November 17, 2009
In a recently-added, and decidedly timely, NACM-sponsored teleconference, legal all-star Bruce Nathan, Esq. of Lowenstein Sandler PC led a rapt group of credit professionals through the ins-and-outs of CIT's prepackaged bankruptcy and what the filing portends for the Chapter 11 process as a whole. "The CIT prepackaged very much an indication of where Chapter 11 is going," said Nathan. "To say it very briefly, it's going much faster than it used to."
Nathan noted that the CIT filing and its prepackaged plan have functioned very differently than they would have in a traditional Chapter 11 proceeding. "On November 1, which was a Sunday, which shows you that people are filing 24/7, CIT Group, the holding company, and another company up the street, CIT Group Funds, filed Chapter 11 in the Southern District of New York," he said. "CIT's factoring sub and other operating business entities did not file Chapter 11. They've been able to do business as usual because they're not in Chapter 11."
"A parent company can file Chapter 11 and the subsidiaries don't necessarily have to," added Nathan, citing a marked change in the traditional bankruptcy process.
While the nature of the CIT plan anticipates what's to come in the corporate bankruptcy process, Nathan noted that the filing itself was easily predictable. "A prepackaged was inevitable," he said. "Their prepackaged plan was filed well before the bankruptcy was even filed. There was an announcement that a prepackaged Chapter 11 would be the backstop."
For trade creditors of CIT, the prepackaged plan is the best they could've hoped for. Nathan noted that trade creditors would receive 100 cents on their claims. Still, as struggling debtors continue to rely on prepackaged filing processes, Nathan added that this isn't always going to be the case. "You have to understand that trade creditors aren't going to receive 100 cents on the dollar in all of these cases," he said. "We hear the name prepackaged, but what's actually been negotiated is a prenegotiated or a prearranged case."
In prepackaged plans, disclosure on the case is made by the debtor and creditors vote on the plan according to set procedures prior to the filing of an actual bankruptcy. In prenegotiated or prearranged plans, the debtor negotiates, pre-bankruptcy, with one or more major creditor groups and makes no pre-bankruptcy solicitation. The creditors get a chance to vote on the plan, but only after the debtor files its Chapter 11 and the court has approved its disclosure statement.
For information on future audio teleconferences, please contact Tracey Flaesch at 410-740-5560 or firstname.lastname@example.org.
Jacob Barron, NACM staff writer
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Each Thanksgiving, there are some 46 million turkeys eaten in the United States. Since 1989, there has been a formal national tradition started by President George W.H. Bush to select one turkey in the U.S. to be pardoned from winding up on an American family's dinner table. Though those might be better odds than playing many of the state lotteries, they're still not that great.
No one wants to be a turkey when November arrives in the United States.
Each year, there are billions of dollars in commercial credit transactions conducted in the United States. The majority proceed without a hitch. But what the current economic crisis has reiterated is that few companies are immune from disaster; even companies thought too big to fail can be pushed to the brink. And now, with businesses strapped and under pressure, there is little room for mistakes. The country's risk appetite has diminished and all companies want security—not a gamble.
There actually used to be a time in the United States where domestic trade was uncertain—that trade from one state to the next posed the same concerns as trading internationally. Thankfully, the Uniform Commercial Code (UCC) was penned in 1952, providing businesses with some security in their transactions.
"It's hard to believe that the UCC has only been around a little more than 50 years," said Greg Powelson, director, NACM's Mechanic's Lien and Bond Services (MLBS). "Before it was in existence, selling on an interstate basis from New York to New Jersey or from Ohio to Michigan was pretty much like it is today, selling from the United States to Mexico. There was no consistency in the rules. Those of you who are selling into Mexico know how scary it can be."
The UCC was designed to inject consistency and to promote interstate commerce. It has been crafted to reduce risks and encourage businesses to extend credit. During his NACM-sponsored teleconference, "Article 9 of the UCC: Securing Equipment, Inventory and Receivables," Powelson discussed the importance of how Article 9 provided for secured transactions and the sale of accounts.
"When we talk about Article 9, we are really talking about collateral, as in your receivables," explained Powelson, who most often speaks to NACM members about mechanic's liens and bonds and the unique conditions involving construction-oriented credit. "The collateral being used to protect you on the lien side is the actual property being improved. When we talk about collateral and Article 9, we're talking about utilizing personal property as collateral. And that personal property can come in a couple of different flavors: tangible and intangible."
Tangible personal property is just that: inventory, goods, equipment, farm products and fixtures. Intangible collateral under Article 9 include payment rights, accounts, promissory notes, instruments, commercial tort claims, deposit accounts and similar documents. The point is to ensure that a company is in the best possible position to recover goods or money due if a customer defaults or files for bankruptcy.
"The idea being that collateralizing by its very definition is reduced risk," said Powelson. "Hopefully, putting you in a position where you can either say 'yes' to credit or if you're currently saying 'yes' to credit, maybe the collateral provides an opportunity where you can actually sell more."
Under Article 9, lenders and trade creditors can take a security interest on collateral owned by a debtor. The law then provides creditors with an opportunity to establish enhanced legal relief. It allows credit managers to make a marginal account secure by integrating security agreements into their finance and credit policies.
Like any security instrument, the UCC takes a tiered approach to how monies are distributed and which entities are at the forefront for payment if a business does crumble into insolvency.
"Who's always sitting on top of that period of timeline? It's the bank. They have the first UCC filing," said Powelson, repeating a common adage in UCC filings. "First in time, first in rights. The priority of the security is determined by the order of the filings. You guys have been out there, you've seen a few bankruptcies. Which creditor always gets paid first? It's always the bank. And why is the bank getting paid first? Is it because they are a simply bank, that they're taking the most risk or because they're providing financing? No. The reason the bank gets paid first is they were there first. They have the first UCC filing in line. They get paid first."
NACM members that missed Powelson's presentation can contact Tracey Flaesch at 410-740-5560 or email@example.com to hear the entire replay of the teleconference.
Matthew Carr, NACM staff writer
As banks continue to be stingy in lending to the small business sector, use of credit cards by companies has become exceedingly en vogue, and the acceptance of credit cards is almost becoming a necessity in some industries. PCI-DSS (Payment Card Industry-Data Security Standard) is an issue that affects anyone taking credit card payments regardless of size, location, composition of business or type of product or service. It was developed by the major credit card companies as a guideline to help organizations that process card payments prevent credit card fraud, hacking and various other security issues. A company processing, storing or transmitting credit card numbers must be PCI-DSS compliant or risk hefty fines and/or lose the ability to process credit card payments at a corporate level (not just at a particular location in violation). To learn more about what the PCI-DSS requires of you and your company, join Fifth Third Bank's Don Roeber in his upcoming NACM-sponsored teleconference, "PCI Compliance," the latest in NACM's Added Advantage teleconference series, which gives attendees 90 minutes of information for the same price as a normal 60-minute teleconference.
To find out more, or to register, click here.
After months of debate and discussion, Senator Chris Dodd (D-CT), chairman of the Senate Committee on Banking, Housing and Urban Affairs, along with his fellow Democrats on the committee, unveiled a new proposal for financial regulatory reform, aimed at preventing another crisis like the one still gripping credit markets today.
"This is a thorough and carefully constructed plan," said Dodd. "It will promote innovation and job creation while protecting consumers and our economy as a whole from another crisis like the one we are now in."
Included in the plan is a controversial move to establish a new financial regulator, the Consumer Financial Protection Agency (CFPA), which would aim to "ensure American consumers get the clear, accurate information they need to shop for mortgages, credit cards and other financial products" and work to prohibit deceptive practices by the industry.
The plan would also feature measures to end the existence of firms that are "too big to fail" by creating a safer way to shut them down, imposing new capital leverage requirements on these firms, requiring the firms to write their own "funeral plans" and requiring the industry to provide their own capital injections. Additionally, the new proposal would update the Federal Reserve's lender of last resort authority to allow for system-wide support rather than firm- and institution-specific support and would establish new standards and increase supervision of the market to insulate the economy from harm.
Support for the plan from fellow Democrats was quick to arrive. "I congratulate Senator Dodd, and I am pleased at the progress Senator Dodd and other members of the Senate have made," said House Financial Services Committee Chairman Barney Frank (D-MA), who referred to a separate regulatory package that was previously submitted in the House. "Obviously the bills aren't going to be identical, but it confirms that we are moving in the same direction and reaffirms my confidence that we are going to be able to get an appropriate, effective reform package passed very soon."
Republicans remained largely silent on the proposal.
The U.S. Chamber of Commerce, however, was quick to comment and offered to work with Senator Dodd on an improved proposal. "We welcome Senate action to reform our broken financial regulatory system," said David Hirschmann, president and CEO of the U.S. Chamber's Center for Capital Markets Competitiveness (CCMC). "This effort needs to have a strong focus on protecting consumers and investors, while ensuring that our markets also supply businesses and entrepreneurs with the capital they need to grow, innovate and create jobs."
The Chamber has opposed the establishment of the CFPA since it was first discussed months ago. Other aspects of the proposal criticized in a release from the organization included measures that would create "one-size-fits all corporate governance rules" and "a systemic risk regulator that duplicates existing regulation," which refers to an independent agency that Dodd's proposal would create to supervise and, in some cases, shrink certain companies whose size and activities threaten the stability of the financial system.
Jacob Barron, NACM staff writer
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A recent case in the U.S. Supreme Court could wind up having ramifications for business creditors as the nation's high court attempts to define what constitutes a company's "principal place of business."
Oral arguments were recently heard by the court in Hertz Corp. v. Friend, which started as a class action suit in California. Melinda Friend and John Nhieu filed suit against the Hertz Corporation in state court, alleging that the company conducted illegal wage and hour practices. Citing tenets of the Class Action Fairness Act (CAFA), Hertz had the case moved to federal district court, which, according to CAFA, is allowed when the amount in controversy is greater than $5 million and members of the class of plaintiffs are citizens of states other than the defendant's home state.
The plaintiffs, however, argued that Hertz itself was a citizen of California, having most of its operations, employees and transactions contained within the state, and thus was not different from any plaintiff, meaning the case should remain in California state court. Though most of its operations are focused in California, Hertz is incorporated in Delaware and considers Park Ridge, NJ its corporate headquarters. Hertz argued that this meant it was not a citizen of the plaintiffs' state, thus raising the question of just where Hertz's principal place of business is really located.
Various districts use different standards to determine a company's principal location. The federal district court in Hertz's case found that it was a resident of California after considering several factors. It was remanded to state court and affirmed on appeal, leading Hertz to file for and receive certiorari from the Supreme Court, which heard oral arguments on November 10.
While Hertz has nothing to do with bankruptcy, the court's eventual ruling could result in changes for where a debtor can file their bankruptcy petition.
In bankruptcy, a filing company will very frequently leverage the vagueness of the nation's definition of what constitutes a "principal place of business" to file in as favorable a district as possible. "Where a case is filed can have significant impact on the outcome," said NACM in its Issue Brief and Suggested Changes to BAPCPA, which was shared with officials on the House Judiciary Committee, among others.
"Filing the case in a jurisdiction other than that of the main offices of the debtor creates a roadblock for participation by trade creditors and employees. Selecting a venue outside of the debtor's location increases the cost of participation by the debtor when travel and housing costs are added to the case. It also takes the debtor away from the business location to participate in activities related to the case. The courts in the local jurisdiction typically have a better understanding of the debtor's business and the local labor and financial environment."
During oral arguments, the justices noted that the term "principal place of business" originated in the bankruptcy context and had traditionally used a multi-pronged approach, similar to the one used by the federal district court in Hertz's original case. Amicus briefs were filed by the U.S. Chamber of Commerce, siding with Hertz, suggesting that the Supreme Court adopt a "nerve center" approach already favored by some circuit courts, but, in lieu of that, adopting any uniform rule which would put an end to the differences from court to court.
The Supreme Court has yet to issue a ruling on the case.
Jacob Barron, NACM staff writer
How to Manage Conflict...And Survive It!
People are often hesitant to rock the boat. They want to avoid situations that could lead to ugly confrontation. It can sometimes become a tightrope walk where the hope for resolution becomes unfathomable. With all the other stressors burdening credit managers these days, a festering in-house drama is the last thing anyone wants. On December 2nd, Toni Drake, CCE, president, TRM Financial Services, Inc. and vice-chairman, Southern Region, for NACM-National, will host the Added Advantage teleconference, "How to Manage Conflict...And Survive It!" The session will define various types of conflict and how to address the situations by identifying the many stages of conflict. By the end, participants will be able to more carefully handle a precarious situation and understand how precise communication and emotional reactions contribute toward a resolution.
NACM members interested in conflict management and learning a constructive management style that enables the pursuit of resolution can register for Drake's presentation here.
McGraw-Hill Construction Reports Major Decline for Construction Economy in 2009, Mixed Picture for 2010
In its 2010 Construction Outlook report, released at the Outlook 2010 Executive Conference in Washington, D.C., on October 16, McGraw-Hill Construction estimates that new construction starts will show a decline of 25% in 2009, followed by an increase of 11% in 2010. The 2009 decline would follow declines of 7% in 2007 and 13% in 2008. Unlike previous years in which weak residential markets powered the declines, the primary cause of this year's sharp decline is commercial construction—dropping by 43%. According to the report, "the diminished activity is taking place...amidst the longest and steepest recession since the Great Depression." MHC predicts that high commercial vacancy rates and a large volume of commercial loans coming due could be the greatest threat to a robust recovery in the commercial construction sector. Looking to 2010, the report predicts that firms will remain slow to hire, credit will remain tight, employment and the fiscal condition of the states will remain weak, and commercial construction starts will decline another 4%. For next year, MHC forecasts substantial growth in single-family housing (+32%), multi-family housing (+16%) and public works (+14%) construction. Growth areas will include the construction and retrofitting of federal buildings, and the construction of highways, bridges, sewer and water projects. MHC economists say this sets the stage for a "more sustained expansion in 2011." Learn more at www.construction.com.
Source: McGraw-Hill Construction
The national industrial vacancy rate edged up yet again during the third quarter of 2009, hitting 10.5%. This represents a new high for the decade and marks the eighth consecutive quarter of increasing vacancy, according to the third quarter industrial report from Colliers International, the global real estate services firm. The cyclical low for industrial vacancies had previously stood at 7.9%; and from one year ago, the U.S. industrial vacancy rate has increased by 1.9%.
Industrial net absorption for the quarter measured negative 47.3 million square feet (msf). Although this is clearly not an encouraging sign, Q3 occupied space contracted by less than it did in Q1 and Q2. Year-to-date industrial absorption in the U.S. stands at negative 132.4 msf. Three markets in particular contributed to the YTD negative absorption: Chicago (negative 18.4 msf), Los Angeles Basin (negative 20.4 msf) and San Jose/Silicon Valley (negative 9.6 msf).
The amount of warehouse construction completions declined again in Q3, in tandem with ongoing weak industrial market conditions, with just 11.9 msf delivered in the July through September period. This is the lowest number for new construction delivery Colliers has on record. Indeed, quarterly new construction has fallen steadily as 2009 has progressed.
In terms of U.S. warehouses under construction, during the third quarter, this metric was down as well. Approximately 22.4 msf of new development was underway at the end of Q3, scheduled to be delivered to the market during Q4'09 and into 2010. Like new completions, this construction underway number is the lowest Colliers has on record and well beneath the 154 msf of construction underway just two years ago.
Warehouse rent patterns mirrored those of absorption mentioned above. Although the average rental rate for industrial space did fall from $5.09 per square foot (psf) during Q2'09 to $5.04 psf in the third quarter, this fractional decrease of 0.9% was the least rents had dropped (psf) in the past year. Bulk warehouse space and tech/R&D space showed larger decreases in rental rates, while flex/service space fared better than traditional warehouse rents.
"The U.S. warehouse market showed ongoing weakness in Q3, with vacancies up, absorptions negative and construction completions/construction underway at the lowest levels our researchers have ever witnessed—which is no surprise given the ongoing recession and stagnating economic landscape," reported Ross Moore, executive vice president and director of market & economic research for Colliers International. "Although a few bright spots are evident, including a pickup in leasing activity and an easing of absorption losses quarter-over-quarter, we predict 'more of the same' for the industrial space market until well into 2010. From our vantage point, warehouse tenants will sit tight and make do with their current space—avoiding expansion and new lease signings—until more signs of a sustainable recovery are evident."
Source: Colliers International
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