November 11, 2010
Slightly more than half of all trade creditors (51.6%) recover less than 5% from their Chapter 11 debtors within the first two years after filing.
According to NACM's October survey, unsecured trade creditors often receive little from their customers in the first 24 months after they file Chapter 11, and many receive nothing at all. Another 12.2% noted that they only had a recovery rate of 6%-10%, while another 8.1% were lucky enough to recover between 11%-20%. Only about 14% of survey respondents said their companies recovered any more than that.
Moreover, a large portion of respondents noted they recovered as much from larger bankruptcies as they did from smaller ones, suggesting that size has little to do with payment performance in Chapter 11. When asked if their company's recovery rate was higher, lower or about the same when dealing with small cases (under $7.5 million in debt), 46.1% of respondents said that their recoveries were "about the same." Still, a notable contingent of participants (25.9%) said their recovery rates were lower when the debtor was smaller. Only 9.6% of respondents said they recovered more from smaller debtors than from larger ones.
"I think smaller companies are less likely to manage a reorganization and often convert to Chapter 7," said one participant, echoing a theme that came up over and over again in the survey comments. "Many of them seem to convert to 7 without any payouts. So on average, we receive less than 5% total recovery," said another respondent.
"Chapter 11 is a joke these days. It's just that until the assets can be sold off, then it converts to Chapter 7," said one participant.
Many respondents noted that while they often receive little or nothing within two years after their customer files, the cases tend to drag on even longer than that. "It has taken more than 24 months to get a bankruptcy done. They usually extend the plan date at least once and sometimes twice," said one respondent. Another participant noted that this was also the case for larger debtors. "Most of the large Chapter 11 filings yield no recovery within the first 24 months."
Of the respondents whose companies did have reasonable recovery rates, many noted they had succeeded in these cases due to attaining critical vendor status and effectively working out a payment plan that resulted in full payment over time. A number of others, however, said their recoveries only came when they possessed liens or some other form of security on what their debtor owed.
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Jacob Barron, NACM staff writer
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The Asian trip by President Obama was delayed twice by pressing matters at home. There may have been some level of understanding among political leaders in India and other Asian states, but the populations are sensitive as to how they are treated by the U.S. (and other global players) and the decision to stay in the U.S. reflected their perceived rank on the priority list. That assessment may be unfair, but the expectations with Obama were high in the world. Obama's campaign suggested he would be a much more engaged global partner and much was made of his time in overseas locales. The fact is, presidents have to attend to matters at home and that makes foreign issues that much trickier.
The question now is whether the trip to India is going to signal a new relationship between two nations that have often been cool toward one another. There will be two key questions to answer: What does India stand to gain from all this and what does the U.S. stand to gain? The answers are complex. At first blush, the Indians seem to have received the most thus far—at least from a diplomatic perspective. The U.S. is now front and center in backing India's desire to be added to the UN's Security Council as a permanent member. This is a far bigger deal for India than many in the U.S. realize. For the majority of Americans, the United Nations is a body for which they hold limited respect. They understand the humanitarian role the organization plays and generally approve of its handling of refugees, world hunger and development issues, but their attitude toward the UN's political role is generally pretty hostile. At best, the UN looks powerless to impact world tensions and at worst it is perceived to be dominated by U.S. enemies.
The UN is much more vital to India and for years there has been resentment over the make-up of the Security Council. The five permanent members with veto power are the victors of World War II: Britian, China, France, Russia (USSR then) and the United States. India has been the de-facto leader of the non-aligned movement for years, but its voice was not as loud as it could have been. Now that India is also emerging as a dominant world economic player, the country wants that recognition. The Big Five still have the power to reject India's application, and China will most certainly block the move, but the U.S. is now publicly on board, and that matters.
As vital as this issue is, the crux of the new relationship will revolve around two issues: trade and South Asian politics. The remarks were careful and predictable when it came to business. The deep antagonism toward China in the U.S. does not apply to India, but the majority of Americans are aware of job losses to India and that many are the kind of technical jobs that Americans once thought they had a lock on. Obama took great pains to point out that trade with India will bring jobs to the U.S. as well. That connection is harder to show than the job losses and that is politically dangerous. The Indian economy is complex and still closely guarded. This is also a fragile democracy that doesn't give its leaders the ability to make wholesale changes that the population is not excited about.
Then there is the whole matter of South Asia as a region. The U.S. is stuck in the middle of ongoing tensions between India and Pakistan and that position becomes more untenable each day. The U.S. engagement in Afghanistan commits the U.S. to engagement in Pakistan as well, whether it is desired or not. At the moment, the U.S. would likely prefer to walk away from the mess in Pakistan but can't because of the needed help in dealing with the Taliban. Pakistan is deathly afraid of stronger ties between India and the U.S., further complicating matters. The U.S. is tilting toward India and that will create a very troublesome situation in Pakistan—especially if the current government falls.
Source: Chris Kuehl, PhD, Armada Corporate Intelligence
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Coming out of the Republican midterm election win, the knee-jerk analysis was that a boost for small businesses should be expected, especially in the area of trade. However, the president of a domestic-based pro-export trade association contended that President Barack Obama's reaction to his party's losses could go in two very different directions based on a couple of successful historic templates. And one almost surely assures legislative gridlock in Washington, D.C.
Obama will have a chance to send a clear message about how serious he is on the issue of trade in the short- and medium-terms quite quickly, said William Reinsch, of the National Foreign Trade Council. With the economy in need of a jolt and pro-business Republicans, who grabbed control of the House and lessened their minority status in the Senate, sweeping into Capitol Hill, it is expected Congress will be more amenable to trade issues for the next two, perhaps four, years. That said, perhaps the most obvious low-hanging fruit, where Republicans, Democrats and the administration could show a sense of cooperation, would be pushing forward a trio of languishing free-trade agreements with Panama, Colombia and South Korea.
"Even just getting the Korea agreement done says we're serious on trade," Reinsch told the National Economists Club last week. "It would have an enormous impact."
Reinsch, like many political experts, said the future of trade improvements, and perhaps any level of bipartisanship itself, will depend on Obama making the first move toward compromise. President Bill Clinton did so after the Democrats were handily defeated by the GOP in the 1994 midterm election, and it has been argued that the next two to three years were among the government's most productive in decades. However, it's not the only workable option for Obama to pursue when thinking about holding onto the presidency, not to mention his agenda, in 2012. Enter the Harry Truman model.
Truman, like Clinton, was successful in garnering a second term in the Oval Office and keeping his power base. However, unlike Clinton, Truman went into attack mode versus what he branded an uncooperative, partisan, "Do Nothing" Congress. Voters, in the end, sided with Truman in his standoff with Congress.
"It's not immediately clear he's going to choose the Clinton strategy," Reinsch said of Obama. "If he feels strongly enough that his direction is the right one, he may just continue the course..." Additionally, Obama obviously isn't the only player who can throw a large wrench into the spirit of cooperation—one businesses that want to see trade and tax cut advances in the near future would like to avoid.
"[GOP] lawmakers could say, ‘Why give the president a victory?' It's a philosophy that makes everything impossible," said Reinsch. He added that one thing Obama is missing that Clinton had is a booming economy to persuade Republicans to reach across the aisle. And remember: several Republican candidates, especially Tea Party members, ran campaigns centered around not cooperating with the Washington establishment and/or Obama.
More from William Reinsch's National Economist Club presentation can be found in this week's eNews story on Brazil.
Brian Shappell, NACM staff writer
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Congress will return for a final Democratic-controlled lame duck session this Monday, but expectations for what they'll actually accomplish before adjourning are low.
Following last week's midterm "shellacking," as President Barack Obama put it, much of what the Democrats had hoped to accomplish before closing the session may be tabled, mainly to avoid any bruising legislative battles before a new Republican-led House and more evenly split Senate take control in early January 2011.
Previously, Democratic leadership in both the House and Senate had floated the idea of taking on as many as 20 bills before leaving for the holiday recess. While vital issues like expiring tax cuts and funding the federal government will, in all likelihood, be addressed, other items like Special Social security payments to seniors and repealing the "don't ask, don't tell" military policy will likely be delayed.
Even lower on the radar is a bankruptcy bill proposed by Sen. Sheldon Whitehouse (D-RI), which NACM has worked on with the senator and his office. Although Whitehouse staffers had hoped to include the Small Business Job Preservation Act (S. 3675) in the lame duck agenda, action on the bill looks even less likely in the post-election environment, meaning the bill will have to be resubmitted and reconsidered in the upcoming 112th Congress.
NACM has worked for months with Sen. Whitehouse on S. 3675, which aims to create a new small business bankruptcy procedure that increases the chances for smaller firms to successfully reorganize. Support for bankruptcy reform in general has slowly spread around Capitol Hill, most recently with outgoing Sen. Christopher Dodd (D-CT) commenting in an interview that the Code should be reformed to more efficiently handle companies that are highly interconnected to the U.S. market at large.
While Republicans are basking in a post-electoral afterglow, and are more energized than they've been in years, even they aren't eager to get down to business in the lame duck session. Politically, they could just as easily wait until the new Congress arrives, which allows them to present a stronger opposition to any Democratic initiatives while also letting them take credit for whatever passes in the early months of the new session, if any legislation escapes what's sure to be a pervasively gridlocked legislative season.
Stay tuned to NACM's eNews and Credit Real-Time blog for updates on government affairs.
Jacob Barron, NACM staff writer
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The election of a former political radical-cum-longtime leader's protégé in Brazil should not be seen as a threat to the nation's newfound economic clout. However, not everyone in the exporting game believes that the pearl of the South American economy will up its efforts to extend an olive branch to the United States and its businesses.
Fitch Ratings and Standard & Poor's strongly hinted that their outlooks and credit ratings for Brazil would be raised in 2011. That depends largely on the continuation of outgoing President Luiz Inacio Lula da Silva's policies by just-elected Dilma Rousseff. Rousseff, a former leftist radical, has become more of a pragmatist in recent years and served closely under the popular "Lula" as his cabinet chief. Still, the ratings agencies intimated they need to see "fiscal restraint," in an apparent nod to what some believe will be Rousseff's temptation to help the lower class, especially laborers, at the expense of now-thriving businesses.
Rousseff's willingness to continue the business-friendly approach by the nation could be critical to domestic exporters, as the sputtering American economic rebound has many, including President Barack Obama, looking at trade as a growing necessity for U.S. companies to flourish in an underwhelming post-recession period.
As noted in previous eNews and Business Credit stories, Brazil was ranked tenth among nations receiving exports from U.S. companies, taking in $41 billion in products in 2008, according to the U.S. International Trade Commission. And that number is expected to rise among nearly all predictions. Brazil is part of a trio of nations known as the BICs (along with India and China) that are expected to drive economic growth as much of the industrialized world continues to sputter through stalled recoveries. Analysts predict BICs will account for more than 25% of the world economy by 2015 and more than 26% of middle class consumption by 2020. The U.S. transportation industry has benefitted most, thus far, from Brazil's growing consumer appetite, though many contend domestic companies have not tapped into Brazil enough to date.
However, the U.S.-Brazilian trade pipeline looks less and less likely to be an open spigot for U.S. producers, said William Reinsch, of the National Foreign Trade Council. He said finding a win-win trade situation with any of the BICs has become more difficult to attain, and that problem will likely continue to grow.
"They're demanding more and more from us when we have less to give," Reinsch noted, saying Brazil could be the worst of the three. Reinsch said negative feelings regarding the United States and its past trade policies remain in each of the BIC nations. Some key trade policymakers appear to hold grudges over what they believe were years of U.S. exploitation of such nations and believe newfound efforts to slow industrial activity in the name of climate control/environmental protection are simply a rouse to take the wind out of their growth, he added. That makes trade with these nations tougher than many will admit.
"It's almost as if they [the BICs] talk ahead of time to find out who's going to be a problem that month," said Reinsch.
Brian Shappell, NACM staff writer
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The latest entry in the Basel Accords, Basel III, could pose a threat to the ongoing global economic recovery, according to some banking and industry associations. A recent letter released by the Bankers' Association for Finance and Trade (BAFT) and the International Financial Services Association (IFSA) argued that the new banking regulations, which, if implemented, would increase capital requirements for trade finance transactions, could derail the already treacherous trade finance market, especially in emerging countries.
According to BAFT-IFSA, this proposed increase in capital requirements would increase the cost of trade credit, thereby slowing commercial activity in developing markets, upon whose shoulders the global economic recovery largely rests. Basel III could also affect small- and medium-sized enterprises (SMEs) harder than their larger counterparts, since these entities generally rely more heavily on trade finance instruments than revolving bank loans.
The Basel Committee on Banking Supervision (BCBS) first released a draft of Basel III in late 2009. Debate on their more stringent capital requirements, among other suggested rules, continues, but all major Group of 20 (G20) financial centers are expected to endorse Basel III at this week's meeting in Seoul.
"Clearly we support the Basel Committee's goal of improving resiliency in the banking sector," said Donna Alexander, CEO of BAFT-IFSA. "However, we wish to highlight that trade finance instruments maintain a much lower risk profile in comparison with other financial instruments." According to Alexander, trade finance typically involves short-term instruments that are fixed and self-liquidating by nature, making them both useful to exporters while posing little risk to the bank doing the financing.
"Failure to take this into account could result in reduced trade flows, at a time when affordable trade credit is essential to continued economic recovery around the globe," she added. "We stand ready to help craft workable solutions to what we believe are the unintentional consequence of well-intended measures."
To learn more about Basel III, stay tuned for the forthcoming January 2011 issue of Business Credit magazine. Click here to get your subscription started today.
Jacob Barron, NACM staff writer
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