September 19, 2013
International trade finance professionals, as well as those beginning to expand to international markets, gathered in Philadelphia earlier this week for FCIB's 24th Annual Global Conference. Trust was the dominant refrain throughout the program that offered key insights from experts, whether it is important between colleagues or partners in foreign locations, creditors to customers or even governments on economic and trade issues.
Always of interest to international trade finance professionals is how to get paid more quickly. One particularly interesting tool discussed at Global that can help companies accomplish this was the bank payment obligation (BPO). David Vermylen, global credit manager in petrochemicals with BP Chemicals, sees BPOs as a great alternative for credit professionals trying to get paid quicker and with less hassle. "Within 20 minutes you can match the shipment information. The system checks it, and your BPO is irrevocable...you can ship your goods," said Vermylen, a member of FCIB's European Advisory Council (EAC). "The moment you have the BPO, you are good. It's flexible, it's quick. If everything could go by BPO, many of the things that can go wrong with letters of credit and all the stress that comes with them gets alleviated."
However, to use such a product requires a higher level of trust in customers than a more traditional agreement, like a letter of credit (LC). Because of this, the LC will likely have a place in international credit "for a very long time," according to Global panelist Luis Noriega, ICCE, vice president at JPMorgan Chase. Another problem with non-traditional products is customers and banks may lack trust in them simply because they are viewed as different or new, as noted by Noriega and EAC member Martine Zimmermann, ICCE, a credit manager at F. Hoffmann-La Roche AG.
Vermylen admitted "these things need education" both internally and externally to enjoy their benefits. "You're talking about a transaction you have a lot of uncertainty about. And now you're going to change away from something that has been working for many years," he said. "If something goes wrong and you have to explain that to your CEO, that's not going to be a good day."
Another application of trust came from keynote speaker Peter Blair Henry, dean of the Leonard N. Stern School of Business at New York University and key member of President Barack Obama's 2008 transition team. He said that an extension of more trust from the advanced economies to emerging ones could help all parties. However, despite strides made by former third-world countries throughout the globe, especially in Latin America and Asia, trust isn't being embraced by the traditional economic powers, nor is discipline or clarity, for that matter.
Henry suggested clarity and trust might dovetail in that a bit more transparency out of the advanced economies could go a long way toward helping their growth rates improve faster. In short, the biggest economies could learn from the newly-relevant ones.
"Look at Latin America since 1994. Inflation has dropped like a stone," he told attendees. "A number of third-world countries turned themselves around and became emerging economies when their leaders embraced a clear commitment to a change of direction."
- Brian Shappell, CBA, CICP, NACM staff writer
More coverage from FCIB Global will be available on the NACM blog and in the November/December issue of Business Credit Magazine.
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The coal industry is in no way a new area of concern for market watchers and creditors. But the challenges, from demand at home and abroad to government intervention, seem to be stacking up in the short term. But there may be hope, though cautious, of an export-led turnaround, so coal isn't likely to fall off NACM's "Industries to Watch" in less than one or two years.
A lengthy list of experts have warned of the short-term potential for financial problems in the coal industry. NACM sources include Bruce Nathan, Esq., partner with Lowenstein Sandler LLP, Ed Altman, PhD, the Max L. Heine Professor of Finance at the NYU Stern School of Business and director of research in credit and debt markets at the NYU Salomon Center for the Study of Financial Institutions, and Adam Rosen, director of PricewaterhouseCoopers LLP's financial restructuring group.
Perhaps the biggest threat to the industry stems from safety disasters that have trapped and killed miners, although environmental concerns are a close second. The Obama Administration's regulatory efforts affecting coal mines have accelerated in recent years. This month, the Environmental Protection Agency leaked plans to ban the construction of any new coal-fired power plants not designed to meet the highest technological standards for limiting emissions. That represents a massive expense. Also pricey is the bevy of safety upgrades called for at dozens of existing operations.
Rosen, who represents the United Mine Workers of America in one of the most well-known Chapter 11 cases in the industry (In Re Patriot Coal Corp.), said regulations have led to a quadrupling of temporary mine closures. The worst hit coal basins are in Central and Northern Appalachia, with 42 and 11 closures, respectively, so far in 2013 alone.
"With all the environmental regulations being imposed, rather than spending hundreds of millions to get the plants up to code, they're just shutting down," Nathan said. "That's a trend you are going to continue to see."
Producers are also dealing with price softness from competition that will intermittently show itself for a long period into the future: natural gas. With natural gas and shale presently flooding the market and prices for them dropping, the effect has been less domestic demand for coal used for energy.
"Natural gas is a permanent concern for the industry and a real obstacle," Rosen told NACM. "There are plants that have the ability to switch from natural gas to coal and vice-versa when the pricing changes. When natural gas is depressed, it makes for an unfavorable environment for coal."
However, Rosen said natural gas prices have been showing signs of strengthening, which will be good for the coal industry. There have also been projections of improved demand abroad in places like Australia. But improvements there and in China, which relies heavily on coal to power steel-making plants, could be 12 to 18 months off, Rosen said. Even then, China is a wild card. Just recently, the government banned coal-powered plants in three industry regions, including parts of Beijing, because of massive pollution problems.
In the meantime, Rosen and Nathan warn trade creditors with debtors tied to the coal industry to look closely at factors like their cash availability as well as, importantly, their ability to borrow over the next one to two years. There is still opportunity in the coal industry for those customers prepared to withstand a year or two, at least, of troubled waters.
- Brian Shappell, CBA, CICP, NACM staff writer
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Merchants continued their assault last week on a class-action settlement with Visa and MasterCard over interchange fees, making their case before the judge that will ultimately determine the agreement's fate.
In an all-day hearing in U.S. District Court in Brooklyn, presiding Judge John Gleeson, who granted the settlement preliminary approval last November, heard arguments for and against the agreement that will eventually form the basis of his final ruling that will determine the settlement's future. If approved, the agreement would provide $6.05 billion in direct payments and $1.2 billion in temporary interchange rate reductions to merchants, but it could also prevent businesses from filing similar antitrust suits in the future.
The curiously structured settlement would allow merchants to opt out of the lump payment and rate reduction portions of the agreement, which nearly 8,000 merchants representing more than 25% of Visa and MasterCard's card volume have already done. It would not, however, allow them to opt out of the parts of the settlement that preclude future suits against Visa and MasterCard over how they set their interchange fees, which most opponents to the settlement consider a fatal flaw.
"The proposed settlement is next to worthless," said National Retail Federation (NRF) Senior Vice President and General Counsel Mallory Duncan. "It does nothing to reduce swipe fees or keep them from rising in the future, it offers retailers pennies on the dollar for the damage that has already been done and it tries to tie merchants' hands from ever suing again. This is actually worse than no settlement at all because it further entrenches the monopoly held by the card companies."
NRF urged Judge Gleeson to "right or reject" the proposed settlement, by either allowing merchants to opt out of the entire agreement, not just monetary provisions, or reject the settlement. "As it stands, the settlement rewards the perpetrators and traps the victims," said National Retail Federation (NRF) Attorney Andrew Celli. "But it is not hopeless. It can be made fair. You have the power to make it so."
For their part, Visa and MasterCard argued that the legal release from future litigation included in the proposal is narrow in scope, covering only existing rules or similar rules the companies might propose in the future, but this has done little to assuage opponents' concerns.
Merchant groups like the National Association of Convenience Stores (NACS) have also called into question the size of the proposed settlement's payout provisions, considering the estimated $30 billion that Visa and MasterCard have earned from interchange fees every year since the lawsuit was filed in 2005, and the still exorbitant costs that merchants pay to accept credit cards even today. "Anti-competitive practices have resulted in our industry paying more in card fees than it makes in pre-tax profits every year since 2006," said NACS President and CEO Henry Armour. "The vast majority of our industry is made up of small businesses. In fact, 60% are single store operators. Because our industry pays such huge fees, $11.2 billion in 2012, NACS has had thousands of conversations with our members about interchange fees and discussed the problems and potential solutions in depth."
The proposed settlement, as a means to alleviate this burden, allows merchants to pass on their processing costs to their customers via surcharge, a provision that became effective in late January. But many have argued that this is an unworkable solution, both from a marketing perspective and because a growing number of states are considering surcharging bans that would make the provision useless. "The primary rules relief in the settlement, surcharging, is completely unworkable because of negative consumer reactions to surcharging, state laws that prohibit it and the level-the-playing field provisions," said Armour. "Most telling is the fact that since February when retailers have had the ability to surcharge under the settlement there has been virtually no movement in that direction. That is compelling evidence that the ability to surcharge has no value to the class."
Judge Glesson offered no hints as to when he might make his final ruling, but noted that regardless of whether the settlement is fully approved, the fight over interchange fees may not be solvable without comprehensive federal legislation.
- Jacob Barron, CICP, NACM staff writer
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Federal budget cuts have hit the U.S. court system as hard as they've hit other government agencies. To cope, bankruptcy courts are looking to a solution used by many companies in the private sector to reduce headcount without simultaneously reducing performance.
According to an article in the September edition of the ABI Journal, bankruptcy courts have adjusted to the budget cuts by finding ways to share administrative services between them, ensuring that cases continue to be administered efficiently even though the federal courts have reduced staffing levels to those not seen since December 1999. Functions like human resources, procurement, budget management, training and other back-office tasks are being shared by several courts at a time, so that other bankruptcy court staff can hopefully continue to focus on court users.
"It is hoped that the changes will not erode what most clerks view as their primary function: maintaining the records and ensuring the smooth and orderly flow of cases through the courts," said Alec Leddy, author of A Year in Washington, D.C.: Helping Bankruptcy Courts through Unprecedented Reductions. Leddy took a leave of absence from his position as a court clerk for the U.S. Bankruptcy Court for the District of Maine to spend a year in the Administrative Office of the U.S. Courts in Washington, where he was tasked with helping the 94 judicial districts develop shared administrative services (SAS) plans, as mandated by the Judicial Conference of the U.S. (JCUS) in late 2012.
Leddy noted that the courts will experience a total minimum reduction of 34-35% in funding between fiscal years 2012 and 2014. "In most—if not all—bankruptcy courts, it means buyouts, layoffs and furloughs," he said.
The approach is similar, though not identical, to businesses that move certain administrative functions to a shared services center in order to reduce their payroll while more tightly focusing on their core competencies. Like in the private sector, however, the court system's shared services experience can lead to some awkward overlapping, and Leddy found that there was no one-size-fits-all approach to how these courts developed these plans.
"[The court districts] often do things radically different [from one another], despite the fact that, as is the case with bankruptcy courts, they are applying the same statutes," he wrote. For example, in Idaho, the Southern District of Texas, Western District of Missouri, Northern Mariana Islands and District of Columbia, the district and bankruptcy courts are consolidated, meaning there is no distinct bankruptcy clerk's office.
- Jacob Barron, CICP, NACM staff writer
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The Federal Reserve's Federal Open Market Committee (FOMC) broke from its two-day economic policy meeting on September 18 with surprising news that it would not slow down on its asset purchase stimulus program despite some evidence of strengthening in the economy.
Kevin Hebner, senior foreign exchange strategist for JPMorgan Chase Bank, was among many experts expecting the Fed to start tapering. While speaking during a session of FCIB's 24th Annual Global Conference in Philadelphia, Hebner said it was possible as early as September 18, and surely in the near future, that the Fed would reduce about $10 billion from the $85 billion per month the federal government has been spending on Treasury and mortgage-backed securities purchases given improvements in some key economic indicators. The FOMC, however, noted in its official statement that there are ongoing concerns with the unemployment rate and escalating mortgage rates, as well as "restraining" fiscal policy. As such, the purchase strategy, like the target for the federal funds rate, remains unchanged for now. Chairman Ben Bernanke indicated during a press conference that the Fed wants to see more improvement, especially "meaningful progress" in labor markets, and in more of a widespread, consistent manner, before the Fed changes course.
While many will focus on the asset purchase issues, Hebner said even more important was that the meeting produced the first release of the Fed's projections for 2016. The FOMC predicts growth of 2.2% to 3.5%, which is about on pace with predictions for 2015, but well below the 4% Hebner said would constitute a better-than-"neutral" outlook. The prediction for overall 2013 GDP is 1.8% to 2.4%, according to Fed statistics. Unemployment is projected at a range of 5.2% to 6% for 2016, also very close to that of 2015, although it would still be a significant improvement from the 2013 projection of 6.9% to 7.3%.
"This is the most important FOMC meeting in at least a year or so," said Hebner. "And it could be hard for people to make sense of it all." Despite eventual tapering, Hebner predicted no hikes to the federal funds rate before 2015 in part because of continued issues in the labor market. Therein, the Fed left the target for the federal funds rate at a range between 0% and 0.25%, as expected.
- Brian Shappell, CBA, CICP, NACM staff writer
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Over the last year the Obama Administration has tried to deepen trade ties to countries with which the United States already enjoys a marquis trade relationship. It began earlier in 2013 with the opening negotiations of a new free trade agreement (FTA) between the U.S. and the European Union, which would aim to build even further on what is already the world's largest trading relationship.
Now the U.S. is taking its first steps in a similar direction with Mexico, as this week Commerce Secretary Penny Pritzker and Trade Representative Michael Froman will accompany Vice President Joe Biden to Mexico to begin a High Level Economic Dialogue with the United States' second-largest export market. "The U.S. strategic relationship with Mexico is one of our most important in the world," Pritzker said. "Not only do we share a 2,000 mile border, but our commercial relationship generates more than $500 billion in two-way trade and supports millions of jobs in both countries."
The goal of the Dialogue isn't necessarily to create a new trade agreement, but rather to strengthen the already marrow-deep trade ties between the U.S. and Mexico. "The High Level Economic Dialogue is a new mechanism to enhance our cooperation on matters of importance to both of our economies," Pritzker added.
The U.S. and Mexico's reputation for closeness may also come in handy as they try jointly to negotiate the Trans-Pacific Partnership (TPP), a global trade agreement that, in addition to the U.S. and Mexico, also involves Australia, Brunei, Chile, Canada, Japan, Malaysia, New Zealand, Peru, Singapore, Vietnam and South Korea.
"Mexico is an important U.S. partner in key international economic forums, from the NAFTA, WTO and OECD to our current joint efforts to negotiate in the Trans-Pacific Partnership and the Trade in Services Agreement," Froman said. "Trade agreements and new job-creating export and investment opportunities go hand-in-hand. We look forward to expanding opportunities with Mexico on both sides of the border through this new, broad economic initiative."
- Jacob Barron, CICP, NACM staff writer
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