July 28, 2011
The best that can be said about this month's Credit Managers' Index (CMI) is that things did not get appreciably worse. The latest data suggest a third month of slump, and it appears the economy is languishing in a state that is not quite in crisis but which isn't showing energy either. For the third month in a row, the overall index was slightly over 54. The fact that it went up by 0.4 is nothing much to cheer, as the overall index had been over 55 for the six months prior to May's slip. "If there is anything to be somewhat encouraged by it is that manufacturing improved over the really down month last July, but at the same time there was weakness in the service sector that didn't appear the previous month," said Chris Kuehl, PhD, managing director of Armada Corporate Intelligence and economic advisor to the National Association of Credit Management (NACM).
Very little changed as far as favorable factors were concerned. Sales were essentially flat at 60—slightly down from 60.8—but that is a pretty solid sign given the declines noted in other areas. "It appears sales numbers have started to stabilize and are not that far from the highs reached a few months ago when they crested at 66.3," said Kuehl. The biggest decline was in dollar collections—from 58.1 to 56.2. There have been other signs that collection activity has been slowing, which is consistent with the overall assessments of the economy of late.
"In comparing the CMI readings to other indices, it is apparent the economy has still not committed to either continued growth or a real decline," said Kuehl. "There have been some positive signs from the latest set of leading economic indicators released from the Conference Board, but there have also been renewed signs of distress as far as consumer confidence is concerned. Not surprisingly there is a sense that much has stalled in the economy as uncertainty has been the rule of the day."
Unfavorable factors don't show signs of increased stress and there isn't a lot to suggest much panic—at least not yet. There was a pretty solid improvement—from 50 to 55.6—in the dollar amount of customer deductions. This was accompanied by modest improvements in the number of rejected credit applications, which improved from 50.9 to 51. There was also improvement in the number of disputes, from 49.3 to 50. "These are not major shifts by any stretch of the imagination, but at least they are not trending downward any further," said Kuehl.
The overall index barely changed and the manufacturing and service sectors have simply swapped positions again as far as stress is concerned. The CMI numbers for the last three months show a general slowdown in business activity. There has been a slump in sales, a reduction in the number of new credit applications and a slowdown in the collection process. The economy is essentially stalled and the question is whether this is a reaction to something short term or a reflection of some greater underlying trend. The CMI data hint that the situation is temporary and related to uncertain factors gripping the economy. Much of this information is more anecdotal than anything that can be pinned onto hard data. The majority of the information from the banking sector suggests there is money to borrow. There is available trade credit according to most sources. Businesses are sitting on more cash than they have in a long time and most companies are not having issues paying their bills. The problem is that almost everybody is worried about contingency plans and are sitting back as they wait for something to change.
The demand needed is not there yet and nobody is quite sure why. The jobless situation is certainly a worry, but the fact is that 91% of the workforce is employed. They are nervous about spending and as long as they stay on the sidelines, the manufacturing community does as well. "There are few in the mood to leverage themselves until they have a better sense of what to expect from the government and from the economy as a whole. Everything is more or less in place for expansion, but there has been no trigger thus far and there is plenty to make people more nervous about the future," said Kuehl.
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Bankruptcy "venue shopping" might become a thing of the past if a bipartisan group of lawmakers has its way.
A new bill introduced in the House of Representatives, the Chapter 11 Bankruptcy Venue Reform Act of 2011 (H.R. 2533), would require corporations to file reorganization cases in the judicial district where they have their principal place of business or principal assets. This would, ideally, end bankruptcy forum shopping, whereby debtors seek to file in a jurisdiction that's sympathetic to their needs but far from the company's employees, assets and connecting community.
Legislation addressing bankruptcy forum shopping has been a subject of debate since late 2001, when Enron filed bankruptcy thousands of miles from its Texas headquarters in the U.S. Bankruptcy Court for the Southern District of New York, a court with a reputation for being management-friendly. More recently, forum shopping was again criticized after General Motors also filed in New York, despite the fact that its principal assets are located in Michigan. These two high-profile examples originated on the home turf of two prominent congressmen, House Judiciary Committee Chairman Lamar Smith (R-TX) and Ranking Member John Conyers Jr. (D-MI), chief sponsors of the reform bill.
"Venue-shopping for sympathetic courts has become an all-too-common practice for large companies filing for bankruptcy," said Smith. "Unfortunately, it significantly disadvantages displaced employees, creditors and shareholders who should be able to participate in the reorganization negotiations. This legislation reforms the Chapter 11 venue rules to prevent corporations from fleeing to friendly jurisdictions for bankruptcy, while leaving employees, creditors and other stakeholders without a voice in the negotiations."
"This long overdue legislation will help level the playing field between employees and management in corporate Chapter 11 bankruptcy cases and restore fairness," said Conyers. "Under current law, the very same management that drove the business into financial distress can retain control of the business by choosing to file the Chapter 11 bankruptcy case in a management-friendly venue."
Reforming the Bankruptcy Code's venue provisions has long been a part of NACM's legislative agenda, because forum shopping may limit participation by smaller creditors. To learn more, read NACM's Issue Brief.
Jacob Barron, NACM staff writer
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Turn the clock back to before the economic crash in late 2007—going "green" was the talk, if not the toast, of the town. However, in the present-day, economic malaise in the United States, many companies that jumped into that pool with large investments aren't finding the sustainability wave that many predicted less than a half-decade ago. This is especially the case with those selling and producing products devoted to solar energy. Perhaps it's why an independent U.S. agency is trying hard to facilitate solar exporting deals for domestic companies in markets abroad.
Earlier this month, the Export-Import Bank of the United States unveiled a pair of new solar-energy project deals matching U.S. companies with markets in India, one of the vaunted BRIC nations carrying much of the worldwide economic growth at present. Ex-Im is providing a loan of $16 million for a project enabling Azure Power Rajasthan Pvt. Ltd. to purchase thin-film solar modules from Arizona-based First Solar Inc. and $9.2 million to Punj Lloyd Solar Power Ltd. to buy similar product from Colorado-based Abound Solar Inc. Both will enable the construction of photovoltaic solar power plants in a pair of expanding Indian cities. To date, Ex-Im has approved $75 million in loans joining U.S. producers and Indian companies on solar projects.
"India is a key country for U.S. exports," said Ex-Im Chairman Fred Hochberg. "In the first nine months of fiscal year 2011, the bank has approved $1.4 billion in transactions on behalf of American exporters and their Indian buyers...we anticipate that next year India may very well become Ex-Im Bank's biggest single market."
While a boon for the U.S. companies landing these exporting deals, the situation at home often has not been so lucrative. With construction, rehabs and investment all falling off the charts amid the lengthy recession and slow rebound, talk of and demand for "green" solutions such as solar power garnered increasingly less buzz. To many, the thought of change conjures up concerns regarding upfront costs, especially for companies already struggling to keep their capital reserves in solid standing.
Mike Joncich, manager of the adjustment bureau for the Credit Management Association, believes companies in a variety of industries are likely to be part of another wave of bankruptcies and eventual liquidations before the rebound ramps up. He noted that green enterprises, particularly, were on his watch list, both because of drop in demand and boom-era market saturation.
"A lot of companies started up to participate in that sector—there was a substantial investment in green companies that are making the best of products that are energy- or resource-saving," said Joncich. "But there was over-investment in those industries, and a number of companies are going to fall out that didn't have the right ideas or right business models to survive. Credit managers have to be aware of such phenomena."
The latest casualty, and at a time when the parent company could use some of the good press that "green" has traditionally generated, appears to be BP's solar operation based in Frederick, MD. Company officials announced earlier this week that BP would close the once-key solar plant, which already had been subject to several previous cost-saving cuts. Most of BP's solar manufacturing operations have been relocated to cheaper international markets.
Brian Shappell, NACM staff writer
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As the talks surrounding the nation's debt ceiling continue to collapse and restart on a seemingly endless loop, the U.S. Treasury is facing criticism over how it's spending what little money it has left to spend before default.
Last week, the Treasury announced that it had issued its second batch of capital from the $30 billion Small Business Lending Fund (SBLF), this time in the form of $214 million to a group of 17 community banks. Two weeks ago, it made its first release under the program, offering $123 million to a smaller contingent of six community banks. The capital is geared toward encouraging these banks to lend to smaller companies by making the funding cheaper as the bank increases its overall lending to small businesses.
This brings the total capital recently released under the SBLF to $337 million, which has some lawmakers begging the question: if the nation is as close to default as the Treasury says, then why isn't it being thriftier when it comes to spending?
"In short, the decision to spend this money undermines Treasury's claims that it is doing everything in its power to maintain flexibility in the face of the Aug. 2 deadline," wrote Sen. Orrin Hatch (R-UT), referring to the date that the Treasury has repeatedly claimed is the absolute deadline for a debt ceiling increase, if lawmakers want to avoid a default. "Given the suggestion by the president and others that a failure to increase the debt ceiling would result in a default on the debt and the inability to send out Social Security checks, it seems imprudent at best to provide hundreds of millions of dollars to small community banks, with suggestions that more SBLF spending is on the way."
Indeed, in their release announcing the most recent batch of capital, the Treasury noted that "additional SBLF funding announcements will be made on a rolling basis in the weeks ahead." In a letter, Hatch also voiced his concern about the timeline for the distribution of the SBLF's remaining budget. "The authority of the department to make capital investments through the SBLF expires on Sept. 27, 2011, one year after the date of the enactment of the Small Business Jobs Act," he said. "This means that the department now has only 62 days to spend the more than $29.6 billion in remaining authorizations."
"In other words, between now and September 27, 2011, the Department is authorized to spend nearly $477 million per day through the SBLF," Hatch added.
The Treasury can ask for an extension in this deadline, but it seems unlikely given Hatch's and others' opposition to the program in general, coupled with the reduced appetite for spending in Washington now, and especially after an increase in the debt ceiling, should such a thing successfully happen before a default.
Jacob Barron, NACM staff writer
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The Federal Reserve's latest roundup of economic conditions in the nation's 12 regions sings a familiar tune to reports from the last three or more months: that growth is still occurring in the U.S. economy, but at a noticeably slower pace.
Slow and modest growth is the name of the game, said the latest edition of the Fed Beige Book, unveiled Wednesday. Part of the reason for the latest moderation in the growth pace, especially in the middle of the country, was concern over political disruptions in the run-up of the debt ceiling debate and shutdowns of some governments entirely, particularly Minnesota. Also in play in much of the central region is the wrench that unpredictable weather has thrown into matters in the agricultural sector.
The Beige Book noted that late summer/early summer drought conditions were severe and caused crop losses and off yields throughout the Kansas City and Dallas regions as well as in submarkets answering to the San Francisco and Atlanta Fed offices. On the flip side, flooding plagued parts of the Chicago and Minneapolis regions. Those in the agriculture industry who did see their crops survive, with notable success stories found in St. Louis and Kansas City, did enjoy high prices for commodities such as corn and cotton. However, such higher costs because of weather-related supply reductions and the aftermath of the previous six-week period's gas price spike, mean businesses around the nation had to contend with higher costs of doing business. One light at the end of the tunnel, however, is the belief among Fed contacts that falling gas/oil prices during the latest six-week tracking period will continue in the coming months, providing a boost for growth that could be significant.
Manufacturing remained steady in most districts, though some slowing of growth levels was reported. The two districts with the best gains in the sector were Kansas City, which saw a boost in its high-tech segment, and Cleveland, which saw a noticeable bump in auto production as Japanese supply-chain disruptions finally started easing. Granted, auto producers still are playing from behind, so to speak, and the back up could lead to slower automotive and auto-parts sales for a bit longer.
Credit conditions have changed little, through there were some reports of the cost of capital dropping amid inter-bank competition for well-regarded business borrowers, such is the case in Richmond, Atlanta, Chicago, Dallas and San Francisco.
Commercial real estate was about split down the middle between the have's reporting improvement (Boston, Philadelphia, Cleveland Chicago, St. Louis, Dallas) and the have not's continuing to report weak conditions (New York, Richmond, Atlanta, Minneapolis, Kansas City, San Francisco).
To view the full 12-region Fed Beige Book report, click here.
Brian Shappell, NACM staff writer
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