eNews September 8, 2009

September 8, 2009

News Briefs

  1. Latest Indicators Show Recovery Weaker Than Expected
  2. Weathering the Storm, Outside and Inside of Bankruptcy
  3. Consumer Bankruptcies Still High, Though Have Eased Down From July
  4. North Carolina Court Says Service of Lien Notice Violates Bankruptcy Automatic Stay
  5. The Future of Doha Looms Over WTO Meeting
  6. Survey Shows International Trade Finance Improving, But Far From Healthy
  7. Credit Managers' Index (CMI) Progress Slows: Amount of Credit Extended and Other Key Indicators Lose Ground, Reflecting a Hampered Recovery

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Latest Indicators Show Recovery Weaker Than Expected

Last week's economic indicators have let some of the air out of the optimism that has been building about the nation's financial recovery. Even NACM's Credit Managers' Index (CMI) showed declines in key areas after six straight months of gains, indicating that the rebound is weaker than once thought. In all, it gives more credence to the cautionary tale the Congressional Budget Office (CBO) has painted that the U.S. recovery will be slow and tentative.

There was good news via the latest Institute of Supply Management (ISM) Report on Business that showed in August, economic activity in the manufacturing sector expanded for the first time in 18 months. This bright nugget of information was partnered with ISM's survey in which executives felt the overall economy grew for the fourth consecutive month.

"The year-and-a-half decline in manufacturing output has come to an end as 11 of 18 manufacturing industries are reporting growth when comparing August to July," stated Norbert Ore, CPSM, CPM, chair, ISM Manufacturing Business Survey Committee. "While this is certainly a positive occurrence, we have to keep in mind that it is the beginning of a new cycle and that all industries are not yet participating in growth."

Industries that saw contraction in August were primary metals, plastic and rubber products, furniture, wood products, food, beverage and tobacco products, and machinery.

The ISM's PMI rose 4% to 52.9%, which is its highest point since June 2007. The increase was fueled by new orders, according to ISM's New Order Index, which hit its highest level since December 2004. "The growth appears to be sustainable in the short-term as inventories have been reduced for 40 consecutive months and supply chains will have to restock to meet this new demand," said Ore.

NACM's CMI was expected to top the 50 level—the sign of expansion—but stopped short at 48.1. NACM Economist Chris Kuehl, Ph.D. was reassured that this didn't mean recovery hadn't stalled, but that, "the credit system has not healed and it may be some time before there is a sense that the biggest issues are behind the economy."

The U.S. Census Bureau and Department of Commerce reported a mixed bag of results for the week. The Census Bureau released that new orders for manufactured goods increased $4.6 billion in July, but unfilled orders were down for the tenth consecutive month, the longest streak of declines in the history of the agency's publishing of the report since 1992.

The agency reported that for new orders of manufactured durable goods, there was saw an increase of $8.2 billion in July to $169 billion, which was an increase of more than 5% and a strong rebound from the 1% decline experienced in June. Shipments of these goods also increased for the second straight month to $173.3 billion. Unfortunately, the same positives weren't true for new orders and shipments for manufactured nondurable goods, which decreased in July, led by petroleum and coal products, which were down more than 7%, or $2.7 billion.

The building sector further let air out of the balloon as the Department of Commerce reported that the seasonally adjusted annual rate of construction spending in July edged lower by 0.2% to $958 billion. This was also down considerably from the $1.07 trillion in construction spending seen in July 2008. For the first seven months of the year, construction spending amounted to $543.8 billion, which was 11.4% below the $613.5 billion seen during the same period last year. Private nonresidential spending fell for the fifth straight month and public nonresidential spending fell 0.8% as state and local governments scaled back projects, despite the injection of federal stimulus dollars.

"We know from contractors' reports that stimulus money is beginning to flow, but what should be a torrent by now is only a trickle in most categories," said Ken Simonson, chief economist, Associated General Contractors of America (AGC). "Given that private construction will continue shrinking for several more months, public agencies charged with spending stimulus funds on construction must do so as promptly as possible."

These declines in nonresidential spending are particularly bad news as the Federal Reserve Board released in August that banks had clamped down on real estate lending as charge-off and delinquency rates for real estate loans have soared to record highs.

One of the bright sides is that the Commerce Department found that new single-family home construction spending continued upward another 7% in July after a 3.1% increase in June.

The economy's rollercoaster ride continues, but the ups and downs are far less severe and frightening.

Matthew Carr, NACM staff writer

NACM's September Survey Now Open

The Monthly Survey for September is now open on NACM's website (www.nacm.org). This month's question deals with how you conduct your collection communication with customers. Respondents earn .1 roadmap points toward an NACM certification and are automatically entered into a drawing to win a free teleconference registration! Click here to participate today.

Weathering the Storm, Outside and Inside of Bankruptcy

The performance of a supplier's credit department comes down to a great many number of things, some of which might not be so easily controlled by the supplier's staff. Throughout the supply chain, customers can run into difficulties that prevent the supplier from getting paid when payment is due. Luckily for suppliers, there are a number of ways to increase the probability of getting paid by even the most distressed, or even bankrupt, customer, and these were discussed by Deborah Thorne, Esq. of Barnes & Thornburg LLP in her most recent NACM-sponsored teleconference, "Weathering the Storm: Strategies for Suppliers."

"A healthy company is only as strong as the weakest link in its operational cycle," read one of Thorne's first slides. Indeed, a number of different factors figure in to a company's success, and thereby the success of their suppliers. Whether it's the customer's customers or the customer's lender or some other factor that leads the company into financial trouble, suppliers who are well prepared will be much more likely to ride out any unforeseen problems. "You need to know where all your documents are," she said. "Having a plan is really important."

Many issues arise when a troubled company hits a rough patch and then argues that its terms are the ones under which the original sale was made. Setting these things up beforehand, and clearly stating that the supplier's terms are the ones that apply to the sale, is all part of being prepared for future supply chain challenges. Several battles over whose terms apply can become very costly, even leading companies into courtrooms to settle the matter. "Cases have ended up in front of a judge because the parties were fighting over whose terms prevailed," said Thorne. "It's also important in terms of what happens when there's a failure to pay. These are all things that you need to know and if you think it's unclear, before there's a break in the chain is a good time to reconcile them."

In addition to having a plan of action for supply chain difficulties, open lines of communication can be critical for a supplier looking to position itself to get paid. "Probably more than anything your lawyer can do is knowing your customer and keeping those lines of communication open," said Thorne. "If you're talking to a person in your customer's purchasing department, you're far more likely to know if there's something happening there and all of those things are terrifically important in getting a sense of whether or not your customer can pay before the payment is due."

Thorne discussed other ways for suppliers to prepare for customer troubles outside of bankruptcy, as well as several legal remedies within the bankruptcy system that companies can use to protect themselves. For more on NACM's teleconference series, or to register for an upcoming teleconference, click here.

Jacob Barron, NACM staff writer

Puts and Sales of Claims Against Financially Distressed Customers: The Dos and Don'ts

In the current economy, as corporate failures remain on the rise, the need to have a well-rounded distressed customer strategy is an imperative. Once a customer begins to demonstrate financial problems that may pave the way for bankruptcy, trying to secure protections like credit insurance is no longer an option. But credit managers can utilize a third party by selling their unsecured claim or entering into a put arrangement to mitigate the risks of doing business with a financially distressed company. Bruce Nathan, Esq., partner in the Bankruptcy, Financial Reorganization and Creditors' Rights Group of Lowenstein Sandler PC, will walk NACM members around the pitfalls of implementing these third-party instruments during his NACM-sponsored teleconference on September 9.

Professionals wanting to maximize the rewards of these arrangements can register here.

Consumer Bankruptcies Still High, Though Have Eased Down From July

The road to recovery is paid for with consumer dollars. No amount of federal money will salvage the economy if individuals aren't spending and households aren't able to avoid financial ruin. Conditions are far from perfect, but it's also how the figures are viewed.

According to the American Bankruptcy Institute (ABI), consumer bankruptcy filings approached 120,000 in August, which was a 24% increase over the same month last year, but was a 5% decrease from the July 2009 filings of 126,000. July's consumer bankruptcy filings were the highest monthly total since the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) was enacted in October 2005 and represented the second time this year that monthly filings topped 125,000.

For much of the past nine months, the ABI has seen month-to-month increases in consumer bankruptcies. In June, consumer filings were down 6.8% from May figures, while the May figures were about 1% lower than the 125,000 filings seen in April. Add in the August decline and there have been month-to-month declines in consumer filings in three of the last four months.

"Consumers are continuing to turn to bankruptcy as a shield from the sustained financial pressures of today's economy," said ABI Executive Director Samuel Gerdano. "As a result, we expect consumer filings to top 1.4 million this year." Except for January, consumer bankruptcy filings have totaled more than 100,000 per month. During the last two months, Chapter 13 filings have continued to account for 28.3% of all consumer cases.

Though bankruptcy has become one of the most prevalent issues in the current economy, at the end of August, the Department of Commerce reported that real personal spending in July had increased nominally by 0.2% and personal income had increased an equally unimpressive less than 0.1%. This was seen as good news, particularly in light of the drop of 1.1% in personal income in June. The Commerce Department gave the thumbs up to the American Recovery and Reinvestment Act, which, during the first half of the year, supplied more than 95% of working families with tax relief that "boosted their disposable income."

That's ideal as the nation enters the prime spending months with kids going back to school and the holiday season looming.

It does appear that those modest sums of disposable income are being tapped, albeit a little tentatively, as the International Council of Shopping Centers (ICSC) reported that in August, U.S. comparable store sales fell 2% from last August. This was tremendous news for chain store sales, because it represented the smallest decline since September 2008 and was a smaller loss than expected. Even Gap, Inc., which posted a 3% drop in comparable-store sales in August, noted that the decline was its best performance since January 2008 and on the right side of the 8% decrease it saw last August. For the four-week period ending August 29, the company reported sales of $1.12 billion, which was a 2% decline from the same period last year. The clothing giant patted the back of its denim collections at its Gap and Old Navy stores for the strong back-to-school performance. It's still striving for rebound as year-to-date net sales have totaled $7.49 billion—not a figure not to sneeze at—but 7% below the same period in 2008.

While massive retailers were happy to simply see the bleeding slow, the ICSC showed that much of the modest declines it reported in its August figures were buoyed by major increases by smaller retailers like Aeropostale, Inc., Cato Corporation and Tandy Leather Factory. Aeropostale, a mall-based apparel retailer, posted total net sales for the four-week period ending August 29 of $241.7 million, a 16% increase from the four-week period last year. Year-to-date, the company's total net sales have increased 20% and Aeropostale's same store sales increased 9% in August.

Cato enjoyed similar success with a 6% increase in sales to $59 million for the four-week period and same-store sales increased 5% for August. The company also opened five new stores during the month, recovering much of the ground it lost over the last year in terms of locations.

Although consumer bankruptcies continued to rise, there is relief that consumer spending is increasing as Americans grow weary of the recession.

Matthew Carr, NACM staff writer

It's Credit Words Time!

It's time to submit your credit stories for this year's Credit Words Contest. Earn cash and roadmap points if you're a winner and roadmap points if we publish your story. It's been a really tough year; we know you have stories to share about how you've made it through the worst business environment you may have ever seen. This is just one topic of many, be creative.

Submission deadline is November 2. Read contest rules and get more information about the contest in the September/October issue of Business Credit, or by clicking here.

North Carolina Court Says Service of Lien Notice Violates Bankruptcy Automatic Stay

A subcontractor's decision to serve a notice of claim of lien on funds shortly after its debtor's bankruptcy filing has landed it in hot water with a North Carolina bankruptcy court, which recently ruled that the move is a violation of the Bankruptcy Code's automatic stay rule. In In re Harrelson Utilities, Inc., held in the U.S. Bankruptcy Court for the eastern district of North Carolina, the court held that not only was the service of the notice a violation of the automatic stay, which prevents creditors from taking any action to collect money after a bankruptcy petition is filed, but that the action also voids the lien on funds itself, rendering the subcontractor's claim worthless.

Additionally, because under North Carolina law a subcontractor may only file a lien on real property upon the service of a valid notice of claim of lien on funds, the subcontractor's lien on real property was also voided by the court. The court in Harrelson noted that if, under state law, the subcontractor has an interest in the funds prior to the perfection of the lien, the action of serving a claim of lien post-petition is an exception to the automatic stay rule. However, if state law provides that the lien right is created by the service of a notice, there is no exception and the lien is then voided. In its decision, the court distinguished between liens on real property and liens of funds, stating that, statutorily, a lien on real property "relates back" to the time of first furnishing of labor or materials. As interpreted by the court, this means that a lien on property creates an interest in the property prior to the actual perfection of the lien. With liens on funds, however, the court ruled that the subcontractor interest is only created upon service and receipt of the notice.

The ruling is a victory for owners in the state looking to avoid getting hit by liens, but the distinction between liens of real property and funds does no favors for North Carolina subcontractors. As mentioned earlier, since state law prevents the filing of a lien on real property without the service of a valid notice of claim of lien on funds, the court's ruling essentially means that a contractor's or debtor's bankruptcy cuts off the opportunity to perfect a lien on funds. If a contractor files for bankruptcy and a subcontractor serves the notice of claim of lien of funds, this violates the automatic stay, voids the claim and, by extension, eliminates the possibility of perfecting a lien on real property.

An appeal of the ruling has already been filed but, if sustained, subcontractors in the state would essentially be forced to serve liens on funds as soon as labor or materials are first supplied, which would have predictably negative effects on project cash flow. Other observers have noted that this statute could give subcontractors with knowledge of a contractor's financial trouble an unfair advantage over other creditors, as they could react to the news by serving liens on funds when they find out about the contractor's condition, much to the chagrin of other subcontractors not so informed.

This news was originally reported via NACM's Mechanic's Lien and Bond Service (MLBS) on its website. For up-to-date information on legal changes throughout the U.S. and tools to help optimize your construction credit department, click here today.

Jacob Barron, NACM staff writer

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The Future of Doha Looms Over WTO Meeting

As ministers of the World Trade Organization (WTO) met last week, the lure of India's massive market again came to the forefront as an appetizing venture. Right now, India is the United States' 18th largest trading partner with $43.4 billion in bilateral goods trade in 2008. Though trade has increased over the last decade, the U.S. currently finds itself running an $8 billion goods trade deficit with the Asian powerhouse: a deficit that is 23.7% more than what it was in 2007.

The relationship between the United States and India has expanded exponentially since the signing of the Uruguay Round in 1995. Since 1994, U.S. exports to India have increased 671%, though still account for just 1.4% of the United States' export portfolio. During that same time frame, U.S. imports of Indian goods have risen 385%. In 2007, goods and services trade with India topped $61 billion, with exports making up $27 billion of that total. U.S. foreign direct investment (FDI) in India has also continued to tick upward. In 2007, U.S. FDI was at $13.6 billion, a 47.8% increase over 2006.

Right now is a critical time for India. Prime Minister Manmohan Singh is at the reigns of the second most populous country in the world that faces a devastating drought. The situation has strained the economy and growth for the year has been adjusted from 7.5% to 6%. Even more dire is that food prices are climbing rapidly—the price for sugar has already hit a 30-year high and other food items aren't that far behind. The government has had to start cracking down on individuals that have begun to horde important commodities.

Last week, the United States' Trade Representative Ron Kirk was in New Delhi trying to forge ahead on the Doha Development Agenda, which has been in a near-constant stall since 2001. "I came to New Delhi with the message that the United States is ready to do the real work it will take to move the Doha Round toward a balanced and ambitious conclusion," said Ambassador Kirk. "We came here in the hopes that our trading partners are ready to do the same."

The United States and India stand as two key opponents in the talks.

"India is a lot more flexible right now than it has been in the past," said Dr. Chris Kuehl, managing director, Armada Corporate Intelligence and NACM economic analyst. "Part of the problem previously had been that the government of Manmohan Singh always had to be cognizant of the fact that it had a hard-left part of its coalition that was prepared to defect if there were any concessions made in terms of trade." After this summer's elections, Singh's party came across much stronger and is no longer dependent on that left-wing coalition, so the government has been more aggressive exploring trade.

Currently, the top United States' export items to India include fertilizers, which amounted to $2.8 billion last year, followed by precious stones and machinery at approximately $2.5 billion each. In the Doha Round talks last year, an inability to come to terms on agriculture import rules was what crumbled negotiations. The U.S. agricultural sector wants access to India's markets, which is especially poignant now since India might not be able to produce enough food this year to sustain its own population, and India wants trade access to the manufacturing sector on the East Coast. So, there will have to be concessions from both sides of the table. The U.S.' ability to reach an accord will also be reliant on how much political capital President Barack Obama has left: Will it all be used up in the efforts to get a healthcare plan passed, or will he still be able to approach his party and ask that they back him on a trade agreement?

"It's about a 50-50 shot that the U.S. will do something," said Kuehl. "But we're closer than Doha has been in ten years. This is the trade deal that will not die. It has been declared a corpse so many times that you'd think it would have rotted by now, but it's still there."

Trade ministers have said they are committed to reaching a deal in Doha Development Round in 2010.

Matthew Carr, NACM staff writer

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Survey Shows International Trade Finance Improving, But Far From Healthy

A mood of cautious optimism has spread across the U.S. and into the world of international trade as a new survey indicates that stability in the trade finance sector is beginning to increase despite some notable remaining weaknesses. Conducted by the Bankers' Association for Finance and Trade (BAFT), in cooperation with the International Monetary Fund (IMF), the survey noted that global access to credit has increased and recovery is underway in some regions, although some significant challenges linger.

"There appears to be a slight improvement in credit availability from the last survey, but the state of the global economy remains weak, further affecting trade," said Howard Bascom, BAFT chairman and managing director for Global Trade Finance and Credit Services at the Bank of New York Mellon. The most recent survey was the third in a series from BAFT/IMF that originally began in December. Eighty-eight banks from 44 countries completed the questionnaire, which asked how the total value of the participating banks' trade finance activities changed from fourth quarter 2007 to fourth quarter 2008 and from fourth quarter 2008 to second quarter 2009.

When compared to previous surveys, notably fewer respondents thought that the decline in value of their transactions was due to credit availability. Other portions of the survey, however, were much less optimistic: nearly two-thirds (62%) of banks surveyed reported a drop in total value of trade finance activities from the fourth quarter 2008 to second quarter 2009 and 86% of respondents noted that a lack of demand for trade activities was responsible for the decline.

"While the survey contains some encouraging information, the data also indicate that considerable issues still exist in the international trade finance arena and must be addressed through public-/private-sector coordination. With global trade estimated to contract by as much as 10% in 2009, it is imperative that stakeholders and policymakers work together to help stem further contraction. Global trade cannot recover if financing for trade transactions is not available," said Donna Alexander, president of BAFT. "As with our prior surveys, the information in this survey will be useful to policymakers as they consider ways to provide enhanced support for international trade finance."

Regionally speaking, an overwhelming majority of participating banks noted that at least a portion of their trade finance activities were centered on emerging Asia (89%), followed by emerging Europe (43%) and developing Asia (36%). The survey was sent to an array of differently-sized banks, nearly three-fourths of which had less than $100 billion in total global assets.

Jacob Barron, NACM staff writer

Distressed Business Services

Many NACM 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 start a reorganization plan, 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 Affiliate staff members can serve as secretary to creditors' 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.

Credit Managers' Index (CMI) Progress Slows: Amount of Credit Extended and Other Key Indicators Lose Ground, Reflecting a Hampered Recovery

After six months of solid gains, the Credit Managers' Index showed slower progress and registered declines in key indicators. There was still some positive movement in the Index as a whole, but there are obvious weaknesses showing up in terms of credit availability, credit applications and sales. There were also areas of concern in terms of dollar exposure, disputes and other negatives. There was a sense that bigger economic issues began to overtake the sector, slowing down some of the progress noted in the last few months. The Index showed a dramatic decline from the levels in July, but overall the Index gained and moved a little closer to the magic number of 50, climbing from July's combined index score of 48 to the August score of 48.1.

These numbers are a little sobering given the sense that the economy had started to come out of the recession in July's report. This suggests that the proposed recovery is a little weaker than some of the indicators reflect, especially in terms of availability of money. The reduction in credit applications indicates that there is less willingness to lend and that companies seeking credit are being put through more hoops than in the past. The number of additional disputes and delinquencies also suggests that some sectors of the economy are still struggling.

NACM Economist Chris Kuehl, Ph.D. stated that these readings do not necessarily mean that the other signs of economic recovery are not accurate but, he indicated, "the credit system has not healed and it may be some time before there is a sense that the biggest issues are behind the economy. There are some shoes left to drop, most notably the commercial property sector." It had been assumed that the August index would crest over 50-signaling expansion, which correlated to the Purchasing Managers' Index (PMI) that had also risen to levels very near the 50 level. "It is mildly encouraging to note that the index has not fallen, but an anemic .1 gain was much less than had been anticipated," said Kuehl.

Other data that has been used to assert that the recession has started to bottom out is accurate and encouraging. Housing starts are returning back to growth and it is encouraging to see durable goods orders back to normal, but the money situation remains a solid concern for business as it seeks to expand into other sectors to capture some newly available market share.

The issues are the same as they have been for the last few months: consumer confidence and investor confidence. At the moment, the investment community is more encouraged than the consumer, and that creates a problem in the not-too-distant future. Until consumers start to draw on the rebuilding inventory levels, there is nothing to suggest that producers should start gearing up again. This is part of what seems to be making credit scarce—a concern that the current growth is somewhat artificial, motivated by inventory gains in anticipation of demand or programs like "Cash for Clunkers."

"Overall, there were more down sectors than positive ones this month," said Kuehl. "There is a small amount of solace to be taken in the observation that none of these areas declined a lot, but growth was expected." The biggest improvement was in number of bankruptcies, but that may be connected to the fact that most of those companies threatened with collapse have already been forced into that procedure.

Click here to view this report, complete with tables and graphs, and the CMI archives.

Click here to sign up to be a part of the monthly survey.

Source: NACM

To view past eNews issues or to visit the NACM Archives, click here.

 

 

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