- Liens and Bonds: A Practical Approach in Tough Economic Times
- Hot Issues in Bankruptcy in Today's Economic Climate
- "How Do I Measure Up?" The Value of Credit Scorecards
- IASB, FASB Continue March Toward Convergence
- CEI Pans Treasury Plan as Detrimental to Credit Markets
- New Bill Would Aid Manufacturing Assistance Centers
- SEC Announces Agenda for Credit Rating Agency Roundtable
- Budget Analysis Refutes Obama Estimates
The outlook for the construction sector continues to be anchored in murky waters. The industry is already one that typically suffers from drawn-out payment cycles and the havoc caused by the financial crisis has only exacerbated this. For those credit managers working with customers in the construction sector, it translates into more headaches than the simple infamous excuse of "I can't pay you until I get paid."
When the economy went into a tailspin 18 months ago, suppliers, materialmen and contractors were forced to watch their already narrow margins vaporize to nothing. Now, they are taking jobs at cost and charging back profitability just to stay afloat, and defaults for materialmen rise. The expertise of effective construction-oriented credit managers to recover payments and maintain the integrity of their company's A/R has been transformed into an increasingly greater trial. Knowledge of mechanic's liens, payment bonds and the realities of dealing with customers in the construction industry is the only hope for survival in a sour economy.
"We all know the outside factors now affecting credit are unprecedented," said Greg Powelson, director, NACM's Mechanic's Lien and Bond Services (MLBS). "We need to recognize that construction credit is unique and why we need to be looking at liens and bonds in the first place. Maybe most importantly, there must be the recognition that in a construction-oriented environment, you are typically going to be asked to extend lines of credit that are greater than the net worth of your customers."
At this year's Credit Congress, Powelson will be leading the session "Liens & Bonds: A Practical Approach in Tough Economic Times." The presentation will focus on the fact that credit professionals must redouble their efforts and adapt relevant policies toward their customers to mitigate risk. He will also delve into waivers, joint check agreements and credit applications, as well as urge credit managers to revisit how they collect correct job information to protect their lien and bond rights.
"When we came to the end of 2008, we were living in a different world," said Powelson. "How we looked at our customers, and how we looked at our business, needed to change. Things have really changed over the last couple months and I think we need to really look differently at how we extend credit."
Powelson is an expert on the nation's various and continually-evolving mechanic's lien and bond statutes. Deadlines for filing notices and bond claims differ from state to state, and the onus is placed on construction-oriented credit professionals to have a solid grasp of these laws. From Powelson's perspective, credit managers should be looking at this difficult economic environment as a catalyst to guarantee that every "i" is dotted and every "t" is crossed.
Matthew Carr, NACM staff writer
To the Moon and Back and Back Again
At NACM's 113th Credit Congress in Orlando, Florida, members have the opportunity to retrace the footsteps of some of the United States' greatest explorers at the Kennedy Space Center, where the dreams of the country's space pioneers took flight.
On the optional tour, "Lunch With an Astronaut" on Tuesday, June 16, visitors will be able to embark on an adventure aboard a special shuttle motor coach beginning at the main Kennedy Space Center's Visitor Complex. The first stop is the LC39 Observation Gantry for a bird's-eye view of current exploration projects from the 60-foot observation tower that has an unobstructed view of the Space Shuttle launch pads. From there, the tour proceeds to the Apollo/Saturn V Center where visitors can get a first-hand look at the massive 363-foot Saturn V moon rocket, the most powerful rocket ever built. As the tour continues, members can experience history in the Firing Room Theater as the countdown reaches zero and they hear and feel the enormous blast as Apollo 8 leaves for the Moon.
To cap the tour, guests are treated to a buffet lunch where the guest of honor is a NASA astronaut. During lunch, members can see a mission briefing, hear real stories of space exploration and have the opportunity to talk to the astronaut. After lunch, members can make some time to view an IMAX film, displayed on a gigantic five-and-a-half story screen, which is hailed as the next best thing to actually being in space.
For more information on what this year's Credit Congress has to offer, or to register, click here!
Bankruptcy filings have kept pace with these troubled times and escalated to levels not seen since before the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). Credit professionals looking for tips on ensuring their payment before and after a customer bankruptcy filing got a wealth of worthy advice from Wanda Borges, Esq. of Borges & Associates LLC and Bruce Nathan, Esq. of Lowenstein Sandler PC in their most recent NACM-sponsored teleconference, "Hot Issues in Bankruptcy in Today's Economic Climate."
Borges and Nathan ran through a broad array of valuable bankruptcy information over the course of the program's 90-minute running time, which was part of NACM's "Added Advantage" teleconference series that offers attendees more time to get more information on some of the B2B credit world's most complex issues.
First on the agenda was the concept of critical vendor status—a mixed blessing for some creditors. "The concept is a simple one," said Borges. "It says you are so important to me and my business that if I don't have your cooperation when I reorganize, if I cannot continue to get your goods or services, I cannot survive." Qualifying for critical vendor status may help up front, but it can also rope a creditor into some unwanted future financial responsibilities. "About four or five years ago, the Bankruptcy Code started to revisit the concept," she added. "They said we will apply a doctrine of necessity and we will determine which vendors are that important to a debtor that we should allow them to be paid their pre-petition indebtedness. They usually come with a catch and that catch is that the debtor will tell you, 'I will consider you to be critical if you continue to sell to me all the products or services that I need on an ongoing basis on the previous credit terms that we have already arranged or that we can agree to on a going-forward basis.'"
"You might receive payment in full on your pre-petition claim, but you are going to be required to sell to the debtor on a post-petition basis on some kind of credit," said Borges. Whether or not this is ideal for the creditor will vary from case to case.
The legal duo also discussed several recent cases and their effects on creditors' rights, as well as issues like set-off, reclamation and the 20-day administrative priority claim granted by section 503(b)(9) of the Bankruptcy Code, as amended by the BAPCPA. "This is one of the benefits of the BAPCPA," said Nathan of the administrative claim. "It's only granted to sellers of goods, not to providers of services. It's kind of a safety net for reclamation because it doesn't require that you satisfy the requirements for reclamation."
"The biggest problem for this priority claim is how to assert it," he added, "because the statute only says that a claim is allowed for by a court hearing. It really is a case-by-case situation."
For more information on NACM's teleconference series, including other programs geared toward bankruptcy, click here.
Jacob Barron, NACM staff writer
Legal Issues in Credit and Enhancements to Best Protect Your Company
and Its Receivables
The quickly rising rates of defaults, delinquencies and bankruptcies have overgrown the economic landscape. Businesses are left having to machete their way through, trying to pinpoint the end of the downturn while doing all that they can to ensure their receivables are secure. Credit executives have had to turn to their ever-expanding chest of ironclad tools, as well as to tap their knowledge of enhancements to best protect their company and its bottom line in case of a customer's demise. Wanda Borges, Esq., Borges & Associates, LLC will further stock credit managers' survival kits by detailing the importance of obtaining a third-party guaranty or security, making sure all necessary documents are legal and binding, as well as bring credit executives up-to-date on the law as it pertains to business and credit transactions during the NACM teleconference "Legal Issues in Credit and Enhancements to Best Protect Your Company and Its Receivables" on April 6th. Borges will lead members into the depths of the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Red Flags regulations, UCC Article 9 and a host of antitrust statutes of which they need to remain wary.
Credit professionals interested in ensuring they are up-to-date on the latest legal changes that can adversely affect credit decisions can register for the teleconference here.
Credit professionals are often the unlauded drivers behind the nation's economy. Their accomplishments are overlooked as everyday business processes and upper management might not often recognize that the credit department is actively saving an organization money, is ensuring that risks are kept at a minimum and that credit professionals actually contribute to a company's growth.
"We're probably the worst at blowing our own horns for all of the value that we bring to the business, which is why I feel a credit scorecard is so terribly important," said Val Venable, CCE, credit manager, SABIC Innovative Plastics, during the NACM-sponsored teleconference "How Do I Measure Up?" "By having an effective scorecard, this helps eliminate these misperceptions and brings better value to the department and certainly better value to the individual." She added, "We bring tremendous value to the business and we need to be able to articulate that and highlight it."
As credit departments reduce headcounts, particularly in collections, credit professionals need to ensure that senior management understands that credit professionals are more than just bill collectors, and a credit scorecard is an ideal way to do so. In designing their reports, credit managers want to make sure it's going to highlight the areas they are particularly proud of and so that everybody can see the progress being made. They may also want to consider highlighting possible areas where they need help from outside the department, such as deductions. When designing what information will be highlighted in the scorecard, heed should be paid to the unique culture of the company.
"Every company is different. Some cultures are what I call 'give me a page,'" said Venable. "They want highlights on a single page, possibly two pages, and not a lot of detail behind it, but if they ask questions, they want you to be able to support what's on that page. Other companies want a book; the end of the month comes and it's a 25-30 page presentation of everything that has gone on in your department: cash flows, key customers—that type of thing. So, it's really important that you know what your company is looking for in your reporting when you start designing your scorecard."
Just as important as the layout, credit managers need to be aware of the resources available, including the turnaround time they have to create the scorecard, as well as the number of people available. As they're sitting down to design the credit scorecard, they want to consider the frequency of reporting—is it a weekly report or is it a monthly report? Knowing how often they are going to prepare it will also affect how in-depth the scorecard is going to be.
"You also want to know who the audience is," said Venable. "You're probably going to create a different report that you're going to share with your team and possibly the salespeople, versus a report that you are going to prepare for senior management or external auditors. So, you really want to know who is going to be looking at the report and what they're going to be doing with it."
Venable said that, in her experience, the higher up credit managers distribute the report, the higher the level of detail the audience wants.
"It has to make a very positive impression on everybody and it should drive action," explained Venable. "It's so important that we have this, not only to promote our department and to self-promote, but we also want to get over the stigma that collections or the credit profession is little more than DSO, dialing for dollars and a backroom cost center."
Matthew Carr, NACM staff writer
Is Your Customer Planning to File Chapter 11? What You Can Do to Protect Yourself
You just saw an article in the morning newspaper reporting that one of your customers is in some financial trouble and may be considering filing Chapter 11 bankruptcy. What do you do to protect your company? Join Mark Berman, Esq., a partner at Nixon Peabody LLP, to find out! This program will review the issues a credit manager should consider upon learning that a customer is considering filing Chapter 11. Issues to be discussed will include credit enhancement strategies, preference exposure analysis and strategies for reducing any exposure, how to manage future business, collections, ongoing contractual relationships, reclamation, stoppage of goods in transit, obtaining adequate assurance of future performance of contractual obligations and much more.
For more information, or to register, click here.
Following a joint board meeting held in London early last week, the International Accounting Standards Board (IASB) and U.S.-based Financial Accounting Standards Board (FASB) announced further steps toward digging the world's markets out of the current credit crisis. Building on the work the two agencies have already undertaken, both the FASB and IASB have agreed to continue work on universal standards for off-balance sheet activity and reiterated their pledge to their overall goal, which is the convergence of International Financial Reporting Standards (IFRS) and U.S. generally accepted accounting principles (GAAP).
Specifically, the boards agreed to develop IASB projects further and moved up the date by which they hope to have common financial instrument standards, making the shift in that specific rule come in months rather than the years previously suggested. Other topics addressed by the boards included changes in financial statement presentation and the measurement of fair value.
"The G20 and other international bodies have called for standard-setters to seek global solutions to a global crisis," said IASB Chairman Sir David Tweedie. "This is not always easy to achieve and there may be areas where, because of the extent of existing guidance, the two boards find it difficult to reconcile differences in the existing standards in the immediate term. That is why in important areas, such as financial instruments, a common standard that significantly improves financial reporting and leads to a less complex approach is required. The path to achieving convergence will undoubtedly be challenging, but the remit we have from policymakers is clear."
The topic of GAAP and IFRS convergence in the U.S. has been in flux somewhat following the collapse of the nation's credit markets, the subsequent bailouts and the shift in political leadership that took place last November. While the Securities and Exchange Commission, another important player in the process of convergence, has remained silent on the subject, the FASB, which serves as the nation's accounting standards setter, has trudged forth with its previously laid plans.
Jacob Barron, NACM staff writer
FCIB International Credit Executives (I.C.E.) Conference
One of FCIB's premier annual educational and networking events, the International Credit Executives (I.C.E.) Conference, will be at The Drake Hotel in Chicago, Illinois, April 19-21, 2009. The conference will be highlighted by programs addressing critical issues facing international finance and credit practitioners, including the breadth of the current recession, the risks and challenges in selling to financially distressed customers in foreign markets and managing credit during a global credit crisis. As usual, the offerings will include the unparalleled expertise of S.J. Rundt & Associates' Dr. Hans Belcsák's "World Markets in Review" and the unmatched perspectives of the "International Round Table Forum."
The $1 trillion Public-Private Investment Program (PPIP) announced by Department of Treasury Secretary Timothy Geithner has earned the ire of many in the financial industry. The Competitive Enterprise Institute (CEI) is now blasting the program as providing little salvation for credit markets, while posing the threat of further deteriorating already gloomy conditions.
With the amount of attention placed on mark-to-market and fair value accounting standards over the last several months, and the potential that the rules have exacerbated the current economic climate, the CEI was taken aback that there was no mention of repealing these measures.
"As an increasing number of Republicans and Democrats have recognized, no matter how much the government spends on bailouts, mark-to-market accounting rules continue to spread the credit contagion and are a major obstacle to true price discovery of assets like mortgage-backed securities," said John Berlau, director, CEI Center for Investors and Entrepreneurs. "But unfortunately, like the Bush administration, Geithner and the Obama team have so far balked at doing anything substantial to provide relief from mark-to-market accounting mandates."
Congress has begun holding hearings on the mark-to-market impact, as seen earlier this month in the House Financial Services Committee's Capital Markets Subcommittee, chaired by Rep. Paul Kanjorski (D-PA). In that hearing, Kanjorski demanded that the Financial Accounting Standards Board (FASB) change the fair value accounting standard.
"Mark-to-market suspension or relief—such as regulatory agencies like the FDIC not subtracting 'paper' mark-to-market losses against banks' regulatory capital—would cost taxpayers virtually nothing and let the market value these assets with private money at what the government is now planning to pay for them," said Berlau. "Financial institutions could buy these discounted securities at a true 'market' price without worrying about a future mark-to-market paper loss eating away at their regulatory capital that determines how much they can lend."
Berlau charges that unless mark-to-market reform occurs, the buying initiatives outlined in Geithner's plan could potentially make the problem worse. The CEI director previously attacked the original plan posed by former Treasury Secretary Henry Paulson to purchase mortgage-backed securities, which was ultimately discarded.
"If the government sets the price of asset securities too low, it could spread the contagion mark-to-market losses even further," explained Berlau. "If it sets the price too high, taxpayers will lose out."
He added that he felt any government money spent to purchase toxic assets will be weighed down by "over-regulation and de facto nationalization." He called on President Obama and his advisors to reform fair value accounting standards, which Berlau believes will allow banks to price assets more rationally during the current liquidity crisis.
Matthew Carr, NACM staff writer
Liens & Bonds: Building the Optimal Credit Department
The construction industry is facing an uphill climb as projections for the residential housing sector remain dismal and non-residential firms are shedding positions at a rapid pace as they watch profit margins vaporize. For credit managers, construction credit is a one-of-a-kind animal. Grantors are often asked to extend lines of credit beyond their customer's net worth. Even the terminology is unique to construction credit, with back charges, NTOS, pay-if-paid and retainage. Then there are powerful tools like liens and bonds that can make or break a company. As such, construction-oriented credit professionals need to be experts in maximizing the leverage provided by lien and bond claim statutes. NACM will hold a half-day session April 24th in Atlanta, Georgia, where Greg Powelson, director, NACM's Mechanic's Lien and Bond Services (MLBS), will lead credit managers through the basics of collecting job information on through foreclosure, to addressing liens and bonds from a national perspective, as well as when credit managers must take action.
A new bill with bipartisan support in the Senate would increase aid to Manufacturing Extension Partnership (MEP) centers. The legislation was introduced by Senate Task Force on Manufacturing Co-chair Olympia Snowe (R-ME) along with Senators Herb Kohl (D-WI), Joseph Lieberman (ID-CT), Debbie Stabenow (D-MI) and Sherrod Brown (D-OH).
The MEP is a public-private collection of facilities that assist small- and medium-sized manufacturers in expanding operations, becoming leaner, increasing sales and creating jobs. Member centers are required to provide two-thirds of their operational expenses after being open for four years, and much of this is raised from state governments, private donors, colleges and universities. The remaining third comes from the National Institute of Standards and Technology at the Department of Commerce, which also oversees the program. Specifically, the legislation would reduce MEP centers' cost share to 50% for all years of operation.
"As the harsh economy is making it increasingly difficult for MEP centers to solicit adequate contributions to meet their cost share requirement, we must bolster our assistance," said Snowe, who additionally serves as ranking member on the Senate Committee on Small Business and Entrepreneurship. "Of the 80 programs that the Department of Commerce funds, the MEP is the only initiative with a statutory cost share requirement above 50%. This bill will give MEP centers much-needed relief so that they may focus on providing counseling and training services to the small and medium manufacturers that are struggling to grow."
"The MEP program has proven effective in helping small- and medium-sized business compete in these hard economic times," added Kohl. "I have been a longtime proponent of this program which has helped improve manufacturing and sustain jobs. The change in cost-sharing requirements will allow this program to continue to thrive and help companies compete on a national and global scale."
Jacob Barron, NACM staff writer
Industry Credit Groups
Credit groups are an effective management tool. They permit 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 as to the most recent payment practices. The purpose of exchanging information is to help group members segregate fiction from fact, so individually competent and realistic credit decisions about a customer can be made.
Managed and operated by NACM Affiliates nationwide, NACM-Canada in Canada and FCIB internationally, credit groups:
- Provide unparalleled networking opportunities
- Assist in the exchange of credit information on common customers
- Facilitate the receipt of, and analysis of, information to make unilateral credit decisions
- Provide the 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
Click here to learn more about NACM credit groups and find the group for your industry.
The U.S. Securities and Exchange Commission (SEC) recently announced its agenda for an upcoming roundtable geared toward the agency's plans for expanded regulation of the nation's credit rating agencies. Scheduled for April 15th in Washington, D.C., the roundtable will feature panelists from various sectors and focus both on what went wrong with credit rating agencies during the nation's most recent financial meltdown and how the industry plans to move forward.
"The roundtable will thoroughly review relevant aspects of regulating credit rating agencies," said SEC Chairman Mary Schapiro. "Insight from leading experts on credit rating agencies and the financial markets will assist the Commission as it continues to pursue aggressive oversight of the industry." Each of the event's four panels will focus on a separate issue: "Current NRSRO (Nationally Recognized Statistical Rating Organization) Perspectives: What Went Wrong and What Corrective Steps Is the Industry Taking?," "Competition Issues: What Are Current Barriers to Entering the Credit Rating Agency Industry?," "Users' Perspectives" and "Approaches to Improve Credit Rating Agency Oversight."
Many observers have noted that part of blame for the country's lamentable economic position belongs to the NRSROs, that, prior to the collapse of the market, gave certain low-grade securities inaccurately rosy ratings. Additionally, the credit rating industry as a whole was often derided for the conflicts of interest that arose from a pricing structure based on the idea that the rating agencies were paid by the entities they rated, thereby leading many to believe that the more you paid, the better your rating.
Regulation of U.S. credit rating agencies, most notably Fitch Ratings, Standard & Poor's and Moody's Investor Service, first fell into the SEC's lap in the Summer of 2007, following the expansion of the agency's powers under the Credit Rating Agency Reform Act of 2006. Since receiving this authority, the agency has issued two major rules, conducted a long-term study of the three aforementioned rating agencies and proposed many other rules to shore up some of the industry's problems.
For more information, visit the SEC's website at www.sec.gov. Additionally, the international feature in the March 2009 issue of Business Credit magazine focuses specifically on the case of the credit rating industry and the lessons it has to offer risk managers around the world. For more information, or to subscribe to Business Credit, click here.
Jacob Barron, NACM staff writer
There is little debate that the new administration has inherited a difficult challenge in trying to restore growth and confidence to the nation's economy. Buckled by overleveraging and surging corporate collapse, the financial health of the United States has been bleak and outlooks have remained tempered. The country's deficit has pushed past what were once reasonable thresholds to numbers that were previously unimaginable and many Americans view any further traveling down that slope as a source of considerable unease. When the White House delivered its proposed $3.6 trillion budget to Congress last month, there was no hiding the sticker shock.
"With the magnitude of the challenges we face, I don't just view this budget as numbers on a page or a laundry list of programs," President Barack Obama said in his weekly address. "It's an economic blueprint for our future—a vision of America where growth is not based on real estate bubbles or overleveraged banks, but on a firm foundation of investments in energy, education and health care that will lead to a real and lasting prosperity."
When the President introduced his budget, he knew it would be marked up and was already facing an uphill climb to win approval from a majority of his own party, let alone Republicans as well. Then the Congressional Budget Office (CBO) released its own estimates of the total costs, slathering on another $2.3 trillion in debt more than what the White House had forecast over the next 10 years. Between 2010 and 2019, the CBO forecasts the total cumulative debt for the nation to balloon to $9.3 trillion, considerably more than the $7.12 trillion the administration predicted.
For the first five years, the two analyses are fairly close; it is in the outer five years that they really begin to veer away from one another. The discrepancies arise largely because of differing projections of baseline revenues and outlays, with CBO's projection of baseline deficits exceeding the Administration's estimate by about $1.6 trillion.
"CBO's new deficit estimates are further evidence of the mess that has been handed the Obama administration," said Senate Budget Committee Chairman Kent Conrad (D-ND). "They show the continuing weakening of the economy has significantly worsened our budget outlook."
Last week, the committee passed Obama's FY 2010 budget, which will now head to the Senate floor, but there is more work to be done in the longer term.
"But, as President Obama himself has indicated, this year's budget is just the beginning, and much more will be needed to put our nation back on a sound long-term fiscal course," said Conrad. The chairman stated that "given the deteriorating economic outlook, it was necessary to make adjustments to the President's budget to keep deficits on a downward trajectory. Non-defense discretionary spending under the budget is $15 billion below the President's level in 2010. In total, spending is reduced from 27.6% of GDP in 2009 to 22% of GDP in 2014."
From the CBO's perspective, proposed changes in tax policy would reduce revenues by an estimated $2.1 trillion over the next decade, a decrease of 6.1%. For the next two years, CBO anticipates that economic output will average about 7% below its potential—the output that would be produced if the economy's resources were fully employed—which is relative to what was seen during the recession of 1981 and 1982. The agency also feels that the downturn will persist for significantly longer than has been predicted, making the current recession the most severe since World War II. The grim news continues as the agency predicts unemployment will peak at 9.4% later this year and that it will remain above 7% through the end of 2011.
"CBO's word is the gospel," said Senator Chuck Grassley (R-IA), ranking member, Senate Finance Committee. "Congress and the Administration need to get the message. The buck stops with the American taxpayer. People can afford only so much government spending, even for the worthiest-sounding causes."
Matthew Carr, NACM staff writer