The Secured Lender - April 2009

J. MICHAEL STANLEY, managing director, Rosenthal & Rosenthal: The only thing I want to add to Barry’s thoughtful commentary is that this challenged environment ultimately causes the weaker retailers to fail. As far as the impact it has on the factoring business, factors generally thrive in two types of environments: a very rapidly expanding economy that requires the flexible funding that factors provide or an economy that’s caught up in this financial vortex that we are experiencing today. Many companies that haven’t used factors may migrate to factors today to shield themselves from the inherent risks associated with this downturn. They do this for two reasons: 1. To protect their receivables because factors have the tools available to anticipate which retailers are trending towards insolvency and can help suppliers to protect their business accordingly; and 2. to obtain financing which may not be otherwise available from banks.

So I don’t see this current market as necessarily bad for the factors. In fact, many factors are experiencing a surge in new business volume. Our overall results for 2008 were exceptionally strong. It may be too early to predict the outcome for this year, but new business activity certainly picks up in this type of environment.

STUART BRISTER, president & chief executive officer, Wells Fargo Trade Capital: I agree and would just add to what both of the gentlemen said. The bottom line is that the U.S. was over-retailed. There were also quite a few retailers that were operating with too little liquidity or that were over-leveraged — many at the hands of private equity players. Now, as we start to consolidate, we are seeing a regressing to the mean, which is definitely affecting our clients. First, there are fewer retail outlets available to our

clients, which ultimately impacts their top line. Second, as our clients start to move goods through other channels, their margins are narrowing, or they are lowering price points to maintain shelf space. Finally, we are seeing a trading-down effect at the consumer level, which makes it more difficult for manufacturers and importers of higher-end products to come down-channel. Those clients who are already at the mass or modest price point then feel the additional competition for shelf space and price pressure. On the other side, the factors are caught in a squeeze because of their ability to provide the appropriate customer credit coverage in a tough retail environment, while also ensuring that their clients have ample liquidity to weather the storm. This dichotomy has only gotten more difficult as the ability of the factors to lay off “ customer risk” through the traditional markets of credit insurers, re-insures, CDS markets, and/or puts from hedge funds has dried up. This is only magnified by the small number of factors that remain, the financial difficulties some of them have had and their ability to hold or maintain exposure levels.

But I agree with Mike in the sense that these trends and consolidations are benefiting those who have capital and the liquidity to stay the course. In fact, last year we had record sales with our factoring volume up over 30 percent and a significant increase in our loans outstanding. Wells Fargo Trade Capital is well positioned to take advantage of this flight to quality.

COVE: Have you seen more business from clients who formerly were able to get bank financing?

BRISTER: Speaking for Wells Fargo Trade Capital — and Barry probably has an interesting view on this as well — I can tell you we’ve had many

more traditional bank customers who have moved over to the asset-based lending world. I also agree with Mike that factors generally do well in both good times, as well as in tough times. Actually, it is probably more so in bad times because people are likely to move away from traditional banking as other financial intermediaries tend to dry up. Additionally, we saw a lot of pick-up in new business from other factors that were having their own troubles. Finally, we have seen opportunities with large corporate clients looking to factors for one-off purchases for liquidity reasons as the commercial paper market continues to be challenged. However, we realize this is a timing issue and that these opportunities will reduce once the capital markets open up again.