April 14, 2009
For credit and risk managers, the only constant is change. The economy is always going to be facing challenges, whether it be double-digit prime lending rates, a subprime meltdown, an era of boom-and-bust, surging bankruptcy filings or protracted periods of leveraged buyouts. Headlines are going to push and pull at sales, but through it all, credit professionals must remain level-headed and act strategically to navigate the bucks and turns of the constantly evolving financial environment.
"Our story hasn't really changed that much over the past 30 years," said Dave Earickson, leader, Risk Management Applications, Dun & Bradstreet (D&B). "How should credit mangers change now? Well, if they were doing everything that they should have been doing all of these years, they shouldn't have to change anything. They should be well equipped to do everything that they need to, to help surf through these economic times. If they haven't and don't have the processes, software and everything in place, then they will have to do some things differently."
At this year's 113th Credit Congress, Earickson, along with William Balduino, leader, D&B's Risk Management Practices, will present "Essentials for Strategically Managing Credit in Any Economic Environment." The session will highlight traditional methods that credit and risk professionals are familiar with, as well as some more unconventional approaches that they should be using. The duo is pushing to move away from the traditional corporate silo structure, where everyone operates individually and then takes the output of their processes from there.
"What we're talking about is a cooperative approach through a customer's lifecycle so that everybody is on the same page," said Balduino. "We're talking about utilizing different data elements that credit folks aren't traditionally used to, but using those elements in conjunction with the other disciplines in the firm is critically important to the overall output in terms of profitability, growth and sustainability of what people want as a customer base."
As business cycles move along their paths, credit and financial executives have to make ongoing assessments of the impact prevailing economic conditions will have on their customers and their organization. They must adapt and adjust their policies and procedures; they must scrutinize their processes for weaknesses exposed in their credit evaluations in response to the modern marketplace. Basic areas to begin with are looking at how a company acquires clients and the power that an evolving knowledge of that customer throughout the relationship will provide.
"What's critical to understand is that many times an individual thinks they know things, that there's a subjective composition about what constitutes their customer base or portfolio or what their assessment is of a particular customer," said Balduino. "Subjectivity is great; it's all part of the art that is credit management, but objectivity will take you a lot further. The point of the lifecycle is to distill the process—the full process—down to its critical elements and have them build upon each other to form a fact-based perspective."
At that point, credit professionals can add all the subjectivity they want, marrying it to their go-to-market strategy and the company's outlined goals. Earickson and Balduino will not only review what is traditionally understood of the risk management discipline, but they will also discuss several other areas where the credit manager normally doesn't play a role, but clearly should and can. A simple example is marketing lists. Many companies are buying them and usually it's the salespeople that decided which SIC codes they want to target and in what states.
"Well, how do you know that that's the right market?" asked Earickson. "A sales guy doesn't know what a good customer is; he just knows that the SIC codes are buying from him. Well, the credit department should be able to go in and say, ‘Yes, those are the five biggest SIC codes that we sell to, but you know what? These two usually give us high-risk customers. The other three usually provide very good customers for us.' That allows the sales department to purchase marketing lists of what their best customers look like, not just what their customer base looks like."
Though the current climate is providing opportunity for change, the essence of Balduino and Earickson's session is realizing that there are best practices that should be applied in not just this economy, but any economy. The take-away should be understanding the opportunity that the discipline provides and how it can be highlighted.
Matthew Carr, NACM staff writer
A New Look for NACM's Website
NACM's newly redesigned website has officially gone live! Now all the links to credit management strategies, news and educational programs you've come to expect from NACM are available to you in a more dynamic, user-friendly format. Be sure to visit www.nacm.org and take a look.
At the request of officials in the House Judiciary Committee and its Subcommittee on Commercial and Administrative Law, NACM's Bankruptcy Work Group has begun work on suggested changes to the Bankruptcy Code. These alterations, if used and approved by Congress, would make the bankruptcy process fairer for unsecured trade creditors and aim to make credit easier to come by for businesses contemplating Chapter 11 protection in today's struggling economy.
The House Judiciary Committee has recently warmed up to the idea of altering the nation's Bankruptcy Code in the hopes of aiding the country's economic convalescence. One specific hearing dealt with Circuit City's unsuccessful reorganization and collapse into Chapter 7 liquidation and opened up the floor to suggestions regarding how to fix the Chapter 11 process and make successful reorganizations more likely. Congressman Jerrold Nadler (D-NY), chairman of the Judiciary Committee's Subcommittee on the Constitution, Civil Rights and Civil Liberties, recently introduced a bill that took many of its tenets from witness testimony at the Circuit City hearing.
Many of these provisions would be of particular importance to trade creditors, specifically one that would revoke the right under Section 503(b)(9) of the Bankruptcy Code to a 20-day administrative claim on all goods shipped within that period. The bill has been delivered to the House Judiciary Committee and the NACM Bankruptcy Work Group was quick to respond to the legislation and make additional suggestions for how the Bankruptcy Code can restore the balance between secured and unsecured creditors and, in the process, provide struggling customers with more access to financing in their darkest hours.
Specific suggestions being considered by the group include items that would affect the applicability of 503(b)(9) administrative claims, the distribution and validity of preference claims, the establishment of venue, the use of the new value defense and the obligation to continue extending credit after a customer filing. Once work on these suggested changes are complete, they'll be delivered to the Committee for further consideration and debate.
Stay tuned to NACM's eNews and Business Credit magazine for more on our efforts to make the voice of trade creditors heard on Capitol Hill!
Jacob Barron, NACM staff writer
Taking the Fear Out of Financial Statement Analysis
For credit managers new to the analysis game, there are mountains of information to digest. Fortunately, some of the basic and key points of financial statements can be conquered during the NACM-sponsored teleconference "Taking the Fear out of Financial Statement Analysis" on April 15. During the presentation, Toni Drake, CCE, TRM Financial Services, Inc. will cover the fundamentals of a customer's financial statement, highlighting balance sheets, income statements, retained earnings and cash flows. She'll also talk about what credit managers should be looking for in financial statements and annual reports to extract the information that is most important to the credit professional—separating the fluff from fact.
This session is designed for credit professionals who have limited exposure to financial statements or for those that are new to financial statement analysis. Members interested in broadening their knowledge of financial statement analysis should click here.
One positive about the economic downturn is that it has forced companies to take a concerted look at the policies and procedures they employ to mitigate risk. Defaults, delinquencies, bankruptcies and liquidations have gone from annoyance to prominence, meaning credit departments are becoming a more visual participant in day-to-day business as they work to protect a company's receivables.
"In today's economy, we have to think in terms of what is the best thing that I can do for my company so that I don't have bad debt in the future, or I at least minimize my risk so that if I'm going into a bad debt situation I've gone into it with my eyes wide open," said Wanda Borges, Esq., Borges & Associates, LLC during the NACM-sponsored teleconference "Legal Issues in Credit and Enhancements to Best Protect Your Company and Its Receivables."
Borges' first stop during the presentation addressed fundamental tools like Uniform Commercial Code (UCC) guaranties. She said that oftentimes, credit and financial professionals decide not to use these because they are too much trouble, there exists a perception that they don't work or that there is confusion about how to author and implement them. There is a constant complaint that professionals don't want to be bothered with the paperwork, a thought that needs to be immediately pushed from the mind. For Borges, knowing about the different guaranties and understanding the different types of entities that a credit manager works with is the best place to start to protect their interests.
With personal guaranties, she pointed out common mistakes that makes these documents useless. "Many of you have a tendency to incorporate a personal guaranty into a credit application," noted Borges. "While that is perfectly legal, many times you find that by incorporating your personal guaranty into your credit application, you don't really have all the belts and suspenders that you may want on that guaranty. Most importantly is the fact that most of you take personal guaranties not knowing whether the person signing the personal guaranty is in fact the person whose signature you think you have."
She also wagged a finger at credit managers that don't verify that the individual has sufficient collateral to their name to support that guaranty or that the person signing it is aware of the document they are signing. A debtor can walk into court later and use the excuse, "I had no idea that I was signing a personal guaranty."
"Imagine, however, if I don't own a thing in my own name. Everything, years ago, was put in my spouse's name," said Borges. "Well, what's the good in getting a personal guaranty from me when I have no equity—I have nothing—nothing to back it up."
She made it very clear that all guaranties need to be guaranties of payment. "You never want to permit a guaranty of collection," said Borges. "That means you have to take every step possible to collect your debt, only to find out it's uncollectable or that your debtor is in bankruptcy or out of business. Only then can you go after the guaranty."
Borges supplied attendees with a wealth of sample documents and guaranties that could be used to draft legal and binding protections. She also detailed the importance of obtaining a third-party guaranty or security and making sure credit executives were up-to-date on the law as it pertains to business and credit transactions, as well as a host of antitrust statutes.
Matthew Carr, NACM staff writer
Under Construction: The Modernizing of Federal Contracting Law
In addition to the funneling of funds into infrastructure projects, the federal government instituted some major changes in federal contracting in the waning days of 2008 and the early months of 2009. The rule that contractors and subcontractors must use E-Verify went into effect on January 15, 2009, followed by an executive order by President Barack Obama that repealed the ban on Project Labor Agreement (PLAs), while also encouraging the use of PLAs by agencies on contracts of $25 million or more.
Included in the contracting shift, on December 12, 2008, new provisions of the Federal Acquisition Regulation (FAR) went into effect for federal contractors. These changes state that contractors must disclose directly to the government when there is "credible evidence" of violations of federal criminal law, making false claims and receiving "significant overpayments," or otherwise face suspension or debarment from federal contracting. For those that do business with the government, questions still remain about complying with this law. In the April issue of NACM's Business Credit magazine, credit managers can get the low-down on the changes and what is required from them in the article "Under Construction: The Modernizing of Federal Contracting Law."
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With bankruptcies increasing due to the ongoing shortage of credit worldwide, credit professionals and their companies have had to become increasingly more creative and thorough in their efforts to seek redress from their debtors after they file for protection under the Bankruptcy Code. Mark Berman, Esq. of Nixon Peabody LLP recently offered his tips and strategies a company can use to protect itself in the instance of a customer bankruptcy in an NACM-sponsored teleconference entitled "Is Your Customer Planning to File Chapter 11?"
Throughout the presentation, Berman discussed how certain securitizing instruments work and how they can help ensure payment, but he cautioned that, in a bankruptcy case, there's often a gap between how things work and how things are supposed to work. Regarding security interests, he noted that these can put a creditor in an advantageous position when a customer decides to file. "If you have a security interest in the assets of your customer and the customer does not pay you according to terms, then you can foreclose on that collateral," he noted. "That means you have a leg up on any creditor that does not have a security interest." However, even though a security interest includes the word "security," nothing about these instruments is guaranteed and their value could be wiped away depending on when the sale was made. "The problem with getting a security interest shortly before a filing is preferences," said Berman. "Under Section 547 of the Bankruptcy Code, they can be preferential."
Prior to seeking a security interest, or even selling to a customer, a credit professional should do their best to be sure that a company is at least more than 90 days out from a bankruptcy filing, which would protect them from any preference claims. Berman noted that knowledge is power when it comes to predicting a customer's future behavior and recommended that creditors look through copies of documents, other security agreements, contracts, letters of credit, credit applications and anything under the sun that might give them a proper indicator of a customer's plans. "The best thing you can do is get your arms around all the relevant facts," he said.
Berman also discussed the contemporary exchange for new value defense, consignment and the ordinary course of business defenses, which can further insulate a creditor's sales from preference claims. "The ordinary course of business defense will protect payments for transfers of goods or services if the debt was incurred in the ordinary course of business and the payment was made in the ordinary course of business," he said, warning that creditors can run into problems with any pre-bankruptcy collection efforts. "The problem with the ordinary course of business exception is that to the extent that a credit manager uses collection techniques to put pressure on the debtor, those pressuring techniques could be sufficient to remove the payments from the ordinary course of business," said Berman. "Therefore, a credit manager just doing their job may be harming their ability to get paid."
For more information on NACM's other teleconferences, or to register, click here.
Jacob Barron, NACM staff writer
Distressed Business Services
Many of NACM's 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. Working in conjunction with the business and its creditors, this service is designed to provide the business with the opportunity to re-establish its financial credibility through time and planning, or to assist in ceasing its existence while minimizing losses to its creditors.
As a quick, efficient and cost-effective alternative to bankruptcy, NACM Affiliates provide forums and facilities to rehabilitate or liquidate the affairs of financially distressed companies as a viable option to bankruptcy court proceedings. These alternatives are often less cumbersome for all involved and less expensive, which means more return to creditors and more money left in the business to regain its footing.
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.
The news continues to be lean for the construction industry. According to the U.S. Census Bureau, construction spending in February was at a seasonally adjusted rate of $967.5 billion, 0.9% below January and 10% below what was seen in February of last year. Though public construction has continued to see modest gains, inching upwards 0.8% in February to $301.7 billion, it is the private sector that continues to be the thorn in contractors' sides. Private construction spending slipped 1.6% in January as a whole, while residential construction fell more than 4%.
Though not a jaw-dropping figure, private nonresidential construction spending picked up a meager 0.3%, but still lower than what was seen last year. This represented the first time that monthly spending for the sector declined for two consecutive months, year-over-year since 2003. For Ken Simonson, chief economist for the Associated General Contractors of America (AGC), this bodes ill on his economic barometer.
"Unfortunately, this decline in construction activity is likely to accelerate in the foreseeable future," said Simonson. "While the recently enacted stimulus should lead to needed increases in public construction spending, that will be little solace for tens of thousands of construction workers that rely on private construction activity to earn their livelihood."
To offset the declines, Simonson and the AGC are pushing for increased investment in infrastructure projects, as well as for government action to improve conditions in the credit markets.
On the positive side, the school construction bond funding provisions of the American Recovery and Reinvestment Act (ARRA) kicked in for state and local governments. The Economic Recovery Act created a new category of tax credit bonds for public school construction and repairs that will pump $24 billion into the 125 largest school districts. With the average age of a public school building pushing 50, three-quarters of the nation's public educational facilities are considered inadequate to meet the needs of students. With a mandate to update these buildings, this provision is estimated to create 625,000 jobs.
"These bonds give state and local government a new, direct injection of capital to jump-start infrastructure projects that will create jobs and improve our cities and towns," said House Ways and Means Committee Chairman Charles Rangel (D-NY). Rangel has praised the efforts of the Treasury Department on expediting the implementation of the funding.
Also going into effect are "Build America Bonds," which allow state and local governments to issue a taxable bond, rather than a tax-exempt bond, for construction projects. Under this provision, the federal government will pay 35% of any interest on the bonds which are designed to enable municipalities to market their bonds to investors for whom tax-exempt status is not relevant, such as pension funds, charitable organizations and foreign investors.
"With state budgets in shortfalls during the recession, we need this money now more than ever," said Ways and Means Committee member Bob Etheridge (D-NC). "These bonds will put Americans back to work, building quality facilities where our students can prepare to enter the 21st century global economy. It's a win-win situation for our students, workers and communities."
Matthew Carr, NACM staff writer
FedEx Shipping Benefit
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Much of the most recently passed stimulus bill, the American Recovery and Reinvestment Act (ARRA), has begun to make its way into various corners of the U.S. administration and economy. Having received a comparatively small $720 million chunk of the bill's nearly $800 billion budget, the U.S. Customs and Border Protection (CBP) recently announced that its share will be spent on modernizing the nation's ports of entry in order to enhance both security and user service.
Specifically, the money allotted to CBP will be used to upgrade the nation's 43 land ports of entry, most of which are located along the northern border of the U.S. Some of these facilities were built before World War II and many have noted that an update is necessary to keep pace with security threats. The ARRA also appropriated another $260 million to provide additional resources for CBP's already ongoing modernization projects, including $100 million for high-tech imaging equipment to provide more efficient and less intrusive inspection of goods crossing into the U.S., bringing the agency's take from the stimulus bill to a grand total of close to $1 billion.
"CBP along with our partners at the U.S. General Services Administration (GSA) will use these funds to enhance technology and modernize infrastructure at land ports of entry to improve our capacity for facilitating growing trade and travel. Our mission requires facilities that meet modern demands," said Acting CBP Commissioner Jayson Ahern.
As part of the ARRA's provisions, CBP will keep taxpayers and other interested observers abreast of their progress in terms of implementation on www.recovery.gov, which was created by the bill to increase accountability and provide citizens with information on the Obama administration's continued efforts to spur the economy. Further, more specific announcements about CBP's modernization efforts will be released in the next few weeks.
Jacob Barron, NACM staff writer
Revised. Revamped. Renewed.
The CMI just got a spring overhaul and it's more popular with the media than ever. It's got a new look, a new method and a new commentator—NACM Economist Chris Kuehl, Ph.D. co-founder and director of Armada Corporate Intelligence.
Review the most current report here.
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With the appetite for U.S. goods waning as the rest of world grapples with recession, the United States' trade deficit has contracted to the smallest gap seen in nearly a decade. After seven straight months of tumbling imports spurred by domestic economic decay, the U.S. Department of Commerce released that the trade deficit stood just shy of $26 billion, a level not seen since November 1999. Since the beginning of the year, the deficit has shrunk 28.3%, with exports experiencing a modest uptick of 1.6% while imports have fallen off 5.1%.
Commerce Secretary Gary Locke said that the numbers indicated the necessity of a swift U.S. economic recovery. "We are taking steps critical to creating American jobs and jump-starting local economies," he said, pointing toward expedited relief efforts to hard-hit communities by the Economic Development Administration (EDA). Under the American Recovery and Reinvestment Act (ARRA), the EDA was given $150 million to accomplish that goal. "We must continue to increase exports by fostering innovation—a goal in which the Recovery Act makes important investments—and break down barriers to U.S. goods and services."
The Commerce Department's efforts have received mixed accolades as a report from the Government Accountability Office (GAO) suggested that one of the agency's arms, the U.S. Commercial Service (CS) system, could stand improvement. The CS has a budget of $235 million and a substantial overseas staff, something with which state agencies looking to help business get involved with international trade cannot compete. Unfortunately, the CS user fees for businesses to utilize the service often dissuade firms. The GAO said that the CS needs to rethink its pricing and lower fees, particularly in light of the fact that about one-third of states provide grants or payments to defray firms' costs to access the programs. The GAO also urged the U.S. and Foreign Commercial Service (USFCS) to improve data collection and accuracy to make sure its fee structure is not jeopardizing the ability of small businesses to take advantage of these trade services. As it stands, the USFCS charges small businesses interested in exporting for export assistance services, including tailored market research and setting up appointments with potential buyers and partners in foreign markets.
"Small American exporters are facing increasingly stiff competition for customers around the world," wrote Senate Finance Committee Chairman Max Baucus (D-MT) to Locke in response to the report by the GAO. "We need to do everything we can to make sure small companies are getting the export promotion help they need from the Commerce Department."
The GAO wrote that the low proportion of U.S. firms that engage in exporting is a major challenge to realizing the nation's full export potential. As it now stands, less than 1% of U.S. firms are identified as exporters. The potential for recovery on the shoulders of small enterprises in the import-export sector has not gone unnoticed, as in 2006, small- to medium-sized businesses comprised 97% of all identified exporters and accounted for 29% of the total value of U.S. exports.
Matthew Carr, NACM staff writer
The International Accounting Standards Board (IASB) recently responded to allegations that the actions of their U.S. counterpart, the Financial Accounting Standards Board (FASB), were incongruous with the two agencies' stated mission of financial standard convergence.
"Immediately following FASB's publication of its proposals on fair value measurement and impairment, the IASB initiated its shortened 30-day consultation process on them, in light of the urgency of the issue," said the agency in a release. "Initial reports regarding new or additional divergences between International Financial Reporting Standards (IFRS) and U.S. generally accepted accounting principles (GAAP) being created by these FASB Staff Positions appear to be overstated. A preliminary review of the FASB's decisions by IASB staff indicates that the FASB's objectives and approach on the application of fair value when a market is not active appear to be broadly similar to those in IFRS."
Specifically, observers referred to FASB's recent acquiescence to congressional and banking sector pressure on guidance for fair value accounting ("FASB Approves New Fair Value Rules" in NACM eNews, April 8). Many in the U.S. blamed FASB's stringent requirements for damaging the balance sheets of struggling banks over the course of the last two years and, in response, FASB loosened up its guidelines, giving banks more freedom over how to accurately value its assets in the hopes of improving balance sheets and reducing writedowns. Many were concerned that this shift would throw a wrench in the gears of IASB and FASB ongoing efforts to create a single global accounting standard, but the IASB pledged to continue reviewing FASB's changes and accelerate the move toward IFRS and GAAP convergence.
IASB also noted that there was support among the board's controlling body, the International Accounting Standards Council (IASC) Foundation Monitoring Board, and the agency's trustees for prioritizing its and FASB's projects and working more toward establishing one large global standard instead of piecemeal adjustments to the current rules. Such a project would focus specifically on the replacement of existing financial instrument standards with a common international standard that's geared to comprehensively address the global credit crisis. Proposals from IASB are expected within six months and will be consistent with the Group of 20's (G20's) recommendation that IASB, FASB and the Accounting Standards Board of Japan (ASBJ) make significant progress toward a single accounting standard by the end of 2009.
Jacob Barron, NACM staff writer