November 3, 2011
The bad news is the October Credit Managers' Index (CMI) did not see September's big gains. The good news is that there was no retreat from September's numbers. The overall index hit 53.8 in September after tumbling to 52.7 in the previous month, but in October the index essentially held steady at 53.7. There was a slight reduction in the index of favorable factors, but the index of unfavorable factors came just a little bit closer to expansion territory. The majority of economic indicators has been reasonably positive over the past few weeks and seems to be pointing to better months to come and the CMI did not dispel this assumption, although the slower pace of progress reminds those paying attention that this is unlikely to be a rapid recovery for any but a handful of sectors.
"Most of the decline took place in the favorable factors suggesting that growth is not yet ready to surge, but the fact remains that adjustments were relatively minor and remain above the trend from earlier this summer," said Chris Kuehl, PhD, economist for the National Association of Credit Management (NACM). The rate of sales slowed from the pace in September, but at 60.4 it is still higher than it has been since April. Expectations were that sales would be back to the levels set last spring, but there was evidence in the other index numbers for a slight reversal of credit availability. The number of new credit applications improved slightly to 58.9, taking this indicator back to April levels. It is apparent that more businesses are seeking to expand and are making more credit requests. The hitch is that there was a decline in the amount of credit extended. However, the decline was not dramatic, falling from 62.8 to 61.9. That leaves current readings higher than through most of the summer, but the slowdown is a bit of a concern as the holiday season begins.
Most of the positive news stemmed from the changes in unfavorable factors. These upward shifts suggest that companies are having more success getting finances in order than was the case earlier in the year. The gains in the index are starting to point to a general recovery. There was a reduction in the number of credit applications rejected and that somewhat contradicts the reduction in credit issued. "The fact is that companies are asking for more credit than they may receive, but there is still evidence of credit movement," said Kuehl.
Overall, unfavorable factors showed improvement. There were fewer accounts placed for collection, fewer disputes and fewer dollars beyond terms. There were also fewer bankruptcies. The unfavorable index is still just shy of the 50 point, sitting at 49.9 and suggesting expansion over contraction, but the trend is headed in the right direction. The last time the unfavorable index was above 50 was in July and the numbers had been sinking deeper into the 40s since. The current reading is about as close to 50 as one gets and is now expected to clear that level next month.
"The latest data on the expansion of the U.S. economy in the third quarter reinforces the notion that conditions have started to improve, and the retail data thus far has been more encouraging than not," said Kuehl. "If one looks at the steady rebound in the financial stability of the business community over the last month, there is some reason to assume that conditions will improve even more in the last two months of the year."
Call for Nominations
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Find out more on NACM's Honors and Awards Program web page. Deadline for nominations is January 20, 2012.
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Though only a matter of days, the favorable market and experts' reaction to the debt plan ratified by member nations of the European Union now seems so long ago as Greece's top politician essentially went rogue and injected a heaping dose of uncertainty back into the continent's dialogue in a thinly veiled attempt to keep some level of support at home. Then, after two tumultuous days, he backed off a plan to put the new bailout from the EU and International Monetary Fund up for a referendum vote to be determined by Greek voters angry at austerity concessions they've been asked to make to address the nation's debt.
After the EU settled on a new Greek bailout and other areas of concern, such as clarifying parameters for future bailouts and assistance that could be used for larger nations such as Italy and Spain in a worst-case scenario, Greek Prime Minister George Papandreou shocked the EU and even some party loyalists with the announcement on Tuesday that the latest bailout would be put to Greek voters. It is believed that if they rejected the EU's bailout plan, which appeared all but finalized with the support of much of the union if not the world, the debt-hobbled nation would almost certainly careen into default.
Soon after, Germany and France pushed to freeze all financial aid to Greece until after a referendum, which they characterized as a virtual vote to determine whether the nation plans to stay in the EU. Meanwhile, Papandreou saw defections from his own party loyalists, leaving him without majority backing for a time. Amid growing calls for his resignation both at home and internationally and preparations for a vote of no confidence designed to oust him from power, the prime minister cancelled the planned public referendum. But, even with the cancellation, Papandreou's political sneak-attack seems to have already had a dramatic negative impact on the EU's attempts to calm markets and foster continued investor activity.
"I think the announcement just adds so much uncertainty into the financial market, as it is unlikely to pass by the Greek public," Chmura Economist and Analytics Economist Xiaobing Shuai told NACM. "The U.S. economy may be in a better position than the European economy, but we don't know the exposure of large U.S. banks and other financial institutions to Greek debt, and other euro debt. That is the key in deciding how big the impact is to the global economy. In short, a more likely Greek default is a bad development."
Enam Ahmed of Moody's Analytics told NACM that a "full-blown Greek default" would have significantly destabilized the euro, as it is unknown how far problems would go regarding its impact on other countries, caught flat-footed by Papandreou's political maneuver.
"The Greek announcement will make it increasingly difficult for France and Germany to get investors to put their money into the EFSF [European Financial Stability Facility]," Ahmed said.
Ken Goldstein, however, believes the Greek referendum, should it have gone on, was more of a red herring to other issues investors are, in reality, more concerned with, such as the prospect that even a bolstered euro bailout fund might not be enough if Italy finds itself on the brink of default not to mention overall health of the international currency system itself.
"The real story is that Europe is stumbling from crisis to crisis, but no one wants to talk about the 800-pound gorilla in the room: Where is the euro headed?" he told NACM. "There is no way to go back to the euro as we've known it for the past decade. Either the euro breaks up or tightens up. And neither is politically popular."
Brian Shappell, NACM staff writer
FCIB's 22nd Annual Global Conference
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- The New Global Financial Environment & the Power of Relationships
Sanjiv S. Sanghvi, Executive Vice President - Global Banking Group, Wells Fargo Bank
- Global Political Risks—How Are you Covered?
Angela Duca, Vice President-Political Risk & Structured Credit, Marsh USA
- Managing Credit Effectively: Risk Management Processes in Today's Global Business Environment
Dr. Michael Sauter, Managing Director, Guardean GmBH (Germany)
- Doing Business in the Americas, Europe, Middle East and Africa, Asia Pacific and Emerging Markets
View program for full moderator/panelist details
- Economics that Influence Foreign Exchange
Kevin Hebner, Senior FX Strategist, JPMorgan
Last week, the House of Representatives approved a bill that would repeal the 3% withholding tax, set to take effect on all government contracts in 2013. The fight for repeal now continues in the Senate.
Though a number of competing repeal measures exist in the Senate, the House's bill, H.R. 674, which passed in a landslide 405-16 bipartisan vote, is the only one that's been read twice and is currently on the chamber's schedule. Other efforts like S. 89, S. 164 and S. 1726, the most recent, haven't been treated with the same urgency.
One of the sponsors of those now largely abandoned efforts, Sen. Scott Brown (R-MA), whose S.164 has garnered 30 cosponsors, led the charge in favor of H.R. 674 this week, formally reintroducing it in the Senate and calling for its swift passage. "Last week's House vote was a rare showing of overwhelming bipartisanship, and now it's time to take this jobs bill across the finish line. I again call on my colleagues in the Senate to avoid any partisan gimmicks and quickly pass the House version of my 3% withholding repeal," said Brown. "If the Senate is willing to unite behind this noncontroversial bill, it will be an important victory for America's job creators, and proof that Congress can pass jobs legislation when all parties negotiate in good faith."
In a statement of policy following the House vote, the Obama Administration voiced its support for H.R. 674, and for its revenue offset, H.R. 2576, which amends the Affordable Care Act, the administration's signature legislative achievement, to change the calculation of modified adjusted gross income in a way that reduces cost to the government.
"The Administration...believes it is important to ensure that federal contractors are compliant with tax laws and supports more targeted efforts that prevent persons with outstanding tax debts from receiving federal contracts," they said. "The effect of the repeal of the withholding requirement would be to avoid a decrease in cash flow to these contractors, which would allow them to retain these funds and use them to create jobs and pay suppliers."
The arguments in favor of H.R. 674 are the same ones made by NACM since it first began pushing Congress for a repeal of the 3% withholding measure, immediately after its enactment in 2006. NACM applauded the House for its repeal vote and urges the Senate to act quickly on this important legislation.
For more information on NACM's fight to repeal the 3% withholding tax, click here.
Jacob Barron, CICP, 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.
While courts can take several months or more to start a reorganization plan, 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 Affiliate 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.
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A commodities and derivatives brokerage firm spearheaded by a former state governor dominated bankruptcy headlines during what was another busy week in the area of distressed businesses. Meanwhile, the municipal bankruptcy issue continued to heat up, becoming increasingly convoluted.
MF Global Holdings Ltd., headed by former Goldman Sachs executive and New Jersey Gov. Jon Corzine, filed for Chapter 11 bankruptcy this week. It's the eighth largest filing by a public company in U.S. history. The company's brokerage business had significant holdings among four of the five deeply debt-hobbled PIIGS (Portugal, Italy, Ireland, Greece and Spain) as well as other struggling EU nations. The brokerage business is not eligible for reorganization under the U.S. Bankruptcy Code, but is eligible to liquidate under Chapter 11.
Some of MF Global's perceived odd business choices caught the attention of the Securities & Exchange Commission, which is investigating the firm. In recent days, whispers of either incompetence or fraud have grown louder.
Tribune Co., which has been a symbol of the massive problems facing publicly-held media and publishing organizations, was dealt yet another setback in its languishing Chapter 11 reorganization process as U.S. District Court Judge for the Third Circuit Kevin Carey rejected two plans in recent days.
However, Carey did intimate that he was leaning closer toward the plan offered by Tribune's ownership, but reportedly wants additional, significant concessions for lower-level creditors and bondholders, who were left with little to nothing in the ownership's plan.
Meanwhile, in Chapter 9 news, the bankruptcy filing out of Harrisburg, PA and mounting opposition to it threaten to turn the entire situation into a proverbial three-ring circus. Since the city council voted 4-3 to file for Chapter 9 over debts tied largely to a failed revamp of a city-based incinerator project, legal objections have come fast and furious.
City Mayor Linda Thompson, the state, two banks, the incinerator bond insurer and the incinerator's operator to date have all filed to have the bankruptcy thrown out by a U.S. District Court judge. They have argued points such as the council not having such authority, illegality and/or that it is simply fool-hearted to pursue given the other options on the table. Judge Mary France is expected to rule on whether the bankruptcy itself can proceed during a Nov. 23 hearing as part of the state and mayoral opposition.
However, in a bit of good news for vendors and suppliers, Judge France ruled this week that Harrisburg can pay them without case-by-case court permission and should continue to do so at least in the short term. The city council had demonstrated resistance toward making such payments.
Brian Shappell, NACM staff writer
NACM's Mechanic's Lien and Bond Services (MLBS): Best-in-Class Service for Today's Construction Credit Professional
MLBS' newly redesigned 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.
MLBS also offers two preliminary notice to owner (NTO) services, deadline tracking, a lien and bond filing program and a suit against bond and foreclosure service. Both NTO services include, at no additional charge, a Next Action Notification Email. These reminders are sent automatically to ensure that your lien and suit deadlines are met during each step of the lien process.
For more information on NACM's MLBS, click here.
Don't miss Greg Powelson's half-day workshop on November 10
in Birmingham, Alabama. Click here for details.
NACM submitted a comment to the Small Business Administration (SBA) this week, offering its support to the agency's recent size certification proposal.
As required by last year's Small Business Jobs Act, the SBA promulgated rules that would mandate new procedures for companies seeking small business-earmarked federal contracts. Under the proposal, an authorized company official would have to certify that their business qualifies as "small" and update this certification on at least an annual basis.
Failure to update the company's size or small business status in the Online Representations and Certifications Application (ORCA) database every year would result in the company no longer being identified in the database as small, therefore rendering it ineligible for the 23% of federal contracting dollars statutorily required to go to smaller firms.
"NACM believes that the suggested amendments would do a great deal to ensure the integrity of the contracting process, more accurately align federal awards with existing statute and, finally, deliver a potential boost to the segment of businesses most responsible for job creation," said NACM President Robin Schauseil, CAE and NACM Chairman Kathy Tomlin, CCE in the submitted comment. "Furthermore, the proposal that requires companies to update their size and status ensures that any business that grows beyond its ‘small' status, or is purchased by a much larger company, is not allowed to remain in the system as a small business, generating profits for their larger parent companies while other small firms are left wanting."
"It is a common sense shift that can correct a significant, detrimental loophole in the government's contracting procedures," they added.
Misrepresentations in small business contracting have been the object of criticism for many years. In several instances, alleged "small businesses" are owned by much larger conglomerates and used as fronts in order to allow large companies to access small business contracts. Ultimately, this reduces opportunities for small businesses, which, by the SBA's own measures, are most responsible for job creation, and leads to a decrease in competition for these contracts and an increase in costs to the taxpayer.
Jacob Barron, CICP, NACM staff writer
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Bucking recent trends both nationally and within the state, Oklahoma has simplified its mechanic's lien statute. One expert called it a case of common sense prevailing and openly hoped it encourages similar changes in other states in upcoming months and years.
Senate Bill 277, signed into law by Governor Mary Fallin on April 6, became effective Tuesday and changed the threshold for a notice to a value of $10,000. It also repeals the pre-notice requirement for notice on residential property—the 75-day from last furnishing mandate now is in effect for both residential and commercial construction. Greg Powelson, director of NACM's Mechanic's Lien and Bond Services, hailed the move as "a real victory for suppliers and subcontractors."
"The Oklahoma statute has been difficult to manage for years," he said. "For the first time, suppliers and subcontractors know their deadlines and have consistency."
Previous law required that claimants on non-residential projects send a pre-lien notice within 75 days of the date of last supply, except on claims less than $2,500.
Perhaps more significant is the repeal of the pre-supply or pre-work "Notice to Owner" requirement, said Powelson. He noted that "under previous law, where there is a claim by a material man or mechanic against a contractor on an owner-occupied remodel of a single family residential dwelling, a valid lien could not be filed unless proof could be given that an owner was notified in specific language dictated in the statutes prior to the date of first supply or work by the claimant." In lieu of that notice, SB277 provides that claimants will send a pre-lien notification within 75 days of the date of last supply in a manner consistent with the non-residential notification requirement in order to file a valid lien. It's important for suppliers to keep in mind the short potential deadline between notice (75 days from last furnishing) and lien (90 days from last furnishing).
"I'd recommend serving notice no later than 60 days from last furnishing to leave enough time to get paid prior to the deadline. Hopefully common sense changes like Oklahoma's will become a national trend," Powelson said.
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