Marine Lenders / Boat Credit

[spindrift]

FYI, this morning I spoke with a good friend who is a broker whose firm used to rep a well known line of quality Taiwan Yachts (been in business many years) in the 55 foot to 100 foot range. Bank of America changed the rules of the game on floorplanning (inventory financing) and end loans. Prices on these boats ranged from $800K to over $4 million. Thus, this dealer / broker has stopped carrying these boats.

This is not a surprise based on earlier discussions on this board by me and others regarding this matter. The credit crunch is impacting our industry.

Spin

[SeaEric]

New boat dealers are giving boats away to avoid curtailments and ongoing interest payments. I am so glad that all of my inventory is owned by others. Gotta love that when the rules change in the middle of the game. Tough times call for desperate measures sometimes.

Luckily, we are doing well. I sold a late model 40' gas powered express boat today. She went for about 70% of the "book" value. The buyer is thrilled and the seller is coming to closing with $30K to pay the note off after my 10%. He's happy she is selling, and I make a nice commission. Seems to me like a reasonable deal for all concerned.

On the retail lending side, BOA just did a loan for one of my customers and beat all other fixed rates by quite a bit. So they are still making boat loans. Key Bank is still the easiest on approvals and therefore the most prolific, but not the best rates.

[spindrift]

Eric

Do you have a gut feel as to when we see a bottom to this? If diesel hits $6.00 plus per gallon this summer / fall what impact will that have?

I would appreciate your input on this.

Thanks
Spin

[Genesis]

The bottom on the credit issue will not come until house prices stabilize.

2010 at the earliest would be my best guess, and it may be worse.

Fannie is estimating that 2009 losses on their credit book will be worse than 2008, so there you go. My estimation of their balance sheet is that they will be insolvent before the end of '09.

[SeaEric]

With all due respect to Karl, the marine lending biz seems to be forging ahead undaunted by the residential mortgage situation. In trying to anticipate problem trends in marine lending, I speak to my boat loan folks in detail on a regular basis. None of them have indicated that they see any tightening of funds or approval parameters. The rates fluctuate here and there, but thats about it. These are local people that I have known and done business with for 20 years. I don't think any of them would sugar coat the sitaution for political correctness.

In looking at the 12 boat deals that we have closed so far this year, 9 of them paid cash. This includes the 3 most expensive boats (52 Hatt, 57 Carver, 83 Broward) sold so far. Of the 3 that did use financing, 2 of them were under $50K boats. The other thing that I have no way of knowing is whether the cash buyers used actual cash, or an equity line.

Other than the lower (in general) selling prices, this season looks like it will be as good or better than any. I'm cynical enough to think that may change at any moment, so I am being a little conservative about company spending. I'm doing my best to retain as much cash on hand as possible.

On a personal note, it looks like my own boat is indeed sold. I have not collected the $$ yet, but that is imminent. I made the decision to sell in order to free up my equity and also to pay off the small loan that was outstanding. Unless something amazing comes along, it is my intention to use cash only for the next boat purchase.

[Genesis]

With all due respect to Karl, the marine lending biz seems to be forging ahead undaunted by the residential mortgage situation. In trying to anticipate problem trends in marine lending, I speak to my boat loan folks in detail on a regular basis. None of them have indicated that they see any tightening of funds or approval parameters. The rates fluctuate here and there, but thats about it. These are local people that I have known and done business with for 20 years. I don't think any of them would sugar coat the sitaution for political correctness.

The Fed's credit report says otherwise.

There will always be outliers, but eventually they get dragged along. I look at national trends and when it comes to credit in general, it is tightening dramatically. There is no sector of lending that is immune to this.

HELOC lines are being cut back to open balances nationally, with the worst damage being in "bubble" areas, but its not confined to there.

The underlying problem is balance sheet and capital reserves necessary to support continued lending. Non-performing assets in one area of a bank's portfolio impact its ability to generate new loans across the board, and they are going to lend where the highest "vig" (difference between cost of funds and income from loans) is present preferentially.

Boats, so long as the loans perform, are generally better than some other forms of credit (E.g. HELOCs) as the rate is a bit higher. However, the danger involved in a boat loan, while not as high as a HELOC (these are frequently 100% losses in a foreclosure as they are second lines and thus subordinate to the first) is still very significant.

As yet another example businesses of all sizes are getting nailed with tightening credit conditions. Corporate defaults have doubled in rate over the last year and the rate of change is accelerating.

In the used market credit is less important, as many people do indeed pay cash. But in the new market it is getting nasty with floor planning being hit severely in many cases, which is resulting in major hits to manufacturers and dealers. Many will not survive this and defaults in this space are already starting to accelerate.

We are roughly in the first couple of innings of the credit tightening cycle. The cycle itself will not bottom until home prices stabilize and from my work on the underlying fundamentals of these firms and banks there is a high probability of a major dislocation in the credit markets (not the pop gun style thing we saw earlier this year and in '07) sometime towards the end of the year or into 2009, likely led by extreme distress or an outright default at Fannie, Freddie, the FHLB system or some combination of the above.

The consequence of that would not be a total shut-off of credit, but it would result in a huge spike northward in interest rates, perhaps as much as a 50% increase (e.g. from 7 to 12%) in what could be close to a "step function."

Needless to say that would play hell with everyone dependant on financing.

[krush]

Here is what the credit industry has been doing...sumarized by none other than Beavis and Butthead

http://www.youtube.com/watch?v=P_UvMKhJF8U