December 19, 2013
U.S. District Judge John Gleeson approved the controversial settlement in the Visa-MasterCard antitrust case December 13, putting what might only be a temporary end to years of litigation over how the world's largest card networks set their interchange, or "swipe," fees.
The final settlement will only cost Visa and MasterCard $5.7 billion, which is still the largest antitrust settlement in U.S. history, but lower than the originally negotiated price tag of $7.25 billion in direct payments and temporary interchange rate reductions. The cost of the settlement fell due to the fact that 8,000 merchants, among them retail titans like Amazon and Wal-Mart, opted out of the deal.
Opponents were swift to respond. "We are very disappointed that this deeply flawed settlement has been approved. It is not supported by the retail industry and would do nothing to reduce swipe fees or keep them from rising in the future," said National Retail Foundation (NRF) Senior Vice President and General Counsel Mallory Duncan. "The settlement permanently ties the hands of thousands of businesses who wanted nothing to do with this misguided case, and a decision to approve it violates established law and common sense," she added, noting that NRF will review the case and the ruling to identify the opportunities for an appeal.
Final approval of the ruling comes just over a year after Gleeson preliminarily approved the settlement back in November 2012. That earlier ruling allowed merchants to surcharge their customers for paying with a credit card, a practice that first became permissible under Visa and MasterCard's acceptance agreements with merchants as of January 2013. The final ruling in some ways cements a merchant's right to pass down their processing costs, at least for the time being, although it still does not supersede state law bans on surcharging, which have come under scrutiny following a recent ruling by another Judge in New York that said the state's surcharging ban was unconstitutional. Similar challenges are expected in other states in 2014 which could pave the way for more widespread surcharging.
Still, retailers, for whose benefit the settlement seemed exclusively crafted, are not expected to begin surcharging both because of competitive concerns and because most of them have built their card processing costs into their pricing. "The retailers, the big box stores, they've passed along the cost of interchange anyway," said United TranzAction's Rudet Fountain. "They know that 90% of their transactions are going to be paid with a credit card, so they account for the cost because they know they're going to incur it."
For companies that sell to other businesses, surcharging can look considerably more attractive, especially after this final approval of the settlement, although again, there are several issues that might make the process of instituting a surcharging program more trouble than it's worth. To hear more from Fountain about surcharging and B2B sales, check out the upcoming January 2014 issue of Business Credit magazine.
- Jacob Barron, CICP, NACM staff writer
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If one of the goals of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) when it was enacted in 2005 was to increase creditor recoveries, then the legislation may have fallen short when it comes to unsecured claims in commercial bankruptcies.
NACM's December survey, which asked "has your company seen its percentage recovered on unsecured claims in commercial bankruptcy cases increase, decrease or stay the same since BAPCPA took effect in October 2005," found that 47% of respondents indicated that the percentage of unsecured claims remained essentially the same pre- and post-BAPCPA. About 19% reported that the percentage of unsecured claims recovered had actually decreased, and 11% found the opposite, that their unsecured recoveries in commercial cases increased.
Of the respondents whose recoveries had improved since BAPCPA, the majority of them credited a change in their staff or in the way their company approached filings. "We've implemented a more comprehensive process to addressing the bankruptcy process which includes training for team members to become more familiar with bankruptcy law, partnering with our internal legal department and utilizing external bankruptcy administration resources," said one participant. "Part of our increase can be attributed to the fact that we hired a paralegal with a bankruptcy specialty," said another.
Decreases in unsecured claims post-BAPCPA were generally chalked up to other aspects of the bankruptcy process, most notably preferences. "We have been hit with more preference claw-back claims in recent years that have directly resulted in a decrease in recoveries," said one respondent, whose experience was echoed by others throughout the comment section. "We have seen a marked increase in the number of preference claims made," said one participant. "Even those without merit had to be settled, even if only at very low percentages."
But again, the most common response points to the conclusion that BAPCPA didn't have much of an effect on unsecured claims one way or the other. Recoveries were low before BAPCPA, and they continue to be low after BAPCPA. "I have not noticed any difference in the general unsecured claims recoveries in recent years compared to pre-2005," said one respondent. "Little to nothing is still little to nothing."
The next NACM survey will go live in January.
- Jacob Barron, CICP, NACM staff writer
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Need information? How do you find your way between fact and fiction, hope and charity, and faith and foolishness?
Join an NACM industry credit group.
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Contact your local NACM Affiliate to learn more about NACM credit groups and to find the group for your industry.
Long before Black Friday drew disappointing results, Industries to Watch warned that retail was in the midst of an uphill financial battle. Bruce Nathan, Esq., partner with Lowenstein Sandler LLP, called it quite possibly the biggest industry of concern regarding insolvency, especially for those late to the e-commerce party. Now, clothier Loehmann's has become an unfortunate example of this very situation as it will shut its doors due to its Chapter 11 bankruptcy filing this week.
The filing was the company's third, and an auction of assets is tentatively slated for December 30. Loehmann's last reorganized a little more than three years ago. The nearly 100-year-old company never found its footing in an increasingly online-driven clothing marketplace, partially because it was among others "playing from behind": those that waited too long to address the changes.
While Loehmann's had its issues for many years, don't expect it to be the last retail bankruptcy, especially in clothing. A number of issues continue to dog the sector, like a slow e-commerce response and overleveraged financials. "The bottom line is you are going to see a shakeout in the retail area in the next few years," Nathan said.
Another distressed industry, as Industries to Watch noted in September, is coal—reappearing in the headlines this week as a U.S. Bankrupcty Court judge approved the restructuring plan of one of the industry's key players, Patriot Coal Corp. While there is much talk of a clean slate and a newfound liquidity infusion from the likes of Deutsche Bank and Barclays, concerns about Patriot's business and that of competitors linger.
Competition from natural gas presents "a permanent concern for the industry and a real obstacle," said Adam Rosen, director of PricewaterhouseCoopers LLP's financial restructuring group, in September. Little has changed since. In addition, there is the ever-present threat of mine closures and costly renovation mandates stemming from escalating federal regulatory efforts to address safety or environmental concerns.
"You've seen producers publicly say they think the worst is behind them, but they're not overly bullish in the near term," Rosen said. He added that deep struggles should be expected for at least another year. Those without solid cash standings to weather that storm are likely to face a solvency crisis.
"The sentiment is it will not be a fast recovery...but recovery is expected," Rosen noted. Perhaps more than any other in that industry, the next several months of activity out of Patriot will warrant close attention for anyone providing credit terms to the company or those downstream.
- Brian Shappell, CBA, CICP, NACM staff writer
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The Federal Reserve finally answered the long-asked "when" question regarding pulling back on its asset buying-based stimulus efforts, announcing that a slight decrease in the pace of purchasing will begin early next year. NACM Economist Chris Kuehl, PhD predicted the move would "cause a ripple" in the business and investment worlds as the "money crutch" will start to vanish soon.
The Federal Open Market Committee (FOMC) broke December 18 from its two-day fiscal policy meeting, the last for 2013, with the announcement that it would leave rates untouched at a range between 0% and 0.25% and would roll back the assets-purchasing pace by about $5 billion per month. The decision was made with acknowledgement that the economy is now expanding at a moderate pace, longer-term inflation expectations have remained stable and risks to the positive economic outlook have become more balanced.
"In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the Committee decided to modestly reduce the pace of its asset purchases," the Fed posted in a statement on its website. "Beginning in January, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $35 billion per month rather than $40 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $40 billion per month rather than $45 billion per month." It added that the FOMC would maintain its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities as well as rolling over maturing Treasury securities at auction.
FOMC member Eric Rosengren fought the decrease on the grounds that still-elevated unemployment and a below-target inflation rate rendered a change in the purchase program "premature."
Kuehl said the move to begin tapering early next year is "no shock." The economist believes markets could interpret the action as the Fed signaling a deeper adjustment in its thinking sooner than later. However, Kuehl also noted that the somewhat surprising deeper concern about deflation rather than inflation could cause the Fed to "keep its foot on the gas" more than it wants to during the next few policy meetings in 2014.
"The expectation was that inflation would become more likely the more money was dumped in the economy, but that has not been the case," he said. "The last thing the Fed wants to do is invite Japanese‐style deflation into the equation."
- Brian Shappell, CBA, CICP, NACM staff writer
Employers—Time to Focus on Your Staffing Needs
As companies begin to expand and add staff, count on NACM to post your credit department openings.
There are some great new job postings right now in the Credit Career Center!
The Export-Import Bank of the United States (Ex-Im) announced last week that it had approved more than $27 billion in authorizations in fiscal year 2013, resulting in an estimated export value of $37.4 billion spread out over a record high 3,842 export transactions. The bank's real victory, however, is that in FY 2013 it approved 3,413 small-business authorizations, representing 89% of all transactions and marking the highest number of small business deals in the bank's history.
"Over the past five years, Ex-Im Bank has created or sustained an estimated 1.2 million American jobs—including 205,000 jobs in FY 2013 alone," said Chairman and President Fred Hochberg. "The bank is a great example of government operating at the speed of business."
In the last five years, between FY 2009 and FY 2013, Ex-Im has assisted in financing more than $188 billion of U.S. exports. For this year, the industry receiving the most Ex-Im support was manufacturing. With $8.4 billion in authorizations in FY 2013, manufacturing became the only industry to receive more financing from Ex-Im than the aircraft industry for the first time since 1997.
Overall exports from the U.S. in 2013 are already on track to break a record, with figures for total exports of goods and services hitting $2.3 trillion. Furthermore, Ex-Im continues to turn a profit for American taxpayers. "Over the past five years Ex-Im Bank has generated $1.6 billion for U.S. taxpayers, above and beyond all administrative operating costs, claims and loan loss reserves we have set aside," said Ex-Im Bank Director Sean Mulvaney at FCIB's 24th Annual Global Conference in September. "We operate at no cost to the taxpayers. It is a self-sustaining agency. In fact, in 2012, the Bank collected $1 billion in fee income and sent more than $800 million (the excess of Bank expenses and loan loss reserves) to the U.S. Treasury."
To learn more about how to grow your business through exporting, visit FCIB's website here.
- Jacob Barron, CICP, NACM staff writer
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The three largest credit ratings agencies, all based in the United States, have faced plenty of criticism for their decision-making and publicly-released outlooks both before and after the global economic downturn. But the European Union appears to be setting the stage to actually sue or fine the trio over perceived damages and ongoing business practices.
The European Securities Markets Authority (ESMA) published a report this month that claims numerous deficiencies are in play regarding how sovereign ratings are generated by Fitch Ratings, Moody's Investors Service and Standard & Poor's. The report found that the agencies demonstrated problems that included conflicts of interest, confidentiality in disbursement of ratings information, timing of information releases and resource allocation (not enough qualified analysts or use of junior-level or newly hired employees). The Authority warned that it has "required the CRAs to put in place remedial action plans to address the issues identified and will monitor their progress against these plans as part of its ongoing supervision."
The three agencies were criticized heavily for their performance in ratings of both companies and countries during the run-up to the worst global recession in more than half a century. In addition, European leaders continued their criticism as the agencies routinely lowered ratings and put warnings on high-debt nations including all of the PIIGS (Portugal, Ireland, Italy, Greece and Spain) in recent years, even though all have since proved to have deeply-rooted fiscal issues.
The EU previously struck at the agencies with what amounted to an attempt to censure them or, at the very least, tightly control aspects of information releases. Last winter, the EU fast-tracked legislation that restricted the timetable in which any of the agencies could release news of sovereign credit ratings of any EU member. The regulations also empowered investors with the right to take legal action against the agencies if financial losses could be tied back to vague measures of "gross negligence" or "malpractice" on the agencies' part.
- Brian Shappell, CBA, CICP, NACM staff writer
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