June 28, 2012
The Credit Managers' Index (CMI) for June sits at 54.5, just slightly behind May's reading of 54.6. The sub-index of favorable factors maintained a reading of 60.2, with the sub-index of unfavorable factors moving downward slightly to 50.6. The reasons for the flux in unfavorable readings are concerning, but instructive, and provide hints to where the economy may be heading in the summer months. The variation in favorable factors also point to changes ahead. The differences are subtle but significant, and that is where the real story gets told.
The most distressing trend of the latest CMI survey completed during the week of the summer solstice is that sales continue to sag. The decline from 61.2 to 60.6 matches the low point set in April, when sales slipped to 60. The trend for the year had been more aggressive with readings between 63.5 and 64.4, but the pace has since struggled. The new credit applications number also declined to 57.5, reaching a low not seen since December 2011. The slowing pace of expansion does not bode well for the summer months. However, a solid increase in dollar collections, which returned to the 60s from 58.5, and the rise in amount of credit extended, from 61.3 to 62.6, "was good news to be sure," said NACM Economist Chris Kuehl, PhD. "The months from December through April were all above 64, so there is still plenty of room for improvement. In the end, the areas that improved were offset by the areas that fell back."
The movement in unfavorable factors is interesting. There was a slight overall decline, but that obscured a lot of the variability within this sub-index. The concern going forward is for the three categories now under 50. The biggest shift took place in accounts placed for collection, down from 50.5 to 48.3. There was also deterioration in dollar amount of customer deductions, from 50.2 to 48.7. On the brighter side, filings for bankruptcies changed little (56.4 to 56).
"The pace of bankruptcy activity has not sped up significantly, and that is a good indication of the fact that most business has not yet fallen back to the miserable patterns of a year or so ago," said Kuehl. The shifts were subtle. The resulting collective number barely changed from what it was last month, and is close to the pace noted for the past year. "Thus far, there does not seem to be an acceleration of distress, and that can be counted as a positive, though it would be nice to see the categories crest above 50 and stay there for a while," Kuehl noted. "Through the course of the year, the lowest level in unfavorable factors was set in August 2011 when it sagged to 49.1, with the highest point set in March 2012 when it reached 52. That is a very narrow band and suggests most companies are holding their own, but not growing like many expected." The data coincide with the majority of the data cascading through the system thus far this year. Durable goods orders have been steady but anemic; the Purchasing Managers Index has not been bad, but not all that good either. Capacity utilization shows a 20% slack and so on.
"The economy as a whole seems to have settled into a pattern that is not in crisis, but neither is it expanding at an acceptable pace," said Kuehl. "It has been opined that no news is good news. There is something to be said for a month of data that didn't really change, especially when changes of late have been more negative than positive. The latest CMI report is nearly identical to the prior reading, and right now that is a cause for some optimism. Not that there weren't variations in the detailsâ€”those will be the trends assessed in the coming months."
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Time Runs Out for Stockton, CA
Any hope that remained for the potential avoidance of a municipal bankruptcy filing on the part of Stockton, California has been all but dashed, and its official Chapter 9 papers are all but guaranteed to go in the books within hours.
The deadline for negotiations between city lawmakers and creditors designed to avoid the largest city bankruptcy filing in U.S. history came and went earlier this week without a solution, as expected. Moreover, on a 6-1 vote similar to one the Stockton City Council gave to approve a measure three weeks ago to authorize its city manager to prepare its Chapter 9 petition, the council passed its Pendency Plan, which is essentially a budget to provide for daily operations while the city is in bankruptcy. It appears the biggest cuts will be to entitlements of retired pensioners, namely their medical benefits.
"This is the most difficult and heart-wrenching decision that we have ever been faced with. We must take action to protect the health, safety and welfare of the entire city and begin the recovery process," said Mayor Ann Johnston.
The cityâ€”which boasts a large number of retiree entitlements and the second-highest foreclosure rate among U.S. citiesâ€”and its creditors, which include a public retirees union and Wells Fargo, had gone through extensive negotiations. The 2011 California law requiring such mediation before an official filing is aimed at keeping struggling municipalities from hastily entering into a Chapter 9. There was hope the law's mandated negotiations were close to yielding a positive result in Stockton, which could become a bellwether case, but talks fell apart.
Stockton is among many U.S. cities, including several in California, struggling to get out of crushing debt wrought by expensive union contacts and retiree entitlements, as well as tax base shrinkage caused by the real estate collapse. NACM contributors like Bruce Nathan, Esq. of Lowenstein Sandler PC have been saying for the better part of a year that a wave of Chapter 9 filings would not be a shock and that creditors owed substantial debts by struggling municipalities needed to start preparing for worst-case scenarios, namely more Chapter 9 filings.
- Brian Shappell, CBA, NACM staff writer
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Russia is scheduled to become the newest member of the World Trade Organization (WTO) later this summer. However, in order to take full advantage of Russia's accession, U.S. lawmakers will have to establish permanent normal trade relations (PNTR) with the country before their WTO agreement enters into force. Complicating the PNTR effort is Russia's human rights record, which is, to put it diplomatically, spotty, and worsening.
Legislation that would establish PNTR with Russia has come up for consideration by both chambers of Congress. Specifically, the bill would repeal the Jackson-Vanik amendment, a Cold War regulation that made U.S. preferential tariff rates for Russian products conditional on the country allowing Jews and other minorities to emigrate freely. While Jackson-Vanik is annually suspended as a matter of course, under WTO rules, if Russia becomes a member and Jackson-Vanik is still on the books, Russia can deny the U.S. access to the markets it's opening as part of its WTO accession agreement. This would allow other markets to enter Russia first and lay the groundwork for future trade prominence, an outcome lawmakers are eager to avoid.
"Russia's accession to the WTO this summer will mean thousands of new jobs and give a boost to our economy here in the United States, but only if we pass Russia PNTR legislation by August. If we don't pass PNTR, American workers, businesses, farmers and ranchers will lose out to their competitors in China and Europe," said Senate Finance Committee Chairman Max Baucus (D-MT). "Unlike a free trade agreement, we will not lower any of our tariffs or change any of our trade lawsâ€”it is a one-sided deal in America's favor. We can't ignore the host of difficult issues we face with Russia, but failing to pass PNTR will only harm U.S. exporters and the jobs they create. America needs the jobs PNTR will bring."
America's $9 billion in annual exports to Russia are expected to double in the five years after normalizing trade relations, and were lawmakers talking about any other country, PNTR would already have been established. But Russia's continued human rights violations and its tacit support of Syria's brutal crackdown on political opposition have made many lawmakers wary of repealing Jackson-Vanik unconditionally.
Baucus has signaled his intention to include the Magnitsky Act in his version of a PNTR bill when the Finance Committee marks up the legislation next month. Named for anti-corruption lawyer Sergei Magnitsky, who died in 2009 under mysterious circumstances after serving a year in a Russian prison, the amendment would deny visas and freeze the assets of parties suspected of involvement in Magnitsky's death, as well as those of other Russian human rights abusers.
Naturally, Russia has similarly signaled that inclusion of the Magnitsky Act would damage its relations with the Obama Administration officials have urged Congress to enact "a clean bill that enables us to maintain our competitive edge," in the words of U.S. Trade Ambassador Ron Kirk, preferring to address lawmakers' human rights concerns in a separate forum.
- Jacob Barron, CICP, NACM staff writer
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Access to credit continues to be an issue for small businesses. Now even lenders are looking for regulatory or administrative fixes that would help them increase the portion of their portfolio taken up by smaller firms.
Witnesses at a June hearing in the House Small Business Committee urged the Small Business Administration (SBA) to continue streamlining their operations in order to simplify the lending process and hopefully loosen the persistent logjam of credit that's plagued smaller companies for years now.
"With small business lending at an all time low, Washington must embrace policies that support functional capital markets without imposing undue restrictions on providers of debt and equity capital," said Rep. Mike Coffman (R-CO), chairman of the Small Business Committee's Subcommittee on Investigations, Oversight and Regulations. "And, in order for SBA programs to operate at the highest efficiency, SBA should be more transparent with its lending partners about the management of its programs, become more streamlined and develop a consistent decision-making process."
Lenders of all sizes testified that instead of trying to design new programs, the SBA should focus on the inner workings of programs already in existence. "Wells Fargo continues to urge SBA to focus its resources on streamlining and improving existing 7(a) and 504 loan programs rather than creating new spinoff programs that serve a limited niche and are confusing to customers," said David Rader, business executive for SBA lending at Wells Fargo. He further added that recent resurrections of and improvements to older SBA programs should serve as a model for the agency. "The recently revised CAPLine program is a great example of SBA listening to borrowers and the lending community. The agency made substantive changes to a dormant program, enhancing it and making it into a viable, workable lending tool, able to meet the working capital needs of small businesses."
Representatives also testified in the hearing, noting that the application process for these entities requires more information than is required for a conventional loan, which limits credit union activity in SBA programs. "If Congress and the SBA were to make it easier for credit unions to participate in these programs, small businesses throughout the nation will have greater access to capital at a time when it is needed most," said Robert Marquette, president and CEO of Members 1st FCU in Pennsylvania.
- Jacob Barron, CICP, NACM staff writer
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It may be the better part of nine months before the International Chamber of Commerce releases its official guidelines for the use of bank payment obligations (BPOs) by financial institutions and trade creditors, but the product is already gaining some lofty users and starting to turn heads in the international business community.
While letters of credit (LCs), are long expected to be used for those seeking security in international transactions, especially first-time arrangements between companies, it appears that the interest of more credit professionals is being piqued by BPOs. A BPO is designed to provide benefits of a LC within a more automated, high-speed, high-tech framework. A BPO ensures that payment between two banks working with a respective supplier and receiver is made predicated on a specific date after predetermined courses of actions are fulfilled, and it does so virtually instantly. David Vermylen, global credit manager at British-based BP Chemicals Limited, said the BPO, developed by financial messaging provider SWIFT in conjunction with the International Chamber of Commerce, goes far in "taking the red tape out of the path to payment" and is "quite refreshing." BP is cited as the first serial, heavy user of BPO said SWIFT representatives.
David Hennah, senior product manager for SWIFT and presenter on the topic at an upcoming FCIB webinar on July 12, noted interest and use are growing. However, he noted that those hoping for widespread use of BPO will, in reality, face perception hurdles, like with any new product or service. And credit professionals hoping to include it in their repertoire will have to get buy-in both from customers and suppliers, as well as in their own houses, from sales departments to upper management.
"Education is the biggest challenge, especially when you're trying to introduce something as a new market practice, particularly when you're up against a long-established one," Hennah said. "I don't want to sound confrontational because we're not positioning it as a replacement for letters of credit, but BPO is playing into that space that reflects that the market has moved away from using some traditional instruments. It's there as an additional option on the menu or tool in the toolbox, if you'd like. You have a massive amount of cost associated with processing traditional (paper) instruments. Certainly, there's a streamlining opportunity here."
- Brian Shappell, CBA, NACM staff writer
On July 12, FCIB will present the webinar on "International Trade Finance and BPO Effects on Credit Risk Management" with Hennah. For more information and to register, visit www.fcibglobal.com and click on the "Events" tab. The topic will also be broached in the July/August issue of Business Credit.
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Never one to shy away from controversy, Z-Score creator and Credit Congress speaker Ed Altman, PhD jumped head first into the bankruptcy battle being waged by incumbent President Barack Obama and Republican challenger Mitt Romney.
The automotive bailouts for Chrysler and General Motors represented perhaps the first major issue Romney used publicly to engage Obama, long before even earning the GOP nod. Altman, the Max L. Heine Professor of Finance at the NYU Stern School of Business and director of research in credit and debt markets at the NYU Salomon Center for the Study of Financial Institutions, recalled that he and Romney were among the few who argued publicly, through published writings, that bankruptcy was the best course for the future of the U.S. auto companies. However, Altman reminded that he was sharply divided from Romney, as he backed the idea to use federal money to help facilitate the restructure, one actually adopted by the Obama Administration, whereas Romney wanted only private investment involved. Altman also didn't use the widely ripped headline "Let Detroit Go Bankrupt" that has generated so much flak for Romney in key swing states Michigan and Ohio during the primary season despite his message of controlled restructuring instead of liquidation.
"You can say a lot of things about Obama, good or bad; but GM filing for bankruptcy saved the company, and the company is profitable now. Without the liquidity [from the government], they weren't going to make it," Altman speculated. "No investors were in the market. If GM was going to survive, some kind of guarantee had to come from the government."
Altman looked back comically on the time he testified before Congress on the issue, which was on the same day the U.S. auto CEOs traveled to Washington from Detroit via hybrid cars (they were chided for each taking private jets amid crumbling company finances in a previous hearing not long before). He noted that most attending the hearing left during his testimony because "people wanted to see them getting into their hybrids." Those who remained, largely Democrats looking to save jobs, weren't particularly fond of an advocate for bankruptcy, even a controlled one.
"I was basically booed out of Congress," Altman said with a laugh.
- Brian Shappell, CBA, NACM staff writer
Much more Credit Congress coverage from Grapevine, TX is still available on our blog at http://blog.nacm.org. Even more will be published in the July/August edition of Business Credit.
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