May 31, 2012
In a quicker-than-expected turnaround, the Supreme Court ruled unanimously to uphold the rights of secured creditors in Chapter 11 bankruptcy-related assets sales.
The high court noted that a Chapter 11 "cramdown" plan could not be confirmed if a secured lender, often a bank, is denied the right to use debt owed to them at an assets auction in lieu of cash. The timing comes as a surprise, as a decision was not expected for several weeks, as does the unanimous vote (with Justice Kennedy not taking part in the decision) since Chief Justice Roberts expressed the importance of "the specific over the general" when analyzing the debtors' point of view in a late April hearing of arguments regarding differing credit bidding decisions in the lower courts.
The court opinion, delivered by Justice Scalia and made public Tuesday, May 29, threw out verbiage technicalities on which the petitioner was basing its argument and on which the Third Circuit based a previous decision that cut at credit bidding rights.
"The general/specific canon is not an absolute rule, but is merely a strong indication of statutory meaning that can be overcome by textural indications that point in the other direction," Scalia wrote. "The debtors point to no such indication here." Scalia's take on the petitioner's argument included characterizations such as "surpassingly strange" and "irrelevant" as well as one that hung its argument on procedural technicalities more so than "substantive" requirements of federal bankruptcy law.
The case in question was RadLAX Gateway Hotel LLC v. Amalgamated Bank. At stake was whether creditors would be able to use the value of their secured debt as opposed to straight cash, a process called credit bidding, as the U.S. Bankruptcy Court for the Seventh Circuit ruled in RadLAX. However, that view is competing with contrary decisions out of the U.S. Bankruptcy Courts for the Third and Fifth Districts, which preceded it and limited credit bidding, in some instances.
The petitioner argued that, in a case like RadLAX, the concern lies in the ability of getting other non-secured bidders to even show up for an auction if they have knowledge that a secured creditor can best the bid without offering up any new cash, instead of just what is already owed to them. In addition, the petitioner said federal law notes that the use of the word "or" in one of the clauses guiding bankruptcy actions says the sale can go on without the right of a credit bid if the "indubitable equivalent" of their claim is realized.
Such arguments drew critical reactions from a majority of the justices, who intimated that the argument against credit bidding runs contrary to the essence of the Bankruptcy Code and the intentions of the U.S. Congress. More on what the judges said can be found here.
- Brian Shappell, CBA, NACM staff writer
International Business Sessions at Credit Congress
Going to Credit Congress? NACM and its industry-leading international division, FCIB, have developed upwards of 10 educational programs for the 2012 Credit Congress being held June 10-13 at the Gaylord Texan in Grapevine, TX.
Among the internationally-focused sessions this year are two more in the popular "Doing Business In..." series featuring Canada and Mexico, as well as "Credit Risk: No Safe Haven" and "An Uncertain Global Economy and Its Effect on Credit," among other sessions. And, as usual, FCIB will host its annual Credit Congress luncheon, scheduled for June 11, featuring popular guest speaker Chris Kuehl, PhD, NACM economist. There's still time to register for Credit Congress and, if already registered, to add these events.
For more information on FCIB, visit www.fcibglobal.com.
"Spring Swoon" Weighs on May Credit Managers' Index
It can now be said that the economy has experienced a third straight year of "spring swoon." In 2010 this was provoked by a premature recovery that made the first quarter look stronger than it really was, and the 2011 culprits seemed to be the supply chain disruption from the earthquake in Japan, as well as the Arab Spring's impact on oil prices. What seems to be the problem in 2012? One explanation holds that the European crisis has become this year's "black swan" as it has affected everything from banks to exports. A second opinion contends there is nothing really wrong with the economic recovery, but that industry is just taking a breather. A third holds that the consumer is hibernating again as they react to everything from high jobless numbers to inflation.
The latest Credit Managers' Index lends some support to all three scenarios, but mostly the data underpins the sense that consumers are in retreat. This is not necessarily bad news, as the consumer can come back to life under the right conditions. The overall CMI slipped again in May and is now sitting at levels last seen in January of this year and about where the CMI was a year ago. "The gains made in the last year have largely been erased and now the question is whether there will be a swift and significant comeback," said NACM Economist Chris Kuehl, PhD. "The drop from 55.1 in April to 54.6 in May is not quite as steep as the one from 56.2 in March to 55.1 in April, but the decline is worrisome nonetheless."
If there are silver linings in this month's report it is that favorable factors did not change much—the favorable index retreated from 60.5 to 60.2. Sales data actually improved from 60 to 61.2, but remains off the pace set earlier in the year when sales hit 64.4. Even better news came from new credit applications, which rose from 58.2 to 59.9. The retreat, and the bad news, was due largely to the decline in the amount of credit extended—down from 64.6 to 61.3. Part of that decline can be attributed to less credit being requested, and more of those asking for credit being denied.
May's data indicated more turmoil in the index of unfavorable factors compared to April's slight shift, said Kuehl. "As suggested last month, the majority of the business community lacks the flexibility to handle many weeks of downturn before there are problems, and this month's unfavorable factors show that this is the case," he noted. Dollar amount beyond terms fell into contraction territory from 50 to 48, as did disputes, which fell from 50.7 to 49.4. Most factor numbers dropped a little, but a big change in dollars beyond terms often signals more issues to come. In the end, the total index of unfavorable factors slid from 51.6 to 50.9. This is not catastrophic, as this is close to where the readings have been for the past year, but there had been some hope of some serious recovery gains by this point, not a reversal. At 50.9, the unfavorable factor index is less than a point from sliding into contraction territory—a place the index has managed to avoid since October 2011.
"The sense of the index for this month is that nothing has developed to perk the economy up, but neither is there evidence of an imminent crash," said Kuehl. "The gains made in the first few months have proven to be more ephemeral than expected and many have concluded that 2012 will not break the 'spring swoon' pattern. The next challenge is to determine if this will be a long and difficult summer as in both 2011 and 2010. Nobody seems quite ready to make that declaration just yet."
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In the wake of the recession, states facing budget shortfalls have looked for spare revenue wherever they can find it, including in unclaimed property enforcement. Now, however, in addition to facing income-starved state governments, companies with less-than-compliant unclaimed property procedures could face pressure from within their own ranks.
A recent decision from the Superior Court of Delaware, New Castle County, found that a business' former tax manager, joined by the state's attorney general, could proceed with a case under Delaware's False Claims Act alleging that the business failed to properly remit unclaimed property. The claim states that the company, SourceGas Distribution, LLC, failed to report unclaimed property acquired in its purchase of a retail gas distribution business, even though the former tax manager had identified the property to them.
SourceGas moved to dismiss, but the unclaimed property allegation was allowed to proceed. Specifically, the company was accused of changing the name of an acquired liability account from "Unclaimed Property Liability" to "Converted Balance from Dec. 2004," which was found to be sufficient evidence of an attempt to conceal unclaimed property.
"Not only are the states pushing harder with enforcement," said Valerie Jundt, managing director at Keane Consulting and Advisory Services, "but now employers need to be concerned that employees will expose them, and for a fee."
As internal and external pressure on escheatment and unclaimed property compliance continues to build, companies of all sizes must take action to minimize their exposure to these potentially harmful violations and penalties. Credit professionals interested in tightening their companies' policies will find a great deal of information in Jundt's presentation, "The ABCs of Unclaimed Property Compliance," at NACM's upcoming Credit Congress. This session will cover the fundamentals of unclaimed property and give attendees the tools they need to implement a successful program to ensure that their companies are audit-ready.
Credit professionals from around the country will attend NACM's Credit Congress from June 10-13 at the Gaylord Texan in Grapevine, TX, taking advantage of this year's cutting-edge educational sessions and value-adding networking opportunities. To find out more about Credit Congress, and to register, click here.
- Jacob Barron, CICP, NACM staff writer
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The Senate Judiciary Committee approved a bill last week that would aim to make it easier for small businesses to properly reorganize.
S. 2370, the Small Business Reorganization Efficiency and Clarity Act, was reported without amendment on a unanimous voice vote during an executive business meeting. As reported in last week's edition of NACM's eNews, in addition to imposing a number of interesting research requirements on various government agencies, the bill would also double the time by which a court must confirm a small business reorganization plan, from 45 to 90 days, and give courts the authority to compel a debtor to self-identify as a small business.
A reorganization process specifically designed for small businesses already exists within the Bankruptcy Code, but debtors can choose whether or not to use it, regardless of their size. S. 2370 gives courts the authority to dismiss a debtor's case for failing to identify itself as a small business debtor. NACM suggested such a change in its previous work with S. 2370 sponsor Senator Sheldon Whitehouse (D-RI).
In remarks made during the bill's markup, Whitehouse described S. 2370 as a modest group of agreed-upon amendments that gives courts and debtors more time to confirm a plan, while also eliminating "catch-all" reporting requirements that served no useful purpose. Co-sponsor Sen. Chuck Grassley (R-IA) and Sen. Tom Coburn (R-OK) agreed with Whitehouse's characterization of the bill, with Coburn describing it as a good, common sense compromise.
The Senate is in recess until next week. It remains unclear when the full chamber might take up S. 2370, or if the House Judiciary Committee has any plans to take up a similar bill, or use the legislation as a vehicle for other related purposes.
Stay tuned to NACM's eNews for ongoing updates on this bill and NACM's other legislative priorities. If you have any questions or comments about NACM's Advocacy program, email Jacob Barron, CICP at firstname.lastname@example.org.
- Jacob Barron, CICP, NACM staff writer
Make Better Credit Decisions with Industry Credit Groups
Credit groups are an effective management tool. They permit credit professionals of different companies servicing the same customer, regardless of industry or trade, to compare information on collection history and provide a forum for the exchange of data about the most recent payment practices. The purpose of exchanging information is to help group members segregate fiction from fact, so competent and realistic credit decisions about a customer can be made.
Managed and operated by NACM Affiliates nationwide, NACM-Canada and FCIB internationally, credit groups:
- Provide unparalleled networking opportunities
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- Provide a forum to discuss the latest developments on credit department procedures,
equipment and other credit management functions
- Support the discussion of account information and delinquent account reports
- Adhere to federal antitrust guidelines
Contact your local NACM Affiliate to learn more about NACM credit groups and to find the group for your industry.
Creditworthiness and paying habits along sovereign lines was, as expected, a recurring topic of interest throughout FCIB's Annual International Credit and Risk Management Summit in Hamburg in May. While sources noted the importance of weighing conditions within each region of a country and relationships with existing customers in such places, FCIB delegates still craved information at the national level, and not just about often-discussed problem nations like Greece, Spain and Russia. Based on panelist, speaker and delegate observations, here is a rundown of some of the latest risk and big-picture economic trends to keep in mind for some less-discussed nations:
Argentina and Bolivia: Concern is growing among those who do business in these nations as the threat of confiscation, such as in Venezuela in the recent past, continues to rise. As such, the short-term credit market is rife with risk, and options like credit insurance are in short supply. The key phrase here is "wait and see."
Bangladesh: Emerging as a manufacturing outsourcing destination because of lower wage demands than other production powerhouses such as China and India.
Egypt: Major changes to the banking system are taking place post-revolution. Hence, even timely payments are often subject to delays of a week or more. One panelist noted that Egypt resembles the Turkey, now a sub-BRIC emerging economy of note, of 25 years ago. Granted, the process of change and reaching potential is more likely to come over decades, not months or years.
Hungary: Those doing business here generally do so on open account following a short period of COD-type arrangements, and characterized Hungary as one of the better-paying European nations at present. However, it often takes three to five days for clearing and gaining access to the payment.
Italy: This PIIGS nation fell off media radar somewhat, but is doing a good job of quickly executing reforms. However, its debt burden remains tremendous, and the nation could struggle more if well-publicized problems in Greece or Spain escalate further.
Netherlands: Held up as the example of how a nation can progress from perennial debtor (up to the late 1990s, early 2000s) to creditor over the course of a decade. Few are in better a position financially, save Germany, in the European Union at present.
Nigeria: Continues to be a high-risk market although, because of the oil trade, can be lucrative as well. Financial problems at Pipelines and Products Market Company (PPMC) remain a concern with possible spillover effect. Fuel shortages have been blamed on PPMC woes, and it is estimated the private market has exposure well exceeding $1 billion.
Slovenia and Croatia: Cash-flow problems for companies there have been an issue for years, but that seems to be abating somewhat.
Tunisia: Showing no improvement, payments are continually late or delayed. A wait of a month for banks to make the money available is not out of the question even when payment is made on time.
United Arab Emirates: The UAE actually benefitted from the Arab Spring revolts. Like parts of Turkey, Dubai now has become a bit of a trading center between more Islamic-tied business, including those operating under Sharia Law, and the west.
- Brian Shappell, CBA, NACM staff writer
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After acknowledging the "increasing downward pressure" facing their economy last week, China announced a renewed focus on building up the country's services sector in order to shore up any potential manufacturing losses.
China's gross domestic product (GDP) growth slowed to a still-meteoric 8.1% in the first quarter of 2012, down from 8.4% in the fourth quarter of 2011. This has raised concerns about further deceleration in the world's second-largest economy among market watchers, including Premier Wen Jiabao. "Fostering growth in the service sector is the main direction for China's economic transformation and restructuring, as well as an internal call to improve people's living standards," said Wen at the opening ceremony for the first Beijing International Fair for Trade in Service, held this past Monday, May 28.
Despite these efforts to allay market concerns, China's slowdown is taking place by design. The Chinese government set the full-year GDP growth target at 7.5% for 2012, marking the first time in eight years that this target has been under 8%, and the country has made it clear that its efforts, which have been largely successful, are geared toward engineering a soft landing.
Although these efforts are necessary from a sustainability perspective, they've come at a less-than-advantageous time for the global economy at large, and particularly for the manufacturing sector. "The Chinese have continued to try to slow things down," said NACM Economist Chris Kuehl, PhD. "That has reduced their demand for goods from the U.S. as well as from other nations that the U.S. sells to. The export business has been critical for the U.S. manufacturer and it therefore causes some heartburn when those foreign markets seem to stumble."
For this reason, Chinese officials have emphasized the importance of trade in the services sector as a way to drive growth in an environment of weaker demand for Chinese products. "Against the backdrop of intensifying uncertainties and risks of global economic downturns, the development of the service sector and service trade will become the new growth pole for China," said Qiu Hong, assistant commerce minister.
- Jacob Barron, CICP, NACM staff writer
To learn more about global economic trends and how to grow your company through exports, visit FCIB's website at www.fcibglobal.com.
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