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Tuesday, June 3, 2008

Economy Puts Tight Squeeze on RV Makers

In Effort to Ease Cash Crunch, Coachmen Taps Insurance, Fleetwood Peddles Assets

Two of the country's largest recreational-vehicle makers, pummeled by high gasoline prices and the slumping housing market, face serious cash crunches and are taking drastic measures to ease the strain.

Coachmen Industries Inc., whose sales have declined 40 percent over the past three years, is borrowing against the value of life-insurance policies it holds on employees and retirees. So far, the Elkhart, Ind., company has tapped about half the cash value of those policies, according to filings with the Securities and Exchange Commission.

Fleetwood Enterprises Inc., which has posted five straight years of losses, recently sold its Riverside, Calif., headquarters and is seeking buyers for other properties, in an effort to raise $100 million to finance a looming bond redemption. In addition to RVs, about 25 percent to 30 percent of Fleetwood's business comes from mobile homes, a market that has been skidding even longer.

The $15 billion RV industry has been among the less-heralded casualties of the mortgage and housing crises, say manufacturers, dealers and others. But the impact has been severe. RV sales peaked in 2006 at about 390,000 vehicles, according to the Recreational Vehicle Industry Association. After a 12 percent drop in 2007, the trade group expects sales to tumble 14 percent to about 305,000 vehicles this year, the lowest level since 2001.

Industry watchers say couples in or nearing their 50s are the core market for motor homes and travel trailers. These couples are delaying their purchases of RVs, largely because they would typically have financed them by selling or borrowing against their homes. That has become more difficult as home values have plunged nationwide.

Meanwhile, banks and other lenders, many battered by mortgage-related losses, have grown more reluctant to make RV loans, demanding higher interest rates and better credit scores. Last week, General Electric Co.'s consumer-finance unit, a major lender in the field, said it would cease to make new RV loans because of disappointing returns.

High gasoline prices have also put off would-be buyers of the fuel-guzzling vehicles. "Gas is a real problem for these guys. What's happening with (sport-utility-vehicle) sales happens in spades with an RV company like Fleetwood," said Al Koch, vice chairman and managing director atAlixPartners, a turnaround and business-advisory firm.

The sales slowdown has already claimed two smaller RV manufacturers. In November, National RV Holdings, a Perris, Calif., maker of high-end motor homes, filed for bankruptcy-court protection and is in the process of going out of business. Last month, another high-end manufacturer, Western Recreational Vehicles Inc., of Yakima, Wash., closed its doors.

Even Winnebago Industries Inc., one of the industry's strongest companies, hasn't been immune. While Winnebago has managed to stay profitable by cutting costs and focusing on large RVs, a market where profit margins are fatter and competitors fewer — it has had four straight years of declining sales.

To get through its cash crunch, Coachmen has borrowed $23.7 million, or nearly half the cash-surrender value of what it describes in its filings as "company-owned life insurance."

Such insurance typically is purchased by a company on the lives of its employees and pays the company when an employee dies. In its filings, Coachmen has said the policies were intended to fund executive retirement benefits. It didn't return phone calls seeking details of the policies or the outlook for its benefits programs.

Coachmen sales fell sharply to $480 million in 2007 from $802 million in 2004. Over that period, it nearly halved its work force to 2,300.

Though its sales fell 7 percent in the first quarter of 2008, Coachman posted a profit of $1.3 million, compared with a year-earlier loss of $10.4 million. Monday its shares, which were trading at $10 a year ago, rose four cents to $3.49 in 4 p.m. composite trading on the New York Stock Exchange.

People familiar with the matter say the company has sought out pricey "rescue financing" from private-equity funds and other lenders. They say it has received one proposal, which is now before the board, and that no decision has been made.

But Coachmen CEO Rick Lavers, while acknowledging the company faces "challenging times," said any discussions about new funding were initiated by the funds and not by his company. "That's because they want to make capital available to us. We don't feel we need it right now. You'd always like to have more cash. We've prepared very well for worst-case scenarios, which unfortunately have come to pass," he said.

Mr. Lavers said the company isn't contemplating a bankruptcy filing. "Rumors of our demise are overstated," he said.

In response to queries from The Wall Street Journal, Coachmen said in an SEC filing that it was "not actively engaged in pursuing additional debt or equity financing" and that its credit line and life-insurance policies provide "adequate sources of liquidity for the company's current and foreseeable operations."

The much-larger Fleetwood Enterprises is in its own rush to raise cash as sales continue to tumble and losses mount. For 2007, it posted a net loss of $89.9 million as sales slipped to $2 billion from $2.4 billion a year earlier. Since last year, the company has shrunk its work force to about 8,500 from 10,000.

Fleetwood bondholders are expected to redeem $100 million in bonds on Dec. 15, and the company needs money to finance the redemptions. In April, it sold its 42-acre headquarters complex for $23.5 million and is shopping around other land and assets, including its division that makes pop-up camper trailers.

Fleetwood shares have plummeted from more than $11 last summer, finishing 4 p.m. composite trading Monday at $3.88, up eight cents, on the NYSE.

Despite its battered share price, Fleetwood is considering issuing more stock to pay off its bonds. Fleetwood Treasurer Lyle Larkin said "we are confident we can meet this requirement, though it sure could have happened at a better time."

Most of the RV industry had banked on baby boomers preparing for their retirement years to fuel a new era of sales growth. That is what Robin Schwartz and her husband were expecting in 2005 when they sold off a gas station and bought Brien's RV, a small RV dealership in Fairless Hills, Pa., about 20 miles north of Philadelphia. Mrs. Schwartz said customer traffic began flagging late last year.

"We are selling more used RVs. Or people will take a lower-end model that doesn't have surround sound, or the cabinets are more basic. It's like stepping down from a Lexus to Hyundai," Mrs. Schwartz said.

Sales manager Harry Wiko estimates Brien's will sell 80 or so RVs this year, down from about 110 in the past couple of years. And the average sale price is down to about $20,000 from $30,000. "It's as bad as I've seen it," he said.

To cut costs, the dealership is keeping fewer RVs in inventory and upgrading roadside service to keep customers happier. It is also paring advertising on local cable TV and a $5,000 Nascar sponsorship it shares with a local radio station.

By: Jeffrey McCracken
Wall Street Journal; May 13, 2008