financing. One manufacturer in the survey worries that its customers might extend their normal payment terms -in essence using the supplier as a “bank.”
As long as distributors pay manufacturers within their traditional terms, a tightening credit market should not affect day-to-day business, says Dave Thompson, former president of Kennedy Manufacturing Company, a manufacturer of industrial tool storage products and medical carts based in Van Wert, OH.
The challenge comes when a distributor does not get paid and that filters through the entire channel.
Manufacturers and distributors with a good relationship can be open about the challenges facing them, he says.
“It’s a catch-22,”Thompson says. “If a distributor’s entire book of business is starting to slow down, a manufacturer with a relationship will try to work with that distributor, but they can’t continue on as if there has been no change in the relationship. They are getting squeezed at the other end as well.”
But just as manufacturers will be looking more closely at distributor paying patterns, distributors should examine their own customers’paying patterns.
Trust is important, Thompson says. “It can disrupt the flow in the industry when trading partners don’t trust each other to get paid. It goes both ways,”he says. “If you order from me you pay me. And I’m not ordering from you unless I expect to pay you.”
Impact on Deal-Making
A top driver of mergers and acquisitions activity is the availability of credit. Over the past three months, “it’s pretty amazing how much credit has tightened,”Coetzee says.
“The last couple of weeks it’s been a week-by-week evaluation of what can and cannot get done.”
As a result, new deals have been put on hold until the credit markets thaw. One potential deal put on ice: Stock Building Supply apparently received a lot of interest when the UK-based Wolseley plc was looking at options for the struggling U.S. building materials unit. But the distributor said that in the end, a sale was not possible.
The credit crunch has a different flavor than fall 2007 when the markets began tightening. Up until a few months ago, it was more difficult to get funding for large deals than for mid-market or small deals.
But in the past three months that distinction has grown irrelevant. “No one is really immune,”Coetzee says. The deals mostly like to secure financing right now are $50 million and below, he says.
In an environment where new buyout financing is not available, strategic buyers with access to capital and conservative leverage have an advantage.
Lange says that if a distributor has a growth strategy that includes M&A, and also has access to capital and experience with successful acquisitions, the current environment is a good one to make acquisitions.
“This could be a very good time to take market share and strengthen business long-term ahead of the next recovery,”he says, adding that the environment is not ideal for a distributor’s first acquisition.
It’s hard to say when the credit markets may open up again, Coetzee says, but the market for buyout financing is likely shut down through the end of this year.
“You can only look at this short-term,”he says. “We’ve never been through the events that have taken place. It’s almost a week-by-week wait-and-see. Longer term, I have no crystal ball on how long this will take.”Credit has been virtually frozen since unprecedented turmoil hit Wall Street and major banks this month. Here’s what it means for distributors, manufacturers and deal-making.
The construction industry has been hit hard by the severe downturn in the housing market and the 160 member companies that make up the AMAROK Drywall Distributor Network are no exception. While a number of distributors are holding their own, others have seen business fall off so much that they have struggled to cover overhead.
Strike two: When builders started to file for bankruptcy and were unable to pay their subcontractors, the distributors’receivables fell off dramatically. Receivables have improved, but the distributors are now facing a third strike: the tightening of credit.
“We’ve seen distributors who have had their bank credit lines cut and some whose banks have quit lending altogether so they’ve had to find a new bank,”says Jeff Jenkins, senior vice president of AMAROK. “Anyone who is not well-capitalized has to juggle things around to pay the bills on the reduced credit lines they have been given, and getting a credit line raised or finding a new bank is a daunting process today.”
What former Fed Chairman Alan Greenspan termed a “once-in-a-century credit tsunami”has distributors and manufacturers in every sector concerned with how turmoil in the financial markets could affect them.
In preliminary results of a recent MDM survey, about 77 percent of respondents said they are concerned with current credit markets “as it pertains to their day-to-day operations and growth plans.”
“Lending standards are going to tighten,”says Chris Coetzee, managing director at Robert W. Baird &Co. and head of the firm’s Financial Sponsor Group. “Companies will find that scrutiny from banks will be higher, and that there will be an incredible focus by bankers on the end markets that these companies sell into.”
Burt Schraga, CEO of Bell Electrical Supply, Santa Clara, CA, has seen this first-hand. He recently renegotiated his credit line at a local bank.
“We have a very close relationship with our bank,”he says. “Our loan was renewed but they were very candid in saying that they were under a lot of scrutiny and not doing a lot of new loans. They also said they were being careful with loan renewals.”He says that the company didn’t see this in the early part of this decade when the industrial recession took hold. “Normally a loan renewal takes a week for due diligence,”he says. “This time it took three or four weeks.”
Many distributors and manufacturers are concerned tightened credit will hamper their ability to move into new markets or make acquisitions. But in many markets, “the operating environment has been good to strong in the last quarter,”says Tom Lange, managing director and head of Baird’s Distribution Group.
“The challenge in the coming year will be to maintain profitability in a declining business environment. CFOs have to evaluate debt covenants against various scenarios that could develop over the next 12 months. The focus should be to make sure liquidity remains available in an environment like this or in an economic downturn.”
The largest concern in the MDM survey seemed to lie with the credit health of customers.
Schraga says that he has already started to see customers pay more slowly. A portion of Schraga’s business is commercial contractors. “It’s not because they are bad guys, but because they are having a difficult time collecting money,”he says. Many of his customers are seeing contracts for work canceled or delayed for six months.
Other distributors are seeing the same thing. Those serving the commercial construction markets are starting to see a slowdown as projects are put on hold because of difficulty in