February 9, 2010
Between a Rock and a Hard Place: Dealing With Supply Agreements, Services Agreements and Long-term Purchase Orders
It's a difficult situation, one in which creditors have found themselves more and more often as the recession took hold. "Bankruptcy may be coming up and you have an agreement that requires you to extend credit terms," said Bruce Nathan, Esq. of Lowenstein Sandler PC. "You're kind of between a rock and a hard place."
Certain contracts and business agreements may require companies to continue supplying credit terms to distressed companies, even when that company is in bankruptcy or on its way there. Sellers looking to protect themselves in such instances tuned into the recent NACM teleconference, "Understanding Your Rights and Obligations in Extending Trade Credit Under a Supply Agreement, a Services Agreement, or Long-term Purchase Order to a Financially Troubled Buyer," led by Nathan along with frequent presentation-partner Wanda Borges, Esq. of Borges & Associates LLC.
Nathan offered creditors one remedy that can help their companies before bankruptcy actually comes into play. "You need to have a reason not to extend credit, then there may be grounds under the Uniform Commercial Code (UCC) and common law that give you the ability to stop extending credit under your contract even if required to do so," said Nathan, referring specifically to UCC Section 2-609, also known as the adequate assurance provision. This section deals with a situation where a customer may be current with the selling company but the seller is concerned that the customer may be on the verge of financial insolvency or on the verge filing bankruptcy. "If you have reasonable grounds to believe that your customer is not going to be able to perform, and the buyer's ability to pay for goods is a reasonable risk, under 2-609, you as the seller can demand adequate assurance of performance," he added, delving further into what constitutes a reasonable risk, as well as what legally amounts to adequate assurance for the seller.
Borges discussed different contract stipulations that may, and may not, help sellers. "Some of you have a requirement agreement," said Borges. "Those are used by a buyer to make sure that you, the creditor, are going to give it a consistent supply of what it needs." This may sound like a bad idea for some creditors or suppliers, but Borges noted that, in some instances, this can actually work to the seller's benefit. "Sometimes you, the seller, will want a requirement agreement because it effectively compels the buyer to keep buying from you," she said, warning, however, that care must be taken when drafting such a provision.
Other contract provisions that sellers include to protect themselves in the case of customer default, Borges noted, can often be unenforceable when things go bad. "Some of you have contract language that says 'In the event there is a bankruptcy proceeding, this contract is dissolved,'" she said. "Forget about it. That language is completely unenforceable in a Chapter 11 proceeding."
"The automatic stay prohibits you from suing on the contract and certainly from terminating the contract," said Borges.
Jacob Barron, NACM staff writer
How to Get Buy-in From the Top Down
It's easy for credit professionals to become frustrated with the way their company views them. One of the most common criticisms lobbed at credit departments by sales teams and others is that they're too black and white, unwilling to negotiate on terms and generally difficult to work with. This perception, which is very often untrue, comes from a fundamental misunderstanding by company officials about the true impact of the credit department, and can lead salespeople to avoid credit whenever possible and cause a great deal of unnecessary stress and profit loss.
Join Susan Archibeque, CCE, director of credit and assistant controller for Nicholas and Company, Inc., on February 18th for the NACM teleconference, "How to Get Buy-in From the Top Down" to learn how a chronically underrated and underappreciated credit department can go from being avoided to being an integral part of the organizational fabric with four components: the credit policy, the credit scorecard, teamwork, and training and recognition. To register for this teleconference, click here.
The financial fate of a host of product manufacturers beholden to Toyota's business could hinge largely on how the Japan-based automaker responds to perhaps its first and certainly its most significant U.S. market crisis. But its suppliers shouldn't be caught too off guard because, to paraphrase the iconic film The Godfather, "This is the business [they] have chosen."
Toyota continues to face scrutiny from the U.S. government and concern from consumers as it attempts to fix serious problems with floor mats and sticking accelerators pedals. That doesn't even take into account new concerns over braking and electronic problems in its Prius lineâ€”manufactured almost exclusively abroadâ€”or intimations from ratings agencies that Toyota's credit rating could slide in the near future amid the fallout. The impact from Toyota products assembled in the United States already is having an impact, one that likely would multiply if repair parts and services face a new delay or the brand's quality continues to be called into question publicly by advocates, lawmakers and the media.
Deborah Thorne, Esq., partner in the Chicago office of Barnes & Thornburg LLP, said the pace at which Toyota solves their problems will be critical to preventing a significant hit to its brand image, and thus, first-quarter prospects for most of its supply chain. But the jury is out on how Toyota will do, especially since it largely stumbled out of the blocks on its recall.
"This is the first time I can remember seeing this kind of thing happening to Toyota, but they certainly have the advantage of seeing domestics [General Motors, Chrysler] go through their problems," said Thorne. "It'll be interesting to see if their damage control is better."
The danger for product manufacturers is some may already be operating on razor-thin margins if they've been supplying other, worse-struggling domestic car producers and related companies during the lengthy recession.
"There could be a ripple effect," said Thorne. "If you're making 150 floor mats per day for Toyota and, all of the sudden, they don't want any, you have extreme pressure put on. What do you do to your employees, or you vendors that send you plastic pellets, and on down the line?"
Less worried about Toyota's suddenly precarious position is Jim Gillette, director of financial services at Michigan-based firm CSM Worldwide. Gillette said product manufacturers dealing with the auto industry are all well aware their supply businesses can decline sharply through no fault of their own for a number of reasons. And while suppliers may face some tough weeks because of Toyota's temporary manufacturing shutdown and a likely sales decline, there are worse companies to be tied to.
"It will be a cash flow problem for suppliers who have significant business with Toyota, but just for the short run," said Gillette, who worked as a financial consultant with GM in the early 1990s. "But, on the beneficial side, Toyota has always made sure its manufacturers have a good cash position and profit from doing business with them. Toyota is not the type to tighten the screws and keep people in a precarious situation."
Despite present ripple effects, it appears considering cutting ties with Toyota would be a huge mistake given the automakers' long memory and the difficulty in landing a supply-based working relationship with the Japanese manufacturer.
"The last thing suppliers should do today is walk away from Toyota," said Gillette. "Ten years from now, Toyota will still be one of the top three manufacturers in the world. You don't want to give that up."
"These things happen, and these things pass."
Brian Shappell, NACM staff writer
New MLBS Half-day Workshop Coming in March!
Join NACM's Mechanic's Lien & Bond Services (MLBS) President Greg Powelson for his next half-day lien and bond workshop on March 19th at the Norwalk Marriott in Norwalk, CA. In "Liens & Bonds: Building the Optimal Credit Department," Powelson will take attendees through the many idiosyncrasies that accompany construction credit and the many ways in which liens and bonds can be used to secure payment on what are often risky projects. From collecting job information all the way through foreclosure, attendees will get a fast-paced look into how they can create the optimal construction credit department.
To learn more about the program, register or read testimonials about Powelson's previous presentations, click here.
Minority-owned businesses continue to find more limited availability and worse rates for borrowing and face a significant hardship now as the economy struggles to emerge from recession, says a new U.S. Commerce Department report.
Commerce's Minority Business Development Agency (MBDA) latest report, Disparities in Capital Access Between Minority and Non-Minority-owned Businesses: The Troubling Reality of Capital Limitations Faced by MBEs, illustrates significant disparities between minority and white-owned firms seeking credit even with comparable credit ratings and borrowing histories. The research indicates minority firms earning more than $500,000 paid an average interest rate of 7.8%, compared to the 6.4% average of white-owned businesses. The divide among firms earning less than $500,000 is even greater. Additionally, white-owned firms were 25% more likely to garner a new line of credit.
Ivonne Cunarro, chief knowledge officer at MBDA, said conditions since the research concluded mid-decade do not appear to be improving based on anecdotal information culled by the agency. The lack of credit appears worst for businesses serving predominantly African-American and Mexican-American communities.
"This consistently has been a problem and, due to the constraints of this recession, it has only exacerbated the problems," Cunarro says. "They are disproportionally effected. They're starting with a lower access level to begin with."
Smaller minority-businesses likely will continue to face problems throughout much of 2010 because of the ongoing struggles of the real estate sectorâ€”as many owners often use their own homes, which have almost universally declined in value, as collateral for loans.
Brian Shappell, NACM staff writer
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Only Four Out of 337 Cities Added Construction Jobs in 2009 As Construction Spending Drops to Lowest Level in Six Years
Construction employment grew in only four out of 337 metropolitan areas in 2009 as spending on construction projects dropped by $100 billion in December to a six-year low of $903 billion, according to a new analysis by the Associated General Contractors of America of federal figures released today.
"The impact of the stimulus is clearly being overshadowed by the sweeping downturn in overall construction demand," said Ken Simonson, the association's chief economist. "Without those public investments however, a bad employment situation will only get worse during 2010."
Simonson noted new Census Bureau figures released recently show that private non-residential spending dropped 18% compared to December 2008. He added that only power construction increased from year-ago levels, by 14%. Developer-financed categories recorded especially large declines, including lodging (down 46%); retail, warehouse and farm (down 37%); and office (down 35%).
In contrast, publicly-funded construction increased by 1.0% between December 2008 and 2009, Simonson noted. He added that stimulus spending helped boost highway and street construction by 3.7%, making it the largest public category. Educational construction, however, dropped 4.0% during the year. Private residential construction dropped 11% for the year as multi-family construction tumbled, even though spending on single family housing has increased for seven months in a row.
Of the four metropolitan areas with an increase in construction employment during the past 12 months, only two areas had gains of more than 100 jobs: Harrisburg-Carlisle, PA (1,500 jobs, 13% gain) and Tulsa, OK (700 jobs, 3% gain). Two metro areas had gains of 100 jobs each in construction: Springfield, OH (8%) and Columbus, IN (5%).
Association officials cautioned that without new investments in infrastructure projects, construction employment will only get worse. They noted that the fiscal year 2011 budget request released by President Obama outlines some important new infrastructure investments, including establishing a national infrastructure fund and boosting investments in high speed rail and new air traffic control facilities. Many of those new investments, however, were offset by cuts for new water infrastructure projects and levee projects, for example.
"Failing to make vital investments in our infrastructure will cost even more jobs while undermining our ability to compete globally for years to come," said Stephen E. Sandherr, the association's chief executive officer.
View the latest construction spending figures, and view the latest metropolitan area construction employment.
Source: Associated General Contractors of America
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