Lenders Scrutinize Auto Industry

July 29, 2005
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GRAND RAPIDS — In rosier times, Bob Roth shrugged off criticism of his company’s balance sheet.

“They’d say, ‘You don’t need all that cash. Why don’t you do this or do that with it?’” recalled Roth, president of RoMan Manufacturing.

“We’ve always felt that it was very important to have a strong balance sheet and cash position because when the world gets ugly, you won’t have the bank breathing down your neck.”

In two years, the Grand Rapids-based manufacturer of industrial welding components has self-financed an expansion into China, lean initiatives, the launch of a consulting service and acquisition of competitor assets and market share.

Meanwhile, Roth has heard reports from suppliers and customers that financial institutions are reining in credit offerings. One customer was told that his lender was no longer servicing the automotive sector.

“We heard it a couple years ago from the tool and die folks,” said Ray DeWinkle, vice president of The Right Place Inc. “We’ve seen it before; banks just decide they’ve got too much exposure in a particular segment of their portfolio.”

The automotive sector has been the hardest hit of the region’s battered industrial sector. Layoffs, plant closings, health-care strife and the reduced market share of the Big Three have defined the market of late.

And it was financial institutions writing the most significant headlines, as the least noticed point on the supply chain was center stage for the industry’s darkest days.

The low point of GM and Ford’s plight was the downgrading of their credit ratings to junk. The elimination of GE Corporate Finance’s OEM early-payment program helped push a host of Tier 1 suppliers into bankruptcy.

In its Chapter 11 filing, Tower Automotive specifically cited the liquidity issues associated with that change for its bankruptcy.

Ron Roden, chair of Miller Johnson Snell and Cummiskey’s banking and financial institutions practice group, noted that lenders now favor construction and real estate investments over manufacturing, and are particularly leery of the automotive segment.

“There has been a lot of talk about how (Tier 1 bankruptcies) could ripple through the supplier industry,” he said. “(Tier 2 and Tier 3) credit availability is all based on the quality of receivables they have with customers. Once (OEMs, Tier 1s) get their ratings downgraded — let alone file for bankruptcy — it quickly restricts the borrowing base that the (lower tiers) have.”

For companies in a growth mode or struggling firms operating largely on credit, such a situation could lead to disaster, he said.

“They may find themselves in a real liquidity crunch,” he said. “The company is going to have to look at what its plans are. Maybe slow down on growth objectives, or work with the bank to restructure that financing agreement.”

Some lenders may be more receptive to helping clients diversify.

“Certain types of manufacturing are in favor, like the biotech area,” he said. “I think the good lenders have a balancing act toward being cautious with the dollars they have out against (automotive) receivables, yet help their good customer develop in another area and diversify.”

Michigan Manufacturers Association spokesman and chief lobbyist Chuck Hadden believes much of the transition is within the banks, namely the string of consolidations in West Michigan that absorbed homegrown lenders into national banks.

“I’ve heard that as the banks have gotten bigger and consolidated, many of those decisions aren’t made locally anymore,” he said. “They’re made in Kentucky, New York or Cincinnati, places where they don’t understand manufacturing like they do here.”

The region has no better example of consolidation than Fifth Third Bank, which acquired Old Kent Bank four years ago.

“There will be winners and losers as a result of stressful periods,” said Jonathan Smith, senior vice president of commercial lending for Fifth Third in West Michigan. “We try very hard not to take a broad brush and say, ‘Gosh, the auto industry is going to be stressed for the next couple of years, let’s get out of the business.’”

Instead, Smith said, the bank opts to examine the industry as it would any other, assessing the likely winners and losers.

“It doesn’t mean we’re always going to be right,” he said. “But we’re very careful to not throw the baby out with the bath water.”

Smith said the bank has paid particularly close attention to the auto industry over the past nine months. He compared the process to last year’s evaluation of its golf course portfolio, when it discovered that appraisals generally overstated revenues by 40 percent to 50 percent and determined that the state had too many golf courses.

Tom Ranville, Standard Federal Bank’s senior vice president/division head of commercial lending, agreed that the hard times have heightened the bank’s credit view of the auto sector, but emphasized that each company must be scrutinized on an individual basis.

“For example, a local company here in Grand Rapids might make all of the bumpers for 90 percent of the Big Three domestic car companies,” he said. “Five, 10 years ago that was a no-brainer.

“Now you look at it a little more closely: Which cars are those on? Are those the kinds of cars that the volume is increasing? Are they at the end of their lifecycle?”

Kim Korth, president of Grand Rapids-based automotive industry analyst IRN Inc., believes that the banking transition has a positive side. Most of the lenders exiting the market are institutions that invested poorly in the 1990s, she said, much like the dotcom investors of the technology segment.

In the last 12 to 18 months, that void was filled by banks and investors with little or no previous exposure to the automotive industry.

“We’ve seen a tremendous amount of activity,” she said. “It’s a fairly difficult time to close a deal right now and banks have been very leery, but some of them are viewing it as a competitive strategy. As their competitors shrink back, they are more willing to jump in.”

United Bank of West Michigan has found success restructuring credit lines with SBA financing, said Doris Drain, vice president of commercial lending.

“What’s happening is, they’re getting jobs again, getting work again, but don’t have any working capital to be able to complete the jobs,” she said.

Many suppliers used a line of credit for liquidity during the 60-to-90-day lag in accounts receivable. The credit was based on a conditional ratio of accounts receivable to work in progress. During stressful times, those ratios are often forced out of compliance, and the bank seizes the accounts receivables and freezes the line.

The SBA loan restructures the credit into a long-term fixed payment and frees up some additional working capital.    

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