Lessons learned from Peters Opal/Bavaria debacle?

[onlyme]

Out of interest, and as duffer hasn't filled in his profile, I must ask why he is motivated to keep this subject alive.

I hope as he/she states that it is in support of affected owners/purchasers, and not as is just as possible an employee/invester in an alternative brand/dealer.

Duffer, should I have offended you through questioning a genuine gesture, than please except my sincere appoligies.

 

[PeterGibbs]

Andrew,

I recognise the picture you paint. I write from personal experience. In my case, I approached the UK dealer, would not agree to his terms, turned to the German distributor and secured all I wanted. The deal proceeded in clockwork fashion, and yes, there was warranty work - all completed in the UK and paid for by the agent without drama.

But that is a picture for mass producers with large distributor networks. And the amount of customisation permitted is virtually none, which applies to most well-known makes these days.

In the case of a new boat purchased from a "50 hulls per year" supplier, where there is scope for customisation (the only reason why they survive) then the purchaser must expect to make a greater financial commitment. In my view this should be sufficient to defray the costs of on-selling should the purchaser not complete. But not so high as to be the main source of cashflow for the builder. Therein lies the risk and the judgement the purchaser has to make. There is little point in setting up securitisation where a builder's cashflow is weak - the outcome is likely to be additional calls for cash, delays in delivery, inadequate resources for warranty work etc.

Purchasers have to recognise what they are dealing with - a marginal situation: but it's often hard to get the romance out of what is a substantial risk when dealing at this, the cottage level, in the industry. A visit to the builder's yard will tell the open-eyed what they need to know. And small companies have form in this respect......

PWG

 

[Observer]

[ QUOTE ]
Most major commercial transactions involve an element of trust or a judgement of risk. If potential buyers of boats are seriously concerned about their deposit being at risk, then I would suggest either

1. Seek a bank guarantee, if you can find a bank that will issue one. However finding a bank that is in a position to evaluate the manufacturer's risk is likely to prove difficult.

or

2. Buy a boat that is already built, and in stock. Then title can pass at the same time as you make your payment, so no risk.

[/ QUOTE ]

I'm not sure that 2 is immune from risk. A stock boat may be financed by a loan and marine mortgage - until that's discharged, the lender will retain a security interest. The particular problem is that a new stock boat will not be Part 1 registered so the existence of a mortgage will not be visible on the Ships Register. However, If the dealer/borrower is a company, it will be registered at Companies House. I'm pretty sure Peters Opal used to finance stock in this way (may have been p/x and/or new stock) - there's a list of charges on the Companies House mortgage register as long as your arm.

 

[jamesjermain]

[ QUOTE ]
Did they pay Peters Opal (in adminstration) full stock price for those stock boats? And had any customers of Peters Opal already paid deposits towards those stock boats?

[/ QUOTE ]

As I understand it they bought the boats direct from Bavaria.

 

[Observer]

[ QUOTE ]
Currently we are arranging bank guarantees for approximately 1% of the advance. These amounts are between about £45,000 and £65,000

[/ QUOTE ]

Jez,

If the deposit/downpayment is 10% of the price, and (as stated in another post) the 90% balance is paid when the boat is completed and title can be transferred, why is a guarantee of the whole price needed?

Is the guarantee cost 1% of the deposit/downpayment or 1% of the total price? If the latter, the true cost of the guarantee is 10% of the amount 'at risk', not 1%.

 

[aknight]

[ QUOTE ]
The point has already been made that when you buy a house you get a solicitor to arrange exchange of title and purchase price at the same time. And when you have a house built for you, or major restoration work done, the builder will expect stage payments to finance the work. If you own the property, then you own all the work you've paid for. Why not get a similar arrangement for boat building - hull laid up, hull paid for, hull the property of the purchaser, etc? This would of course require a different sort of dealer - one that is acting as an agent rather than one who buys the boat from the builder then sells it on to you.

[/ QUOTE ]

I agree. On a new build, the system would be preferable if it was clear that a customer owned the work-in-progress for which the customer had paid. That way, if the builder suffers a business failure, the process of sorting out what belongs to the customer and what falls back into the insolvent estate to help pay other creditors is reduced somewhat, to working out what has been done or added since the last stage payment. It's likely that in many cases it might be hard to make that calculation - do you rip out joinery installed since the last payment, for example, or close up new hatch openings (assuming they're not moulded in).

But that may be less of a problem than it sounds. It wouldn't follow that it was sensible to hand the half-finished boat over to the customer. Many customers would rather have their money back rather than inheriting the hassle of building out. So the administrator would realistically have to pay to the customer the value of the unfinished boat as at the last stage payment (invoicing) date - an easy enough value to ascertain, as it would be the amount invoiced - in return for the customer transferring back his title to the work-in-progress which could then be built out and sold by the company in administration, or sold on as WIP to whoever purchased the insolvent company's business. Of course, if the administrator couldn't find a trade buyer who was willing to pay for half-built boats (which would become 'stock' boats of the buyer), then the insolvent estate would take a financial hit, to the detriment of other unsecured creditors, but at least the customers who had in all fairness paid for the WIP would be protected.

But the above system may be workable only for low volume builders operating direct sales, who do in any event seek stage payments from customers because they are to all intents and purposes building to order. It would be much harder to apply in the case of a volume builder who would inevitably - not least because many customers would want this in order to manage their own cash flow - seek stage payments on a regular basis, e.g. one third, one third, one third, regardless of the actual value of the WIP accrued on the relevant hull number at the stage invoicing point.

So while anyone buying off a small volume builder directly might usefully consider your suggestion as an option, it is less likely to be relevant in the case of a purchase from a volume manaufacturer. In any event, the difficulty remains that most often, buyers of a volume produced yacht are buying through a distribtuor, who takes and banks the customer's money on terms that are, in a number of cases, less than clear, with the results that we are presently seeing in the case of Peters Opal.

I remain of the view that unless and until the industry gets its act together, the more successful approach for most customers is to obtain collateral for deposits and stage payments, rather than to seek to obtain ownership or tracing rights in a half-built boat.

 

[Sailfree]

Not directly replying to your post but wanted to add to the thread.

In another post I admitted that I am now unsure of the ownership question on the 3 new boats that I have bought but just remembered that with Jeanneau it was no cash - no splash but I also had to insure the boat in transit on the lorry so I assume title was passed to me when it left the factory.

I agree with others though that the situation is still less than satisfactory and it needs government consumer legislation to make it more like 100% secure. Until then all purchasers can do is use credit cards for deposits and/or bank guarantees for the deposit and the final purchase price.

 

[aknight]

[ QUOTE ]
[ QUOTE ]
Did they pay Peters Opal (in adminstration) full stock price for those stock boats? And had any customers of Peters Opal already paid deposits towards those stock boats?

[/ QUOTE ]

As I understand it they bought the boats direct from Bavaria.

[/ QUOTE ]

Understood. I had inferred that the 'stock boats' you mentioned in your original post were 'stock' of Peters Opal, not new builds from Bavaria.

 

[aknight]

Peter

I agree, and with one qualification I would go even further than you and suggest that buying from a low-volume builder is tantamount, in this day and age, to having the boat built to order.

If that's correct, then it makes complete sense for the builder to charge stage payments that reflect its investment in the WIP, to cover itself against the risk of the customer pulling out for whatever reason, incluidng the customer's own bankruptcy.

The point that you allude to in your email is, essentially, how best to allocate the risks between the small, easily-hurt builder and the equally vulnerable customer. If you assume that the customer is prepared to pay for the WIP as it accrues, then the builder's risk in that WIP is carried mostly from the point at which the builder orders the components until the point at which the customer makes the stage payment for that phase of the build, once completed. (There is one risk not covered off, which is the builder's potential loss of profit on the entire boat if the customer does not complete the purchase). I'd suggest that level of risk is reasonable for the builder and that the working capital requirement to fund each stage is relatively straightforward to finance.

For the customer's point of view there are two major risks. The first is that by means of a stage payment he has paid for WIP that he doesn't own. This could be solved by transferring title to the WIP to customer (all it needs is a simple Bill of Sale) when he makes the stage payment.

The second risk faced by the customer is that the builder fails and leaves him owning a half built boat sitting in the builder's shed. There are two workarounds to that, I think. The first is that the administrator of the builder buys back the WIP from the customer for an amount equal to the stage payments as mentioned in my preceding post. The alternative is that the builder offers its customers a completion guarantee under which an insurance provider will fund the completion of the boat by a third party as long as the buyer pays the agreed completion price for the finished boat. That way, the customer gets his finished boat at the agreed total price, and the risk of a new yard charging more than the original builder would have done is laid off onto the insurers.

 

[Duffer]

I can assure you that my only interest is to see that these buyers and others in the future do not lose out when a dealer/importer/manufacturer goes bust. I have no past or present financial interest in this or any other boat builder/dealer etc. It is a fair question so no offence taken. I entirely accept that dealers, builders etc need to make a decent living. My concern is about these rare cases where consumers can be left high and dry with substantial losses.

To lower the veil a little I bought a new boat from a volume manufacturer 3 years ago and got a good deal for paying more money up-front. I then had some sleepless nights until delivery some months later when I realised I had no protection. All it needs is an unexpected downturn in demand or over-ambitious expansion plans to tip a builder or dealer into receivership. Unlike Farepak or Northern Rock the government will not take any action, anymore than if a Porsche dealer went bust...

Although a volume foreign manufacturer, my contract was written as if it was a one-off commission in a small local yard so definite room for improvement there. I agree with Andrew Knight's reply to Freestyle's point that a customer being left with an incomplete boat may be much more trouble than it is worth. Unless completion can be arranged e.g. by the purchaser of the assets of an insolvent builder then customers are likely to be much better off getting their money back.

A question about bank guarantees - do these pay out relatively swiftly within weeks of insolvency or is it necessary to wait months (years?) until the receivership and all its related litigation is completed?

One final point. The attitude of the industry when an insolvency comes along seems to be "Oh dear, how sad, never mind". I don't think this is good enough. They should put in place a scheme or arrange bank guarantees to protect consumers from this risk. If this was the norm rather than the exception I bet the industry could reduce the cost from 1% to say 0.5%, i.e. a point at which it would be silly for consumers not to pay for this cover. I also think the yachting press in its buyers' guides and boat show supplements should highlight the importance of this type of cover. Most buyers think broker's client accounts confer some sort of protection in the event of insolvency: they don't.

Last week Austrian piano-maker Bosendorfer covered itself in glory by delivering a replacement grand piano (worth twice as much) to a village hall in the South West after the first one was dropped on arrival. So far by failing to bail out its affected UK customers, Bavaria has covered itself in something else.

 

[aknight]

Bank guarantees/getting title to part-built yachts

This publication (September 2007) by a well-known law firm - not mine - has a useful article on page 9, covering many of the points explored in this thread. It is strictly aimed at superyacht buyers, but the legal principles are sound even if you are only spending a paltry hundred grand or so.

It would seem that the industry may be at least slightly rattled, based on this recent editorial.

 

[Observer]

A bank guarantee will pay out quickly once demand has been made. Banks don't want be drawn into acting as referee between parties in contractual dispute and the typical wording will be that the bank undertakles to pay up to a limit of £x on receipt of demand from the creditor stating that a payment has been demanded from the debtor but not received.

The real issue is the availability (or otherwise) of the guarantee. If the debtor (dealer) is creditworthy, the guarantee is redundant. If it is not, the guarantee will only be available if fully cash collateralised. That means the dealer can't use the cash deposit so you're back to square one. (This is a bit simplistic but, believe me, banks don't give guarantees lightly.)

 

[aknight]

A bank guarantee will pay out quickly following a valid demand. There is, however, a range of possible forms of bank guarantee not all of which may be demanded immediately. Some forms require the beneficiary to obtain judgment against the boat builder first in the case of an alleged failure by the builder to adhere to the terms of the contract or, in the case of an insolvency, to wait until the insolvency process (e.g. the administration) has completed. 'First demand' guarantees, which essentially allow the beneficiary to claim immediately, usually just by stating in writing that the builder is in breach or is insolvent, are available as you suggest, but cost more and are less willingly given.

If I might just gently take issue on one point, the fact that the bank is unwilling to issue a guarantee for its customer is indicative of the fact that the builder is a poor credit risk. That may be because its cashflows are weak, or because it offers insufficient collateral, or just because it has not been trading for long. On any of those grounds, if the bank isn't biting, my view is that customers should not pay deposits unless they have an appetite for risk and the pricing reflects their assumption of that risk. So the fact that the bank won't issue the guarantee is a useful indicator for customers - they can walk away and protect their wealth, or put their wealth on risk in exchange for a market return.

For a private buyer paying unsecured cash over to a private company, that return should be at least 12-13 per cent gross per annum in my view, translated however into the discount on the purchase price. That is in addition to the usual extras that will have been negotiated as an incentive to buy from that company at all, as opposed to buying from the competition.

 

[Observer]

[ QUOTE ]
A bank guarantee will pay out quickly following a valid demand. There is, however, a range of possible forms of bank guarantee not all of which may be demanded immediately. Some forms require the beneficiary to obtain judgment against the boat builder first in the case of an alleged failure by the builder to adhere to the terms of the contract or, in the case of an insolvency, to wait until the insolvency process (e.g. the administration) has completed. 'First demand' guarantees, which essentially allow the beneficiary to claim immediately, usually just by stating in writing that the builder is in breach or is insolvent, are available as you suggest, but cost more and are less willingly given.

If I might just gently take issue on one point, the fact that the bank is unwilling to issue a guarantee for its customer is indicative of the fact that the builder is a poor credit risk. That may be because its cashflows are weak, or because it offers insufficient collateral, or just because it has not been trading for long. On any of those grounds, if the bank isn't biting, my view is that customers should not pay deposits unless they have an appetite for risk and the pricing reflects their assumption of that risk. So the fact that the bank won't issue the guarantee is a useful indicator for customers - they can walk away and protect their wealth, or put their wealth on risk in exchange for a market return.

For a private buyer paying unsecured cash over to a private company, that return should be at least 12-13 per cent gross per annum in my view, translated however into the discount on the purchase price. That is in addition to the usual extras that will have been negotiated as an incentive to buy from that company at all, as opposed to buying from the competition.

[/ QUOTE ]

To be honest I haven't come across bank guarantees that require any form of due process before. Is a guarantee that (say) requires judgement to be obtained against the dealer/builder of much help to a boat purchaser, in the circumstances we've been discussing? Well, I suppose it does provide a safety net. But due process itself could take several years. Not very appealing.

What about a guarantee that can only be called when an insolvency process has ended? Again the potential delay looks unattractive.

I think, if I felt the need to be secured, I would only be interested in a first demand guarantee.

With respect to the emphasised text above - I think that's simply the converse of what I said - if the covenant is poor, the guarantee will be hard to secure. Anyway, I agree.

 

[aknight]

Professionally, I also usually encounter first demand guarantees of the type you describe. However these are issued in a different context, between heavyweight commercial counterparties, and in different business sectors carrying very different risks.

As the publication I mentioned in one my earlier posts hints, first demand guarantees are not a given. I dug round in that law firm's site last night and noticed a few other publications that expanded somewhat on the point, and explained the points one should look out for when negotiating such documents.

I don't think the fact that a guarantee is not a first demand guarantee makes it any less helpful. Clearly in the first place the customer will push for a first demand guarantee for the reasons you outlined. However if, on grounds of cost or otherwise, another flavour is all that can be obtained, that still represents very good protection - some might say 'watertight' but as a sailor and a lawyer I don't use that word /forums/images/graemlins/smile.gif.

Guarantees that depend on a stated resolution, for example, conclusion of an insolvency procedure or a court judgement, are not so inconsistent in approach with credit insurance products, which may similarly link payout to a stated event or to the effluxion of time (typically 90-180 days). The point, either way, is that the customer is covered. Yes, he may have to wait, but at least he will get paid out.

The issue I was taking was one of emphasis. Your point seemed to be that if a bank wouldn't issue a guarantee, that was a Bad Thing (apologies if I misinterpreted). I was saying it was a Good Thing as it was a clear warning signal to the customer about the degree of risk that he would assume by handing over an uncollateralised deposit.

 

[Whitelighter]

[ QUOTE ]
[ QUOTE ]
Currently we are arranging bank guarantees for approximately 1% of the advance. These amounts are between about £45,000 and £65,000

[/ QUOTE ]

Jez,

If the deposit/downpayment is 10% of the price, and (as stated in another post) the 90% balance is paid when the boat is completed and title can be transferred, why is a guarantee of the whole price needed?

Is the guarantee cost 1% of the deposit/downpayment or 1% of the total price? If the latter, the true cost of the guarantee is 10% of the amount 'at risk', not 1%.

[/ QUOTE ]

Currently, as our relationship with the builder is fairly new we are underwriting the full value of the boat by bank guarantee, even with the builder certificate and documentation in our possession. While I have faith in the builder, this protects us and our customers for a reletively low cost.

 

[Duffer]

I would like to thank all those who have contributed to this debate, in particular Andrew Knight for his legal input. I have certainly learned a lot more about bank guarantees as a result.

I hope the affected customers manage to get their money back (or their completed boats). It is never too late for the new board of Bavaria to do the right thing and provide this assurance. I certainly wouldn't consider buying a new one until they do.

A couple of points not previously mentioned - it is always possible to open a joint account with the vendor requiring the buyer's permission to withdraw money. The vendor/builder then know the money is in place. This is perhaps more applicable to one-off commissions however.

Also a case brought by the banks is before the House of Lords at the moment. They are seeking to restrict their liability under s. 75 CCA for foreign transactions and also consequential loss. The implication is that if e.g. you paid your deposit on a qualifying card you can get the whole contractual sum and e.g. legal costs back as well. So this case is one to watch.

 

[colbo3765]

I have only really picked up on this thread late in the day as I have been away from the UK and missed the news. However, as an ex customer of Peters Opal I feel I should put in my h'apenny worth.

Maybe I am missing something here but has there been any mention of Peters Opals 'after sales service'? My own experience was very negative. The boat, a Bavaria, was a fundamentally good if bargain basement product and we were very pleased with it. The treatment we received from Peters right from the very beginning with commissioning to the day we sold the boat was very shoddy. It was a constant and stressful struggle to get the firm to face up to their warranty responsibilities and, when they did do any work to the boat it was always poorly and, it seemed, grudgingly done. The icing on the cake was when they collected my boat from Portsmouth, motored off without opening the engine seacock and then tried to suggest that I was responsible!!! I have spoken to others who have owned Bavaria's and Legends and there is a very strong pattern of dissatisfaction. The day we sold that boat and bought our current one was a happy day indeed. we no longer had to deal with Peters Opal. Now, I have every sympathy with the ex employees of the firm who have been made redundant, particularly at this time of year but I can't help feeling that to a certain exent Peters had it coming to them. Cash flow issues might have been at the root of it but I am sure that a lack of repeat custom and some bad PR in the market did them no good whatsoever. Good luck to the new owners of the business, I hope it goes well for you. I am sure it will if you treat your customers in a fair and civil way.

 

[Longshanks]

Just read this excellent thread for the first time this morning. Couldn't stop!! The contributions are first class. My point is that many of the "suggestions" here could equally apply to buying a used yacht through a broker, could they not? The issues of client accounts, deposits, etc, present similar risks when a broker goes bust from what I can see. There are some other active threads on this topic right now, so I won't duplicate the points made...but well done to all who have contributed. I'm now a more nervous buyer of even a used yacht, but rather that than the sleepless nights and possible loss of capital in what could be an uncertain period for many in the boating world.

 

[Observer]

[ QUOTE ]
Just read this excellent thread for the first time this morning. Couldn't stop!! The contributions are first class. My point is that many of the "suggestions" here could equally apply to buying a used yacht through a broker, could they not? The issues of client accounts, deposits, etc, present similar risks when a broker goes bust from what I can see. There are some other active threads on this topic right now, so I won't duplicate the points made...but well done to all who have contributed. I'm now a more nervous buyer of even a used yacht, but rather that than the sleepless nights and possible loss of capital in what could be an uncertain period for many in the boating world.

[/ QUOTE ]

The situation with brokerage boats (i.e. where a broker is acting as agent of the seller) is a bit different - there should not be the same risk of loss if the broker goes bust. The general contractual situation is that monies paid to the broker do not belong to the broker (subject to broker's claim for commission, which would normally become payable when the sale is completed) because he is not trading (the boat) for his own account, he is acting as the seller's agent. So there should be no question of the 'deposit' on the sale and purchase contract, or the completion monies, being mingled with the broker's own funds. If the broker is holding money relating to the sale and purchase of a brokerage boat, he can only be doing so under an actual or implied trust for the benefit of the purchaser (or seller). (It appears likely that a deposit would initially be held for the benefit of the purchaser and, at the time of completion and payment of the balance, for the benefit of the seller).

So any money received by the broker - deposit or completion monies - should always be held separately from the broker's own funds in a client account. It never 'belongs' to the broker and (apart from any commission entitlement) he has no legitimate claim on it. Therefore, as long as the broker is scrupulous about separating client money into a client account, neither buyer nor seller should be materially at risk. (Of course there could be a risk on the seller if there is outstanding finance on the boat, but that's not the discussion here.)

However, if buying through a broker, be aware that a broker may, in some cases, also be acting as a trader, buying and selling 'stock' boats for his own account (this was undoubtedly the case with Peters). In that event, the broker does have a contractual claim on monies paid and it would not be surprising if a client account was not used. In this case, the status of a deposit looks uncertain, at best. Where a purchaser had paid the full contract price, he should also have acquired title, but there could be some difficulty if the broker had financed the stock boat through a marine mortgage and failed to discharge the marine mortgage when the purchase price was received. In that connection, I think it is quite likely that Peters did obtain finance on at least some used stock boats through a marine mortgage and there may be some buyers in the situation described above.