October 31, 2013
Despite the threat of a political impasse in the U.S. that some thought could derail the entire global economy, October's Credit Managers' Index (CMI), published by the National Association of Credit Management (NACM), was largely unfazed. The combined CMI improved from 56.6 in September to 56.7 in October, marking the highest reading in over a year and a half.
The October CMI may have been the most watched in years, according to NACM Economist Chris Kuehl, PhD. "The dominant story for the bulk of the last quarter was the political impasse that resulted in a government shutdown for three weeks and posed a threat to the U.S. credit rating," he said. "Everyone was hanging onto the edge of their seats to see what this would do to the economy. Predictions ranged widely from utter financial chaos to no real response at all."
Recent declines in retail, consumer confidence and industrial production seemed to bear out the most pessimistic predictions, but the CMI tends to lead other indicators by approximately three months. There was a slight drop in July's CMI readings, signaling some anxieties in the financial community about the then-looming threat of a government shutdown or default, but that was followed by successive increases in August, September and now October. "The credit decision is very early in the business process and thus signals future intent," Kuehl said. "The sense thus far is that all the political turmoil did not have an impact on the future plans for business."
The most surprising data in this month's CMI came in the favorable factors index, the combined reading of which increased from 60.9 last month to 61.5 in October. Sales slipped just slightly from 62.7 to 62.5, but managed to stay above 60, as it has since April. The CMI's best news came in the new credit applications and amount of credit extended readings. New credit applications rose from 57.4 to 58.5, signaling that more companies are seeking additional credit in order to grow their business. "This alone would not be cause for great celebration as there are many occasions that companies seek credit but are doing so from a position of weakness," Kuehl said. "The better news is that amount of credit extended also increased from 62.9 to 63.8, suggesting that those asking for additional credit are good companies with solid credit ratings. These are the companies expecting improvements in the economy by next year."
If the October CMI reflected any of the negative economic effects of the political brinksmanship in Washington, it did so in the unfavorable factors. The overall unfavorable index declined from September's 53.8 to October's 53.6, driven by rejections of credit applications, which slipped from 53 to 52.1, and accounts placed for collection, which fell from 54.3 to 53.3. "More companies are having issues, which may be directly related to the government shutdown and related stress given that 156,000 companies do work for the government," Kuehl said. Still, disputes, dollar amount beyond terms and dollar amount of customer deductions all registered increases, and the unfavorable index itself has by and large remained stable and trending in the right direction.
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When a major event, especially a lengthy sporting event like the Olympics or World Cup, comes to certain cities or countries, the credit-granting opportunities are robust. However, that opportunity often comes with a heightened risk of late payment or delinquency.
Standard & Poor's Ratings Services, when discussing ratings for companies in such industries as media and telecommunication, and NACM Economist Chris Kuehl, PhD are among those that have predicted massive business opportunities tied to the major events coming to Brazil. The nation is not only hosting the World Cup in 2014, but also the Summer Olympics in 2016.
"For many companies, being a part of the supply chain of products and services can be the opportunity of a lifetime," said Octavio Aronis, senior partner with Brazilian law firm Aronis Advogados. "It can also end up being a very tough business situation. In addition to unusually long payments that many suppliers are required to provide, a small product quantity error or just a slight delay in the delivery time could sink even a well-established company. Unfortunately, mistakes will happen, oversights will be made and losses will be incurred."
Because of the stakes, credit professionals need to be wary before rushing into a deal to provide products or services to another firm whose financial health is tied closely to a major event. Take for instance the many contractors and product providers associated with the Grand Prix of Baltimore auto-race that never got paid by organizers, brought in far less money than expected and faced massive criticism for their budgeting. That event is dwarfed in comparison to something like a World Cup, an Olympics or even a football bowl game.
In a recent blog post, Aronis, who will present the FCIB webinar "Doing Business in Brazil" on November 12, listed the following among suggestions for those extending credit to World Cup organizers or the companies selling to them:
- Push for the shortest terms that can realistically be expected. It is common for a creditor with 90-day terms to get paid in 180 days or longer for such events.
- When selling to a supplier of event organizers, ensure that there are no clauses that indicate you get paid after they get paid.
- Perform due diligence by purchasing credit reports known to provide accurate, verifiable financial and legal information on a company. If a company is operating on a shoestring budget or faces several lawsuits, that should be a huge red flag. In places like Brazil, where bankruptcy cases often take more than a decade to resolve, taking a risk on a red-flagged company is not advisable.
- Ensure your contract is in order and free of loopholes, preferably by using Brazilian professionals to help with documentation.
- Consider credit insurance to safeguard your receivables.
- Brian Shappell, CBA, CICP, NACM staff writer
For more information on the November 12 FCIB webinar or to register, click here.
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The Federal Reserve proposed its first-ever standardized minimum liquidity requirement for large and internationally-active banks last week. The new rules would also apply to systemically important non-bank financial companies as designated by the Financial Stability Oversight Council and ultimately subject U.S. financial institutions to more stringent reserve requirements than they would face under the dictates of the global Basel III framework.
Each institution covered by the proposal would be required to hold minimum amounts of high-quality liquid assets (HQLA) that can be converted quickly into cash. Items such as central bank reserves and government and corporate debt would count toward the liquidity buffer, while those like private-label mortgage securities, covered bonds and municipal debt would not. Still other types of assets would count toward the buffer, but only at a fraction of their value.
Firms would have to hold HQLA in an amount that's equal or greater to each institution's projected cash outflows minus its projected cash inflows during a short-term stress period. The ratio of the firm's liquid assets to its projected net cash outflow is its "liquidity coverage ratio," or LCR, which would apply to all internationally active banking organizations. According to the Fed, this would generally include those institutions with $250 billion or more in consolidated assets, or $10 billion or more in on-balance sheet foreign exposure, as well as the previously-mentioned systemically important non-bank financial institutions. A less stringent LCR will apply to bank holding companies and savings and loan holding companies that aren't internationally active but have more than $50 billion in total assets.
The proposal mirrors Basel III, but also diverges in important ways, most notably in how compliant institutions will have to calculate their assumed rate of outflows. The Fed will require banks to calculate their LCR using the period when the bank's outflows are at their highest, and since these outflows can vary greatly over the course of a month, this could result in a relatively large reserve requirement. Basel III would require banks to calculate a similar ratio, but on a more lenient basis.
Another noteworthy difference is that the Fed's proposal puts banks on an accelerated timeline for compliance, which, according to the Fed, is due in part to the fact that many U.S. banks have already begun to stockpile these assets in the wake of the financial crisis. Whereas under Basel III, institutions would have to comply by 2019, the Fed's transition period begins on January 1, 2015 and requires banks to be fully compliant by January 1, 2017.
"Since financial crises usually begin with a liquidity squeeze that further weakens the capital position of vulnerable firms, it is essential that we adopt liquidity regulations to complement the stronger capital requirements, stress testing and other enhancements to the regulatory system we have been putting in place over the past several years," Federal Reserve Gov. Daniel Tarullo said. "This rule would help ensure that the liquidity positions of our banking firms do not weaken as memories of the crisis fade."
Many have voiced concerns that the Fed's proposals, which have tended to skew towards not risk-weighting assets when calculating a bank's reserve requirements, could reduce credit availability in the U.S., particularly for low-risk transactions such as those involving trade financing. Stay tuned to NACM's eNews, blog and Business Credit magazine for more analysis on how the Fed's proposals could affect trade creditors.
- Jacob Barron, CICP, NACM staff writer
Trade Credit's Chance to Improve the U.S. Payment System is Now!
The Federal Reserve has asked for feedback from trade creditors and other users of the U.S. payment system in its pursuit of a better payment system. Opportunities to make the credit professional's voice heard in the coming months include a survey about payment systems, town hall meetings and a free teleconference on November 5 exclusively for NACM members.
The NACM teleconference will feature Fed Senior Vice President of Industry Relations Sean Rodriguez, who will discuss areas of particular concern, including fraud potential, international electronic payments and timeliness of funds availability. The teleconference begins at 12:00pm EST and will last one hour. A question and answer period with a Fed representative will be included in the event.
To learn more about the teleconference, and to register, click here. Be sure to share this with other members!
To learn more about the Fed endeavor, refer to the October 24 edition of eNews.
As one of Europe's four most important economies, the struggles of Spain with its massive debt and weak growth have caused havoc in the country and throughout the European Union in recent years. This week, the Iberian nation finally provided long-absent hope in the form of its first quarterly economic growth since 2011's first quarter.
Spain's gross domestic product in the third quarter increased by 0.1% over the previous quarter. Granted, it still decreased 1.2% on an annual basis from 2012's third quarter. Lackluster as the quarterly increase may seem, the bump could foreshadow hope of some level of long-awaited stabilization and, perhaps, a true rebound within a few years. After all, Spain has posted a quarterly GDP gain only five times since 2009, when the recession and EU debt crisis was just getting started. The nation, and its EU partners for that matter, need any confidence they can get.
Spain has been forced to up its game in the area of exporting. Reliance on its previous main economic driversâ€”government spending, tourism and the once-booming real estate industryâ€”is no longer an option. Granted, the important economy doesn't have it as easy as fellow EU member Italy, for example, which has a greater ability to sell well-known brand name items that have global appeal. Spain also continues to deal with 26% unemployment, debt-to-GDP ratios nearing 100% and territorial laws and enforcement that are far from consistent. It is important to monitor what impact, if any, the third quarter GDP growth news has in the EU's Economic Sentiment Index next month, as most Spanish businesses believed in the most recent period that conditions would worsen in late 2013 and early 2014.
- Brian Shappell, CBA, CICP, NACM staff writer
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The U.S. Small Business Administration (SBA) supported nearly $30 billion in lending to small businesses in fiscal year 2013, registering a slight drop from the record $30-billion-plus levels of fiscal years 2011 and 2012.
During the fiscal year ending September 30, SBA loan approvals supported $29.6 billion in financing to small businesses through its two main loan programs, 7(a) and 504, making FY 2013 the SBA's third-highest lending year ever, right behind the $30.5 billion SBA-supported financing in FY 2011 and $30.25 billion in FY 2012. The number of individual loans made with SBA support did increase slightly in the FY 2013, despite the drop in dollar value, from 53,848 loans in FY 2012 to 54,106 in 2013 fiscal.
Low-dollar 7(a) loans made through the Administration's Small Loan Advantage (SLA) programs, however, continued to show dramatic increases, as did the number of private lenders participating in the program. First launched in February 2011, the SLA initiative was designed to expand access to loans under $350,000. The program was revamped in June 2012 to reduce paperwork requirements and expand the available pool of participating lenders, resulting in a more than 300% increase in SLA loans and an over 700% increase in the number of lenders using the program. SBA backed nearly 5,000 loans for nearly $745 million through the SLA program in FY 2013.
"We continue to get more capital into the hands of small business owners than ever before," said Acting SBA Administrator Jeanne Hulit. "Small businesses are the engine of our economy, and reaching our third-highest year of SBA lending in FY 2013, demonstrates the strength and resiliency of America's 28 million small businesses as they continue to recover from the Great Recession and drive our economy forward."
SBA's short-term lending programs seemed to be more popular throughout FY 2013 overall, at least as far as usage is concerned. The Agency's 504 program, geared toward providing longer-term fixed-rate financing for real estate and major fixed assets, experienced a slight decline in FY 2013, but still supported $11.7 billion in lending. The SBA's other increasingly-popular short-term financing program, CAPlines, provides lines of credit to help small businesses with their day-to-day working capital needs, and continued to see increases in FY 2013, with SBA approving 682 loans for more than $500 million under the program. The program was redesigned and streamlined over two fiscal years ago, and since then, SBA has cumulatively approved 1,200 loans after previously only approving 1,300 CAPlines loans in the 15 years prior.
- Jacob Barron, CICP, NACM staff writer
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