February 13, 2014
An overwhelming majority of the European Parliament has voted to support a tentative European Commission proposal calling for a streamlined and consistent set of business insolvency laws throughout the 28-member bloc. Still, there are experts who are tempering optimism that such rules could become a reality anytime in the near future.
The Parliament, on a 580 to 69 vote (19 abstentions), backed a Commission plan to change insolvency laws, shifting them more toward allowing and fostering business restructuring and recovery during troubled financial times instead of the current system where liquidation is the usual outcome. Key provisions of the new laws, if passed, include extending the rules that cover rescue proceedings, creating an EU-wide insolvency registry, reducing the opening of multiple insolvency proceedings against one company and clarifying the rules for dealing with the insolvency of groups of companies. European Commission Vice President and EU Justice Commissioner Viviane Reding noted that "the first option for viable businesses should be to stay afloat rather than liquidating."
The effort is not as simple as it appears. The obstacles, such as state-to-state legal differences that inhibit the plan from working on an EU-wide basis, could prove to be more difficult than supporters let on. "Contract law is not harmonized," said Freddy Van den Spiegel, chief economist and director of public affairs at BNP Paribas Fortis. "As soon as you touch contract law, you have unintended consequences. Indeed it will be difficult."
Van den Spiegel pointed to efforts to make rules consistent in other business sectors such as insurance and pensions, noting that those are progressing slowly because of the diversity in laws and accepted practices throughout the EU. However, Thomas Voller, attorney with the Germany-based firm Voller Rechtsanwälte, is more optimistic about the prospects. He believes the insolvency changes, which would make EU cases more similar to US-based Chapter 11 bankruptcy filings, could be on the books within a couple of years once a finalized proposal clears the EU Council and is worked into each member state's existing laws. "Unification of the rules has worked in Europe before, and it will work again," Voller said. "The countries normally do take these rules. For instance, we have unified money laundering rules in this space. It just takes time."
Either way, Voller argued the insolvency reform would be positive for businesses and creditors alike, because a new insolvency system could help eliminate today's common problem of unnecessarily liquidating businesses that could realistically rebound.
- Brian Shappell, CBA, CICP, NACM staff writer
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A new article published by the American Bankruptcy Institute (ABI) found that the cumulative total of bankruptcy filings since the implementation of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) would have been about five million cases higher had the law not been enacted.
"Supporters of the bill thought that the high rate of filings [prior to BAPCPA] constituted a crisis and that BAPCPA eliminated certain existing opportunities for abuse," said Ed Flynn, a consultant with ABI in his ABI Journal article "BAPCPA: The Mystery of the 5 Million Missing Cases." "It does appear… that the legislation has led to a permanent drop in filings somewhere in the 30% range."
This might sound like a good thing to unsecured trade creditors who often find themselves on the losing end of most bankruptcy filings, but the article found that the decline in cases has had little to do with an increase in financial health for potential filers. While most of the five million cases that BAPCPA prevented were clearly in the consumer arena, some of the reasons for the permanent drop in filings are similar to those found in commercial circles.
Flynn found that BAPCPA made filing for bankruptcy much more expensive, a common complaint in the commercial filing sector that has also characterized consumer bankruptcy trends as well. For unsecured trade creditors in commercial cases, the situation is often even more dire because what payments they fairly received from the Chapter 11 debtor in the 90 days preceding their filing are often clawed back in the form of preferences. Furthermore, the increase in filing costs that resulted from BAPCPA arrived during an era of widespread use of secured debt. The increased filing costs drain additional value from the debtor's estate, and what's left is often barely enough to make these secured lenders whole, meaning unsecured lenders receive little to nothing. Flynn also attributed the permanent decline in filings to BAPCPA's "thousand paper cuts," generally referring to many other provisions in the law that made bankruptcy either more difficult or less beneficial to the debtor than before 2005.
This downward trend in filings occurred independent of economic changes, Flynn noted. "Logic dictates that certain economic factors would correlate well with bankruptcy filing trends," he said, referring specifically to mortgage and credit card delinquency rates, unemployment rates and home prices. However, Flynn found that none of these indicators provided a solid correlation to actual bankruptcy filing activity.
Most recently bankruptcy figures have continued an historic decline as total filings in January decreased by 13% from the same period in 2013. Year-over-year total commercial filings fell by 23% in January and commercial Chapter 11s fell by 21% in the same period.
- Jacob Barron, CICP, NACM staff writer
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The latest quarterly study by Experian and Moody's Analytics on small business credit conditions showed the fourth consecutive improvement, making 2013 a clean sweep for those hoping for a rebound. Credit profile recovery, however, is anything but even on both regional and industry levels.
The Experian/Moody's Analytics Small Business Credit Index tracked at 117 for Q4 2013, a 1.2 point improvement from the revised 115.8 from the previous period. Expanding credit balances appeared to have the most influence on the latest index rise. Analysts also cited the federal government's long-awaited completion of important matters, like government funding throughout FY 2014, with reduced brinksmanship. Granted, there is still concern regarding the Affordable Care Act and high unemployment, either of which could cause a setback for small business credit improvement.
The paramount concern raised in the Experian/Moody's study, however, was that fourth quarter delinquencies failed to improve from the third quarter. The share of delinquent dollars rose to 10.1%, up 0.1% from the level where it's been stuck since the second quarter. At least there's some evidence that the severely delinquent are paying debts more quickly.
By industry, agriculture showed the largest gain in delinquency rates between the third and fourth quarters based on price weakness and a looming increase in input prices. Construction and manufacturing also saw delinquency rate increases, while transportation, services and finance all held firm or showed decreases.
Meanwhile, prompt payment habits appear to be occurring in areas most associated with new oil and natural gas production booms and developments in technology. The survey noted that most of these are in the West: "Throughout the recovery, companies in the eastern half of the US have paid later than their western peers, and the past quarter was no different. Credit profiles are especially strong in the Mountain West, whereas the Eastern Seaboard remains a regional laggard." Utah, Wyoming and Arizona showed the best performances. Meanwhile, Florida, Pennsylvania and the District of Columbia's small businesses all notably struggled with paying on time.
- Brian Shappell, CBA, CICP, NACM staff writer
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Federal Reserve Chair Janet Yellen sounded a familiar note in her first appearance this week before the House Financial Services and Senate Banking Committees. In her testimony, Yellen pledged to maintain the Fed's tapering of bond purchases and to continue on the path of accommodative monetary policy that she helped set in her prior position on the Federal Open Market Committee (FOMC).
"I expect a great deal of continuity in the FOMC's approach to monetary policy," Yellen said. "I served on the Committee as we formulated our current policy strategy and I strongly support that strategy, which is designed to fulfill the Federal Reserve's statutory mandate of maximum employment and price stability."
The Fed Chair noted that the FOMC continued to believe that progress was being made toward its objectives and, as such, investors shouldn't expect the Fed to be thrown off its course of tapering back bond purchases except by some sudden noteworthy changes. "If incoming information broadly supports the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings," Yellen said, adding that "a highly accommodative policy" will remain in effect at the Fed even long after bond purchases end. "Purchases are not on a preset course, and the Committee's decisions about their pace will remain contingent on its outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases."
Regarding the FOMC's outlook, Yellen said that real GDP growth was estimated to have risen at an average annual rate of more than 3.5% in the third and fourth quarters of 2013, up from a 1.75% pace in the first half of the year. Inflation has remained low and while unemployment has remained a problem, specifically the high level of long-term unemployed and part-time workers who would prefer full-time positions, the Fed expects the labor market to continue its recovery. "My colleagues on the FOMC and I anticipate that economic activity and employment will expand at a moderate pace this year and next, the unemployment rate will continue to decline toward its longer-run sustainable level, and inflation will move back toward 2% over coming years," she said. "We have been watching closely the recent volatility in global financial markets. Our sense is that at this stage these developments do not pose a substantial risk to the US economic outlook."
- Jacob Barron, CICP, NACM staff writer
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The outlook in Ukraine continued to darken last week as the last of the "Big Three" credit ratings agencies issued the country its third downgrade in two weeks and the Ukraine's central bank took disconcerting measures to prop up its ailing currency.
Fitch Ratings followed the example set in January by Standard & Poor's and Moody's Investors Service on February 7 when it downgraded Ukraine's long-term rating from B- to CCC, signifying that "default is a real possibility." In issuing the downgrade, Fitch actually broke from the European Union credit rating agency regulation, which stipulates that the publication of sovereign reviews must take place according to a pre-published schedule, except in situations "where there is a material change in the creditworthiness of the issuer that we believe makes it inappropriate for us to wait until the next scheduled review date." Ukraine wasn't scheduled for another review until February 28, but "developments in Ukraine warrant such a deviation," the agency said.
Chief among Fitch's concerns is the high level of political risk in the country surrounding the controversial decision of President Viktor Yanukovich to reject an Association Agreement with the EU and accept a $15-billion lending package from Russia instead. Russia has lent Ukraine $3 billon of the total sum, but has put further disbursements on hold pending the foundation of a new government. Fitch noted that Russian support is likely conditional on Yanukovich's political survival, and said that it no longer assumes the loan will be made in full, meaning Ukraine has both lost external market access to financing and entered a potentially dangerous loan deal.
Of greater concern to companies with customers in Ukraine is the National Bank of Ukraine's (NBU's) decision to enact Resolution No. 49, which took effect February 7, placing a number of new restrictions on foreign exchange transactions that could greatly limit their ability to get paid. Specifically, Resolution No. 49 implements a monthly limit of 50,000 hryvnias, or about $5,700, on purchases of foreign currency and imposes a five-day waiting period on corporate purchases of foreign currency to service external debt while banning outright purchases of foreign exchange to make early repayments on external debt.
The NBU intended to use these limits to boost the hryvnia, but they could also negatively affect trade and create a black market for foreign currency, while making it much more difficult for foreign suppliers to get paid. The limitations don't currently prevent businesses from servicing external debt altogether, but Fitch warned that "given the fluid and uncertain state of affairs, there is a risk that controls could be tightened."
- Jacob Barron, CICP, NACM staff writer
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It’s a common practice for general contractors (GCs) in New York to retain a percentage of payments to material suppliers until jobs are fully complete. That situation for credit-granting suppliers looks to have a real chance of changing during this year’s New York State Assembly session, though it could depend on how much opposition GCs decide to mount.
State Assemblyman Edward Braunstein will serve as the primary sponsor of legislation designed to bar GCs from holding money from material suppliers. When the National Association of Credit Management (NACM) asked Braunstein, he said it was a fairness issue. "I had been having conversations with representatives from the materialmen's industry, particularly lumber, and it makes no sense to me that if you deliver a product, especially one with a warranty and you can look at it there onsite, why there would be a need to hold funds in retainage," Braunstein said.
He believes that the proposal, which did not make it to a full assembly floor vote in 2013, has a stronger chance now because of a meeting last year with various committee staffers and leadership who wanted to ensure that there were no unintended consequences before pushing it forward. Braunstein believes solid support now exists for the anti-retainage effort. Granted, the matter must wait until the Assembly has tackled the state budget, which will likely continue through at least March.
Dana Schnipper, president and CEO of JC Ryan EBCO/H&G LLC, said that the current law needs only a minor tweak, as little as one sentence, to set things right for material suppliers. "We're making the case that we are selling complete product, and what you do with them is your issue as the contractor," said Schnipper, who serves on the executive committee of the Northeastern Retail Lumber Association. "Saying material suppliers would be exempt from retention would force entities who hold money as insurance to finish the job to not do so on the materials, but only on the labor. Right now, nothing protects the supplier. It's a drain and holds back our businesses because all the money that is held can’t be reinvested on other projects."
Chris Ring of NACM's Secured Transactions Services agreed that materialmen are the most vulnerable and somewhat "held hostage" because their money is often unavailable for the longest time. That could be upwards of four years if awaiting completion on something like a skyscraper in New York City. He is also far from confident about the prospects of the proposal sailing through the Assembly quite so easily. "I don’t see any reason why general contractors would lay down for this because they benefit so much from retainage laws," Ring said of possible pushback. "It really isn't in their best interest. At the end of the day, they're probably going to want to keep things they way they are."
He added that subcontractors, too, benefit from retainage as it pertains to materialmen, albeit it to a significantly lesser degree.
- Brian Shappell, CBA, CICP, NACM staff writer
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