Business Starts to Look Towards Expansion

Many companies have been sitting in a holding pattern since the Great Recession officially started in the fall of 2007. Economic recovery has been weak, holding many companies back from investing in new structures and equipment—until now.

We had a flurry of automation and new equipment expenditures between 2009 and 2011, as companies opted for things like robotics instead of re‐hiring workers for more basic activities. Since then, companies have been "banking" profits for the past several years. Coupled with "cheap money" for borrowing stemming from historically low Federal Reserve rates, the time is probably correct for many industries and companies to make their next strategic move: expand their operations.

Add to this trend the rapid acceleration of online order activity, and there is a real push for the ability to handle new distribution and fulfillment strategies across the spectrum for retailers and their suppliers. Retailers are beginning to embrace the notion of the Omni-channel. Omni-channel strategies embrace the notion that a customer should be able to engage in commerce with a retailer in any manner that they prefer, whether it is online, brick‐and‐mortar, or in any other manner available. Fulfillment and where customers take delivery is also an important factor. The bottom line is that online sales volume (expected to add more than $1 trillion in new sales by 2018 worldwide) will continue to drive the need for flexibility, expansion and investment in how fulfillment is handled. That will lead to new construction and expansion of structures throughout the supply chain—especially as NAFTA trade heats up from a growing Mexican manufacturing supplier sector.

This is the counter argument to the reduced durable goods data and the credit crunch. There remains a great deal of money in the coffers of the corporate community and that means that they are less dependent on the banks than in the past. The business community has reasons to expand and, at the same time, some to be cautious. The sense is that many companies are starting to worry about market share, which can drive decision-making. The path of expansion this year will be determined by this tension between a need to compete and the need to be fiscally prudent.

- Chris Kuehl, Ph.D., NACM Economist and co-founder of Armada Corporate Intelligence

Where Should FSOC Go from Here?

U.S. Treasury Jacob Lew pledged Wednesday to protect the goals set forth in the Dodd-Frank Wall Street Reform and Consumer Protection Act and those of the Financial Stability Oversight Council (FSOC).

"No law is perfect," Lew told the Senate Committee on Banking, Housing and Urban Affairs members. "But let me be clear: we will vigilantly defend Wall Street Reform against any change that increases risk within the financial system, weakens consumer, investor or taxpayer protections, or impedes the ability of regulators to carry out their mission."

FSOC, which Lew chairs, grew out of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, which is challenged with preventing future risk of financial institute failures. The council monitors market developments for potential risks to financial stability and then takes action against those that it deems threaten the nation’s financial system.

As a young organization, it “should be open to changes to its procedures when good ideas are raised by stakeholders,” Lew said. What constitutes a good idea differs among stakeholders and other interested parties, however.

A panel of FSOC’s critics voiced their concerns at the hearing. Speakers were comprised of Douglas Holtz-Eakin, president of the American Action Forum; Gary Hughes, executive vice president and general counsel of the American Council of Life Insurers; Dennis M. Kelleher, president and CEO of Better Markets, Inc.; and Paul Schott Stevens, president and CEO of the Investment Company Institute.

In response to concerns previously voiced, FSOC adopted a set of supplemental procedures last month. “Companies will know early in the process where they stand, and they will have earlier opportunities to provide input,” Lew said. “The changes will provide the public with additional information about the process, while still allowing FSOC to meet its obligation to protect sensitive, nonpublic materials. FSOC will provide companies with a clearer and more robust annual review process.” Holtz-Eakin characterized the changes “as a good first step,” stressing that more needs to be done.

Points of contention center around the desire for greater clarity on the metrics leading to designation. Lew, however, stated factors leading to a company's designation as a systematically important financial institution (SIFI) could not be quantified because the structure of each firm differs. Numerical metrics would not sufficiently capture a firm’s complex structure, he stressed.

“It is not clear the weight given to certain factors over others or what makes a designation more likely,” Holtz-Eakin said. “FSOC’s process needs more rigorous quantitative analysis, respect for other regulators and their expertise, greater concern for market impacts and a clear path for the removal of a designation.” Three of the four nonbank financial companies identified as SIFIs are insurance companies.

Hughes argued the designation and de-designation process lack procedural safeguards such as separate staff assigned to enforcement and adjudicative functions and clear explanation as to why particular companies were designated. “A company should have access to the entire record that is the basis for an FSOC determination.”

The problems and criticisms surrounding FSOC could reflect that part of the process still needs to be developed, said Jim Wise, NACM’s Washington lobbyist and managing partner of Pace, LLP, in a phone interview. “Is it transparent enough? Is it uniform enough? Does it allow for entities to prepare for this? Some people think it takes too broad an approach. It raises the question of whether Dodd-Frank really oversteps its boundaries.” In November, the Government Accountability Office released a report that analyzes the FSOC’s designation process for SIFIs. The report supports those that believe the process lacks transparency and accountability, adding that process should be systematic and measurable.

- Diana Mota, NACM associate editor

Click here to read “House Bill Promotes Shedding More Light on Financial Stability Oversight Council” in today’s eNews.

Digital Currencies Sparking New Interest in U.S. and U.K.

The innovative online payment network Bitcoin made some waves this week, sparking new interest in the United States and triggering the release of a comprehensive report from the United Kingdom government that could foreshadow regulatory activity. And despite wariness from some of alternative currencies’ earlier framers, regulation still looks to be an important step toward increasing the legitimacy of Bitcoin as a payment method.

Nasdaq OMX Group Inc. announced on Tuesday that it will provide Noble Markets, a New York-based company for trading Bitcoin, with technology to run a marketplace that allows companies to trade digital currency. “Noble’s platform will use Nasdaq’s X-stream trading system, a high-tech system for matching market participants’ orders that is used by more than 30 exchanges and marketplaces worldwide,” according to a joint statement to The Wall Street Journal.

Also on Tuesday, the U.K. government issued a report that looked into the benefits and risks associated with digital currencies like Bitcoin. The 28-page report took into account responses from 120 people who use digital currencies and/or related services.

“The government considers that digital currencies represent an interesting development in payments technology, with distributed, peer-to-peer networks and the use of cryptographic techniques making possible the efficient and secure transfer of digital currency funds between users,” the report reads.

However, the report also recognizes that regulations need to be put in place in order to avoid the potential for criminal usage. “The government intends to apply anti-money laundering regulation to digital currency exchanges, to support innovation and prevent criminal use,” the report states. “The government will look at how to ensure that law enforcement bodies have effective skills, tools and legislation to identify and prosecute criminal activity relating to digital currencies, including the ability to seize and confiscate digital currency funds where transactions are for criminal purposes.”

Digital currency values took a hit earlier this year after London-based bitcoin exchange Bitstamp suspended services following a hacking incident that accounted for more than $5 million in losses, with at least two filing for bankruptcy protection since then. Although not driven by internal fraud or reaching the scope of the infamous Mt. Gox/Bitcoin exchange collapse, the news rattled some mainstream media outlets.

- Jennifer Lehman, NACM marketing and communications associate

Back to the Gate: Ryanair Grounds Trans-Atlantic Flight Plans Less Than a Week After Announcing Them

(Updated) Ireland-based discount airline Ryanair made waves earlier this week announcing plans to open up Trans-Atlantic routes, at least a dozen of them, at rock-bottom pricing by the end of the decade. It made even bigger headlines four days later, in peculiar and embarrassing fashion, by noting that its board is actually not supporting plans for tickets as cheap as 10 euro (pre-tax) or potentially any concrete plans for Trans-Atlantic routes at all.

After days of dominating the headlines, the discount airline pulled a 180 in a tersely worded press release. It reads, in full, as follows: “In the light of recent press coverage, the Board of Ryanair Holdings Plc wishes to clarify that it has not considered or approved any Trans-Atlantic project and does not intend to do so.” It was not immediately clarified whether the reversal occurred because Ryanair never had the official support of its board and simply made an error releasing the information or if the reaction since the original announcement was not to the liking of board members, shareholders and other company decision makers. Either way, it’s a big blush for a company already known for a quirky, if not sketchy, reputation. Rumors still persist that Ryanair could launch Trans-Atlantic options under another brand name in the future, but any information about the company’s plans—even those put out in official releases—is hard to take too seriously in the chaotic PR fallout of the odd retraction.

Originally, talk of Ryanair offering Trans-Atlantic flights looked to be a bit of a game-changer for travelers on very tight budgets. However, the impact on business flyers would likely have been muted when compared with other travel classes. Angela Bradbury, a frequent Trans-Atlantic flyer who worked for many years in credit before taking a position as global finance business analyst at Innospec Inc., said the cramped quarters and lack of amenities business travelers need means most would only try it once or twice unless their companies were in the most dire of budget scenarios.

"The biggest complaint in Trans-Atlantic flights is being crowded," said Bradbury, an FCIB conference speaker and former member of its European Advisory Council. "Ryanair is known for crowding people in their planes. Nobody wants to sit in such an area for eight or nine hours."

Val Venable, CCE, director of credit with Ascend Performance Materials, is also a frequent Trans-Atlantic flier who believes business travelers would find problems with the lack of amenities and lack of space would be a deal breaker.

"In many cases, I get on a plane and start working or have to go straight to a meeting when I get off. If I’m in cramped quarters and can’t work or even get some rest, that’s lost productivity," Venable said. Aside from space, long waits and having to pay for virtually every service or amenity, there’s also the consideration that professionals likely won’t be traveling among people with similar considerations.

"What you’re going to have with a lot of families traveling this way is things like animal cracker crumbs rubbed into your sleeve when you’re going straight to a meeting," Venable predicted.

- Brian Shappell, CBA, CICP, NACM managing editor


Citibank Bond Payments to Argentina Halted

Citibank announced on Tuesday that it will no longer make bond payments to Argentina and plans to eventually transfer debt payments elsewhere due to “unprecedented international conflict of laws,” according to the Associated Press.

The statement comes after the March 12 ruling by U.S. District Judge Thomas P. Griesa that reaffirmed his previous decision that Citibank cannot process interest payments on Argentine bonds. In response, Argentina threatened to rescind Citibank’s operating license.

In its statement on Tuesday, Citibank is planning to “develop and execute a plan to exit the custody business in Argentina as soon as possible.”

The dispute originated 14 years ago after Argentina defaulted on $100 billion of debt. While many bondholders made deals in exchange for discounted exchange notes, a group of U.S. hedge funds sought full payment.

Last summer, Griesa ruled in favor of the hedge funds—which include Elliott Management’s NML Capital Ltd. and Aurelius Capital Management LP—and blocked all interest payments on Argentine debt. The ruling ultimately caused Argentina to again default on July 31. Earlier this month, Argentina unsuccessfully argued that Citibank should not be included in last summer’s ruling.

Founded in Argentina in 1914, Citibank is present in 25 Argentine cities and offers a broad range of financial services and product. Argentina’s profile, from a business perspective, has long been considered rocky at best, but it began to worsen rapidly again last year and has yet to stabilize. Along with frequent stories of corruption, unrest and growing anti-U.S. sentiment, Argentina’s reputation has also dealt with credit rating agency outlook downgrades and, more recently, a dubious positioning among the worst three nations in Bloomberg’s annual “misery index” study.

Kevin Hebner, ‎senior FX Strategist at JPMorgan Chase Bank, said while serving as an instructor during the inaugural year of NACM's Graduate School of Credit and Financial Management International (GSCFMI) in 2014 that Argentina has become viewed by many in credit and business in the same negative way as struggling parts of the Middle East and Eastern Europe. At least in the near term, “there’s no reason to believe things will get better,” said Hebner, who will speak at GSCFMI again this year in June.

- Jennifer Lehman, NACM marketing and communications associate
For more information on Hebner’s classes and others at the 2015 session of NACM’s Graduate School of Credit and Financial Management International, or to register, visit https://www.nacm.org/gscfm-international.html.

Spain Enjoying Recovery — But Beware

The Spanish economy is now seeing its growth numbers seen since the recession. That positive change has arrived hardly means that all the problems are rapidly fading.

Unemployment remains at a record high and the number of people in financial distress has been mounting every month. The bottom line is that Spain has been boosted by two factors that are worrisome to many others. The low value of the euro has been great for a country that still relies pretty heavily on manufacturing and the ability to export these goods. The Spanish sell extensively to Latin America and to the United States. Therein, the weak euro has been very helpful. Then there is the fact that oil prices have been low, causing some real savings regarding energy consumption.

Still, Spain needs a great many of its economic sectors to rebound and right now there is some sign of that taking place. It has not only been the manufacturing community, but tourism has benefited from the weak euro—Spain is a decent place for a bargain trip these days.

The country has a very long road to travel to regain economic momentum lost during the last recession, and it is not at all clear that voters will be that patient. Local elections will be held in a couple of months, and most predict that protest parties and populists will gain positions. An even-more critical impact could come during national elections later in the year. Right now, the dominant parties are desperately trying to point out that things are getting better and that all that is needed is some more time. It is not all that clear that the population of Spain is going to give them that opportunity.

- Chris Kuehl, Ph.D., NACM economist

NACM Industries to Watch: U.S. Oil



A steep downward trend in crude oil prices, dropping by nearly half since the summer, has already caused mass layoffs and, now, two new bankruptcy filings in March. Factors such as these and others have made the domestic industry, as well as those that support it, one to watch for potential restructuring activity. 

“The primary factor is the drop in prices,” said Kit Pettit, a senior associate with the Pennsylvania firm Bernstein-Burkley, PC. “A lot of these individually run startups don’t have the business experience or acumen to adjust.” In July eNews and NACM Secured Transaction Services coverage, Pettit predicted potential problems concerning the industry: “There are a number of new entities or startups looking to get work. You may very well have companies that fail to perform properly. You may have companies that don’t know what they’re doing or perhaps expanded too quickly or don’t have employees with enough skill or training."

If prices hold at these levels or continue to fall, solvency struggles could increasingly affect more established companies if they are overleveraged, Pettit added. Restructuring experts nationwide identified the global energy sector in a recent survey by AlixPartners as the area with the most potential for restructuring activity this year. (Learn more about the survey in item No. 3 of the March 12 eNews edition.)

This year, a number of Texas-based oil and gas companies already have sought protection under Chapter 11. In January, Austin-based WBH Energy LP became the first shale oil and gas producer to file and foreshadow the potential of a greater trend. This week, Dune Energy Inc., a Houston-based oil and gas explorer with operations in its home state and Louisiana, filed following a failed merger. 

Drilling company BPZ Resources Inc., also from Houston, followed on the heels of Dune, citing $275.2 million in debt.  Another Houston-based company, Cal Dive, an offshore oil services outfit, filed the previous week. Our efforts to negotiate additional financing to fund business activities and pursue identified strategic alternatives were further impeded when oil prices plummeted and production growth faltered, creating additional obstacles to our restructuring efforts,” said Manolo Zuniga, BPZ president and CEO, in a statement.

- Diana Mota, NACM associate editor

Small Business Optimism Rising, Consumer Outlook Not

The National Federation of Independent Business’ (NFIB) Small Business Optimism Survey shows its third highest reading since 2007 in February, rising 0.1 points to 98. The index's level is giving some economists reason for optimism despite slow economic activity and poor weather conditions across the country.

“Small business owners are finding reasons to hire and spend, which is great news,” said NFIB Chief Economist Bill Dunkelberg. “Large firms have been powering the economic recovery since the Great Recession, but that may be shifting to the small business sector. February’s data suggests there are fundamental domestic economic currents leading business owners to add workers and these should bubble up in the official statistics and support stronger growth in domestic output.”

However, Gallup’s U.S. Economic Confidence Index, also released this week, registered a -3 for the week ending on March 8. Most respondents believe the economy is worsening, though the index illustrates that overall sentiment is closer to neutral than significantly negative.

- Jennifer Lehman, NACM marketing and communications associate

(Non-Oil) Trade Deficit Worsening Fast

It was not long ago that the United States was boasting of its improved trade deficit, but those days are gone and unlikely to make a comeback anytime soon. The whole issue of a trade deficit can be tricky to grasp, as a wide deficit between what one sells and buys may not be a bad thing, just as having a narrow deficit isn’t always necessarily good. The basic idea behind trade is that one buys from others what is too expensive to make at home and one sells what one is able to produce best. In reality, it doesn’t work this smoothly, but the basic premise is there—selling and buying are both important parts of the economic equation.

The latest data show that the deficit has grown considerably, and there is little mystery as to why. The dollar has been gaining in value for months while the euro, yen and pretty much every other global currency is weak against the dollar. That obviously makes selling outside the U.S. challenging and that imports are easier to sell in the U.S. The hike in the value of the dollar has also come at a time when the U.S. consumer is getting its act together and seems willing to spend, while the status of the global consumer is slipping further. The European demand for U.S. goods is low, and Asian demand is not much better. When interest rates rise again, the dollar will leap in value to the point it will be a major impediment to those in the export trade in the U.S.

All of this deficit activity is taking place apart from the oil sector and that is an unusual position for the U.S., historically. For decades, the most important part of the trade data was related to the price and demand for oil. The bulk of the U.S. imports were energy-related and as recently as 2006, the U.S. imported some 65% of the crude oil it needed. That percentage has crashed to less than 20% in most months and that has seriously limited the overall level of imports. The new driver for U.S. imports is the consumer and their insatiable demand for new goods.

The challenge for the U.S. is not on the import side as much as it is on the export side. The U.S. has to regain some of that footing despite the problem created by the strong dollar. To some extent, the U.S. companies have been able to hang on to some market share based on quality and service, but that will not offset high prices triggered by a strong dollar forever. The U.S. can’t do much about the popularity of the dollar these days, but there may have to be a more determined effort to support the exporter than has been the case in the past. The U.S. is not export-dependent in the same way that Australia and others have been, but it is a vital part.

- Chris Kuehl, NACM economist and co-founder of Armada Corporate Intelligence

NACM Welcomes Rudet Fountain to Staff

NACM is happy to announce that Rudet Fountain has accepted a position of executive vice president. He will concentrate on strengthening the sales of NACM’s business services and developing a cross-functional sales team at NACM. Rudet is already well known in NACM circles, having served as vice president of NACM relations for United TranzActions for the past 15 years.

“Since UTA and NACM have had a long-standing successful partnership at many levels within NACM, Rudet will continue to support and promote the UTA sales efforts in his new NACM position,” said UTA President Dean Middleton. “Both NACM and UTA are committed to strengthening the credit profession through new sales and services within their organizations and will continue to work closely together to achieve these goals,” said NACM President Robin Schauseil, CAE.