Don't Bank On It
Struggling Banks Add to the Struggles of
by Megan Headley
“We had the largest backlog and the largest receivable in
the history of the company at the time of the receivership so it’s all
hard for us to understand,” John Barber told USGlass in a one-on-one interview
in December 2010, three weeks after his company, Barber Glass, was placed
into receivership by Ontario’s Superior Court of Justice.
“I thought we had a deal at the bank only to find out at last hour that
it didn’t happen,” Barber said. By the time the 127-year-old glass fabrication
company’s assets were auctioned off in March, industry professionals were
referring to “the Barber example” as a cautionary tale of what can go
wrong with a loan during today’s economic climate.
It’s far from being the only example.
In August 2009, Bob Lawrence, president of Craftsman Fabricated Glass,
wrote a letter to customers that explained the challenging process the
company was undergoing to replace its lender. Lawrence explained that
the company was grappling with significant challenges in upgrading to
new equipment and software and began to experience losses as it worked
to set the problems to right. “The losses began to challenge our banking
relationship,” he wrote.
Much like Barber, Lawrence wrote that Craftsman “had never failed to pay
our bank obligations,” although the failure to meet certain covenants
triggered the bank to forebear those covenants.
Craftsman took action to cut costs and worked hard to return to profitability,
paying down vendors along the way. As, Lawrence wrote, “we were about
to achieve 12 months of profitability,” an offer to buy the company that
would have paid the bank its secured loan was received and rejected.
“Our lender had heard that I had received the purchase offer,” Lawrence
wrote. “It did not care that it was insufficient to other creditors. When
a lender decides that they want a client to leave, they employ tools that
will make its ‘unwelcome’ clients’ lives miserable.”
As the downturn began to drop in full force, Lawrence accepted an offer
to sell a majority stake in Craftsman Fabricated Glass to Cristacurva,
a glass fabricator headquartered in Guadalajara, Mexico.
Never Missed a Payment
Over the course of the past couple of difficult years, numerous fabrication
and glazing companies have fallen by the wayside.
Though the reasons behind these closures and sales have been varied, the
common thread has emerged. Glass companies are among those industries
paying for banks mistakes. Companies that have had some leniency in their
loans when, for example, they faced a delay due to bad weather or a jobsite
glitch, suddenly find themselves in hot water when those same problems
arise in this new environment of tightened lending criteria. Banks that,
in the past, had not enforced certain covenants, now hold glass companies
A January 31 report from the Federal Reserve Board, “Senior Loan Officer
Opinion Survey on Bank Lending Practices,” noted that roughly 20 percent
of banks, on net, indicated that they had reduced the sizes of lines of
credit for commercial construction, about the same as in previous surveys
(see chart below).
“Even though companies have never missed a loan, never missed a payment,
never missed compliance, bank examiners are now telling them that these
companies are not good credit because the past couple years’ earnings
have not been very good as opposed to when looking at them historically.
Therefore, the bank examiners say, rather than work it out with them,
put pressure on them,” says Bill Stone, president of Louisville Plate
Glass in Louisville, Ky.
“If the bank cancels a company’s line of credit, there has to be some
reason behind it,” says one Midwestern glazing contractor who declined
to be identified for fear of retribution. “Either the company is in trouble
and the bank doesn’t want to renew, or,” he points out, “the bank is in
trouble and can’t renew, most likely because they have not followed sound
lending practices at the time the original loan was put in place.”
The insult added to this injury is that industry insiders know that these
actions can be damaging to the bank, although not nearly as damaging as
it is to the glass shop whose assets are strewn upon the auction block.
As Lawrence pointed out, the bank penalized Craftsman for rejecting a
buy offer, even as the company was on track to profitability. The offer
had been rejected, Lawrence explained, because “it would have been unacceptable
to our key suppliers which had no security.”
Stone adds that the complicated nature of the manufacturing business is
beyond the efficacy of banks that want to quickly recoup losses and move
on to the next item—when a little understanding of these businesses would
help everyone involved.
“There is a tremendous difference between foreclosing on a glass company
such as Barber, for example, than on an office building or a shopping
center. If they foreclose an office building or shopping center they can
hire a realtor who will do the same thing for them that the previous owner
was doing for himself. If they foreclose on a [glass fabricator], they
have no idea what the equipment’s worth, they have no idea what to do
with the equipment, they have no sophistication in the industry,” he says.
“It’s a complicated business and they wind up taking 20, 30 cents on the
dollar, if they are lucky, whereas if they are patient and let the Barbers
of the world work their problems out they eventually come out of the problem.”
As stories of these situations circulate locally, other companies may
preemptively change lenders.
“When they yank credit lines, they leave a reputation gap for years,”
says Carl Miller, president of Tab Glass & Window Corp., a glazing
contractor in St. Petersburg, Fla. But, Miller adds, “On a case-by-case
basis, I would love to know the underlying reasons.”
Miller also points out that there is an underlying reason when a loan
requirement is challenged. “Many ‘glass shop owners’ take out the capital
they should leave as retained earnings to bolster their balance sheet
for the lean years,” he says.
For his part, the Midwest glazing contractor notes that the big banks
have little choice in the matter other than to suffer the losses. “Because
the FDIC regulators are climbing all over most banks these days, the banks
have no choice other than to enforce their agreements to the letter of
Across the Board
The accusation has been thrown by glass professionals that banks are taking
a particularly critical look at this industry. That accusation may stand
simply because banks aren’t taking a critical look at the workings of
these glass businesses. But at a time when the players in commercial construction
are still at the bottom of the recession looking up, one can hardly find
a segment in the construction industry where big bankers are eager to
“I think there’s a general reluctance by banks to pursue anyone in the
construction or real estate industries at the present time. And quite
truthfully, you can hardly blame them,” says the anonymous glazing contractor.
“The real estate and construction industries are a war zone right now
and it would only make sense that these areas would not be prime targets
for most, if not all, lenders. Bankers are business people and businesses
exist to make money. Most people in the construction and real estate field
are losing money and, therefore, bankers are going to have little if any
interest in them at the present time.”
Stone considers this reluctance to pursue these markets as much a cause
of the problems as it is an effect.
“The banks have been extremely cautious about investing in projects and,
as a result, there hasn’t been the amount of broadness of the construction
industry and growth because banks refuse to loan the dollars,” he says.
“The commercial construction industry, I think, is harder hit than the
rest of the economy,” Stone continues. “We are worse off than most people
Back to Basics
At this point in time, glass shops fearing for their loans have to weigh
their options and their risks. Companies are finding that the fundamental
principles of lending are unchanged, it’s just that the leniency of earlier
times has gone.
“I think the old three ‘Cs’ regarding borrowing are as applicable today
as they were 40 years ago when I first heard about them. Specifically,
to get a loan you need character, capacity and capital,” says the anonymous
glazing contractor. “At the present time, all three of these components
are critical. Even two without the third won’t cut it today.”
Miller adds on the point of “character” that it doesn’t hurt to get to
know your lender better, even in today’s environment.
“Relationships are more important today than ever, so you don’t end up
explaining a problem as a story. I try to join the same service club,
golf with them, meet for lunch, etc., so we are at least acquainted. I
have been burned in the past,” Miller explains, “when they could always
find another to loan to, and I immediately took all my business elsewhere.
Operating legally today requires a level of disclosure that lets everyone
know your business anyway, so being open in person creates access and
Relationships may be even more important as community banks have “stepped
into the breach to some extent where bigger banks have pulled back,” as
Ben Bernanke, chairman of the Federal Reserve, said during a January forum
on “Overcoming Obstacles to Small Business Lending.” He added, “There
are substitutes for lazy lending, which is just the hard work of understanding
the business.” He noted that small local banks are taking on that hard
“I believe smaller regional or larger community banks are the best source
for new loans,” Miller agrees.
Stone adds his own commonsense advice: “Watch your costs, watch your overhead.”
While that point, Stone says, is insultingly obvious, he says that many
companies have to really look at what that really means for their business.
“Have the courage that, if you only have three days worth of work a week,
you open three days a week. In other words, cut your overhead,” he says.
“Capital is rising and the leveraging is beginning to slow down. Lending
is starting to improve,” Bernanke commented during that January lending
forum. He added, “I think 2011 will be a better year for small business
For consumers as a whole, one can hope that lending will begin to improve,
but for now things seem less rosy within the commercial construction arena.
“This is one of those times when the old adage seems to be true, that
you can only borrow money if you don’t need it,” says Michael Collins,
vice president of the building products group at Jordan, Knauff &
Co., an investment banking firm in Chicago that specializes in the door
and window industry. “On the other hand, we’re seeing increased willingness
by lenders to loan against good assets, such as current accounts receivable,
usable inventory and machinery and equipment. As the economy improves
and competition for loans increases, we typically see lending standards
and required covenants loosen up.” He added, “Based on the number of calls
I’m getting from lenders looking for projects, I would say that process
of increased competition has begun.”
He adds, “I’m not personally seeing any loosening of underwriting criteria
and, in fact, I don’t think there can be any loosening for a while because
the new FDIC requirements for the banking industry don’t allow for any
loosening, only tightening. The banking industry, like several other industries
in this economy, is struggling.”
Miller interprets the struggling as correcting. “Banks are now doing the
real underwriting they should have, which is interpreted as ‘tightened
criteria,’” he says.
Stone doesn’t excuse the correction he sees.
“The banks currently only want to lend money to people who don’t need
it. I feel very strongly that the banks are doing everything they can
to keep us in this recession—maybe not intentionally, but all of their
activities do it,” he says. Stone adapts Regan’s quote on government,
commenting, “The banks are not the solution, the banks are part of the
Glass companies watching their peers’ problems are still seeking their
Megan Headley is the editor of USGlass.
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