MEDIA: Podcast
WEBSITE: http://www.thestreet.com/
DATE: 05/17/07
PROGRAM: TheStreet.com TV - Executive Interviews
SUBJECT: Interview w/ Mark Sunshine, First Capital
Gregg Greenberg, Reporter:
Welcome to the TheStreet.com TV, I’m Gregg Greenberg, reporter for TheStreet.com. Joined today by Mark Sunshine. Mark is the president of First Capital, which focuses on traditional factoring and asset-based lending. Mark’s here to discuss credit quality in middle market companies, welcome Mark.
Mark Sunshine, President, First Capital:
Thank you, thank you for having me.
Greenberg:
Alright. First of all, tell me about First Capital.
Sunshine:
First Capital is a financial services firm headquartered in Florida, with operations both in the United States and in Asia. We finance middle market companies, providing senior security, working capital for those middle market companies, credit protection on their accounts receivable and outsourcing services; accounting, book keeping, collateral management and treasury services.
Greenberg:
So you’re involved in all parts of the lending process. Tell me, where is credit quality right now?
Sunshine:
It’s interesting you ask. Credit quality in most sectors is stable to improving. However, there are a few sectors where credit quality, we believe, is still weakening. Those principally are the auto, and auto parts industries, housing and related industries to housing, as well certain other industries where there’s a lot of buyouts by private equity firms, that have heavily leveraged their target acquisitions.
Greenberg:
Ok, let’s talk about housing first because obviously that’s in the headlines. An most people’s main asset. Ben Bernacke is out there today saying that the housing slump may get a little worse but it’s not going to spill over, those bad sub-prime loans aren’t going to spill over. What do you see form your perspective.
Sunshine:
Well Mr. Bernacke has the advantage of being able to control policy and therefore half of that can be a self-fulfilling prophecy. However, I think that there is going to be a spillover effect. I think certain regions; the south Florida region for example, if the housing and construction boom slows down there could be a very significant spillover effect. We’re looking for regional softness in areas that are in fact very heavily housing dependent.
Greenberg:
But is the Florida peninsula an anomaly? Because people keep talking about Florida, but you hear a lot about house flipping down there, people are going to flip more houses there as opposed to the Midwest.
Sunshine:
Um the Florida peninsula is a little bit of an anomaly but there are other regions of the country that have similar speculative building booms that took place. And let’s remember, Florida is the fourth most popular state in the country. It’s a very large anomaly that could in fact drag down the entire Southeast.
Greenberg:
Very important politically as well. Now let’s talk about the private equity leverage and that’s something you also alluded to earlier. You see these buyouts that are piling on the debt, taking companies private. Is that going to come back to haunt us?
Sunshine:
We think that if there’s an economic slowdown, not a recession, just a slow down in the growth of GDP. That a large number of companies that have been over leveraged, in our opinion, by the buyouts firms will have a problem having enough cash flow to service their obligations. We think that there’s a great deal of risk in the economy.
Greenberg:
How would that scenario unfold? And you can give an example of the retail sector, which is something I know you look at.
Sunshine:
The scenario would unfold in the retail sector with weakening sales and falling free cash flow in the leveraged retail firms and eventually a cascading series of defaults and bankruptcies. And a lot of the retail firms that have been leveraged, retail firms used to have real estate, lease hold interests, things that if they got into trouble, free cash flow fell down, they could then go and borrow against.
Greenberg:
Tangible assets.
Sunshine:
Tangible assets, that’s right. And the way that the buyouts have been done in the retail sector is all of those tangible assets, typically real estate related, have been moved over and the actual retailer is essentially an empty shell. Their inventories have already been hawked, they don’t own the real estate anymore, there’s really nothing there.
Greenberg:
What is the state of inventories? Because people are also worried with the consumer, whether or not they can keep spending. And retailers need to know how much they are going to stock on their shelves to meet that demand.
Sunshine:
Well, what we saw in our portfolio companies that ship to retailers, we saw a very weak April and so far a weak May. Which suggests that the retail numbers which were down considerably the previous month, have resulted in lower reordering by a considerable margin. That could have been a weather anomaly, could have been a gas anomaly, and could have been any number of things, that might self correct. But right now retail sales are not looking all that robust. Reordering is not particularly strong and it appears that retailers have a lot of inventory in stock.
Greenberg:
And with regard to First Capital, you are probably seeing a more inventories, everything is made in China, how is this affecting the way you lend against assets now?
Sunshine:
We have a very active part of our practice which is in fact lending and facilitating import/export trade between the United States and, if you will, the Asian Pacific, which is much more than China, other countries in the Asia-Pacific realm. It’s a different discipline to be able to effectively facilitate that trade coming out of Asia and into the United States, from both a lending collateral perfection, as well as remember we have our whole service side of the business facilitating that trade, getting the inventory cleared through customs. And making sure the Chinese manufacturers and US companies are in fact talking the same language, the same credit language and they same trade language.
Greenberg:
Finally, what’s your outlook for the rest of the year? Are we going to get an economic slowdown, are we going to see consumers shut down if gas prices shoot up, give me your economic feeling.
Sunshine:
Well I think I have to go with Mr. Bernacke, because after all what his feelings on what the economic outlook is, he can force it to happen by changing interest rates, changing monetary policies. And I think that Mr. Bernacke feels that the rest of the year is going to be robust and that the US economy is in a relatively healthy state. And I would expect policy to in fact facilitate those thoughts. So I have to go with where Mr. Bernacke is.
Greenberg:
Alright and I’ll go with you. Mark Sunshine, President of First Capital and I’m Gregg Greenberg with TheStreet.com TV. Thanks for being here, it’s always a pleasure.
Sunshine:
Thanks for having me.