eNews April 3, 2014

April 3, 2014


News Briefs

  1. Credit Managers' Index for March Stalls at 55.5
  2. Wal-Mart Sues Visa over Interchange Fees
  3. Electronic Balloting Used for First Time in Chapter 11 Case
  4. Fed Objects to Capital Plans of Five Bank Holding Companies
  5. Global PMI Numbers Hit the Brakes in March


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Credit Managers' Index for March Stalls at 55.5

The Credit Managers' Index (CMI) from the National Association of Credit Management (NACM) saw little change in the readings for March as it slipped from 55.6 to 55.5. The stall at February and December levels leaves January's spike as the anomaly in recent months. The index's readings, which had fluctuated since October, provided cautious expectations of consistent future growth. It was hoped that the February reading was the outlier, rather than a grim thesis for the rest of 2014, but a holding pattern due in part to the effects of a harsh winter is preferred to a decline, leaving room for some optimism about the economy in months to come.

Most of the factors comprising the March CMI stayed the same from the previous month, with a few notable exceptions. The sub-index of favorable factors fell slightly from 59.4 to 59. Within this index, sales moved from 59.4 to 59.1, staying on the low side of the last year. In the previous 12 months, the sales reading was above 60 for eight months, but fell into the high 50s for the last two. New credit applications slid from 58.1 to 57.3. Dollar collections dipped from 58.8 to 56.4, posting the most dramatic change in the favorable factors. The only positive shift was in amount of credit extended from 61.4 to 63.1. "The rise in amount of credit extended is better news than it might seem as it suggests some anticipation for better days ahead," said NACM Economist Chris Kuehl, PhD. "That credit was being extended despite the drop in applications for credit is a good sign in general."

The unfavorable factor index behaved similarly, with an almost imperceptible rise from 53.1 to 53.2. There is no evidence of severe financial turmoil showing up thus far. Rejections of credit applications moved from 52.3 to 52.4, trending in a positive direction, which is a good thing when coupled with the data on amount of credit extended. Filings for bankruptcies moved by the same amount, but in the opposite direction, from 58.5 to 58.4. The rest of the factors posted greater changes. Accounts placed for collection declined again, from 54.6 to 54.1, as did disputes, which fell the most from 51.9 to 50.9. Dollar amount beyond terms marked one of the few positive trends, improving from 51.1 to 52.4, but was bested by the increase in dollar amount of customer deductions from 50.4 to 51.2.

"At least the roller coaster seems to have ended for the moment," Kuehl said. "What accounts for this month of almost no movement? There have been many theories put forward thus far and one cited as the reason for the stall in the overall economy is the impact of an unusually long and bitter winter." The CMI isn't far from readings registered in other segments of the economy. The latest durable goods numbers, industrial production numbers and other measures have been flat as well. Ample evidence suggests that weather caused a great deal of disruption in almost every category. The transportation system was paralyzed several times, affecting everything from manufacturing to retail. The most recent Federal Reserve Beige Book readings reported that weather had caused a slowdown in the economic growth in nine of the 12 districts. Some GDP numbers have been anemic, but about what was expected.

"Nothing seems to be pointing to a steep or extended decline, but it is not very encouraging for the CMI to flatten out in a fairly unimpressive position," Kuehl said. "There is nothing to set off alarm bells, which was not the case in February when there was a significant decline from the readings the month before. The sense for March is that almost everything is on hold and waiting for the return of predictable weather. The readings indicate a business community that is still somewhat encouraged about what might be happening in the economy later in the year, but there is a bias toward caution for the moment."

For a full breakdown of the manufacturing and service sector data and graphics, view the complete March 2014 report here. CMI archives may also be viewed on NACM’s website here.

Source: NACM

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Wal-Mart Sues Visa over Interchange Fees

Wal-Mart, the world's largest retailer, filed a lawsuit last week against Visa, Inc., the world's largest card network, seeking damages for alleged antitrust violations in the form of inflated interchange fees. Wal-Mart estimates that Visa's price fixing cost it at least $5 billion, and since the antitrust case is being filed in federal court, the Clayton Antitrust Act permits Wal-Mart to seek three times that amount in damages, meaning a successful suit could result in a $15 billion penalty for Visa.

The case is the latest development in the fight between merchants and card networks over interchange, or "swipe," fees. After US District Judge John Gleeson approved a controversial settlement last year, several large retailers opted out of the deal in order to pursue their own lawsuits. While the agreement ended an eight-year antitrust case against Visa, MasterCard and several financial institutions and granted merchants a $5.7 billion cash settlement and the right to surcharge, it also barred merchants from ever suing the card networks again for similar activity. Having opted out, Wal-Mart is now seeking what it believes is due.

Visa previously sued Wal-Mart in June in an attempt to bind them to the terms of the original settlement, after Wal-Mart "made plain" that it would file this most recent complaint. Visa hoped to end what it called "the continuation of endless, wasteful litigation between the parties," but has so far been unsuccessful in its quest for "finality in its dispute with Wal-Mart." Other groups of retailers have already filed their antitrust cases, and the National Retail Federation (NRF), the world's largest retail trade association, has also appealed Gleeson's approval of the agreement.

In its complaint, Wal-Mart said that "Visa's monopoly power has enabled it to dictate price and inhibit competition." Specifically the retail giant objected to Visa's requirement that companies accepting any Visa card product accept every Visa card product, and alleged that Visa not only conspired to fix interchange fees, but also worked to enact rules that prevented Wal-Mart from protecting itself from them.

The case is named Wal-Mart Stores Inc. v. Visa USA Inc., and was filed in Wal-Mart's home state of Arkansas.

- Jacob Barron, CICP, NACM staff writer

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Electronic Balloting Used for First Time in Chapter 11 Case

Processes improved by electronic technology are already an increasing part of business credit in areas like payments and tradeline data sharing, and now it seems the court system is warming to more progressive, technology-based approaches. In theory, these approaches could reduce the cost of Chapter 11 proceedings if widely adopted.

The U.S. Bankruptcy Court for the District of Delaware, for the first time, has accepted electronic balloting procedures in a Chapter 11 case, according to UpShot Services LLC and law firm Cole, Schotz, Meisel, Forman & Leonard PA. The purpose of electronic balloting procedures is to reduce the time and cost of transferring official and, often, signed documents currently required by more traditional methods, such as paper in the mail stream.

Bruce Nathan, Esq., partner at Lowenstein Sandler LLP, said this case, involving Pitt Penn Holding Company Inc., is the first he's heard of using electronic balloting procedures in a Chapter 11, but that it’s not a novel concept considering several courts, including the prominent Bankruptcy Court in Delaware, already accept electronic transfers on some filings including proofs of claim. "I love paper, but this electronic thing is the wave of the future. Actually, it's already happening," said Nathan. "You will see more and more people filing this way. Will paper be eliminated all together? I’m not going to predict that, but we can see where it’s going, and there will be more of this technology trend continuing."

As for whether increased electronic procedures in Chapter 11 will save money for all parties involved in Chapter 11 proceedings, when case information is going right into a system and eliminates some middle men (re: the postal service) or even materials (re: paper, envelopes), it stands to reason that there is certainly potential savings. And, afterall, every dollar counts in a bankruptcy restructuring.

- Brian Shappell, CBA, CICP, NACM staff writer

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Fed Objects to Capital Plans of Five Bank Holding Companies

The Federal Reserve conducted its fourth-ever Comprehensive Capital Analysis and Review (CCAR) program at the end of March. The review includes both qualitative factors, such as whether a holding company's capital planning process is strong enough, and quantitative factors, such as whether or not the company maintains enough capital in reserve to withstand hypothetical periods of economic and financial market stress.

This year's review found the Fed approving the capital plans of 25 bank holding companies, but objecting to the remaining five, put forth by some of the banking industry's biggest names. Citigroup Inc., HSBC North American Holdings Inc., RBS Citizens Financial Group, Inc. and Santander Holdings USA were all recipients of Fed objections on the basis of qualitative weaknesses, while Zions Bancorporation received an objection because it did not meet a minimum post-stress tier-1 capital requirement.

The most notable of these objections belongs to Citigroup, which is held to "significantly heightened supervisory expectations" because it counts itself among the nation's largest and most complex bank holding companies, according to the Fed. "While Citigroup has made considerable progress in improving its general risk management and control practices over the past several years, its 2014 capital plan reflected a number of deficiencies in its capital planning practices, including in some areas that had been previously identified by supervisors as requiring attention, but for which there was not sufficient improvement," the Fed said in its results. "Practices with significant deficiencies included Citigroup's ability to project revenue and losses under a stressful scenario for material parts of the firm's global operations and its ability to develop scenarios for its internal stress testing that adequately reflect and stress its full range of business activities and exposures."

Taken in isolation, and individually, according to the Fed, each deficiency would not warrant an objection, but when taken together, they raise serious concerns regarding Citigroup's ability to properly plan for and weather a crisis. For that reason, Citigroup and its underperforming cohorts will have to resubmit plans, but until then, none of them can make capital distributions without prior written approval from the Fed.

On the whole, however, bank holding companies in the US continue to increase their capital kept in reserve since stress tests began in 2009. "The aggregate tier 1 common equity ratio, which compares high-quality capital to risk-weighted assets, of the 30 bank holding companies in the 2014 CCAR has more than doubled from 5.5% in the first quarter of 2009 to 11.6% in the fourth quarter of 2013, reflecting an increase in tier 1 common equity of more than $511 billion to $971 billion during the same period," the Fed said in its release, noting that this trend is expected to continue.

- Jacob Barron, CICP, NACM staff writer

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Global PMI Numbers Hit the Brakes in March

After the Global Manufacturing Purchasing Managers' Index (PMI) surged in February to levels not seen in either of the last two calendar years, its March performance hit a wall with declines in many important categories including output and new orders.

The Global PMI, published by Markit in accordance with JPMorgan, fell to 52.4 in March, down from the revised February figure of 53.2. Though the February numbers were bolstered in part by a strong performance out of the United States that continued for the most part in March, it wasn’t enough to offset slower rates of output in expansion in formerly hot nations like Taiwan, India and, most notably, China. The latter showed contraction for the second straight month and at levels not seen since a temporary slowdown in November 2011, Markit analysts noted.

The study noted the US continues to enjoy "robust improvements" in business conditions and employment. Though down from February, the latest reading of 55.5 is still the second best performance in the last 15 months by a sound margin. And, with underlying demand at a strong level, it's only expected to improve from here in 2014, Markit and JP Morgan hinted. Across the Atlantic, the Markit Eurozone Manufacturing PMI held stable at 53. However, it was a bit more of a mixed bag with multi-year highs in France, Spain and Ireland but a loss of momentum in Germany, the Netherlands and Greece, the only of these nations to have slipped back into contraction territory.

"Although growth is cooling from [some of] the highs reached at the end of last year, the picture remains one of continued expansion, suggesting manufacturing will remain a contributor to both global economic growth and job creation," said David Hensley, director of global economics coordination at JPMorgan.

Country Manufacturing PMI Jan. 2014 Feb. 2014 Notes
 Australia  48.6  47.9 Orders up, but not enough to carry other areas
 Brazil  50.4  50.6 Marginal, but seventh straight rise in production
 Canada  52.9  53.3 Supply disruptions could be problematic by April
 China  48.5  48.0 Rate of new order contraction accelerating
 Czech Republic  56.5  55.5 Growth slows, still historically high
 France  49.7  52.1 New orders fuel best reading since June 2011
 Germany  54.8  53.7 New orders at worst since October
 Greece  51.3  49.7 Orders, output both slow
 Indonesia  50.5  50.1 Conditions broadly unchanged
 India  52.5  51.3 Orders soften after Feb.'s one-year high
 Ireland  52.9  55.5 Fastest output increase in five years
 Italy  52.3  52.4 Best quarterly performance since 2011Q2
 Japan  55.5  53.9 Though slower, still 13th straight output expansion
 Mexico  52.0  51.7 Subdued client demand more apparent
 Netherlands  55.2  53.7 All five key components down from strong Feb.
 Poland  55.9  54.0 Slower export demand hits order levels
 Russia  48.5  48.3 Business climate deteriorating, orders fall hard
 Spain  52.5  52.8 Output, new order improvements quickening
 South Korea  49.8  50.4 Output levels rebound from Feb.
 Taiwan  54.7  52.7 Output, orders expanding, but at slower pace
 Turkey  53.4  51.7 Inflation pressures a fast-rising concern
 United Kingdom  56.2  55.3 Input costs, inflation levels plummet
 Vietnam  51.0  51.3 Export orders rebounded


- Brian Shappell, CBA, CICP, NACM staff writer

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