National Association of Credit Management

Though outsourcing has its detractors in the United States and pro-labor countries because of protectionism and/or grim economic prospects, many international credit professionals at FCIB's Annual International Credit & Risk Management Summit in Hamburg still rely on a shared services center or have more regularly come to establish their own new roots working in one.

FCIB Board Member Martine Zimmermann, credit manager at F. Hoffman-La Roche in Switzerland, noted many in her industry have centers in places like India and some Eastern bloc countries. However, having faced uncertainties, with the most notable ones being salary increases and frequently changing staff, she admits some colleagues are not quite as sold on it.

"This is especially an issue in India, where its known escalation as a key emerging economy is forcing a change in demographics, or at least demand from those who want to move up a rung amid newfound wealth, or for some, a livable wage," one credit executive at the conference noted during a question-and-answer session that intimated it might not be the right time to outsource anything more to India. "But there are still plenty of Asian and Middle Eastern areas drawing attention for the same reasons India did a few years ago: significant cost reduction."

Meanwhile, FCIB Board Member Henk Swinnen, of Netherlands-based DSM Shared Financial Service Center, defended the use of shared services centers. He noted," let's say the average rate is 7000 euros—if you increase it 10% per year, it's still much cheaper than Holland, and northern Europe." He added that his company was not outsourcing, "we're offshoring," and noted that after 10 years of use, a shared service center has been very positive.

Katarzyna Wawro of Hitachi Data Systems noted that she has been working in a shared service center, adding that, like many others, that satellite office of a foreign corporation started small and expanded after finding success. "Initially, we only did simple processes. Now everything for managing credit is there and we are doing all collection for Europe, Canada and the U.S.," Wawro said.

Not every delegate at the summit was without serious concerns, however. For example, panelist Raul Davila of New York-based Bamberger Polymers was among those who said complications with moving functions of the business farther and farther away from the main credit department hub can easily arise and oftentimes be harder to fix when thousands of miles away, or when they're operating on significant time differences, or in a vastly different cultural landscape.

- Brian Shappell, CBA, NACM staff writer

Look for more coverage on FCIB's recently-concluded International Credit and Risk Management Summit in NACM's eNews, on NACM's blog, and in Business Credit magazine!

The U.S.-Colombia Free Trade Agreement (FTA) officially entered into force yesterday.

The agreement is expected to increase U.S. exports to Colombia by more than $1 billion annually, while increasing U.S. gross domestic product by $2.5 billion and supporting thousands of new jobs. More than 80% of U.S. exports are now immediately granted duty-free access according to the terms of the FTA, while remaining tariffs will be phased out over the course of the next decade.

"Colombia is dropping tariffs on our manufactured and agricultural goods and that means the door is opening for American workers and businesses to grow," said Senate Finance Committee Chairman Max Baucus (D-MT). "This is a major economic win that levels the playing field for American workers and businesses."

Baucus noted that U.S. companies have lost Colombian market share recently since, in the years between the U.S. FTA's creation and its approval, Brazil, Argentina and Canada have all signed their own FTAs with Colombia. "Colombia's economy is growing quickly and it's a lucrative market for the world-class products made here in the U.S.," he added. "This trade deal is worth a billion dollars in new U.S. exports and thousands of new jobs at home, and that's just the kind of boost our economy needs."

Business groups also lauded the FTA's entrance into force. "Colombia has been the world's greatest turnaround story of the past decade," said Thomas Donohue, president and CEO of the U.S. Chamber of Commerce. "Given the Colombian economy's rapid growth, this landmark agreement will open the door to exciting new business opportunities and job creation in the U.S. and Colombia."

U.S. exports to Colombia have already risen four-fold over the past decade, topping $14 billion last year, according to the Chamber.

Jacob Barron, CICP, NACM staff writer
 

As would be expected, FCIB’s annual International Credit and Risk Management Summit kicked off with a lot of talk of the problems in the European Union. Notably, doomsday predictions about Spain and of a potential Greek exit from the Euro—which have been covered in NACM's eNews and blog—were front of mind. Also of particular interest during the conference, currently ongoing in Hamburg, was talk of conditions in the Middle East.

During a discussion looking at the region, and trade therein, one year removed from the Arab Spring uprisings, panelists surprised some in the crowd by outlining a perhaps overlooked fact about Middle East-based businesses and their proprietors amid the many perceived cultural differences: that there are actually more significant commonalities with so-called “traditional” businesses in the West than often depicted.

“We have exactly the same types of worries; we have the same concerns about the future, our kids, etc.,” said Ferda Efe, a senior director with Ashland Specialty Ingredients in Istanbul. “They’re really not that different from the rest of the world. We are all one world now, in the end.”

Additionally, panelists poked some holes in notions that Middle Eastern businesses, officials, salespeople or credit professionals are so culturally unique for taking the time to build the trust level of a relationship, having distaste for when someone overpromises but under-delivers and being dogged in negotiations. Among those three characteristics, are any of these things an American or European credit professional would NOT want?

Similarly, a presentation on Islamic banking laws/Sharia law compliance by Dr. Salman Khan generated interest, if not controversy at times, by showing that the traditional banking methods and products are similar. In fact, to become Sharia compliant with a credit agreement, a traditional product is held up as the model and stripped of things that are not considered compliant (the ability to make money off interest, things considered not in “good faith” or ethical, etc.). Additionally, Khan alleged there was “little meaningful difference between the conventional banking industry and the Islamic banking industry at present.” He characterized the differences as “cosmetic, theoretical and superfluous.”

“What has happened in reality, the facts are thus: the implantation in practice has diverged from theory to a large extent,” he told FCIB delegates. “You have a Sharia-compliant, not Sharia-based, industry paradigm. The Islamic banking and finance industry operates almost entirely from infrastructure designed for the conventional banking system. There has been no development of a tailored system. The point is Islamic banking has to fit into the platform, however that is even really possible.”

Brian Shappell, CBA, NACM staff writer

The Senate is likely to reauthorize the Export-Import Bank (Ex-Im Bank) after Democrats caved yesterday to Republican demands for votes on five amendments.

While no vote was held on the legislation at large yesterday, an agreement was reached between Senate Majority Leader Harry Reid (D-NV) and Minority Leader Mitch McConnell (R-KY) allowing a set of GOP amendments to be considered. Each amendment would require a 60-vote majority to be included in the final bill.

Given the controversial nature of the five amendments, which are geared toward handcuffing Ex-Im's operations in some way, their inclusion in the final version of the reauthorization bill is unlikely. Simply allowing them to come up for a vote, however, has quieted Republican objections. While the full legislation will also require 60 votes to proceed to the President's desk for enactment, that goal is more easily reached since the bank enjoys bipartisan support, whereas the amendments belong to one side of the aisle.

The bill, H.R. 2072, was approved by the House of Representatives last week by an overwhelming 330-93 margin. Under its terms, Ex-Im's charter, which is set to expire at the end of this month, would be extended for another three years. The bank's lending limit would also be increased from its current $100 billion to $140 billion.

Jacob Barron, CICP, NACM staff writer
 

The House voted last week to reauthorize the charter of the Export-Import Bank (Ex-Im Bank) for another three years. According to the bill, H.R. 2072, the agency will also receive an immediate bump in its borrowing limit, to $120 billion, followed by two $10 billion increases in the next two years, bringing the grand total to $140 billion.

Under the agreement, the increases are contingent on Ex-Im's default rates remaining below 2%. The Treasury Department must also submit regular reports on the bank's efforts and its negotiations with other countries to reduce or eliminate import and export subsidies.

Lawmakers approved the plan by a 330-93 bipartisan margin, with all 93 "no" votes coming from the Republican Party.

"The passage of this bipartisan legislation provides much-needed certainty and predictability to U.S. exporters and their workers by extending the bank’s authority through Fiscal Year 2014 and increasing its portfolio cap to $140 billion," said Ex-Im Chairman and President Fred Hochberg. "The bank will continue financing U.S. exports to meet increasing foreign competition and fill the void when commercial financial support is unavailable. This is a no cost jobs bill. Ex-Im Bank export financing currently supports over 1,000 American jobs every working day."

Hochberg also voiced his hopes for swift Senate approval of the bipartisan legislation, an effort that failed on its first attempt last week. Senator Jon Kyl (R-AZ) blocked a motion by Senate Majority Leader Harry Reid (D-NV) to approve the bill by unanimous consent, and instead submitted five amendments to the legislation, each designed to limit Ex-Im's activities in some way. Among the amendments are measures that would put an expiration date of May 31, 2013 on the bank's charter, limit loans, outstanding guarantees and insurance provided by the bank and prohibit the bank from financing energy projects in other countries, among others.

In response, Reid filed for cloture on the bill, setting up a vote for later today. Stay tuned to NACM's blog for updates.

Jacob Barron, CICP, NACM staff writer
 

The Chapter 11 filing of Adelphia Communications Corp. was marred by disputes between creditors over how each would be paid. As far as the company, formerly the fifth-largest cable company in the U.S. before filing its case in 2002 as a result of internal corruption, was concerned, drastic measures were necessary.

An article in the May 2012 edition of the American Bankruptcy Institute (ABI) Journal discusses the "troubling precedent" set by Adelphia when it took an unorthodox step to shore up support for its reorganization plan: the debtors agreed to pay certain creditors their attorneys' fees if the creditors dropped their objections to the plan. "The Adelphia decision surely resulted from a genuine desire to conclude a contentious and difficult bankruptcy case under an unusual set of factual circumstances," said author John Sheahan, a trial attorney in the Office of the General Counsel in the Executive Office for U.S. Trustees, "but the practice of paying a creditor’s attorneys’ fees in exchange for plan support could quietly become more widespread after Adelphia."

In late 2010, the U.S. Bankruptcy Court for the Southern District of New York issued a decision on the payment of non-fiduciary professional fees in Adelphia. The court allowed a number of distressed investors to be reimbursed for legal fees and other expenditures spent in competing for larger recoveries from the debtor's estate. Adelphia's confirmed plan included a provision that paid the legal fees of certain creditors who had settled their plan objections, and that the court approved the fees without requiring these creditors to prove that they had made a substantial contribution to the estate.

This departs from case law and a more literal interpretation of the statute because Section 503(b)(4) of the Bankruptcy Code permits the court to award "reasonable compensation" to the attorneys or accountants of entities who make substantial contributions to the case is specified ways, as long as they can prove such contributions. "The court reasoned that Section 503 'is [not] the only way' that professional fees can be paid by the estate and relied on a little-used provision of Chapter 11 to support its ruling: Section 1123(b)(6)," which Sheahan noted was "a catch-all clause authorizing plans to contain 'any other provision not inconsistent' with the Bankruptcy Code."

Though Sheahan noted that Adelphia was an especially unique and contentious case, and that the U.S. Trustee Program officially views the decision as one that should be conservatively applied in the future, the precedent set by such a "you support my plan, I'll pay your attorneys" approach could be troubling down the road. "Whatever the merits of this highly case-specific approach in Adelphia, it provides little guidance and less certainty in future cases that may follow Adelphia's precedent," he said.

To find out how to obtain a full copy of Sheahan's article, click here.

Jacob Barron, CICP, NACM staff writer
 

Through this week’s elections, the Greek populous and opposition politicians sent their anti-austerity message and thumbed their noses at those holding the purse strings behind the European Union and International Monetary Fund’s bailout of the debt-addled nation. Other members of the EU, mostly northern, aren’t taking it lightly—and the response could lead to even greater uncertainty.

Railing against the austerity demands allowed by incumbents, neither of the two major parties—New Democracy and Pasok in Greece—were able to come close to winning a minority. This situation will cause heightened uncertainty (disruptions) in the nation and beyond over the coming weeks. The politicians who made the gains railed against any ideas for alliances and have publicly voiced rhetoric about desiring more favorable bailout conditions.

Those footing the bill, notably the Germans, aren’t amused and have answered with thinly veiled threats about delaying the planned bailout payment to Greece scheduled for today (Thursday). Worst-case scenario has Greece falling out of the Euro by some time this summer, NACM Economist, Christ Kuehl noted.

But what is the big impact on the credit industry? Perhaps the answer, for the short-term, is to do nothing except keep an eye on things very closely in the coming days and weeks ahead. Remember the basics: know your customer.

Ben Deboeck, country and sector risk coordinator for Ducroire Delcredere (keynote speaker at FCIB’s International Credit & Risk Management Summit in Hamburg from May 13-15), noted that Greek unrest rarely comes as a surprise anymore. Deboeck pointed out that bond markets barely moved.

“Nothing too surprising happened yet,” the Belgian-based Deboeck told eNews. “So, immediate consequences of the Greek elections, as well as French elections, are rather limited I'd say. More important than Greece/France is probably what is happening in Spain, with the government finally moving towards action to tackle the banking problem”.

Going forward, however, Deboeck admits the impact of sustained volatility or an increase in volatility could affect consumer and business confidence and therefore eventually, credit.

- Brian Shappell, CBA, NACM staff writer

For more information on next week’s International Credit & Risk Management Summit, including Deboeck’s keynote speech, visit www.fcibglobal.com. Additionally, check out the NACM blog and future editions of eNews for on-site coverage from the event.

Republican presidential candidate Mitt Romney has gone on the offensive to try to turn his negatively-perceived 2008 views on the auto bailout into a positive. It will take work to on his part to disengage the resulting brake that slowed his campaign efforts during the GOP primaries in states like Ohio and Michigan earlier this year.

Romney, bashed for the self-penned 2008 New York Times headline “Let Detroit Go Bankrupt,” was back on the Ohio campaign trail and proclaimed that he deserved “a lot of credit” for the rebound of the automotive industry. In his opinion piece, Romney tried to remind people that, beyond the hyper-discussed headline, he called for a “managed” and controlled U.S. automotive industry bailout, which was shepherded by incumbent President Barack Obama in 2009. The basic gist was that the president had acted on his publicly-offered advice. Romney sidestepped the fact that he opposed much of the government’s financial involvement for U.S. auto companies despite assertions from most bankruptcy experts that private investment appetite was not near strong enough during a steep downturn to have facilitated it without the bailout. They argue that liquidations would have been near-unavoidable.

Both auto industry-dependant states are key “swing states” that will go a long way in determining the 2012 Presidential Election. Romney faced a considerable image problem in both states during the primaries largely based on the ill-worded headline. The auto bankruptcy bailout almost certainly will remain a battle issue in both states through November. After all, it was the first issue Romney publicly used to engage Obama after announcing his official candidacy last year.

Brian Shappell, CBA, NACM staff writer

A common theme that emerged in nearly every session at this year's FCIB International Credit Executives (I.C.E.) conference was the ever-expanding role of the credit department. From assessing risk beyond accounts receivable, to implementing bold new productivity enhancements, credit professionals seem to be asserting themselves into numerous other functions of their companies, and presenter after presenter at the conference seemed to prove it.

Held from May 2-4 this year at the luxurious Westin Michigan Avenue in Chicago, I.C.E. offered attendees the chance to hear cutting edge, in-depth economic presentations from an elite set of presenters, along with worthy insights from professionals that shared their day-to-day responsibilities and concerns. Chief among the presentations that focused on the mutual exchange of practices between credit professionals was a productivity enhancement roundtable, moderated by honorary life member of FCIB David Marsh, CICE, CBF.

The session offered four individual credit professionals a chance to discuss specific changes they made to increase productivity in both their departments and their companies. Susan Fattore, ICCE, corporate credit manager at Heico Companies, talked about consolidating her company's 20-plus accounts receivable operating systems. After six to eight months of preparation and three years of implementation, Fattore noted that the single system now in effect improved efficiency for her and credit staff at Heico's numerous other entities. "There's no human error and it promotes better communication among the credit managers because they know which of them share the same customers," she noted. "It gives users access to information that they didn't have prior to the system."

Kelly Bates, FCIB vice chairman and director of global credit & collections at Chiquita Brands, Inc., talked about her efforts to shift her company's global credit function to a North American headquarters. Inconsistency among credit and collection practices drove Bates to push for a more centralized credit function. "At first it was rejected, but I think it was a process of elimination," she noted. "It evolved into the right decision." Now, Bates noted "our best practices were tweaked into global policies and procedures. The reporting structures are consistent and everything is managed out of our department."

Implementing a new, similarly consistent bolt-on system that focused on collections was the focus of Larry Durrant, CCE, ICCE of UPM Kymmene, Inc.'s presentation. "We had so many systems and so many practices that we needed standardize," said Durrant, noting that choosing the right system for the company was an intensive process that involved the IT, credit risk management and purchasing departments. Nonetheless, the results have offered a great deal of user flexibility. "They can pull their statements any time they want, they can track their orders and they can get their invoices," he added. "They can view their account any time 24/7 and see what's paid and not paid."

Finally, Rick Hayes, ICCE, senior manager of worldwide credit & collections at Viskase Companies, Inc., recalled his experiences at a prior company eliminating redundancies in their order management process. "There was a trade credit operation and then there was a long-term customer financing operation, and the two were throwing a lot of data back and forth," said Hayes. "There was a lot of time spent looking at the same things." By bringing in new analysts, Hayes was able to reduce deductions, headcount and take the company, as he put it, to a point "where we're spending most of our time on fire prevention and much less time on fire fighting."

After that, attendees gathered for a networking dinner and reconvened the next morning for two especially relevant presentations, the first, a global economy forecast from NACM Economist Chris Kuehl, PhD, and the second, a "Doing Business in the BRICs" panel, this time moderated by Kuehl. Previous panelists Fattore and Hayes joined Luis Noriega, ICCE, vice president of JPMorgan Chase Bank, N.A., and Norman Zusevics, credit risk manager at Shure, Inc. in a lively, attendee-led discussion of selling concerns in these economically hot countries, as well as many others beyond the scope of the presentation's title.

Between the diversity of the program and the wealth of networking opportunities that punctuated each presentation, the 2012 I.C.E. conference served as a model growth tool for credit professionals, offering answers to attendees rather than just rehashing their problems.

For more information on FCIB's educational opportunities, visit www.fcibglobal.com. And don't forget to look for pictures from this year's I.C.E. conference in the upcoming June 2012 issue of Business Credit.

Jacob Barron, CICP, NACM staff writer
 

NACM Staff Writer Jacob Barron, CICP, was on hand in Chicago for FCIB’s annual ICE Conference this week. Full reports will be posted here on Monday. In the meantime, here are some interesting points and quotes from the proceedings:

CFTC Commissioner Bart Chilton, ICE keynote speaker, calls cyber attacks "a big threat." The notable "Flash Crash" on May 6 last year was originally thought to be a result of one.

Chilton on the hard fact about oil markets:  "If you don't have speculators, you don't have a market."

PJ Bain, CEO of PrimeRevenue, on supply chain issues (among the hottest topics of the conference): "Supply chain finance breaks the linkage between when a buyer pays and when suppliers get paid."

Janet Kim, Esq., on trade compliance difficulty: "You could spend days on any of these laws.”

Panelists on BRICs: Understanding a country's history is critical as it can greatly help exporters avoid getting burned. Doing so seems to be an increasing interest, theme that developed as I.C.E. progressed.
 

Corporate bankruptcies experienced a freefall in April, far outpacing the decline reported on the part of individuals/consumers.

Statistics prepared by Epiq Systems Inc. in accordance with the American Bankruptcy Institute found total bankruptcy filings dropped 16% from the same period last year. However, the numbers indicated commercial filings fell 25% to 5,132 for the month on an annual basis and by 9% between March and April.

“Businesses continue to cut costs to improve their financial stability,” said ABI Executive Director Samuel J. Gerdano. “As businesses remain committed to bolstering their balance sheets, bankruptcy filing rates will continue to decrease.”

However, some bankruptcy experts like Bruce Nathan Esq., of Lowenstein Sandler PC, aren’t convinced that a downward trend in bankruptcy is a situation with which creditors should become too cozy.

“Even as the economy improves, a lot of companies are going to be dealing with debt walls on debts pushed out to 2013 and 2014 by banks,” said Nathan. “I can safely predict that the trend of a decrease in filings will not last forever. Chapter 11 will increase again soon.”

Brian Shappell, CBA, NACM staff writer

Although lackluster manufacturing statistics out of China and its top trade partners isn’t necessarily reason for alarm, as noted in last week’s eNews by economists Chris Kuehl, PhD and Ken Goldstein; market watchers and credit analysts remained somewhat puzzled at often contradictory data coming from the Asian powerhouse.  
 
While the Chinese government’s official Purchasing Managers Index was listed at a 13-month high in April at 53.3, it contradicts indexes, including one conducted independently by HSBC that finds the manufacturing PMI closer to 49.3 for the same period. It is the ninth straight decline noted by HSBC of private Chinese companies, and the level falls below the proverbial Mendoza line dividing growth and contraction. Fitch Ratings pointed out this very problem, and the issues/uncertainty it creates for investors and the credit profession, this week.
 
The U.S.-based ratings agency believes the divide can be chalked up to private sector companies experiencing a significant disadvantage in the area of credit availability when compared to its public sector competitors. Fitch noted the ‘official’ [government] PMI figure reflects positive returns from large state-owned enterprises in particular, whereas the HSBC index is almost exclusively comprised of information from private sector entities.
 
“The divergence of the indicators may reflect differential terms of access to credit, with the contracting HSBC index representing the tighter credit conditions for private companies, whereas the expanding official index reflects China’s large state-owned entities, which enjoy support for growth and expansion and have easier access to funding,” Fitch said in its statement. “This is perhaps not surprising from a credit perspective when considering a centrally directed economy trying to integrate a growing capitalist business sector.”
 
While perhaps not a “surprise,” the continued uncertainty continues to be a source of frustration among investors and credit-granters.
 
Brian Shappell, CBA, NACM staff writer

After five straight months of gains, the Credit Managers’ Index (CMI) -- unveiled today at www.nacm.org -- showed an unsettling decline. Granted, the slide is far from drastic, and the CMI sits at a level exceeding that of nine of the previous 11 months.

The decline in the CMI is consistent with other data released in recent weeks. The numbers are not suggesting an imminent crisis, and nothing that approaches the return to recession being seen in Europe. However, it indicates that the robust growth that started the year has faded somewhat, provoking concerns the economy will start to retreat for the third time in as many years.

Said NACM Economist Chris Kuehl, PhD: “Spring 2012 did feature tensions in Iran sufficient to force the price of oil up for a while, and the financial crisis in Europe has had almost as much impact on the global economy as the [2011] disaster in Japan.”

Among the biggest drags on the CMI were declining sales impact on the index of favorable factors and dollar amount of customer deductions category within the unfavorable factors side.

Kuehl characterizes the present CMI as one in a "fragile situation" that is close to contraction, but he noted there are also several reasons to remain upbeat.

Brian Shappell, CBA, NACM staff writer

(NOTE: The April CMI is now available. Visit www.nacm.org to view the full breakdown. Additional coverage is also coming to this week's eNews, available Thursday afternoon).

The Commerce Department (DOC) reported this morning that U.S. economic growth had slowed in the first quarter of 2012. Gross domestic product (GDP) increased at an annual rate of 2.2%, compared to 3.0% in the fourth quarter of 2011.

While the slower growth is bound to raise concerns about the strength of the U.S. economic recovery, much of the negative aspects of the GDP report were offset by an increase in consumer spending. Personal consumption expenditures (PCE) increased by 2.9% in the first quarter, compared with an increase of 2.1% in the fourth of last year.

With business spending, the picture was just a mixed. Real exports of goods and services increased by 5.4% in the first quarter of 2012, compared with a 2.7% increase in the prior quarter, but overall business spending fell. Nonresidential investment decreased by 2.1% in the most recent report, in contrast to a much more robust 5.2% increase at the end of last year.

Further contributing to the deceleration was a continued decline in federal spending, albeit often at a lower clip. Overall, federal spending decreased by 5.6% in the first quarter, compared to a decrease of 6.9% in the fourth of 2011. National defense decreased by 8.1%, as opposed to last year's 12.1% freefall. Nondefense spending had experienced a 4.5% increase at the end of last year, but decreased by 0.6%, in the first three months of 2012.

The DOC's Bureau of Economic Analysis, responsible for issuing the quarterly readings, stressed that this 2.2% reading was an advance estimate, based on source data that are incomplete or subject to further revision by other agencies. A second, more accurate reading for the first quarter of 2012 will be released at the end of May.

Jacob Barron, CICP, NACM staff writer
 

The world’s largest hedge funds are betting that the prices for industrial commodities will start to rise, and quickly, by the end of the year. This includes iron ore, copper, aluminum and most of the rarer elements. The only thing they see tanking will be gold, as they have concluded that this is a metal that has been far overpriced as people flee other investment options.

The rationale is that there will be a significant level of global economic recovery to stimulate demand for commodities that many operations have elected to slow production of. The low prices of copper shoved some of the bigger producers into limiting capacity. The same process has been at work with aluminum. Steel demand is still far below what it was a few years ago, but it has been in recovery as there has been more life in the automotive sector as well as in mining equipment and agricultural equipment.

Analysis: In this scenario, the manufacturer faces a dilemma. If they do not lock down supply now, they face the threat of higher prices. If too many elect to buy now, the supply issues will occur that much sooner, and the prices will escalate. If the producers respond to these high prices, they will up their output and the commodities hit the market before there is real demand. Then, there is then the possibility of a glut that pushes the prices back down—just as the real demand starts up, and those who waited get the best deal.

Chris Kuehl, PhD, NACM Economist
 

"Information received since the Federal Open Market Committee met in March suggests that the economy has been expanding moderately. Labor market conditions have improved in recent months; the unemployment rate has declined but remains elevated. Household spending and business fixed investment have continued to advance. Despite some signs of improvement, the housing sector remains depressed. Inflation has picked up somewhat, mainly reflecting higher prices of crude oil and gasoline. However, longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects economic growth to remain moderate over coming quarters and then to pick up gradually. Consequently, the Committee anticipates that the unemployment rate will decline gradually toward levels that it judges to be consistent with its dual mandate. Strains in global financial markets continue to pose significant downside risks to the economic outlook. The increase in oil and gasoline prices earlier this year is expected to affect inflation only temporarily, and the Committee anticipates that subsequently inflation will run at or below the rate that it judges most consistent with its dual mandate.

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0% to 0.25% and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.

The Committee also decided to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate to promote a stronger economic recovery in a context of price stability."

Source: The Federal Reserve

New statistics unveiled by the United States’ and Chinese governments show significant declines in various manufacturing categories for the last month. But, while some in mainstream media cover the happenings with a tone of panic, economists tell NACM that such deep concern is not warranted even if the numbers look poor on the surface.

China’s Purchase Manager’s Index tracked at 49.1 for the most recent period, representing the sixth straight decline in activity out of the manufacturing powerhouse. This came at the same time the U.S. Commerce Department reported a 4.2% decrease in durable (long-term) goods orders in March, the largest slide in about three years.
Despite that, Conference Board Economist Ken Goldstein isn't all that worried about manufacturing seeing a deep downturn in mid- or late-2012 in China. He doesn’t see the manufacturing statistics as foretelling any kind of economic hard-landing there, as feared by some market-watchers.

“Industrial production globally had been slowing but appears to be turning around judging from signals from PMI’s across the globe,” Goldstein told NACM. “China is the exception, not the rule. That sets up the dynamic where their weakness pulls others down or everyone else turns a corner, allowing China to up their exports and cushion their landing. Besides, South Korea just reported an increase in consumer confidence, suggesting the Koreans are not that worried about contagion. If that is true, why should anyone else be?”

Brian Shappell, CBA, NACM staff writer

(Note: China will be front-and-center during creditor-centric discussions on the final day of the FCIB's I.C.E. Conference in Chicago, which runs May 2-4, as well as in FCIB's latest "Doing Business in China" webinar May 9-10. For more information or to register, visit www.fcibglobal.com and click the "Events" tab).

In front of eight of the Supreme Court of the United States' nine sitting justices Monday, attorneys argued the finer points of why credit bidding should or should not be enforced as a right of secured creditors during a bankruptcy-related assets sale. Though a judgment could come as late as the end of June, the justices throughout the argument hearing appeared wary of arguments that would undermine the right on the part of secured creditors to use credit bid tactics.

The case in question is RadLAX Gateway Hotel LLC v. Amalgamated Bank. At stake is whether creditors will be able to use the value of money owed by the debtor selling assets at the auction table as opposed to straight cash, a process called credit bidding, as the U.S. Bankruptcy Court for the Seventh Circuit ruled in RadLAX. However, that view is competing with contrary decisions out of the U.S. Bankruptcy Courts for the Third and Fifth Districts, which preceded it and would limit credit bidding if widely adopted.

Appearning for the petitioner (RadLAX), David Neff argued that, in a case like RadLAX, the concern lies in the ability to attract other, non-secured bidders to even “show up” for an auction if they have the knowledge that a secured creditor can best the bid without offering up any new cash, just what is already owed to them. In addition, Neff said federal law notes that the use of the word “or” in one of the clauses guiding bankruptcy actions says the sale can go on without the right of a credit bid if the “indubitable equivalent” of their claim is realized.

Neffs’ argument drew critical reactions from several of the judges, who intimated that the argument against credit bidding runs counter to the essence of the Bankruptcy Code and the intentions of the U.S. Congress:

“You’re depriving secured creditors the opportunity to hold onto an asset if he believes the asset is being undervalued,” said Justice Alito.

“If a creditor loaned you $1 million, he got a secured interest in the property – that’s the deal,” said Justice Breyer. “There is still an advantage for the debtor to stretch out the payments over time. So, give him the property.”

“The greatest security is knowing what the courts will do,” said Justice Sotomayor. “The greatest security is knowing what the courts will do. What is the value in the business world of us upsetting the norm? Why should we upset the expectations?” She added that the presence of stalking horse bidders in a vast amount of U.S. bankruptcy cases already illustrates the existing “process is working.”

“It doesn’t take a genius to figure out that, if you allow people to bid cash or credit, you’re going to get more bids and higher bids than they are only allowed to bid cash.” Said Justice Scalia.

However, those arguing against credit bidding seemed to find a strong ally in Chief Justice Roberts, who took attorney Deanne Maynard, arguing on behalf of secured creditors’ rights, to task for “avoiding” the fact that language (specifically the word “or”) in federal law could be construed that one condition could potentially be used as a substitute for the other.

Maynard argued that the condition discussed by Neff/the case petitioners was intended by Congress as an “other” condition, one that is supposed to come in the process after an auction is completed not one that supersedes other conditions guaranteeing the credit bidding right of secured creditors.

“The whole code is set up to protect secured creditors from the undervaluation of their claim,” Maynard said. “If the secured creditor can’t raise enough cash, which is a real risk, you’re taking out of the marketplace one of the most knowledgeable parties of the property.”

Roberts responded by noting the key importance of “the specific over the general” during the Supreme Court review of the issues and statutory language.

Brian Shappell, CBA, NACM staff writer

A House panel approved legislation yesterday that would rescind the federal government’s authority to unwind failing financial institutions.

In a 31-26 vote, the House Financial Services Committee voted to repeal Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which grants regulators the authority to wind-down faltering firms in the interest of protecting the broader economy. The measure was included as part of bill designed to cut the deficit by $35 billion.

Republicans, including Financial Services Committee Chairman Spencer Bachus (R-AL), have long considered Title II a provision that institutionalizes bailouts. In addition to rolling back several other portions of the Dodd-Frank Act, the bill approved by the committee would repeal the Federal Deposit Insurance Corporation’s (FDIC’s) authority to lend to a failing firm, purchase the assets of a failing firm and guarantee the obligations of a failing firm. It would also eliminate the FDIC’s authority to borrow up to a percentage of the book value of a failed firm’s total consolidated assets in the days following its appointment as receiver.

As far as the repeal of Title II’s effect on the federal budget, Bachus cited a Congressional Budget Office (CBO) report which pegged the proposal’s savings at $22 billion over 10 years. Democrats countered, however, that as designed, Title II would eventually recoup any money borrowed from the taxpayer, typically by assessing fees on larger financial institutions.

In a letter prior to the committee’s vote, Treasury Secretary Tim Geithner urged Chairman Bachus to rethink his attempts to reduce the nation’s deficit by essentially gutting the Dodd-Frank Act, arguing that any budget savings would be erased by the costs of future crises. “Title II…prohibits the government from bailing out failing financial institutions, provides authority to break up or unwind those institutions and ensures that major financial institutions, rather than the taxpayer, bear the costs of future financial crises,” said Geithner. “By eliminating this authority, this provision would critically undermine the government’s ability to limit the damage to the economy in the event on future financial crises.”

“This provision was carefully designed to have no cost to the taxpayer over the long run,” he added. “Eliminating this provision would increase the risk that future financial crises would increase future deficits.”

Despite the committee’s approval of the bill, it has little chance of passing the Democratically-controlled Senate. Nonetheless, it could serve as a blueprint for future Republican attempts to undo the Dodd-Frank Act should the party retake the Senate or the White House, or both, in November.

Jacob Barron, CICP, NACM staff writer

Struggles among United States-based manufacturers of solar power-related products have been well documented as at least one significant company in the industry has filed for bankruptcy protection just about every month since last fall amid stiff competition and wavering domestic consumer demand. And, now, news out of Germany looks grim as the Frankfurt-based First Solar announced it would shutter a domestic plant and “idle” four production lines in Malaysia amid the acknowledging that “the European market has deteriorated to the extent that our operations there are no longer economically sustainable.”

However, India clearly is pressing on with its alternative/renewable energy generation platform as a nation, and solar energy appears to be a big part of that. Demand for solar products developed largely in the U.S., Germany, China as well as other smaller Asian nations has skyrocketed in recent months as India struggles to tries to keep up with energy resource needs imposed upon by its surging population and development. To wit, the Jawaharlal Nehru National Solar Mission aims to expand the solar capacity within the country to 20,000 megawatts by the end of this decade, which would translate into generation of 7% of all energy used within India coming via solar means.

The latest high-profile Indian solar project, dubbed the “Rajasthan Sun Technique Energy Private Limited” has brought the Indian government and developers together with Reliance Power, a U.S. subsidiary with French ownership, as well as institutional investments from Far East Asia and Holland. Despite its reauthorization beyond this year becoming a political football in the U.S. Congress, the Export-Import Bank of the U.S. approved an $80 million loan this week to facilitate the purchase of products for the project from manufacturing outfits based in eight U.S. states and the District of Columbia. It is the seventh loan venture involving Ex-Im on an India-based solar project.

Brian Shappell, CBA, NACM staff writer