eNews November 1, 2012

November 1, 2012



News Briefs

  1. Credit Managers' Index for October Falls to 54.4
  2. Storm Impact Likely to Be Economically Positive in the End
  3. Ongoing Possible Distribution Scam Offers Lessons to Credit Professionals on Fraud
  4. 'Amazon of the Middle East' Draws New Investment, Shines Spotlight on Increased Consumption Behavior
  5. Municipal Bankruptcy Trend Awareness Spreading, Early Filer Sees Chapter 9 Exit
  6. IFRS Foundation Rebuts SEC on Concerns Regarding Transition to Global Accounting Standard

 

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Credit Managers' Index for October Falls to 54.4

The October Credit Managers' Index fell from 55.3 to 54.4, reflecting the mood of the overall economy right now. Some aspects point in a positive direction, and some are decidedly worrying. The sense is that a few of the big issues that have been affecting other economic measures are having an impact on the CMI as well. It is hard to point explicitly at the "fiscal cliff" as a cause for overall decline, but it is also quite apparent that the uncertainty affecting business decision-making is having an impact, as some of the future indicators are weaker than expected at this point.

The most distressing number in this month's survey, and the one that seems to point to the fiscal cliff issue, would be sales. The October sales number has fallen as low as it has been since the middle of last year, settling in at 57.4. In July, the sales index dipped under 60 for the first time since November 2011, but in August there was a strong rebound to 62. That was followed by September's slip to barely back under 60 to 59.5. "Given that many companies continue to indicate that they are planning more capital expenditures, there is not much to attribute this drop to other than worry about the outcome of the fiscal cliff issue," said Chris Kuehl, PhD, economist for the National Association of Credit Management (NACM). "The silver lining in this case would be that a solution to the crisis would likely result in a jump in capital expenditures and investment in general. The downside is that the powers that be could still allow the unthinkable to occur."

In most respects, the other favorable factors stayed comfortably above the 50 mark despite the fact that all four categories slipped. Amount of credit extended is still solidly in the low 60s with a reading of 62.2. New credit applications slid from 57.4 to 56.6, the lowest since late last year. Dollar collections moved downward pretty sharply from 58.5 to 54.6. "This is cause for some concern as this is the lowest reading for collections in over a year," said Kuehl. "There is mounting evidence that the business community is retrenching to some extent." It should be noted, however, that the reading is still in the mid-50s and well into expansion territory, just like the overall favorable factor index, which fell to 57.7.

The unfavorable factors also saw some decline, but nothing as dramatic as in the favorable factor numbers. The shift in the unfavorable factor index from September to October was very slight, a decline from 52.6 to 52.3. This slow erosion and essentially flat performance since the August reading of 53.1 is better news than one would assume given all the struggles that the economy has been plodding through of late.

Dollar amount beyond terms sported the biggest decline as it slipped from 51 to 48. In the past, this has indicated that companies are starting to struggle to meet their obligations, and in the months to come some of the other negatives start to accelerate. There was also a decline in dollar amount of customer deductions from 51 to 50.7, and filings for bankruptcies sagged as well from 59.1 to 58.9. Thus far, the bottom has not dropped out of the unfavorable categories indicating that there is time for a rebound, but past patterns suggest that these numbers will look worse in months to come unless there is a shift in economic fortunes.

Some unfavorable factors did improve, although the movement was pretty slight. There was a gain in rejections of credit applications from 51.4 to 52. Likewise, there was a gain in accounts placed for collection from 52.5 to 53. Even disputes improved slightly from 50.5 to 50.9.

The complete CMI report for October 2012 contains the full commentary, complete with tables and graphs. CMI archives may also be viewed on NACM's website.

- NACM

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Storm Impact Likely to Be Economically Positive in the End

There is something almost perverse about the economic assessment of a natural disaster or major storm, like the one that hit the U.S. Mid-Atlantic and Northeast areas early this week. In the midst of all the painful and tragic destruction, there is the inescapable fact that people and communities rebuild after a disaster—and the richer the community, the swifter that reconstruction becomes.

The storm that ravaged the eastern seaboard will cause billions in damage. The vast majority of the businesses and people affected by this storm insured their property against just such a development and, in the weeks and months to come, they will be receiving billions in payouts so that they can start to recover. There will also be millions more coming from the federal and state authorities. None of this aid will replace the lost memories and treasures, and it will certainly not help those who lost loved ones in the catastrophe. However, from a strictly economic point of view, the aid will boost the regional economy.

The most immediate impact will be on industries that were forced to shut down and lose customers that can't be replaced. This is the transportation sector mostly—notably, airlines that cancelled flights lost that revenue forever. Retailers will likely benefit in the short term, as people stocked up—at least those businesses that did not suffer damage and power loss. In the longer term, the reconstruction process will add billions to the economy and will mean that jobs will be on offer for many months to come. The estimate is that local GDP growth will increase by as much as 1% when all is said and done.

It is the fickle nature of disaster: The damage can't possibly be underestimated and the silver lining is not on people's minds as they watch their lives ripped to pieces. Many of those who were battered may not recover fully for years, but the region itself will come out ahead once the recovery process gets underway. At various points in history, it has been a massive tragedy that stimulates growth. For example, the utter destruction of World War II propelled the U.S. economy out of a deep recession and stimulated a decade of growth.

- Armada Corporate Intelligence

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Ongoing Possible Distribution Scam Offers Lessons to Credit Professionals on Fraud

An ongoing distribution scam in the materials industry offers credit professionals and their companies a stark look into the sophistication of fraud, and the importance of due diligence.

Over the last year or so, two Canadian companies, Canstruct and AYA Distributors, have allegedly scammed dozens of sellers across the United States. "They'd pretty much ask for a $50,000 line of credit. When you ran the credit, it came back as AAA. Everything looked good," said Jeff Keller, manager of legislative and regulatory affairs for the National Retail Lumber Association (NRLA), who's been investigating the possible fraud with the Albany, NY office of the Federal Bureau of Investigation (FBI). "So they did that about a year ago. For the next eight months or so, as they were getting all these credits across the country, they would send out bids and they would never fill them."

Two or three months ago, however, Keller noted that the companies began placing orders en masse. "They have millions of dollars of credit lined up," he said. "They send a third party contractor to come pick it up and they don't tell anyone where the materials are going. Whenever someone calls and says 'when do we get our payment?' they'll say 'here's a check number, here's the date that it's being cut...' but no one's been paid that we know of yet."

Regarding the cleanliness of the companies' credit reports, Keller noted that it wasn't clear whether or not Canstruct or AYA Distributors had relied on a fake company in order to trick their reports into looking as perfect as they did. As the news about the potential scam has spread, they've had a tougher time getting approvals, but that still hasn't stopped them from trying. "They're actually still calling people now," said Keller.

Although more than a million dollars have already been lost from victim companies, other potential victims that luckily denied these applications were saved by their skepticism, and some issues unique to the materials industry. "It's a Canadian company and our materials dealers don't have lien protection in Canada, so some dealers would say 'I've never heard of you and I can't lien the property,'" said Keller.

"Another warning sign is that they'd say 'I need $60,000 worth of material,' and the dealer would say 'sorry, you're a first-timer, we can only give you up to $30,000,' and they'd say 'okay, let's take the $30,000,' and in this industry you can't really do that," he added. "If you need $60,000 in material, half of that doesn't complete the job." Still, because of its sophistication, the scam has caught veteran credit professionals and novices alike. "I think the big thing is that if you've never dealt with them and they're out of country, just really do diligent background checks," said Keller.

Companies in the materials industry who have experience with either AYA Distributors or Canstruct can find a form to share their information with Keller, the NRLA and the FBI by clicking here.

- Jacob Barron, CICP, NACM staff writer

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'Amazon of the Middle East' Draws New Investment, Shines Spotlight on Increased Consumption Behavior

In the June 2010 Business Credit article titled "Unveiling Opportunity: Economic Potential Comes with Vagueness, Potential Risk in Islamic Finance," international credit experts painted a picture in which the Middle East's younger and more educated population wanted more consumer-based products such as iPods, smartphones and designer-brand clothing. Even amid growing unrest, where Internet social media helped fuel resistance movements, the desire for "keeping up with the Joneses," so to speak, in neighboring regions continues to become more of a known quantity than in the past and is well on businesses' radar.

Feeding into such trends is news this week that a growing online retailer based in Dubai, Souq.com, was selling a significant stake in its business to the South Africa-based media group Naspers. While final details remain sketches, Souq.com officials likened the deal's scope to the significant Yahoo! acquisition of Maktoob three years ago. Naspers previously bought into ventures in China, Russia and India as part of its global media market expansion.

Souq.com officials purport it is the "largest e-commerce site in the Arab world"─one that attracts over eight million visits per month from online shoppers in the Middle East and North Africa regions─and readily acknowledge the widely-held moniker "Amazon of the Middle East." One look at its website and a user will find striking similarities to Amazon's e-commerce platform, just one of those aimed at the demographic of those regions.

Perhaps rising consumerism in the Middle East should not be a surprise to the business community. It and finance and business practices in the region were hot topics at FCIB's Annual International Credit and Risk Management Summit last spring in Hamburg and is again on the slate for FCIB's 23rd Annual Global Conference in Philadelphia this month (see ad above).

"We have the same types of worries and wants. We have the same concerns about the future, our kids, etc.," said Ferda Efe, a senior director with Ashland Specialty Ingredients, during the Hamburg summit. "They're really not that different from the rest of the world. We are all one world now, in the end."

- Brian Shappell, CBA, NACM staff writer

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Municipal Bankruptcy Trend Awareness Spreading, Early Filer Sees Chapter 9 Exit

Perhaps the greatest measure of what a trend is occurs when a cottage industry pops up around it. That appears to be the case in the world of municipal bankruptcy in California, as the first high-profile community to file for Chapter 9 protection looks to be emerging from the process thousands of miles away and another one approaches a key first milestone.

This week, the chairman of a California-based group said that the filings California has seen in the last year─officially three in total─were "the tip of the iceberg" amid the launch of a municipal bankruptcy-focused website, Broke-Cities.com. "Many more municipalities could be headed toward a similar fate," said Douglas Neistat of the Municipal Bankruptcy Advisory Group. The site was developed "to assist the growing community of those who are impacted by troubled municipal economies and the complex state and federal laws and regulations that govern cities in distress."

Meanwhile, the topic of municipal bankruptcy has started appearing on an increasing number of conference dockets, high-priced webinars and public lectures. An example of the latter is scheduled for November 2 by the Houston Law Review with a panel debating the question "Is Bankruptcy the Answer for Troubled Cities and States?"

As for those already into the process, Central Falls, RI has officially exited its Chapter 9 process less than a year and a half after its filing. Perhaps helping the proceedings along was a post-filing deal struck by the municipality's attorneys and groups representing public workers and retirees groups over issues such as entitlements, health care and pensions. It is worth noting that, because of the high concern of what would happen to borrowing costs in communities that took this route, Moody's Investment Services quickly raised the city's credit rating as well as its outlook, which now sits in the "positive" category for the first time in many months after Central Falls exited bankruptcy.

Meanwhile, in the larger Chapter 9 case involving Jefferson County, AL, a vote appears to be just days away on its Chapter 9 roadmap of adjustment. Though a number of detractors remain, Jefferson's County bankruptcy plan, which includes a hotly-debated small rate increase for sewer services to local residents, is likely to garner County Commissioner approval and move to the next part of the process thereafter. Granted, most expect intense appeals by creditors.

- Brian Shappell, CBA, NACM staff writer

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IFRS Foundation Rebuts SEC on Concerns Regarding Transition to Global Accounting Standard

A report issued last week by the International Financial Reporting Standards (IFRS) Foundation offered a strong rebuttal to some of the United States Securities and Exchange Commission's (SEC's) concerns about the transition to a single set of global accounting standards.

An SEC Staff Report released in June identified a number of potential hiccups that could affect the switch away from U.S. generally accepted accounting principles (GAAP) and toward IFRS. Shortly afterward, the trustees of the IFRS Foundation began assessing the SEC's conclusions, presenting their findings in this latest report, which found that while challenges exist in the transition process for the U.S. none of these are insurmountable. "The U.S. is well placed to achieve a successful transition to IFRS, thus completing the objective repeatedly confirmed by the G20 leaders," said Michel Prada, chairman of the trustees.

Among the SEC's concerns that the IFRS Foundation found to be questionable was the suggestion that a gradual transition from GAAP to IFRS might be preferable to a 'big bang' method of transition, as the report described it. "A gradual approach through convergence might be an appropriate short-term strategy for a particular jurisdiction...but it cannot be a substitute for adoption," said the report. "However, the viability of a gradual introduction of IFRS on a standard-by-standard basis is in the view of staff, questionable. We have found no evidence of a jurisdiction that has successfully adopted IFRS using a standard-by-standard approach."

The report went on to note that a gradual shift to IFRS might negatively affect financial markets by creating uncertainty and lack of comparability for single companies' financial statements over the entire transition period. Furthermore, the standard-by-standard approach would also risk creating a number of exceptions to IFRS, ultimately defeating the purpose of a single global standard.

A decade-long convergence project undertaken by the SEC has also left GAAP and IFRS looking more similar than ever, meaning the transition might not be as painful as many in the U.S. fear. "The experience of other countries suggests that many of the challenges can be overcome with the appropriate political will to make a commitment to the mission of a single set of global standards," said the report. "Moreover, in many areas the U.S. is better prepared than other jurisdictions to consider the adoption of IFRS."

The SEC has previously provided timelines for when it could begin to require financial statements to be filed according to IFRS, first in 2014, then revised later to 2015 or beyond. Currently, however, no official timeline for the switch has been adopted.

- Jacob Barron, CICP, NACM staff writer

 

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