During the last two years, Foothill Group Inc. has been forced to learn a new and unfamiliar way to make money--by losing it first.
The Los Angeles-based company had won praise in the 1970s and early 1980s as one of the nation's fastest growing and most profitable commercial-finance firms, lending to new or ailing companies unable to get enough money from conventional bank loans.
But the firm's brief foray into equipment leasing to Texas oil-service companies turned into a disaster, thanks to the energy glut and resultant collapse of oil prices. Foothill lost a combined $18.4 million in 1982 and 1983 and some thought it might follow many of its troubled oil-industry borrowers into bankruptcy.
But the losses apparently taught Foothill some valuable lessons. And today, after some painful restructuring--including office closings, layoffs, the sale of assets and management reorganization--and determined never again to stray from its primary business--Foothill is staging a dramatic comeback.
Profits, Morale Return
Replacing talk of bankruptcy is talk that 1985 will be one of Foothill's best years ever. Profits are back, as is employee morale, which was shattered by the cost-cutting moves a year ago. The company, proclaiming itself the nation's largest independent commercial-finance firm, confidently predicts that it will earn a 20% annual return on shareholders' equity.
Instead of publicity about its own troubles, the firm once again is attracting attention for its long-time role in helping other struggling companies. Foothill most recently has been in the news as a lender to United Press International, the troubled wire news service, and Oak Industries Inc., the ailing San Diego-based cable-TV and media company.
In both cases, Foothill not only stands as a potential savior, but also stands to make a pretty profit. Both also illustrate Foothill's success in serving high-risk businesses.
'Where We Want to Be'
"We serve these markets about as good as anybody," proclaims Don L. Gevirtz, Foothill's controversial co-founder, chairman and co-chief executive, adding that the firm is "right where we want to be" in its comeback.
To be sure, Foothill's problems are by no means over. The firm's level of bad loans, while down dramatically from the 1982 peak, still is high by historical standards and could rise again if the economy weakens. And the firm faces increasing competition from banks and other institutions with greater resources and access to cheaper sources of funds for lending.
But, analysts agree, Foothill's major energy-related nightmares are over. The firm has sold off much of its leasing equipment and written down the value of what remains.
"Any problems they will encounter in the future will be prospective problems, not based on what they have done in the past," says analyst Harold M. Levine of the New York-based securities firm of Arnhold & S. Bleichroeder Inc. "They certainly won't be hit again by energy involvement in Texas."
Foothill's painful lesson in sticking to the business that it knows best is a lesson being learned throughout corporate America these days, as companies that prospered by diversifying in the inflationary 1970s now are divesting themselves of many of their far-flung operations.
For years since its founding in the early 1970s, Foothill avoided diversification, amassing a string of profitable years by sticking to its core business of making asset-based loans to struggling companies or to start-up firms considered too new or speculative to suit bankers' tastes.
In recognition of the higher risk, the interest rates on these loans were sometimes as much as six or seven points above the banking industry's prime rate--the benchmark for loans to most credit-worthy borrowers--while Foothill's cost of funds typically was around the prime rate.
Heavily Secured Loans
However, Foothill structured the loans so that they were anything but risky. Unlike many conventional bank loans not secured by assets, Foothill's loans were heavily secured, usually by the borrower's accounts receivable, equipment or buildings.
To reduce its risk even further, Foothill typically secured far more collateral than the value of the loan, in some cases even securing borrowers' private homes. If the borrower went belly up, Foothill was usually first in line to collect its assets.
Such activity turned out to be very profitable.
"They made out like bandits," says analyst Levine of Foothill's profits from lending to Sambo's Restaurants Inc. during the restaurant chain's unsuccessful two-year effort to reorganize under Chapter 11 of the federal bankruptcy laws. Overall, Foothill lent to about 15,000 small- to medium-sized firms, and also financed several leveraged buy-outs and other takeovers.