eNews February 3, 2009

eNews Weekly Update - National Association of Credit Management
February 3rd, 2009

News Briefs

  1. APG Announcement
  2. Obama Stimulus Passes House
  3. Fed Holding Rates Steady
  4. Preferences Coming Home to Roost?
  5. Capital Pipelines to Emerging Markets Expected to Ease
  6. Ex-Im Backs Small Business Expansion Into Latin America
  7. Obama Administration Gauging China Response?
  8. ASA Offers 10 Survival Tips for Subcontractors in Lean Times
  9. Suppliers Indicate Plans to Pullback on Spending

Upcoming Events


1

APG Announcement

We are pleased to announce that NACM and Verifraud have reached an agreement whereby Verifraud will run the operations of NACM’s Asset Protection Group. Partnering with Verifraud, an industry leader in fraud risk management, will allow NACM’s APG to significantly expand the depth of its services while staying true to its original mission and history.

Verifraud will provide members with the resources necessary to combat the rising sophistication of credit fraud during economic times that demand innovative, bottom-line solutions. Verifraud is driven by member ROI—ensuring that your needs will be met through Verifraud’s extensive knowledge, expertise and intellectual property. Both NACM and Verifraud want to take APG to the next level.

The transition will be seamless; within a short period of time, APG members should anticipate noticeably higher service levels as well as a gradual introduction of more creative and effective prevention solutions.

NACM President Robin Schauseil, CAE expressed her excitement about this new partnership by saying, “Members can look forward to many improvements in the coming months as we began to implement the new model necessary for APG’s transformation. APG has had a long-standing relationship with Verifraud’s Gary Bares and knows that this partnership will allow members access to great service, information and innovative solutions.” Gary Bares, Verifraud’s CEO and founder, said, “I am honored and excited by the opportunity to bring Verifraud’s unique strengths to the Asset Protection Group at a time of critical need. Credit professionals are burdened with cost-cutting measures and APG will aid these efforts as more sophisticated fraud prevention solutions will inevitably result in decreased bad-debt levels.

APG membership, marketing and support will continue to be handled by NACM.

APG members can reach the Verifraud team by telephone at 480-718-9701 or email at APG@verifraud.com.

All APG web inquires will be sent directly to the Verifraud team for follow-up.

 

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C4F: Employment Connections for the Business Credit Industry

 

2

Obama Stimulus Passes House
President Barack Obama’s stimulus package, dubbed the American Recovery and Reinvestment Act of 2009, recently passed the House of Representatives, with the vote falling strictly along party lines without a single republican’s support. Despite the controversial nature of the bill and seemingly virulent GOP opposition, its passage drew cheers from House democrats and state governors.

“Our prosperity begins with Main Street businesses in communities across the country,” said Rep. Nydia Velázquez (D-NY), chairwoman of the House Small Business Committee. “It is critical that entrepreneurs have the resources they need not only to survive this downturn, but to help create jobs and lead the nation toward recovery.” Velázquez extolled the bill for its small business provisions, namely $13 billion in new lending and investment and $30 billion in targeted tax relief for the sector. The legislation also increases the guarantee on loans for lenders from the Small Business Administration (SBA) and aims to unclog frozen secondary markets, which, as Velázquez noted, have become stagnant in recent months, denying private lenders the liquidity they need to make additional loans. The new capital provided by the bill is expected to create or retain 400,000 jobs.

“Our Committee has heard from small businesses across a variety of sectors about their need to access credit for operational costs,” said Velázquez. “This legislation will go a long way toward addressing their concerns and getting capital flowing again. By providing $30 billion in targeted tax relief, this legislation will help cash-strapped businesses that will spend the money now and spur economic recovery in the short term.”

"States are facing fiscal conditions not seen since the Great Depression—anticipated budget shortfalls are expected in excess of $200 billion. To address these shortfalls and meet balanced budget requirements, states have begun taking action to cut government services or increase revenue. Absent federal action, states will have to take even stronger actions that will make the recession more severe and slow the nation’s economic recovery,” said the National Governors Association in a statement. “Governors support the objectives of the American Recovery and Reinvestment Plan to stimulate private investment, create jobs and speed recovery. Governors also support several key elements of the bill critical to states—increased federal support for Medicaid and K-12 and higher education, investment in the nation’s infrastructure, and tax provisions to spur investment. Governors also support additional transparency and accountability provisions to protect the American taxpayer.”

The bill now heads to the Senate for markup and what is expected to be a close, contentious vote. Republican support for President Obama’s initiatives has experienced a recent backlash and many in the Senate have noted that they would not vote for the Act in its current state.

Jacob Barron, NACM staff writer

 

What would you bid on at an auction?

Why not think about donating something similar to this year’s Scholarship Foundation Silent Auction?

Who wouldn’t want to be part of a win-win situation? Get an early start on your 2009 deductions and help a fellow professional at the same time!

For more information on how to donate to the 5th Annual NACM Scholarship Foundation Silent Auction, held each year at Credit Congress, click here.

 

3

Fed Holding Rates Steady
Industrial production, housing starts and employment have maintained their track of steep downward declines over the last quarter, with unemployment hitting its highest rate in 16 years. Consumers and businesses have cut back on spending, entrenching themselves for the long haul, while global demand has slowed significantly. According to the Federal Reserve Board, financial market conditions have improved, giving a tip of the hat to government efforts to mainline liquidity and strengthen financial institutions, but credit conditions still remain extraordinarily tight.

There is hope that a gradual economic recovery will begin to blossom later this year, but the Central Bank admits the downside risks to such an outlook are significant. Uncertainty continues to dismantle confidence, evident by the fact that $194 billion in federal funds has been injected into the banking system, yet the Fed’s quarterly Senior Loan Officer Survey showed that 65% of banks tightened lending standards to large- and middle-market firms.

As such, the Federal Open Market Committee (FOMC) decided to keep its target range for the federal funds rate between 0-.25%. As economic woes persist and the duration of the downturn remains hazy, the committee feels that the rate will likely stay at its current level for a considerable period of time to be beneficial.

“In light of the declines in the prices of energy and other commodities in recent months, and the prospects for considerable economic slack, the Committee expects that inflation pressures will remain subdued in coming quarters,” said the FOMC.

Nonetheless, concerns about inflationary risks that could dampen economic growth and price stability in the longer term are not yet extinct.

The Fed will continue to utilize all the tools at its disposal. The agency plans to purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and stands poised to expand the quantity of such purchases and the lifespan of the purchasing program as warranted. Longer-term Treasury securities are also on the menu for the Central Bank if circumstances come to light that such transactions would be effective in improving credit market conditions. Richmond Federal Reserve Bank President Jeffrey Lacker voted for the Fed to take up this action immediately at the FOMC’s last meeting, indicating that he felt the Central Bank should expand its monetary base by purchasing Treasury securities instead of through targeted credit programs.

Matthew Carr, NACM staff writer

 

Business Credit Compensation Survey

NACM's groundbreaking Business Credit Compensation Survey provides invaluable data for the credit professional. This study is NACM's first comprehensive salary survey specific to the credit industry and includes compensation benchmarking information for individuals in comparable positions and with similar backgrounds, education and experience.

See how you stack up for your position nationwide.

Click here here to order the survey through the NACM Bookstore.

 

4

Preferences Coming Home to Roost?
The reason the Bankruptcy Code provides for preferences is one that might make some credit professionals scoff; they were created to maintain fairness in bankruptcy proceedings. “The problem is it goes up the priority ladder or to administrative creditors which would include the trustees,” said Bruce Nathan, Esq., a partner at Lowenstein Sandler PC. “It’s supposed to preserve fairness, but one wonders.”

As credit professionals and their companies face the grim specter of continued rises in bankruptcy filings due to a sagging economy, Nathan, in his most recent NACM-sponsored teleconference, “Preferences Coming Home to Roost? Not With All Those Preference Defenses!,” offered attendees a number of different ways that they can protect themselves from a debtor’s preference claim and also gave them an update on some interesting recent cases. “Your participation is predictive of where we’re going on preferences,” he said. “Preference litigations are down but preference decisions are not.”

In particular, Nathan discussed a recent case out of the Tenth Circuit which found that a debtor who uses one credit card to pay down debt on a separate credit card account could rightfully claim that payment back as a preference. The argument in the cases that have addressed credit card payments as preferences is over whether or not a credit card payment constitutes a transfer of real property, which is the first requirement of a preference claim. “Up until the last few months, there was a division among the few courts that had addressed the issue,” he said. “Some argued that it was a transfer of real property because they control the funds, and it’s that control that led the courts to have credit card transactions be considered preferences.” For more on the Tenth Circuit case in question (In Re Marshall), be sure to look for Nathan’s upcoming article in the March issue of Business Credit.

Nathan’s presentation also included a thorough explanation of the ways creditors can defend themselves from preferences. For more information on NACM’s 2009 teleconference series, or to register, click here.

Jacob Barron, NACM staff writer

 

Credit Risk Mitigation Techniques

Tough times are in the cards for companies in nearly all economic sectors and on every compass point in the country. But it is continuing innovation that will help businesses survive the current winter until the spring thaw arrives. On February 9th, credit managers can take advantage of the more than three decades of experience Walter (Buddy) Baker has at his disposal, and get a handle on the rewards of using credit insurance by analyzing real-life case studies. Baker will walk credit professionals through recent coverage innovations, including "key-account" and single-buyer insurance, as well as detail the differences between "named-buyer" ("European-style") and "discretionary-credit-limit" ("American-style") policies. From there, the attendees will delve into the relative merits of policies with cancelable and non-cancelable limits, as Baker reviews situations where credit insurance was used by companies with four varied objectives: risk containment, improved credit-decisions, sales expansion and increased financing.

To register for this teleconference, click here.

 

5

Capital Pipelines to Emerging Markets Expected to Ease
In 2007, net private capital flows to emerging markets were at a record $929 billion. In 2008, as the economic slump began weighing on the global marketplace, that figure took a steep nosedive to an estimated $466 billion. Now, while the world is in the clutches of crisis, the Institute of International Finance, Inc. (IIF) anticipates that private capital flows to emerging markets will struggle to be around $165 billion in 2009. This is a stark revision from the picture painted by the association just four months ago, when it predicted that net flows for the year would be around $562 billion. This was before the fourth quarter tailspin that further shook the confidence of banks and investors.

“Indeed, we are now anticipating negative world growth for 2009,” said IIF Managing Director Charles Dallara. “While all components of net private capital flows have recently weakened appreciably, the most significant weakness is for net bank lending where we now see a net outflow from the emerging markets of about $61 billion this year, after a net inflow last year of $167 billion and a record of $410 billion in 2007.”

For the first time since World War II, the IIF is forecasting global output to dip into negative growth of 1.1%, which is a substantial about-face from the 2.0% advance seen last year. This is primarily because of the recessions seen in many of the world’s supporting economies as well as the precipitous drop in the price of oil and other commodities.

Dallara foresees that the carnage will be widespread and no emerging market will be spared in the coming months, though the most substantially hit will be those European emerging markets—such as Turkey, Ukraine, Poland and Russia—where net private capital flows will fall from $254 billion in 2008 to just $30 billion this year. This will place considerable strain on a region that has been heavily reliant on external finance.

The outlook for Latin America is expected to be just as bleak as net private capital flows are cut in half from $89 billion in 2008 to $43 billion in 2009. Emerging markets in Asia will continue to see a decline, though nowhere near as halting as the drop seen last year when inflows plummeted from $315 billion in 2007 to $96 billion in 2008. For the year ahead, the IIF anticipates net private capital flows to emerging Asian markets to hover around $65 billion.

Non-bank credit flows to emerging markets are anticipated to be down sharply as well, amounting to a net $31 billion this year, a substantial decrease from the $125 billion seen in 2008 and several leagues away from the $222 billion in 2007. An interesting component could be Latin American sovereign countries like Argentina, Ecuador and Venezuela, which are expected to possibly increase their borrowing demand as they adopt more expansionary fiscal policies.

“Many of the leading emerging market economies have entered this very difficult period in healthier economic conditions than in the periods of crisis in the 1990s and in the 1980s, with lower inflation levels, stronger reserves, more pragmatic and more prudent economic policy leadership,” said Roberto Setubal, vice chairman and president, Banco Itau Holding Financeira S/A of Brazil. “At the same time, the leading banking institutions in many emerging market economies, which have largely avoided direct involvement in the subprime crisis, are not suffering from the same degree of distress as those in the mature economies.”

Despite the advances made by emerging markets leaders, Dallara said that there is no room for complacency.

“Vigilance on the part of leaders of the emerging market economies is all the more important given that their countries are susceptible to contagion from the mature economies, which will face enormous tests throughout this year,” said Dallara. “Indeed, there is a clear case for initiatives that ensure that the efforts made by these emerging market countries are backed with international office support.” At this, Dallara pointed out that the International Monetary Fund (IMF) needs to expand its resources and modify its approaches to providing financing.

Foreign direct investment to emerging markets is expected to at least remain stable. Despite the global slowdown, FDI to these markets will likely total over $195 billion, which is comparable to the estimated $260 billion in FDI last year and the $304 billion seen in the year before.

“Our forecasts for FDI have to be viewed with some caution, given a significant decline in global capital spending that is underway, the erosion of corporate profits and the decline in commodity prices,” warned Yusuke Horiguchi, first deputy managing director, IIF. “In addition, global weakness in real estate prices will curb FDI in the construction sector, notably in tourism and residential areas.”

Matthew Carr, NACM staff writer

 

Credit Words: Stories of Victory and Defeat

Overall Winner of $250
Linda Olsen, CBA
Assistant Credit Manager
Credit Department
Oklahoma City, OK

Runners Up and Winners of $50
Loretta April
Credit Manager
Seaboard International Forest Products LLC
Nashua, NH

Bob Steve
Credit & A/R Manager
Harter Secrest & Emery LLP
Rochester, NY

We congratulate Linda, Loretta and Bob on their success. To read the winning stories, watch for your copy of the February issue of Business Credit magazine. The stories will also be posted on the NACM website under Business Credit magazine.

 

 

6

Ex-Im Backs Small Business Expansion Into Latin America
Throughout the U.S. financial crisis, exports have often been touted as the one bright spot in an otherwise hopeless economy, and while many American companies have been forced to lay off workers and cut costs, many are still thriving by finding ways to expand into new markets, namely by taking advantage of the considerable demand for agricultural and packaging products in Latin America.

The Export-Import Bank of the U.S. (Ex-Im Bank) has, throughout the crisis, been offering financing to small businesses hoping to sell their wares and services in distant markets. “For the past two years, we’ve gone from about 20 employees to 50 employees while working with Ex-Im Bank on a number of transactions, and we’re still hiring,” said Joseph Barbi, president and owner of feed processing equipment and engineering services firm, Engineered Systems and Equipment, Inc. “Our staff works 50-60 hours a week, overtime with no stop!”

"Because of Ex-Im Bank, we've been able to expand our export markets considerably, with export deals totaling more than $7 million in the past couple of years," said Barbi. "We used to be in a situation, especially in Mexico and Central America, where European competition and financing put us out of the market. But in the last couple of years, in every single project we've done with Ex-Im Bank where we've been in competition with European companies, we have won it!" Barbi is just one of many small business owners who has benefitted from Ex-Im financing in foreign markets. Mark Andy Inc. of Chesterfield, Mo., has sold more than $1 million of specialized printing equipment for the labeling, flexible packaging and folding carton industries to three different buyers in Brazil in the past six months, backed by Ex-Im Bank medium-term insurance.

“Buyers are finding it increasingly difficult to find financing, so Ex-Im Bank is becoming more and more critical to them in getting the financing they need to buy our U.S.-made products," said Jeff Auton, Mark Andy manager of trade finance. "We're making every effort to sustain jobs during the difficult, tumultuous times that we're facing worldwide. Programs like Ex-Im Bank help fill production slots at our plants in Chesterfield and Cincinnati, Ohio."

In fiscal year 2008, Ex-Im authorized $3.2 billion for direct support of small businesses as primary exports. Two-thousand three-hundred and twenty-eight transactions were approved, representing 86% of the total number of authorizations.

For more information on Ex-Im’s financing for small businesses, visit www.exim.gov.

Jacob Barron, NACM staff writer

 

Distressed Business Services

Many of NACM's Affiliates are involved in a national network to provide assistance in the rehabilitation (if possible) or liquidation (if necessary) of businesses in severe financial difficulty.

While courts can take several months or more to get a reorganization plan started, NACM Affiliates can assist in getting a plan approved in as little as 30 days. Most helpful is the knowledge that experienced professionals are ready to step in at the most difficult time. NACM Affiliated Association staff members can serve as secretary to creditor's committees, provide other needed advisory services and are fully aware of the prevailing laws and regulations relevant to each situation.

Click here to learn more about NACM’s Distressed Business Services.

 

 

7

Obama Administration Gauging China Response?
Claims of the yuan being grossly undervalued have been a worldwide and decades old criticism. President Barack Obama couldn’t be accused of being silent on the matter either. During his presidential campaign, Obama made clear that he and Vice President Joe Biden would use every diplomatic avenue necessary “to achieve change in China’s manipulation of the value of its currency, a practice that contributes to massive global imbalances and provides Chinese companies with an unfair competitive advantage.” This stance surfaced once again, this time during the Senate Finance Committee nomination hearings of Obama’s pick for Department of Treasury Secretary, Timothy Geithner, on January 22nd.

Geithner did not personally verbalize the claims, though he did submit in written testimony his and President Obama’s belief that China continues to purposefully keep the yuan devalued against the dollar to boost exports. Currently, the exchange rate between the yuan and the U.S. dollar is 6.8442 to 1.When the news of Geithner’s comments made their way out onto the international stage, the accusations ruffled the feathers of the People’s Bank of China (PBC), who unilaterally refuted the claims.

From China’s standpoint, evidence is readily available. On July 21, 2005, after a decade-old agreement between the two countries, China severed the yuan’s peg to the U.S. dollar. The result was the currency instantly rose a little more than 2% in value from 8.28 to 8.11. Since that tie has been broken, the PBC points out that the yuan has continued to strengthen as the dollar has slid.

Trade between the United States and China has been exceptionally robust since the start of the millennium, but for U.S. interests, China continues to post an expanding trade surplus that has increased substantially in seven of the last eight years. China is the fastest growing market for U.S. goods and the nation’s second-biggest trade partner behind Canada. In 2007, U.S. exports to China increased more than 17% and in 2008, those figures continued to inch upwards, albeit far more modestly. Nonetheless, the disparity remains stark, as American exports represented just $66 billion of the total $379 billion in trade conducted between the two countries last year, translating into a trade deficit for the U.S. of more than $246 billion.

Chinese business leaders told the Xinhua News Agency that China’s price advantage is related to lower labor and material costs, and has little to do with currency issues. One analyst told the news agency that the comments from Geithner were meant to see how China would react.

“Obviously, China is a big player in the world economy,” White House Press Secretary Robert Gibbs told reporters. “It is an area that we clearly have to have a vibrant policy on.” Gibbs reiterated that what Geithner submitted in written testimony to the Senate Finance Committee was a restatement of what the President had stated during the campaign trail.

“We have to take a comprehensive approach to enhancing our economic relationship with China, including the currency issue,” said Gibbs. “As you know, by law the administration—every administration since 1989—has had to make a determination about currency each spring. That determination will be made not any differently in this administration,” adding that a decision will be reached in the coming months.

China contributed a major portion of the global growth in 2008, with some estimates as high as 20%, and the country is sitting on the world’s largest reserves of nearly $1.9 trillion. The Chinese central bank has cut interest rates, and though the economy is still growing, that growth is being slowed by the financial turmoil wreaking havoc on world markets and abating appetites for Chinese goods.

At the World Economic Forum last week, China’s Premier Wen Jiabao said, “In a world of economic globalization, countries are tied together in their destinies and can hardly be separated from one another. The financial crisis is a test of the readiness of the international community to enhance cooperation, and a test of our wisdom.”

He added, “Past experience shows that in crisis it is all the more important to stick to a policy of opening-up and cooperation. Trade protectionism serves no purpose as it will only worsen and prolong the crisis.”

Matthew Carr, NACM staff writer

8

ASA Offers 10 Survival Tips for Subcontractors in Lean Times
The American Subcontractors Association (ASA) recently released a podcast entitled “10 Survival Tips for Subcontractors in Lean Times,” offering creditors in the construction industry tips on how to thrive despite the nation’s currently problematic economy. “Many subcontractors have talked to me and expressed their grave concerns about the economic climate,” said Don Gregory, chair of Kegler, Brown, Hill & Ritter’s construction and litigation practice. “Indeed in my 26 years of practicing construction law this is the most serious downturn I have witnessed.”

Gregory’s presentation goes through his 10 tips one by one, highlighting the risks and pitfalls that make subcontracting in today’s economy an estimable challenge and reminding listeners that sometimes the best way to move forward is to review. “Many contracts these days contain a contingent payment clause. This may delay payment if it’s a pay-when-paid provision,” he said. “If it’s a pay-if-paid provision, it may shift the entire credit risk of non-payment from the owner to the subcontractor, so in these difficult times, it’s more important than ever that subcontractors review their contracts for this shifting of credit risk and make changes.”

As one would expect, Gregory noted that firms that can cut costs may be better positioned to ride out the current market turmoil. “If there’s an opportunity to reduce your labor costs, these decisions are never easy, they’re never fun, but if you can cut costs by leveraging technology and putting yourself in a lean and mean mode, perhaps you’ll be better situated to emerge even more profitable down the road as work conditions improve,” he said. Still, Gregory noted that there are some sections of a subcontractor’s business that shouldn’t be cut back, namely training and marketing. “Challenging economic times are the wrong time to ignore training,” he said. “When there is some time, invest in that training, perhaps in an area that will bring new work or work with a bigger profit margin. For example, green building. A subcontractor schooled in green building, with their people trained accordingly, perhaps has a business advantage over others who are still doing work the same old way. Train for your current and especially your future markets.”

Subcontractors should also remain vigilant in their efforts to give notice, said Gregory. “You really need to emphasize your efforts to give notice in difficult economic times. You need to do your due diligence with respect to the customers that you’re working for and also preserving payment rights,” he said. “The bottom line is notice, notice, notice.”

The full podcast can be downloaded for free on ASA’s website.

Jacob Barron, NACM staff writer

 

9

Suppliers Indicate Plans to Pullback on Spending
According to a recent survey by the Institute for Supply Management (ISM), more than 35% of the survey’s respondents plan to substantially slash capital spending in the year ahead. Added to the cutback total is another 42% of responding companies that plan to at least reduce spending in the coming months, while only a very small fraction, less than 1.5%, planned on increasing capital expenditures in 2009.

For the majority of those indicating their companies will be reining in costs during the next year, the uncertainty surrounding the economy was hailed as the chief cause. Other factors weighing on the move towards reduction included worsening of sales prospects, the high cost of and difficulty in obtaining financing, the high cost of inputs, as well as instability in the bond markets, cuts in state revenue and the high cost of building materials. The vast majority of anticipated cutbacks were expected to be primarily on equipment and structures.

“There were no surprises in the responses to the survey,” admitted ISM’s Chief Executive Officer Paul Novak, CPSM, CPM, APP. “The difficulty obtaining financing for capital projects and the cost of that capital in what are declining markets makes for a difficult business case to move ahead with those projects.”

The dour economic temperament was further highlighted by the fact that more than 42% of the ISM survey’s participants stated that they will either be substantially cutting or at least slightly reducing their production capacity for 2009. Fortunately, among those companies, the outlook was that the reductions would only be temporary, with just 9.9% of the companies anticipating the drawbacks to be permanent. The ISM’s survey showed that production capacity reductions were expected to last at least six months to a year in the majority of cases, while almost a third were too unsure to establish a concrete timeframe.

These production drawbacks were mirrored by the fact that many of the survey’s respondents stated the impact of the financial turmoil has been most felt in a reduced demand for the firm’s goods or service. More than 60% of respondents pointed to that factor as the most significant toll the current crisis is levying on their companies.

Matthew Carr, NACM staff writer

 

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