22:58,800 --> 00:23:01,919 Speaker 2: necessarily productive to the case, and so it's become a 369 00:23:02,080 --> 00:23:07,679 Speaker 2: huge disincentive to actually do a real restructuring in a bankruptcy. 370 00:23:07,720 --> 00:23:09,760 Speaker 2: People try to get in and get out as quickly 371 00:23:09,760 --> 00:23:13,920 Speaker 2: as they can to minimize the feeburn, and they don't 372 00:23:13,960 --> 00:23:16,600 Speaker 2: often use the process in the way it can be 373 00:23:16,760 --> 00:23:23,239 Speaker 2: used to shut unproductive plants, exit unproductive contracts. You know, 374 00:23:23,280 --> 00:23:26,920 Speaker 2: you need time to do that, You need to be able, 375 00:23:27,119 --> 00:23:31,160 Speaker 2: you need to have negotiating time with your significant counterparties 376 00:23:31,200 --> 00:23:32,800 Speaker 2: in those and people just don't want to do it. 377 00:23:33,119 --> 00:23:35,919 Speaker 2: They want to go in and go out, restructure the 378 00:23:35,920 --> 00:23:38,800 Speaker 2: balance sheet, put everybody into the place that they agreed 379 00:23:38,840 --> 00:23:44,160 Speaker 2: to be, and nothing in that addresses the underlying business issue. 380 00:23:44,560 --> 00:23:49,040 Speaker 2: So I think there's a huge disincentive these days to 381 00:23:49,119 --> 00:23:53,760 Speaker 2: go into bankruptcy unless you really have a clear path 382 00:23:54,600 --> 00:23:57,960 Speaker 2: that you've already laid out and you've convinced your stakeholders 383 00:23:58,320 --> 00:24:01,200 Speaker 2: is the best path to take. And so I suspect 384 00:24:01,240 --> 00:24:03,080 Speaker 2: we will see a bunch more elemies. 385 00:24:04,040 --> 00:24:07,520 Speaker 3: So experts like yourself are here to help management teams. 386 00:24:07,560 --> 00:24:10,679 Speaker 3: So when would you normally get involved with a company 387 00:24:10,800 --> 00:24:14,960 Speaker 3: or management teams willing to hire outside experts at first 388 00:24:15,000 --> 00:24:17,960 Speaker 3: signs of trouble? Or is it more when companies get 389 00:24:18,000 --> 00:24:20,640 Speaker 3: into real distress and you have outside parties. So are 390 00:24:20,640 --> 00:24:24,399 Speaker 3: your relationships more with management teams, with investors or all 391 00:24:24,480 --> 00:24:24,919 Speaker 3: the above. 392 00:24:25,520 --> 00:24:27,400 Speaker 2: It's a little bit of all of the above. I'm 393 00:24:27,400 --> 00:24:32,080 Speaker 2: a true turnaround person. I don't My work is not 394 00:24:32,400 --> 00:24:35,879 Speaker 2: here to just facilitate your bankruptcy and do the administrative 395 00:24:35,880 --> 00:24:38,800 Speaker 2: components of the bankruptcy and the cash flow forecasts. My 396 00:24:39,000 --> 00:24:42,160 Speaker 2: work is to help you actually save the business. If 397 00:24:42,280 --> 00:24:46,879 Speaker 2: management and the board are thinking well enough ahead of 398 00:24:46,920 --> 00:24:51,240 Speaker 2: what needs to happen, they definitely you will hire us earlier. 399 00:24:51,440 --> 00:24:55,600 Speaker 2: Often though in my industries that I work in, we 400 00:24:55,680 --> 00:24:59,080 Speaker 2: get hired way too late. But you know, if you 401 00:24:59,080 --> 00:25:02,000 Speaker 2: don't mind, I'll tell you about a really wonderful success story. 402 00:25:02,040 --> 00:25:03,520 Speaker 3: We love post stories. 403 00:25:04,440 --> 00:25:10,439 Speaker 2: So Taylor Brands. Taylor Brands is the parent company of 404 00:25:11,240 --> 00:25:16,240 Speaker 2: Joseph A. Banks and the Men's Warehouse, and leading into COVID, 405 00:25:16,320 --> 00:25:21,320 Speaker 2: the company had experienced many quarters public company, many quarters 406 00:25:21,400 --> 00:25:27,159 Speaker 2: of sales declines. There had been incorrect pricing decisions, there 407 00:25:27,200 --> 00:25:32,040 Speaker 2: had been they weren't following their market obviously. You know, 408 00:25:32,160 --> 00:25:36,359 Speaker 2: the Men's Warehouse is an entry level product for young 409 00:25:36,440 --> 00:25:41,480 Speaker 2: man coming you know, their first their first prom their 410 00:25:41,520 --> 00:25:47,240 Speaker 2: first wedding, their first job interview, So entry level price points. 411 00:25:47,320 --> 00:25:50,920 Speaker 2: And you know, those guys are very sensitive to fit 412 00:25:51,400 --> 00:25:53,399 Speaker 2: and they're very sensitive to price, and they want to 413 00:25:53,400 --> 00:25:55,919 Speaker 2: buy something updated that doesn't look like they're dressing like 414 00:25:55,960 --> 00:25:58,240 Speaker 2: their grandfather. And the company had kind of missed the 415 00:25:58,240 --> 00:26:02,360 Speaker 2: boat on all counts. The board made a change and 416 00:26:02,600 --> 00:26:09,240 Speaker 2: put in a very very forward thinking, e commerce savvy 417 00:26:09,520 --> 00:26:15,400 Speaker 2: new CEO National and Densh was very much about modernizing 418 00:26:15,400 --> 00:26:17,560 Speaker 2: his management team, looking at data et cetera. And so 419 00:26:17,600 --> 00:26:21,200 Speaker 2: when Covid and he had been having this whole discussion 420 00:26:21,240 --> 00:26:23,119 Speaker 2: with his board about the fact that they needed to 421 00:26:23,160 --> 00:26:27,320 Speaker 2: exit about a thousand stores, they needed to completely re 422 00:26:27,520 --> 00:26:30,439 Speaker 2: merchandise the remaining store base all of that, and the 423 00:26:30,480 --> 00:26:34,600 Speaker 2: board was very reticent to do anything like that because 424 00:26:34,600 --> 00:26:38,000 Speaker 2: it would affect earning so drastically. So now you can 425 00:26:38,000 --> 00:26:42,520 Speaker 2: see where I'm going. Covid starts and he and I 426 00:26:42,560 --> 00:26:45,560 Speaker 2: sit down. We pulled together the rest of his new 427 00:26:45,600 --> 00:26:50,320 Speaker 2: management team and we talked through restructuring undercover of COVID. 428 00:26:50,359 --> 00:26:53,720 Speaker 2: Covid was going to ruin their earnings no matter what, 429 00:26:54,000 --> 00:26:57,720 Speaker 2: so why not be bold and take this once in 430 00:26:57,760 --> 00:27:02,080 Speaker 2: a lifetime opportunity to actually restructure the business. And that's 431 00:27:02,080 --> 00:27:05,720 Speaker 2: exactly what we did. We spent six months planning what 432 00:27:05,800 --> 00:27:08,840 Speaker 2: was going to happen before we even filed, so that 433 00:27:08,920 --> 00:27:13,040 Speaker 2: when we filed, we were in and out very quickly. 434 00:27:13,800 --> 00:27:17,040 Speaker 2: And it's been a huge success. The company is just 435 00:27:17,480 --> 00:27:21,560 Speaker 2: has really really done well in a tough category, you know, 436 00:27:21,640 --> 00:27:25,280 Speaker 2: because I mean, you're not wearing a suit today, you know. 437 00:27:25,320 --> 00:27:27,040 Speaker 2: The listeners can't see that. But he's not wearing a 438 00:27:27,040 --> 00:27:30,679 Speaker 2: suit at nor does most anybody wear a suit anymore 439 00:27:30,760 --> 00:27:33,080 Speaker 2: unless they really are in a situation where they need 440 00:27:33,080 --> 00:27:35,040 Speaker 2: to do one. And so, you know, it's a very 441 00:27:35,040 --> 00:27:38,879 Speaker 2: tough category. And you know, men want things with a 442 00:27:38,880 --> 00:27:40,640 Speaker 2: little bit of stretch in them. They don't want an 443 00:27:40,640 --> 00:27:43,560 Speaker 2: old fashioned white cotton dress shirt that doesn't have any 444 00:27:43,600 --> 00:27:46,000 Speaker 2: movement in it and all that. So they were able 445 00:27:46,080 --> 00:27:50,960 Speaker 2: to use that process to liquidate access inventory through the 446 00:27:51,000 --> 00:27:55,600 Speaker 2: closing stores and have room and liquidity to re merchandise 447 00:27:56,280 --> 00:27:59,719 Speaker 2: the stores in a way that then the company's been 448 00:27:59,720 --> 00:28:02,760 Speaker 2: exceed eating its business plan ever since we exited it. So, 449 00:28:03,760 --> 00:28:07,120 Speaker 2: you know, really great success story, but not everybody is 450 00:28:07,840 --> 00:28:11,920 Speaker 2: that bold to want to do that. 451 00:28:11,920 --> 00:28:12,399 Speaker 3: That's great. 452 00:28:12,640 --> 00:28:15,600 Speaker 1: You know one thing though, during the COVID pandemic, the 453 00:28:15,640 --> 00:28:18,480 Speaker 1: FED built out the economy and we had access to 454 00:28:18,800 --> 00:28:21,439 Speaker 1: you know, cheap cash. It's likely that we're not going 455 00:28:21,480 --> 00:28:24,480 Speaker 1: to see that happen again. So how is retail going 456 00:28:24,560 --> 00:28:25,159 Speaker 1: to cope with that? 457 00:28:26,800 --> 00:28:29,880 Speaker 2: Well, the retail knows what its barring based is right now. 458 00:28:29,960 --> 00:28:33,600 Speaker 2: I mean again, you know, if you've got bonds in place, 459 00:28:34,440 --> 00:28:37,440 Speaker 2: you know those bond interest rates are not going to change, right, 460 00:28:37,600 --> 00:28:41,600 Speaker 2: So it's only your ABL and your ABL facilities are 461 00:28:41,640 --> 00:28:43,720 Speaker 2: at very very low interest rates to begin with, so 462 00:28:44,320 --> 00:28:50,160 Speaker 2: I don't see that issue at least short term impacting retailers. 463 00:28:50,720 --> 00:28:53,400 Speaker 1: What are you telling retail You know, you see them 464 00:28:53,480 --> 00:28:55,840 Speaker 1: day today, so you know, kind of going back to 465 00:28:55,880 --> 00:28:58,280 Speaker 1: what you said, what is your advice to them? 466 00:28:58,920 --> 00:29:02,240 Speaker 2: Well, alex Partners has a Terra for Room in place, 467 00:29:02,520 --> 00:29:05,480 Speaker 2: as do most major consulting firs, but I think ours 468 00:29:05,560 --> 00:29:08,280 Speaker 2: is better because we've got two of them. We've got 469 00:29:08,280 --> 00:29:10,400 Speaker 2: one focused on retail and consumer products and we went 470 00:29:10,480 --> 00:29:13,880 Speaker 2: one focused on automotive and industrials because they're very different 471 00:29:13,960 --> 00:29:17,720 Speaker 2: storylines as to what you're capable of doing in the interim. 472 00:29:18,120 --> 00:29:21,640 Speaker 2: On the retailing consumer products side, it's about cost reduction. 473 00:29:22,320 --> 00:29:25,560 Speaker 2: It's about making sure you're as diversified as you can be. 474 00:29:26,160 --> 00:29:30,239 Speaker 2: If you had been looking at diversifying as far as 475 00:29:30,280 --> 00:29:34,200 Speaker 2: your supplier base into other sectors but hadn't pulled the 476 00:29:34,200 --> 00:29:37,080 Speaker 2: trigger yet, now is the time to do it, and 477 00:29:37,120 --> 00:29:41,400 Speaker 2: really helping people manage through those issues. And then it's 478 00:29:41,600 --> 00:29:46,400 Speaker 2: you know, making sure that you're using sophisticated data analytics 479 00:29:46,440 --> 00:29:50,320 Speaker 2: in choosing your price points so that you're really capturing 480 00:29:50,480 --> 00:29:53,920 Speaker 2: as much of the consumer demand as you possibly can. 481 00:29:53,960 --> 00:29:58,480 Speaker 2: You're hitting those sensitive consumer prices. So you know, we're 482 00:29:58,520 --> 00:30:03,440 Speaker 2: working with any large scale retailers who again have this 483 00:30:03,760 --> 00:30:07,680 Speaker 2: very most of them, very long decision making cycle that's 484 00:30:07,680 --> 00:30:10,200 Speaker 2: got to be a lot shorter, and so helping them 485 00:30:10,240 --> 00:30:16,000 Speaker 2: build consensus internally using data to then make quick decisions 486 00:30:16,000 --> 00:30:19,240 Speaker 2: and have confidence in the decision that they're making and 487 00:30:19,280 --> 00:30:22,000 Speaker 2: how it's going to impact their business. Most people are 488 00:30:22,040 --> 00:30:27,280 Speaker 2: planning to be down. Most people are managing their fourth 489 00:30:27,360 --> 00:30:32,160 Speaker 2: quarter purchases down to take into account what they're anticipating 490 00:30:32,200 --> 00:30:36,160 Speaker 2: to be softness in consumer demand, being very careful with 491 00:30:36,200 --> 00:30:39,520 Speaker 2: their purchases and making sure that they're not stuck with 492 00:30:39,560 --> 00:30:41,760 Speaker 2: a bunch of excess inventory. I mean, we all remember 493 00:30:41,840 --> 00:30:44,960 Speaker 2: during the recession the racks and racks of on sale 494 00:30:45,000 --> 00:30:48,880 Speaker 2: clothing and on sale everything everywhere. They learned a lot 495 00:30:48,920 --> 00:30:52,280 Speaker 2: of really good lessons about inventory management from that cycle, 496 00:30:52,360 --> 00:30:55,040 Speaker 2: and a lot of them have incorporated it into their business. 497 00:30:55,040 --> 00:30:57,560 Speaker 2: And then it's really just getting your models up to 498 00:30:57,680 --> 00:30:59,760 Speaker 2: date on that. And then if you really think that's 499 00:30:59,760 --> 00:31:02,560 Speaker 2: going to cause you a liquidity issue, because there are 500 00:31:02,640 --> 00:31:05,400 Speaker 2: retailers who are still i mean black Friday is a 501 00:31:05,400 --> 00:31:08,080 Speaker 2: real thing, you know, which means you're in the black. 502 00:31:08,360 --> 00:31:11,120 Speaker 2: That's where Black Friday came from, is that a retailer 503 00:31:11,160 --> 00:31:14,000 Speaker 2: loses money the whole year and then they finally make money. Well, 504 00:31:14,000 --> 00:31:17,640 Speaker 2: while it's no longer the Friday before Thanksgiving because they 505 00:31:17,680 --> 00:31:23,160 Speaker 2: break price and break promotions earlier in November, it still 506 00:31:23,240 --> 00:31:26,680 Speaker 2: is a real thing. And so if you believe your 507 00:31:26,720 --> 00:31:30,680 Speaker 2: fourth quarter is going to be depressed to some degree, 508 00:31:30,760 --> 00:31:34,520 Speaker 2: you're negotiating with your lenders now to see what additional 509 00:31:34,560 --> 00:31:38,719 Speaker 2: liquidity relief you can get to get through that period 510 00:31:38,800 --> 00:31:42,680 Speaker 2: of time after Christmas where you're going to be paying 511 00:31:42,680 --> 00:31:46,000 Speaker 2: off your suppliers. And it's typically a low liquidity period 512 00:31:46,160 --> 00:31:51,520 Speaker 2: for retailers. It's a high liquidity period generally for consumer 513 00:31:51,520 --> 00:31:55,720 Speaker 2: products companies because then they're getting paid right after the 514 00:31:55,720 --> 00:31:59,880 Speaker 2: holidays because typically you're selling into retailers with extended terms, 515 00:32:00,520 --> 00:32:02,520 Speaker 2: more extended terms. So if you're you know, if your 516 00:32:02,520 --> 00:32:05,800 Speaker 2: typical terms with the retailer thirty forty five sixty days, 517 00:32:06,040 --> 00:32:10,240 Speaker 2: retailers will negotiate ninety to one hundred and twenty day 518 00:32:10,360 --> 00:32:15,240 Speaker 2: terms for that holiday period and then pay you after 519 00:32:16,400 --> 00:32:18,360 Speaker 2: so and then of course you need to put that 520 00:32:18,440 --> 00:32:21,320 Speaker 2: right back to work, because then you're trying to finish off, 521 00:32:21,600 --> 00:32:24,080 Speaker 2: you know, spring merchandise and get it into the stores. 522 00:32:24,160 --> 00:32:27,080 Speaker 1: And is that something we're saying now longer payment. 523 00:32:26,760 --> 00:32:29,240 Speaker 2: Term, Yes, okay, that is one of the things that 524 00:32:29,280 --> 00:32:33,440 Speaker 2: people are negotiating. The problem is is that during COVID, 525 00:32:34,720 --> 00:32:40,360 Speaker 2: additional capital for many of these consumer products and apparel 526 00:32:40,400 --> 00:32:46,520 Speaker 2: companies really just got destroyed. And so there are a 527 00:32:46,560 --> 00:32:50,960 Speaker 2: lot of companies overseas, and again we have to take 528 00:32:50,960 --> 00:32:53,760 Speaker 2: into account that the majority of this stuff comes from 529 00:32:53,800 --> 00:32:58,880 Speaker 2: outside the US. These are smaller factories, they work on 530 00:32:58,880 --> 00:33:02,920 Speaker 2: on less working capital, and they're still recovering from the 531 00:33:03,000 --> 00:33:06,360 Speaker 2: hit they took during COVID when they had to shut 532 00:33:06,400 --> 00:33:10,640 Speaker 2: their factory completely or they had massive orders canceled when 533 00:33:10,680 --> 00:33:13,640 Speaker 2: they already had purchased things and started them into work. 534 00:33:14,400 --> 00:33:18,960 Speaker 2: So there are many vendors who today at least have 535 00:33:19,280 --> 00:33:23,640 Speaker 2: less capability of negotiating that because they just don't have 536 00:33:23,720 --> 00:33:28,160 Speaker 2: the working capital to float for the retailer. Some are 537 00:33:28,200 --> 00:33:35,480 Speaker 2: doing better. Some the governments themselves have created private credit 538 00:33:35,520 --> 00:33:39,800 Speaker 2: funds that work sort of as a local factoring relationship 539 00:33:39,920 --> 00:33:44,239 Speaker 2: for those factories and granting credit to retailers. But if 540 00:33:44,240 --> 00:33:46,960 Speaker 2: you don't have that kind of backstop working with you, 541 00:33:47,040 --> 00:33:50,640 Speaker 2: then you really are going to find it very difficult 542 00:33:50,720 --> 00:33:53,280 Speaker 2: to get some of those longer terms. And less you're 543 00:33:53,280 --> 00:33:57,320 Speaker 2: working you're a very very very large business. You're a Target, 544 00:33:57,360 --> 00:34:01,280 Speaker 2: you're a Call's, you're a Macy's. You know, then you're 545 00:34:01,320 --> 00:34:04,600 Speaker 2: working with very large factories, and then you may have 546 00:34:04,640 --> 00:34:07,240 Speaker 2: a little bit more latitude to negotiate some of those things. 547 00:34:07,520 --> 00:34:09,840 Speaker 1: Can you kind of explain what the factory means? 548 00:34:10,080 --> 00:34:15,600 Speaker 2: Oh, factoring is the ability to sell your receivable or 549 00:34:15,680 --> 00:34:20,040 Speaker 2: borrow against your receivable under certain terms. When you're larger 550 00:34:20,320 --> 00:34:22,960 Speaker 2: as a consumer products company, you can get a traditional 551 00:34:22,960 --> 00:34:26,120 Speaker 2: credit line from a regular bank, you know, if you're 552 00:34:26,160 --> 00:34:28,920 Speaker 2: a US based company, But if you're small and you're 553 00:34:28,960 --> 00:34:33,120 Speaker 2: overseas that the factoring basically helps you manage your credit risk. 554 00:34:33,200 --> 00:34:39,000 Speaker 2: It's credit insurance essentially, and it also accelerates your ability 555 00:34:39,400 --> 00:34:43,440 Speaker 2: to get that cash. So if I've just shipped something 556 00:34:43,680 --> 00:34:47,360 Speaker 2: to Macy's and it's you know, multiple containers, it's a 557 00:34:47,440 --> 00:34:50,480 Speaker 2: very large order, it's a multimillion dollar order. Macy's has 558 00:34:50,520 --> 00:34:53,200 Speaker 2: sixty day terms with me, then I'm not going to 559 00:34:53,239 --> 00:34:55,759 Speaker 2: see that cash for sixty days. Well, I can go 560 00:34:55,880 --> 00:34:59,160 Speaker 2: to a factor. The factor will buy the receivable from 561 00:34:59,239 --> 00:35:02,719 Speaker 2: the equivalent and I'll get the cash today. Now I'll 562 00:35:02,800 --> 00:35:06,600 Speaker 2: get instead of getting the ten million dollars for the order, 563 00:35:06,680 --> 00:35:09,080 Speaker 2: maybe I'll only get nine because there'll be a discount 564 00:35:09,160 --> 00:35:12,520 Speaker 2: rate associated with it. But that's what factoring is. 565 00:35:13,200 --> 00:35:18,520 Speaker 1: And what's the appetite for credit insurance providers? Given escalation 566 00:35:18,600 --> 00:35:21,840 Speaker 1: and tariffs? Do they have a big appetite to provide 567 00:35:21,960 --> 00:35:25,480 Speaker 1: insurance to distressed retailers? Are they starting to scale back? 568 00:35:26,600 --> 00:35:29,600 Speaker 2: I think the answer is it depends if it's if 569 00:35:29,640 --> 00:35:33,920 Speaker 2: it's a large, well capitalized retailer. I think credit insurance 570 00:35:33,960 --> 00:35:39,160 Speaker 2: will continue to be there. The kinds and terms of 571 00:35:39,200 --> 00:35:43,560 Speaker 2: the insurance may change, the charge on it may change. 572 00:35:43,719 --> 00:35:48,640 Speaker 2: But the more distressed you are, the more difficult your 573 00:35:48,760 --> 00:35:52,520 Speaker 2: suppliers are going to find getting credit insurance, and so 574 00:35:52,560 --> 00:35:57,040 Speaker 2: that will force them to change their terms, shorten the terms. Basically, 575 00:35:57,600 --> 00:36:00,800 Speaker 2: so if I was able to in the past grant 576 00:36:00,880 --> 00:36:03,960 Speaker 2: you a sixty day term, I may now need to 577 00:36:04,000 --> 00:36:06,000 Speaker 2: get part of the cash up front. I may need 578 00:36:06,040 --> 00:36:08,279 Speaker 2: to get a deposit to put the goods into work 579 00:36:08,280 --> 00:36:11,040 Speaker 2: in the first place, you know, sort of a production 580 00:36:11,160 --> 00:36:14,839 Speaker 2: deposit against the materials. Costs, so I'm not out if 581 00:36:14,880 --> 00:36:16,800 Speaker 2: for some reason I don't get paid the balance. 582 00:36:17,440 --> 00:36:20,040 Speaker 1: Do you expect to see a lot of suppliers at 583 00:36:20,080 --> 00:36:21,400 Speaker 1: liquidity issues. 584 00:36:22,800 --> 00:36:28,239 Speaker 2: I think it depends on the supplier. The less well 585 00:36:28,239 --> 00:36:32,520 Speaker 2: capitalized suppliers are going to have issues, and the people 586 00:36:32,560 --> 00:36:36,879 Speaker 2: who are concentrated in China still are going to have 587 00:36:37,040 --> 00:36:43,319 Speaker 2: issues less so for places where the tariffs may be 588 00:36:43,440 --> 00:36:48,160 Speaker 2: moderated to lower levels. You know, the problem we have 589 00:36:48,239 --> 00:36:53,880 Speaker 2: right now is that American business, and particularly in the 590 00:36:53,920 --> 00:36:59,200 Speaker 2: consumer sector, which is where I primarily work, thrives on predictability, 591 00:37:00,080 --> 00:37:03,200 Speaker 2: at least the ability to believe you can predict what's 592 00:37:03,239 --> 00:37:07,440 Speaker 2: going to happen with the consumer. This is so unpredictable 593 00:37:07,960 --> 00:37:14,439 Speaker 2: moment by moment that you really can't figure out how 594 00:37:14,480 --> 00:37:18,680 Speaker 2: to react. You know, you're trying to predict consumer behavior, 595 00:37:18,719 --> 00:37:22,360 Speaker 2: and you're also trying to predict price, ultimate price, and 596 00:37:23,640 --> 00:37:27,319 Speaker 2: if both of those are moving on you constantly, what 597 00:37:27,400 --> 00:37:30,520 Speaker 2: you're going to do is you're going to default to 598 00:37:30,680 --> 00:37:35,080 Speaker 2: the most conservative view of the world and have the 599 00:37:35,160 --> 00:37:38,400 Speaker 2: point of view that if things are going well, you 600 00:37:38,480 --> 00:37:42,280 Speaker 2: can do what's called chase product, which means I placed 601 00:37:42,280 --> 00:37:45,839 Speaker 2: an original order with you for a million units, and 602 00:37:45,920 --> 00:37:49,600 Speaker 2: now I'd like to upsize it to a million two 603 00:37:50,960 --> 00:37:55,080 Speaker 2: because things are going well and things have moderated. So again, 604 00:37:55,120 --> 00:37:58,160 Speaker 2: it makes it really tough upstream on the suppliers because 605 00:37:58,200 --> 00:38:00,879 Speaker 2: they don't want to lose the sale. But what they're 606 00:38:00,880 --> 00:38:02,560 Speaker 2: going to have to do is they're going to have 607 00:38:02,640 --> 00:38:06,359 Speaker 2: to authorize over time and rush things into work and 608 00:38:07,960 --> 00:38:13,520 Speaker 2: maybe air freight things because the order has upsized. So again, 609 00:38:14,040 --> 00:38:19,920 Speaker 2: it creates additional cost for the supplier, and you know 610 00:38:19,960 --> 00:38:21,880 Speaker 2: they're going to have to just decide whether or not 611 00:38:21,960 --> 00:38:24,480 Speaker 2: they can even accommodate that if that happens, if there's 612 00:38:24,480 --> 00:38:26,680 Speaker 2: a recovery, for example, in the second half of the year, 613 00:38:27,840 --> 00:38:28,600 Speaker 2: and what if. 614 00:38:28,480 --> 00:38:31,520 Speaker 1: Your most contrained view on the market. 615 00:38:31,600 --> 00:38:36,920 Speaker 2: I think consumer demand across the board in the fourth 616 00:38:37,040 --> 00:38:41,680 Speaker 2: quarter will be down somewhere between five and ten percent. 617 00:38:42,000 --> 00:38:45,479 Speaker 2: That's kind of the data that I've seen that would 618 00:38:45,520 --> 00:38:50,880 Speaker 2: show that based upon what's going on today, particularly if 619 00:38:51,440 --> 00:38:55,120 Speaker 2: price increases hit to the degree that we think they 620 00:38:55,160 --> 00:38:59,040 Speaker 2: may if these tariffs stay in place. But we'll see, 621 00:38:59,080 --> 00:39:01,399 Speaker 2: I mean, maybe we'll be the chip industry and we'll 622 00:39:01,400 --> 00:39:05,440 Speaker 2: get a pass. On a day to day basis, you 623 00:39:05,520 --> 00:39:07,760 Speaker 2: just sort of don't know what's happening. And that's given 624 00:39:07,760 --> 00:39:12,320 Speaker 2: the lead times in producing product to sell to the customer. 625 00:39:12,360 --> 00:39:17,320 Speaker 2: Other than grocery, which is immediate, everything else has about 626 00:39:17,400 --> 00:39:21,920 Speaker 2: a four month plus lead time depending on where it's 627 00:39:21,960 --> 00:39:26,680 Speaker 2: coming from. So you know, you're trying to predict what 628 00:39:26,760 --> 00:39:29,600 Speaker 2: the consumer is going to want. You probably have a 629 00:39:29,600 --> 00:39:32,239 Speaker 2: good idea of what they want, but the question is 630 00:39:32,280 --> 00:39:34,280 Speaker 2: how much they're going to spend it at what price point? 631 00:39:34,600 --> 00:39:36,719 Speaker 2: You're trying to predict that four to six months out. 632 00:39:37,800 --> 00:39:40,880 Speaker 2: That's that's pretty hard in this environment. 633 00:39:40,800 --> 00:39:42,799 Speaker 1: And as an advisor, how do you deal with that? 634 00:39:43,360 --> 00:39:46,279 Speaker 2: If your lender is going to work with you, and 635 00:39:46,320 --> 00:39:50,759 Speaker 2: you have extra capital and you're willing to potentially take 636 00:39:50,840 --> 00:39:54,400 Speaker 2: market share, which some people are looking at. Am I 637 00:39:54,480 --> 00:39:55,880 Speaker 2: going to be the person that's going to be in 638 00:39:55,960 --> 00:39:58,759 Speaker 2: stock if the demand comes back, and I'll just take 639 00:39:58,800 --> 00:40:02,640 Speaker 2: the risk of having to deal with heavier markdowns. That's 640 00:40:02,680 --> 00:40:06,360 Speaker 2: one school of thought that people are doing. But a 641 00:40:06,360 --> 00:40:10,560 Speaker 2: lot of people who don't have excess capital are being 642 00:40:10,600 --> 00:40:13,960 Speaker 2: forced more into the other position, which is basically assuming 643 00:40:14,000 --> 00:40:17,520 Speaker 2: that demand is being down and playing very conservatively in 644 00:40:17,520 --> 00:40:19,800 Speaker 2: what they do because they can't afford to take the loss. 645 00:40:20,280 --> 00:40:23,399 Speaker 1: And what do you worry about the most given of 646 00:40:23,400 --> 00:40:25,440 Speaker 1: this chaos. 647 00:40:25,000 --> 00:40:29,600 Speaker 2: I worry that there are going to be some retail 648 00:40:29,640 --> 00:40:34,200 Speaker 2: and consumer boards that are going to be so stuck 649 00:40:34,320 --> 00:40:39,040 Speaker 2: in their debate about what to do or whether they 650 00:40:39,120 --> 00:40:46,879 Speaker 2: agree with management's recommendation, that the company will miss an 651 00:40:46,960 --> 00:40:51,280 Speaker 2: opportunity to do what it needs to do to succeed 652 00:40:51,400 --> 00:40:54,680 Speaker 2: through the next couple of years. And you know, once 653 00:40:54,719 --> 00:40:58,960 Speaker 2: a retailer in particular is out of cash, there is 654 00:40:59,400 --> 00:41:04,120 Speaker 2: very little place to go to generate additional liquidity to 655 00:41:04,239 --> 00:41:08,480 Speaker 2: fund a turnaround. And so you know, having seen several 656 00:41:08,560 --> 00:41:12,440 Speaker 2: of these, unfortunately over the past few years, where management 657 00:41:12,560 --> 00:41:15,880 Speaker 2: doesn't work seriously to do something about the business, or 658 00:41:15,880 --> 00:41:18,640 Speaker 2: where the board prevents them from doing it or whatever, 659 00:41:19,360 --> 00:41:23,319 Speaker 2: to the point that then when they're out, then, at 660 00:41:23,400 --> 00:41:26,160 Speaker 2: least in the sector in which I work in, unfortunately, 661 00:41:26,440 --> 00:41:29,000 Speaker 2: your unless you can do a very quick sale of 662 00:41:29,040 --> 00:41:32,239 Speaker 2: the business, you know, you're looking at a liquidation. And 663 00:41:32,280 --> 00:41:36,040 Speaker 2: so what I fear is that we will lose some 664 00:41:36,200 --> 00:41:39,200 Speaker 2: segments of the industry that could have been saved, that 665 00:41:39,280 --> 00:41:41,319 Speaker 2: there was a reason for them to continue to be 666 00:41:41,400 --> 00:41:47,800 Speaker 2: there because of this, you know, frozen decision making while 667 00:41:47,880 --> 00:41:49,120 Speaker 2: the company trails down. 668 00:41:49,760 --> 00:41:52,760 Speaker 1: Holly This has been great stuff. Thank you so much, 669 00:41:52,960 --> 00:41:56,800 Speaker 1: Holli Utland, Managing director at Alex Partners. It's been a 670 00:41:57,160 --> 00:41:59,720 Speaker 1: real pleasure having you on the Credit Edge. 671 00:42:00,080 --> 00:42:02,560 Speaker 2: Many thanks for joining us my pleasure. 672 00:42:03,160 --> 00:42:06,560 Speaker 3: For more credit analysis, go to BI cred that's BI 673 00:42:06,760 --> 00:42:11,480 Speaker 3: space cried on the Bloomberg terminal. Bloomberg Intelligence is part 674 00:42:11,480 --> 00:42:14,759 Speaker 3: of our research department, with five hundred analysts and strategists 675 00:42:14,760 --> 00:42:19,200 Speaker 3: working across all markets across the globe. Coverage includes over 676 00:42:19,239 --> 00:42:22,239 Speaker 3: two thousand equities and credits and outlooks on more than 677 00:42:22,360 --> 00:42:27,319 Speaker 3: ninety industries and one hundred market indices, currencies and commodities. 678 00:42:28,239 --> 00:42:30,560 Speaker 3: Please do subscribe to the Credit Edge wherever you get 679 00:42:30,600 --> 00:42:34,560 Speaker 3: your podcasts. We're on Apple, Spotify and all other good 680 00:42:34,640 --> 00:42:38,960 Speaker 3: podcast providers, including the Bloomberg Terminal at B pod Go 681 00:42:39,239 --> 00:42:43,000 Speaker 3: that's bpod space go. Give us a review. It helps 682 00:42:43,080 --> 00:42:45,240 Speaker 3: us spread the word, and please do tell your friends. 683 00:42:45,560 --> 00:42:48,200 Speaker 3: I'm Steve Flynn. It's been a pleasure having you join 684 00:42:48,280 --> 00:43:07,320 Speaker 3: us again next week on the Credit Edge.