Adds analyst comments, latest share price
NEW YORK (Thomson Financial) - Shares of Talbot's Inc. were battered early
Wednesday following its disclosure that HSBC is no longer prepared to continue
making letter of credit facilities available to the company. In addition, in a
Form 8-K filed after Tuesday's closing bell, the company said that Bank of
America has determined it won't provide a new facility or allow new drawings on
an existing $130 million letter of credit that expired on Feb. 23.
The stock was down 28.2% to $9.22 in morning action, putting it atop the
percentage decliners list on the New York Stock Exchange. Volume of 2.15 million
was already more than double the issue's 30-day daily average of 994,819.
In the 8-K, the Hingham, Mass., apparel retailer said HSBC made its
notification on April 9. The notification followed a reduction in the prior
letter of credit facility limit to $60 million from $135 million on April 8.
HSBC now plans to phase out its commitment to Talbot's, lowering the limit to
$45 million on May 8 then $30 million on June 9 to $15 million on July 8 until
the facility is cancelled on August 8.
Talbot's, which also disclosed an extension of its $18 million revolving
credit agreement with Mizuho Corporate Bank Ltd. to April 10, 2010, said it has
recently negotiated 'open account' payment terms with the majority of its
current merchandise vendors and that it may pursue similar deals with other
vendors. It also plans to pursue new letter of credit agreements with other
lending sources.
If it's not able to secure new letter of credit agreements, Talbot's said it
plans to purchase inventory "without utilization of letters of credit, subject
to the availability of cash on hand."
On March 12, the company reported its unaudited fourth-quarter results,
posting a loss of $171 million, or $3.23 a share. At that time, it said cash and
cash equivalents stood at $25.48 million as of Feb. 2.
Oppenheimer weighed in on the news, saying it believes the best case
scenario is that the company finds letters of credit "at a much higher cost" or
it changes terms with its vendors. The firm also thinks Talbot's may be forced
to cut its inventories in order to reduce working capital needs.
"Bottom line is that TLB is to see its operations hurt and/or financing more
expensive; we would expect a hit to cash and earnings. It also raises concerns
as to the ability of TLB to access capital to finance future growth, which in
part is dependent on TLB's ability to improve fundamentals," Oppenheimer said.
The firm, which has a perform rating on the stock, said the company's most
difficult period may be ahead as its financing needs tend to peak in the second
quarter. For comparison, it noted that Talbot's had letters of credit totaling
$172.2 million for last year's second quarter while this year, as of June, it
will only have the $18 million letter from Mizuho and a remaining $15 million
from HSBC available.
"Clearly, TLB will need to find a new form of financing," Oppenheimer said.
"But with two major banks walking away it won't be easy and financing will not
be cheap."
Stifel Nicolaus shared a similar sentiment. The firm said the news itself
was a surprise because the company gave a confirmation of its liquidity on its
recent fourth-quarter conference call.
"While we believe TLB can work through this pressure on liquidity, the
situation gives us cause for concern," Stifel told clients. "These banks have
access to more detailed financial data than is publicly available and their vote
of no confidence given their greater insight raises question."
The firm reiterated a hold rating on the stock, saying it believes Talbot's
can work through the pressure on liquidity, noting options such as sell its
credit card receivables, forgoing a dividend payment in 2008, the sale of J.
Jill or even raising capital through an equity offering.
It said it expects the stock price to be under pressure in the near term
until visibility on its turnaround efforts improves.
Michael Baron
mb/mb
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