January 10, 2013
According to data provided to the American Bankruptcy Institute (ABI) by Epiq Systems, Inc., there were 57,788 total commercial bankruptcies during calendar year 2012, a 22% drop from the 74,415 filings during the same period in 2011. Chapter 11 filings also fell in 2012, as the 7,760 filings marked a 10% decrease from the 8,658 Chapter 11 filings in 2011.
Looking ahead to 2013, practitioners and credit professionals should expect filing rates to remain low. "I think the decline will continue into 2013 because all the fundamentals for it are still there," said Bruce Nathan, Esq., partner at Lowenstein Sandler PC. "With the economy in this sluggish growth, banks are not rushing to purge their troubled loans. Only an event like [Hurricane] Sandy and maybe some of the uncertainties generated by the 'fiscal cliff' might contribute to a few bankruptcies."
The big culprit adding downward pressure on filings, however, is sustained low interest rates. "Low interest rates allow companies that are overleveraged to keep operating," said Nathan. "Once the economy takes off and interest rates start to rise and banks feel more comfortable shedding their portfolio, you'll see kind of a normalcy return to the bankruptcy market."
"With slow growth you would think that bankruptcy should be taking off, but it's just not happening because of low interest rates," he added.
A few key industries could manage to buck any declining trends. For example, recent discussions among Congressional leaders and the White House have revolved around reducing spending to build on the deficit goals of the recent deal on the so-called "fiscal cliff." Cuts to the country's two largest health care programs, Medicare and Medicaid, are on the table in the negotiations, and these could easily lead to a rash of bankruptcies in the health care industry.
Nathan noted that retail could also be a hot spot. "There are troubled retailers out there that bear watching," he said, noting that 2012's holiday season was the industry's worst since 2008. "These are folks that are affected by a lot of things like internet sales and certain other factors. There is a risk of Chapter 11s."
In the middle market, the high administrative cost of a Chapter 11 continues to depress filing rates. "It's very unlikely that a small company can survive Chapter 11," said Nathan. "That's why they're going to hold out as long as they can."
- Jacob Barron, CICP, NACM staff writer
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The beginning of this decade was one where market watchers, ratings agencies and those looking for business growth lauded the prospects and performance of China and India, while bemoaning the lackluster economic rebound in the United States. Fast-forward to the beginning of 2013, and one U.S.-based ratings agency appears content to flip the script entirely.
Fitch Ratings had a busy week, chiming in on several of the world's most important economies. The agency appeared somewhat rosy on its prospects for U.S. corporate credit calling conditions "favorable," and officially rated the outlook for credit as "stable" even as it noted the impact of international volatility and that the short-term fiscal cliff resolution "will do little to address tax and spending uncertainties."
"Modest GDP growth in 2013, healthy operating margins, solid balance sheets and extended maturity profiles provide ample flexibility to face macroeconomic risks abroad and government tax-spending uncertainties...Credit risks remain largely company-specific and are characterized more by business-model risk and operating underperformance rather than leverage. As in 2012, downgrade risks in investment grade will be concentrated among companies that are underperforming peer groups."
Fitch was particularly high on the oil and gas-refining, capital goods manufacturing, telecom/cable, as well as building and home products/services industries in the United States, but was not as positive on the agribusiness and coal industries. Powerhouse Asian nations were also viewed poorly. One Fitch representative told members of the Chinese press this week that China's growth model, driven by large amounts of debt, is far from sustainable and that the nation is very unlikely to escape the "negative" outlook presently held by the agency.
On India, another Fitch spokesperson noted debt levels in that nation, in addition to high inflation and a slowing growth rate, were collaborating in what could result in a ratings downgrade within the next year or two. Fitch is among many that appear to be concerned with India's eroding market advantages, especially wage costs, in a number of industries. Fitch also levied a thinly-veiled threat at Japan that a sovereign rating downgrade was looming if a sales tax increase, perceived as a necessity, is delayed.
- Brian Shappell, CBA, NACM staff writer
FCIB Announces ICE Spring Conference International Track at Credit Congress '13
Held in conjunction with NACM's 117th Credit Congress & Exposition, FCIB's international track will complement the year's largest gathering of business credit professionals in the country. Sessions include:
• Alternative International Financing Options
• Trade Compliance Update and Export Regulations
• International Business Ethics
• Working Capital Management and Cash Forecasting
• Credit As a Profit Center
• Understanding Insolvency's Effects on the U.S. and Canadian Supply Chain
• Doing Business in Mexico: Lessons from a Debt Collection Case
FCIB looks forward to welcoming you to Las Vegas!
Lenders affiliated with the Small Business Lending Fund (SBLF) continue to outshine their non-SBLF counterparts by increasing loans made to smaller companies.
According to a report released this week by the U.S. Treasury, institutions receiving capital through the SBLF increased their small business lending by $7.4 billion over the baseline and by $740 million over the prior quarter. This marks the sixth consecutive quarter wherein SBLF participants increased their lending to smaller companies.
"Community banks participating in the Obama Administration's Small Business Lending Fund have consistently increased small business lending over the past two years, resulting in increased access to capital for thousands of small and family-owned businesses across the country," said Deputy Secretary of the Treasury Neal Wolin. "With the help of lending supported by SBLF, these small businesses continue to grow and create jobs in their neighborhoods."
The SBLF was established in 2010 with the passage of the Small Business Jobs Act and incentivizes community banks and community development loan funds to increase the number of loans they make to small businesses by reducing the bank's cost of capital as it increases this type of lending. Treasury invested $4 billion in 332 institutions through the SBLF, and the average dividend or interest rate paid on these funds by community banks was 2%, a low rate that can be reduced even further, to 1%, if the banks increase qualified small business lending by 10% over their baseline.
All in all, the SBLF seems to be working as intended, as SBLF banks have increased small business lending by greater amounts than a peer group of similar banks across median measurements of size, geography and loan type. The program may have contributed, at least in a small way, to a reduction in small businesses concerns about overall credit availability. According to the National Federation of Independent Businesses (NFIB) most recent small business optimism index, only 1% of owners reported that financing was their top business problem, tying the measurement's lowest reading in history.
- Jacob Barron, CICP, NACM staff writer
CBF Designation Requirement Changes
The NACM Education Department has made a change to the Credit Business Fellow (CBF) designation requirements. In an effort to address the changing needs of today's credit professionals, the Financial Statements: Interpretation and Credit Risk Assessment course has been eliminated from the CBF designation requirements. Only two courses are now required to qualify for the CBF exam: Business Law and Credit Law.
Please contact the Education Department at 410-740-5560 or firstname.lastname@example.org with any questions about pursuing your professional designation.
Few notable companies have been forced to fight seemingly losing battles on two fronts—a crumbling business model, as well as a near economic plague affecting the population around it—more than Virgin Megastores in France.
The problems that plagued companies like Borders and Tower Records in the United States in past years are similar to those faced by Virgin, leaving it on the brink of insolvency. It was announced this week that it would make a formal bankruptcy filing mid-week. There are currently 26 stores operating in France under the Virgin moniker. Once an international chain, founder Richard Branson began selling off pieces for local ownership a little more than five years ago.
Virgin stores in France faced a double-whammy. It lost market share by the bucket-full thanks in part to online retailers like Amazon and various types of downloading services from competitors like Apple. Added to that has been the problem of debt spilling over from other European Union nations like Greece and Spain causing the French economy to stumble. Unemployment in the intertwined European Union economy finds a jobless rate in member nations nearing 12%, with some well over 20%. This is especially hitting some key buying demographics in ways that far exceed concerns solely over consumerism.
"The young population in Europe as a whole is vastly underemployed—a rate of over 26% for those under 30," said NACM Economist Chris Kuehl, PhD. "For all intents and purposes, there is a lost generation of young people who may never be able to enter the economic mainstream."
The latter point obviously underscores how much the problems in the EU go beyond these types of retailers and bleed into the potential creation of massive social problems.
- Brian Shappell, CBA, NACM staff writer
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A number of provisions designed to increase the amount of federal contracting dollars reaching small businesses were tucked into the more than 1,600-page National Defense Authorization Act (NDAA), an omnibus spending bill that was signed into law last week.
Specifically, the measures aim to break the government's losing streak when it comes to its own small business contracting requirements. Statute dictates that 23% of all federal contracting dollars go to small businesses, but the federal government has failed to meet that threshold for the last six years in a row.
The provisions included in the NDAA aim to enforce the government's existing small business contracting goals by making meeting the goals a part of senior agency employee reviews and bonus discussions. Other provisions change limitations on subcontracting from cost to price, which aim to make it easier for small companies to comply with other procurement rules while also allowing them to team up to pursue larger contracts. Additional provisions are geared toward preventing fraud by placing penalties on violating subcontracting limits and making it easier to suspend and debar companies found to be intentionally defrauding the government.
Most of the provisions came from previously introduced bills that originated in the House Committee on Small Business, chaired by Rep. Sam Graves (R-MO). "In the beginning of the 112th Congress, our committee made it a priority to listen to the concerns of small contractors who want to seek business opportunities with the federal government," said Graves. "The process uncovered various barriers that made it harder for small businesses to succeed, so we introduced and reported out legislation to address the problems."
"The small business provisions in the NDAA will help make sure existing small business goals are actually met, empower small business advocates and crack down on fraud," he added.
Other measures in the NDAA require the Small Business Administration (SBA) to develop more accurate size standards for each industry and increase scrutiny on contract bundling, a process by which several contracts are grouped together into a much larger, more expensive project that makes it harder for smaller companies to successfully bid.
- Jacob Barron, CICP, NACM staff writer
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The National Association of Manufacturers (NAM) sharply criticized Congress last week for failing to pass a bill that would have prevented a tax increase on the industry.
Each year, Congress conducts the Miscellaneous Tariff Bill (MTB) process, which cobbles together thousands of pieces of tax and tariff reduction legislation, proposed by lawmakers in both chambers, into one omnibus package. The resulting bill typically lowers the cost of certain manufacturing inputs and some finished products not made or available in the United States, and usually passes the House of Representatives and the Senate overwhelmingly.
However, the last-minute rush to avert the so-called "fiscal cliff," among other legislative quandaries that frequently left Congress paralyzed, led lawmakers to delay the completion of the MTB process until after 2012 had ended. This means that on January 1, 2013, a number of tax and tariff reductions from the previous year's MTB expired, leaving manufacturers holding the bill.
"Congress's failure to pass the MTB has resulted in a tax increase on manufacturers in the United States, hurting their global competitiveness and putting jobs at risk," said NAM Vice President of International Economic Affairs Linda Dempsey. "It is currently 20% more expensive to manufacture in the United States compared to our largest trading partners, and the lack of an MTB will only widen that gap."
A new MTB has already been drafted by the current Congress. The U.S. Job Creation and Manufacturing Competitiveness Act of 2013 (H.R. 6727) is aimed at addressing NAM's concerns and is expected to eventually pass with bipartisan support. Still, NAM's issue isn't with the bill's content, so much as with its timing.
"Manufacturers of all sizes benefit from these important tariff suspensions to obtain raw materials and inputs that are not available in the United States," said Dempsey. "In failing to enact this important legislation, Congress has increased costs on manufacturers and made it more difficult for manufacturers to maintain and grow production and jobs in the United States."
- Jacob Barron, CICP, NACM staff writer
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