Gredit plays vital role in lumber industry outlook

Perspective factors heavily into any assessment of current business conditions. Many lumber companies today continue to bravely face an environment best described as perilous. Some - through timely decisions, savvy management, international opportunities, and plain good fortune-are operating profitably. To sum it up, the present business environment remains mixed at best.

Credit continues to be an important element influencing these circumstances. Consumer credit is closely watched by many lumber business owners, given the obvious impact on lumber demand by housing construction and home improvements. As widely reported elsewhere, we also closely monitor employment metrics. inflationary undercurrents, tight lend- ing practices, skyrocketing fuel prices, and volatile consumer confidence because of the powerful, direct correlation these factors have on industry commerce.

With specific regard to credit extensions to businesses-for opera- tional or capital requirements-we've observed relatively limited instances of new, expanded loan packages. Generally speaking, such programs have been issued to well capitalized firms with strong credit ratings, seeking to acquire failing companies or assets at fire sale prices. As for existing credit facilities, notes accompanying the balance sheets we review continue to reflect negotiated amendments to loan terms and covenant modifications (including required financial ratios). In addition, we have observed a number of companies reducing their reliance on bank credit or decreasing leverage by reallocating cash otherwise used for operating expenses to pay down debt.

From financial statements and accounts receivable aging data, we again see a mixed bag with respect to trade credit. Here are some general observations:

. Timely remittances on accounts payable continue to vary, with debtor quality and cash flow throughout the supply chain as the logical primary determinants. As evidenced below, reported Blue Book "pay indicators" reflect this variability.

For companies with reported pay indicators, about 4O7o pay "mostly within terms." Nearly 35Eo remit "regularly beyond terms."

It should be noted, however, that this distribution of pay has been relatively consistent over the past several quarters. In other words, we have not observed a noticeable decline (or improvement) in industry pay during that span.

Overall, credit portfolio quality remains a focus. Most creditors continue to reduce their exposure to highrisk, slow-pay accounts while concentrating on the retention of moderateto-low risk accounts, even accepting some slowness in pay.

Providing an industry perspective, Roger Peterson, credit manager for West Fraser Timber Co. Ltd., Vancouver. B.C.. comments on the economy's broad impacts and the real-life applications regarding trade credit: "After years of unlimited building and open purse strings, 2007 hit our industry like a ton of bricks. Credit limits were reeled in, our customers were in dire financial straits, as were the banks they were dealing with. The great recession has taught us a hard lesson. It is my belief that credit will for many years to come remain a privilege that is earned rather than a right that is given."

As observers of credit conditions for more than a century, we affirm that the circumstances of the past two years have indeed been the most challenging in more than a generation. We share the view that safely extending credit-by following sound credit policies and using trusted credit toolsis critically important.

Finally, we are also optimistic that forecasts for modest reductions in unemployment will contribute to a strengthening economy. As this unfolds, we believe the credit climate-including lending and tradewill certainly improve.

- Jim Bartelson is executive v.p. and Chuck Curl is director of ratings at Blue Book Services, publisher of the Lumber BIue Book. Contact them at (630) 6683 500 , jbartelson@ bluebookservice s .com, or c c url@ bluebooks ervic e s.com.

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For over 100 years, our experts have been providing quality claims and risk management services to the lumber, woodworking and building material industries. Remember, "yot! get what you pay for." We understand wood. We gef your business... because it's our business too. Wood is allwe do.

By Chuck Thomas,