You Know the Economy is Bad When …
Chalk this Wall Street Journal story (registration required) up to a sign that the credit markets must be really tight. Apparently, the credit markets have been so challenging these past few weeks, it's been all but impossible for companies debating a bankruptcy filing to obtain the often necessary debtor-in-possession (DIP) financing to manage the costs for "lawyers, layoffs and other restructuring necessary for a company's rebirth." According to one expert quoted in the story, "the number of lenders willing to do DIP financing has shrunk in recent months from 30-plus in the heydays of 2006-07 to maybe five or six now." Perhaps the silver lining in this is that if your suppliers were debating a bankruptcy filing, you may get a respite of a few extra weeks or longer while they search the factory floor or the server room for the pennies they'll need to file the actual papers. In all seriousness, however, this is but further proof that the great majority of companies are going to have to learn to manage through supplier insolvencies in the midst of the credit crunch.
- Jason Busch
- Jason Busch
I'm getting ready to post a short piece next week on one of the dirty little secrets in retail -all retailers of all shapes and sizes have asset based lines of credit that they use to buy landed merchandise. As far as I can tell from my research, the largest tend to not bump up against the edge of the line, but mid-sized and smaller ones surely do.
The thing about these loans is they are heavily laden with covenants. With a bunch of very nervious bankers out there, there is tremendous risk if a company falls out of covenants (covenants vary by type of merchandise sold and business model) the loans will be called and the company pushed into chapter 11.
This is a serious matter, and will constrain retailers in more ways than can be described in one paragraph. It's a big deal.