Surprise bankruptcy filing stuns recession-weary dealers, manufacturers
If the boating industry had any illusions that a turnaround was near, they were largely put to rest when Genmar Holdings filed for Chapter 11 bankruptcy protection.
The June 1 announcement raises many questions: What will Genmar - the world's second-largest fiberglass powerboat manufacturer - look like after reorganization? Will it shut down or sell off any of its 15 boat lines? What will happen to its network of more than 1,000 dealers worldwide?
Those questions, which even company chairman and CEO Irwin Jacobs was not immediately able to answer, will be addressed in the coming months. In the meantime, two things seem likely: The repercussions could be far-reaching, and the boating industry may not yet have seen the full effects of one of the worst economic downturns in its history.
The filing comes as a surprise - in large measure because Jacobs has been, and continues to be, a voice of optimism for boating's future. Most who share that long-term view envision a painful shakeout process leading to a leaner, more efficient industry - just as Jacobs sees this reorganization creating a stronger Genmar. That painful process, however, may not have run its course.
"I think the reality is there's a lot of bad news still to come out over the next year," says Don Parkhurst, senior vice president of SunTrust Bank and past president of the National Marine Bankers Association. "I think [Genmar's announcement] really got people's attention, and I think it shook them back to reality."
Because Genmar is a privately held company, it isn't required to report quarterly earnings, and its financial data is not open to public scrutiny. "The reality is that up until now no one really knew what was going on inside Genmar," says Parkhurst. "And, of course, Irwin Jacobs is a dynamic individual, and so what he is saying out there in the media is all you have to go on." He compares Genmar's bankruptcy in the boating industry to the General Motors and Chrysler bankruptcy filings in the auto industry.
Less than a month before filing for Chapter 11, Jacobs unveiled the latest model in his FinCraft line and predicted it would be a success. "I believe that FinCraft could make the difference in not only helping your dealership to get through these historically difficult times, but FinCraft in many cases could make the difference between a dealership being profitable or not being profitable," he said in a May letter to dealers.
At that time, Jacobs expected to build and retail 8,000 to 10,000 FinCrafts by the end of 2010. It's not known how the Chapter 11 filing will affect these plans. However, VEC Technology, a Genmar subsidiary that developed a high-tech process for manufacturing these fiberglass boats, isn't included in the filing, Jacobs says.
It also wasn't too long ago (April) that Jacobs said he was looking at providing floorplan financing for his dealers, as more lenders pulled out of the marine business and market leader GE announced a rate increase.
"That would have made you think they were flush with cash, and obviously that wasn't the case," says Parkhurst.
According to court documents, Genmar has listed assets of $237.5 million and liabilities of $216.5 million. Jacobs says the company also has substantial intangible assets. The list of creditors holding unsecured claims includes Volvo Penta, which is owed $2.6 million by Genmar Michigan, $1.9 million by Genmar Minnesota, and more than $748,000 by Genmar Yacht Group; and Mercury Marine, which is owed nearly $578,000 by Genmar Minnesota, more than $663,000 by Genmar Michigan, and more than $403,000 by Genmar Tennessee.
Also on the list is Bombardier Motor Corp., which is owed more than $36,000 by Genmar Tennessee and nearly $88,000 by Genmar Minnesota. Raymarine, EZ Loader Boat Trailers and North American Composites are a few of the other creditors.
A $40M infusion
Jacobs says he and two others put $40 million in cash into the company three months before the filing, a move he says he never would have made had he known he would be looking to reorganize. "That should tell you where I thought our business was," he says. "I didn't think two or three weeks ago that this was possible, but the banks just became unreasonable, and we just couldn't deal with it."
Court documents say a number of factors led to the Chapter 11 filing, starting with the economic downturn that has beset the marine industry since the fall of 2007. "The debtors responded immediately to these market conditions with operational changes and infused additional equity, but conditions continued to erode as overall economic conditions led to falling customer confidence and declines in retail sales," court papers say. "In addition, financing sources previously available to the debtors and their dealers became more restrictive and, in some cases, unavailable."
Genmar concluded that financing would only be available through the debtor-in-possession loan process.
According to court documents, Genmar's primary financing is through a credit facility with Wells Fargo, with participation by Fifth Third Bank, with obligations totaling nearly $71 million, plus accrued costs, as of June 1.
Genmar has received a commitment for debtor-in-possession financing from Wells Fargo and Fifth Third banks, which has been approved by the bankruptcy court. DIP financing is a special form of financing provided for companies under the Chapter 11 bankruptcy.
Mark Sheffert, the chief restructuring officer who has been consulting with Genmar since March, says in court documents that Genmar has "stretched their vendors to the limit, and some are refusing to source the debtors, even on a cash-on-delivery or CAO basis. In addition, it is my opinion that most vendors will not be willing to extend any additional credit without a payment or assurance that the Chapter 11 debtors had sufficient DIP financing available."
Parkhurst, who says he has no specific knowledge of Genmar's situation, notes that, in general, when banks give loans they have specific parameters associated with them, such as the amount of cash a company must keep on hand and the amount of debt it is allowed to accrue. "Obviously, something was going on inside this company that the banks were not comfortable with," he says.
In "normal" times the money owed to the banks would mean nothing, Jacobs says. In the past, he says his company has owed hundreds of millions to banks and paid back every cent. "I think it says something about how vulnerable you can be today," Jacobs says.
Dealers had varied reactions to Genmar's news, though the court's decision to allow the company to honor appropriate past and ongoing warranty and rebate claims was a relief, according to Phil Keeter, president of the Marine Retailers Association of America.
"There were a lot of fears ... about what would happen," Keeter says. "This will calm dealers, and it will also cut down on all the chatter that's going back and forth about those brands disappearing."
In court filings, Genmar detailed its customer programs, including warranty, return and exchanges, and recall programs. It estimated the aggregate amount of obligations under these programs would not exceed $17 million in the next 12 months. It also detailed dealer programs, such as volume discounts and rebates, floorplan interest payment, credit sales and orders. Prior to June 1, dealers placed about $35 million in orders with Genmar, of which $5.1 million was prepaid, according to court documents.
In connection with floorplan financing provided by GE, each month Genmar pays interest charges incurred by the dealer under its floorplan lending arrangements with GE for up to 180 days. The amount of monthly obligation owed to GE, as of the filing date, was about $800,000, and a similar amount is due each month.
"If debtor was not able to continue honoring these incentive programs, they would suffer irreparable harm to their businesses, brands and going concern value," Genmar says in its filings. "Honoring the obligations due GE and the dealers under the dealer programs is crucial to continued operations."
Taken by surprise
Jacobs says he cannot predict what the ultimate impact will be on his dealer network. But he insists Genmar is trying to prevent dealers from going out of business, and he is hoping to be in a position to support them "as good, if not better, than we were before this happened."
Many Genmar dealers - past and present - say they were caught off guard by the filing. "I was surprised it was Genmar, especially having read all of Irwin's quotes in the last six months," says Joe Lewis, owner of the Mount Dora (Fla.) Boating Center.
Lewis was a Four Winns dealer until recently and still has boats in stock. He says he and Genmar were negotiating a contract renewal for this year and were following the steps of a model dealer-manufacturer agreement when talks broke down because Genmar wouldn't show him its financials.
"I just think it illustrates just how wide-sweeping the effects of this whole thing have been on the industry," he says. "I, for one, do not think this is the final one we're going to hear along these lines."
"I didn't see it coming, honestly," says Ed Lofgren, chairman of the MRAA and owner of Massachusetts-based 3A Marine Service. "I had heard and read Irwin's remarks in the past, and there didn't seem to be any indication that there were difficulties."
Lofgren, who sells Genmar's Seaswirl and Four Winns brands, says he is confident Jacobs will be back and Genmar will be strong again. "I have great respect for that man," he says. "I think he's very comfortable here [in the boating industry], and I don't think he wants to exit at this point. He did a marvelous job with the OMC rescue and putting that deal together with BRP and others.
"I want to be a Genmar dealer, I really do," he adds.
Larry Russo, of Medford, Mass.-based Russo Marine, says although he's a Sea Ray and Boston Whaler dealer, he's concerned about the ripple effect on the entire industry. "If a vendor is having a hard time and is short on cash, and Genmar comes along and says, 'Sorry, I can't pay you,' they're also not going to make any orders for Brunswick if they have to file bankruptcy themselves," he says. "That is my major concern, that some vendors will be negatively impacted."
However, Russo, a former Carver dealer, says he hopes Genmar comes out of this strong, because competition helps make everyone better.
Dennis Morgan, owner of Missouri-based Angler's Port Marine, says he's disappointed but confident the Ranger brand he sells isn't in trouble. "The bottom line is Ranger Boats is not in Chapter 11, the mother company is," he says. "No matter what happens with Genmar, there will always ... be a Ranger."
In fact, Ranger Boats president Randy Hopper put out his own statement, saying the company is continuing business as usual and that he expects Ranger to remain a strong brand.
Hopper says the fishing segment has not been hit as hard as the rest of the industry. "I believe that our segment has hit bottom, and we are seeing recent evidence of improvement," he says. "Ranger boats are still built, sold and serviced one at a time. It's who we are, and we remain flatly committed to that legendary legacy of leadership."
An era of stress
Industry-leading companies, including Brunswick, Volvo Penta and Yamaha, all say the Genmar filing is reflective of the challenging nature of the boating industry. "For the past few years, we in the marine industry, have seen market demand diminish as the economy has weakened, and tighter credit has had an impact on both consumer demand as well as dealers' access to wholesale financing," Brunswick - Genmar's largest competitor - said in a statement. "We have said before that we expect that this situation will likely lead to a negative impact on builders and dealers."
Clint Moore, president and CEO of Volvo Penta of the Americas, says his company was "saddened" by the news. "The marine industry has been under unprecedented stress over the past year," says Moore. "As one of Genmar's major engine suppliers, we believe that it is necessary at this stage to continue to work responsibly with Genmar and its important dealer network to minimize disruption and facilitate a smooth exit from bankruptcy." Volvo Penta is owed several million dollars by various Genmar companies, according to court filings.
Phil Dyskow, president of Yamaha Marine Group, stresses that his company is not a Genmar creditor, and he expects the company will emerge "stronger and more nimble" than before. "Genmar has always been recognized as one of the largest, best-managed and best-funded companies in our industry, so this underscores the very challenging times that we as an industry are going through," Dyskow says. "This is one of the best companies and, if they're having these challenges, it's very indicative of the challenging time that we're all facing."
More to come?
Industry analysts say this will likely not be the last marine company to file for bankruptcy protection. "If the summer season fails to materialize, we believe we will see more dealers and manufacturers shutting down," says Hayley Wolff, of Rochdale Research. "We suspect some dealers and manufacturers likely hung on this past winter with the hope of being bailed out by selling inventory ... when the summer arrived. In the absence of any seasonal rebound, we would expect more dislocations."
Tim Conder, of Wachovia Capital Markets, agrees. "We believe  will not only be the peak for this industry down cycle but also a multicycle peak in marine bankruptcies," he says.
Jacobs, for his part, has promised to come back stronger and more stable. However, he says it's important that no one forgets this downturn and learns from it, even if these economic conditions are never seen again.
"There's something that has to fundamentally change," he says, noting dealers and floorplan lenders can no longer be expected to take on the risk they have been assuming, and factories cannot continue to produce as many boats as physically possible.
"I think [Genmar's Chapter 11] says something about how vulnerable you can be today," says Jacobs. "This is the most unprecedented time in the history of our industry, bar none. I can't sit here and make predictions as to what the business is going to be like [in the future], but I will say this: There has to be a fundamental change in this industry."
This article originally appeared in the July 2009 issue.