eNews August 4, 2011

August 4, 2011

News Briefs

  1. NACM Members See Customers Walking Away Instead of Filing Bankruptcy
  2. Municipal Bankruptcy Roundup: RI City Finally "Falls"
  3. President Obama Signs Debt Ceiling Increase
  4. Auto Supply Disruptions Easing, Selling Conditions Aren't
  5. GDP Worse than Expected
  6. Brazil Continues Pressing Currency Manipulation Impact on Trade


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NACM Members See Customers Walking Away Instead of Filing Bankruptcy

A slim majority of respondents in NACM's July monthly survey have seen an increase in customers that simply walk away from their business rather than file bankruptcy.

When asked if they've seen "an increase in customers that, instead of filing bankruptcy, simply close their doors and walk away from their business," 51% of respondents answered "yes" and 44% of respondents answered "no." The remaining 5% of participants weren't sure.

Some respondents noted that businesses seemed to be taking hints from the many consumers who have simply walked away from their mortgages following the housing and banking crises of the last few years. "My take on this is that business owners have seen consumers close the door and walk away from their house when they could not pay," said one participant. "Is it then so odd that we would see businesses following suit?"

Others noted that walking away is a means to clearing the slate for some debtors, and that many of them are back in business soon after claiming that they have no way to pay their creditors. "To make matters worse, many of them open up within a few days under a new name and act like nothing happened," said one respondent. "Some of these clients actually start another similar business as well," said another.

Ultimately, the act of simply closing a company's doors and leaving the business behind seems relegated to the world of smaller companies. Survey participants noted that larger companies typically can afford the high cost of filing bankruptcy, should it be necessary. Small businesses, on the other hand, can't afford an actual filing, and choose to simply walk away instead. "They don't have the funds to file bankruptcy so they are walking out and closing the door and resurfacing somewhere else or under a new name to start over," said one respondent. "I think most have realized that bankruptcy costs money, and they are unable to absorb the fees, still continue in business and make a profit even though they have alleviated debt," said another. "Financing is becoming more and more difficult to obtain."

This poses a number of challenges to trade creditors, most notably in the form of an astronomically more difficult collection process. "It does make collection much harder, if not impossible," said one respondent. "I have one customer whose attorney advised 'closing the doors' versus filing bankruptcy. That customer owed in excess of $500,000 to creditors." However, the costs of a bankruptcy filing go both ways, weighing heavily on the debtor as well as its creditors. Some participants noted that having a customer walk away, at the very least, saves the hassle that comes with a filing and could end up being better for the creditor in the long run. "It's probably a good idea for them to take this course of action," one respondent said. "There are usually no assets and walking away eliminates unsavory trustees from coming to the creditors for preference payments."

NACM's August monthly survey is now live and asks about venue issues in bankruptcy. Click here to participate now.

Jacob Barron, NACM staff writer

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Municipal Bankruptcy Roundup: RI City Finally "Falls"

In what could be an aberration, or the start of a widespread trend caused by the stagnant economy, the first municipality among a group tied to recent widespread media coverage of debt problems has filed for bankruptcy protection.

Facing pension obligations of about $80 million and an estimated $25 million deficit projection through 2016, the state-appointed receiver representing Central Falls, RI opted to file for Chapter 9 bankruptcy this week. It was seen as the only option to avoid financial doom after requests for retired employees and their widows to voluntarily cut pensions were rejected. A federal judge could potentially force such concessions if her/she sees fit. It is the fifth, but most noted, municipal bankruptcy filed in 2011.

The bankruptcy filing from the small Rhode Island community, not far from Providence, would pale in comparison, financially, with one pending in Jefferson County, AL. The county, which would stand as the largest municipal bankruptcy in U.S. history, seemed to get at least a temporary lifeline in recent days as one of its key creditors stepped in last week offering a renegotiation plan. Local reports indicate the creditor and Jefferson County remain far apart on terms thus far during negotiations, which are related to the more than $3 billion in debts tied to a sewer rehab project there several years ago. Alabama Gov. Robert Bentley noted earlier this summer that Chapter 9 was "a very strong possibility."

Meanwhile, the mayor of Pennsylvania's capital city is scraping to save pieces of a state-recommended debt plan to prevent the city from filing Chapter 9 that failed to pass the city's council two weeks ago in a 4-3 vote. On Tuesday, Harrisburg Mayor Linda Thompson publicly offered up a debt plan not too different from the one proposed by the state. Thompson made changes to appease locals, who believe city residents would shoulder an unfair portion of the sacrifices called for in the state plan by adding a commuter workers' tax and by leasing its parking garages out, instead of selling them as suggested by the state. But, like the state plan, Thompson advocated selling its trash incinerator entirely. The failed trash incinerator project, sold to voters as a cash generator, stands as the primary cause of Harrisburg's massive debt problems.

Pennsylvania state lawmakers hurried in recent weeks to pass S.B. 907, which would strip any third-level city—Harrisburg fits that distinction—of state funding if it files for bankruptcy before July 2012. Some city lawmakers still believe bankruptcy is an option that should be explored, despite the ramifications, which likely would include sullying the capital city's reputation and making it more expensive for itself and other similar-sized Pennsylvania cities to borrow.

Is Chapter 9/municipal bankruptcy a topic that you'd like to hear more about, primarily in the form of a teleconference hosted by one of NACM's top legal experts? Please let us know what you think by emailing traceyf@nacm.org. Please put "Chapter 9 teleconference" in the subject line of your response.

Brian Shappell, NACM staff writer

Distressed Business Services

Many NACM Affiliates are involved in a national network to provide assistance in the rehabilitation (if possible) or liquidation (if necessary) of businesses in severe financial difficulty.

While courts can take several months or more to start a reorganization plan, NACM Affiliates can assist in getting a plan approved in as little as 30 days. Most helpful is the knowledge that experienced professionals are ready to step in at the most difficult time. NACM Affiliate staff members can serve as secretary to creditors' committees, provide other needed advisory services and are fully aware of the prevailing laws and regulations relevant to each situation.

Click here to learn more about NACM's Distressed Business Services.

President Obama Signs Debt Ceiling Increase

President Barack Obama signed the debt ceiling increase bill into law earlier this week, marking an end to a debt crisis that threatened to throw the country into default.

After passing the House on Monday, the Senate approved the bill in a 74-26 vote on Tuesday, and sent it immediately to the president's desk mere hours before a Treasury-stipulated deadline by which the country would no longer be able to meet its obligations.

As previously reported, the deal raises the debt ceiling in two stages, initially providing an immediate $400 billion increase in the $14.3 trillion borrowing cap, then raising it another $500 billion this fall. The agreement also cuts agency budgets and creates a bipartisan committee to draft legislation that finds an additional $1.5 trillion in deficit cuts that will be voted on later this year.

Agreement on the new bipartisan committee will be incentivized by the fact that failure to find common ground on where to make cuts would trigger automatic reduction cuts across the board, including cuts to defense spending.

While the deal prevented an official default, a ratings downgrade from one of the big three credit rating agencies, Fitch, Standard & Poor's and Moody's, could still be forthcoming, due to the fact that the bill kicks many major decisions down the road and leaves investors with little in the way of certainty.

Following the debt ceiling increase, Fitch reaffirmed its AAA rating for the U.S. over the short term, while acknowledging that the country still faces considerable fiscal challenges. Moody's followed suit, affirming its AAA government bond rating for the U.S., but altering its outlook to a negative one. "In assigning a negative outlook to the rating, Moody's indicated, however, that there would be a risk of downgrade if (1) there is a weakening in fiscal discipline in the coming year; (2) further fiscal consolidation measures are not adopted in 2013; (3) the economic outlook deteriorates significantly; or (4) there is an appreciable rise in the U.S. government's funding costs over and above what is currently expected," said the company in its announcement.

As of Wednesday, Standard & Poor's was the lone rating agency holdout, remaining silent on a possible downgrade to U.S. debt.

Jacob Barron, NACM staff writer

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For more information on NACM's MLBS, click here.

Auto Supply Disruptions Easing, Selling Conditions Aren't

Though automobile and auto-parts manufacturers are greeting the easing of Japanese-influenced supply-chain disruptions as good news, the economy is preventing the industry from getting any kind of smooth ride as questions linger about the growth rate's ongoing inability to hit a higher gear.

This week, the largest three U.S. car manufacturers all reported significantly higher sales in July, though that doesn't present the entire picture. GM officials, while discussing their 8% sales increase, also warned that slumping consumer confidence was a massive concern. Additionally, the increase from May and June can't be taken as a cue to pop the champagne, as both of those months fell well short of analysts' predictions and expectations.

Those in the industry hoped the arrival of the year's second half would foreshadow growth, especially with improvements to the supply line. Without a boost to the supply line, dealers would have toiled with depleted inventory to sell to customers, which would, in turn, slow the need for production at manufacturing and parts-production plants. But even with the better-than-expected production ability in Japan, malaise in the economy appears to be too much of a drag to fully overcome.

Still, the faster-than-expected recovery of Japanese manufacturers of auto parts, especially its heavily relied upon electronic components, was greeted as positive news during a review of the last six to eight weeks of economic conditions published in the Federal Reserve's latest Beige Book. This was most notable in the District 4 area, which includes Ohio and Michigan.

Steel producers had blamed sluggish shipping conditions for the second quarter on the earthquake/tsunami-caused problems in Japan having a domino effect on domestic car producers. However, both steel and auto manufacturers reported that the disruptions have diminished considerably: "District auto production showed a moderate rise in June on a month-over-month basis...year-over-year declines were mainly limited to foreign nameplates."

Brian Shappell, NACM staff writer

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GDP Worse than Expected

Real gross domestic product (GDP) for the U.S. only grew at 1.3% in the second quarter of 2011. That's according to the latest from the U.S. Commerce Department's Bureau of Economic Analysis, which released the data in a report that read like a litany of bad economic news. Private sector analysts had expected a reading of 1.8%.

Perhaps even more devastating than the second quarter's disappointing GDP numbers was the Commerce Department's revision of the previous quarter's growth rate; although it was previously pegged at 1.9%, Commerce revised first quarter 2011 growth down to 0.4%, a devastatingly slow pace that's only a hair away from economic contraction.

Despite the anemic growth in the first half of 2011, Commerce noted that GDP has grown for eight consecutive quarters now. A possible explanation for the lagging recovery could be found in another one of Commerce's negative revisions announced today, which showed that the percent change in real GDP for all of 2009 was actually 0.9% lower than originally reported. This means that the now-ended recession was even more severe than originally thought, leaving the economy in a much deeper hole to crawl out than first believed.

Leading the less-than-stellar growth in the second quarter was a deceleration in imports, which count as a subtraction in the calculation of GDP. This, coupled with an upturn in federal spending, buoyed growth for the quarter, along with an upturn in overall business investment, which could be the only silver lining in the recent readings.

Real nonresidential fixed investment increased 6.3% in the second quarter, compared with an increase of 2.1% in the first, and nonresidential structures increased 8.1%, compared to a 14.3% decrease in the prior quarter. Exports also saw a bump, by 6%, but this was down slightly from the 7.9% increase in the previous period.

Offsetting these contributions to GDP growth was a sharp slowdown in consumer spending, as real personal consumption expenditures increased by only 0.1% in the second quarter, dropping two full percentage points from the 2.1% increase in the first.

Jacob Barron, NACM staff writer

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Brazil Continues Pressing Currency Manipulation Impact on Trade

Supplanting a debt ceiling-preoccupied United States from leading the charge against widely perceived currency manipulations on the part of the Chinese and the advantage it provides to trade, hot-growth economy Brazil has picked up the baton of late.

Brazil's trade statistics, unveiled by its trade ministry Monday, found a $3.1 billion trade surplus in July. That, coupled with the fact that the surplus has more than doubled from the $1.3 billion reported last July, would figure to be positive news in most cases. However, trade officials in Brazil publicly fumed because the surplus was well below the $4 billion projection. The trade surplus reported in June was $4.43 billion.

Brazilian officials returned to the attack against China, with the prime complaint being what they call an intentional lowering of China's currency's valuation that allows the economic powerhouse to export goods cheaply to other nations. To wit, Brazilian President Dilma Roussef, whose significant pro-labor ties actually frightened some in the business community before the election, is pushing to strengthen its anti-dumping fees. Her hope is that it will weed out some of the cheaply priced products that manufacturers in Brazil say are hurting their ability to compete. It's part of the newly unveiled "Bigger Brazil" plan that also contains tax breaks and exporting incentives for Brazilian-based manufacturers. Ironically, many Brazilian manufacturers can directly tie their growth in recent years to exporting products to the likes of China.

Still, despite what it sees as a trade setback this summer and talk of a growing inflation/bubble problem, Brazil continues to demonstrate its strength as a key "emerging" economy. Last month, Moody's Investors Services gave Brazil's sovereign credit rating an upgrade and called its outlook "positive" for the trend to continue.

Brian Shappell, NACM staff writer

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