November 29, 2012

News Briefs

  1. Key Indicators Reverse Trend, November Credit Managers’ Index Jumps to 55.2
  2. EU Tries to Bolster Stability with Greek Aid, Ratings Agency Limitation
  3. House Approves Bill Establishing PNTR with Russia
  4. Change of Business Needs to Include Change of Metrics
  5. Treasury Declines to Label China Currency Manipulator
  6. Municipal Bankruptcy Roundup: San Bernardino, Harrisburg, Detroit


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Key Indicators Reverse Trend, November Credit Managers’ Index Jumps to 55.2

The latest iteration of the Credit Manager's Index (CMI) issued by the National Association of Credit Management (NACM) returned to form in some key factors, and jumped almost a full point from where it languished in October. November's 55.2 reading is still shy of the high points reached back in February and March (55.8 and 56.2, respectively), but is back to the levels seen in August and September. When the reading from October fell to 54.4, there was a sense that it may have been an anomaly, and not as dangerous as it would appear. Now that assessment looks more accurate.

The most important jump was in sales, which climbed from 57.4 to 60.4. This marks the best sales month since August when the reading was at 62. However, the best improvement in the favorable factors was in dollar collections, from 54.6 to 61.3. "That is an impressive showing by any measure, and suggests that companies are seeing enough improvement in revenues to start catching up on their debt," said NACM Economist Chris Kuehl, PhD, who added that the full-point improvement in amount of credit extended signals more demand from reliable customers than in the past few months. This is a noted pattern: as companies begin to get current on their credit, they are often motivated by the need to ask for more credit for expansion. "First they catch up and then they ask for more credit and that appears to be happening again," said Kuehl. The only favorable factor that weakened was new credit applications, but just slightly, from 56.6 to 56.5.

There was slightly more volatility in the unfavorable factors, causing a decline in the overall unfavorable index. Every category except dollar amount beyond terms, which moved from 48 to 49.9, slipped. Rejections of credit applications fell to 51.1 from 52 and accounts placed for collection fell more steeply, from 53 to 51.2. Kuehl noted that the fall in rejected credit applications was not major, but "a signal that there are still applicants coming with less than acceptable ratings" and that the collection level is consistent with the pace set most of the year and suggests "many companies are still trying to get back into financial shape." Of the other unfavorable factors, dollar amount of customer deductions slipped just under the 50 mark to 49.7, suggesting some negotiation is taking place between good customers and their creditors, Kuehl said.

"The news is essentially positive despite the evident weakness in the unfavorable factors," Kuehl said. The trend in favorable factors has reversed for the moment, and seems to reflect some of the other good news for the overall economy in the housing sector improvement, in both the manufacturing and service sub-sectors, along with the evident reaction to a more upbeat consumer. December's data will be watched with more than a keen interest, as this may be the month that most reflects the impact of Hurricane Sandy. "Any impact due to a downturn attributed to storm damage is likely to be serious, but somewhat short lived. By the early part of next year there may be better numbers than expected as the rebuilding effort gets fully underway," said Kuehl.

The complete CMI report for November 2012 contains the full commentary, complete with tables and graphs. CMI archives may also be viewed on NACM's website.

Source: NACM

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EU Tries to Bolster Stability with Greek Aid, Ratings Agency Limitation

The European Union, continuing to struggle with a debt crisis among many of its members, had a busy if not surprising week of action emanating from Brussels. First it finalized a deal long in the works to help Greece avoid the ever-present threat of sovereign insolvency. One day later, in a move that smacked of "shooting the messenger," the EU moved to enact significant restrictions on how and when the three biggest ratings agencies in the world could publicly assess the sovereign credit ratings of its member nations.

The Greek government's acceptance of the EU's Eurogroup conditions, despite unrest from the public sector over cutbacks, ensured that more bailout terms would flow to the troubled southern European nation, paving the way for the Greek program to get "back on track," as EU officials characterized it. Greece will be getting greatly-reduced interest rates and loan extensions of 15 additional years, among other measures of support in exchange for significant budget cuts and promises, such as continued work toward new debt goals of 124% of GDP by 2020 and sub-110% two years later.

But the bigger head turner came in an official reprimand against the "Big Three" ratings agencies (Moody's Investors Service, Standard & Poor's and Fitch Ratings), all of which are based in the United States. The EU is fast-tracking legislation that restricts the timetable in which any of them could release news of sovereign credit ratings of any EU member. The regulations would also empower investors with the right to take legal action against the agencies if financial losses could be tied back to vague measures of gross negligence or malpractice on the agencies' part. Some call the move an attempt at improved transparency and competence, while others liken it to censorship.

The three credit ratings agencies were criticized heavily for their ratings of both companies and countries during the run-up to the worst global recession in more than half a century. In addition, European leaders continued their criticism as the agencies routinely lowered ratings of and put on warning high-debt nations including all of the PIIGS (Portugal, Ireland, Italy, Greece and Spain)—all of which have regularly revealed deep-rooted fiscal issues. Also noted more recently, was the S&P and Moody's treatment of former economic powerhouse France, which saw its prestigious "Aaa" rating downgraded a step in 2012 by both agencies. EU officials allege the timing and content of such downgrades unnecessarily exacerbated problems and have made recovery significantly more difficult.

- Brian Shappell, CBA, NACM staff writer

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 House Approves Bill Establishing PNTR with Russia

The U.S. House of Representatives approved a bill before the holiday approving permanent normal trade relations (PNTR) with Russia.

This would allow the U.S. to take full advantage of Russia's newly opened markets and decreased tariffs that resulted from the country joining the World Trade Organization (WTO) in August. Since then, U.S. exporters hoping to take advantage of Russia's membership have been hamstrung by the Jackson-Vanik amendment, a Cold War regulation that made U.S. preferential tariff rates on Russian products conditional on the country allowing Jews and other minorities to emigrate freely. The amendment is regularly suspended as a matter of course, but according to WTO rules, its presence on U.S. books allows Russia to increase tariffs on U.S. products entering the country until it is fully repealed.

In addition to repealing Jackson-Vanik, the bill approved by the House also normalizes trade relations with Moldova and imposes sanctions on Russian human rights violators, particularly persons identified as responsible for the detention, abuse or death of Russian lawyer Sergei Magnitsky, who died under mysterious circumstances in a Russian prison in 2009. The Magnitsky portion of the bill is hugely unpopular with the Kremlin, and it remains to be seen how the provisions will go over in Russia.

The saga of approving PNTR played out before the election as Congress attempted, and failed, to enact a bill before the August recess. The House bill now heads to the Senate for consideration, where many are hoping for swift passage. "Passing this bill will provide a one-sided economic benefit for the U.S. by boosting our exports to Russia, and that's exactly what America's ranchers, farmers, workers and businesses need," said Senate Finance Committee Chairman Max Baucus (D-MT). "I will continue to work in the Senate to get PNTR across the finish line and onto the president's desk before the end of the year. We need to act now to take advantage of this opportunity and provide a much needed boost to our economy."

Russia is the world's ninth-largest economy. Full approval of PNTR could potentially double U.S. exports to Russia in five years.

- Jacob Barron, CICP, NACM staff writer

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Change of Business Needs to Include Change of Metrics

As noted throughout the November/December issue of Business Credit, strong measurement and analysis of performance metrics by a company and its credit department go a long way toward ensuring maximum profitability. But how many companies doing so still unknowingly contend with massive blind spots by using the wrong metrics or, in many cases, omitting the most helpful ones? John Salek, vice president of business services at Genpact, contends it's a lot more than one might think.

Salek, who hosted a webinar on performance metrics for FCIB members this fall, noted that it's not just about carefully measuring metrics, it's about ensuring you are using the right metrics. The biggest problem, in his view, is that businesses often forget to update the metrics they're measuring as the business model changes. A myriad of things, large and small, such as the launch of a new product, use of a foreign currency or introduction of prompt payment discounts can result in change. "Credit managers often don't think to update their metrics when their business changes," he told NACM. "If you're not measuring the right things, it's a killer. Yeah, your DSO might be down, but you're getting killed on deductions."

Salek gave an example of a company that had gotten into the business of refueling trucks being used for various purposes. Upon a closer look, it showed there was often a lag in billing for the refueling service. That oft-missed monthly cut-off meant the invoices were sometimes 30 days behind, obviously slowing payments down considerably. Salek said the company's cash position was being hurt badly by the retained accounts receivable, resulting as much from no metrics being used to measure the gap as the fact that the payments were coming in later than they should have. "You've got to measure losing time," he quipped. "It's those kinds of big time-span differences that become a big cash-flow hit."

Without the proper metrics and analysis to track such an occurrence and others, cash-eating problems can go undetected for months if not years, to the detriment of the credit department and overall business.

- Brian Shappell, CBA, NACM staff writer

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Treasury Declines to Label China Currency Manipulator

The U.S. Treasury once again decided against labeling China a currency manipulator in its Semi-Annual Report to Congress on International Economic and Exchange Rate Policies. In its refusal to do so, Treasury cited a number of steps taken by Chinese authorities to bring the renminbi (RMB) up to market value. "The RMB has appreciated by 9.3% in nominal terms and 12.6% in real terms against the dollar since June 2010," said the agency. "China's trade and current account surpluses both have fallen to 2.6% of GDP from peaks of 8.8% and 10.1% of GDP, respectively."

Furthermore, continued progress toward a more economically liberal China made Treasury even more reluctant to apply currency manipulator status this time around. "The Chinese authorities have substantially reduced the level of official intervention in exchange markets since the third quarter of 2011," said the Treasury, "and China has taken a series of steps to liberalize controls on capital movements, as part of a broader plan to move to a more flexible exchange rate regime."

Still, Treasury stated its continued belief that "the RMB remains significantly undervalued, and further appreciation of the RMB against the dollar and other major currencies is warranted."

Many believe the RMB is kept artificially low by China, giving the country's goods an edge and negatively affecting the ability of American manufacturers to compete internationally. Applying the currency manipulator stamp to China became a campaign issue in the last presidential election when republican nominee Mitt Romney declared that he would apply the label on his first day in office. The Obama Administration has repeatedly declined to do so because of the severe ramifications such a move would have on the United States' relationship with China.

The currency manipulator title is largely symbolic, but applying it would require the U.S. to engage Beijing on adjusting the RMB's value. Treasury last applied the label to China 18 years ago, in 1994.

- Jacob Barron, CICP, NACM staff writer

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Municipal Bankruptcy Roundup: San Bernardino, Harrisburg, Detroit

In San Bernardino, CA, the city council has voted on a budget measure that would include stopping payments to its pension program at least temporarily. Officials will submit the proposal to a judge who is tasked with reviewing its Chapter 9 bankruptcy filing, as well as its eligibility, before the plan's deadline at the end of this week. Entitlements, such as worker pension funding, are the driving force behind the California community's ongoing debt crisis. It is estimated the city has $143.3 million in unfunded pension obligations at present. Employee and retiree entitlements have become a financial scourge affecting many cities throughout the nation, and it's only expected to escalate as a result of a rapidly aging workforce.

Meanwhile, in Harrisburg, PA, talk of a potential municipal bankruptcy could have legs again, and may just force its creditors back to the negotiating table. Though the city has been denied Chapter 9 eligibility multiple times because of a quickly-passed state law aimed at temporarily blocking third-level cities in the state from filing for bankruptcy, the entire dynamic could change as said law is just days from expiring. As such, parties involved with an ill-fated trash incinerator project that has become the complete opposite of the financial windfall it was expected to be, could see a city with a bit more power in the negotiating process without a massive obstacle in its way.

Whispers of potential municipal bankruptcy has been revived again in Detroit, as it failed to meet certain required benchmarks set by the city to trigger some $10 million in state funding. City officials have acknowledged that it could run out of cash before year's end and struggle mightily to meet commitments without the funding. As such, Mayor David Bing has noted that unpaid furlough days for public employees are likely to begin soon after the 2012 holiday season. For several years the city has been regularly mentioned among municipalities struggling the most with insolvency.

- Brian Shappell, CBA, NACM staff writer


To view past eNews issues or to visit the NACM Archives, click here.

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