eNews Aug 9, 2012

August 9, 2012

News Briefs

  1. Majority of Credit Professionals Check Credit References, but Few Trust Them
  2. Manufacturing Numbers Miss Their Marks
  3. Congress Adjourns without Approving PNTR with Russia
  4. Fall FCIB Keynote: U.S. Needs to 'Get into the Game' More in Asia
  5. July Commercial Bankruptcy Filings Fall 22%
  6. Credit Condition Trending Positive for Small Businesses, but Payment Times Lagging


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Majority of Credit Professionals Check Credit References, but Few Trust Them

NACM's July Survey showed that while a vast majority of trade credit professionals check their new customers' credit references, only a few of them thought doing so was worthwhile. A whopping 82.4% of respondents answered "yes" when asked, "Do you check a new customer's credit references?" while a comparatively meager 17.2% answered "no." The remaining 0.4% weren't sure.

The reason why credit professionals don't trust their customers' references is simple: because they're provided by the customer. "When a new customer gives us references they are giving us only their best vendors," said one participant. "Customers will give you their best references, so is it really giving you an unbiased snapshot of the customer's ability and willingness to pay debt obligations timely?" asked another. "We rely on independent third-party resources and plug that variable, along with others, into a scorecard to predict the level of risk and assign credit terms accordingly."

Over and over in the comments, customer credit references were considered too biased to really be of use, although many considered checking them a necessary part of the credit review process. "We check references on less than 1% of our customers," said one respondent. "We use references only if the information in the credit reports is lacking or if we need confirmation of something."

Some respondents cleverly counteracted the slanted nature of the credit reference by increasing their sample base. "You have to take the references with a grain of salt," they said. "I try to ask for at least six references. This way you might get one that their relationship isn't stellar with."

Others simply disagreed, and occasionally found great value in calling a credit reference that gives them information the new customer probably didn't think the reference would share. "You would think that a company would provide references from their vendors that they pay according to terms," said one participant. "It always amazes me the references we get back that show the debtor does not pay their bills in a timely manner."

"While they will probably be the companies the customer pays the best, it does give you insight into payment terms and credit limits. And I have on occasion had a company send a reference that had nothing good to say about the customer," said one respondent, summarizing the value of credit references by saying, "You just never know."

- Jacob Barron, CICP, NACM staff writer

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Manufacturing Numbers Miss Their Marks

The U.S. manufacturing sector and its counterparts from emerging economies including China and Mexico had been counted upon as a bright light during dark economic times in many parts of the world, especially Europe. But over the last 10 days, there has been plenty of bad news to go around on that front, and the dreaded "R" word has returned with vigor into the lexicon of global economic analysts.

The July Purchasing Managers Index (PMI) for U.S. manufacturing fell just a bit under the 50-point level that divides contraction and expansion. For an economy that was supposed to be doing well by now, this wasn't greeted as good news. Soon after followed news of South Korea and Japan missing PMI manufacturing estimates, not to mention Australia taking a nose dive on significantly reduced resource consumption by trading partner China. And therein may be the problem du jour, even more so than the euro crisis.

"The global shift downward in PMI data is not entirely unexpected, but it is still disappointing given what had been expected at the start of the year. But the most worrisome decline is that of China, as it would seem to prove that China really doesn't have the ability to start and stop its economic progress at will," said NACM Economist Chris Kuehl, PhD. "There have been many that assumed that when China turned the switch and engaged in stimulus, the economy would instantly respond. It has been three months since the Chinese interest rates dropped and the country began to promote bank lending again, and two months since the stimulus efforts got underway. So far, there hasn't been much reaction."

Perhaps the concern speaks to an overreliance on Chinese consumption. It's certainly the case for Australia and some Asian trading partners. But, apparently, a similar overreliance is having an impact on this side of the globe, as Mexico's PMI also saw a surprising decline after months of enjoying its newfound status as the belle of the economic ball, so to speak.

"The Mexican PMI remains tightly connected to the U.S., and that has become a bigger and bigger factor," Kuehl noted.

It is worth noting, however, that Mexico remains well above the 50 level for growth (now at 55.2). Additionally, China's PMI, while not as high as wished, reached a three-month high for July and has a chance to remain in growth territory for much of the rest of the year.

- Brian Shappell, CBA, NACM staff writer

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 Congress Adjourns without Approving PNTR with Russia

Congress adjourned for its annual recess on August 3, without passing a bill to approve permanent normal trade relations (PNTR) with Russia.

This means that Russia will officially join the World Trade Organization (WTO) on August 22, and be well within its rights to increase tariffs on U.S. goods entering the country. Since Congress won't return to work until September 10, the failure to pass a bill before leaving Capitol Hill puts U.S. exporters at a competitive disadvantage in Russia, the world's ninth-largest economy, at least for now.

Immediate passage after the conclusion of the August recess isn't exactly a guarantee either, as Congress is expected to be preoccupied with looming defense cuts and the sequestration details of last year's debt ceiling agreement.

In the final week before the recess, neither chamber of Congress managed to schedule a vote on two bills that would have approved PNTR with Russia by repealing the Jackson-Vanik amendment, a Cold War regulation that made U.S. preferential tariff rates for Russian products conditional on the country allowing Jews and other minorities to emigrate freely. The amendment is regularly suspended with little fanfare, but its presence on U.S. books allows Russia, under WTO rules, to discriminate against U.S. products until the regulation is eliminated.

Each version of the PNTR bill has been coupled with a version of the Magnitsky Act, named for anti-corruption lawyer Sergei Magnitsky who died in 2009 under mysterious circumstances after serving a year in a Russian prison. The House's version would deny visas and freeze the assets of parties suspected of involvement in Magnitsky's death, while the Senate's version would take a much broader approach, allowing the law to be applied to human rights violators outside of Russia and beyond the scope of the Magnitsky case.

Some iteration of the Magnitsky legislation was considered a prerequisite for any bill approving PNTR, as lawmakers were wary of being perceived as having given Russia a free pass on trade without any penalties related to the country's human rights record, especially in an election year. Analysts have noted, however, that PNTR has a time limit, while either version of the Magnitsky Act does not. Congress could easily have approved PNTR ahead of Russia's accession to the WTO and addressed the Magnitsky legislation at a later date.

- Jacob Barron, CICP, NACM staff writer

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Fall FCIB Keynote: U.S. Needs to 'Get into the Game' More in Asia

U.S. Chamber of Commerce officials continue to assert that the federal government needs to do more to increase market access to up-and-coming Asian markets. The message is particularly important to one Chamber official who was just announced as the keynote speaker of FCIB's 23rd Annual Global Conference in November.

Myron Brilliant, senior vice president of international affairs with the Chamber, has long urged the federal government to widen its approach to expanding its exporting activity as the best and perhaps only hope of growing jobs significantly in the short or medium term. Even with the Obama Administration's pledge to double exports during a five-year period ending in 2014, Brilliant is among those who believe more should be done on behalf of U.S. businesses and their access to markets.

Brilliant had noted in a CNBC story earlier this year, the importance of continuing to pursue new free trade agreements (FTAs) like the trio passed in the last year with Panama, South Korea and Colombia. Brilliant argued that FTAs increase exporting activity and, in turn, those exports create jobs. Brilliant also advocated pursuing FTAs or additional means to expand market access for U.S. businesses in growing economies like Vietnam and Malaysia where access is considered far from open. Moreover, he told CNBC panelists and interviewers that working out such deals could help the U.S. set terms on issues such as dealings with state-owned businesses and intellectual property rights.

There could be a strong case for the argument in places like Vietnam, provided the right risk-aversion measures are taken by credit managers. Coface's Summer 2012 Country Risk Overview notes that Vietnam, like some of its Asian counterparts, has three key strengths: a skilled, low-cost workforce; a strong agricultural and natural resources potential; and a development strategy based on economic openness and diversification. In short, it's a high potential market when proper risk management protections are in place at the start of any dealings. Granted, there is significant risk involved in dealing with Vietnamese-based outfits. Among risks of note are shortcomings in the business environment and infrastructure, corruption and a lackluster banking system, according to Coface.

The likelihood of new FTAs in the near future is slim, however, as it took nearly five years to push the last three through.

- Brian Shappell, CBA, NACM staff writer

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July Commercial Bankruptcy Filings Fall 22%

The current year continues to make 2011 look like an awful year for bankruptcies, as total filings declined again in July 2012. Total filings fell by 12%, according to data provided by Epiq Systems, Inc. and the American Bankruptcy Institute (ABI), aided by a 22% decline in total commercial filings that mirrored the figures from the first six months of the year.

There were 4,513 commercial filings in July 2012, down from 5,800 during the same period in 2011. Noncommercial filings for July saw an 11% drop from the July 2011 total, from 104,373 to 92,560. "The July filings continue to reflect the effects of sustained low interest rates and weak consumer spending," said ABI Executive Director Samuel Gerdano. "We are still on pace for perhaps the lowest total new bankruptcies since before the financial crisis in 2008."

By Chapter, the trend wasn't as universally downward. Total commercial Chapter 11 filings saw negligible increases in July, with the total of 599 representing a 1% increase from the same period in July last year. On a month-to-month basis the jump was far more statistically significant, as July 2012 Chapter 11 filings were 10% higher over the June 2012 total of 543.

Nonetheless, bankruptcies seem to be getting less and less frequent as 2012 plods on. The average nationwide per capita filing rate for the first seven calendar months of 2012 decreased in July to 4.04 total filings per 1,000 population from the 4.08 rate seen in the first six months of the year, and average total filings per day in July 2012 fell 12% to 3,131.

The same five states that had the highest per capita filing rates for the first six months of 2012 remained in their positions for the seventh, with Nevada (7.00), Tennessee (6.97), Georgia (6.46), Utah (6.06) and Alabama (5.89) all struggling with far greater than average filing rates.

- Jacob Barron, CICP, NACM staff writer

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Credit Condition Trending Positive for Small Businesses, but Payment Times Lagging

A new study tracking small business credit conditions finds its index on the rise. Despite the small size of the quarterly increase, it's far better than the retraction seen in the index for much of last year. Still, some underlying sub-categories are raising red flags going into the second-half of this year.

The Experian/Moody's Analytics Small Business Credit Index reported a 0.9 point increase from the first quarter of 2012 to the second. The index now sits at a level of 104.1. The improvement to the conditions-tracking index marks the third-consecutive increase. However, those who spearheaded the study noted that fears stymieing confidence among U.S. small business owners, along with a similar lack of optimism among consumers, could continue to keep gains in credit availability and terms for small businesses from growing at a more robust clip.

"Small businesses continue to get their financial houses in order, but the progress is slow and they remain cautious in expanding their operations," said Mark Zandi, chief economist at Moody's Analytics. "Until small businesses step up more aggressively, the economy will struggle to grow."

Perhaps more disconcerting than the slow increase to the index for secured and unsecured creditors alike is the study's findings in the category of days beyond contracted terms (DBT). It notes that businesses paid their bills on average 7.4 days DBT. Just one year ago, the average DBT was below 7. Allen Anderson, president of Experian's Business Information Services, characterized it as a "critical" issue of note for businesses.

- Brian Shappell, CBA, NACM staff writer


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