June 15, 2010
The Federal Reserve found economic conditions throughout the nation continuing to improve, albeit at a "modest" pace, according to the Beige Book report unveiled one day after Fed Chairman Ben Bernanke publicly tried to alleviate market concerns of a slowing of the rebound. However, there were few positive changes of note in the commercial real estate and financial industry segments.
Though U.S. businesses appeared to be spending more during the latest reporting period (mid-April to late May), commercial real estate activity remained generally weak but at least stable in many areas. Office, industrial and retail vacancies continue to increase in most districts, though areas including New York, Philadelphia, Dallas and San Francisco helped increase leasing activity through cutting rental rates. Most are not expecting any boom period in commercial construction any time soon. And districts based in Philadelphia and San Francisco are pessimistic about the potential for a previously forecasted upturn for the construction sector before year's end.
There do appear to be some blips of optimism in several districts such as New York (increase in leasing among legal firms), Cleveland (automotive parts vendors seeing an orders uptick) and Dallas (commercial real estate investment capital showing strong signs of returning).
Meanwhile, two-thirds of the Fed's 12 districts reported that commercial and industrial lending by banks remained weak on lessened credit demand and tougher standards for borrowing, in areas such as commercial real estate more than others.
Brief breakdowns of all 12 Federal Reserve districts are now available in an extended version of this story on NACM's Credit Real-Time blog.
Brian Shappell, NACM staff writer
Don't Underestimate Recognition
"If I gave you the choice between a satisfied employee or an engaged employee, who would you take and why?" This was a question posed by Chester Elton, this year's Credit Congress General Session speaker. The right choice is an engaged employee, because businesses with engaged employees grow.
So, how do you get, or create, engaged employees? It starts with recognition, and managers are your front line. Elton's book, The Carrot Principle, co-written with Adrian Gostick, shows throughout how recognition can have tangible, positive effects on a company's bottom line. Become a better leader and buy your copy of The Carrot Principle today from the NACM Bookstore.
Read more about the General Session and all other convention happenings on NACM's Credit Congress web pages. Continuing full Credit Congress text and photo coverage will be available in the upcoming July/August issue of Business Credit magazine.
As Congress continues to look for ways to create jobs, or at least retain them, many on Capitol Hill have warmed to the idea of revising the Bankruptcy Code to make it far more conducive to economic growth and recovery. Specifically, lawmakers are aware that small businesses rarely can successfully reorganize using the Chapter 11 process, and they've set their eyes on a new procedure that allows smaller viable firms to successfully reorganize, but also quickly winds down those that have little chance of surviving, regardless of what happens in the courtroom.
NACM has entered the debate, offering support to Sen. Sheldon Whitehouse (D-RI) and meeting with staffers in his and Sen. Jeff Sessions' (R-AL) offices. The American Bankruptcy Institute (ABI) has also been vocal in the debate over how best to reshape the Code to allow more small businesses to remain active in the market. In a recent podcast, "Reforming Small Business Bankruptcy," ABI Resident Scholar Juliet Moringiello discussed the case for reform with Melissa Jacoby, George R. Ward Professor of Law at the University of North Carolina School of Law, who began by mentioning the most common concern among debtors, creditors, academics and lawmakers alike.
"The standard concern is that Chapter 11 is centered around large public companies," said Jacoby. "Because they're oriented around those, the process is thought to be too expensive and complicated for smaller debtors and their creditors."
Jacoby also noted that certain aspects of Chapter 11 rely on the presumption of a creditor base that is active, invested and involved in the process. "That isn't happening in small cases," she said. "It's just not cost effective." Indeed, the costs associated with participation in a small business case may be prohibitive, especially when a creditor's claim isn't all that large to begin with. As a result, cases begin to suffer from a lack of balance between interested parties. "There's an imbalance in the negotiations and also in the oversight of cases," said Jacoby. "I think sometimes creditors don't even bother to vote in small business cases because they don't have as much of an involvement."
As far as ways to counteract this negative trend, Jacoby suggested that while she believes a smaller amount of creditor participation is here to stay, one option would be to "shift the presumption of silence." When a creditor abstains from participating in a case, its silence is construed as a "no" vote on whatever plan is proposed. "Silence basically means no," she said. "We could shift plans to mean yes in a small business case." Creditors would be deemed to consent to a plan should they not participate, making it harder for them to not be a part of the bankruptcy process and, ideally, making the negotiations far more balanced. "You could have a system that expects less creditor participation but that creates incentive for participation," said Jacoby. "There are ways to combine pieces of Chapter 12 and Chapter 13, and give some carrots to creditors to be more involved."
A full replay of the podcast can be found here.
NACM and its Government Affairs Committee continue to work toward changes in the Bankruptcy Code that benefit small business debtors, their creditors and the economy at large. Stay tuned to NACM's eNews and Credit Real-Time Blog for future updates.
Jacob Barron, NACM staff writer
Things Are Looking Up, But Don't Let Up in Getting Paid
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Export letters of credit (LCs), in theory, are one of the most reliable ways of guaranteeing some level of safety in a vendor-customer relationship. However, they often offend customers being asked by a vendor to enter into such an agreement. But when dealing with financial institutions and businesses based in the Islamic world, export letters of credit do not appear to generate the same level of disdain as they do with businesses and financial institutions in the Far East, especially China, for example.
In the latest issue of Business Credit magazine, Export Credit Consulting's Managing Director Richard Gref, CICE notes there are growing opportunities, but increased risk, to make deals to tap into growing consumerism in many Islamic-majority markets (Saudi Arabia, Egypt, Lebanon, etc.). "They've got money and, in each case, they have the younger population that wants to be upgraded [to have what their American counterparts have]," said Gref.
Whereas a China-based business might view a request for an export letter of credit as a "you don't trust us" proposition, Islamic financial institutions and area businesses typically are comfortable with using them, said Gref. They often see the detailed specification of terms as a good thing.
"Their take is more of, 'it's a win-win for both' in that we as an exporter have to comply with it, and they as an importer are willing to go along with it," he notes. "They will pay their in-country fees, and we will pay our country's fees."
Danielle Austin, of Export Trade Associates, said she is pleased to hear that exporters are using LCs well, and that they're gaining traction with some of those emerging markets.
"The exporter should be controlling the process and 'calling the shots,'" said Austin, who has presented past NACM teleconferences on letters of credit. "Export LCs still are the safest way to do business internationally and are 'governed by something vs. nothing.'"
Much more on opportunity and risk in Islamic Finance can be found in the current (June 2010) issue of Business Credit magazine on page 4. For more on Business Credit magazine, click here.
Brian Shappell, NACM staff writer
Attention Credit Champs
What was the most successful solution your credit department implemented this past year? Was it new software, a new machine/computer, a new process for staff or another new resource? The experts in credit management are you, the people who practice it every day. You can share your knowledge with your profession while earning recognition and Roadmap points! Submit an article, or short story, to Business Credit magazine. We'd like to hear from you.
September/October's Business Credit will feature articles on solutions and troubleshooting, particularly in regard to technology. To submit an article or short story, email an abstract with the anticipated word count by July 1st to email@example.com. The article/short story is then due by July 15th. Please include "BCM submission" in the subject line of your email.
Pressure from lawmakers has continued to mount on U.S. Treasury Secretary Timothy Geithner who some believe isn't doing enough to hold China accountable for manipulating its currency and infringing on intellectual property (IP) rights.
In a recent hearing before the Senate Finance Committee, the first in a series examining the U.S.-China economic relationship, Chairman Max Baucus (D-MT) pressed the Treasury Secretary for specific actions he would take to ensure American businesses are competitive in the global economy and, specifically, the ever-booming Chinese market.
"As the world's fastest-growing economy, China offers tremendous potential for American ranchers, farmers and businesses," said Baucus. "But America must strengthen its strategy for dealing with persistent irritants in the U.S.-China economic and trade relationship. China must stop infringing on American intellectual property rights, discriminating against American innovators and protecting its domestic industry at the expense of American companies."
Baucus offered four steps to redefine the nation's approach to its relationship with China:
- Formulate a coordinated, comprehensive U.S.-China economic strategy led by the White House.
- Work multilaterally with key trading partners to make it clear to China that the world is watching and is united in its concern about China's currency misalignment, ineffective protection and enforcement of IP rights and industrial policies favoring homegrown, or "indigenous," innovation.
- Pursue recourse with the tools offered by international institutions such as the International Monetary Fund (IMF) and World Trade Organization (WTO), where effective, and where these tools are not adequate, work to strengthen them.
- Take strong unilateral action when necessary.
China has left the door open to revaluing its currency, the renminbi, but has refused to bow to Western pressure to do so. Many observers have noted that correcting its currency would benefit China, and that the country will in all likelihood do so sometime in the near future. Still, lawmakers remain skeptical about China taking action on its own. "We cannot expect China to do this of its own volition—the United States must develop a comprehensive plan and I will keep pushing the administration to formulate and implement just such a plan," said Baucus.
Jacob Barron, NACM staff writer
Important eNews Story Update
Following last week's posting of the eNews story about the ongoing legal spat between MGM Mirage and the general contractor on its massive CityCenter project in Las Vegas, "MGM Mirage Sidestepping GC to Make Nice With Subcontractors," new information warranted a update/reposting of the story on the NACM website. NACM has now spoken with subcontractors and MGM Mirage sources who sat in on a meeting with the two parties, without the general contractor (Perini Building) that filed the $492 mechanic's lien against MGM Mirage. The upshot could have the subs getting money much quicker than had been feared in recent weeks.
Check out the NACM blog to view the story and in the future as news breaks on a variety of important industry topics. NACM also regularly posts short updates on our Twitter account—You can find us under the moniker "NACM_National."
FDIC Chief Economist Richard Brown appears confident that economic conditions, on the whole, are in the early days of a rebound. And though he told attendees at a June National Economists Club event that he believes there won't be a commercial real estate meltdown when loads of debt comes due later this year and into 2011, the FDIC remains "paranoid" about such potential because of the housing sector's previous slide deep into the red.
Brown noted that credit charge-offs, while still rising, have leveled off significantly; foreclosures have started to decline and commercial loan delinquencies of 90 days or more have dipped in recent months. "We're not all the way out of the woods yet, but we're getting better," said Brown. Moreover, like the housing market correction, the worst of the commercial real estate's economic woes are primarily relegated to "sand spots" and areas where industry has left.
However, Brown said the ongoing decline in finished lot values has left many developers, not to mention financiers, "stuck." This is most noticeable in areas of the Southeast, such as Georgia and Florida, the West Coast because of unsustainable boom-era overbuying and price run-ups and the industrial upper Midwest because of an economic downturn that started years before the national economic bubble popped. Many small and midsized banks, largely frozen out of the credit card and most profitable (mid-decade) areas of the real estate boom, have large commercial real estate portfolios and, thus, growing concerns over what will happen when that debt comes due this year. The total commercial real estate portfolios represent upward of $2 trillion, said Brown.
Additionally, Brown noted that capital remains slow to return to commercial real estate because of investors' newfound post-recession aversion to risk. And the government bailout train has yet to hit the industry segment. "It's been fairly frozen," said Brown. "Put into perspective: One of the disadvantages is you don't have government support like you do for homeowners [first-time homebuyer tax credit, government-sponsored enterprises Freddie Mac and Fannie Mae, etc.].
But there are solid fundamentals that will help commercial real estate avert the level of disaster that sunk housing values and many homebuilding companies alike. Brown said the commercial real estate downturn differs from the preceding residential one greatly in that most loan servicing is done by the actual issuer/financier instead of companies beholden to large groups of investors that bought pieces of tranches full of high-risk home loans.
"There's much more authority to restructure...And restructuring around today's cash flows and today's rates makes a lot of sense for everyone," said Brown. "So, this is not going to be a thunderclap crisis as it was for mortgages. It's going to take time to work out, but this probably will be manageable."
Brian Shappell, NACM staff writer
MLBS Offers Complete Lien and Bond Services and More
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For more information on NACM's MLBS, click here.
A comprehensive new bill in the House Judiciary Committee would resolve many ambiguities surrounding British Petroleum's (BP's) legal liability in the wake of the Gulf Coast oil spill.
Called the Securing Protections for the Injured from Limitations on Liability Act (SPILL Act), the bill was introduced by Gulf Coast Rep. Charlie Melancon (D-LA) and Judiciary Committee Chairman Rep. John Conyers (D-MI), who noted that the nation's current liability regime was too complex and outdated. "It is clear to me that many of our laws addressing liability and related issues must be updated to reflect the realities of our 21st century economy," said Conyers. "We should not allow reckless corporations to use 19th century laws to shortchange their victims. There is simply no reason to arbitrarily limit the legal accountability of multibillion-dollar corporations at the expense of hardworking American families."
The bill would amend the Death on the High Seas Act, passed in 1920, to permit recovery of non-pecuniary damages, such as pain and suffering and loss of care, comfort and companionship, by the decedent's family. It would also standardize the geographic threshold for the Act's application and permit surviving family members to bring suit against the company directly rather than through a personal representative. The SPILL Act would also repeal the Limitation on Liability Act, passed in 1851, which limits the liability of vessel owners to the value of the vessel and its cargo.
Other provisions in the bill would clarify class action rules to allow impacted states to seek redress in their own courts and strengthen bankruptcy rules to prevent corporations responsible for widespread damages under the Oil Pollution Act from seeking to sever their assets from the legal liabilities they owe to innocent victims.
"It is indefensible that a 90-year-old law is protecting BP from being held fully accountable for the harm they have caused these families," said Melancon. "I thank Chairman Conyers for working so quickly to fix the law so that BP and any other corporation that puts the safety of their workers at risk are held fully responsible."
The bill has also been cosponsored by Reps. Jerrold Nadler (D-NY), Maxine Waters (D-CA), Sheila Jackson-Lee (D-TX), Linda Sánchez (D-CA), Hank Johnson (D-GA), Steve Cohen (D-TN), Anthony Weiner (D-NY), Ted Deutch (D-FL), Judy Chu (D-CA) and Bruce Braley (D-IA).
Jacob Barron, NACM staff writer
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While Nashville is still reeling from recent floods, the Gaylord Opryland Resort and Convention Center, host of next year's NACM Credit Congress, has already started out on the road to a full recovery.
The facility, which has been closed since May 2 when a series of storms caused historic flooding throughout Middle Tennessee, recently announced that it would be fully operational a full six months before the 2011 Credit Congress and would reopen on November 15, 2010. Several of Gaylord's other attractions in Nashville, including the Grand Ole Opry House, the Gaylord Springs Golf Course, the Wildhorse Saloon and the General Jackson Showboat, are also currently under reconstruction and would be restored and open for business in the months leading up to the hotel's grand reopening.
Moreover, the reopened resort will feature wholesale restorations and redesigns of its bars, restaurants and other facilities. Rather than further interrupting their business at a later date, the Gaylord Opryland has decided to use its closure to move forward with $24 million in capital improvements that were already planned for the facility in the coming months and years.
"We commit to you regular communication on our progress, and will be launching a web page with details of our construction milestones and photos of our progress," said Senior Vice President and Chief Sales Officer Kemp Gallineau. "I promise you we will return as quickly as possible and better than ever."
To learn more about NACM's recently concluded 2010 Credit Congress, including session coverage and event photos, click here.
Jacob Barron, NACM staff writer
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