January 6, 2011
The news for the end of the year was better than anticipated, matching the news coming from the retail sector in general. The gains in the overall Credit Managers' Index (CMI) were impressive, but of more significance is the improvement in some key sub-sectors. For the past four to five months there were pretty steady gains in areas like sales and new credit applications—the sectors that usually herald some improvement in business conditions. But, until this month, the gains had not reached levels set earlier in the year. It now looks like there is some momentum heading into 2011, as the combined index now sits at 55.8.
Sales reached the highest point of the last 12 months, getting back to levels last seen in April when it was at 65.7. It now stands at 65.9, a solid improvement on the 61.9 registered in November. "Sales numbers have been rising in both manufacturing and service sectors and that is promising for the coming quarter," said Chris Kuehl, PhD, National Association of Credit Management (NACM) economic advisor and managing director of Armada Corporate Intelligence. "The improvement in new credit applications is more significant yet, given the impact it has on future growth. For the first time in well over three years, it broke 60. There is certainly reason for future optimism as this factor was only registering 54 to 54.8 as late as September. More and more businesses are now anticipating expansion and are seeking credit in order to meet that expected demand."
The gains in credit extended and dollar collections were more modest, but both categories are now above 60 as well, pushing the favorable factor index to a relatively robust 62.1. The last time this occurred was back in March and April when there was a similar anticipation of growth in the overall economy.
That is the good news. The not-so-good news is found in the index of unfavorable factors where there are trouble spots showing up. There were more rejections of credit applications, but some of that was expected with the overall increase in credit applications. The more troublesome aspect of these rejections indicates far more unqualified applicants than in the past. "This is the point in an economic recovery that provokes some desperation within the business community," said Kuehl. "As key competitors start moving to capture more market share, their rivals have no choice but to try to keep pace, forcing companies to seek expansion regardless of whether they can really afford it."
Several other unfavorable factors also showed weakness. There were more disputes, more accounts placed for collection and more filings for bankruptcy. The data suggest that another series of industry shakeouts are on the way. This is the period when weak companies that have been hanging on in anticipation of increased demand will either get the business boost they need to survive or will discover that the rescue is too late. Overall, the combined index of unfavorable factors remained steady compared to last month, but it's expected that these numbers will worsen in the months to come—unless and until there is a more pronounced recovery in the economy.
Click here to view the full commentary, complete with tables and graphs, along with CMI archives.
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If they had to choose, a vast majority of credit professionals would take NACM's suggested preference reforms over the maintenance of the Bankruptcy Code's current rules on payment of Section 503(b)(9) administrative claims.
That's what NACM's most recent monthly survey indicated, as 89% of respondents, when asked what a new bankruptcy bill by Sen. Sheldon Whitehouse (D-RI) should do, said that the legislation should reform preference statutes to make the debtor or trustee responsible for proving that a payment was preferential, while also limiting the amount that can be sought only to the remainder after new value has been applied. Only about 5% of respondents answered that the bill should maintain the Code's current Section 503(b)(9) administrative claim payment provisions, which require that all claims on goods sold to the debtor within 20 days of a bankruptcy filing be paid, in full, upon plan confirmation.
Despite the low number of votes, the 5% of respondents favoring Section 503(b)(9) claims still made an undeniably strong case for the maintenance of the Code's current provisions governing these claims. "Knowing that the 503(b)(9) rights are in place allows my company the latitude, in most instances, to continue shipping on open terms even if we are worried about the financial strength of a customer," said one participant. "I believe this gives more companies the chance of working their way out of difficulty without having to file bankruptcy."
Respondents who answered similarly voiced other concerns about what would happen if Whitehouse's bill allowed payments to stretch far beyond the confirmation of a plan. "That would put the creditor at severe risk of never recouping the claim, as the customer would have unlimited time to repay that and severely undermine that portion of the Code," said one participant. "If I can't have justice, then at least leave the administrative claims payment provision alone," said another. "At least I don't have to hire an attorney to defend that."
When given the choice, most respondents jumped at the opportunity to avoid having to prove their company's innocence in a preference claim. "We have been the subject of many preference demands in which they were defended down to under the threshold, but because the initial amount was very large, we needed to pay a sum in the end," said one participant, referring to provisions in the Code that place a $5,000 minimum on preference demands, and require that any claims less than $10,000 be brought in the district of the creditor. "The new change would eliminate many preference demands. There seems to be a number of cases in which the debtor/trustee demands first without even evaluating the account."
"I have long been opposed to the way preference claims have been handled," said another respondent. "It is the only instance that I am aware of in our legal system that you are presumed to be guilty and have to prove your innocence."
The most common sentiment, however, was that creditors wanted both: a shift in the burden of proof on a preference claim and prompt payment of their 503(b)(9) claims upon plan confirmation. "I don't think we should have to choose one or the other," said one respondent. "I think both are necessary."
NACM's first survey of 2011 is now live and asks about your greatest concerns for the coming year. To participate now, click here.
Jacob Barron, NACM staff writer
Thought for the New Year
"When I'm appreciated, I do great work."
- Chester Elton, co-author of the The Carrot Principle and General Session speaker at the 2010 Credit Congress
Click here for details on this year's Credit Congress at the Gaylord Opryland in Nashville, TN.
Credit trends in 2011 appear to be on the upswing for incorporated U.S. businesses. The jury remains very much out for consumers/individuals, which could have a decided impact on the smallest U.S. businesses, as personal bankruptcies neared a record high.
A Fitch Ratings study unveiled this week predicted a continuation of modest economic growth for U.S. corporations and ongoing improvements to credit availability. Fitch noted there is a continuing "abundance of caution due to global macroeconomic imbalances that favor conservatism," but believes companies' improved cash/capital standings will greatly help them garner more of the credit they need in 2011.
"Cash generation will continue to provide companies with more flexibility in pursuing growth," said a Fitch statement. "Fitch expects that corporate downgrades will occur primarily from self-inflicted, [overly] shareholder-friendly actions." The biggest risk factor in the area of corporate credit, other than current economic woes, is ongoing and significant changes on the part of U.S. regulators and lawmakers, said Fitch. However, many believe the Congressional shift in favor of Republicans could be a help for business in general, though it remains to be seen what the GOP-influenced agenda truly will look like.
Meanwhile, personal bankruptcies increased by 9% in 2010, to more than 1.5 million, said a new National Bankruptcy Research Center (NBKRC) study. It is the biggest increase in personal filings since 2006, not long after sweeping bankruptcy filing changes were enacted at the federal level. About one in 150 Americans filed some sort of bankruptcy in 2010, said NBKRC.
The most significant credit and bankruptcy problems have been noticed in the Southwest and parts of the Southeast. Nevada, however, is far and away the dubious leader, with an overall rate that is 40% higher than the second worst in bankruptcy filings, thanks in part to an unemployment rate exceeding 14%, said NBKRC. The largest increases in filings from 2009 to 2010 were in Hawaii, California and Arizona. All three saw an increase of more than 20%. However, the most encouraging declines in filings were found in Tennessee (-7.2%), South Carolina (-4.1%) and Iowa (-3.6%).
Brian Shappell, NACM staff writer
A New Start
The January print issue of Business Credit is on the way.
NACM's first issue of the year introduces your 2011 Board of Directors and features best practices from its staff of writers and other authors, as well as continued expertise from regular contributors such as Bruce Nathan, Esq. and Dr. Hans Belcsák.
This issue also completes the wrap-up of last year's regional and CFDD conferences. Is your face among those represented?
Business Credit archives are online. Simply log in to browse electronic versions of NACM's official magazine.
As it is in many other disciplines, the field of B2B credit management has seen an outrageous amount of technological advancement over the last 30 years. Where once there were telex machines and ledgers, now there are only computers and software designed to do much of your thinking for you. Many of these developments have been specific to the credit field, while others were born elsewhere and have come to be part of the DNA of modern risk management and collections.
The Internet is just such an example of a technology that began in one sphere and spread into every other aspect of American life and business. So pervasive has the Internet become that it's sometimes easy to forget that it's even there, let alone that it offers an endless amount of information right at the user's fingertips.
Credit professionals looking to make the most of this ubiquitous resource in their day-to-day decision making process can do so by attending NACM's upcoming teleconference, "Exploring Credit Resources on the Internet," led by Lynette Warman, Esq. of Hunton & Williams LLP on January 12, from 3:00-4:00pm EST. Over the course of her presentation, Warman will use her estimable experiences in the legal field to show creditors how they can tame the Internet and make it work for them.
While the Internet is increasingly vast, it's also constantly changing and evolving, meaning creditors looking for information on a potential or current customer need to take a fluid, efficient approach to searching for valuable data. Warman will provide the tips and tricks that users need to keep in mind when conducting effective searches, and will also offer attendees a lengthy list of Internet sites, both free and fee-based, that offer creditors the up-to-the-minute information they need to stay ahead of potential fraudsters and insolvent customers.
To learn more about this presentation, or to register, click here.
Jacob Barron, NACM staff writer
Leverage Goes a Long Way
Leverage the strength of FCIB's powerful global network by being an engaged member; we guarantee that you'll receive strong, sound and dependable guidance for your credit-related issues. As you continue to work through this tough economic climate, stay ahead of your competition by having access to the latest—and most reliable—information.
Stay engaged and get connected with the world of international credit and trade finance—a great place to start is the FCIB Member Forum!
Perhaps it's no coincidence, but the Small Business Administration (SBA) chose the day the Republicans returned to Washington to officially take control of the House to applaud the success of a loan guarantee program included in the White House-pushed Small Business Jobs and Credit Act of 2010.
SBA Administrator Karen Mills announced this week that the agency approved more than $10.3 billion in loan guarantees during the first three months since the "Jobs Act" was signed into law on Sept. 27. Mills noted the guarantees supported more than $12 billion in lending to small businesses through the end of 2010. She called the legislation the most important federal effort to help small business in at least a decade.
"The loan enhancements of higher guarantees and reduced fees—first implemented as part of the Recovery Act—have been a vital resource for tens of thousands of small businesses at a critical time when lending markets had dried up," said Mills. "Beginning in February 2009, these loan enhancements engineered a significant turnaround in SBA lending, including driving record-high levels of SBA lending in recent weeks. The end result is that the agency helped put more than $42 billion in the hands of small businesses through the Recovery Act and Jobs Act combined."
The cornerstones of the Jobs and Credit Act included an array of tax cuts and the establishment of a $30 billion lending fund, which would provide capital to small, viable community banks to increase lending to smaller firms. The fund was designed to be performance-based and to incentivize those lenders that extend new credit by decreasing the dividend rate banks pay as they increase lending. The legislation, painted by opponents as a last-minute attempt by Democrats to curry favor with voters in the November general election, was also sold on the concept that it was deficit-neutral and could potentially reduce the tax gap.
Most Senate Republicans argued against the measure as government intrusion into free markets and another costly measure on top of previous efforts. Part of the vitriol attached to the legislation could be traced to an early move by the Democratic leadership in the Senate to place strict limits on the GOP's ability to offer amendments to the legislation. Even an amendment to curtail unpopular 1099 requirements seen as a potential financial albatross for small businesses failed to gain traction amid pre-election partisan bickering and jockeying.
Brian Shappell, NACM staff writer
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A newly Republican House of Representatives convened yesterday, ushering in a new class of conservative lawmakers and committee chairmen. How the new committee leaders choose to use their new powers, to subpoena witnesses and call investigative hearings, will fundamentally shape this year's legislative season.
Many of the transitions from Democratic to Republican leadership were easily predicted, with former committee ranking members becoming chairmen. The powerful Ways and Means Committee, notable for its tax writing power, will be chaired by former ranking member Rep. Dave Camp (R-MI), a near 20-year veteran of the House. Camp, who played an important role in the 1996 passage of welfare reform, is expected to use his position to advance his party's quest to create jobs by cutting taxes. He'll also push for full approval of pending free trade agreements (FTAs); to ram this point home, the committee website already has a ticker feature illustrating the estimated billions in tariffs levied on U.S. exports to Colombia since the agreement was first signed but not approved.
Other familiar faces include Rep. Spencer Bachus (R-AL), former ranking member, and now chairman, of the House Financial Services Committee, and Rep. Lamar Smith (R-TX), former ranking member and now chairman, of the House Committee on the Judiciary. Bachus has pledged to roll back portions of the sweeping financial regulatory reform bill, the Dodd-Frank Act, partially named after former Financial Services Chairman Barney Frank (D-MA), which was enacted in the last Congress. Smith, on the other hand, will oversee the committee that sends the most bills to the House floor, on average, and whose jurisdiction includes bankruptcy law, which could see changes or amendments in the coming year.
Hot button issues like the budget and oversight will be largely directed, at least in the House, by Rep. Darrell Issa (R-CA) and Rep. Paul Ryan (R-WI), two comparatively new faces who've promised to rule their committees with iron fists. Issa now chairs the Oversight and Government Reform Committee and has vocally opposed the current administration, at one point calling President Barack Obama "one of the most corrupt presidents in modern times" and then back peddling that assertion. His chairmanship promises a great deal of fireworks, including major investigations into how the more than $800 billion stimulus program enacted in February 2009 has been handled.
Ryan, on the other hand, will be the go-to Republican for delivering on his party's promise to reduce government spending as he chairs the Budget Committee. Many of his suggestions, such as raising the retirement age to 70 and generally reducing entitlements, are politically controversial, but Ryan has vowed to take the lead in reducing the nation's deficits. Stringent budget considerations will also figure heavily into the Agriculture Committee, newly chaired by Rep. Frank Lucas (R-OK), who may be forced to consider some of the worst cuts to farm subsidies in more than a decade.
Jacob Barron, NACM staff writer
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For more information on NACM's MLBS, click here.
Yet another study has come out pointing to what appears to be the foundations of a recovery for the long-struggling commercial real estate industry. But its authors admit that several major U.S. and international markets have a long road of struggles yet to conquer.
January's "Global Market Report," released by New Jersey-based commercial real estate provider NAI Global, looks at the sector's conditions in 217 worldwide markets and found conditions in most markets had already either stabilized or improved, with prospects looking for brighter than in 2010. NAI predicted across-the-board improvements in areas including credit availability, investor interest, vacancy rates and stabilized property rents/values.
"We began to see clear signs that the global economy and commercial real estate markets had stabilized and were beginning to improve with a noticeable pickup in transaction volume around the world," said NAI Global President/CEO Jeffrey Finn. "Companies around the globe are taking advantage of the current market, extending or renegotiating leases, securing investment properties, disposing of underperforming assets and finalizing plans for growth in the next 24 months. We expect much a much more active market."
NAI expects a boost in 2011 to come largely from the private investment market, which is more confident because a massive wave of predicted commercial foreclosures "never materialized," and from international gains in Brazil, India and China. The latter are expected, or more likely hoped, to outweigh well-documented problems in Greece, Ireland and Spain, among other struggling economies.
Domestically, the lead market is far and away Washington, DC: "The nation's capital is the strongest office commercial real estate market. It continues its track to recovery propelled by the federal government activity in 2010." One particular success area is that of restauranteurs. Operators jumped on opportunities, such as those around the city's Verizon Center, and the nearby popular Chinatown neighborhood, and it's more than paying dividends. NAI also noted improvements or stabilization in key markets such as Boston and Chicago. Still, NAI appeared quite concerned about prospects in Los Angeles (where rental rates are still declining amid 30% vacancy rates on new spaces), Atlanta (high vacancies despite rent adjustments) and Miami (large blocks of unused space in industrial and retail markets).
Brian Shappell, NACM staff writer
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