Foorplan squeeze: reaction to GE’s rate hike

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30_floorplan_01The lender says it had no choice but to increase rates and that it is not exiting marine floorplanning

Dealers around the country, already struggling to make ends meet, say they were shaken by the news that GE Capital Solutions was raising its interest rates and making other changes in its financing policies. And some say the rate increases, combined with the moribund state of the retail market, could knock them or their colleagues out of business.

“These terms and conditions will not only dramatically increase cost, they will siphon off cash vital to survival in these tough economic times,” Mount Dora, Fla., dealer Joe Lewis wrote in a letter to Brunswick Acceptance Company, the joint venture between Brunswick and GE that provides wholesale floorplan financing for qualified Brunswick dealers.

“Your timing could not be worse,” Lewis continues. “These are unprecedented times in the marine industry. No one knows better than we retailers. Just like BAC, we are not immune to the challenges of our industry. Unlike BAC, we don’t have the luxury of passing along our increased cost of doing business without consequences.”

GE sent letters to dealers in late February and early March announcing its plans, saying the changes were necessary “to continue to provide the level of service and liquidity the industry requires.” The changes, which went into effect April 1, include a doubling or tripling of interest rates in some cases, and tougher requirements on curtailments. The exact rate changes vary by dealer, and GE spokesman Ned Reynolds says it’s company policy not to comment on pricing.

With major players as Textron and KeyBank exiting the boating business, GE has up to 80 percent of the marine floorplan financing business, according to some estimates. “There’s no one else out there,” says a Texas dealer who asked not to be identified. “You’re basically stuck between a rock and a hard place.”

Brad Michael of Marine Industries Unlimited, which runs the South Florida Boat Show held in Miami Beach each June, says dealers are going out of business weekly in his area, and these changes will worsen an already tough situation. “I don’t care who the dealer is – it’s going to put them out of business immediately if something is not done,” he says. “Half the dealers are struggling to make these payments and stay current; another half have been somewhat late.”

Higher floorplan rates coupled with low consumer demand are not helping the upcoming show, Michael says. A lot of dealers rely on co-op to attend and work the shows, he says, but dealers are not ordering from builders, so there is no co-op.

“It’s a bloodbath; it’s absolutely horrible,” Michael says.

Dennis and Linda Morgan, owners of Angler’s Port Marine in Warsaw, Mo., also wrote a letter to BAC saying they are concerned about the hit their business will take from the changes. In their letter, the Morgans note that they pay for their inventory as sold, pay all monthly charges in a timely manner, and their history of turning inventory has been “outstanding.”

Last year, they paid LIBOR plus 2.85 percent for their interest rate, and now they will pay LIBOR plus between 7.2 and 10.8 percent, they say, calling the amount “excessive.”

“What we are asking you to consider is to support those of us who have supported you … to not apply the same stringent terms to your good customers as to the bad,” they wrote to BAC. “These are, no doubt, trying times for us all. And now more than ever, BAC should weigh carefully its short-term needs of its long-term interests. What looks good on paper today may turn out to be corporate disaster tomorrow if it ends up snuffing out this industry.”

Staying the course

Despite the speculation of some dealers that the increases could be the lender’s way of getting out of the marine market, GE, in a statement to Soundings Trade Only, reiterated its intentions of remaining in the marine floorplan market.

30_floorplan_02“While these revised rates and terms may increase carrying costs to most manufacturers and dealers, they are absolutely necessary to enable us to maintain our commitment to the marine industry,” says Bruce Van Wagoner, president of GE Capital Solutions’ Marine Group, in an e-mail to Trade Only. “We have supported this market for many, many years and expect to continue to provide funding and maintain our commitment to our marine industry partners.”

Also, GE’s cost of doing business has increased along with most other businesses. “Funding terms for our customers were adjusted due to high volatility in the markets where we raise funds and changes in the risk profile of our portfolio,” Van Wagoner wrote.

“Every dealer must determine the impact on their cash flow, but the fact is that when considering the ultra-low base rates of today, the average borrowing costs of our marine customers in the current environment remain lower than many have experienced over the past 20 years,” he says. “Our expectation is that every dealer will take responsibility for the inventory they purchased and find ways to sell and pay for it.”

While there was no shortage of critics to GE’s rate increases, others say the news could be worse, considering all the lenders that have left the industry. “My first thought is I’m glad that they’re taking the time to do something to manage their risk to stay in the floorplan business,” says Jim Coburn, president of the National Marine Bankers Association.

Don Parkhurst, past president of the NMBA, agrees that it’s good news GE is accepting new invoices, and that if they were trying to exit the business they wouldn’t be taking these actions.

“This reflects what it costs them to raise money today,” he says. “They’re not trying to bankrupt these dealerships.”

The fallout

Analysts agree that GE’s actions could have a dramatic affect on dealers. “This puts added pressure on an already-stressed dealer base as they struggle to finance boats,” wrote Rochdale Research analyst Hayley Wolff. “This likely will translate into fewer orders for new boats and hurt smaller boat companies – all factors that will lead to a shakeout in boating.”

There are roughly 1,450 boatbuilders and 6,000 dealers in the United States, she says, adding that these numbers haven’t changed dramatically “even as the size of the industry has shrunk by 50 percent.” However, that could change depending on the length of the downturn. According to some estimates, as many as 25 percent of the dealers might not make it through the recession.

Edward Aaron, an analyst with RBC Capital Markets, says GE’s tightening of lending standards could “further destabilize an already fragile industry.” And, he notes, with GE being the last major player left for marine floorplan financing, it has the power to dictate its terms.

“Like other industries built on credit, the magnitude of the recent credit constriction has the potential to greatly transform the marine industry landscape,” Aaron wrote. “Prohibitively high carrying costs will cause the industry to move closer to a build-to-order model. Unfortunately, this transition isn’t likely to happen without significant dealer casualties.”

Aaron notes that the marine industry had been lobbying for boats to be eligible for the Term Asset Based Securities Lending Facility – designed to increase liquidity in the consumer and business lending market – and it was announced March 20 that floorplan loans would be included. The announcement followed more than 13,000 e-mails to Congress and the Treasury Department expressing the marine industry’s concerns about floorplan financing.

“The decision to include floorplan loans in TALF is a significant victory for marine manufacturers and dealers,” says Thom Dammrich, president of the National Marine Manufacturers Association.

Aaron, however, says he isn’t sure TALF is the answer. “Given the pressure that GE is facing in other areas of the business, we cannot foresee that marine lending will be a priority for its use of capital,” he wrote. “Any relief would have to come from the entry of a new competitor.”

So what is the answer? That’s a question the industry is wrestling with. There is currently a group looking into organizing a federal marine credit union. And while many agree it’s a good idea, it’s seen as a long-term solution rather than one that can provide immediate help.

Irwin Jacobs, chairman of Genmar Holdings, says it’s an issue he’s been struggling with for months. “The No. 1 thing I’m working on for our dealers is how I can come up with a better floorplan situation that doesn’t take business necessarily away from GE, but takes some of the pressure off of GE and allows our dealers to have a relationship with us,” he says.

“I can’t promise when [this might happen],” he adds. “I can’t say at this point, but I can tell you there isn’t a day that goes by that it doesn’t come up in some form of a meeting or a conversation.”

In the meantime, the head of the second-largest boatbuilder suggests GE and dealers come to some sort of agreement on how to make the situation livable for all concerned. “What the dealers have to do is go to GE with the rationale of what they can and can’t do,” Jacobs says. “On the GE side, they’re getting clobbered, as you can well imagine, with so many of the problems that they’ve got. But I think reasonable people should be able to work out reasonable things.

“You can’t just scream and kick about it,” he continues. “You’ve got to bring some rationale to it, and maybe over time they’ll work this out where they push some of these costs forward, rather than in these difficult times.”

This article originally appeared in the May 2009 issue.

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