Finance & Insurance - Don't trip over a green shoot

And the banking community went berserk, hurling around keenly priced long term loans funded by short term wholesale money and egged on by ‘non refundable’ bonuses. By the time the securitised sub-prime mortgages (thanks Uncle Sam) had been packaged up and flogged on to other naïve and greedy bankers, the fuse was well and truly alight.

Add in the torrent of venture capitalist and private equity debt that flooded the scene, and a catastrophic ‘correction’ was inevitable. Confidence ebbed - well, flooded – away as losses piled in and credit dried up.

So here we are today. The world wide marine industry was never going to escape the flying financial shrapnel.

A hazard inherent in the health of the marine industry is that few actually need a new boat. They might want one, but it's not essential - unless the end user is in the commercial or military world.

From the top end of the market (Ferretti, Jongert, Tarquin, etc.) to the suppliers of smaller leisure craft (Dehler, Genmar, Poncin, etc) there have been bankruptcies or frantic re-financing exercises galore. And those who were strong enough to re-jig their finances and production capacities have had to be nimble.

Big names such as Hinckley, Nimbus, Princess, Fairline, Hallberg, Bénéteau etc. – indeed almost any major player you care to think of – have had to reduce workforces or hours; or both.

Current cut-backs represent a return to production levels regarded as the norm a few years ago. Apart from the owners of companies that have gone bust, the major losers are those who paid mad multiples to buy into booming businesses at the peak of the cycle. Bavaria is a classic example.

And how are bankers treating their clients now? By and large, the answer seems to be badly. Credit – when available – has shot up above base rate (0.5%) as banks screw ever larger margins out of their surviving clients.

Extortionate
An accountant who acts as a non-exec FD on the boards of various (non-marine) companies tells me that banks seem to be demanding an extortionate minimum 4-5% above base. And this is to the sound companies. Add several points to that rate for the less fortunate.

One OEM supplier to the marine trade agreed, telling me: 'Our bank has been reasonably helpful but it's not a time to be trying to borrow money, as all they want is personal guarantees - where before they wouldn't have mentioned the words… Banks are desperate to unhinge any low cost borrowing they previously got into.'

And a friend who specialises in high yielding commercial property packages told me that some banks were demanding 4-5% above LIBOR (not base rate) - even when the developers have signed up quality tenants on tasty returns. It seems that banks are using every opportunity to claw back the losses they foolishly incurred in securitised sub-prime packages and other casino-style gambles by hiking up margins on credit to commercial and retail clients.

But if the banks are not the top of the pops, credit insurers seem to be incurring the greatest wrath. One manufacturer said: 'Many supply chain firms take out policies which offer them insurance if their clients go into administration - typically such a policy would pay back 80% or 90% of the outstanding sum; provided one had observed the credit limits which had been agreed with the insurer on each client. More than 95% of our debtor book was covered. From October, one by one, insurers withdrew cover on almost every single major client to a point where less than 25% of our debtor book is now covered.'

This story would be confirmed by many others in the wider commercial world. Insurers cancelled the cover and ran for the hills - without even offering to refund part of the premiums charged - which were supposed to be based on the size of the debtor book.

Rueful
And another manufacturer ruefully added: 'Credit insurers sell you insurance which they can then discontinue and keep the premium. Suppliers are forced to use them because the banks like them. They think it shields their own risk.'

However – despite the antics of banks and credit insurers – some people in the UK marine world are beginning to cheer up a bit. The weakness of the £ against both the $ and the euro has increased the competitiveness of exports and made competing imports more expensive.

Claire Horsman (marketing manager at yacht builder Northshore) said: 'As all our boats are built to order, we are in a different situation to most manufacturers and we have a full order book, already into summer 2010 deliveries. The weaker pound has strengthened our export market as well as our UK market (against imports). As we are gradually expanding (now building up to 70 boats a year and the largest sail boat manufacturer in the UK), our turnover this year, so far, has exceeded previous years.'

Those who supply the commercial and military sector are also doing OK. Liverpool based MST (Marine Services Technology) is a case in point. Set up in 2002, MST is already looking at an annual turnover of £9m. By designing and manufacturing a variety of RIBs to the specific requirements of its many and varied clients, MST continues to grow apace; proof that those who offer a bespoke specialist service get their reward.

And of course the weakness of sterling has helped, since much of MST’s market resides overseas.

There’s also stabilisation at some UK motor yacht builders. Andy Fitzgerald, whose successful firm OceanAir supplies blinds and other interior fitments to boatbuilders around the world, comments: 'I would say British boatbuilders are doing a fantastic job keeping their end up and they are doing it rather better than a lot of others overseas. Some are cutting back, but nothing like what is going on elsewhere. The USA continues to be an OEM problem area and is dramatically down on its peak of two and a half years ago. Overall the OEM game is, in my opinion, still falling. It will depend on who has sold their inventory to the end customer. Boatbuilders all over the world are closing for extended summer shutdowns and in the US the capacity may not recover. I am not sure things have been downsized enough yet in Europe; but then it didn't get as "hot" here either.'

Relevant
Mr Fitzgerald’s comment on selling inventory is particularly relevant. In the USA, the government's Term Asset-Based Securities Lending Facility (TALF) - intended to free up to US$1 trillion worth of credit – will now include marine floorplan financing. NMMA president Thom Dammrich said: 'The decision to include floorplan loans in TALF is a significant victory for marine manufacturers and dealers.'

Has the UK government made a similar move? No. So funding floorplan schemes is down to the likes of GE and Lombard. We asked Lombard what involvement the company has in floorplan schemes and Ian Braham, head of Marine Finance commented: 'At Lombard we continue to support the industry and we’re providing finance for a number of large boat retailers to enable them to retain a stock of boats.'

As to the state of the market, he added: 'Whilst we have noticed some slowing of the market, as buyers take more time to consider their options, business is still faring very well. At the half year, our new business volume was up by 6% on the same period last year. We continue to work closely with our customers providing the right finance options that suit their needs. There has been some rationalisation of the marine finance market recently, with some lenders reducing their activities but at Lombard, we continue to invest in the business and continue to lend. We’re currently experiencing an increase in applications through boat dealers. They are reporting an increase in buyer interest over the last month or so. Many purchasers are finding that the low cost of borrowing, along with some attractive boat prices, are currently making it a good time to buy a boat.'

In common with other OEM suppliers, OceanAir has been developing its superyacht product range. Mr Fitzgerald says: 'Our success in the superyacht industry helps replace the slow down in volume production yards. Our policy of product investment and offering a complete service – design, manufacture and install - continues to be a winning formula. Our customers are working hard on remodelling their ranges for some exciting autumn launches.'

Adjusted
James Grazebrook’s Halyard (maker of silencer and exhaust systems) is another successful OEM supplier that has adjusted to the market changes. 'There are some bright spots with exports, commercial orders which have grown very strongly, and the weak pound giving us better profit margins,' Mr Grazebrook says. 'We also changed our business a year ago to improve our management of big superyacht and commercial projects. I don't pretend it's easy, but we're faring better than we expected. We managed the downturn with each major customer and we're starting to see a bit more predictability in the whole thing.'

Crucially, he added, we need to see what will happen when the boat show season gets under way in mid-September.

Another specialist supplier to the ‘big boys’ confirms Mr Grazebrook’s feeling that things are stabilising. Belmar Engineering supplies custom made fuel tanks and deck hardware to major motor yacht builders and Jim Whitehouse says: 'Since last November, order levels dropped. However we are now experiencing an upturn as our clients are ordering more; especially for their new models.'

Reassuringly, he also said he was getting paid on time by his two main clients. But other OEMs have suffered problems being paid by other big builders, and stories about companies being on ‘stop’ abound - which is never a healthy sign.

So what lies ahead for the UK boatbuilders? The large motor yacht companies have cut back, and sales of boats under 50ft seem to have taken the biggest hit.

But investment in new models continues; which is the brave but intelligent course of action (provided it can be funded) in times such as these.

As to when (or if) volumes will ever get back to levels seen a couple of years ago; who knows? It’s crystal ball time.

But at least those well-managed companies who have adjusted costs and production levels to suit the current situation and invested in marketing initiatives should be able to get back to positive bottom line returns; if not to previous turnover.