assessing risk|realizing opportunities

Creeping Credit Crisis or Poor Risk Management?

bankruptcyI receive a daily feed from Biz Journal. One of the stories from The Triangle Business Journal was a Chapter 7 bankruptcy of CJ Woodmaster, a manufacturer and retailer of wooden furniture down in the Tar Heel State. I don’t know the details surrounding the causes of the liquidation of CJ Woodmaster other then a few quotes by attorney William Yeager, the bankruptcy counsel for the company, “Their level of debt and the limitation of getting new credit lines snuck up on them,” he says. Mr. Yeager continues to state that hundreds of customers who have paid for purchases but have yet to have their order filled will lose money. Ouch!

I began to shake my head. Aha, hard evidence of the recession and an example of contagion from the soft housing market. You don’t need furniture for houses that are not being built and consumers whose credit cards are maxed out can’t buy a sofa from CJ. Yet another example of the creeping credit crisis that prowls around like a ravenous cougar seeking some small business to devour.

Mr. Yeager goes on to offer some additional observations about CJ Woodmaster. He says he is trying to get a handle on the company’s assets and liabilities from the numerous companies set up by CJ Woodmaster and further adds that the IRS is a major creditor and that “various business units owe tens of thousands of dollars in taxes to the Internal Revenue Service. The federal tax liens date back as far as 2002″.

Now I’m not so sure that the creeping credit crisis can be blamed for this one. The few cursory observations I gleaned from this brief article suggests to me a telling breakdown in CJ’s ability to manage risk factors that eventually led to its Chapter 7 Bankruptcy filing.

Having hundreds of customers waiting for orders to be filled is a sign of a vibrant company. If CJ had that many customers and it was losing money it indicates unrealistic product prices it charged to its clients. This mispricing could be the result of an inefficient manufacturing operation or the strangulating costs associated with developing and managing distribution through a chain of retail outlets. Perhaps CJ should have decided it was either a manufacturer or distributor of furniture goods. Not both.

This assertion may be supported by additional observations made by Mr. Yeager in the article. Mr. Yeager is having difficulty getting a handle on the extent of the company’s financial condition. He blames the complexity of the company structure and apparently the numerous financial statements he must put together. This is evidence of a problem in corporate structure and governance, information management and reporting. These factors may lie at the root of CJ’s inability to determine inefficiencies in its manufacturing or distribution functions and why its integrated strategy was unprofitable.

Lastly if a company has a series of tax liens pending for five years this is a major red flag. CJ’s inability or reluctance to satisfy tax liabilities shouts a disturbing ambivalence to corporate governance. It is a disclosure that would give any potential credit provider or equity investor a strong reason to pause.

April 3, 2008 Posted by | bankruptsy, credit crisis | , , , , , , | Leave a comment