May 5, 2009
As banks, companies and consumers continue to wade through the recession, bankruptcy filings have kept pace, increasing to levels not seen since before the passage of 2005's Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). Unfortunately for unsecured creditors, in many instances, the payments they are owed are often extremely difficult to collect following a customer filing, as secured creditors often take precedence to the point where there's little left for unsecured vendors. Preference claims can also be a major drain on a vendor's accounts receivable simply through the exorbitant legal fees often required to properly defend them.
Creditors and their companies have taken to doing more secured business whenever possible and this can often have a marked effect on a company's fiscal health. "I think unsecured creditors generally don't fare too well when companies go bankrupt," said Mark Berman, Esq. of Nixon Peabody, LLP. "Anything they can do to enhance their understanding of how to improve their position, or to recognize warning signs of a customer in trouble and thereby minimize the impact of a subsequent bankruptcy on them, are to be encouraged."
Credit professionals and their companies that are seeking to have a better understanding of how to protect their assets in a customer bankruptcy can learn more by attending Berman's session, "Credit Enhancements," at Credit Congress, which will offer attendees a unique look at some of the steps creditors can take to increase the likelihood that they'll get paid after a filing. "My goal is to go over the various types of things that a credit manager can consider in trying to improve the chances that, in a meltdown, they will be able to be paid," said Berman. "These are generically called credit enhancements and they're alternatives to general unsecured credit."
For more information on Berman's presentation and other worthwhile educational sessions being offered at this year's Credit Congress in Orlando, or to register, visit http://creditcongress.nacm.org.
Jacob Barron, NACM staff writer
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Credit Congress in Orlando continues to prove it's the best bang for your buck. Orlando was recently named the nation's 2009 top value destination by Hotwire.com. In its survey, which has been released annually for the last four years, Hotwire.com includes the availability of travel discounts and entertainment, transportation and lodging costs in the rankings compilation.
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After realizing a persistent haze of uncertainty still exists regarding some of the ambiguous wording in its "Red Flags" Regulations, the Federal Trade Commission (FTC) has decided to delay enforcement until August 1, 2009 and will soon release a template to help affected companies plan compliance. "Given the ongoing debate about whether Congress wrote this provision too broadly, delaying enforcement of the 'Red Flags' Rules will allow industries and associations to share guidance with their members, provide low-risk entities an opportunity to use the template in developing programs and give Congress time to consider the issue further," said FTC Chairman Jon Leibowitz. This is the second time the FTC has delayed the mandatory compliance deadline in the last seven months.
The regulations are in response to the years of increasing cases of identity theft as more and more businesses and consumers used the Internet for transactions, resulting in tens of billions of dollars in write-downs each year. In 2003, the Fair and Accurate Credit Transactions Act of 2003 (FACTA) directed that financial regulatory agencies craft rules requiring creditors and financial institutions to develop and employ programs to detect, mitigate and respond to instances of identity theft.
NACM's diligent work with the FTC in an attempt to clarify the "Red Flags" Regulations' language and its effect on trade creditors had significant impact in the FTC's decision to delay implementation. NACM has also been active in educating its members about their responsibilities under the looming regulations that require companies to develop and implement a written program to recognize and mitigate identity theft by the now defunct May 1st deadline.
"There's no question in anybody's mind that this electronic world we live in has become more and more dangerous on a daily basis by people being able to steal other people's identity and use them, run with them, charge up enormous amounts of monies, and get away with it," said Wanda Borges, Esq. in the NACM-sponsored teleconference "'Red Flags' Regulations Simplified" on April 29th. "In particular, since 9/11, people have become more and more aware that there is a dangerous world out there and we have to learn to protect ourselves."
She added, "We are aware that there is identity theft. We have to learn how to protect ourselves."
NACM has stressed for several months the need for its membership to adopt programs that comply with the FTC's "Red Flags" Rules because they do not apply merely to consumer transactions. If a company extends credit, it is considered a "creditor" under FACTA and is subject to the rules. In addition to the April 29th teleconference, NACM held two other teleconferences in conjunction with the FTC to clarify how the regulations affect businesses and also published in the March 2009 issue of Business Credit magazine "Red Flags" guidelines and sample language that trade creditors can use in crafting their own program.
For NACM members, revisiting the magazine article is easy. It can be found online in the NACM Resource Library. Click here to log on to the Resource Library and then type "red flags" in the search field.
Providing Senior Management the Facts on Financially Distressed Key Customers
As the economy continues to shed muscle, more and more companies are finding themselves overleveraged and facing the all-too-real possibility of collapse. Key customers are stretching out payments as their position weakens and cash flows inch toward dire. For credit managers, the onus is placed on their shoulders to lead their firms toward profitability, regardless of economic woes. Their job is to protect receivables and identify customers that are faltering. But often the reporting to senior management of the deteriorating financial condition of key customers can be challenging. Tomorrow, May 6th, Kenneth Rosen, Esq., partner, Lowenstein Sandler, PC, will provide credit professionals a wealth of tools they can use when "Providing Senior Management the Facts on Financially Distressed Key Customers." Rosen will equip members with ideas and concepts that they can use to develop decisive and informative reports, including introducing data not generally known to the public.
Members who want to learn about the ratios that really matter, as well as the reliability of the Altman "Z" Score and the relevance of anything other than cash flow, can register for the NACM teleconference here.
The job of the credit professional is one of heightened importance in today's still struggling economy, but without proper support from a company's other departments and upper management, proper performance of their ever-daunting task can become needlessly difficult. For credit practitioners looking to increase their department's profile and get the support they need, NACM recently offered the teleconference, "Gaining Buy-in From All Levels in Your Organization," presented by Susan Archibeque, CCE.
"What you need to do is look at your company and see if credit is part of your company's scorecard," she said. "What impact is your accounts receivable (A/R) having on your company right now?" By looking at A/R's effect on a company, Archibeque noted, it becomes easier to show management and other departments just how important the credit function is. Additionally, credit professionals should look at their own department to see what's working and what isn't, and may be forced to face some difficult truths before they can really gain support from all levels of their organization. "One of the things that I believe is really important is looking at your credit policy," she said. "You may need a new one. It may be an old one that's been sitting on the shelf, collecting dust. You need to ask if it is in line with the company's philosophy." Streamlining the department's processes and getting all credit staff on the same page is also key to increasing credit's visibility. "Eliminate what is not needed. With every company I go to, there are a ton of processes that they do every day and that aren't worth it," said Archibeque. "Make sure you've got adequate workflows and understand that you might need to educate your own department."
Too often, a credit professional's attempt to increase their department's organizational value ends with their self-analysis. "We look at our credit department, but we don't look at our sales team," said Archibeque. "You need to ask, 'What is their perception of the credit department?' Do they see you as black and white or hard to work with?" Working with other departments and knowing what they're doing, and what they're going to do, will also benefit credit professionals looking for added company buy-in. Archibeque asked, "What account is your sales team going after or what account is your company going after?" "There may be a specific market they're trying to penetrate. You need to know where the company wants to go and where they want to be."
Additionally, Archibeque offered tips on how to properly present credit's worth to the rest of the organization, how to increase accountability for sales and collections and how important it is for companies to know who has the authority to do what and when. For more information on NACM's teleconference series, or to register, click here.
Jacob Barron, NACM staff writer
Distressed Business Services
Many NACM Affiliates are involved in a national network to provide assistance in the rehabilitation (if possible) or liquidation (if necessary) of businesses in severe financial difficulty.
While courts can take several months or more to get a reorganization plan started, NACM Affiliates can assist in getting a plan approved in as little as 30 days. Most helpful is the knowledge that experienced professionals are ready to step in at the most difficult time. NACM Affiliated Association staff members can serve as secretary to creditors' committees, provide other needed advisory services and are fully aware of the prevailing laws and regulations relevant to each situation.
Click here to learn more about NACM's Distressed Business Services.
Last week, following passage by the House of Representatives, the Senate pushed through the Fiscal Year 2010 budget conference agreement by a vote of 53-43. The five-year plan keeps many of the priorities of President Barak Obama's budget intact, such as calling for new investments in energy, education and healthcare, and tax relief for those making less than $250,000, though it did undergo a series of edits because of the current and forecast economic climate.
"Passage of this budget sends a clear signal that Congress, working in concert with President Obama, is moving forward on a new agenda for the country," said Senate Budget Committee Chairman Kent Conrad (D-ND). "We adopted the president's priorities of reducing our dependence on foreign energy, promoting excellence in education and setting the stage for fundamental healthcare reform."
The budget focuses on creating "green jobs," preserving the environment and assisting with high energy costs that have households under thumb. It intends to overhaul spending, planning to cut the deficit in half by 2012 and two-thirds by 2014. The ultimate aim is to bring the deficit down to 3% of gross domestic product (GDP), which would represent a 75% reduction from what it is now. In all, the five-year budget provides $764 billion in tax cuts, mainly for the middle class, while extending several credits, providing estate tax relief and three years of AMT relief.
During debates on the Senate floor, Conrad pointed out that there were significant changes made to the president's initial budget, particularly in light of a report from the Congressional Budget Office that forecast that the country would lose $2 trillion in revenue over the next decade because of the global economic slowdown. Because of this, over the next five years, Congress made $555 billion worth of changes.
But the back and forth between the two parties has been heated ever since President Obama first submitted his plan.
"The spending is so reckless that even with much higher taxes, we are on an extremely dangerous fiscal path," said Senator Judd Gregg (R-NH), ranking member of the Senate Budget Committee. "This budget will double and eventually triple the public debt, driving it up to 75% of GDP. How does a nation get out from underneath that?"
Gregg argued that the budget will green light a national sales tax on energy that will cost $3,000 per year per household and would place additional strain on the middle class by ending the Make Work Pay tax credit and omitting $187 billion worth of tax relief that the House-passed budget resolution had included.
"Under this budget, Americans across the economic spectrum will be paying more of their earnings to the governmentâ€”it will go far beyond simply taxing 'the rich,'" said Gregg. "Owners of small businesses, which are the engines of economic growth, will be taxed at a much higher rate under the backwards theory that the government can better generate prosperity. This budget penalizes investment and innovation through higher taxes, which will constrain the nation's long-term productivity."
Matthew Carr, NACM staff writer
Legal Migration: Dealing With International Insolvency
Domestically, when it comes to getting paid from an insolvent customer, or one that's already filed bankruptcy, there's a list of legal remedies creditors can try to use in order to secure what they're owed. Internationally, this is also true, although the body of law surrounding these remedies in certain jurisdictions may still be somewhat undeveloped, leaving creditors at the whim of a judge who may or may not have experience dealing with issues such as these. As it is with culture, custom or even cuisine, so it is with customers: some things are the same in international insolvency, and others are extremely different. To learn more about bankruptcy systems around the globe, be sure to read this article in the May 2009 issue of Business Credit magazine. Click here to get your subscription started.
The Export-Import Bank of the U.S. (Ex-Im Bank) recently announced that it would support over $1 billion worth of exports from hundreds of U.S. companies doing business with Mexico's state-owned oil facility, Petroleos Mexicanos (Pemex). Specifically, the bank authorized $900 million in long-term direct loans to support U.S. exporters working to further develop new projects at Pemex Exploration and Production (PEP) and the Cantarell oil fields.
The $900 million will be split into two separate chunks aimed at the two separate projects. A $600 million, 10-year direct loan will be given to Pemex to support the purchase of U.S. exports to be used in the new PEP projects, which comprise 18 natural gas and crude oil exploration sites located on land and offshore at the Bay of Campeche on the northern coast of the Yucatan, and a $300 million, 10-year direct loan will be given to Pemex for the purchase of U.S. exports for the Cantarell offshore oil fields.
The exports that Pemex will purchase are mainly engineering services, oil field equipment, offshore platforms, drilling and well services and upgrade and rehabilitation services. Hundreds of vendors, of varying sizes and in a wide array of U.S. locations, will benefit from the loans.
Pemex is Ex-Im Bank's largest borrower. From 1998 to date, Ex-Im Bank has approved $8.3 billion in financing to support U.S. exports for Pemex's activities for a wide range of oil and gas exploration, development and processing projects. In August 2008, the bank approved a $150 million small-business facility supporting Pemex's purchases of equipment and services from U.S. companies of 100 employees or less.
Jacob Barron, NACM staff writer
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There has been a lot of controversy concerning the use of mark-to-market and fair value accounting standards, and their contribution to the financial woes the world is experiencing. Hearings have been held in Congress trying to hammer out a future for the regulations, and during the second week of April the Financial Accounting Standards Board (FASB) released final staff positions (FSPs) intended to provide additional guidance on disclosures regarding these measurements, as well as impairments of securities.
The Public Company Accounting Oversight Board (PCAOB) has issued a Staff Audit Practice Alert to ensure that auditors are aware of the changes.
"This alert is intended to remind auditors of their responsibilities in conducting reviews of interim financial information and annual audits in light of the new FSPs related to fair value measurements and other-than-temporary impairments," said PCAOB's Martin Baumann, chief auditor and director of professional standards."The alert will be helpful to auditors as they conclude their work related to the first quarter of 2009 or prepare for the review of the second quarter and the audit of financial statements, including integrated audit."
The FASB issued FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Deteriorated and Identifying Transactions That Are Not Orderly. The FASB states that this relates to determining fair values when there is no active market or where the price inputs being used represent distressed sales. The purpose it to reaffirm the objective of fair value measurementâ€”to reflect how much an asset would be sold for in an orderly transaction, as opposed to a distressed or forced transactionâ€”at the date of the financial statements under current market conditions. Specifically, FASB's goal was to reiterate the need to use judgment to ascertain if a formerly active market has become inactive and in determining fair values when there is such an occurrence.
FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, is aimed at bringing greater consistency to the timing of impairment recognition, and providing greater clarity to investors about the credit and noncredit components of impaired debt securities that are not expected to be sold. The measure of impairment in comprehensive income remains fair value. But this FSP also requires increased and more timely disclosures regarding expected cash flows, credit losses and an aging of securities with unrealized losses.
The third of FASB's published positions is FSP FAS 107-1 and APB 28-1, Interim Disclosures About Fair Value of Financial Instruments, which concerns fair value disclosures for any financial instruments that are not currently reflected on the balance sheet at fair value. Prior to issuing this FSP, fair values for these assets and liabilities were only disclosed once a year. Now, these are required on a quarterly basis.
The PCAOB staff alert further discusses the reviews of interim financial information, audits of financial statementsâ€”including integrated auditsâ€”disclosures and auditor reporting considerations. FASB's FSPs are effective for interim and annual periods ending after June 15, 2009, though entities can adopt them for the interim and annual periods ending after March 15, 2009.
Matthew Carr, NACM staff writer
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The International Accounting Standards Board (IASB) and its U.S. counterpart, the Financial Accounting Standards Board (FASB), recently issued a letter to leaders of the Group of 20 (G20) countries, updating them on the two boards' progress and stressing the importance of improvements to global accounting standards due to the international nature of the current credit crisis.
"In our letter of March 31, we introduced you to the work of the Financial Crisis Advisory Group (FCAG). The FCAG was established by the IASB and the FASB to advise the two Boards about the standard-setting implications of the global financial crisis and potential changes to the global regulatory environment," said FCAG co-chairs Harvey Goldschmid and Hans Hoogervorst. "In our discussions, it has been abundantly clear to the 18 senior, internationally diverse leaders who comprise the FCAG that the global nature of the financial crisis has underscored the need for globally accepted improvements to financial accounting and reporting standards. We note that at its April 2009 meeting, the G20 similarly concluded, 'Standard-setters should make significant progress towards a single set of high-quality global accounting standards.' Consistent with that observation, we urge continued support for the process already underway between the IASB and the FASB."
Specifically, the letter referred to efforts by the two boards to improve accounting for off-balance sheet items, provide globally consistent fair value measurement guidance for inactive markets and enhance fair value disclosure requirements. The most ambitious project from both boards, touted as the "chief priority" by the FCAG, will involve globally standardizing financial instruments and consolidation and de-recognition projects. "We believe that the more significant, lasting and global improvements are those that will stem from the financial instruments and consolidation/de-recognition projects," they said. "The financial instruments project, in particular, is very wide-ranging and complex, and issuing a comprehensive proposal by the end of 2009, as the G20 has urged, is ambitious and challenging, requiring significant resources, coordination, and focus."
"The FCAG strongly believes that the two boards can only achieve what the G20 seeks if they can completely focus on the highly complicated technical work that these projects entail. Additional work on other issues, beyond the commitments the boards have already made, will inevitably lead to delays on the projects that matter most," the two co-chairs concluded.
The FCAG will issue a report to the G20 on their efforts to ensure IASB and FASB coordination in July and will meet again in December.
Jacob Barron, NACM staff writer
The seasonally adjusted Credit Managers' Index (CMI) rose another 1.3% in April after rising by 2.5% in February and 0.5% in March. This marks the third month in a row for growth after six months of contraction. "There had been concern that the April numbers might have been lower, but they came closer to matching the more robust pace in February," commented NACM Economist Chris Kuehl, Ph.D. This increase matches up well with the data coming from other sources, most notably, the increase in consumer confidence seen in several national surveys.
As in past reports, there are still a number of components in the combined index below the 50 level, but more of them are trending in a positive direction. Sales have continued to rise as have new credit applications, dollar collections and the amount of credit extended. "All in all, the index of favorable factors increased quite substantially from 43.1 to 44.8, marking the highest reading since November 2008 when the real economic collapse began to manifest itself," said Kuehl. "There are no index values above 50 as of yet, so all are still in the contraction zone, but the trending is in the right direction." The unfavorable factors did not show as much positive change, but there was also some movement in the right directionâ€”fewer bankruptcies and a reduced dollar amount of customer deductions. The other factors remained fundamentally the same as in March and some tracked a bit more negatively, especially disputes.
This marks the third month of positive data in a row from the CMI and that has tended to presage some of the positive data that is just starting to develop in other surveys. Kuehl pointed out that conditions have started to improve in select parts of the economy and faster than had been originally indicated by many economists. "The consumer is more confident than expected, the markets came off the bear market in March to score a healthy April and there have been no surprises in the banking sector for a while. It would suggest that the recession began to reach its lows in March and this is also what the CMI would suggest," he said. The CMI has consistently been a harbinger of economic conditions in the country and this latest data supports the notion that conditions have started to stabilize. It will not be a cause for real celebration until the CMI climbs back above 50. However, the tracking supports this development for the not-too-distant future.
The seasonally adjusted manufacturing index showed some continued improvement, but there are evidently still problems in the sector when compared to the service industries, which had been reflected in the overall CMI numbers. It is important to note that there were some impressive gains in the favorable factors, such as new credit applications and amount of credit extended. The opening of the capital markets has been reflected in credit activity to an extent and this served to counteract some of the more negative news. In the end, the index of favorable factors ended up the same as in March.
The seasonally adjusted service sector index staged a rebound from the March decline, bouncing back on the strength of some of the unfavorable factors. (The March components had sunk after an initial jump in the February index.) There have been fewer disputes, less dollar amount of customer deductions and a reduction in accounts placed for collection. The improvement from 41.7 to 43.5 is not sensational, but it shows more trending in the right direction and is something of a relief after the sag in March. The vast majority of the U.S. economy lies in the service sector, so performance here is especially relevant.
"The return to positive trends in the service sector is important given the fact that 80% of the U.S. economy is reliant on this sector. The numbers in March were of concern, but the partial rebound in April is consistent with the other data that has been emerging. The biggest fear remains that unemployment will keep expanding and keep putting pressure on the service sector," said Kuehl.
Source: National Association of Credit Management
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