Factors and their Funding Costs – Part I

In recent years, finance companies like Wells Fargo, CIT and Bibby Financial have benefited from historically low interest rates, a credit cycle that has been buffeted by the Federal Reserve pumping money into the system, reduced competition from banks (because banks are focused on capital and regulatory issues) and the slow growing (not retracting) economy.

If you look at the existing factors, there are only five or six prime factors in the U.S. that have their own credit departments.  Only two of these factors are banks- Wells Fargo and CIT. The downside to being a bank is they are governed by Basel regulatory capital rules which are punitive to non investment grade and non rated corporates  see More Regulatory Capital, less Trade Finance?

The plus is they have access to cheap deposits, particularly Wells Fargo.  Remember banks like Wells Fargo and CIT are considered Too Big Too Fail, and therefore enjoy some discount to their true costs of raising funds due to the implicit government backing.

Other factors like Rosenthal, First Capital, Capital Business Credit and Bibby Financial must rely on various sources for capital, including banks lines and private equity. Bibby Financial is owned by the Bibby Line Group, a diverse conglomerate across a range of industries from shipping to financial services so there is probably some intra company funding schemes that go on.

That leads to the question of what is the weighted average cost of capital (“WACC”) of factors.  WACC is defined as a firm's cost of capital in which each category of capital is proportionately weighted.  All capital sources - common stock, preferred stock, bonds and any other long-term debt - are included in a WACC calculation.  This is by no means an easy calculation to do.

During the financial crisis of 2008, it looked like many factors were going bankrupt and funding costs were dear.  Times have changed, and the large factors have restructured their balance sheets to be more competitive.

In our next post, we will take a look at CIT’s funding cost more closely.

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