NEW YORK, April 22, 2020 /PRNewswire via COMTEX/ — NEW YORK, April 22, 2020 /PRNewswire/ — COVID-19 will cause a huge spike in asset dispositions across multiple sectors once the economic recovery begins, advised Dan Kane, Co-Founder and Managing Member of Tiger Capital Group, in a podcast interview with The ABF Journal posted on April 20.
Retailers, manufacturers and distributors will be particularly hard hit due to the cascading economic effects of the pandemic, Kane told Phil Neuffer, managing editor, in the fifth episode of the magazine’s podcast series exploring the effects of COVID-19 on the ABL industry.
“We have all heard how the United States is so over-retailed compared to other countries,” Kane said, noting that many chains were teetering even before the pandemic. “This event may expedite the reduction to get us where a lot of the other countries are in terms of retail square footage … I don’t see how the next year or two are not going to be very busy in retail store closings, unfortunately.”
[vimeo id=”408529412″ width=”600″ height=”350″ autoplay=”no” api_params=”” class=””]For now, though, lockdown orders make it impossible to run selective store closure sales or going-out-of-business events, Kane noted. “Until it is safe for employees and consumers to go shopping again, we just cannot run sales [via brick-and-mortar channels],” said the veteran ABL executive, who has nearly 30 years of experience in the disposition and appraisal of consumer goods, commercial and industrial assets, real estate and intellectual property.
When economic activity starts to resume, moreover, the unknowns include whether consumers will feel safe enough or have enough money to resume shopping and whether altered business practices will dampen sales. “We’re already hearing that certain locations may not even accept cash because of the dangers associated with touching the money,” Kane said.
In the meantime, the shutdown will continue to hammer a wide range of industries. Vendors that supply retailers, for example, typically lack signed purchase orders until their goods are ready to ship. As a result, they’re getting stuck with cancellations. The lockdowns also threaten to leave retailers with massive amounts of out-of-season merchandise. “And think about how many retailers and others cannot afford to pay their rent now, as well was what’s happening to those who supply food to restaurants, all of the workers there,” Kane said. “There is so much less trucking going on these days. In auctions, we have seen reductions of 25 percent on the price of trucks.”
Oil and gas, too, has cratered. “Oil needs to be at $40 or $45 a barrel for producers to make money,” Kane noted. “Today it’s something like $20.” In the 15-minute interview, Kane described how Tiger has pivoted by relying more heavily on data in its approach to retail and wholesale inventory appraisals, which have continued during the pandemic. He noted that machinery and equipment appraisals are largely on hold because they typically require in-person examinations.
During the discussion, Neuffer asked Kane about the effects of the pandemic on junior debt and mezzanine lenders. [Tiger’s financial services practice provides junior secured debt (tranche B, mezzanine) financing and equity capital.] In his candid response, Kane described the situation as “scary” right now. “You’ve got the bottom 20 percent of the loan, and all of a sudden there is just a massive drop in asset values everywhere,” he said. “It is really hard. These loans are just much riskier.”
Pricing new loans is challenging as well due to the unprecedented level of uncertainty, he added. As lenders try to account for such risks, borrowers could end up facing more conservative advance rates and higher reserves and pricing. “No one ever envisioned that you would almost have a total shutdown of the economy like this,” Kane said.
While retail liquidation sales are on hold, Tiger’s Commercial & Industrial Division has been able to conduct online auctions —a longstanding focus of the company—that generated solid returns for sellers. “We actually had two auctions [of professional audio/video gear] in March that we were very happy with,” Kane noted. “We had a very high number of registered bidders and an extremely high sell-through, which was encouraging.”
Until the pandemic passes, asset-based lending will face challenges, but stakeholders should be planning now for the next turn of the cycle, Kane advised. “Think ahead, because at some point the recovery is going to start, and you want to be ready to act very quickly.”
In closing, he pointed listeners to Tiger’s new for lenders, which ranks the risk of various inventory types based on the work of Tiger’s analytical teams.