From his unique perch as the CFO of First Capital, a factoring company that borrows from commercial banks in order to provide asset-backed loans to manufacturers and distributors, Mark Hogard sees the current financial crisis in a way that other folks might not. “I don’t think people in mainstream America are actually seeing how severe of an issue this is if they don’t have an account at Lehman or Washington Mutual. They haven’t been feeling the effects yet,” he says. “They will.”
Working for a company that forms something of a bridge between finance and the economy at large, Hogard also foresees dire times ahead for both companies like his and consumers if Congress is unable to agree on an effective bailout plan. “There is a potentiality for the credit tightening to become worse, making it harder to obtain loans, and for the lack of credit to push us into a severe recession. Rates like Libor [the London Interbank Offered Rate] would continue to spike and increase the cost of borrowing for companies like us,” he says.
For consumers, “it will be more difficult for them to get mortgages, second mortgages,” he told CFO.com, noting that many will see “friends that become victims of layoffs. Hopefully, it won’t happen to them.”
Indeed First Capital, a private West Palm Beach, Florida-based company with $1 billion in total assets and annual revenue of $80 million, is already feeling the effects of the doubling of Libor’s overnight dollar rate on September 17. The company has a financing facility based on Libor that is refinanced once a month and is thus “bracing” itself for a stiff rise in the cost of borrowing, according to the finance chief.
Hogard also expects the company to be hit by the rise in the cost of capital raised via commercial paper. Although it isn’t a direct issuer of commercial paper, the company’s lenders pass along the cost of commercial paper they issue to back loans to First Capital. “So when commercial paper [borrowing rates rise], that increases the cost of borrowing for us,” he says.
The company has caught a break, however: its only involvement with the major players in the financial meltdown is that its commercial and directors’ and officers’ liability insurance policies are with AIG. But the insurance isn’t material to the company’s finances, says Hogard, noting that he’s received assurances from First Capital’s insurance agent that the ailing company’s insurance subsidiaries are financially solid. Still, the CFO says, he’s keeping “a close eye” on AIG’s fortunes.
Since First Capital’s main product is an asset-backed loan against a client’s receivables and inventory set at a floating rate, Hogard’s main challenge is to keep its borrowing — which is also variable-rate — in proper balance with its lending. The company’s business strategy is to make commercial loans to manufacturers and distributors, rather than consumers. Further, it has done no subprime lending and “very little commercial real estate” lending, he says.
Up until now, the company has been able to keep its profit margin stable by passing rate increases along to its borrowers, according to the CFO. “We’ve been able to maintain our balance sheet with plenty of excess capital and excess lines of credit,” he says.
Hogard thinks the company will be able to stay in balance throughout the crisis. “The best thing we can do is to make sure we keep excess capital and credit available so we don’t overleverage the company,” he says. In the current crunch, that might be the worst thing it could do.