October 4, 2012
The Credit Managers' Index (CMI) for September is nearly the same as in August, falling only half a percentage point to 55.3. The gain made in the CMI in August showed an economy with an overall better performance than earlier in the year. The August 55.8 was the highest this year, except for the February number, which matched it. The sense was that some key areas were showing improvement. The CMI has only been at or above this level three times this year. In short, the bounce first registered in August appears to be more secure than originally assumed. Slight shifts in some categories (factors) have implications for the next few months, but it can be asserted at this stage that the momentum from late summer is carrying forward to some extent into the fall.
There was a slight decline in the favorable factor index due mostly to a reversal of the sales number. It slipped from 62 to 59.5, marking the second lowest point reached in over a year after July's 58.5. The rebound in August was expected to continue into September, but that was not the case for sales, and may be the most worrisome of the figures. Without some expansion in sales, the other categories may start to slump as well. "Sales is well above the contraction level, but everyone would be more comfortable if it was back in that 60 range," said Chris Kuehl, economist for the National Association of Credit Management (NACM). There was also a decline from 59.7 to 58.5 in dollar collections. This category bounces fairly consistently between 58 and 62, but is trending on the low side of that range.
Other favorable factors were more cooperative. New credit applications posted another gain, moving from 56.8 to 57.4. Better news came from amount of credit extended with an improvement from 61.4 to 62.3. "There may be more credit applications being rejected, but those that have been approved appear to be getting higher dollar amounts and that is essentially good news," said Kuehl, who also noted that though the index number for rejections of credit applications was higher in past months, as long as it remains over 50 there is reason for optimism.
Unfavorable factors varied more than those of the favorable factor index. The unfavorable factor index sank from 53.1 to 52.6, making it largely responsible for the decline in the combined index. The shift was not all that drastic and far cry from the sub-50 readings from just a month ago, but expectations were that the numbers would improve. All factors remain above 50, but some of them took a dip and are a lot closer to contraction territory.
The largest drop was in disputes (51.9 to 50.5), followed by rejections of credit applications (52.4 to 51.4). The deterioration in rejections of credit applications is somewhat troubling, and partially offset the gain in new credit applications. There were lesser declines in dollar amount of customer deductions (51.4 to 51.0) and bankruptcies (59.6 to 59.1). Among the numbers that improved, as expected, was most notably dollars beyond terms, which improved from 50.9 to 51. "In general terms, September showed only modest movement up or down, and in the face of all the other negative data on the economy that is nothing to be dismissed as insignificant," said Kuehl.
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Fraudsters that are proficient at swindling and lawbreaking continue to try new schemes and methods, as well as some tried and true ones, to profit at the expense of trade creditors. This is not going away. As one source noted, his company's write-offs were running "about twice as high" this year because of fraud, especially involving credit cards. An example in play in California underscores the importance of relying on protection tools such as NACM's National Trade Credit Report (NTCR).
NACM was recently informed of an alleged California-based fraudster hitting up small- and medium-sized businesses for larger-than-usual lines of credit. The company in question, a computer/electronics wholesaler based in Montebello, even had what appeared to be active domestic corporate charter with the California Secretary of State dating back to 2006 and the valid tax permit through the California Board of Equalization. The company's "proprietors" even took up residence in a high-end office building for several months, meeting in person with vendors' sales and credit staffs on multiple occasions. Then, as invoices started going well past due, phones and emails started getting ignored and they vanished. The alleged scheme even caught NACM member company, Mouser Electronics, Inc., based in Texas.
"We wrote off $50,000, which stings quite a bit bigger than a bumble bee sting," said Donald Smith, director of customer accounts. "We would have easily lost another $50,000 or more had we not run an National Trade Credit Report (NTCR) through our local NACM-Southwest affiliate and identified that this was a fraudulent scheme. They did this quickly, mostly from March to May, and it looks like some companies were out well over $100,000 judging from the lines on the report. The report was a really good tool, even if a little after the fact, to stop the bleeding."
The NTCR on the company, which relied on several other companies that eventually got burned as references early on, showed several red flags: 13 credit lines in excess of $750,000 over the course of two months for a business that didn't seem size appropriate for such requests and that the company's officers curiously shared names with a famous actor, comedian and governor, respectively, were among other reasons for concern.
Smith noted Mouser presently integrates the NTCR into its regular risk management processes to alert them to any red flags that could foreshadow or unveil a fraudulent attempt. He noted in reference to the NTCR that "the trade information is invaluable; you don't get it from a regular credit report from one of the other guys out there."
- Brian Shappell, CBA, NACM staff writer
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The Basel Committee on Banking Supervision issued three reports this week evaluating the implementation of the Basel III capital requirements in the European Union, Japan and the United States. Of the three, only Japan made it through the process unscathed.
Both the EU and the U.S. were judged to be "materially non-compliant" with at least one of the Committee's criteria, which are geared toward ensuring that banks have enough capital in reserve to avoid another collapse like the one that contributed to the recession. According to the reports, the U.S. lags in its regulatory treatment of securitizations, and the EU falls short in regulations pertaining to the definition of capital and the internal ratings-based approach to credit risk.
For the U.S., the "materially non-compliant" grade on securitizations stemmed from "the U.S. regulatory agencies' proposed implementation of an alternative approach that would replace the Basel approach, which is based on external credit ratings." The Dodd-Frank Wall Street Reform and Consumer Protection Act eliminated references to external credit ratings, urging banks to use other tools to evaluate creditworthiness after the large credit ratings agencies like Moody's, Fitch and Standard & Poor's were deemed at least partially responsible for overrating the quality of risky loans and contributing to the collapse of the subprime lending market.
However, the Committee reserved its sharpest criticism for the EU, whose approach to bank capital requirements "falls substantially short of the Basel framework."
Gaps in the EU's regulatory approach might allow banks to hold too little capital in reserve against their exposure due to a vague definition of what banks can count as high quality capital. Furthermore, the Committee's report considered the EU's regulations on how banks use internal models to assess risk to have too many exemptions, meaning banks could understate the riskiness of certain exposures, thereby allowing them to hold less capital in reserve and have a possible competitive edge over their non-EU counterparts. "The team is concerned that internationally active EU banks could take advantage of the modified rules in their capital structure," said the report. "This potentially has material impact both in terms of financial stability and an international level playing field."
Though its criticism was harsh and touched a raw nerve in the EU, the Committee noted that its assessments of the U.S. and EU were based mostly on draft regulations, and that further reports will be required once these rules are finalized. "It is pleasing that Japan's transposition of the Basel III standards into final rules has been judged as compliant," said Stefan Ingves, chairman of the Basel Committee. "In the case of the European Union and the United States, the gradings were based on draft regulations, meaning that there is now a window of opportunity for the gaps identified to be closed."
Basel III has received a wealth of criticism itself for requiring too much of still-fragile banks, and particularly for requiring them to keep too much in reserve for what are essentially very low-risk transactions, such as those associated with trade financing. Though the framework is still being revised, many have noted that, in its current state, the Basel III rules would require banks to hold 100% of a trade finance transaction in reserve, making it five times more expensive to hold on their balance sheets. This could lead to an exit of many banks from the trade financing business, leaving other non-traditional lenders to pick up the slack.
- Jacob Barron, CICP, NACM staff writer
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In what has the potential to be a landmark case in the area of trade and international bankruptcy law, federal judges began hearing arguments this week over a Texas judge's rejection of a reorganization plan of a Mexican manufacturer, which wants its plan upheld by U.S. courts.
The appeal of Mexico-based Vitro was slated to begin October 3 before a three-judge panel in the U.S. Court of Appeals in New Orleans. Vitro SAB believes its reorganization plan was not manifestly contrary, as U.S. Bankruptcy Court Judge Harlan Hale characterized it, during an early summer decision under Chapter 15 of the U.S. Bankruptcy Code. His rejection of the plan broke from tradition as bankruptcy court judges typically honor decisions from judges in Mexico and Canada, even when domestic bondholders and trade creditors take a sizable hit, as a show of respect and an indication of the importance of good business relations among North American nations, unless what is proposed is an egregious assault on the rights of domestically-based creditors.
Vitro, a glassmaker, previously saw its reorganization plan approved by courts in the Mexican city of Léon that included waiving the guarantee claims of U.S.-based bondholders while Mexican creditors received 40 cents on the dollar and the debtor retained company control. Bankruptcy expert Bruce Nathan, Esq. of Lowenstein Sandler PC argued that Hale essentially was coming to the aid of bondholders and trade creditors by making it harder for Mexican authorities to abridge U.S. rights in their courts. Granted, he admitted there could be negative implications as well from an international business perspective, though all of that is still "a long way off" from being determined.
- Brian Shappell, CBA, NACM staff writer
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Many sections within the chapters have also been reworked, including those covering cellphone-based collection efforts, FTC rulemaking in terms of decedent estates and data security/breach initiatives at the federal government level.
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Yet another powerful trade association has joined the chorus of voices opposing a pending settlement on interchange fees charged of merchants by Visa and MasterCard.
Last week the National Restaurant Association (NRA) came out against the settlement, joining the National Retail Federation (NRF), the world's largest retail association, and other opponents like the National Association of Convenience Stores (NACS), the National Grocers Association (NGA) and mega-retailers like Walmart, Target and Lowe's.
The NRA is one of the 19 named class plaintiffs, lending a bit of weight to their announcement, since other opponents aren't necessarily parties to the actual lawsuit, In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation.
NRA's board rejected the settlement unanimously. "There is strong concern that the proposed settlement agreement will not achieve the litigation's most critical goal—to fundamentally change a broken marketplace in which swipe fees are set," said NRA President and CEO Dawn Sweeney. "The current payment system is so convoluted, the average restaurateur has no idea exactly what they are paying and why they are paying large amounts to accept credit and debit cards, which are necessary in today's marketplace. The proposed settlement does not address those issues."
Interchange, or swipe, fees are hidden charges banks collect each time a credit card is used to make a purchase. Combined credit and debit card swipe fees have tripled over the last decade to about $50 billion a year. The settlement would allow merchants to pass on these interchange fees to their buyers via a surcharge, but opponents say it lacks a mechanism by which sellers can negotiate for lower interchange rates and does nothing to block future increases.
Other provisions of the settlement include a $7.25 billion payment from Visa and MasterCard, given to merchants via temporary rate decreases as well as lump payments, and a stipulation that no suits on interchange fees can be brought against the two companies in the future if the agreement enters into force.
"Restaurateurs also have no ability to negotiate fees or terms of card acceptance, and after digging into the details of the proposed agreement, we have serious concerns that rather than correct those fundamental flaws, it cements those flaws for decades to come," said Sweeney.
The proposed settlement is still pending in court. A ruling on its legitimacy is expected sometime in early 2013.
- Jacob Barron, CICP, NACM staff writer
More information and the full history of the interchange settlement can be read in the September/October Business Credit magazine feature, “Swing and a Miss: What the Visa/MasterCard Settlement Does Might Be Less Important Than What It Doesn’t Do.”
An online version of this article is also available to NACM members.
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