eNews January 24, 2013

January 24, 2013

News Briefs

  1. Reshoring/Insourcing to Give Mexico Another Boost?
  2. GAAP Loophole Allows Companies with Noncontrolling Interests to Inflate Cash Flow
  3. Ohio Court Reviewing "Pay-if-Paid"
  4. Bank Economists Warn against U.S. Austerity
  5. Report: Pension Funding Shortfall Growing in U.S. Cities
  6. NE Governor Approves Revised Keystone XL Pipeline Route


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Reshoring/Insourcing to Give Mexico Another Boost?

It may be a bit early to call it a trend, but it appears that more companies based in western nations are starting to bring some jobs back "home" or closer to it, as wages and other costs associated with outsourcing rise in places like Asia, India and Eastern Europe. But before domestic workers from the United States can pop the champagne corks, they might have a bit of competition for those opportunities as some people's idea of bringing jobs back to America doesn't necessarily mean the United States.

There is presently much debate over whether reshoring/insourcing—bringing jobs that had been outsourced to countries where labor is, or at least was, significantly cheaper—is starting to take hold. The buzz topic has been debated more recently in mainstream media outlets like the Wall Street Journal, the Atlantic and programming on National Public Radio. Each of the trio has had contributors who believe that more and more companies are reversing the tide on outsourcing or considerations about doing so not just because of wage increases abroad, but also for issues including improved customer service and shipping disruptions. Granted, Financial Times and statistics from the U.S. Business and Industry Council firmly argued that there's still as much if not more reliance on overseas production. It's worth noting that John LaRocca, CICP of Hitachi Data Systems Corporation, stateside, noted during the FCIB Global Conference in November that the undoing of a major move to outsourcing and bringing jobs back home can be an expensive and "gut-wrenching experience to unseat."

Still, assuming there has been movement back "home," more activities have been placed in the U.S. than in previous years, notably by companies like Apple and General Electric. However, for every story of jobs getting resourced to the Americas, there seem to be rumblings that other companies are bringing the jobs back to North America, namely Mexico. Electronics manufacturer Emerson has brought jobs closer to its U.S. base by moving to Mexico. Meanwhile, Honda, which over the years has had a number of operations in the United States, announced it will be manufacturing some of its SUV products in Mexico, while potentially expanding operations that produce the Fit line.

Mexico has been one of the success stories during the global slowdown, even as some of the vaunted BRICs (Brazil, Russia, India and China) take steps backwards from the hot growth of recent years. The nation also boasts a solid infrastructure, close proximity to the U.S. market and, despite media coverage, has a somewhat secure business sector that is shielded, or out-of-the way of areas overrun by violent drug cartels.

The firm Frost & Sullivan noted in a release this week that Mexico's "favorable business environment" is contributing to a positive outlook for opportunity and growth over the next decade. "Mexico will continue growing at modest but stable rates for the next couple of years," said Frost & Sullivan Research Manager Lorena Isla. "The growth rate would be [even] higher if the new government speeds up structural reforms, particularly in the energy sector."

- Brian Shappell, CBA, NACM staff writer

Manual of Credit and Commercial Laws, Volume III: Construction Issues—Update Available Now!

New for 2013, language and state laws have been updated throughout the entire volume including:

  • Chapter on Personal Property Liens thoroughly rewritten
  • Chapter on Trust Funds updated
  • Chapters on Liens and Bonds updated

Entire volume updated to reference liens, bonds and trust funds applicable to the 21st century.

NACM's Manual of Credit and Commercial Laws continues to provide essential information for credit professionals, but now in a highly flexible and more affordable format—four volumes that may be purchased separately or as a comprehensive set.

Watch for future updates of volumes I, II and IV.

Click here to get your copy of Volume III and for more information about Manual updates and the wide array of resources available to today's credit professionals.

GAAP Loophole Allows Companies with Noncontrolling Interests to Inflate Cash Flow

A recent study published by the Georgia Tech Financial Analysis Lab found that a loophole in U.S. generally accepted accounting principles (GAAP) allows some companies to mislead analysts on operating cash flow.

Parent companies that have noncontrolling or minority interests have to very carefully designate the amount of income and equity that can be attributed to these not-wholly-owned subsidiaries on their income statements and balance sheets. However, under GAAP, that requirement doesn't extend to the statement of cash flows, one of the credit professional's most valuable tools when it comes to establishing a company's creditworthiness.

"As such, investors, analysts and other users of financial statements may be unaware that operating cash flow includes amounts attributable to both controlling and noncontrolling interests, potentially leading to overestimates of cash available for dividends to controlling interests," said the report, authored by Georgia Tech MBA Student and Graduate Research Assistant Maital Dar who works in the lab with its director Dr. Charles Mulford, Invesco Chair, Professor of Accounting and instructor at NACM's Graduate School of Credit and Financial Management (GSCFM).

The study found that there isn't a standard system of disclosing how much cash to which the parent company has access, meaning that if a significant amount of cash comes from a noncontrolling interest and a company was selling to the controlling interest, they could be misled into believing their customer had much more cash than they actually do.

"If distributions to noncontrolling shareholders are minimal, for all practical purposes, total operating cash flow is the relevant measure of cash flow available to controlling shareholders," said the report. "However, when distributions to noncontrolling interests are significant and recurring, consolidated operating cash flow is no longer a valid measure of cash flow available to controlling shareholders."

Dar and Mulford make recommendations about how to institute reforms that address the lack of consistency, but until such measures take effect, credit professionals assessing their potential customers need to look at corporate structure and how much of that cash really belongs to the company to whom they're selling.

The full report can be found here. For more information on Mulford and other GSCFM professors, click here.

- Jacob Barron, CICP, NACM staff writer

Hurry! Registration for FCIB's Foreign Exchange Management Online Course Closes February 1

Increase your knowledge and professional visibility by enrolling in the FCIB-MSU Foreign Exchange Management Online Course. If you deal in a currency other than your domestic currency, learn to identify FX issues and risks before being exposed to them.

The four-week online course addresses:

• The Foreign Exchange (FX) Market
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This course is available only once a year and begins February 4, 2013! Space is limited. Register now!

Ohio Court Reviewing "Pay-if-Paid"

A court in Ohio is reviewing a case of potential importance to anyone in construction. It's one dealing with the seemingly age-old issue of "pay-when-paid" clauses. A reversal of the typical holding in such a case could carry potential ramifications involving such clauses well outside the state's borders.

The case in question is Acoustic Ceiling & Partition of Ohio, Inc. v. Continental Building Systems, which has reached the state's Appellate District Court of Appeals. The appeals court will review a lower court's ruling that contractual language involved in the Acoustic Ceiling case was not explicit enough to rise to an enforceable "pay-if-paid" clause.

The American Subcontractors Association (ASA), which wrote a brief on the issue, argued the clause in question was tantamount to one that guaranteed payment "in a reasonable time" for services rendered rather than, as the debtor argued, a pay-if-paid clause that would have bestowed added risk on the subcontractor. ASA noted that reversing such a decision would contradict previous rulings from throughout the country and be dangerous for subcontractors and those extending credit in such industries:

"Courts across this country have recognized that such clauses are harsh and unconscionable and that such terms will often cause an inequitable forfeiture. Courts in Ohio and around the country hold that such forfeiture provisions must be strictly construed and that they must 'clearly and unambiguously condition payment to the subcontractor on receipt of payment from the owner.'"

Most states require explicit and transparent language on pay-if-paid and similar provisions. The bar to which someone must rise to successfully use the tactic is high, said Greg Powelson, director of NACM Secured Transaction Services (STS), which administers the Mechanic's Lien and Bond Services division. In fact, such provisions are not enforceable on virtually any level in a number of states, like Delaware and California. Still, Powelson characterized the case as worthy of following closely and one that serves as a reminder of the importance of reviewing terms in hoping to find such unacceptable clause inclusions. "It's always scary when these things are revisited, and it always has to be fought. They're going to use it again [if successful in getting the initial court decision overturned]," he said. "Regardless of enforceability, it's important to review purchase orders and subcontracts and crossing these terms out of the contract. These kinds of things simply must be identified before extending credit."

It's also a reminder of the difficulty of navigating things like the mechanic's lien process without the potential for a costly gap for businesses extending credit. "Because of the unique nature of mechanic's lien statutes, all sorts of issues come up from time to time that make things more difficult than they have to be," Powelson said. "Even if something is unenforceable in the end, credit managers could find themselves expending legal fees to support a position already well-supported by case law."

- Brian Shappell, CBA, NACM staff writer

Make Better Credit Decisions with Industry Credit Groups

Credit groups are an effective management tool, allowing credit professionals of different companies servicing the same customer, regardless of industry or trade, to compare information on collection history and provide a forum for the exchange of data about the most recent payment practices. The purpose of exchanging information is to help group members separate fact from fiction, so competent and realistic credit decisions about a customer can be made.

Managed and operated by NACM Affiliates nationwide, NACM-Canada and FCIB internationally, credit groups:

  • Provide unparalleled networking opportunities
  • Assist in the exchange of credit information on common customers
  • Facilitate the receipt and analysis of information to make unilateral credit decisions
  • Provide a forum to discuss the latest developments on credit department procedures,
    equipment and other credit management functions
  • Support the discussion of account information and delinquent account reports
  • Adhere to federal antitrust guidelines

Contact your local NACM Affiliate to learn more about NACM credit groups and to find the group for your industry.

Bank Economists Warn against U.S. Austerity

A group of bank economists predicted continued growth in the U.S. for 2013, provided that the country can somehow dodge the possibility of severe spending cuts.

The Economic Advisory Committee of the American Bankers Association (ABA) noted that the resolution of the so-called "fiscal cliff" earlier this month created economic headwinds for 2013, resulting in an economy that they expect to grow slowly in the first half of the year before accelerating into the second. However, the committee warned that tax hikes, fights over the debt ceiling and deep spending cuts could "stop our economy in its tracks."

"If you double down on austerity this year, you're flirting with recession," said Scott Anderson, committee chairman and Bank of the West chief economist. "Resolving the debt ceiling and providing clarity on taxes and spending will boost confidence, opening the door for faster growth at a critical point in the economic expansion."

The committee expects inflation-adjusted gross domestic product (GDP) growth for the first half of 2013 to be below 2%, but rising to 2.6% in the year's final quarter. Things look a little better for the private sector specifically, but the tax hikes that opened 2013 are expected to have a -1.25% drag on growth, a number that could get bigger should additional budget cuts further restrain growth.

Despite the warning, the committee, which is comprised of chief economists from the nation's largest financial institutions, also described the federal budget deficit as declining, but unsustainably high. "While budget deficits continue to fall, addressing the federal debt as a whole is still a work in progress," said Anderson. "Much more needs to be done to reduce the federal deficit over the long term."

In terms of lending, the economists expected the credit growth from 2012 to continue into this year, forecasting a 6.5% increase in business loans over the course of 2013.

- Jacob Barron, CICP, NACM staff writer

UCC Filing Services—Full Service/Flat Fees

Put Yourself in the Best Possible Position to Get Paid.

Service begins with the Financing Statement Filing Program. NACM's UCC Filing Services prepares and files both Blanket and Purchase Money Security Interest Filings in addition to perfecting consignments. All you'll need after startup is the name, address and corporate structure of your customer. NACM's UCC Filing Services will take it from there.

Getting started is easy; NACM's UCC Filing Services can break down your business and distribution channel and determine the most effective type of filing for your business and we'll assist you in writing the two key critical elements, your security agreement and collateral description. Once written you're ready to file.

To get started, contact Greg Powelson, Director of NACM's Secured Transaction Services at gregp@nacm.org or call 410-919-8680.

Report: Pension Funding Shortfall Growing in U.S. Cities

Still ignoring media coverage of Chapter 9 (municipal) bankruptcy filings? That may not be a sound strategy given the findings of a new Pew Charitable Trusts study.

Pew's report, A Widening Gap in Cities: Shortfalls in Funding for Pensions and Retiree Health Care, noted that a group of 61 major U.S. cities comprises a steep $217 billion chasm between what it has promised to public sector workers/retirees and money they actually have set aside to meet such entitlements. The findings are based on investigating trends mainly from 2009 and 2010 and suggest the problem is likely to continue:

"A look at 40 cities that reported results for all of their pension plans for fiscal years 2005 through 2010 showed declines in funding levels beyond the end of the recession."

Pew cited the following among cities regularly shortchanging pension funds and making less than two-thirds of their annual recommended contributions: Charleston, Chicago, Little Rock, New Orleans, Omaha and Portland. On the flip side, cities including Los Angeles, Baltimore, Denver, Charlotte and Dallas have kept pace well.

The growing gap is a key reason why, despite Chapter 9 being used quite sparingly during the last 80+ years, Bruce Nathan, Esq. of Lowenstein Sandler PC, and speaker at this year's Credit Congress, has been talking of the potential trend for nearly two years now. Such entitlements are seen by many as the top threat to fiscal health for municipalities. Deborah Thorne, Esq. of Barnes & Thornburg LLP also expressed concern, predicting that there could be significant ramifications for credit departments if a quick escalation in filings happened within the next couple of years. "I don't see states and municipalities becoming better funded than they have been," Thorne said in the upcoming February issue of Business Credit. "I see that getting worse. Vendors selling to public entities want to be mindful of how they are going to be paid and how well financed the portion of the municipality is that you are dealing with."

Pensions and other retiree entitlements for former public sector employees has been an issue in a number of places where Chapter 9 filings have been used as an answer to escalating debt problems that appear to be getting worse for municipalities throughout the nation. Notable among them is San Bernardino, CA and multiple others in the state, as well as Central Falls, RI.

- Brian Shappell, CBA, NACM staff writer

CBF Designation Requirement Changes

The NACM Education Department has made a change to the Credit Business Fellow (CBF) designation requirements. In an effort to address the changing needs of today's credit professionals, the Financial Statements: Interpretation and CreditRisk Assessment course has been eliminated from the CBF designation requirements. Only two courses are now required to qualify for the CBF exam: Business Law and Credit Law.

Please contact the Education Department at 410-740-5560 or education_info@nacm.org with any questions about pursuing your professional designation.

NE Governor Approves Revised Keystone XL Pipeline Route

Nebraska Governor Dave Heineman (D) approved a revised route this week for TransCanada Corporation's Keystone XL Pipeline.

The controversial project's original route was rejected by President Barack Obama early in 2012, but revisions have continued since then to make the pipeline less of an environmental eyesore. Specifically, the U.S. State Department, which has jurisdiction over the project because it crosses the U.S.-Canada border, sought proposals to reroute the pipeline around Nebraska's environmentally-sensitive Sand Hills region.

Heineman's approval comes on the heels of the Nebraska Department of Environmental Quality's (NDEQ's) evaluation of TransCanada's proposed reroute, which tiptoes around the Sand Hills. "Construction and operation of the proposed Keystone XL Pipeline, with the mitigation and commitments from Keystone, would have minimal environmental impacts in Nebraska," said Heineman in his approval letter, also citing that the construction process would be a windfall in economic benefits and tax revenue for the state.

NDEQ's report and Heineman's go-ahead now become part of the project's application to the State Department for a Presidential Permit to begin construction, again necessary because the pipeline crosses from Alberta, into the U.S. and ultimately down toward the Gulf of Mexico.

"Governor Heineman's approval of the new Keystone XL route now clears the way for President Obama to move quickly and also approve KXL for the benefit of our nation and its workers," said Karen Harbert, president and CEO of the U.S. Chamber of Commerce's Institute for 21st Century Energy. "After extensive public consultation and exhaustive review, the president can confidently move forward on this critical project that will increase America's energy security and generate much needed jobs and investment."

Not everyone was as ecstatic as Harbert, however, as chief protest group BOLD Nebraska criticized Heineman for waffling on the environmental effects, specifically that while the approved reroute does avoid the Sand Hills, it crosses right through the Ogallala Aquifer. "Gov. Heineman just performed one of the biggest flip-flops in Nebraska political history," said Jane Kleeb, who leads the opposition. "He approved the pipeline route that crosses the Aquifer after he asked President Obama to deny the route that crossed the Aquifer."

Kleeb also alleged that the NDEQ report was biased in favor of the pipeline and that it overstated the project's potential economic benefits, which have proved hard to define by any measure. TransCanada predicts that the pipeline would cost $5.3 billion and create 9,000 jobs in the U.S., but other long-term assessments aren't as glowing.

Approval from the State Department will still take months as its review continues.

- Jacob Barron, CICP, NACM staff writer

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Employment Connections for the Business Credit Community


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