April 5, 2012
The Credit Managers' Index (CMI) for March is trending in a positive direction and is yet more reinforcement for the notion that the economy is doing better and that the recovery may be real. The combined index is now at the highest level seen in well over a year, even if the 56.2 reading is lackluster compared to the boom years of the last decade that featured index numbers well into the mid-60s and occasionally in the 70s.
The good news this month stems from an improvement in unfavorable factors, while favorable factors held their own. Sales, dollar collections and amount of credit extended all dipped a little, but stayed above 60. In fact, all favorable factors remained above 60. The more significant shifts took place in unfavorable factors. For the first time in more than a year, all unfavorable factors were over 50 and the combined total was a solid 52. The biggest jumps took place in the more sensitive indicators—accounts placed for collection moved from 50.9 to 52 and disputes moved from 49.7 to 50.9. Disputes have not been out of the 40s since July of last year and even that was only for one month. Dollar amount of customer deductions went from 48.5 to 51.1, which is only the third time it has been above 50 in the last year. Overall, the index of unfavorable factors reached the highest level in over a year. In the last four months, the numbers have been rising from the contractionary levels set last year. In November the index broke 50 by the barest of margins. Since then, the index has crept up in increments—50.4 in December, 50.3 in January, 51.1 in February and 52 in March.
"At about this time, one should be thinking that all of this is going to lead somewhere that may not be all that good for the overall economy," said NACM Economist Chris Kuehl, PhD. "The next phase in the progression involves a boost in the inflation threat." Kuehl explained that up to this point, the pressure of the recession and the plethora of low cost competitors have combined with a consumer who doesn't have much tolerance for higher prices. With the cost cutters going bankrupt and the consumer feeling a little flusher, the remaining companies can now start to hike prices. This is certainly good for their bottom line, but will mean that prices will start to rise and that fuels inflation. The current commodity-led increase is enough of a threat, but once the general price situation shifts, the real inflation threat develops as this will stimulate wage hikes as well. The rise in inflation is a sign that the economy as a whole is on a real rebound and now the emphasis will be on figuring out how to restrain that inflation surge without sending the economy back into recession.
Consider Becoming a Silent Auction Donor
The NACM Scholarship Foundation is delighted to again host its Silent Auction during the Credit Congress & Expo in Grapevine, Texas. Funds raised from the auction go directly to the Foundation to support its goal of providing financial assistance to credit professionals for educational programs that increase their knowledge and strengthen the profession and business community.
Click here to review details on donating and bidding on the NACM Credit Congress web pages.
One would expect the managers of what's often a company's largest asset, its accounts receivable, to be pretty high on the invite list to upper management meetings. Sometimes this is the case, and sometimes it isn't.
NACM's monthly survey for March found that credit's inclusion in top tier meetings was split pretty evenly, with about 51% responding that "yes," they were included in meetings with upper management at their companies, and about 47% responding that "no," they were not. The remaining 2% noted that the question was not applicable, often due to their company's size or structure.
Some participants noted that their companies used meetings to let employees know how valued they are. "Our company does a nice job of making all employees feel part of the team. They understand that if an employee feels they are part of the process, they take ownership," said one respondent. "Both corporate and divisional senior and executive management are very good about bringing credit into the conversation when there is a change or issue," said another.
Others, however, considered their exclusion from such meetings a depressing sign of the company's priorities. "We are included when it's convenient for upper management to have us there," said one participant. "Otherwise, no we are not and a lot of times we are not even informed of any changes that may pertain to us in a timely fashion."
"Management attention is mostly concentrated on operational areas involving production, revenue and sales. Credit functions are not a primary focus," said another.
As some noted, this can create a rift between departments that are deemed worthy of inclusion at upper management meetings and those departments that are not. "Upper management...views the department as a necessity and keeps us in the background," said one respondent. "Upper management does not portray or embody an attitude of cooperation and benefit between sales and the credit department. This continues to feed the sales versus credit atmosphere dividing the two departments."
NACM's April survey deals with accounting ratios and is now live. Participate today by clicking here, and be entered into a drawing to win a free teleconference registration.
Jacob Barron, CICP, NACM staff writer
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The U.S. Bankruptcy Court in Delaware recently got over being the venue for some high-profile bankruptcy cases. And though bankruptcy filing levels appear to be on a significant downswing, the court in the first state of the union will hear a pair of cases likely to gain their own widespread attention in the mainstream media.
"Pink slime" became a new phrase in American lexicon this year amid fast-spreading stories, which gained intense notoriety through social media, of the wide use of chemical-laden meat additives by restaurants, especially fast food outfits. The public backlash caused a drastic reduction in orders and, thus, those in the meat additive industry are struggling.
As such, the first industry Chapter 11 bankruptcy filing—not expected to be the last—comes from AFA Foods, which cited media coverage and its impact on sales to explain an inability to pay debts owed to secured and unsecured creditors. Even the case's judge, Mary Walrath, has expressed skepticism in its reorganization prospects. It has been reported that a quick company sale might be the most optimistic option.
The troubled solar products industry experienced yet another in a spate of filings this week. Solar Trust of America LLC, began having liquidity problems stemming largely from issues at parent company Solar Millennium AG. The parent company, based in Germany, was trying to sell Solar Trust, but could not finish the deal before filing its own bankruptcy in Europe.
The case is significant because Solar Trust owns development rights to the world's largest solar power project, the Blyth Solar Power Project, in California. Just one year ago, it garnered a conditional loan from the U.S. Department of Energy exceeding $2 billion, almost ensuring the Republican Party will dredge up the issue as the presidential election approaches. The Obama Administration is still recovering from the hit it took when Solyndra, a company with deep ties to President Barack Obama being investigated for fraud, filed bankruptcy months ago. More than a half-dozen other solar-related companies have filed for some form of bankruptcy protection since late last summer, most of which are tied to oversaturation in the U.S. market and an inability to compete on price with Asian manufacturers of solar products.
Brian Shappell, CBA, NACM staff writer
New Lien and Bond Course Available in Credit Learning Center
Construction-oriented credit professionals understand the value of knowing the basics of the lien and bond process.
In "Liens and Bonds: The Critical Nature of the Preliminary Notice," the newest module in NACM's Credit Learning Center, the preliminary notice is stripped down to its basic components. This module addresses the when, why and how the preliminary notice relates to retaining lien rights, while leveraging receivables down the ladder of supply. From state-to-state nuances through timeframes and required elements, this must-view module will get you started down the right path.
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Many have argued that the Chapter 11 process, at least as it works for unsecured creditors, is broken. Among those advocating for changes to the Bankruptcy Code to better provide for trade creditors are not merely the scorned trade creditors themselves, but also a burgeoning class of legal professionals.
"Increasingly, Chapter 11 is a tool for a failing company to shed its assets and distribute its unencumbered cash proceeds, if any, to creditors," said Brett Weisenberg of Cooley LLP. "The exit strategies clearly provided for Chapter 11 debtors—confirmation of a liquidation plan or conversion of the case to Chapter 7, with their attendant delay, expense and risk—no longer adequately address the goals of the various constituencies within a liquidating Chapter 11."
Weisenberg is the author of an article titled "Expediting Chapter 11 Debtor's Distribution to Creditors," which will appear in this month's edition of the ABI Journal, published by the American Bankruptcy Institute (ABI). In it, he outlines a two-part proposal for changes to the Bankruptcy Code that would enhance Chapter 11 process effectiveness, specifically by providing for a "structured" dismissal of the Chapter 11 case in certain instances and a combined disclosure statement and plan hearing. "While many bankruptcy courts have authorized these alternative exit strategies as being permitted by the Code, the time is ripe to make crystal clear that these procedures are in fact authorized by the Code," said Weisenberg.
Such a structured dismissal would prevent debtors from languishing in bankruptcy when there's little reason to believe it will be successful. Weisenberg noted in his article that the criteria to use such a structured dismissal "should include (1) the debtor holding less cash to be distributed than some maximum amount, and (2) establishing, by a preponderance of the evidence, that (a) proceeding in the requested fashion is in the best interests of all creditors and (b) confirming that a Chapter 11 plan of liquidation would be overly burdensome or impractical under the specific facts of the case."
In theory, this would provide creditors with a better chance at greater recovery, since, rather than a lengthy, expensive and ultimately futile Chapter 11 process, the case would be dismissed, and authority granted to the debtor estate fiduciaries to make a distribution to creditors. Furthermore, the speed of the process would be increased by the combination of the disclosure statement and plan hearing, which Weisenberg noted was similar to the procedure used by small business debtors under Section 1125(f) of the Code.
Until these changes are made, however, Weisenberg said that creditors and bankruptcy professionals "will be forced to expend funds on an overly complicated and cumbersome plan-confirmation process, or be compelled to fight over whether utilizing these alternative exit strategies is permitted under the Code."
Learn more about NACM's positions on the Bankruptcy Code and other statutes in the 2012 NACM Issue Brief.
Jacob Barron, CICP, NACM staff writer
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While no one is claiming the worldwide economic recovery is going to jump into high gear imminently, manufacturing activity news out of several key areas appeared promising. That said, the European Union is far from being among the group...not even close.
An HSBC/Markit monthly study on Brazilian manufacturing activity found the third straight month of gains in its Purchasing Managers' Index (PMI). Its PMI now sits at 51.1 The recovery can best be described as tepid, but there is some momentum behind it, and manufacturers are starting to become optimistic, according to reports. The government-based stimuli seem to be helping.
In China, its activity in March was bolstered by improvements in demand within the automotive, electronics and tobacco industries. Government-released statistics indicate its PMI rose 2.1 points in March and now exceeds 50. Like that of Brazil and most PMI measures, any level exceeding 50 is considered positive growth/expansion. Market-watchers expressed surprise at the level of optimism found throughout China's manufacturing sector as stories, perhaps exaggerated ones, of a potential Chinese slowdown surfaced in early parts of this year.
Meanwhile, Canada's manufacturing statistics also showed promise. Its PMI, done in conjunction with RBC and Markit, found the index at 52.4, up from February by more than a half-point. Analysts believe better conditions in the United States have prompted gains in areas such as machinery, lumber and automotive production.
However, the European Union is looking at near unilateral manufacturing woes. The EU's PMI declined 1.3 points to 47.7, a low for 2012 thus far. Even stalwarts Germany and France showed signs of the EU's greater problems, as it is known for exporting to the nations now in the greatest financial straits. Just two nations out of the entire bloc—Ireland and Austria—reported a manufacturing output uptick. Not surprisingly, massive unemployment problems in the EU have garnered increased media attention of late.
Brian Shappell, CBA, staff writer
Best-in-Class Service from NACM's Mechanic's Lien and Bond Services (MLBS)
MLBS' Lien Navigator is a web-based service that provides up-to-date information for all 50 states and Canada, including notice, lien, payment bond and suit timelines, procedures and other relevant information in a state-by-state/province-by-province format.
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For more information on NACM's MLBS, click here.
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