Credit crunch a crazy quilt of circumstance

ELKHART, Ind. - If you want to see what a credit crunch looks like, head south on Indiana State Road 19 out of Elkhart — past the strip malls, bank branches and restaurants to the still-beating heart of “the RV Capital of the World.”  There, scattered along a 2-mile stretch of Nappanee Street, you’ll find a ragtag assortment of RV dealerships that are in many ways symbolic of the nation’s crazy-quilt lending landscape.

One has lost the battle for survival after its credit lifeline was pulled, as its vacant showroom attests. Others are hanging by a thread, trying to outlast an RV industry downturn that has been exacerbated by a lack of credit for manufacturers, dealers and customers. Still others contend that their credit problems have largely disappeared and that business has picked up substantially in the last few months.

The availability of credit, it seems, depends largely on perspective.

For the owner of Elkhart County RV, the situation remains “brutal,” following the sudden withdrawal of big national banks from what’s known as the floor plan financing market.

“I cannot buy any new product unless I use my own money,” said Tony Gaideski, who is down to seven units and can’t secure financing to purchase more RVs. “None of the banks in this town will lend me money, and I don’t know anywhere in the country where anybody is doing any financing for RVs. “

Just up the road, however, Rob Reid, president of Great Lakes RV Center, said he still has the same $3 million floor plan credit line he had before the recession. He said his biggest problem is getting would-be buyers qualified for loans.

“The biggest thing is retail credit,” he said.  “They have to start giving the customers money to buy. That’s what’s going to get the whole thing going again.”

A block to the south, International RV World General Manager Dave Titus said business at the company’s three lots in Elkhart, northern Michigan and Florida is up 15 to 20 percent this year. That’s in part due to decreased competition, he said, but also because his company never relied on lenders to buy inventory.

“We planned ahead for a slow time,” he said. “A lot of businesses didn’t .”

Some in the industry see opportunity in the chaotic credit situation.

RV manufacturer Thor Industries Inc. this week launched its own credit service to provide retail financing for purchasers of its units, much as GMAC does for autos.

“So many lenders exited or dramatically scaled back their RV lending that Thor saw it as a need and a benefit to its dealers,” said Ed Arienti, president and CEO of Thor CC, Inc., which is initially licensed to operate in eight states.

In Elkhart County, however, bankers willing to talk on the record about the credit situation insist they have money to lend.

‘Still making loans’
“We’re still making loans to qualified buyers, but that’s been part of our philosophy all along,” said Jim Hyatt, president of the First State Bank of Middlebury, which extended credit to Reid’s dealership after his previous bank, Goshen Community Bank, called in his line of credit. “We’re also seeing opportunities with some very good, very solid companies, where they have banked at other banks and are now saying, ‘We want to do business with someone who’s going to be around to take care of us.’”

His comments were echoed by Tom Stark, a commercial loan specialist with Lake City Bank.

“To be honest, we’ve been very busy with (businesses) who have been asked to leave other institutions,” he said. “They’ve had a couple tough years, but they’re going to come back and we’re going to help them as much as we can.”

Dallas Bergl, president and CEO of INOVA Federal Credit Union, a 67-year-old institution that was founded by employees of Miles Laboratories, the manufacturer of Alka Seltzer, said his organization is limited in its ability to provide big commercial loans but is actively courting would-be RV buyers.

“We’ve done a whole marketing campaign around ‘We do have money to loan if you’re looking to purchase a home or a car,'” he said. “The mortgage side has been fairly robust, but we haven’t seen much in autos or RVs.”

But another local banker, who spoke to msnbc.com on the condition of anonymity, said his bank won’t be making new RV loans until there is solid evidence the local economy is reviving.

“Because of the uncertainty in our area, I almost have to project future losses over the next nine to 24 months,” the banker said. “If I’m not going to see profits, my capital will go down. If I fear I’m going to be undercapitalized, either I have to go get more capital or shrink my balance sheet. So, no, the situation hasn’t gotten easier yet. If anything it’s getting more difficult. Until the economy picks up, until my commercial customers are making money again, I can’t really free up the credit.”

Strange as it seems, all of these representations may be true, given the uneven ways the credit squeeze has affected homeowners, would-be homeowners, prospective purchasers of big-ticket items, credit card users, retailers, investors, banks and just about anyone else with a stake in the economy. 

‘It's hard to make sweeping statements’
“It’s hard to get our arms around it because you’ve got different situations in different parts of the country,” said Phil Ingrassia, a spokesman for the Recreation Vehicle Dealers Association. “Just like with the overall economy, it’s hard to make sweeping statements that it’s getting better.”

That is borne out by conflicting signals being sent by federal agencies and senior officials in recent weeks.

Treasury Secretary Timothy Geithner told a banking group on May 13 that the national lending picture is improving.  Two weeks later, the Federal Deposit Insurance Corp. warned that “the credit picture remains grim,” The Wall Street Journal reported.  And on Wednesday, Federal Reserve Chairman Ben Bernanke warned that credit could tighten again if the U.S. does not begin to get its fiscal house in order. (Click here to watch a CNBC video on a new Standard and Poor's report on the state of credit in the U.S.)

Most experts and government officials say the credit freeze has slowly been thawing nationwide as a result of massive infusions of federal money into the banking sector.

That meshes with the experience of many small business owners in Elkhart.

Thad Naquin, owner of Naquin Chevrolet-Cadillac-Nissan, said that his problems qualifying buyers for auto loans, which began in the fourth quarter of 2008, largely vanished in March, when $5 billion was released to GMAC for lending.

And Carl Higley, owner of Higley TV & Appliances, said his difficulties ended in early April when he changed buying groups ­and gained access to a new preferred lender. Independent retailers like Higley often join together in such groups to better compete with the big chains. “We had three (loans) approved in one day last week,” he said. “That’s huge.”

But the RV industry has proven to be a tougher nut to crack.

“Most dealers are OK with retail lending right now, but there still seems to be a big problem on the wholesale side,” said Mark Bowersox, director of the Recreation Vehicle Indiana Council. “ It’s one thing to make a loan to a consumer; it’s another thing to open a $5 million credit line to an RV dealer.”

Tom Walworth, general manager of Statistical Surveys Inc., which tracks RV industry sales, said the inability to get product to the showrooms has played a large part in the demise of nine RV manufacturers  in the last year and a half.

He said that as of March, wholesale sales of towables — so-called fifth-wheels and trailers — were down 60.9 percent from a year earlier, while motorized RVs were off by 78.2 percent. But at the retail level, the declines were far lower, at 43 percent and 55 percent, respectively.

“You can lay the lack of wholesale activity at the feet of the lack of wholesale flooring,” he said.

An exodus from the market
Walworth said the absence of wholesale financing was created by near total pullout from the market late last year by the big banks that controlled most of the market, including Textron Financial, GE Capital, Bank of America, KeyBank, U.S. Bank and Bank of the West. That’s a big problem for an industry in which 79 percent of motorhomes and 72 percent of towables were purchased with financing in 2005, according to statistics from the Go RVing Coalition.

And floor plan lending is not a niche that local and regional banks or credit unions can easily fill, because it is a labor-intensive practice that requires the lender to carefully evaluate the quality of the collateral, which means it typically takes a high volume to make it profitable. 

The Small Business Administration has moved to address the situation, expanding an existing loan program and initiating a pilot inventory lending program, which will take effect on July 1.

But Gaideski, the owner of Elkhart County RV, said neither of those programs will solve his liquidity woes.

“From what I understand they’re only offering a 75 percent (loan guarantee), which means I’d have to go even deeper in debt to come up with the rest,” he said.

Gaideski also feels that he got a bad shake from his former floor plan financier, Textron Financial, saying that the company suddenly sent him a letter on Dec. 30 withdrawing his line of credit.

“It said, ‘Here’s how we’re going to help you out, we’re going to pull our line … and we’re going to allow you to sell the inventory that you have on hand.’”

(A Textron spokeswoman did not return a call from msnbc.com seeking comment.)

Credit extended to some dealers
But several other dealerships contacted by msnbc.com said they were able to continue pre-existing credit lines with GE Capital and KeyBank, even as the companies were pulling back in the floor financing market and turning away new customers.

Dan Davis, owner of RAD Transport, an Elkhart company that delivers RVs to dealers around the nation, said GE Capital has simultaneously been weeding out other dealers. “GE Capital has foreclosed on a lot of dealers … taking their inventory and shutting them down,” he said. “Some of the factories are actually having to buy back the inventory.”

Ned Reynolds, a spokesman for GE Capital, acknowledged that the company made some “adjustments in the first quarter in terms of its credit program,” but said it intends to remain active in providing floor financing for the RV industry.

“We think this is a viable business for us,” he said. “We’re just making the best of a tough environment and working through this cycle.”

(Msnbc.com is a joint venture of Microsoft Corp. and NBC Universal, which is 80 percent owned by GE Capital’s parent, General Electric.)

Big national lenders weren’t the only ones yanking credit lines when the freeze was at its worst last winter.

Steve Riegsecker said Goshen Community Bank pulled the plug on his business, rescinding his $350,000 line of credit and thereby forcing him to default on a $1 million floor plan loan from Textron that he had used to purchase inventory for his 20,000-square-foot showroom in nearby Middlebury.

“I was struggling at the time, but I was making my payments,” Riegsecker said. “But they always wanted to know, ‘How are you going to make it?’ Then they came in on a Tuesday night about 5 o’clock and handed me a letter (rescinding the credit line), and that was it.”

Reigsecker didn’t declare bankruptcy and is instead working to pay off the outstanding debt, though he’s not sure if he’ll ever be able to.

“I’m starting completely over, selling cargo trailers and mini-pontoons (small boats),” he said. “That’s how I started my business, and that’s how I grew it.”

Goshen Community Bank President Doug Johnston cited privacy laws in declining to comment on matters involving individual customers and said he had no comment as to whether the bank had rescinded credit lines extended to local RV businesses.

Survivors have a different view
Survivors of the RV retail downsizing see it in a different light.

“My opinion is that they simply culled the ones that weren’t operating good businesses,” said Todd Cornell, president of Tiara RV of Elkhart.

And Titus, the general manager of International RV World, said, “The (dealers) who are hollering about floor plans, sad to say, they shouldn’t have had them to begin with. There were guys out there with $10 million floor plans who couldn’t buy you lunch.”

While RV industry players are divided on financial strategies, they stand united in taking a bullish view of long-term prospects.

“Manufacturers are burning through inventory, and the dealers have developed new local credit sources like credit unions and regional and community banks,” said Walworth of Statistical Surveys. “That’s going to pay dividends in the future.

“I’ve seen this industry go down in the early ‘80s, in the late ‘80s, in the early ‘90s and after 9/11, and each time it’s come back stronger than it was,” he continued. “There’s been so many times when people have shoveled dirt on this industry, but it comes back every time.”

Keith Leggett, a senior economist with the American Bankers Association, said that even if demand for RVs picks up, it will take a while for the credit market to catch up.

“As the economy weakens, banks see a deterioration of their balance sheets,” he said. “But those sheets tend to lag the economy, so while most economists are looking for some recovery in the second half of the year, it’s going to be at least a year before you start seeing an increase in credit quality.”

That may be too late for Gaideski, owner of Elkhart County RV. He said he’s not sure how much longer he can last without being able to buy new inventory.

“My dream is to stay in business — I love what I do,” he said. “But the reality is a different story.”

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