Analysis of GE’s rate increase

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Although GE’s rate increase will likely hit small dealers particularly hard, the company’s decision to increase its rates is a response to its own rising cost of funds, according to Don Parkhurst, past president of the National Marine Bankers Association.

“It’s not trying to run people out of the marine business,” said Parkhurst, a senior vice president with SunTrust Bank. “They’ve got to cover their own internal costs.” The increases “reflect what it costs them to raise money today.”

However, Parkhurst added, the substantial increase in rates could hurt many dealers, particularly those with smaller operations.

“These are going to be huge additional expenses for a dealership that is already straining to make its monthly payments,” Parkhurst said. “The dealers are going to take this real hard.”

Here are some details of the new rates, which go into effect April 1:

  • The new rate plan is based on a dealer’s average money loan balance and the age of the boat. The previous rates were based on average outstanding marine receivables per month, the percentage of business financed by GE, and the age of the boat.
  • A dealer with $99,000 or less in average monthly loan balances will now pay 14.27 percent, over the base rate, on a boat that is 541 days or older. That is the highest possible rate in the new rate table.
  • In the old chart, the highest possible rate was 7.17 percent, which would have been paid on a boat older than 540 days by a dealership with less than 50 percent of its business financed by GE and less than $2 million in receivables per month.
  • The lowest possible rate in the new table is 7.2 percent, over base rate. That’s for a dealer with an average monthly loan balance of $1 million or more on a boat up to 360 days old.
  • Under the old system, the lowest possible rate was 4.42 percent, which was for a dealer that did 75 percent or more of its business with GE, on a boat less than 540 days old and with $6 million or more in receivables per month.

The highest rate, Parkhurst noted, has almost doubled. Also, the lowest rate in the new chart is higher than the highest rate in the old chart.

“It’s a pretty big jump, a very big jump,” he said.

GE’s Commercial Distribution Finance business notified marine dealers in late February that it was increasing rates, saying the changes are necessary to provide the “level of service and liquidity the industry requires,” according to a letter from Bruce Van Wagoner, president of GE Capital Solutions’ Marine Group.

“Over the last several months, several marine wholesale and retail financing sources have exited the industry, retail boat registration numbers have fallen off dramatically, and many marine manufacturers have idled and/or rationalized their production,” Van Wagoner said in his letter.

Parkhurst said the increase is a reaction by GE to the internal cost of funds.

“They were losing money on all this business,” he said. “If you look at the money they borrowed from Warren Buffet at 10 percent, they were losing money on everything they did in marine floorplanning. They’ve got to have a positive return, and they’ve got to be able to pay their funding source back.”

— Beth Rosenberg
b.rosenberg@tradeonlytoday.com

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Comments

14 comments on “Analysis of GE’s rate increase

  1. Craig A Stigleman

    Unfortunately, this rate increase is only going to force more dealers into liquidation. While it is understandable, raising rates in a declining market, when dealers can least afford it, results in more dealers being forced out of business, which in turn further decreases dealer base and forces additional increases. We are in a downward spiral and nothing on the forefront from Washington gives hope of breaking this spiral. I applaud GE for remaining in the floor plan market and hopefully, for those of us that survive, we will see an upturn and a resurgence of boat sales for the remaining dealers. Surviving is the operative word.

  2. brad michael

    small dealers? this should put erery dealer out of business except a small handful that don’t floor plan. any body disagree with me that is a dealer? makes me want to puke!

  3. Curtis

    Because GE has made many bad lending decisions to large dealers who are now out of business. The dealers who are left are being made to pay for their mistakes. All of the distressed boats being dumped in the markets at 50 cents on the dollar make it very hard for the dealers still in business to sell a boat. Ge might just get the rest of the boats if something does not change. What happened to the money GE got from the government and zero percent?

  4. Boat Sales

    Most of this is driven by the age of the inventory in the system. Dealers are not turning inventory as before, and have little or no equity in the boats in their possession.

    It is tough to compete against liquidation sales, but dealers that continue to hold prices high are only fighting an up hill battle. If other dealers would be paying curtailments (principal) then they would have been encouraged long ago to turn the product (discount as needed) and keep their capital rotating/flowing.

    GE (Textron and others) let this turn into an interest only market and now are doing a 180 trying to correct the problems they allowed to grow in the first place.

    Survival ?!?! – it will be tough for many dealers and probably for a few of the lines we represent.

    But like the housing problems, we did it to ourselves, now we have to pay the price. (unless you can beg for a government bailout so that our kids, grandkids and great grandkids can pay off the Chinese)

  5. Johnny Konkler

    GE raises floorplan interest rates and changes terms….dealers let their inventory go back….the manufacturer has to buy it back…oops! they’re already hurting!…the inventory gets scattered across the country at 60% – 75% of invoice…oops again! now that takes sales away from other dealers and again hurts the manufacturer thereby causing more dealers to let their inventory go back and now we have manufacturers closing the doors and we begin again. Where is the getting off point?

  6. Gary Wilson

    What is disturbing is the cause and effect Nada’s Sept-Dec 08 publication’s devaluation ratio had on standing preowned inventory for dealers and wholesale underwriting groups nationwide. 11% across the board every boat brand, every model, every year. Combined with the depreciation of the two previous issues for the year most boats would have between 30-35% variance on value to the consumer on nada.com. This should have been a recinded issue. GE and Genmar were notified of the publication but nothing reflected true value in January 09 issue. Nada serves as a baseline for retail and wholesale underwriting and not to forget it is the only consumer forum for prospective boat buyers to measure what they should pay to a dealer or private party on offer to own. Overnight everyones preowned portfolios dropped 11% aggregate. Not to mention before winter season. Nada responded to inquires as to what analysis was used to substantiate the values, it was proprietary based with dealer advisory council input. No dealer would agree to the Sept-Dec issue values. This case alone has a enormouse impact on aging, lack of turn ratios, trade ins, loan advance both retail and wholesale, new manufacture turn ratios thus widening the gap of value between new vs used values stregthening only the consumer and not the dealers who are the only entity in this industry that can heal the market. GE’s increases, retail underwriting advance guideline restrictions and tightening and continued dealer losses are in fact a direct relection of nada in lieu of what dealers continue to be told. Not to be interpeted as abusive simply fact based. Interested to see if this one is posted.

  7. Jerry

    It was just a few years ago GE was bragging on how profitable GE money was and a lot of us dealers were also profitable. Now with things like they are, the dealer is now going to pay the price for GE to break even. We try to save money for hard times, what happen to the money GE made just a few years back? I don’t know a dealer in my area who can survive with these arrangements. How can it be profitable for GE to take back inventory, sell it for 45% of its invoice value at an auction, minus transportation cost and commissions? Why not come to some agreement between the dealer, GE, and manufacture on what lost is acceptable and let that dealer try to find a buyer or outside financing for the inventory. That keeps everyone in the game and also reduces the losses for everyone. But I believe GE’s true intent is to exit the marine market, and with that, paints a dismal future for us all, if its not here already!

  8. Boating Gal

    Our dealership–which my husband and I started nine years ago–has been blessed with steady, solid sales growth each year, despite all the ups and downs of the marine industry (not to mention the world) during the past decade.

    First came 9-11 and the fear and turmoil that followed, but we survived and we grew. Then our region endured catastrophic weather over several years: floods, tornadoes, ice storms, and still we survived and we grew. Then last year: the gas prices, the foreclosures, the layoffs and unemployment, and still we were surviving it. Indeed, we still were showing some growth, albeit with smaller margins being made, to be sure.

    We survived because we provide the kind of excellent customer service you can’t find in the chain or superstore mentalities.

    But can we survive the latest blows that the consumer lending industry, the floor plan companies exiting, and GE have now dealt us? Or will this be the ‘knockout’ punch? Only God knows. But I do know this: small business is as much the backbone of the marine industry as it is for the rest of the country. If we go down–as seems intended by GE’s new program terms–it won’t be just us and our employees who suffer from the impact…

  9. Tom

    Didn’t anybody learn anything when the government imposed the 10% luxury tax. Boating over $100,000 took a 70% bath. Looks like we’re in for another…hope you have your life jacket on because it’s going to be a rough one!

    Ps. One solution may be to keep the old rates and have the extra go to paying down the balance instead of both the higher rates and curtailments at the same time. Dealers who are in trouble need help to keep alive not help to bury themselves.

  10. Danny @boats4u

    This whole economy makes me sick when it comes to what we the boat dealers have done wrong. WE HAVE DONE NOTHING WRONG, we have done our best to take care of customers and provide something special for the industry. The moves GE has made will certainly hurt many of us and destroy many as well. It is a shame GE is not working with the dealers to get through these times. Our store might survive if we can meet the unacceptable and unreasonable demands GE has now implemented.

  11. MTECHMARINE

    Anybody here remember 1980??
    When interest rates were 22% and the banks wouldn’t finance boats.
    Floorplan? “You need an alternate source of collateral”.
    Since the advent of matched units and megadealers this business has backed itself into a corner and now it will suffer.

  12. Dennis Morgan

    We are a mom & pop boat dealership that has fought the odds for 10 years in this industry. We so far managed every year to keep our 8 employees working all year with no lay offs. We have paid GE over $50,000.00 in interest. Paid curtailments when possible and the lights are still on. The bottom line is GE does not care about helping us but only making sure their credit rating and bottom line is profitable. They, I feel want to exit the marine business totally and rather than just get out of it they are going to force most of us to go out of business this year. No dealers no marine business.
    No matter what we as dealers do, they GE, will make sure they make the money. Good luck to all this year and does anybody want to buy a cheap boat?

  13. arch

    This new G.E. position is terribly unfortunate, BUT IS ANYONE SURPRISED? If you are, you are out of the loop. GE isn’t in business to lose money. Just because it causes problems for it’s customers, that doesn’t mean they can ignore their cost of doing business and ignore their stockholders.
    IF MATERIALS AND LABOR COSTS ON BOATS DOUBLED, THEREFORE DOUBLING THE PRICE ON BOATS, ARE YOU GOING TO CONTINUE SELLING BOATS AT THE SAME PRICE YOU DID BEFORE IN ORDER TO BE “FAIR” AND NOT PUT A BURDEN ON THE BOAT BUYER? Of course not, yet you expect GE to?

    I”m not trying to downplay this problem, which I know is a HUGE ISSUE, but let’s be realistic here.
    Do we need representation? Absolutely. From us individually, to our local marine trade associations, on up to NMMA. We need to hit the phones, send faxes, letters, etc. Somebody should organize a movement, an action plan. NMMA or whoever the industry chooses to represent us, needs to contact GE and try to work something out.

  14. nanotagger

    I am disappointed that the SVP of a Bank of SunTrust size would describe the Berkshire Hathaway investment in preferred stock, with 10% dividend, as anything having to do with GE’s cost of funds. Clearly GE funds its lending activities through sales of commercial paper, which at the moment are partially being purchased by the US Treasury from GE, with rates in the range of less than 2%. GE’s cost of funds is no where near the “Buffett” loan of 10%. There is a big difference between capital (which is leveraged in GE’s case somewhere in the 20 to 1 range) and the cost of short term loan funding borrowing. I would expect a little more financial sophistication here. GE is in it for the money and with the competition gone, this is their rate. it is not like the dealers have a lot of options…. but I do think GE is going to end up owning alot of boats…..

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