January 9, 2014
The year 2013 was more than a little interesting as far as the Credit Managers’ Index (CMI) was concerned. Some of what was expected took place, and so did a great deal of things not anticipated—at least not to the extent it developed.
Consistency was anticipated and for the most part unrolled as predicted. Index readings were above 50 all year for the second year in a row. As anything over 50 indicates expansion in the economy, this was indeed good news. If there was anything to object to it was that readings never approached the upper 50s, staying in the mid-50s throughout the year. The most interesting month of 2013 was May. The dramatic spike in overall readings that month nearly gave me a heart attack. May saw progress far beyond what anyone had expected and caused a great deal of anticipation for the months that followed—to see if what appeared to happen was really a trend that could be counted upon.
Three changes took place in May and mostly carried through almost to the end of the year. New credit applications, after bouncing along at a semi-respectable level in the mid 50s, jumped to 59.2 and then to 59.3 in June. From that point forward, this favorable factor’s readings were generally in the 60s, and this shift was even more obvious in manufacturing’s May number, which improved two points over the month before to hit 57.4. This is evidence of a pronounced increase in the number of companies seeking credit. By itself, this is not a signal of growth and expansion as any credit manager knows there are plenty of companies that will ask for credit when in financial distress in hopes that somebody will throw them a lifeline. To make this reading significant, where growth is concerned, it has to be accompanied by a spike in the amount of credit granted, as that suggests that the companies seeking more credit are indeed creditworthy.
It turns out that there were gains in the number of credit applications granted as well and much of this started in May. This development coincided with when the Purchasing Managers Index started to trend back up after its sub-50 dip earlier in the year. This was the point that many of the manufacturers started to ramp up and we now know this process was building fast as we saw third quarter GDP numbers crest above 4% for the first time since early 2010.
This is one of the strengths of the CMI. By looking at what the credit manager is doing a reader of these findings will be looking at the very beginning of the business process – a look that is even earlier than that of the purchasing manager. After all there will be no purchasing until there has been some credit arranged. The CMI has proven to be a very reliable early warning system as far as the economy is concerned and the activity in the early part of the summer reinforces this observation. By the time the third quarter was underway the CMI was suggesting that business was getting more active and ramping up, a few months later that was clearly the case.
- Chris Kuehl, PhD, NACM Economist
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Commercial bankruptcies declined precipitously again in 2013, according to statistics released this week by the American Bankruptcy Institute (ABI) and Epiq Systems, Inc. With the probability that the new head of the Federal Reserve won’t change the tortoise-slow course of stimulus tapering for several more months, low interest rates will likely help keep filings low.
ABI and Epiq statistics indicate that commercial filings dropped 24% in 2013, bringing the rate of filings back to levels not seen since 2006. In 2013, 44,111 businesses entered bankruptcy. Total bankruptcies, including consumer, also plummeted by 13% to 1.03 million for the year. That also represents the lowest point since the economic downturn and correction began in late 2007.
Declining business bankruptcy levels are a trend that should continue in 2014 in large part because of the low cost of borrowing. Interest rates have been held at historic lows as the Federal Reserve, under outgoing Chairman Ben Bernanke, has kept the target for the federal funds rate between 0%-0.25% and has continued with Treasury assets purchases. The latter has only been slowed recently, and the cuts have been by an amount far less than markets expected. Incoming Fed Chairman Janet Yellen, who was confirmed by the U.S. Senate this week, is expected to mostly stay the course of her predecessor with no quick changes to the funds rate and extremely slow tapering efforts. That and low expectations for a sudden, hot surge in economic growth have a growing number of economists and bankruptcy experts comfortable in predicting the continuance of decreasing bankruptcy filings.
“I don’t think the trend will change this year,” said Bruce Nathan, Esq., partner with Lowenstein Sandler LLP. “It’s interest rates that are going to drive this for businesses, and the fundamentals aren’t changing. You may have the same dynamics from 2013 continuing.” Nathan did add that there could be a short-lived increase in filings by some struggling retailers that didn’t do as well as hoped at the register during the holiday shopping season.
- Brian Shappell, CBA, CICP, NACM staff writer
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An amended version of the Virginia commercial credit reporting bill was introduced in the Virginia General Assembly last week.
The previous bill, HB 2198, has since been abandoned after the Virginia Small Business Commission made no recommendation on the bill last December. On January 3, however, Delegate Christopher Head (R), a former co-patron of HB 2198, introduced HB 370 for consideration in the General Assembly's 2014 legislative session. While HB 2198 was clearly the inspiration for HB 370, the newest version of the legislation seems to take into account the concerns of NACM and some of the previous bill's other opponents and abandons some of HB 2198's most controversial provisions.
As introduced, HB 370 eliminates HB 2198's identification provisions, which would have required commercial credit reporting agencies to identify the source of so-called "negative information" to the subject of a commercial credit report. Instead, HB 370 boils HB 2198 down to two major provisions: one that requires commercial credit reporting agencies to provide the subject company a free copy of their commercial credit report, less any information that's deemed proprietary to the commercial credit reporting agency, and another provision that provides the subject of a report with further recourse to challenge an "inaccurate statement of fact" on their credit report after the subject has exhausted the commercial credit reporting agency’s standard means of dispute resolution.
The legislation still could have implications for the commercial credit reporting industry. Under the terms of the second half of HB 370, the representative of a subject company can, within 30 days of exhausting a commercial credit reporting agency's dispute resolution procedure, file a written summary statement with the reporting agency identifying the disputed information and indicating the nature of the disagreement. Within 30 days of receiving this summary, the reporting agency must either delete the item that is disputed or mark it in the report as being disputed.
Concerns linger about how this provision could potentially weaken the strength and value of commercial credit reports on Virginia businesses, and about the practicality of how commercial credit reporting agencies would delete pieces of information or marking them as disputed in individual company credit reports. NACM will continue to review the legislation and work to ensure that no bill is enacted that could negatively affect the free and open exchange of credit information.
- Jacob Barron, CICP, NACM staff writer
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The world's largest retail trade association appealed the recent approval of a $5.7 billion antitrust settlement against Visa and MasterCard over interchange fees last week. As expected, the National Retail Federation (NRF) asked the 2nd U.S. Circuit Court of Appeals to overturn the lower court's ruling just three weeks after it was issued, opening the next chapter in the still-raging battle between merchants and card networks over card processing costs.
U.S. District Judge John Gleeson approved the controversial settlement on December 13, ending a suit filed against Visa, MasterCard and several financial institutions in 2005 by merchants who alleged the card networks and banks had colluded to keep interchange, or "swipe," fees unreasonably high. Under the terms of the approved settlement, the defendants will pay merchants $5.7 billion in direct reimbursements and temporary interchange rate reductions and allow merchants to pass on their card processing costs via surcharge.
Merchants, and more specifically retailers, objected to the settlement on the grounds that the size of the settlement, the largest in U.S. antitrust history, was far too low considering Visa and MasterCard collect approximately $30 billion annually from interchange fees. They also objected to a provision of the settlement that bars merchants from ever bringing similar legal challenges against Visa and MasterCard, which, retailers argued, allows the two card processing giants to continue to set their interchange fees in secret.
"A majority of the original plaintiffs in the case repudiated the settlement as soon as they saw its terms, the nation’s largest retailers have spoken out against it, and close to 8,000 retailers and merchants have formally rejected the proposal. This is an abuse of the class action system and should never have been approved," said NRF Senior Vice President and General Counsel Mallory Duncan. "The only people pleased with this settlement are Visa and MasterCard, because it means they can continue collecting tens of billions of dollars in hidden fees, the class action lawyers who stand to collect half a billion dollars in fees without fixing the problem, and a lower court, which has cleared a time-consuming case off its docket, but has done a serious disservice to merchants and the public in the process."
In its appeal announcement, NRF also denounced the idea that surcharging was a viable solution to retailers and other merchants laboring under the high costs of card acceptance. "Instead of lowering fees, the card industry's settlement proposes that merchants pass them along to consumers in the form of surcharges," Duncan said. "That is absolutely the opposite of what the retailers sought, and major retailers have soundly rejected surcharging."
B2B sellers, however, have remained interested in surcharging ever since the practice was allowed 60 days after the settlement's preliminary approval. To learn more, check out the article titled "Just Too Early" on page 42 of the January 2014 edition of Business Credit.
- Jacob Barron, CICP, NACM staff writer
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The United States’ recent success story in the area of oil and energy production continued to pay dividends in the area of trade, at least through November. Also helping matters was the continued focus on exporting by more and more domestic companies.
Commerce Department statistics unveiled this week showed approximately $194.9 billion in exports and $229.1 billion in imports for November. The $34.3 billion deficit represented a $5 billion decrease in the trade gap since October and the smallest in just over four years. Export increases were driven by areas including industrial supplies/materials, capital goods and automotive vehicles parts. The import decrease came largely in the area of oil/energy products, as domestic production continued a surprisingly strong performance. By country, the largest US deficit continued to be with China ($26.9 billion) and the European Union ($14.3 billion), though both fell significantly in November. The largest surpluses existed with Hong Kong ($2.9 billion) and Australia ($1.2 billion).
Neighboring Mexico also registered positive trade data for November, posting a surprise surplus on the back of manufacturing exports. South Africa also surprised markets by moving from a deficit to a surplus in November. Canada shocked, in a dubious way, by falling into a slight deficit for the month on a surge of imported machinery and other equipment that wasn’t balanced by heightened business exporting. Others that saw existing trade surpluses rise were the EU, South Korea, the Czech Republic and Brazil, though the latter comes with many red flags in its annual trade performance levels (the worst in a decade). Countries that still boasted a surplus, albeit noticeably shrinking ones, in the latest monthly trade statistics included Argentina, Finland and Qatar.
- Brian Shappell, CBA, CICP, NACM staff writer
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FCIB Roundtables held in the European Union late last year demonstrated that whistle-blowing polices appear to vary greatly, with some companies having well-defined parameters and others lagging far behind in developing strategies.
Roundtable participants illustrated that whistle-blowing on the issues of legal or ethical violations in trade credit is an area with many shades of grey: there is no “one size fits all.” A company and credit department’s response to issues as they arise boils down to the buy-in by top-level management to ensure that everyone within the company feels responsible for compliance. In short, companies need to disseminate and regularly impart information to ensure that employees are up to speed on all compliance- and ethics-related matters. Importantly, ignorance was not considered a mitigating circumstance at the upper management level or within all facets of the credit department. Therefore, credit managers should work to position themselves at the forefront of such corporate policies, arguing their importance as a credit risk element, and be in the know at all times on these matters.
Potential whistle-blowing red flags for a customer discussed at the Roundtables included the following:
• Customer appears to be evasive or unclear.
• Products ordered don’t fit the line of business or are incompatible with destination.
• Customer appears to be unfamiliar with product use.
• Customer declines routine services (training, maintenance).
• Customer is willing to pay cash when trading terms would be the norm.
• Abnormal shipping route.
• Freight forwarder is final destination.
• Customer omits final destination or is unwilling to supply upon questioning.
The five-event series that began in September 2013 in London will culminate with a roundtable in Zurich on February 13. Compliance and ethics will also be a part of the programming for FCIB’s Annual International Credit & Risk Management Summit in May in Munich, Germany. For more information on these upcoming events, click here.
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