December 10, 1920 



HARDWOOD RECORD 



17 



Refinancing the Lumber Industry? 



This article is written with the aim of projecting into the com- 

 posite mind of the lumber industry the suggestion of the possibility 

 of improving the processes of financing under which lumber is now 

 manufactured and distributed. It is not its purpose to present a 

 finished idea, a plan all ready for operation; but merely to plant 

 the germ of a plan, which the lumbermen themselves may, or may 

 not, be able, by taking thought, to quicken into growth and nurture 

 into maturity. 



The germ of the plan was suggested to Hakdwood Eecord by 

 Baker, Fentress & Company, lumber bankers of Chicago, who call 

 it "Ee-financing, " and intimate that it might be made the means 

 of "putting the lumber trade in a much stronger financial position, 

 with the result that such periods as the lumber business is now pass- 

 ing through could be minimized or avoided." 



Their thought is that inasmuch as other industries, such as U. S. 

 Steel, General Motors, American Locomotive, Westinghouse and 

 Wilson & Co., have thought it wise and have found the means of 

 "increasing their working capital, thereby placing themselves in a 

 strong financial position to meet every contingency in the near 

 future," the lumber industry might also so fortify itself. 



They state that such industries as they refer to are spoken of as 

 "controlled," while the lumber industry is known as "uncon- 

 trolled." From this point they argue that this is "another reason 

 why the lumber industry should refinance itself in order to better 

 stabilize both production and the marketing of lumber products." 



There are various ways of raising additional working capital, such as 

 selling of capital stock, the borrowing through long-time loans, using the 

 physical properties and facilities a.s security, thereby leaving free and 

 clear all the quick assets to meet seasonal requirements through short- 

 time loans from the banks. In some Instances consolidation of com- 

 petitive interests might be desirable. 



As the lumber industry ranks among the largest in the country, rela- 

 tively the raising of additional working capital to meet all the requirements 

 is an enormous job in spite of the fact that there are many sources 

 from which to secure such additional working capital. The subject is 

 worthy the most intelligent thought of the leaders of the lumber Industry. 



In reply to these suggestions the Editor of Hakdwood Eecord 

 said: 



We fully realize that the principal reason for lack of stability in the 

 industry is the large number of units manufacturing and selling the 

 product. It strikes us that refinancing in Itself would not relieve this 

 condition unless such refinancing brought about a consolidation of many 

 units into a distinctly smaller number. 



Will be glad, indeed, to have more definite thought from you and 

 whatever specific information you may have which would indicate: 



First : How the enlarged capitalization of the industries cited has 

 been of direct benefit to those Industries ; 



Second : How such refinancing of the lumber industry might directly 

 work to the advantage of that business. 



Baker, Fentress & Company came back with the following answer 

 to Haedwood Record's request for further enlightenment: 



Referring to paragraph 2 of your letter — in our judgment the specific 

 benefit would be to minimize the extremes in mill prices, wholesale prices 

 and retail prices. 



Referring to paragraph 3, our Ideas are fully in accord with yours. 

 What we meant by refinancing undoubtedly would be only a fractional 

 part of the changes, reforms and other qualities in the situation which 

 would tend to stabilize the lumber Industry and transfer It from the 

 so-called uncontrolled class of industries to the class of controlled in- 

 dustries. 



This letter continued with the statement that "the subject is 

 one which concerns the smallest as well ,as the largest operator, the 

 wholesaler and retailer; and the ultimate consumer should not be 

 forgotten in this discussion. The nature of our business restricts 

 us to the making of loans to the larger manufacturing companies 

 which have records of production and net profits, and you will 



realize the number of these concerns is a small fraction of the total. 

 We are enclosing extracts from a letter that we write in answer 

 to such concerns when inquiring about loans. These will give you 

 our point of view on financing the lumbering industry so far as it 

 applies to the larger manufacturers, who own timber lands which 

 would justify loans of $100,000 to $1,000,000." 



The following are the excerpts from the lumber financing letter, 

 which was referred to: 



The object of our long-time loans is to give the lumber company much 

 more time than could be afforded by its usual bank lines and to enable it 

 to avail itself of an additional source of security for indebtedness by 

 placing a large part of its financial burden on its physical properties, 

 leaving its lumber accounts and other quick assets free of incumbrance 

 and available for use in obtaining short-time bank loans as temporary 

 conditions demand. We believe a lumber company's debts should fall 

 into two distinct classes: (1) Seasonal requirements, generally bank 

 lines, which should be protected by 2 or 3 to 1 in quick as.sets and paid 

 oft from time to time in the course of the year ; (2) any other debts, 

 however incurred, which should be secured by the physical properties, 

 funded over a period of years, and worked out and paid off through 

 lumbering operations. Our observation has been that lumber companies 

 are prone to have too much short-time indebtedness, thus imposing on 

 the banks an undue share of the company's burdens, and also placing 

 the company in the position where it is likely to be caught in the 

 maelstrom of a temporary tight money market and forced to "dump" its 

 products at sacrifice prices in order to pay off short-time debts. 



Further comment from Baker, Fentress & Company is to this 

 effect: 



The war has developed many emergency plans in financing which have 

 worked with more or less satisfaction. I refer particularly to the so- 

 called revolving funds for the Railway Administration, the financing of 

 the War Utilities Board, etc. The stock raisers of the country have had 

 difficulties which parallel the recent experiences of the lumbermen, par- 

 ticularly the smaller operators. These very difBculties necessitated new 

 thought, new ideas and action, which have resulted in the Chicago banks 

 taking an active part in refinancing of the cattle raisers. 



A clipping from the New York Herald was enclosed, which told 

 of the raising of a pool of approximately $12,000,000 in the banks 

 of Wall Street to augment a general fund e,xpected to reach a total 

 of $30,000,000 to finance the renewal of loans made to the owners 

 of breeding cattle, in order that these breeders might carry their 

 stock over and not have to dispose of it for slaughter. 



Chicago bankers subscribed $8,000,000 to the pool and Boston 

 and St. Louis bankers were to be solicited to form additional pools 

 to add to the New York and Chicago subscriptions. 

 . The Live Stock Financing Corporation, with a nominal capitaliza- 

 tion of $500, was formed under Virginia laws to operate the pool. 

 Into the treasury of that corporation the funds on loan will be 

 paid, and it in turn ■will issue its certificates of participation to 

 the various banks to the extent to which they have subscribed. 

 The funds will be secured by chattel mortgages on the cattle, to be 

 deposited against the loans and held by the financing corporation. 



No new loans will be made, but as stated above, the money will 

 be u.scd entirely for renewals and no loans will be made on cattle 

 being prepared for market or on cattle purchased or held for specu- 

 lative purposes. 



The arrangement provides that the subscribing banks will receive 

 8 per cent on their money and that the breeder's paper will be 

 taken over at 10 per cent. The 2 per cent difference will be used 

 to pay the expenses of the corporation undertaking the financing. 



Baker, Fentress & Company conclude with the opinion that it is 

 the prerogative of the trade press to "direct the thought of the 

 -industry along the lines suggested, and urge a symposium on the 

 subject." Accordingly, Hardwood Eecord is passing the entire 

 discussion along to its readers, so that if any are interested they 

 may write in, setting forth their ideas. Baker, Fentress & Com- 

 pany believe that our readers can, and probably will, supply us 

 with "many and varied viewpoints." 



