eNews July 21, 2011

July 21, 2011

News Briefs

  1. Borders Forced to Turn the Page
  2. Small Businesses Face “Painful” Transition from GAAP to IFRS
  3. Municipal Bankruptcy Roundup: Harrisburg, Jefferson County, Central Falls
  4. House Passes "Cut, Cap and Balance Act" as Debt Ceiling Negotiations Continue
  5. Italy Surprises Markets with Speedy Austerity Package
  6. Senators Try Second Push for Small Business Regulatory Reform


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Borders Forced to Turn the Page

Stung as a deal fell through at the last minute, struggling book-retailer Borders announced a potential bankruptcy auction would not go forward and that the end of the former giant through liquidation was unavoidable.

Borders, which filed for Chapter 11 reorganization in February, will submit to U.S. Bankruptcy Court a previously-announced proposal from Hilco and Gordon Brothers to purchase the store assets of the business and administer the liquidation process. A hearing is tentatively scheduled for Thursday, and liquidation could begin as early as Friday. It is expected the company will close its remaining 399 stores, which employ more than 10,000 people.

Products such as the Kindle and other popular electronic book-reader products hit significantly at Borders' business model, and both they and top competitor Barnes & Noble have been trying to break into the more tech-friendly niche. However, both have been playing from behind, so to speak.

"We were all working hard toward a different outcome, but the headwinds we have been facing for quite some time, including the rapidly changing book industry, eReader revolution and turbulent economy, have brought us to where we are now," said Borders Group President Mike Edwards.

Despite the cancellation of a planned auction sale, the story may not yet be over, said Wanda Borges, Esq. of Borges & Associates LLC.

"A notice has been filed that says 'the debtors received a bid from a non-insider to purchase the inventory, furniture, fixtures, equipment and leases for approximately 30 stores for which the debtors reserve the right...to seek approval in connection with the sale hearing...to be held on or about July 21, 2011...if the bid becomes a qualified bid.' This week could still prove interesting in the Borders case—we may yet see a continued business operation," Borges told NACM.

Foreshadowing of Borders' demise into bankruptcy gained steam through late 2010 and, increasingly, throughout January. The big-box book retailer intimated twice in as many months that it would have to delay payments to creditors and/or vendors in an attempt to bolster its capital position. In addition, it was widely reported that Borders was trying desperately to renegotiate terms with financiers at Bank of America and General Electric, among others. These developments all helped tank a stock that was already trading below $0.50 per share. A late 2010 poll conducted by The Street found that more than two-thirds of respondents believed a Borders Chapter 11 filing was likely. At least one major publishing company reportedly stopped all shipment of books to Borders for a time, fearing this week's announcement was an inevitability that would arrive sooner than later.

Check NACM's blog for updates on this and other breaking news stories.

Brian Shappell, 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.

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Small Businesses Face “Painful” Transition from GAAP to IFRS

Small businesses could face severe regulatory challenges as the United States continues its effort to converge its generally accepted accounting principles (GAAP) with International Financial Reporting Standards (IFRS).

The process of creating a singular global accounting standard has been ongoing for several years now, but at a recent roundtable hosted by the U.S. Securities and Exchange Commission (SEC), no matter how regulators choose to go about imposing the new standard on the nation's public companies, the smaller of them expected to face technical and financial difficulty.

"I see no benefit to IFRS at all," said Shannon Greene, a panelist at the roundtable and chief financial officer and treasurer of Tandy Leather Factory, Inc., a small leather and leatherworking supply company based in Fort Worth, TX. "All it's going to do is cost us money."

Greene noted that while her company is looking to expand internationally, as many other small companies are in a time of booming export opportunities and low domestic demand, there will be no real way to escape the cost of implementing and abiding by the new standards. "I think it's just going to be painful for a small company," she noted, adding that while regulators often cite increased comparability as a benefit afforded to companies that switch to IFRS, Tandy Leather Factory's unique position and industry renders this benefit largely non-existent. "For comparability purposes, we don't really have any competitors," said Greene. "I don't even get the benefit of my financial statements being comparable to someone else's financial statements for investment purposes, for banking purposes, for capital investment purposes, et cetera."

"Anytime you ask us to spend money that doesn't help us sell more product, you get a lot of flak from the senior management team," she added. "I don't have anything really positive to say from our company's perspective. Personally, I get it, but I just can't see how we get from where we are to where we want to be."

Jacob Barron, NACM staff writer

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Municipal Bankruptcy Roundup: Harrisburg, Jefferson County, Central Falls

The growingly desperate debt situations and/or budget shortfalls in three U.S. municipalities continue to push the discussion on Chapter 9 bankruptcy into the national media spotlight.

The city council of debt-hobbled Harrisburg, PA somewhat surprisingly voted down a state-backed debt-restructuring plan Tuesday that would have included selling off parking garages and a trash incinerator, the latter of which is the primary cause of the capital city's massive debt problems, as well as freezing public employees' salaries. Opponents to the plan, which failed by a margin of 4-3, said the plan punished taxpayers too much for the bad decisions of others, while giving investors/bondholders who gambled on Wall Street a bit of a free pass. Harrisburg Mayor Linda Thompson is said to be trying to work up a compromise plan including some aspects of the state's recommendations within the next two weeks.

Pennsylvania state lawmakers hurried in recent weeks to pass S.B. 907, which would strip any third-level city—Harrisburg fits into that distinction—of state funding if it files for bankruptcy before July 2012. Among the concerns would be the sullying of the capital city's reputation and, by default, that of the state. That's not to mention the likely subsequent concern on the part of investors and bondholders, thus making it more expensive for other similar-sized Pennsylvania cities to borrow even if they're much better off than Harrisburg fiscally, which most are. Still, a bankruptcy filing is far from off the table, sources indicate.

While the Harrisburg situation remains cloudy, Chapter 9 bankruptcy appears to be the most likely debt solution in Jefferson County, AL. Struggling with the massive debt load caused largely by a sewer retrofit project last decade, Jefferson County's commissioners are tentatively scheduled to meet with a municipal bankruptcy expert today (after eNews' deadline). If it were to file, it would be the largest municipal bankruptcy in U.S. history. And, unlike in Pennsylvania, Alabama Gov. Robert Bentley does not appear to be fighting the move with any level of vitriol. In fact, Bentley noted earlier this month it was "a very strong possibility."

Meanwhile, Central Falls, RI officials and their state-appointed expert, who is trying to help the small community avoid running out of cash and into a Chapter 9 bankruptcy filing believe the most effective way to avoid financial doom is to cut pensions for retired workers drastically. As such, those receiving city pensions, mostly police and firefighters, are being asked to voluntarily accept severe pension cuts, nearing 50% annually to help offset the estimated $25 million deficit projection through 2016. It is estimated Central Falls presently faces pension obligations of about $80 million.

Is Chapter 9/municipal bankruptcy a topic that you'd like to hear more about, primarily in the form of a teleconference hosted by one of NACM's top legal experts? Please let us know what you think by emailing traceyf@nacm.org. Please put "Chapter 9 teleconference" in the subject line of your response email.

Brian Shappell, NACM staff writer

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For more information on NACM's MLBS, click here.

House Passes "Cut, Cap and Balance Act" as Debt Ceiling Negotiations Continue

The U.S. House of Representatives, in a strongly partisan and largely ceremonial vote, passed the Cut, Cap and Balance Act this week. It moves on to the Senate where it faces almost certain failure due to its intense cuts to entitlement programs and requirement that any increase in the nation's debt ceiling be coupled with sending a balanced budget amendment to the states for ratification.

The bill was passed in a 234-190 vote that fell strictly along party lines, with only five Democrats voting in favor. In addition to making the nation's desperately needed debt ceiling increase contingent on a balanced budget amendment, the bill also codifies the spending cuts put forth in Rep. Paul Ryan's (R-WI) previously submitted budget and aims to reduce the size of the government overall to 20% of GDP. In any instance in which the government went beyond the 20% of GDP threshold, spending cuts would automatically be trigged, according to the bill's language.

President Barack Obama has paid the bill little to no attention, instead choosing to focus on the ongoing debt ceiling negotiations, which are expected to produce an agreement with more bipartisan support. While negotiations originally began between Obama and prominent House Republicans like Speaker John Boehner (R-OH) and House Majority Leader Eric Cantor (R-VA), discussions seem to have now shifted to the Senate, where lawmakers like Senate Minority Leader Mitch McConnell (R-KY) seem much more open to compromise.

The Cut, Cap and Balance Act essentially will be dead on arrival in the Senate and serves more as a form of political cover for House Republicans with strictly anti-tax, anti-spending constituencies. "I was part of the team that balanced the federal budget for the first time in a generation and believe we can and must get back to balancing the books in Washington," said Rep. Dave Camp (R-MI), chairman of the House Ways and Means Committee, in a statement similar to the dozens of other releases from Republican lawmakers that came with the bill's passage. "Cut, Cap and Balance is a plan to do that and requires a balanced budget amendment be sent to the states before the debt limit can be increased. It is the strongest signal that business as usual is over in Washington."

"With unemployment at 9.2%, we must enact a plan that will bring confidence and certainty to America's best job creators—small businesses—without raising taxes as Democrats have demanded," said House Small Business Committee Chairman Sam Graves (R-MO). "We all agree that we must pay our bills, but raising taxes in order to sustain Washington's largesse is not the answer—real and significant spending cuts are. The Cut, Cap and Balance Act would provide them."

Jacob Barron, NACM staff writer

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Italy Surprises Markets with Speedy Austerity Package

Unlike Greece and Ireland, which had to be coerced if not browbeaten and bribed with a bailout by the European Union (EU) to pass austerity plans to combat growing sovereign debt problems, Italy fast-tracked one within the last week. Though an impressive display on the part of the Italian parliament, one where even opposition lawmakers opted not to use legislative technicalities and stalling tactics to block a formal vote on the matter, tough questions regarding economic and debt realities still exist for the EU's third-largest economy.

On a 161-135 vote, Italian lawmakers passed an austerity program aimed at balancing its budget and cutting its debt in half within the next three years. The package is valued at 48 billion euro and includes measures such as pension cuts, public worker salary freezes and raising the retirement age. There was obvious opposition to the move, one which Italy's center-left politicians alleged requires significant concessions by the poor and public sector workers but not on many perceived free-spending politicos, but nothing rivaling the violence seen in Greece as a reaction to its own debt-fighting measures.

The announcement of the package, which arrived with what some characterized as vague details, did calm markets somewhat initially. However, significant concerns remained in the days that followed, and it appears the nation may be heading toward eventually ousting embattled Prime Minister Silvio Berlusconi prior to the end of his term in 2013.

As noted in the July 14 editions of eNews, scandals have dogged the Berlusconi government, especially the prime minister himself, leading investors, citizens, opposing politicos and even former high-level supporters to unilaterally question its competence in public. Italy's outstanding debt load of about $2.2 trillion (USD) is nearly five times the size of Greece's debt and more than 10 times that of the respective commitments of Ireland and Portugal. It has fueled concern since a collapse on the part of Italy likely would affect the world economic rebound, or lack thereof, on a much greater scale than troubles in its counterparts in the so-called PIIGS nations.

Brian Shappell, NACM staff writer

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Senators Try Second Push for Small Business Regulatory Reform

Two prominent Republican lawmakers are pushing a regulatory review bill for the second time, couching the bill and its provisions as economic imperatives.

The Freedom from Restrictive Excessive Executive Demands and Onerous Mandates Act, or FREEDOM Act, had previously failed on procedural grounds in the Senate but has gone on to garner a fairly strong level of bipartisan support. The idea, according to bill sponsors Olympia Snowe (R-ME) and Tom Coburn (R-OK), is that the FREEDOM Act would reduce excessive red tape and outdated, inefficient and onerous federal regulations, thereby allowing businesses to add to their payrolls and begin hiring again.

"The momentum in support of comprehensive regulatory reform is growing, with a majority of the Senate, and of the members of the committee of jurisdiction, already having voted in favor of the FREEDOM Act on the Senate floor," said Snowe. "Indisputably, we require an economic game-changer to reverse the disturbing and lasting trend of high unemployment across the country. Removing needless red tape and inefficient bureaucratic barriers to job creation is one sure fire way to promote economic growth nationwide, but the longer we dither on this issue, the longer our economy will continue to stagnate."

Snowe cited testimony from a witness at a recent hearing in the Senate Committee on Small Business and Entrepreneurship that illuminated the benefits of a reduced regulatory burden. "The fact is, according to a witness at one of the Senate Small Business Committee hearings, a 30% reduction in regulatory costs would save nearly $32,000 for a 10-person firm, which is enough to hire one additional person," she said. "Think of what that would mean for our economy if every small firm experienced that relief."

The FREEDOM Act would work by strengthening the Regulatory Flexibility Act (RFA), which requires federal agencies to conduct small business analyses for any regulation that would impose a significant impact on a substantial number of small firms. Specifically, the new bill would require agencies to consider indirect economic impacts in their small business analyses, enforce existing periodic rule review requirements and penalize agencies that slack off on these reviews.

Jacob Barron, NACM staff writer

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



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