Companies that have stockpiled more goods during the coronavirus pandemic are turning to creative strategies to put inventory to work and generate cash.
The tactics include tapping firms that specialize in buying and holding inventory for other businesses, as well as more traditional measures such as borrowing against inventory to stay afloat.
Companies “want to get as much liquidity as they can to get through this period and beyond,” said Steve Box, a senior adviser to Channel Capital Advisors LLP.
Inventories for retailers, manufacturers and distributors ballooned as factories and stores shut down and consumers stayed home during the extensive lockdowns in the early weeks of the pandemic. Adding to inventories, companies stocked up on goods and raw materials to ward against shortages caused by snarled transportation routes and other supply-chain difficulties.
Some stockpiles have thinned out, but many companies say they expect to keep more goods on hand as they navigate an uncertain economic recovery. A second-quarter survey of supply-chain executives by consulting firm McKinsey & Co. found that nearly half of respondents said they would increase their inventory of critical products owing to weaknesses laid bare by the pandemic.
Mei Yee Pang, who leads the global supply-chain practice at DHL Consulting, said transportation constraints have helped push companies to add more inventory. Companies are moving more goods by ocean as flight capacity has shrunk, adding to transport costs. Because it takes longer for goods to arrive by sea, companies need to order more per batch and store more products, she said.
The cost concerns have businesses looking at a variety of techniques aimed at turning the carrying cost of goods into cash until demand is more certain, stoking interest in firms that buy and hold inventory on behalf of their clients.
One such outfit, Falcon Group, says it is signing up more clients for that service this year as companies adopt “just-in-case” supply-chain strategies that require more buffer stock and move away from lean, just-in-time principles aimed at paring inventory costs. Executive Chairman Kamel Alzarka said companies showing interest recently include telecommunications and technology firms that tend to use high-value parts.
Falcon, which has its main office in London, places the inventory on its own balance sheet, taking on the cost—as well as the risk that clients may abandon the goods. In 2013, for example, Falcon was left holding 749 cars that it had to offload to second-tier auto-dealers.
Companies like Falcon typically buy the inventory at one price and then sell it to clients, adding a charge that includes storage and transportation costs, supply-chain experts say, as well as a fee meant to offset the risk they take on with the inventory.
Oliver Chapman, chief executive of OCI Ltd., said the British trading company has seen a 42% increase in inventory requests from six months ago.
In one instance, Mr. Chapman said, a private-health firm approached OCI in April, in the early days of the pandemic, looking to store personal protective equipment without knowing when or where it would need the gear. OCI bought £100 million ($126 million) worth of PPE, predominantly masks and gloves and mostly from China, and stored the supplies in the U.K.
Some inventory holdings are being turned into investment mechanisms. U.K.-based [email protected] Capital PLC said it sets up a special-purpose vehicle that buys goods and raw materials from a client, using money from outside investors who receive bondlike securities in return.
The company’s client roster swelled in the second quarter to 100 from 60. Some were doing business in Italy and were seeking new sources of cash, fearing the country’s coronavirus outbreak could trigger a credit crunch in its rickety banking system, said Chief Executive Alessandro Zamboni.
Another method companies are turning to is asset-based lending, in which firms use inventory as collateral to secure loans. It shows up as debt on the balance sheet, but allows access to immediate funding.
Asset-based lending is a longstanding tool, with volumes totaling around $95 billion in the U.S. last year, according to Refinitiv LPC. Large banks including Wells Fargo & Co. and Bank of America Corp. are active players in the market.
Macy’s Inc., which closed its stores from mid-March to early May, in June set up a $3.15 billion asset-based borrowing facility for which it posted almost all its inventory as collateral. Douglas Sesler, who led the retailer’s refinancing, said the use of inventory was essential to making lenders comfortable with a larger facility.
The pandemic raised a challenge: Banks couldn’t make sure all the inventory they were lending against was in place. They applied a small discount to the stock Macy’s has on paper, which will be reduced when the lenders are able to check stores and warehouses.
One New York-based lawyer said he is fielding more requests for asset-based lending from investment-grade companies that ordinarily would tap bank loans or the bond market but now can’t get those deals done.
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