May 2, 2013
NACM's Credit Managers' Index (CMI) for April fell to levels not seen in over a year, reflecting the sluggishness of the overall economy. The 53.3 mark is the lowest in over 16 months, the same weak levels seen in the "spring swoon" of 2012. The reading is still in expansion territory, but it is certainly heading in the wrong direction. There are some positive notes, but for the most part the data shows an economy struggling with dual issues: the favorable factors, which signal growth, are not offering encouragement, and the unfavorable factors, which indicate whether companies are in a credit crisis, are exhibiting weakness.
For the favorable factor index, the sales number was a potential bright spot, gaining slightly over last month (from 57.4 to 58.3). In general, the data over the last 12 months was relatively consistent, ranging from a high of 62 in August 2012 to a low of 56.7 in December. The bad news is that those readings of 60 and above were from the beginning of last year until the end of summer. Since then, they have slipped into the high to mid-50s. New credit applications changed very little from last month (from 56.9 to 56.5). This suggests that companies are still seeking to expand and are asking for credit, and the data is consistent with other data emerging on capital expenditure decisions since the first of the year. Most of the organizations that track capital expenditure report a steady increase, but no spectacular expansion thus far. Dollar collections also remained relatively stable (from 57.7 to 57.2). The most significant drop in favorable factors was in amount of credit extended (from 61.6 to 60.8). Although nearly a one-point decline, the more important point is that the category remains above 60, and thus far is the only factor consistently in this range. It has not dipped below 60 in over a year, indicating that plenty of companies are extending credit to creditworthy applicants. The overall favorable factor index retreated only slightly (from 58.4 to 58.2), but is one of the lower readings from the past year. The only month with a weaker performance was October, which saw a rebound back above 60 in November. Few expect to see that development this time.
"The real damage to the CMI came from the unfavorable factors," said NACM Economist Chris Kuehl, PhD. "Many companies are now feeling the stress of the slow economy this year." The index of unfavorable factors fell more than a point (from 51.4 to 50), and is dangerously close to slipping into contraction territory. The index has not been this low since July 2012. Accounts placed for collection actually improved (from 49.7 to 50.1), as did disputes (from 48.3 to 48.5), which counts as stable even though the reading is below 50. On the reverse side, rejections of credit applications slipped (from 51.9 to 51.6), but not dramatically. Filings for bankruptcy also slipped (from 57.3 to 56), but remains firmly in the mid-50s. The most dramatic declines were in dollar amount beyond terms (from 51.2 to 47) and amount of customer deductions (from 49.9 to 46.8).
"The collapse in dollar amount beyond terms signals that many companies have entered the danger zone," said Kuehl. "The sense is that many companies are now on the brink of real trouble, and if the economy continues to stall, there will be some overt business collapse in the next quarter or two."
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At a 2009 symposium, a group of insolvency professionals at the American Bankruptcy Institute (ABI) identified the need to reform the Chapter 11 process. The resulting group, the ABI Commission to Study the Reform of Chapter 11, has held hearings across the country, listening to the critiques and suggestions of bankruptcy professionals, practitioners and stakeholders, and on May 21, at NACM's Credit Congress, the Commission will hear from the unsecured trade credit community, and consider its recommendations on how to update an outdated reorganization process.
Indeed, though the current Bankruptcy Code has been amended several times since it was enacted by the Bankruptcy Reform Act of 1978, the business and credit economy has changed so much since then, and so quickly, that a new Code has become necessary. Some of the architects of the 1978 Code even recognized upon its passage that it only had a 40-year shelf-life. "At the time in 1978, we said we need to revise the bankruptcy laws because the entire underlying credit economy in the business world had changed dramatically in the 40 years since the 1938 Chandler Act," said Richard Levin, a partner at Cravath, Swaine & Moore LLP who was also counsel to a subcommittee of the House Judiciary Committee when the 1978 Code was written.
"At the same time, we said we knew that there would need to be a bankruptcy reform act of 2018, 40 years hence, because the entire credit economy and business world would change again. Now, it's changed dramatically in 30 years, and I think we're at that point," he added.
In the end, the Commission's work will result in "a comprehensive report, part blueprint for reform and part catalog of open issues and current options," according to Commission Co-Chair Robert Keach. For the Commission hearing at Credit Congress, representatives of the unsecured creditor community, all of them credit professionals, will present the most pressing issues facing them and their companies in two separate panels: one on the Section 503(b)(9) 20-day administrative priority claim, and the other on preferences.
Each panel will consist of three credit professionals, all of whom will testify individually and then answer questions from Commissioners. The Section 503(b)(9) 20-day administrative claim is an important trade-creditor remedy for goods sellers who ship to a debtor within 20 days of their filing. The statute grants them an administrative priority claim for those goods, increasing their chances of getting paid for them, but some have argued that the provision drains value from the debtor's estate. The Code's preference provisions have been a thorn in unsecured creditors' sides for some time, as they state that a debtor is entitled to reclaim certain payments they made to unsecured creditors in the 90 days leading up to their filing.
- Jacob Barron, CICP, NACM staff writer
Good Behavior Rewarded
Your company’s good corporate behavior is now worth participation points on the NACM Career Roadmap and for CCE Recertification! The NACM Education Department is pleased to announce that we will now reward credential holders for their company’s contribution of their A/R data to an NACM Affiliate credit reporting database. A member of a company that contributes full A/R data to an NACM Affiliate credit reporting database may claim one point per year on the Career Roadmap and 0.25 points per year on the Recertification Report.
Contact the NACM Education Department at email@example.com with any questions.
U.S. Bankruptcy Judge Christopher Klein reportedly predicted that he will hear arguments in the City of Stockton's bankruptcy case regarding whether it is legal, if not fair, to continue paying into a state-run pension program while expecting creditors, mostly secured ones, to take a significant cut on what they are owed. This comes less than a month after Klein deemed the case eligible for Chapter 9 bankruptcy protection.
Still, last week, it was confirmed that the city and key creditors in the bankruptcy case, the largest Chapter 9 on record from a U.S. city, have told a judge they are willing to resume negotiations that previously failed. Stockton essentially wants concessions from some of its creditors, and is using the newfound eligibility as a negotiating chip. Similarly, the community of Central Falls, RI also forced stakeholders to yield and take a cut, but to public employee and retiree pension benefits, after its Chapter 9 began moving successfully through the courts there.
In April, Klein ruled that Stockton met the threshold to officially enter into municipal bankruptcy because it actually was insolvent and had gone through the "good-faith" negotiation processes mandated by the 2011 California law designed to slow the number of such filings. At that time, the judge did point out that he wasn't dismissing the bondholders' problem with creditors taking losses while Stockton continued to make full contributions to the state pension program (CalPERS), just that it wasn't the right time to raise such an objection.
Meanwhile, in Harrisburg, PA, the fact that its attempt to file for Chapter 9 protection some two years ago failed has not taken the topic off the table locally. Now, candidates in the mayoral election in Pennsylvania's capital city are using the issue as a significant campaign item of debate. At least one candidate appears to be leaning toward making another attempt in rapid fashion, while another challenger for the position believes it should be the absolute last resort, and has alleged that filing a Chapter 9 is tantamount to giving up control of Harrisburg to a federal judge.
In 2011, Harrisburg's city council defied the wishes of the state and its own mayor by voting 4-3 to file for Chapter 9 bankruptcy. Supporters of doing so said it would give the city leverage to renegotiate debt largely tied to a massively unsuccessful trash incinerator project, once predicted to be a financial windfall for the city, and provide a more fair option to local taxpayers who didn't want to take a hit out of proportion to that of investors. Debt from the bungled incinerator project more than quintuples the city's annual budget. State and mayoral plans to sell off city assets such as parking garages and the incinerator operation, as well as raise taxes, were rejected by the council. Still, Harrisburg's filing was rejected when a judge upheld the hastily-passed Pennsylvania law aimed at temporarily blocking third-level cities in the state from filing.
- Brian Shappell, CBA, NACM staff writer
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Senators Sherrod Brown (D-OH) and David Vitter (R-LA) unveiled new legislation last week that would require banks to follow new reserve capital requirements that don't rely on risk weights. Such an approach would put the U.S. at odds with the global Basel III capital requirements, which stipulate that banks need to hold different amounts of capital in reserve for different types of assets, depending on their default risk.
The Terminating Bailouts for Taxpayer Fairness Act (TBTF) most notably would require megabanks (institutions with more than $500 billion in assets) to live up to a minimum of 15% in high-quality reserve capital, for all assets across the board. In a one-pager about the bill released by Brown and Vitter's offices, this provision would mean that big banks "will be faced with a clear choice: either become smaller or raise enough equity to ensure that they can weather the next crisis without a bailout." The bill also empowers regulators to increase the 15% threshold as institutions grow.
Community, mid-sized and regional banks will have a less stringent 8% capital reserve requirement under TBTF, which is lower than the Federal Deposit Insurance Corporation's (FDIC's) estimate that the sector typically holds 10% of their total assets in reserve already. Community banks will also have their regulatory burden reduced overall, which lawmakers hope will allow them to better compete with bigger banks.
The bill is a rare bipartisan effort, undertaken by Brown and Vitter, two of the Senate's most liberal and most conservative members, respectively. Nonetheless, its enactment is anything but certain, as Wall Street has already mobilized against it, and even some observers remain reluctant to ignore capital requirement frameworks like Basel III in a sector as globally interconnected as banking.
"I commend Senators Brown and Vitter for this important, bipartisan initiative. At the same time, I believe the U.S. implementation of Basel III is necessary to ensure that other nations follow through on their commitments to strengthen capital requirements for large, internationally-active banks," said Sheila Bair, former chairman of the FDIC. "Basel III was meant as a floor, not a ceiling, and proposals to strengthen bank capital requirements should build on that accord."
The Basel Commission on Banking Supervision has yet to comment on the proposal, but initial concerns surrounding Basel III included criticism that its risk-weighted reserve requirements would make trade finance transactions more expensive for banks, and ultimately force institutions out of this type of financing in general. The same criticism could apply to TBTF, which ignores risk weights altogether. Most recently the European Union, in its implementation of Basel III, recognized the inherently low-risk nature of trade finance and allowed banks to hold less reserve capital for these transactions, with the hopes of keeping trade financing available and affordable.
- Jacob Barron, CICP, NACM staff writer
"I started calling members to network with, as I wanted a mentor."
"We wanted all our credit individuals to become educated."
These quotes from a March 14, 2013 eNews story convey the vision of NACM's Credit and Financial Development Division (CFDD): to be a leading provider of professional development opportunities through learning, coaching, networking and individual enrichment.
Meet and get to know some of the most valuable resources in the industry: other credit people like you.
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Everyone from investors to teenaged consumers seems to love Apple products. The tech-culture phenomena created by everything from its laptops to the iPhone and iPad have made it one of the biggest brand names in the world, as product after product is deemed a hit by reviews and at the register. But there's at least one agency that believes business model risk may render Apple, Inc. less creditworthy in the long term than some of its competitors.
Though both Moody's Investors Service and Standard & Poor's have given Apple a credit rating just below top AAA levels, Fitch Ratings this week raised questions regarding how much Apple deserves such a glowing rating. Though it has not released its own public rating on the company yet, Fitch speculated "such a rating would likely fall in the high, single A category," but no higher. Fitch noted it valued Microsoft (AA+), IBM (A+) and Oracle (A+) at or above the higher ratings levels that Apple is likely to earn, surprising market-watching investment experts. Fitch reasoned:
"This reflects the volatility in consumer preferences, significant competition that accelerates product commoditization and rapid evolution of technology. Consumer product companies such as Sony, Nokia and Motorola Mobility have proven the risks related to ever-changing consumer tastes, low switching costs and a highly competitive environment. Each has historically had a dominant market position and strong financial metrics, only to falter over a relatively short period of time."
Fitch added that a more sustainable, long-term business model would be needed to move Apple into the AA range. Still, it did not bash Apple...far from it, actually. Fitch praised the company's ability to adapt to, and even set trends in, consumer tastes. It noted that "better diversification and the stickiness of its iTunes ecosystem clearly make it a stronger credit" than some of the previously mentioned companies that fell from the mountaintop, so to speak.
- Brian Shappell, CBA, NACM staff writer
Manual of Credit and Commercial Laws, Volume III: Construction Issues—Do You Have the Update?
New for 2013, language and state laws have been updated throughout the entire volume including:
- Chapter on Personal Property Liens
- Chapter on Trust Funds
- Chapters on Liens and Bonds
The entire volume has been updated to reflect the liens, bonds and trust funds applicable to the 21st century!
Watch for future updates of volumes I, II and IV.
Click here to purchase volume III and get more information about the wide array of resources available to today's credit professionals.
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