May 30, 2013
The National Association of Credit Management (NACM) held its 117th Annual Credit Congress in Las Vegas from May 19 through 22, offering global credit and risk management professionals unparalleled networking opportunities, executive-level insights and perspective-shifting presentations from the two keynote speakers.
Terry Jones, founder of Travelocity and author of On Innovation, kicked off this year's General Session with a uniquely-tailored presentation that challenged the audience of over 1,200 credit professionals to actively embrace change in their businesses. "Change continues to accelerate," he said. "We're living today in a wired world. Customers are getting smarter and they have those tools in their toolbox. This new world is a world where choice happens instantly. It's a world where prices are transparent."
Information, said Jones, has escaped thanks to the Internet. "It's found its freedom," he noted. "It's being beamed to us all the time and we are empowered by it." Companies that fail to accept this new reality and cling to refrains like "we've always done it this way" will find themselves left behind as other, smarter companies embrace this new reality and aim to thrive in it. "If you don't like change," said Jones, "you're going to like irrelevance even less."
The Super Session also left attendees awed by Jeffrey Ma's daring, but mathematically-justified approach to taking risks. Ma, author of The House Advantage: Playing the Odds to Win Big in Business and subject of the best-selling book, Bringing Down the House, as well as the hit motion picture 21, was a member of the now-famous blackjack team from the Massachusetts Institute of Technology (MIT) that used card-counting techniques to win millions, and his insights reflected the success he found paying close, meticulous attention to numbers.
Ma recommended that attendees and their companies stick to a well-crafted system when it comes to taking risks, even when those systems don't necessarily pan out correctly at first, offering a story where he lost two consecutive hands of blackjack, each valued at $50,000. The important thing to remember was to have a system that allows for risks to be taken. "If you think taking a risk is the right thing to do, you've got to do it," he said. "You can't favor inaction over action."
Jones and Ma were just two of the many speakers that made this year's Credit Congress an unqualified success, giving today's credit and risk professionals the knowledge they need to thrive in today's business world. Each of them met with attendees and signed copies of their books following their presentations.
- Jacob Barron, CICP, NACM staff writer and Brian Shappell, CBA, CICP, NACM staff writer
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Credit Congress: 'Balance' the Key as Credit Professionals Call for Chapter 11 Changes during Hearing
Before a packed room during NACM's 2013 Credit Congress, six credit veterans testified as part of a public field hearing conducted by the American Bankruptcy Institute (ABI) on the need for change to the Bankruptcy Code in the areas of Section 503(b)(9) and preferences. What resulted was a lively discussion with seven members of the ABI Commission to Study the Reform of Chapter 11.
ABI Chairman of the Board Geoffrey Berman noted that, with changes in the world financial environment, "a better set of tools is required" in Chapter 11 bankruptcy, and that the Bankruptcy Code "was not designed to address these changes."
An important topic that came up several times during the hearing was creditors' committees. While questions arose about the costs involved with committees, the ability to find people in the applicable trade who are willing to serve, and the potential conflicts of interest, the value of committees still remains, which appeared to be reflected during the ABI commission members' comments. Commissioner William Brandt Jr. said it was very unlikely creditors' committees "will see their sunset."
"Our task is not to roll back the tides of history, but reset the equilibrium," Brandt said. Meanwhile, Commissioner Steven Hedberg noted the importance of the Commission in "balancing rights" between secured and unsecured creditors. "It's a big part of what's going to happen in this process." However, such "balance" discussions also led to the question of whether or not service providers should have the same rights under Section 503(b)(9) as manufacturers.
In any case, a repeal should not be on the table. "Repealing 503(b)(9) would create so much more uncertainty in the supplier community," said Sandra Schirmang, CCE, ICCE, senior director of credit for Kraft Foods Global, Inc. "It would make such precautionary, damaging actions much smarter moves for suppliers, to the detriment of debtors. As unsecured creditors, we're willing to take on reasonable risk, but not to an outrageous extent and not if we think that money won't ever be paid to us."
On preferences, Berman took exception to testimony regarding the idea that a majority of trustees are "shot-gunning" without analysis, or don't care about context when filing preference claims. "Saying a trustee is just taking a check register and filing lawsuits is not typically accurate. Yes, there are firms that do that, but that's not how everybody does it," he said.
Berman also got into a spirited debate with Kathy Tomlin, CCE, credit and collections manager with Central Concrete Supply Co., Inc., one of three on the preference panel, over the proposal that the onus should be on those filing the preference claim rather than the creditor. Tomlin had said that the "guilty until proven innocent" theory was working against creditors.
He further argued that modern credit managers have a greater opportunity and ability to gather information than ever before, telling panelists "The moment you have a claim, go pull the records." Tomlin responded that creditors only had their own records, and that advances in technology have worked to provide debtors with that same, greater availability of information as well, which somewhat nullifies the argument against moving to an "innocent until proven guilty" status for creditors.
Overall, panelists representing NACM continually noted just how far preference law has gotten away from the original intent of the Code. "The tremendous amount of expense involved in pursuing and fighting actions is doing too much to drain the already deficient pot that exists in bankruptcy," said Val Venable, CCE, director of credit at Ascend Performance Materials, LLC. "The preferences statute should be changed so that the pursuer of preference recoveries should first prove that the payments were not in the ordinary course of business and that new value was not given by the creditor."
- Brian Shappell, CBA, CICP, NACM staff writer
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As talk of the sequester on the part of the federal government crept into the national dialogue, so did concern for potentially heightened insolvency risk for companies dependent on ongoing government spending. Perhaps no industry had more reason for worry earlier this year than mid-market defense contractors. In fact, the sector made the short list of returning Credit Congress speaker Ed Altman, PhD, who back in January had informally made note of those that faced a tough path to continued solvency. During an NACM interview at Credit Congress, the creator of the Z-Score, the statistical bankruptcy predictor and its newer smart phone app, said that nothing has shaken his pessimistic outlook in this area.
The budget showdown in Washington and sequestration put mid-market defense contractors in the crosshairs of those looking for industries where key companies could experience struggles in 2013. While there has been little to speak of in the way of defaults in the sector to date, it is becoming increasingly clear that the government spending cutbacks are going to hurt the mid-level players far more than their bigger counterparts, which have more options for keeping cash flow and profits afloat. Altman, the Max L. Heine Professor of Finance at the New York University (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 said that overreactions to the threat of government spending cuts may have hurt the industry as much as the cuts themselves.
"In preparation, a lot of the companies that buy from defense contractors cut back, and more than they needed to," Altman said. "Sales went down; investment went down. In some cases, overreacting is self-reinforcing." He added that the subsequent dive in requests of credit from banks may have had the collateral damage of influencing banks to cut back on what they offered, leading to chilled availability and poorer terms for business borrowers. All this will only cause the mid-market to lean more heavily on trade creditors going forward. Trade creditors need to be aware of the dangers in dealing with an industry heading into what appears to be a stiff headwind, barring a change of heart and unexpected cooperation within the U.S. Congress, before granting credit on debtor-friendly terms.
In addition, Altman fretted about the potential for a spike in mergers within the defense contracting industry as mid-level players begin to exhaust their cash positions. What that means to credit professionals in this sphere is the likelihood of fewer credit jobs, and, as the industry becomes dominated even more by larger providers, the spread of the "do more with less" culture.
- Brian Shappell, CBA, CICP, NACM staff writer
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For the first time, FCIB hosted its International Credit Executives (ICE) spring conference in conjunction with NACM's 117th Annual Credit Congress. The program featured all that attendees had come to expect from previous ICE programs, only with more opportunities for networking and more time to drill deeply into the most pressing, complex and fascinating elements of global business.
Beginning with the Executive Exchange session on International Credit, the ICE program offered an intensive 360-degree look at the management of international credit, from turning the credit department into a global profit center, understanding insolvency in particularly hot export markets and conducting international business ethically.
One particular session in the ICE program, "Working Capital Management and Cash Flow Forecasting," unraveled the mystery of hedging foreign exchange risk, an aspect of exporting that often confounds credit professionals and their companies. Led by moderator Patrick Spargur, ICCE of Bally Technologies with a panel comprised of Gent Culver, CICP of International Game Technology and Scott Edgeworth, also of Bally Technologies, the session offered a fascinating, no-nonsense look into how foreign exchange affects a company's working capital, and at what point a company should consider implementing an F/X risk-hedging program.
"It depends on the size of those foreign sales," said Edgeworth. "If you have a small percentage of your sales that are in a foreign currency and it's not affecting your bottom line or your earnings per share, then most companies won't do it."
For larger public companies, Edgeworth noted that the effect of foreign exchange losses on earnings per share serves as a barometer for when they'll consider initiating a process to mitigate those losses. "When it starts to move that earnings per share figure by about a penny or so, that's when they start looking at it," he said.
The panelists also discussed currencies whose foreign exchange risk is particularly difficult to mitigate, specifically the yuan. "It's a harder currency because it's controlled by the government, and I don't know what I want to do with it," said Edgeworth, who also noted that Brazil's currency was so difficult to work with on the foreign exchange market that he implemented procedures to intervene before sales went through. "In Brazil, you might get sales, but you will never get your money out."
- Jacob Barron, CICP, NACM staff writer
Good Behavior Rewarded
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From the announcement of its breakthrough standing as NACM's first national member, to educational sessions and the classroom, W.W. Grainger, Inc. had a significant presence at Credit Congress.
Grainger was recognized along with Roofing Supply Group during the General Session as the first national members of NACM. The new membership category, designed for larger businesses with multiple locations, requires membership in at least five NACM affiliates throughout the country. One of the company's own, National Credit Manager Ed Bell, PhD, CBA, ICCE, not only played a key role in working with NACM to forge the deal, but also served as a speaker at the annual event.
Bell took part in two heavily-attended educational sessions on the final day of Credit Congress. He presented "Practical Analysis When Reviewing Customers: Determining Credit Limits Without Financials" and was then a part of the panel for "Easy Techniques to Quickly Determine Customer Financial Risk."
Bell reminded attendees in the first session that much of the information needed by credit professionals can be obtained by a simple action: "ask for it." This can include reaching out to a customer directly for their financials—which sometimes requires borderline begging, he admitted—talking to fellow credit managers in industry credit group meetings or, more importantly, seeking an assist from one's own sales team.
"If you partner with your sales team, you can teach them what to look for. If you can't get out and look at a customer yourself, have sales do it for you," Bell said. "Don't ask them to be a credit manager, but ask them to look at what kind of operation they have. 'Send me a picture of the facility.'" He added that a photo once sent by one of his sales colleagues depicted a business site with little more than a ragged fence and ramshackle portable storage facility. "That told me right there that we had to be careful with this."
In the latter session, Bell advocated the use of more credit scoring systems to generate some automated credit decisions. "We've had to reduce our staff; we've had to become more efficient. The only real way to do that is to use automation, scoring models and technology." Granted, Bell warned of the dangers of a company and credit department relying too heavily on scores to the point where the big picture is missed. "I don't think we'll ever get to the point where the scores will be able to tell us everything," he said.
Grainger also had multiple employees attend the Business Credit Principles certificate session held on site at the conference, as well as another who sat for the CCE certification exam.
- Brian Shappell, CBA, CICP, NACM staff writer
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Here are some stories that broke while NACM editorial staff was at NACM's 117th Annual Credit Congress.
Several big-box retailers filed an antitrust suit against Visa and MasterCard over interchange fees last week. The group of plaintiffs consists of retailers that have already opted out of the preliminarily-approved $7.25 billion settlement against Visa, MasterCard and several other financial institutions, including Macy's, Target, JCPenney and Kohl's. Their chief concern is that the preliminary settlement would prevent Visa and MasterCard from being sued for future antitrust violations.
A group of state attorneys general also recently objected to the settlement on similar grounds. AGs from California, Ohio, Arizona and six other states argued in court last week that the deal would force them to give up their rights to prosecute Visa and MasterCard for anticompetitive behavior in the future. A total of 48 states and the District of Columbia filed a brief supporting the objections of the aforementioned attorneys general.
Elsewhere, Experian reported that small-business credit conditions improved significantly during the first quarter of 2013, despite the threat of heavier tax burdens and sequestration spending cuts. The latest Experian/Moody's Analytics Small Business Credit Index climbed 5.7 points in Q1 to 109, up from 104.3 in the previous quarter. Much of the improvement was driven by lower delinquency rates and stronger consumer spending.
The U.S. House of Representatives passed a bill last week that would speed construction of the Keystone XL oil pipeline from Canada's tar sands to the U.S. Gulf Coast. The bill would also eliminate the need for President Barack Obama's approval for the $5 billion project, the benefits of which vary depending on who's talking. Proponents argue that it will create jobs, while opponents say that its environmental costs are too great. The White House has yet to rule on the pipeline, citing environmental concerns, but the U.S. State Department, which is still preparing its final report, had previously concluded that it would have little major impact.
And finally, banks continued their earnings winning streak in the first quarter of 2013, according to an announcement made by the Federal Deposit Insurance Corporation (FDIC) last week. Commercial banks and savings institutions insured by the FDIC reported a 15.8% increase in aggregate net income in Q1, jumping from $34.8 billion in the same period last year to $40.3 billion this year. This is the 15th consecutive quarter that earnings have registered a year-over-year increase. The proportion of banks that were unprofitable fell to 8.4%, from 10.6% a year earlier, and average return on assets (ROA) rose to 1.12% from 1.00% a year ago, marking the highest quarterly ROA since the second quarter of 2007.
- Jacob Barron, CICP, NACM staff writer
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