O bankruptcy, where is thy sting?

LBM veterans say–sometimes with exasperation–that attitudes appear to be changing with regard to both corporate bankruptcy and the way the industry treats companies that take that route.

GEORGIA PHOENIX: The banks forced Wheeler's Jim Manis, left, and Mark Manis to file for Chapter 11. But by selling some real estate, they managed instead to liquidate their LBM operation, buy back some assets and Wheeler's corporate name, and reopen in Rome, Ga., as a smaller but operationally similar company.
Bard Wrisley / www.bard-images.com GEORGIA PHOENIX: The banks forced Wheeler's Jim Manis, left, and Mark Manis to file for Chapter 11. But by selling some real estate, they managed instead to liquidate their LBM operation, buy back some assets and Wheeler's corporate name, and reopen in Rome, Ga., as a smaller but operationally similar company.

"Five years ago, Chapter 11 was a death knell," the head of one materials distribution group tells ProSales. "Now it's a refinancing tool."

That may be true, others say, but if so the fault lies in part with vendors' and distributors' changing attitude toward dealers. In some cases, what seems to have emerged is that suppliers have come to regard a few big dealers much as the government did giant banks: as Too Big To Fail. In others, a dealer's choice of bankruptcy appears designed to achieve certain select objectives while otherwise continuing with business as usual. For instance, Stock Building Supply entered Chapter 11 primarily so it could get a judge to cancel scores of leases on former properties that it had closed but on which it still owed rent.

There also is evidence that bankruptcy hasn't changed much. Roper Brothers of Petersburg, Va., filed for Chapter 11–which is supposed to protect you from creditors while you reorganize–but also closed its doors and sold a yard. Houston-based Bison Building Materials got some troubling leases canceled, but at press time it hasn't revealed a way to reorganize itself into a going concern. And when ORCO Construction of Livermore, Calif., tried to use Chapter 11 to sell itself to one company, it ended up getting bought by another.

Of all the bankruptcy cases, the one that has evoked the most comment involves Wheeler's, the Rome, Ga.-based dealer that at one point was among America's 25 biggest LBM operations. It filed for Chapter 11 in February 2008. Two months later, in a jaw-dropping maneuver, owners Mark and Jim Manis liquidated their company, created a new operation, and then bought back for roughly $3 million enough of their assets to resume business under the Wheeler's name. Jim, the company's president, notes to ProSales that Wheeler's has fewer than 100 employees and perhaps $20 million in annual revenue vs. more than 1,000 workers and $270 million in 2006. On the other hand, it's alive.

What intrigues folks is that Wheeler's managed to keep some of the same suppliers that had been with it before–and that presumably lost money when the first Wheeler's was liquidated. How did the Manis brothers do it? Jim cites several factors that other dealers are unlikely to duplicate.

First, the brothers held their real estate separate from the various legal entities that carried the Wheeler's brand, and they resisted calls to borrow on or otherwise use that land to bolster the LBM operation's finances. Rather, they applied the proceeds of real estate sales during the liquidation hearing. And because this happened early in the recession, they were able to sell their lots at decent prices.

Second, several years ago the Manis brothers' lead bank tore up the personal guarantees that had been linked to the business, so when Wheeler's went down, personal assets weren't at stake. "That's a stroke of luck that may not happen again," Jim says. And third, he says, Wheeler's had such a good reputation for paying its bills that it had built up plenty of goodwill with its suppliers.

"When we did Chapter 11 and re-emerged, we were concerned about whether vendors and customers would come back," he says. "There were a lot of sleepless nights. (But) our vendors came back, and it was amazing how they opened up, gave us lines of credit. Some didn't turn us loose with much, but it was enough. We also had a few where we paid COD, but again it was enough that we've got every product line filled. We're not wanting for lack of vendors."

Wheeler's also might have been helped by the fact that the Atlanta market was shaken up more than most by the recession. Along with Wheeler's, Ply Mart also went out of business (its owners have since reopened a single store under a different name), and ProBuild bought two other dealers.

Such changes could cripple manufacturers if, as increasingly seems to be the case, they sell exclusively through certain dealers in a market. In such cases, the closure of a dealer could shut a vendor out of a metro area.

"Your vendors are saying 'I need to sell into this market and how can I best do that?,'" Jim Manis says. "And we were chosen."

Stock's Chapter 11 raised eyebrows primarily because of the canceled leases. A number of observers regard that act as tantamount to stiffing dealers who had sold their operations to Stock in past years and had expected to be paid in part through long-term leases.

But an LBM exec with detailed knowledge of those deals notes that, in many cases, the dealers who sold to Stock got a lower tax bill by taking part of their payment in rent rather than collecting sales dollars up front. In effect, they took a calculated gamble that Stock would stay in business for the entire length of the lease, and they lost.

Stock also exemplified how Chapter 11 has changed. Chapter 11 is supposed to provide breathing room on bills due. But from its first day, Stock stressed it wanted to keep paying its suppliers.

That's a crucial change, says one distributor who declined to be identified. "In the old days, if somebody went Chapter 11, you'd write it off at a loss," he says. Today, a supplier must work hard to make certain that it's included in the Chapter 11 company's list of critical vendors. Then, "After they emerge reorganized, you treat them as a new company," the distributor says.

Peter Ganahl, president of Ganahl Lumber in Anaheim, Calif., and a member of the ProSales Editorial Advisory Board, believes that some companies in Chapter 11 are benefiting from how the weak economy is forcing manufacturers to keep supplying major customers, regardless of their status. "When the sawmills have a full order file in the future they will be way less willing to sell to Chapter 11 companies that stiffed them," he predicts. "Right now, they are challenged to get enough business and as such are more flexible. But even now, these bankrupt companies will be on a very short leash."

That leash presumably involves terms rather than price at Wheeler's. "I don't know that we're paying a whole lot more for products than we used to," Jim Manis says.

"My brother and I have always had a philosophy that your builders are going to go out of business and leave you hanging, and a year later they'll come back in and build houses again," Jim adds. "You're never going to earn the money back until you open up to them again. That was our philosophy, and our vendors were probably saying the same thing."

Bill Tucker, president of the Florida Building Material Association, says vendors "are working relationships harder and watching them closer" because it's very much in their interest to be working with the dealers who are most likely to survive the downturn and remain a good conduit for selling the vendors' products in a particular market.

That would suggest that the bigger the company, the more likely a vendor or distributor would want to help a company recover through Chapter 11 rather than go out of business entirely. "If Joe Smith in Roanoke goes Chapter 11, it's hard to come back because you can't get the vendor relationships," he says.

Regardless of the size issue, it's possible Chapter 11 filings will grow in popularity because of a larger trend in society to walk away from debts. Recent NAHB surveys have found that builders have a far greater tendency today than before to just hand a construction project back over to the lender rather than try to work out payment terms.

"Consumers are losing their fear of bankruptcy, and ultimately this will have an effect on dealers," adds Ruth Kellick-Grubbs, an LBM consultant. "People are just throwing up their hands and saying 'the economy is hurting me.' They don't do anything to help themselves."