Detroit Bankruptcy Conclusion Due in Weeks?

The finish line for the complicated Detroit Chapter 9 may just be in sight, as the judge presiding over the largest municipal bankruptcy in US history has targeted the first full week of November for a ruling on the city’s exit plan.

Bankruptcy Judge Steven Rhodes said testimony and arguments will wrap next week in the city’s complicated bankruptcy case, barring an extreme situation. Granted, Rhodes had vowed early this year to move the case rapidly and have it wrapped by summer, but the complexity of the case as well as a mountain of objections and court actions from creditors trying to maximize returns and unions trying to preserve pension and health care benefits rendered the accelerated timetable impossible. It shouldn’t be a surprise, as expert attorneys like Lowenstein & Sandler LLP’s Bruce Nathan have long described the Chapter 9 process as one with high potential for delays and complications not seen even trickier Chapter 11 cases.

The outcome of the Detroit case remains under close watch nationally because of its potential implications for many US cities struggling with escalating debt problems tied primarily to retiree benefits such as pensions and health insurance, which is among the core issues in play in the Motor City.

- Brian Shappell, CBA, CICP, NACM staff writer

FCIB Global: Dangerous to Rely on Region-wide Data, Trends?

In business, generalities tend to be bandied about quite a bit. And a topic that continues to suffer from this seemingly centuries-old trend is international trade (e.g., “Europeans don’t pay on time,” “All of the Middle East or Eastern Europe is dangerous right now,” etc.). Often, nations or even regions within a country get unfairly lumped in with places where instability or slow payment culture are pervasive. Even within the latter distinction, there are companies that could be considered diamonds in the rough. Throughout FCIB’s 25th Annual Global Credit Conference, expert speakers from the credit and financial industries tried to remind attendees of these dangers, especially in missed opportunities, or relying primarily on broad-brush, surface-level analysis.

“Finland and Spain are as different as the US and China,” said Michael Andreasen, ICCE, who is based in the Netherlands with TNT Express N.V. and a member of FCIB’s European Advisory Council. “Many people have the misunderstanding that all of Europe is the same.” The Middle East can be considered in the same lens, as other Global speakers noted increased wariness of doing business there because of Islamic State and Israel-Palestine fighting this year even through there are many countries in the overall region that are almost completely unaffected by these conflicts and are rife with opportunity for Western exporters.

Panelist Nelson de Castro, senior VP and US head of trade sales for Wells Fargo International Trade Services, agreed that failing to drill down beyond region-wide statistics and anecdotal information continues to be a problem, especially for those newer to exporting. Granted, US-based credit professionals could deduce as much from business at home in some ways. “Pennsylvania and Texas are like two different countries,” de Castro joked. 

- Brian Shappell, CBA, CICP, NACM staff writer

FCIB Global: Reshoring Still a Concept in Eye of Beholder

Bringing formerly outsourced jobs, especially manufacturing ones, back to the United States continued to be a hot topic this week at FCIB’s 25th Annual Global Credit Conference. While it is clear that outsourcing of jobs is no longer considered as much of a cost no-brainer as several years ago, nothing resembling a consensus on the matter has been established.

Some, like Euler Hermes Economist Dan North, proclaimed during his Global keynote speech that manufacturing reshoring is a real trend. Reasons for this include the US’s emergence as more of an energy power from its natural case holdings (Re: the cost of energy in and near America continues to decline), closer proximity to its destination markets of choice, easier quality control measures and some erosion of massive labor cost advantages formerly flouted by China and India, among others.

However, there are many success stories of outsourcing or, similarly, use of shared service centers for some credit functions. Hitachi Data Systems Corp. is an example of shared services working brilliantly, with demonstrated strong performance coming out of places like Poland. In addition, some believe mass reshoring still is more theoretical than the industry standard.  “I’ve heard a lot about reshoring, but I haven’t met anyone who has actually done it,” said Cynthia Wieme, CCE, ICCE, MICM, of Norgren Inc.  Also, with the recent Obama Administration pushback against tax inversion strategies, it stands to reason that the taxation status related to some offshoring operations could also be further considered by the federal government.

Even North, who views the re-shoring trend as one that is gaining, said there will be challenges for US producers, even if energy costs remain highly favorable. One blinding reason is, like Japan, a majority of the working population fits into an older demographic that is much closer to retirement than their prime productivity years. 

“We’ve got an age problem in the United States,” North said. “We don’t have enough skilled employment to fill the labor market participation gaps.” He added that the US likely will need an improved program to encourage legal immigration of skilled workers from around the world.

- Brian Shappell, CBA, CICP, NACM staff writer

FCIB Global: Personal Touch Increasingly Critical in Latin Collections

Talking about the weather in a customer’s area, how their kids are doing and what they’re having for dinner might inspire debtors in urban parts of the United States, especially the Northeast, to be impatient or even to seek an end to the conversation. However, in Latin America, failing to do so with some regularity will almost certainly downgrade the position of one’s company when it comes to whom debtors will pay in timely fashion when liquidity is a problem, said a breakout panel of credit experts at FCIB’s 25th Annual Global Credit Conference this week.

Moderator Alessia Zalambani, CBA, ICCE, corporate credit manager at Domino Foods Inc., was first to note the importance of building and maintaining a business and personal relationship with customers in many Latin-based countries. “If they have the choice between buying from you or paying you or someone else, the relationship is so important,” she said.  

This could become particularly important in the coming year, as Latin America’s recent hot performance could be counteracted at least somewhat by a number of problem situations: non-diverse product and service options beyond the natural resources sector at a time when Chinese demand is slowing dramatically (virtually every Latin nation except Brazil and Mexico), growing anti-US sentiment (Bolivia, Argentina), national elections between candidates with vastly different views on the business community (Brazil), poor FX holdings (Venezuela) and increasing pushback for debtor-favorable terms (Mexico).

Baltimore Aircoil Company Inc., Global Credit and Collections Director Sean Papperman noted that once delinquency has crept into a payment situation, it’s too late. “The sooner you set up the relationship, the better, and you have to refresh it—you can’t afford not to,” Papperman said.

- Brian Shappell, CBA, CICP, NACM staff writer
The extended version of this story will be available in this week's edition of eNews, available late Thursday afternoon at www.nacm.org. 

FCIB Global: Tough Headwinds Ahead Even for Strong Economies

Though admittedly called the economic “Prince of Darkness” at times, Euler Hermes Economist Dan North may have been found himself less pessimistic about worldwide growth prospects than fellow keynote speaker at FCIB’s 25th Annual Global Credit Conference Carolyne Spackman, an economist and VP at American International Group Inc. (AIG).

Spackman said the European Union is showing strong potential for a triple-dip recession. “The EU is still mired in deflation and debt…it’s a dismal picture,” she said.  The Russia-Ukraine situation is only increasingly problems though Russia, which had become an increasing export destination for formerly growing consumption-based activity, showed weakening even before the sanctions arrived. With gas/fuel/oil prices dropping to levels not seen in years, it will only weigh on that economy, and those who bet on its growth, more. That said, with geopolitical tensions rising in multiple regions again, it may be premature to assume low oil prices will stay for an extended period.

Regardless, the returning economic problems in the EU – especially noted by slipping in France and Italy – could have a bit of a domino effect, Spackman and North agreed. China’s economy, though unlikely to see a hard landing, may continue to grow at slightly muted rates because of a lack of buying out of the EU. Spackman noted this could impact even hot Latin American economies because the importance of selling natural resource commodities to Chinese producers. All of it could conspire to throw in a wrench into US Federal Reserve policy as well.

“Will the US think twice about raising interest rates?  It remains to be seen if they will actually raise rates in June,” said a skeptical North. It continues to be noteworthy that the US is doing somewhat well at present, and seems to be improving. But North showed concern with a number of areas that could act as a drag on the US pace of growth over the next decade: a near 100% debt-to-GDP ratio, potential for less consumption in trade markets for several years, a lack of any entitlement reform plan.

- Brian Shappell, CBA, CICP, NACM staff writer
For more coverage from the FCIB Global Conference, check out FCIB_Global on Twitter.com throughout the week.

Industries to Watch: Domestic Airlines Lifting Off

Among issues that in recent years dogged the US airlines industry—and, by proxy, suppliers downstream—were routes operating well below capacity, surging fuel costs and an economic recovery that saw its share of delays. But those concerns have largely been grounded for domestic-based carriers, placing the airlines industries and direct suppliers on NACM’s Industries to Watch list for positive reasons, a rarity in recent years.

Z-Score bankruptcy prediction model creator Ed Altman, the Max L. Heine Professor of Finance at the New York University (NYU) Stern School of Business and director of research in credit and debt markets at the NYU Salomon Center for the Study of Financial Institutions, told NACM this week that the turnaround in the airlines industry has been noteworthy. The reasons are many: reduced number of flights, fewer empty seats per flight, general economic improvement domestically, less aggressive pricing competition between the major carriers and eased concerns over fuel costs.

“They’re just more efficient,” said Altman, who will serve as a first-time instructor at NACM’s Graduate School of Financial and Credit Management on the campus of Dartmouth College in June 2015. “And with a fairly vibrant US economy, flying is back in fashion more than it was during and right after the economic crisis.”

Altman is not alone in his predictions of stability for the airlines industry. Each of the so-called “Big Three” ratings agencies based in the United States have offered upgrades to either the credit ratings or outlooks of some airlines. Justification for the positive movement focused on expectations for continued strong demand, especially for the four largest US-based carriers and an absence of “debilitating, widespread battles for market share,” as Moody’s Investors Service characterized it.

Less stable are predictions of health for carriers conducting business primarily in the European Union and, to a lesser extent, Asia. Economic woes and potential concerns over fuel access caused by the deepening Russia-Ukraine border dispute have created significant headwinds.

“I think the fundamentals definitely are not good in the EU situation,” said Altman. “It’s not just because of Ukraine. They’re also not as competitive right now.” Altman added that one advantage favoring EU-based carriers is the strengthened US dollar versus the euro, which had gained significantly in strength when the US was deep into its recession.

- Brian Shappell, CBA, CICP, NACM staff writer

Germany Teeters on Edge of Recession

The German economy is in trouble and the latest industrial production numbers suggest that this decline is far faster than anyone had anticipated. The majority of analysts expected to see some reduction German manufacturing output, but nobody seems to have expected a 4.0% reduction that took industrial output to the levels of the recession in 2009—most thought there might be a reduction of perhaps 1.5% at most. The headwinds are reaching gale force, and they are both self-inflicted and out of their control.

The biggest problem is that exports are way below what they have been—falling from an average growth of around 8% to less than 1% and, in some months, slipping into negative territory. Germany has really only one viable export market left and that is the US. As important as that is to the German economy, it is not enough to offset the loss of Europe as a whole and the slowdown in demand for China. China buys German machinery—not consumer goods—and right now China is not seeing growth at anything near the levels of the past. German consumer goods usually go to the other nations in the euro zone, but most have experienced a drop in economic growth some months or years ago, meaning they are aren’t buying much.

Another factor is that German support for sanctions against Russia over the invasion of Ukraine has caused near panic in the markets. The Germans do not have an alternative to Russian gas this winter and the projections have been bleak—assertions that there will be interruptions in service and far higher prices as Germany will have to turn to very expensive alternatives for their gas. These are going to be costly supplies. Even if Germany is willing to pay, there is not enough available to meet the demands of the country. This could be a very cold and challenging winter unless the Germans back away from these sanctions.

- Armada Corporate Intelligence

Tax Inversion Strategies Now in Doubt

A significant change in the suddenly hot topic that is the tax inversion system will have to come from Congress, but the Obama White House wanted to throw enough doubt into the business community to slow the practice down. The latest rules outlined by the Treasury Department late last month seem to have accomplished this as, within hours of the announcement, shares in several companies started to plummet. Apparently, investors no longer think they will be successful in plans for inversion.

As a reminder, tax inversion is a means for companies to lower their tax bite by buying a foreign rival and moving the combined company headquarters to the country with the lower corporate tax rate. This was a rarely used technique for a long time because it usually meant setting up in a less-developed nation, where the costs of doing business exceeded the savings. With corporate taxes  generally lower in Europe and even Canada, sometimes significantly so, the temptation is greater for US companies.

The part of the inversion process that most irritates its opponents is the ability of a company to loan money to itself and, in the process, avoid taxes on that cash. The foreign HQ would loan money to the US branch and it would not be treated as taxable transfer. That is no longer possible under the new Treasury prohibition. The Treasury rules also close some ownership loopholes that will make inversions more difficult and less lucrative, though they do not ban the practice. Making these moves entirely illegal would depend on Congress, but there are few who think that such a change would make it through both houses anytime soon. 

Those who have already completed their inversion will not be affected by the ruling, as this has not been made retroactive, to the relief to those who recently completed deals. One concern within the international business community is that, because foreign companies with US subsidiaries use a tax technique called “earnings stripping” to lower their US tax bill, there is some fear that Treasury officials will target this next. This might cause many of these foreign operations to rid themselves of US subsidiaries, which could prove costly as far as jobs and investment are concerned.

- Armada Corporate Intelligence

Bankruptcy Roundup: Argentina, GM, Radio Shack, Revel

US District Judge Thomas Griesa held Argentina in contempt of court September 29, a rare though not unprecedented move, in connection with the troubled nation’s ongoing sovereign debt disputes. Argentina had been ordered previously to make payments to two US-based hedge funds before other bondholders, but has yet to do so. The Argentinean government responded defiantly by placing $161 million in bond interest payments into a state-run financial institution that is not subject to US control and by declaring that the payment showed its commitment to its bondholders.

General Motors returned to an investment grade rating with Standard & Poor’s (S&P) for the first time since its bankruptcy and subsequent government bailout last decade. S&P analysts believe that the recent auto recall and scandal that ensued from allegations of withheld information regarding auto defects, some blamed for fatalities, will have only a small impact on the company going forward. GM tried to use its earlier restructure to shield itself from financial responsibilities stemming from safety incidents occurring around the time of the bankruptcy.

Radio Shack received good news, a rarity for anyone in the retail electronics field of late, as a hedge fund with significant holdings in the company agreed to pump in needed financing to prevent the company from becoming insolvent in 2015. That sector and specifically Radio Shack, which was noted in an NACM Industries to Watch article in August 2013, is comprised of a high number of financially overleveraged retailers with a multitude of problems such as oversized stores, too many locations, an inadequate response to e-commerce strategy and notoriously poor management decisions. Radio Shack did try to trim its number of stores and hours of operations to save money, but has continued to rack up quarterly losses.

Revel Casino may have some life left after all. Its September bankruptcy auction drew at least two buyers, with a winning bid hitting $110 million for the two-year-old, lavish Atlantic City property that cost more than $2 billion to build. The winner, Brookfield Asset Management, seems intent on reopening the property as a casino even though Revel was one of one of four Atlantic City gaming operations to shutter its doors in 2014 because of oversaturation in the industry in the region and weakened demand in a still lackluster economy.

NACM’s Credit Managers’ Index for September Plunges

The September report of the Credit Managers’ Index (CMI) from the National Association of Credit Management, which is now available, shows the lowest reading in nearly two years. Though still in growth territory, this was not a good month and that brings a great many concerns to the forefront.

“This was not a small reversal of fortune by any stretch of the imagination,” said NACM Economist Chris Kuehl, PhD. “This could be termed a collapse…The numbers this month are almost shocking and there will be intense interest in what the index reports in the next iteration as this will determine whether this is the start of a depressing trend or just one of those anomalous months.” 

There is some hope that August and September are typically difficult to get an accurate read on “given the vagaries of the summer break and the return to school.”
Most of the distressing news in the CMI will be found in the unfavorable factors, which could indicate some real business distress. That index is dangerously close to slipping into contraction territory due to struggles in disputes, dollar amount beyond terms and bankruptcies. All in all, these numbers are bad and signal more distress to come. It is also hard to determine just what the issue is given that much of the other economic data of late has been good.


- NACM
 For a full breakdown of the manufacturing and service sector data and graphics, view the complete September 2014 report at http://web.nacm.org/CMI/PDF/CMIcurrent.pdf. CMI archives may also be viewed on NACM’s website at http://web.nacm.org/cmi/cmi.asp.