September 1, 2011
The Credit Managers' Index (CMI) for August hasn't been this low in more than a year—falling from July's 53.9 to 52.7—and is now tracking at levels last seen in 2008-2009. "The news this month is not good and comes as no shock to anyone who has been tracking the data coming from all directions," said Chris Kuehl, PhD, economist for the National Association of Credit Management (NACM). If there is any good news, it is that the combined number has not yet fallen below 50, the threshold separating contraction from expansion. But the index of unfavorable factors fell to contractionary levels. The last time the unfavorable index was this low was in the 2009 period when the recession had just started to show signs of easing. The fact that the data was not worse this month than it was is probably worth noting as most of the other indices released in the last few weeks suggested there might have been an even steeper decline.
Kuehl said the best news in this month's data is found in the favorable index. Here the data barely changed, going from 58.9 to 58.1. This is still much lower than most of the last year, but the precipitous collapse that took place in the companion part of the overall index did not take place here. There was even some improvement in the amount of dollar collections, while declines in the sales category were slight, from 60 to 59.2. "The most interesting aspect of the data is that extension of credit actually improved in the middle of all this gloom and doom. The fact that favorable factors have improved slightly or remained stable provides some hope that conditions will improve in the coming months," said Kuehl. "There is still demand and business progress, but the crisis in the overall economy has been putting pressure on the finances of many companies."
Upon examining the unfavorable factors, it is striking that the problem is primarily one of sudden business stress and failure. The biggest declines were in accounts placed for collection and dollar amounts beyond terms. These are signs of real distress among customers, but it is equally significant that filings for bankruptcies did not increase dramatically and there was not an acceleration in the rejection of credit applications. The divergence in these factors is particularly interesting and informative. While speculative, one could look at this data and conclude that companies got in trouble in the last month or so because of a sudden drop in business after anticipating better times. Evidence from earlier in the year showed that companies across the board were anticipating better days in the second half of the year and many were trying to prepare for this with expansion plans. This anticipated economic growth did not come to pass and these companies swiftly got into trouble.
If there is a small silver lining to all this, it is that the level of bankruptcies has not risen at the same pace. That means one of two things. If the economy gets back in gear in the next couple of months, companies struggling now will have some time to gain control of their budgets and be able to avoid sliding further toward collapse and ultimately bankruptcy. If the economy doesn't catch fire to some extent in the near future, the bankruptcy rate will start to climb and the index will reflect it. The other mildly encouraging piece is that the rate of rejection for credit applications was not markedly different from last month. There is still credit available to customers that are bucking the trend. This is not like the situation at the end of 2008 when the entire credit system came screeching to a halt and even the best of companies were denied access.
The data this month is mixed but with a decidedly downward slope. The CMI remains in expansion territory, but is holding on to that status by a thread. There may be another month of essentially flat growth in store, but after that the economy will begin to tilt in one direction or another. If there is no real improvement in some of the fundamentals, the index will reflect continued deterioration. There is some resilience evident in the index numbers as the favorable categories are holding their own. The sectors that will drag the whole index further under include those that are most dependent on the decisions that companies made when they were expecting some solid economic growth by now. The credit requested made sense at the time, but now there is some serious concern as far as what happens next if the growth rate remains mired in the predicted 1% to 1.5% region.
View the full CMI report for August here.
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Arguably the most significant bankruptcy proceedings in U.S. history appear to be nearing a conclusion, in some cases, after a lengthy wait. Others appear to still have a long way to go.
Lehman Brothers Holdings, Inc. Three years after filing and with more than 80 subsidiaries failing in the wake of its reorganization attempt, the Lehman Brothers Chapter 11 case is approaching its finish line. U.S. Bankruptcy Court for the Southern District of New York Judge James M. Peck approved the former financial pacesetter's payment plan to creditors Tuesday. Specifics of the plan will be available to the nearly 50 creditors who combined for claims exceeding $130 within weeks, with a Nov. 4 voting deadline.
A confirmation hearing is tentatively scheduled for Dec. 6. Bryan Marsal, LBHI's chief executive officer, called the judge's approval of the plan a "major milestone" in the complicated bankruptcy case. Coincidentally, there was also significant news in the last week coming out of the second largest bankruptcy case in U.S. history, though it may not be all that close to completion.
Washington Mutual (WaMu). Nearly at the three-year point since it filed for Chapter 11 protection, WaMu's creditors and shareholders presented final arguments in bankruptcy court asking for the judge to reject a $7 billion reorganization plan. Opponents argued a settlement deal WaMu made with a group of hedge funds undermines the fairness of the bankruptcy process and alleged incidents of insider trading.
The proposed settlement, like many proposed bankruptcy plans in recent years, would leave unsecured creditors and shareholders with little or nothing, more likely the latter. Even U.S. Bankruptcy Judge Mary F. Walrath noted the case continues to be convoluted by those involved and hinted that a decision on her part isn't necessarily imminent.
Solar Industries. Yet another blow to the so-called green products and services niche segment came last week as New York-based SpectraWatt Inc., a spin-off of Intel Corp. that had been based in Oregon until 2009, filed for Chapter 11 protection. SpectraWatt officials said the company's products, primarily high-tech solar cells, had become "noncompetitive" as Asian manufacturers continue to deeply undercut the firm and its competitors on pricing and overhead. Hurting matters for the company earlier this year was its unknowing receipt of defective components that were used in the production of its own products, which caused their value to plummet.
In the filing, SpectraWatt foreshadowed a slew of solar business failures by pushing for an auction to be held quickly, in less than one month, on its prediction that the market will be flooded with such solar product sales very soon. At least three major solar plants shut their U.S. operations in the last year, including Evergreen Solar, which filed for Chapter 11 protection last month.
Borders. There was some hope that, after Borders' July decision to liquidate following its inability to remain competitive or profitable in a changing books-retail industry, another company would step in and purchase more than 30 existing stores. It now appears, the number of stores Alabama-based Books-A-Million Inc. will buy actually is just 14. The affected stores, whose purchase will cost Books-A-Million just under $1 million, are expected to be primarily located in the Midwest and New England regions, where the retailer is hoping to expand its market presence.
Brian Shappell, NACM staff writer
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The largest U.S. companies are sitting on massive cash reserves while smaller businesses are still struggling to find capital.
A new report from REL Consulting and CFO magazine found that 1,000 of the country's largest public companies had $853 billion in cash at the end of 2010, marking a 6% increase since 2009, a 33% increase since 2008 and a near 75% increase since 2005. The primary driver of all the cash-hoarding behavior is a fundamental lack of confidence in the market and residual concerns about market and demand volatility as the global economy sputters its way to recovery.
In other cases, respondents to the research cited the fact that there were few other high-yield investment alternatives available at present, leading them to stockpile cash while awaiting better opportunities. A small group of companies noted that they were reserving cash in anticipation of future mergers and acquisitions activity.
Despite the fact that these larger companies are holding massive amounts of cash, they're also borrowing to meet their needs. Total debt at these companies has increased by more than 30% over the last five years, and most noted that they were borrowing in order to get cash on their balance sheet and taking advantage of low-cost debt.
This cheap borrowing frenzy hasn't expanded to include smaller companies, most of whom remain starved for capital. This is seen as worrisome because most economic growth is generated by smaller businesses. In order to rectify the gap between the nation's largest firms and their smaller counterparts, the REL research recommended that large companies offer faster payment terms to their smaller suppliers to help inject them with cash, while also receiving a small discount from the supplier itself. A shift in terms such as this could potentially be a win-win for businesses large and small.
Additionally, the research found that companies' ability to collect from customers, pay suppliers and manage inventory improved by only 2% in 2010, following a major downgrade in 2009. This improvement was primarily driven by revenue growth, rather than higher quality working capital management, the report said.
Jacob Barron, CICP, NACM staff writer
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Even businesses in nations somewhat shielded by the global economic downturn's impact on the United States and European Union are finding it hard to survive. One case of a dramatic increase in business failures can be found in Australia.
Long bolstered by its mining industry and some level of past protectionism, Australia has started to happen upon dark times economically, which could very well have a noticeable impact on U.S.- and E.U.-based companies that do businesses there. Despite what was supposed to be a recovering global economic landscape by now, Australia found business failures up 25% in the most recent quarter and at their highest level in a year, according to a new Dun & Bradstreet (D&B) Australia study, Business Failures and Start-ups Analysis. Newer retail, finance and service-sector businesses appear particularly hampered by present conditions, the study illustrates.
D&B, for its part, downgraded the credit ratings of upwards of 75,000 firms in the last quarter.
"The likely long-term prospects across the construction, retail and manufacturing industries are difficult to predict given the volatility in both the domestic and global economic environment. However, certainly over the next one to two years, it is more likely than not Australia will continue to see an increase in the number of business failures in these sectors in particular," said D&B Australia CEO Christine Christian.
From a trade standpoint, Christian speculates the largest impact on U.S. companies could be a potential need to find source alternatives in areas such as automobile-related and steel-based products in part because of the strong, perhaps overly so, Australian dollar. However, because the bankruptcy trend is having the biggest impact on smaller Australian firms, and those involved primarily in domestic business dealings at that, the overall impact on U.S. trade with Australia in the important agricultural sector is most likely to be somewhat "negligible in the short and long term."
Brian Shappell, NACM staff writer
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August was another rough month for the euro zone, and not many people are holding their breath waiting for an improvement.
The most recent edition of the European Commission's Economic Sentiment Indicator (ESI) showed that confidence in the European Union (EU) had declined sharply in August, falling at the fastest rate since late 2008. The ESI declined by 5 points to 97.3 in the EU, and by 4.7 points to 98.3 in the euro area. "This decline resulted from a broad-based deterioration in sentiment across the sectors, with losses in confidence being particularly marked in services, retail trade and among consumers," said the Commission in its release.
Confidence fell hardest for the largest member states, with Germany losing 5.7 points and the United Kingdom 5.6. Poland and the Netherlands experienced a sizeable decline as well, by 3.6 and 3.0, respectively. Despite Italy's notable problems with debt and the recent news that the government would jettison its previously submitted retirement plan, that nation lost only a small amount of confidence, as their ESI fell by 0.7.
The Italian government continues to work on an austerity program that will cut 45.5 billion euros from its budget. Most recently, sources expected the government to drop a largely reviled plan that would've delayed retirement for many of the nation's workers. Specifically, the plan would've prohibited Italians from counting college and military service in the 40 years of work that's required for retirement eligibility. Until 2005, military service was compulsory.
While the ESI primarily focuses on business confidence, its measurement of consumer confidence also showed a sharp decline in both the EU and the euro area. "In both regions consumers were pessimistic about the future general economic situation and expressed higher unemployment fears," said the Commission. "Their expected financial situation and their saving expectations were also assessed more negatively than in the past months."
Jacob Barron, CICP, NACM staff writer
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