July 10, 2014
Gowex, a provider of Internet hotspots internationally, filed for bankruptcy this week in the wake of an admission by its chairman that financials for the Spanish technology company had been falsified for roughly four years. As was noted during several educational sessions at NACM's 118th Credit Congress this year, nothing is typically more helpful to a credit manager than a company's financials. But examples of inaccurate financials hitting the news have been plentiful in various international markets during recent years, as it has in the US, exemplified by Enronâ€™s fraudulent accounting-based collapse.
Credit Congress speakers, including Ed Bell, PhD, ICCE of W.W. Grainger, Inc., did repeatedly remind credit professionals that, while very important, financials are not the whole story. There are plenty of ways to improve the credit-granting decision process without them, including using information from outside credit reporting agencies, following current events and maintaining more frequent contact with the customer. He also spoke highly of getting information via industry trade groups. "You can work with other companies in your area and exchange information," he said. "It's a good way to find out about customers in your local area or peer group. I can bounce questions off them: 'What was your experience with this customer?' I would always recommend using a peer group."
The Gowex scandal started when a group of high-level investors, operating as Gotham City Research LLC, outed the company, challenging its financials and abilities to generate the profits it claimed. Gotham City, while controversial, read between the lines. While outside the scope of many, credit managers could be well-served by doing some of the same. The trouble is, however, many donâ€™t even read beyond the first few lines of financials.
An important lesson one would think obvious, is to actually read and analyze them, said Toni Drake, CCE, president of The Connection Center and Lynnette Warman, Esq., partner at Calhane Meadows PLLC in another Credit Congress session. "What good is getting financials if you're going to throw them into a drawer and not read them?" Warman said.
- Brian Shappell, CBA, CICP, NACM staff writer
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The US Department of Justice (DOJ) accused American Express (AmEx) of stifling competition in court this week. Specifically the DOJ, in a case brought by the US and 17 other states, argued that the company's anti-steering rules, which stipulate that merchants accepting AmEx credit cards cannot encourage buyers to pay with less expensive forms of payment, blatantly violate US antitrust laws. The case could have a wide-reaching impact on merchants hoping for greater competition and consequently lower card processing costs.
"AmEx has controlled the price and has excluded competition," Craig Conrath, a DOJ lawyer, argued in court on July 7. "AmEx does not have to worry that a competitor is going to come along with a lower price."
Card-network giants Visa and MasterCard were originally also named in the litigation, but consented to a court order that ended similar anticompetitive policies. AmEx, however, refused to sign on to a similar settlement and is now fighting for its right to prevent merchants from directing customers toward payment methods that have lower processing costs.
"It is clear why AmEx imposes its anti-steering rules. AmEx charges merchants the highest prices, on average, of any card network, so merchants have every incentive to encourage their customers to pay in other ways," said the DOJ in its pretrial memorandum, which previewed the government's argument and AmEx's response, both of which will be heard over the next several weeks in a nonjury trial in Brooklyn, NY. "Faced with the plain language and unmistakable impact of its anti-steering rules, AmEx will defend its conduct with an unabashed attack on the notion that price competition is a good thing. Confirming the powerful impact of its rules, AmEx claims that, if it were required to free merchants from those restraints, so many merchants would encourage their customers to use less expensive payment forms that AmExâ€™s entire business model would be in jeopardy."
"That argument may be litigation hyperbole, but in any case, it is legally irrelevant," the DOJ said. "AmEx's supposed fear[s] that [its] product will not prove sufficiently attractiveâ€¦to compete in a free market cannot justify rules that are 'inconsistent with the basic policy of the Sherman Act.'"
The lawsuit aims to fix what the DOJ referred to as the "American Express problem" that arose in the wake of last year's settlement between merchants and Visa and MasterCard, which allowed merchants to push buyers toward cards with lower processing costs and surcharge buyers for the cost of the interchange, or swipe, fees instituted by the processing network. By maintaining its anti-steering rules, which require accepting merchants to not steer business toward other lower-priced card networks or even to other forms of payment, AmEx effectively makes it impossible for any of its accepting merchants to garner any benefit from the settlement.
- Jacob Barron, CICP, NACM staff writer
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The struggles of gaming in the Eastern United States have continued into the summer as another bankruptcy was announced for one of Atlantic City's newest casinos while one of its mainstays announced plans to somewhat surprisingly shutter operations. Issues for the casino industry don't appear to be just on the East Coast either, as a wary eye is falling on a Las Vegas-based giant with big plans brewing despite large debts.
In early 2013, Industries to Watch reported a glut of weaknesses in US gaming operations, especially in the northern half of the Eastern Seaboard. Sources within the industry noted that at least three to five casinos will need to close by 2015, primarily in Atlantic City, NJ, for the existing properties to have a realistic chance of success. That appears on the way to becoming a reality as Revel, a glitzy property on the northern end of Atlantic City's famed Boardwalk, open for less than two years, filed for bankruptcy protection for the second time in June and is reportedly scrambling to find a buyer. It comes just a couple months after the closure of Atlantic Club, a former Hilton-owned gaming operation, located less than a mile away.
Revel's neighbor, Showboat, which will cease operations at the end of August, showed far fewer noticeable problems with its business model. But an oversaturation of players in the market, both in the city and throughout other neighboring states, and the return of Internet gaming in some areas turned the focus of its parent company, Caesars Entertainment Corp., to three other properties it owns in the New Jersey beach destination.
Caesars has been a bit of a wildcard of late. It is well known that Caesars is carrying a high debt load, so much so that Fitch Ratings downgraded its issuer default rating this spring amid a heightened possibility of a necessary restructuring of debt within two years. Caesars, however, seems to still be confident as it will open its Horseshoe Casino property in downtown Baltimore by summer's end. It would mark the third casino opening in the state of Maryland this decade, with at least one more on tap within the next 12 months. Caesars is also pursing new projects in New York state, within an hour of Manhattan, and in South Korea.
With so much competition in newly legalized gaming destinations and the Internet, there is as much potential for market saturation as ever within the US gaming industry. Large American appetite for gaming or not, some operators likely will face the reality that there is not enough demand for everyone to thrive or even survive without solvency issues. The spreads for various legal casino operations are going to be different from place to place and need to be monitored by credit departments doing direct and downstream business with them.
- Brian Shappell, CBA, CICP, NACM staff writer
Do You Know the Benefits of an NACM Industry Credit Group?
How about the need for reliable and expert industry information? NACM Industry Credit Groups are one of the best sources available to the credit professional to help form sound judgments on their customers by providing open communication lines for the exchange of credit information. How about networking? You'll meet and exchange ideas and information with other credit professionals, regardless of industry or trade. Discover the power and possibilities with the cumulative experience and expertise of many!
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The convergence of US generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS) at one point seemed almost inevitable. Officials were enthusiastic about the switch to a global reporting standard, one that would make financial statements much more comparable across borders, facilitate easier transactions and benefit businesses and investors all over the globe. The timeline for convergence was generous, and the effort was always more geared toward getting IFRS to take hold in the US, rather than a true blending of the two standards, but nonetheless the agencies charged with making this transition happen seemed committed and the ultimate replacement of GAAP appeared to be a foregone conclusion.
This process has gone quiet in recent years, however, and according to Fitch Ratings, the unfinished nature of some notable convergence projects suggests that the full US adoption of IFRS is becoming less and less likely as time wears on and standard-setting officials move on to other efforts.
"Full US adoption of IFRS seems unlikely to happen anytime soon," Fitch Ratings said in a recent report. "It is now several years since the Financial Accounting Standards Board (FASB) and their international counterpart, the International Accounting Standards Board (IASB), began moving away from efforts to converge their two sets of accounting standards. By early 2014, it had become clear that the continued work of the two boards could not produce a converged standard for two of the four projects, financial instruments and insurance."
Apathy or distraction on the part of some US regulators seems to primarily be what's behind the noted slowdown in convergence progress. "Considering domestic use of IFRS is a priority for the Securities and Exchange Commission (SEC)," Fitch said. "Unfortunately the agency has many priorities right now, and high on the list are likely to be rule-making responsibilities associated with the implementation of Dodd-Frank and the JOBS (Jumpstart Our Business Startups) act."
"So, in 2014, it is still a question of wait and see, whether, and to what extent the US makes a further move toward IFRS," they added.
- Jacob Barron, CICP, NACM staff writer
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Fears that growth prospects were on shaky ground early this year seem to have eased, as strong output and new orders pushed global economic conditions forward in the June edition of the Global Manufacturing and Services Purchasing Managers Index (PMI), produced by JPMorgan and Markit Economics.
The Global All-Industry Output Index rose to 55.4 from May's 54.2. Within the numbers, indices tracking the output, new orders, output charges and employment categories all saw improvement, according to Markit data. Growth was particularly strong in the United States and the United Kingdom, and a slight slowdown in the recent European rebound was more than offset by desired signs of stabilization in Asia's biggest economies.
"Global economic growth hit rates last seen in 2011, as strong expansions of manufacturers and service providers alike provided a positive end to the second quarter," said David Hensley, director of global economics coordination at JPMorgan. He added that the previously mentioned categorical gains foreshadow potential for "above trend growth of global GDP in the second half of the year."
In the US, the increase in output rival the highest level recorded since Markit began tracking statistics for the nation in late 2009. With 50 being the line between improvement and deterioration, the June US PMI for manufacturing surged to a whopping 57.3. Moreover, new orders are tracking at much sharper levels than in May even as export order growth was at one of its lowest points this year. The only concern, as voiced by Markit Chief Economist Chris Williamson, was that expected tighter Federal Reserve policy on interest rates could eventually dampen domestic demand, which will be a problem if that dovetails with lower export performance. Williamson seemed less concerned with the Markit US Services Business Activity Index, which jumped from 58.1 to a 61.0 finish in June. Confidence is riding high within services, and accelerated growth is expected through the third quarter in the US.
Growth remained pretty solid in the Markit Eurozone Composite PMI, though it did decline from Mayâ€™s 53.5 to 52.8 in June. The region's power economies, Germany and France, failed to expand with the former logging its lowest output growth for 2014. Still, business confidence remains high, and new orders are expected to continue to be strong going forward. In addition, Italyâ€™s growth of 54.2 marked its best performance in 38 months. Another bright spot was Ireland holding onto its gains while Spain lost only a little of its recent momentum.
Another partner of Markit, the now monthly (former quarterly) HSBC Emerging Market Index eased some fears about those nations. That index rose to 52.3 from 50.6 on a growth acceleration in China, India and Mexico as well as stabilization in Russia. Granted, Russia also reported its third-weakest level of business expectations in 27 months of being tracked by HSBC and Markit, so volatility is expected to be the norm there, moving forward. Brazil's composite index also tracked positive, though mostly because of the services sector. Turkey, however, continues to lose its once seemingly unshakable momentum. Smaller, more recent Asian players in global economics also appear to be struggling, statistics indicate.
- Brian Shappell, CBA, CICP, NACM staff writer
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Total commercial bankruptcy filings during the first six months of 2014 dropped by 22% compared to the same period last year, according to the latest figures from the American Bankruptcy Institute (ABI). So far this year, there have been 18,492 commercial cases. By the same point in 2013, there had been 23,569.
Commercial Chapter 11 filings also fell during the first half of the year as the 3,009 filings represented a 13% decrease from the 3,454 commercial Chapter 11s during the first six months of 2013. Overall, total filings in 2014 are 12% lower than they were at the end of June 2013. "The steady decline in bankruptcy filings reflects the continued deleveraging of consumers and businesses in a sustained low-interest-rate environment," said ABI Executive Director Samuel Gerdano. "We expect the decline to continue through the end of 2014."
June total commercial filings were 2,813, representing a 19% decrease from the 3,486 filings during the same period in 2013. Chapter 11 filings in June only registered a 3% decrease (498 to 481) from their June 2013 levels.
These declines have been reflected lately in NACM's Credit Managers' Index (CMI), which has shown improvement in the "filings for bankruptcies" factor, meaning fewer cases. Other negative trends, however, could suggest an increase in bankruptcies in the months ahead. "It will be interesting to see if this reading gets worse in future months as these other categories are now trending badly," said NACM Economist Chris Kuehl, PhD, regarding the possibility that bankruptcies might rise after the June CMI's deteriorations in rejections of credit applications, accounts placed for collection, dollar amount beyond terms and dollar amount of customer deductions.
On a per capita basis, the bankruptcy filing rate for the first six months of 2014 decreased slightly to 3.09 (total filings per 1,000 per population) from the 3.13 rate for the first five months of the year. States with the highest per capita filing rates were Tennessee (6.25), Alabama (5.23), Georgia (5.23), Utah (4.94) and Illinois (4.93).
- Jacob Barron, CICP, NACM staff writer
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