A rapidly shrinking lending landscape

Posted on Written by Reagan Haynes

Dealer concern mounts as Textron’s pullout leaves only GE and Bank of America as floorplan players

Still coping with the September loss of KeyBank as a retail and commercial marine lender, the industry was dealt another blow in December when Textron Financial Corp. said it is quitting marine floorplan financing.

The pullouts leave boat dealers with a dwindling number of financing options, particularly at the floorplan end, where only two major players remain.

Meanwhile, Buffalo-based M&T Bank and Baltimore-based Provident have announced a merger scheduled to take place in April, raising the possibility that another retail lender will be lost. Both banks handle marine loans, but they specialize in different segments of the market, and some in marine finance question how they would integrate those operations.

M&T had pulled back to operate in its footprint area of the Northeast. It is dealer-focused and concentrates on smaller boat loans, according to Don Parkhurst, past president of the National Marine Bankers Association and senior vice president of SunTrust’s marine finance unit. Provident, on the other hand, does a lot of business through marine finance companies, and focuses on mid-sized and larger loans.

A spokesman for M&T says he doesn’t know how or if marine lending will change in the future.

“As of today, both banks will continue to do what they’ve always done,” Phil Hosmer of M&T said at the time of the merger announcement. “It will be business as usual, and as the process continues, hopefully in the second quarter, we’re going to look at our business lines and figure out the best way to integrate them.”

Capital One, too
Capital One, based in the Washington, D.C., area, also pulled out of retail marine lending in late December, according to NMBA president Jim Coburn, vice president of consumer lending at Flagstar Bank.
Several calls to Capital One were not returned, although three industry insiders, including one Capital One employee, confirmed the bank is no longer taking marine applications.

Capital One had merged in 2006 with North Fork Bank, a Long Island, N.Y.-based institution known for a focus on yacht loans in excess of $1 million. The bank reportedly lopped off its marine lending branch in December.

Coburn says Textron’s departure from commercial finance is particularly disappointing.

“This is not good news for the industry, as floorplan product availability continues to diminish,” Coburn says. “Considering the state of the U.S. economy and Textron’s relationships with lower credit-rated business, their move is not surprising.”

As for what happens next, it’s anybody’s guess, Coburn says.

“Consumer confidence and product sales must start making a comeback before we see improvement or new floorplanners seeking opportunity,” says Coburn. “Until that happens, all businesses, including lenders, will continue to operate in cost-efficiency and back-to-basics mode.”

Floorplan squeeze
Though he was largely positive at the National Marine Bankers Association annual meeting in November, Coburn warned that floorplan financing is in a precarious situation. And that was before the departure of Textron, which analysts estimate held a market share of between 10 and 15 percent.

Since GE’s retail unit pulled out of boat financing in June, its floorplan customer base has become understandably nervous, Coburn says.

The loss of Textron and Key leave GE Commercial with an even larger share of the marine floorplan market, and analysts worry that some of the marginal dealerships on which Textron had focused might not find another source of inventory financing and will be forced out of business.

Stephen White, spokesman for GE Commercial Finance, would not say whether GE would pick up dealer floorplan lines that were displaced by Textron’s departure, but reiterated that GE had no plans to leave the industry.

“We remain committed to providing floorplan financing to our marine dealers,” White says.

Shakeout coming?
If those marginal businesses left without financing by the Textron pullout don’t get picked up by someone else, the result will be fewer boat manufacturers and fewer dealers in 2009, Coburn predicts.
At least one major manufacturer agrees.

“When this thing starts subsiding and things start turning, we are going to lose an enormous amount of manufacturers,” says Irwin Jacobs, chairman of Genmar Holdings, the nation’s second largest boatbuilder.
Genmar already is looking at setting up in-house floorplan finance options, so dealers won’t be left high and dry if their sole source withdraws.

Now the industry is down to just two major wholesale lenders — GE and Bank of America — although occasionally a dealer can make an arrangement with a local bank that doesn’t offer wholesale financing as a product, but wants to hook up with a good customer.

“There is no way that these two remaining players, with all of their own significant issues, will have any desire to help displaced Textron dealers,” says Larry Russo Jr., owner of the 68-year-old Russo Marine in the Boston area. “This will force this group of dealers into a desperate situation, causing more pain than they can possibly sustain. Survival for these Textron dealers will be very difficult at best.”

A few years ago, Russo was one of KeyBank’s biggest floorplan accounts. In 2006, the dealership that operates in three New England locations took on the Sea Ray line. The following year, Russo switched floor lending to GE, which offered him a better rate through its Brunswick Acceptance partnership with Brunswick Corp.

Don Galey at Galey’s Marine in Bakersfield, Calif., says his 70-year-old dealership used Key for retail, but stays loyal to GE for floorplan finance.

“However, it would be good if more banks were in, because it creates more competition,” Galey says. “Not only to do the wholesale or flooring, but also retail.”

Their own priorities

All dealers should be prepared for the possibility they will lose floorplan financing, Galey says.

“You always have to keep your options open, because the board of directors at KeyBank or GE are going to do what they think is best for their bank and their stockholders, so nothing’s etched in stone. We can weather any downturn or storm for months, or even years, because we plan to be here.”

Fred Pace, managing partner of Legendary Marine in Florida, thinks some dealers take things for granted and assume floorplan finance will always be there for them.

“The ability for small, medium and large dealers to get a reasonable amount of floorplan financing was easy, and I think the current economic environment will change that, and it will become more difficult for dealers to get the floorplan they need,” says Pace.

Legendary, which operates four dealerships in Florida and one in Alabama, has been using Textron as a secondary source of floorplan finance, “but it appears that will change,” Pace says.

“It [the Textron and KeyBank withdrawals] certainly makes us take a different view of our relationships going forward with floorplan lenders,” Pace says. “It has certainly become a bigger part of our business … If GE were to exit the industry, it would have an enormous impact. It would change as we know it today. I think we’re all very hopeful that GE remains an active floorplan lender.”

More than money
GE provides important data that helps Legendary not only in market registrations, but also in determining what product lines are doing well in various geographic areas.

“That particular information has become more and more important,” Pace says. “It’s something our dealerships look very strongly at and review with management teams.”

Pace applauds Jacobs’ possible venture into in-house floorplan financing.

“He’s uniquely positioned to do things other manufacturers can’t,” Pace says. “We think Irwin is thinking out in front in order to enable his dealers to secure financing during these times. Brunswick is equally committed to helping its dealers.”

Bruce Hawthorne at Camano Marine in Camano Island, Wash., also worries about GE pulling the plug on floorplan financing. Like most dealers, he knows a colleague who was left in the lurch when Textron dropped out.

Retail still tight
Despite experts’ warnings that floorplan finance is in a shakier position than retail, many dealers continue to say they are unable to get boat loans for viable customers.

Declining marine sales, combined with the credit crisis, are forcing lenders to re-evaluate whether they can continue to make boat loans while they focus on deposits and recapitalize, Coburn said at the NMBA conference. About half of the marine lenders who have left the field since 1999 have cited margin and front-end profitability as reasons for dropping out.

While retail financing has gotten a little trickier with the departures of giants like GE and KeyBank in 2008 (and others such as Wachovia, Regions and Citizens), loan money is available for the qualified buyer, Coburn says. The difference is that risk criteria have reverted back to where they were 15 years ago.

Russo, though, says he has been squeezed more on the retail side.

“We’re down to two retail lenders,” he says. “We [had] 10 last year, and now we have two. KeyBank was our big source. For a lot of large dealers of our size, KeyBank was the go-to source.”

In-house operation
Galey’s uses its own in-house F&I department to place loans, but is feeling the pressure of the dwindling number of lenders. Still, having the department on the premises helps, Galey says.

The in-house F&I people hone their knowledge of individual lenders. They learn, for example, which banks might accept someone with a lower credit score, or which will accept a smaller down payment.

The science is even more precise than that. Some banks are more likely to approve in the last four or five days of the month and more likely to deny loans in the first week of the month, Galey says. And, fortunately for him, lenders tend to look not only at the borrower, but the seller, too.

“Even with all the laws and regulations that banks have today, they’re still human, so the human equation is part of it,” Galey says. “The lender might do more for our organization than other dealers because they know us; we cover six acres and we’re the oldest in California … so the lender feels more comfortable.”

In Washington state, Hawthorne says retail financing is not his biggest concern. “We need customers to sell to,” he says. “Nobody wants to buy any boats.”

The real problem

“This isn’t a bank problem, it’s a market problem,” Russo agrees. “There aren’t enough buyers out there right now who are able to pay decent prices for boats.”

Camano Marine often uses Craigslist.org to buy boats with good results, Hawthorne says. But because of the glut of repossessed boats on the market, he had one potential buyer asking to pay $95,000 for a boat priced at cost for $140,000.

It’s a lack of buyers that leads banks to pull out of marine lending, Parkhurst says.

“As an industry, it doesn’t help us to sit around and point fingers and place blame, because we’re all in this together,” Parkhurst says. “At the end of the day, it’s really that the boat sales aren’t there. It’s not the dealer’s fault or the manufacturer’s or the banker’s fault; it’s [that] the economy is bad. That’s why people aren’t buying boats.”

Don’t point fingers

The belief that there is no money out there for loans is not true, Parkhurst says, and has led people to misdirect their anger at the banks.

“It doesn’t solve anything to say it’s all the bankers’ fault, and there’s no money, because neither thing is true, and neither thing helps the marine industry,” Parkhurst says. “We need to move beyond finger-pointing and think, ‘What can we do to make the best of a bad situation?’ ”

Russo Marine says it did just that in December, pulling in more sales for that month than in recent years. Instead of taking the “lazy” approach, Russo says, employees did everything they could to get people into the dealership during the historically slow season.

Hawthorne is particularly enthused about an idea dealers came up with for the Seattle Boat Show in late January. Dealers can select customers from their files to receive VIP passes for a sneak preview the day before the show officially opens. The event is free for the VIPs, along with snacks and cocktails in a reception hall.

“I’m really excited about it,” Hawthorne says.

Quality slippage?

Parkhurst says the perception that loans are harder to get is partially because the quality of buyers tends to slip during a recession.

Some boat dealers agree with that, but others see it differently.

“We find that in a downturn, the customer is stronger, because one that is not strong knows he is not strong, so he is not reaching for the moon,” says Galey.

Galey points out that Bakersfield was the ninth-hardest hit area in the nation in terms of home repossessions and foreclosures, so his customer base isn’t typical.

“We’re not going to see that customer coming in here for years, because they know it takes credit,” Galey says.

Pace says there’s no question it is more difficult to buy a boat today than it was six months ago. Credit scores must be higher, down payments larger, and the applicant must have more capital in the bank.
Coburn says dealers should not expect a return to lax standards anytime soon — if ever.

Hitting the wealthy
This recession has been unique in who it has hurt, Parkhurst says.

“In a mild recession, you see that … luxury items still sell,” Parkhurst says. “But in this one, luxury items like diamonds and fur coats are off about 40 percent.”

That’s because stocks, retirement nest eggs and home values all have shrunk between 40 and 50 percent, Parkhurst says.

“You look at who that hits, and clearly it’s the wealthy,” Parkhurst says. “So this recession is hitting the wealthy really hard and causing luxury sales to be harder hit than others, and at the end of the day, boats are a luxury good.”

This article originally appeared in the February 2009 issue.

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