December 30, 2010
Set against a backdrop of an only modest economic recovery, a number of big news stories that affected the B2B credit profession broke in 2010.
The struggles of 2009 loomed large in the nation's rearview mirror, and lawmakers looked to two not-unrelated sources—small businesses and exports—early in 2010 to bolster the still-tepid market. In his State of the Union address, President Barack Obama focused heavily on job creation, calling for increased lending to small businesses and a doubling of exports over the next five years, which he said would support another two million jobs in America. While buttressing international business was a common theme of bills and agreements enacted and discussed throughout the year, the results were mixed and many who may have been stirred by the President's rhetoric were underwhelmed by his accomplishments. By mid-year, the President's newly-founded Export Council had proven to be less than a game changer, leaving more work to be done even as the year drew to a close. There were some notable victories, however, including a record-breaking year for the U.S. Export-Import Bank and 11th-hour finalization of trade agreements, but the excitement that kicked off Obama's February address spent most of the year giving way to much less dynamic realities.
Of course, many corners of the international market did little to inspire confidence among potential exporters; a number of long-established economic risks reached their nadir in 2010, with first Greece and Spain, then Italy, then, later in the year, Ireland seeking economic solace in a harsh austerity plan, a financial bailout or a combination of both. Portugal seems to be next on the chopping block, but each of the five "PIIGS" nations (Portugal, Italy, Ireland, Greece and Spain) still faces a long road back to sustainability.
Much of the controversy surrounding the debt troubles of Europe's problematic countries were escalated by their treatment at the hands of the big three credit rating agencies (Fitch Ratings, Moody's and Standard & Poor's) who received harsh reprimands themselves, some of which were tied to regulatory retaliations and the industry's role in creating the subprime mortgage collapse. Departing Senator Christopher Dodd (D-CT) unleashed his first draft of a drastic financial reform bill that included new rules aimed at the credit rating agencies in March with the final, slightly watered-down version enacted in July. The bill also included provisions that exempted small businesses from Section 404(b) of the Sarbanes-Oxley Act, and charged the Federal Reserve with issuing new regulations on interchange fees as they apply to credit card transactions.
Whether good or bad, it's hard to argue that 2010 was anything other than a busy legislative year on Capitol Hill, as a number of outsized bills were passed in seemingly rapid succession. None were more controversial than the aforementioned Dodd-Frank financial reform bill and the Affordable Care Act, which, in addition to overhauling the nation's health care system, also included a reviled 1099 reporting requirement on any business that purchases more than $600 worth of goods or services from another business within a year. The provision is almost universally unpopular and repeal efforts will continue into the next Congress.
More specific to trade credit and NACM were developments surrounding the Federal Trade Commission's (FTC's) "Red Flags" Rules and the attempts by Sen. Sheldon Whitehouse (D-RI) to enact a new bankruptcy bill. In May, the FTC announced what would be its final delay of the enforcement date for the "Red Flags" Rules, which require businesses to create written policies that govern how they would detect and mitigate any occurrences of identity theft. The year culminated in the passage of the Red Flag Program Clarification Act, which, while limiting who precisely has to comply with the FTC's rules, is expected to do little in the way of exempting trade creditors.
Whitehouse's bankruptcy bill was introduced in late July, after NACM met with the Senator's office regarding the state of the Bankruptcy Code as it applies to trade creditors. The bill would've created a new bankruptcy procedure for small businesses that was similar to the Chapter 12 process for family farmers and fisheries. NACM continued to work with Whitehouse's office on the legislation, and, despite little interest to amend the bill in the lame duck session, NACM will be involved in negotiations on a similar bill in 2011 as well.
Jacob Barron, NACM staff writer
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Leave it to China's banking sector to try to one-up the Christmas holiday.
China's central bank surprised markets Saturday with a 25 basis point increase to its interest rates, which caused a subsequent bump of the same size to mortgage rates there. The reason can be summed up in one disconcerting word: inflation. The home of world's most sizzling economy found worse-than-expected inflation statistics in studies completed in recent days and moved to increase rates as a way to cool off such pressures. It is the first time the central bank has done so in about three years, and most economists and analysts took the news as a thinly-veiled hint that multiple increases should be expected in 2011.
China's off-the-charts growth has started to cause significant price increases on everything from housing to food to energy. It's that inflationary pressure, which the nation has been trying to reduce for months through other means to no avail that could lead to the long-requested revaluation of the Chinese currency. And it's the perceived undervaluation of the Chinese government that has caused growing friction with many trade partners, especially the United States, because of the distinct advantage it allegedly provides.
"The failure to restrict inflation with purely administrative measures has left the Bank of China with few options, and that has prompted the adjustment of interest rates," said NACM Economic Advisor Chris Kuehl, PhD, who is also director of Armada Corporate Intelligence. "The problem now is that this is not likely to be enough either. The flow of cash that has allowed inflation to become a major problem stems from the export-centered Chinese economy. The only real option left for China is to allow its currency to get stronger. Such a move will limit the amount of money flowing into the system, making imports cheaper."
Kuehl added that the adjustment to the yuan is unlikely to be immediate, though it does appear inevitable. Economists including Kuehl and Byron Shoulton, international economist and vice president of FCIA Management, have speculated that part of China's very public reluctance to revalue the yuan stems from the continued pressure of the international community, especially the United States. In essence, the more U.S. trade officials and politicians bring up the issue, the less likely China is to enact the changes because it does not want to appear to be cowering in any way to Western interests.
Meanwhile, China isn't the only well-performing nation to wrestle with potential inflation and how to fight it. It remains to be seen what a recent presidential regime change, despite a smooth transition between party allies, in Brazil will mean for its hot economy. Though the South American nation's economy has emerged as the one demonstrating the most growth in the western half of the world by far, previous boom periods historically were followed by harrowing crashes because inflation was not properly brought under control.
Brian Shappell, NACM staff writer
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The Senate recently passed a six-week extension of the Andean Trade Preference Act (ATPA) and the Trade Adjustment Assistance (TAA) program, sending the 111th Congress' trade priorities out with a yawn.
In a year where officials made much of free trade agreements (FTAs), economic partnerships and increased exports, the very brief extension of these two programs drew only faint praise amid open disappointment from notable lawmakers.
"This is a modest but welcome step that will preserve important benefits for U.S. workers and our allies in Colombia," said Sen. Chuck Grassely (R-IA), ranking member on the Senate Finance Committee, which has jurisdiction over international trade. "I regret that this Congress didn't do more. We're ending the session with much unfinished business on the trade agenda. I hope the 112th Congress will do a better job addressing these many items, beginning with the implementation of our three pending trade agreements with Colombia, Panama and South Korea."
The TAA program provides extended income support and job training to workers, farmers and fishermen who lose their jobs because of increased imports or factory shifts abroad and also helps prevent layoffs entirely by assisting trade-distressed companies to retool and become more competitive. The ATPA, which Congress established in 1991 to encourage Andean countries to diversify their economies away from illicit drug production, provides Colombia, Peru and Ecuador with additional duty-free benefits.
These programs had been deemed essential by Grassley's committee counterpart Max Baucus (D-MT) in the week prior to the extension's package. "These trade programs are absolutely critical for our economy and for jobs...across the country," said Baucus. "Trade Adjustment Assistance provides job training and opportunities for workers here at home, training that is more important than ever in these difficult economic times. Combined, the Generalized System of Preferences and Andean Trade Preference Act support tens of thousands of U.S. jobs while sustaining economic growth and employment across the U.S. and the globe."
The extension was passed just prior to the Christmas holiday, meaning another extension will become necessary just as the next Congress is arriving in Washington.
Jacob Barron, NACM staff writer
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A French-based trade organization holding recent multilateral talks on the commercial aircraft industry has unveiled a new export credit deal. The tentative pact was considered necessary amid the escalation of public financing in the industry post-recession and to level the playing field for U.S.- and European-based manufacturers. However, with the final particulars still somewhat of a mystery, it remains hard to gauge the impact on the aircraft manufacturers and carriers or whether the agreement will serve as a template for similar industries.
During talks held by the Organization for Economic Cooperation and Development (OECD) in Paris, more than a half-dozen nations agreed in principle on terms for state financing designed to help support commercial aircraft exports. Among those approving the deal, principally, were the United States, Brazil, Canada, Japan and several European Union nations. Though the final language of the deal has been hard to come by, it is expected that fees would be adjusted closer to market rates. In some instances, that could mean more expensive credit terms, as part of the agreement appears bent on steering the industry back to borrowing from private sector sources that, like many other industries, dried up during the recent recession years. Concern was beginning to spread that extensive reliance on public-sector financing rather than traditional investor sources would create an unsustainable bubble.
"The objective of the agreement is to create and maintain a market- and risk-based fee system that produces a level playing field between manufacturers, airlines and governments," the OECD said in its December release. "The agreement, if formally approved, will unify the previous disparate financing terms and conditions between large and regional jets. It also contains mechanisms to smooth very sharp market movements. There are no quantitative restrictions on export credit agency programs."
John Hardy, president of the Coalition for Employment through Exports (CEE), characterizes the accord as "a rational approach to an increasingly complicated situation" and, if successful, could lead to broad multilateral agreements in other major capital goods industries where export credit is used to compete with domestic manufacturers/producers. However, the success of the aviation deal remains a big "if" at this point.
"The structure of this is a little conceptual until the final wording is all worked out," Hardy told NACM. "There's a distinct possibility there will be some tweaking of this agreement if the reality is much different than what they're predicting."
Hardy notes two of the significant drivers of the agreement are the end-of-year sunsetting of the Home Market Rule, an agreement between the United States and European export credit agencies not to use export credit as an unfair advantage in each other's backyards, so to speak, and that the Export-Import Bank had previously been unable to offer U.S. carriers the same type of generous terms available to non-American carriers. However, trying to address multiple areas could lead to conflicting goals, Hardy warned.
"You're trying to level the traditional playing field, which for export agencies is usually the playing field for manufacturers. But in this situation, the Treasury [Department] was trying to deal with leveling the playing field for the manufacturers and the carriers (the airline industries themselves) at the same time," he told NACM. "That's a complicated, tricky situation. It'll be interesting how it all plays out." Hardy admits it would be a better situation for everyone if the impact of the agreement was more predictable but, alas, it remains decidedly up in the air.
Brian Shappell, NACM staff writer
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Just before the holiday, two top-ranking Senate officials on the Committee for Small Business and Entrepreneurship brokered an eight-year reauthorization for both the Small Business Innovation Research (SBIR) and Small Business Technical Transfer (STTR) programs. This marks a victory for program advocates since, for the last two years, they've been authorized by seven separate short-term extensions.
Both programs, administered by the Small Business Administration's (SBA's) Office of Technology, ensure that smaller high-tech, innovative firms play a significant role in the federal government's research and development efforts. Eleven federal departments participate in the SBIR, while only five departments participate in the STTR, which annually awards $2 billion to small businesses.
"The SBIR and STTR programs are some of the most effective public-private partnerships in the federal government and a model for other countries," said Committee Chair Mary Landrieu (D-LA). "For years, the programs' futures were in jeopardy, but this deal with the Small Business Technology Coalition and the Biotechnology Industry Organization adds needed stability and support for entrepreneurs with an innovative idea and for the Department of Defense and other agencies that partner with small businesses to develop technologies for our country. This is a good compromise that preserves the integrity of the programs as truly for small businesses."
The agreement brokered by Landrieu and her committee's ranking member, Sen. Olympia Snowe (R-ME), extends the programs through 2018 while also changing some eligibility requirements and increasing award levels under the programs, among other adjustments.
"After several years of vigorous discussion and debate, I am pleased that Chair Landrieu and I are able to announce that this unprecedented, landmark compromise measure to reauthorize the SBIR and STTR programs has passed the full Senate," said Snowe. "First and foremost, this compromise preserves these critical programs as small business initiatives—a central tenet that I have always considered essential to any agreement. At the same time, the legislation allows for limited participation in the SBIR program by majority venture capital backed firms."
The programs were set to expire at the end of next month. Landrieu and Snowe's reauthorization passed the Senate by unanimous consent.
"This reauthorization legislation provides the SBIR and STTR programs with critical allocation and award size increases, and by extending the programs for eight years, it provides small businesses applying to these programs, which award roughly $2 billion annually to small high-tech firms nationwide, with certainty for the future," Snowe added.
Jacob Barron, NACM staff writer
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Though a bit behind the schedule unofficially relayed to NACM, MGM Resorts International (MGM) has largely made good on its promise to settle directly with subcontractors that worked on a massive mixed-use development on the Las Vegas Strip despite an ongoing dispute with the project's general contractor.
A November court filing illustrated that MGM came to terms with more than 90% of the more than 200 subcontractors that worked on CityCenter, the subject of the historically largest lien by general contracting outfit Perini Building last spring. Of those agreements, more than 150 have already received their payments, MGM claimed. MGM officials told NACM this summer that the company planned to take the unique approach of settling directly with subcontractors, many of whom were desperate for payments because of recession-caused financial problems, and would do so by Thanksgiving. Said officials could not be reached for additional comment this week.
Granted, a handful of the subcontractor holdouts will likely have to wait for quite a while. Among them are subsidiaries of Perini as well as some firms that worked on the Harmon Hotel portion of the project, a key piece of the dispute between Perini and MGM. MGM alleged Perini botched the construction of the Harmon Hotel portion of the project so badly that it needed to scrap more than 20 floors from its original design. Perini filed the lien alleging that MGM abruptly stopped paying for work already completed, made thousands of change orders on the project's design well after an agreed-upon deadline and ordered workers off the site in March all in an attempt to buy time because of the casino/resort developer's unrelated and ongoing financial struggles.
Months of bubbling hostility between the two firms was brought to a head with last spring's filing, which registered at a historic $492 million. Likely linked to proof of settlements between MGM and subcontractors, it was reduced in October by about $68 million by a Nevada judge despite Perini's objections. The direct settlements are significant and out of the ordinary. However, public pressure was mounting and several state and national lawmakers publicly pleaded for someone to make right by the struggling subcontractors. The Las Vegas-based contractor told NACM at the time that at least it appeared MGM's intentions were good, not to mention helpful for those who needed a cash infusion from work they'd already completed. The same source said this week it is widely believed that all subs that were willing to settle directly with MGM have done so, though many took less than reportedly owed for CityCenter work.
Brian Shappell, NACM staff writer
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