eNews March 3, 2009

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

News Briefs

  1. Where Are We Now?
  2. Lack of Muni Transparency Leading to Suspect Trades
  3. Creditors' Committees Get Mixed Reviews in NACM's February Survey
  4. Electroindustry Uncharged About Economic Near-Term
  5. Antitrust Issues in Troubling Economic Times
  6. Lieberman Questions PACER Increases, Seeks More Protection
  7. Bank Regulators Begin Forward-looking CAP Assessments
  8. Job Creation Maintains Focus for Manufacturers


Where Are We Now?
Much has been said about the state of the nation's current economy and the question of whether or not we've reached the proverbial "bottom." While it may only provide a cold kind of comfort, the fact that our battered economy may have reached the end of its historical drop means that the rebuilding effort can begin. On the other hand, the fact that the market still has further to go before hitting rock bottom means that there's still work to be done and difficult conditions to be weathered.

The very reason companies want to know if we've reached the bottom is so that they can know when to change course and whether to position themselves and their business for clearer skies and better conditions or reduced sales and continued cost-cuts. That cartoon bounty of wisdom, G.I. Joe, once said, "knowing is half the battle," but sometimes knowing isn't as easy as it sounds.

"What we've seen over the last year or so is dramatic change in the U.S. economy as well as the world economy," said Chris Kuehl, Ph.D., co-founder and managing director of Armada Corporate Intelligence. "Part of what we are trying to do now as a nation and as credit managers and people dealing with money, is simply reacting to those changes, and anticipating what kind of changes will come up in the next few months and what the expectations will be."

"Most of these things we've dealt with for a long time, it's just that they keep evolving. And as we go through these different evolutions, our responses change and our expectations change," he added.

As an expert economist, it's Kuehl's job to know where the market is, how it got there and where it's going. He regularly provides his insightful analysis to companies and credit professionals both domestically and internationally through his daily email intelligence briefs and through presentations like the one he'll deliver at NACM's upcoming Credit Congress this June. "Where Are We Now? An Assessment of the Economy Mid-year" will give attendees a lively and intelligent look at the first months of the Obama presidency and the effect of legislation on the recession. Kuehl will also offer his assessment of the actions taken by the Federal Reserve, judge whether or not other economic predictions were right or wrong and deliver a thorough explanation of what companies should expect in the future.

To learn more about this and other educational opportunities offered at Credit Congress, click here.

Jacob Barron, NACM staff writer


Internet Payment Platform Teleconference

The Internet Payment Platform (IPP) is a free Electronic Invoice Payment Presentment (EIPP) system offered by the U.S. Treasury's Financial Management Service. It centralizes purchase orders, invoices, invoice payment approval and the Treasury's payment reporting for federal agencies and their suppliers. The IPP represents an opportunity for Federal agencies to transform their existing paper-based processes into a streamlined electronic flow.

Through IPP, federal agencies and suppliers can:

  • Deliver electronic purchase orders to suppliers
  • Receive electronic invoices from suppliers
  • View invoice status and invoice disputes
  • Capture the Treasury's payment reporting and offset detail payments
  • Take advantage of IPP email notification options

These services are available at no cost to federal agencies and their suppliers. Join us for this informative talk to learn more and have your questions answered. To register for this GBG teleconference, click here.



Lack of Muni Transparency Leading to Suspect Trades
In light of the credit and housing crisis, there has been a move in Washington toward ensuring greater transparency and protection for market participant, but for nearly the past decade, in the municipal bond market, there has been an unnerving trend that has some parties expressing concern.

Bond issuers in the $2.6 trillion municipal bond market are supposed to make annual filings of financial information or a material event like a downgrade or default, as well as a number of other events. Since municipal bonds are issued by states, the Constitution prevents the federal government from enforcing regulations, meaning the responsibilities for disclosing this information falls onto the shoulders of bond underwriters and dealers. The Securities and Exchange Commission (SEC) and the buffer entity the Municipal Securities Rulemaking Board (MSRB) are supposed to oversee that these disclosures are made, but it's a practice that is apparently failing, leading to a lack of or suspect information.

"As far as I'm concerned, this was 100% avoidable," said Peter Schmitt, CEO, DPC DATA. "I think now, if you're an investor, you've got to hope that something is going to be coming out of this movement in Washington for greater regulatory reform so that problems like this can be addressed."

In the mid-1970s, the government created a limited regulatory scheme for the municipal securities market that included the mandatory registration of securities brokers and dealers. In 1989, because of the slow dissemination of information regarding primary offerings, the SEC adopted new rules concerning the due diligence obligations of underwriters. This was again revised in 1993 and secondary market disclosure concerns were raised.

Over the last year, as the municipal bond market struggled and rating agency failures came to light, the bond insurance industry was torpedoed. "Up until last year, more than 50% of new issues came with bond insurance with automatic AAAs on it," explained Schmitt. "That homogenized the risk for investors until the bond insurance industry essentially melted down. Now, the latest figure I've seen is 17% of new issues are coming with some form of bond insurance, but it's viewed with great skepticism because how can a corporate credit improve a municipal credit? People are finally asking that question after all these decades."

This makes the need for disclosures all the more important. A recent study by DPC DATA uncovered hundreds of trades in bonds in 2008 that were questionable in terms of meeting regulatory standards for investor protection. DPC, one of four Nationally Recognized Municipal Securities Information Repositories (NRMSIR), found 667 dealer-to-customer sales that were executed at par or higher after a default or other stress notice was filed by the issuer or obligor. The majority of these trades occurred during the tumultuous months of September through November when credit markets were in the throes of implosion. Schmitt admitted that he didn't know the exact terms of these deals, but suggested that it was a failure by dealers to ensure suitability or fair pricing in trades.

In half of these sales, there was no way for investors to protect themselves with independent research because no financial statements had been made publicly available in the official disclosure system during the 2007 or 2008 calendar years.

Schmitt doesn't think there is much hope for municipal bond market disclosures on the horizon. On July 1st, the MSRB will become the sole clearinghouse for municipal bond disclosure data—the only NRMSIR. He thinks it is a role the MSRB is incapable of handling.

"They have dropped the ball when it comes to disclosures," said Schmitt. "And if they treat this building block of investor protection that lightly, it doesn't give me any confidence that they should have a broader mandate, that they should regulate other parties in the market. I'm not saying those other parties ought not to be regulated. I'm just saying that I don't think the MSRB is where you want to go with it. Just look at their track record."

He added, "By consolidating this clearinghouse under the MSRB, they have solved the wrong problem. There are so many other more important things going on that they're ignoring, and it's going to be less likely that those problems will see the light of day."

Schmitt admitted the multiple repository system was far from perfect, but it at least ensured there were practically no worries about violating the Tower Amendment.

Transparency has been an issue that has haunted the municipal bond market for some time. A report last year by DPC showed that for bonds issued between 1996 and 2005, across all bond classes, market sectors and issuer geographies, more than 50% of bonds outstanding for nine or more years have one or more years of disclosure delinquency. Of those, 25% were chronically delinquent, missing three or more years of disclosures. The study also found that the riskier the bond, the more likely there was a failure to meet disclosure compliance.

Matthew Carr, NACM staff writer


What to Do When Your Customer Files Chapter 11

The rise in corporate bankruptcies has been a terrifying event for creditors to witness. The troubled economy and timid spending from consumers is sinking enterprises across the country at a seemingly rapid pace. That means more and more credit managers are hoping to avoid the irritation of preference claims and so many other costly bankruptcy hurdles. No credit professional wants to be stuck asking, "What do I do?" when one of their customers files for bankruptcy protection. Mark Berman, Esq., partner, Nixon Peabody LLP, will present the NACM-sponsored teleconference "What to Do When Your Customer Files Chapter 11" on March 4th. Berman will cover enhanced recovery efforts like automatic stays, stopping goods in transit and reclamations. He will also discuss critical vendors, the administrative priority for suppliers of goods, creditors' committees, proofs of claims, executory contracts and doing business with a Chapter 11 debtor.

Members interested in attending the teleconference and enhancing their bankruptcy skill set should register here.



Creditors' Committees Get Mixed Reviews in NACM's February Survey
NACM's most recent monthly survey, asking "Have you ever served on a creditors' committee?," illustrated the broad array of opinions regarding the worth of these committees in a bankruptcy case, with some saying their attendance helped their company get a better claim in the proceedings and others arguing that a credit professional's time is better spent elsewhere. As early estimates were quite low, a somewhat surprising 29.6% of participants said that they had served on a creditors' committee, while the remaining 70.4% said they had not.

One of the most oft-repeated refrains in the survey comments was that, although creditors' committees are often time consuming, they can also be invaluable to a credit professional looking for a more hands-on understanding of bankruptcy. "It was a very enlightening experience and taught me more about the bankruptcy process," said one respondent. "I've served on many through the years," said another. "I have found that they can be very beneficial. They help you understand the financial position of the debtor, which in turn helps to determine how you want to proceed with the debtor and determine how to reserve for the amounts due."

Still, while many considered creditors' committees to be valuable learning tools, as a means to collecting more from a bankrupt debtor, many respondents found the committee experience to be somewhat lacking. "Most times, serving on the committee really does not get you anywhere with regards to assisting in recovering unsecured creditor funds," said one participant. "However, as a form of experience, each intermediate or senior credit person should at least sit on a committee, purely for the experience."

"Based on the returns we have received on large public bankruptcies, it appears that even a well run, involved creditors' committee can provide only marginal utility to unsecured creditors," said another participant. "In my opinion the reward/time ratio precludes involvement."

Respondents ran the gamut between first-time committee members to seasoned pros with many committee co-chairmanships and chairmanships under their belts. "The first and largest creditors' committee I served on involved a very large coal company filing bankruptcy. It was a great learning experience and was very, very time consuming," said one respondent. "We were able to improve the position of unsecured creditors through our negotiations with the secured creditors and with the debtor and their bank. It was just at the time that the preferred vendor concept was being explored legally, so that also came into play for most on the creditors' committee."

"In a sense, we created a 'preferred' class of unsecured creditors using this theory, which saved several additional companies from filing bankruptcy as a result," they added.

NACM's new March survey deals with the stimulus package and is now live on www.nacm.org.

Jacob Barron, NACM staff writer


NACM Monthly Survey for March

NACM's new monthly survey for March is now available! This month's question deals with the recently-passed stimulus package and whether you think it'll financially impact your company's business. Respondents get .1 Roadmap points and are automatically entered into a drawing to win a FREE teleconference registration! Visit www.nacm.org to participate today!



Electroindustry Uncharged About Economic Near-Term
There's plenty of uproar about the U.S. economy contracting a stomach-turning 6.2% during the fourth quarter of 2008, with bad news found across all sector lines. However, the National Electrical Manufacturers Association (NEMA), which is also comprised of electrical and medical imaging equipment manufacturers, has seen business conditions gaining ground in February for the second month in row, though the outlook ahead remains weak.

The association's Electroindustry Business Confidence Index (EBCI) rose to 27.3 points in February, up from a level of 20 in January. The index gauges confidence in the electroindustry in North America, Asia, Europe and Latin America. NEMA said that despite "the recent rebound, the business environment remains bleak." In reality, the February reading was still far below the break even mark of 50 points and signals a continued steep deterioration in electroindustry conditions.

Future expectations outlined in the ECBI have basically remained unchanged, slipping 1.1 points in February to 36.4, continuing a tight range of unease that has held since December. At least for NEMA, the levels are still will above the cycle low of 17.5 seen in October after the Wall Street collapse. As seen across nearly every sector forecast, NEMA's index remains firmly entrenched in contraction territory, with nearly half of respondents expecting business conditions to erode well into the second half of 2009.

Matthew Carr, NACM staff writer


Liens & Bonds: Building the Optimal Credit Department

The construction industry is facing an uphill climb as projections for the residential housing sector remain dismal and non-residential firms are shedding positions at a rapid pace as they watch profit margins vaporize. For credit managers, construction credit is a one-of-a-kind animal. Grantors are often asked to extend lines of credit beyond their customer's company's net worth. Even the terminology is unique to construction credit, with back charges, NTOS, Pay-if-Paid and retainage. Then there are powerful tools like liens and bonds that can make or break a company. As such, construction-oriented credit professionals need to be experts in maximizing the leverage provided by lien and bond claim statutes. NACM will hold a half-day session April 24th in Atlanta, Georgia, where Greg Powelson, president, NACM's Mechanic's Lien and Bond Services (MLBS), will lead credit managers through the basics of collecting job information on through foreclosure, to addressing liens and bonds from a national perspective, as well as when credit managers must take action.

Members interested in attending the event can register here.



Antitrust Issues in Troubling Economic Times
Despite the relatively old body of law governing competition, antitrust issues still beguile credit grantors regularly and violations of those laws can be easily made and painfully costly, especially in a recession. "This topic becomes more and more important everyday especially in today's economy," said Wanda Borges, Esq. of Borges & Associates LLC. In a recent NACM-sponsored teleconference, Borges offered listeners all they needed to know about what they can and cannot do, what can and cannot be discussed, when and how credit terms may be adjusted and what is covered under the various antitrust statutes.

In an economic downturn, many credit-granting companies will turn to their competitors for information on a particular customer's past payment behavior. "Your natural fear is, ‘well, I need credit information, I want credit information, I want to reach out, how can I do that safely?'" said Borges, noting that, despite the sometimes vague regulations, "You can do that many ways, completely safely."

First and foremost, Borges recommended that credit professionals looking to others in their industry for information learn to make a record of their communications, in order to maintain their innocence should things get legally troublesome. "Put everything in some form of writing, either email or faxes," she said. "I would recommend no longer picking up the phone and asking your fellow competitor ‘hey what are you doing with this customer? Are you selling to them?' The next statement will be ‘what are you going to do when they get caught up?'" she added, noting that this type of forward-looking statement is exactly the sort of thing that could get credit professionals and their companies in trouble.

"Having that kind of conversation can lead you right to a Sherman Act violation," said Borges.

Still, she urged attendees to put their trust in the exchange of credit information for the sake of their business. "The exchange of valid, good credit information is not only permissible, but is more and more on a daily basis essential to you," said Borges. "It has become commonplace for me to hear stories, but I just heartily suggest having those conversations in writing and not having them on the phone."

Borges used three true scenarios to educate listeners about what was permissible and what was not and also discussed the various antitrust statutes and what actions constitute illegal business practices. For more information on NACM's teleconference series, or to register, click here.

Jacob Barron, NACM staff writer



Protect Your Assets, Get the Best Working for You

Unemployment claims on the rise, but credit and finance professionals are more important for your company’s bottom line than ever. Protect your assets, keep your credit positions and fill them with high-quality talent.

Discover who’s out there with NACM’s Careers in Commercial, Credit, Collections & Finance (C4F), the online resource for employment connections in the business credit industry. No more endless piles of resumes from unqualified applicants lacking relevant experience. No more countless returns at other job board sites to sift through.

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C4F: Employment Connections for the Business Credit Community



Lieberman Questions PACER Increases, Seeks More Protection
In 2002, Senator Joe Lieberman (I-CT) authored the E-Government Act, which was designed to promote and improve electronic government services. The bill's other primary goals were to reduce costs for businesses trying to obtain court documents, to increase transparency and at the same time protect personal information. Last week, Lieberman, chairman of the Senate Committee on Homeland Security and Governmental Affairs, sent a letter to the Committee on Rules of Practice and Procedure requesting a more concerted effort by the Federal Court system to comply with the E-Government Act.

Any credit manager that has attended an NACM teleconference or other educational event is well aware that the Public Access to Court Electronic Records (PACER) system is highly praised as a treasure trove of information. Currently, PACER charges $.08 per page for access. The E-Government Act changed provisions of the Judicial Appropriation Act of 2002 allowing courts to charge fees to the extent necessary. The ultimate goal, however, was to move from a simple fee structure to enabling the information to be accessed freely to the greatest extent possible.

"Seven years after the passage of the E-Government Act, it appears that little has been done to make these records freely available—with PACER charging a higher rate than 2002," wrote Lieberman. "Furthermore, the funds generated by these fees are still well higher than the cost of dissemination, as the Judiciary Information Technology Fund had a surplus of approximately $150 million in FY2006."

Lieberman wants Judge Lee Rosenthal, chairman, Committee on Rules of Practice and Procedure to explain how PACER fees are determined and what is being done to ensure access is granted as cheaply and freely as possible. He had additional concerns that the information contained in publicly available court filings was not being protected enough.

"A recent investigation by Carl Malamud of the non-profit Public Resource.org found numerous examples of personal data not being redacted in these records," said Lieberman. "Given the sensitivity of the information and the potential for identity theft or worse, I would like the court to review the steps they take to ensure this information is protected," and report to his committee on the matter.

Matthew Carr, NACM staff writer


Business Credit Tackles Credit Scoring and Analysis

Check out the recently released March issue of Business Credit magazine for articles about how to make the most of credit scoring. This month's domestic feature illustrates the importance of consumer credit scoring in creating a complete customer profile, while the international feature offers a lesson to risk managers worldwide about credit ratings and scoring models. Also, this month's issue offers NACM's most thorough explanation of the Federal Trade Commission's (FTC) new Red Flags rules, including a sample policy that credit professionals can use to construct their company's own Red Flags program. All this, plus other contributions from some of the industry's sharpest minds, make the March issue a must-read!

Click here to get your subscription started today.



Bank Regulators Begin Forward-looking CAP Assessments
A consortium of federal banking regulators, made up of the Board of Governors of the Federal Reserve System (FRB), the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTC), recently announced that forward-looking assessments of the nation's banking organizations had begun as part of the Obama administration's Capital Assistance Program (CAP). The U.S. Treasury also released the terms and conditions of the CAP which will dictate how capital will be provided to banks, how banks can apply and what restrictions apply to those institutions awarded the preferred securities that the program will distribute.

The forward-looking assessments that will be conducted by the nation's banking regulators will be aimed at evaluating the capital needs of major U.S. banking institutions if they were to face an even more challenging economic environment than the one they face today. If a bank is found to be in need of a bigger capital buffer, they'll first have the opportunity to seek out financial assistance from the private sector and then be allowed access to government capital through the CAP. Eligible banking institutions with assets currently in excess of $100 billion, on a consolidated basis, will be required to undergo the assessments, and these entities may access CAP financing immediately if the banking regulators find that additional capital is needed for the bank to survive a lengthy recession. Banking institutions with consolidated assets below $100 billion are also eligible for the CAP, but under separate conditions available at the Treasury's new accountability website, www.financialstability.gov.

The aim of the CAP is to ensure that banks can remain in a position to aid in the country's economic recovery by increasing lending even if the current recession lasts longer than expected. In fact, banks that apply for CAP funds must submit a plan for how they intend to use this capital to preserve and strengthen their lending capacity. The Treasury will make these plans public when the bank receives the capital and the bank will be required to submit monthly lending reports broken down by category.

"By reassuring investors, creditors and counterparties of banking institutions—as well as the institutions themselves—that banks have capital in a sufficient amount and quality to withstand even a considerably weaker-than-expected economic environment, the CAP instrument should improve confidence and increase the willingness of banking institutions to lend," said the Treasury.

The assessments are expected to be completed before the end of April 2009.

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.



Job Creation Maintains Focus for Manufacturers
The single largest driver of economic growth is the manufacturing sector, pumping more than $1.6 trillion into the economy each year and employing more than 13 million workers. As the nation had its legs kicked out from under it by recession and the rest of the world tumbled after, the manufacturing sector kept the United States in the black throughout 2008, expanding exports to record levels. And though trade activity remains a core part of economic strength, there is growing trepidation about immediate challenges the industry faces.

"The vitality of manufacturing is not a given," said the National Association of Manufacturers (NAM) President and CEO John Engler. "It requires hard work and smart policies to keep U.S. manufacturing competitive in the global marketplace. The basic challenge is to retain and create jobs."

With world gross domestic product expected to decline sharply and the dollar regaining strength, global trade is expected to hit the lowest levels seen in decades. The growing concern from manufacturers is the shift from buyers to more affordable markets, which could then slow U.S. economic recovery efforts.

"Global competition will only get more vigorous, so manufacturers in America must always look ahead," said Engler. "We need to lay the groundwork now so we will be in a strengthened position to expand when the economy begins to grow again."

At the top of the legislative agenda for NAM is tax cuts. The association points out that following the tax cuts in 2003, the U.S. economy averaged 3.6% growth, double the pace of the three prior years and faster than the average pace seen during the 1970s, ‘80s or ‘90s. So, NAM is planning to push for a corporate tax rate of 25% or less, as well as individual tax cuts, R&D tax credits and investment tax cuts. The association also wants the U.S. to amend the practice of taxing U.S. companies on income earned in foreign territories, creating double taxation on foreign earnings.

Despite being a strong supporter of the stimulus legislation, NAM expressed strong reaction to the recent release of President Barack Obama's budget.

"At a time when our country is mired in a severe recession, suffering from rising job losses and a financial system in turmoil, the high taxes and anti-investment provisions in the Administration's budget plan will stifle our economy's ability to recover, grow and create jobs," said Engler. He admitted NAM supported the temporary stimulus legislation because the belief that the targeted government investment and tax relief would jump start the economy, "but it makes no sense to jump start one minute, slam on the brakes the next and then head full-speed into reverse."

Engler said that's what the current budget proposal means for jobs and growth, while resulting in impaired recovery and devastating 401k accounts, pensions and other retirement funds.

Matthew Carr, NACM staff writer

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