February 16, 2010

News Briefs

  1. U.S., Canada Sign Government Procurement Agreement
  2. Bernanke Hints at Rate Increases
  3. Senate Passes Bill to Right Small Business Tax Wrongs
  4. Roundtable: Commercial Real Estate Needs Government Help
  5. U.S. Ag Companies to Look for M&A Opportunities in Adjacent Sectors

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U.S., Canada Sign Government Procurement Agreement

The U.S. and Canada signed an agreement on government procurement that would provide for permanent U.S. access to Canadian provincial and territorial procurement contracts, in accordance with the World Trade Organization (WTO) Government Procurement Agreement (GPA).

Additionally, the agreement allows American companies to compete for Canadian provincial and municipal construction contracts not covered by the GPA through September 2011. The U.S., in turn, will provide reciprocal access to Canadian companies to 37 states already covered by the GPA, as well as a limited number of Recovery Act programs.

"The U.S.-Canada trade relationship supports many good jobs on both sides of the border," said U.S. Trade Ambassador Ron Kirk. "This agreement resolves key outstanding U.S.-Canada government procurement issues and creates tens of billions of dollars worth of new job-supporting export opportunities for American companies and workers. From February 16, American exporters can rest assured that they will be able to compete on a fair and equal basis in a wide range of Canadian provincial, territorial and municipal procurement contracts."

Canada is America's largest goods trading partner. In 2009, the goods trade exchanged between the two countries totaled more than $430 billion.

The agreement also drew cheers from Congress, specifically Ways and Means Trade Subcommittee Chairman Sander Levin (D-MI), who suggested the new agreement vindicated some controversial "Buy America" provisions in the Recovery Act that passed a year ago.

"Some have described the so-called 'Buy America'' provisions in the Recovery Act as 'protectionism.' But this agreement shows just the opposite is true," said Levin. "The United States has been trying, unsuccessfully, for 15 years to open the Canadian provinces to U.S. suppliers. The 'Buy America' provisions in the Recovery Act finally brought Canada to the negotiating table. I applaud the Administration's work in concluding this agreement with Canada."

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 false, 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.

Bernanke Hints at Rate Increases

Efforts from the Federal Reserve to increase credit by lending to banks through its discount window and by keeping the federal funds rate at a historically low level could be coming to an end soon, in part to fight potential for inflation.

During testimony before the House Financial Services Committee last week, Fed Chairman Ben Bernanke told lawmakers the Fed's board has "been working to ensure that we have the tools to reverse, at the appropriate time, the currently very high degree of monetary stimulus." He intimates the Fed will wind down bargain overnight lending terms for banks through its discount window—traditionally a last resort for the banking and lending industry because of negative connotations that became commonplace during the recession—within weeks.

One of two still-operational Fed credit facilities opened because of the illiquidity crisis is the Term Asset-Backed Securities Loan Facility (TALF), which helped bolster small business lending in 2008 and 2009. However, Bernanke appears encouraged that the use of such Fed offerings declined sharply by late 2009, and it is expected the program will be shuttered on March 31. The only likely exceptions will be loan activity tied to new commercial mortgage-backed securities.

"The Federal Reserve believes that these programs were effective in supporting the functioning of financial markets and in helping to promote a resumption of economic growth," said Bernanke during the House hearing. "The exit from these programs is substantially complete: Total credit outstanding under all programs, including the regular discount window, has fallen sharply from a peak of $1.5 trillion around year-end 2008 to about $110 billion last week."

As such, the discount window rate of 0.5% will likely increase substantially in April or May.

While the Fed has wavered little in recent months about its intentions to end programs such as TALF by this spring, its stance on the target for the federal funds rate, now at a range between 0% and .25%, is harder to gauge. Though Bernanke strongly hinted at one point in the hearing that a moderate increase in the federal funds rate would be necessary in the near future to stave off inflation, he closed his prepared testimony to Congress saying the economy "continues to require the support of accommodative monetary policies." The mixed messages have led some analysts to predict the Fed will raise the rate at the outset of its next policy meeting, slated for March 16, despite Bernanke's previous vows that the Fed's Federal Open Market Committee would keep the federal funds rate untouched well into 2010.

Brian Shappell, NACM staff writer

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Senate Passes Bill to Right Small Business Tax Wrongs

A bill recently passed by the Senate would prevent small businesses from incurring disproportionately large tax penalties aimed at wealthier citizens and corporations that invest in tax shelters.

The Small Business Penalty Fairness Act would require the Internal Revenue Service (IRS) to scale its penalties according to the benefits received by the offending company or individual that fails to disclose any of its investments in tax shelters. Leaders in the Senate Finance Committee and the House Ways and Means Committee began investigating the issue last November after learning some small businesses unknowingly became involved in these transactions and were being hit with tax fines as high as $300,000 per year while only receiving a benefit of as little as $15,000.

The legislation received bipartisan support in the Senate. "These penalties are intended to punish big corporations who attempt to skirt their tax obligations by investing in abusive transactions, not break the backs of small businesses who unknowingly fail to disclose the proper information," said Senate Finance Committee Chairman Max Baucus (D-MT). "This legislation will protect small businesses from excessive and unfair tax burdens by bringing tax penalties in line with tax benefits."

"I welcome the passage of this bipartisan legislation to protect small businesses throughout the country from overly burdensome and unintended penalties," said Senator Mike Crapo (R-ID). "With similar bipartisan support in the House for this legislation, I hope it is sent to the President as soon as possible."

Specifically, the bill would peg the penalty for failure to disclose reportable transactions to the IRS at 75% of the tax benefit received. The minimum penalty would be $10,000 for corporations and $5,000 for individuals, while the maximum would be $200,000 for corporations and $100,000 for individuals. The Act would also clarify the Department of the Treasury's authority to withhold payment to federal contractors who owe back taxes on amounts paid for property, as well as payments for goods and services.

Jacob Barron, 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.

Roundtable: Commercial Real Estate Needs Government Help

Deep, ongoing struggles in the commercial real estate sector continue to threaten economic growth and business credit conditions. It's part of why a Washington, D.C.-based think tank is calling on the federal government to give commercial real estate financing as much attention as it is directing toward job creation and a health care overhaul.

The Real Estate Roundtable unveiled its 1Q2010 Sentiment Index, indicating a more positive present and future view of economic and real estate conditions. And though the sense of gloom has subsided somewhat, Roundtable President and CEO Jeffrey DeBoer said the commercial real estate sector desperately needs help from the federal government. Specifically, he said the Obama administration needs to create a program that encourages and provides incentives for funding commercial real estate debt refinancing, which is needed to jumpstart a debt deleveraging process key to a more robust economic rebound this year.

"The volume of real estate transactions is anemic," said DeBoer. "Transaction volume is down more than 90% compared with 2007. The scarcity of transactions feeds on itself as value determination is made more difficult, and lenders are more reluctant to extend credit."

Still, the Roundtable's first-quarter report found that there have been some improvements in the availability of capital, albeit not enough. One of its panelists, a lender who was not identified by name, commented that there now is more competition on debt: "One year ago, there was absolutely zero activity; at least now there's some activity." The lender added that this has helped tighten spreads.

Also of note is the widespread belief that the freefall in real estate asset values appears to have passed. The report noted that 45% of respondents believe asset values will improve this year, while 35% believe they will remain stable.

Brian Shappell, NACM staff writer

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U.S. Ag Companies to Look for M&A Opportunities in Adjacent Sectors

As financial markets recover, mergers and acquisitions (M&A) in U.S. food and agriculture are likely to build in 2010, according to a new Rabobank report. However, antitrust issues are likely to drive companies to look for opportunities in adjacent sectors.

In August, the Department of Justice (DOJ) and the USDA announced they would hold a series of public workshops to explore competition issues in the U.S. agricultural industry. These workshops, which begin in March, aim to identify an appropriate role for antitrust and the regulatory enforcement in U.S. agriculture.

While this is not a new issue, the Obama administration voiced concern over the pace and degree of concentration in agriculture, and its impact on the competitive position of farmers. This coupled with other factors triggered the workshops.

"The DOJ's new stance is likely to see companies thinking twice before launching proposals that could face resistance," said Managing Director of Rabobank Food & Agribusiness Research and Advisory (FAR) Bill Cordingley.

Instead, U.S. agricultural companies will look for opportunities in adjacent sectors where the DOJ is less likely to object based on anti-competitive grounds. "In fact, it could accelerate the trend toward industry convergence across sectors as corporations search for new avenues of growth and profitability that avoid triggering antitrust actions," said Cordingley.

This involves U.S. agricultural companies looking for opportunities that unite their operations in ways that have not previously been attempted. For example, convergence:

  • The multi-species, multi-origin animal protein model, which is currently emerging, will be closely examined for high concentration in the beef, hog and poultry sectors;
  • Is likely to continue between the grains, sugar and energy sectors with the ethanol sector being the focal point; and,
  • In the beverages sector between carbonated soft drinks, dairy, beer and spirits will be further explored.

"Companies faced with the ever-increasing need to leverage fixed-cost bases, drive for efficiencies and develop strategic competitive advantages, will seek out these opportunities to grow as the interest in M&A returns this year—despite a more aggressive approach by competition agencies that will present additional obstacles," said FAR Assistant Vice President Erin FitzPatrick.

Source: Rabobank

Liens & Bonds: Turning Notices Into Cash

Thirty-five states and one Canadian province require some type of "pre-lien" prior to filing a lien or bond claim. To learn more, join Greg Powelson, director of NACM-National's Mechanic's Lien and Bond Services (MLBS) for the upcoming NACM teleconference "Liens & Bonds: Turning Notices into Cash" on February 22nd at 3:00pm EST. Powelson will take a look at the preliminary notice. He'll discuss when it's required, why it's required and various state nuances. In addition, this session will provide insight into using the pre-lien as a vehicle to leverage receivables.

Click here to register now.


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