Sports Authority Bankruptcy Moves to Liquidation

The Sports Authority, Inc. has relinquished all hope of reorganizing and leaving bankruptcy and has opted to convert its Chapter 11 into a liquidation.

The Sports Authority filed for bankruptcy protection on March 2 as it became burdened with more than $1.1 billion in debt. The original plan included selling off unprofitable stores, closing them down and reorganizing the remaining stores that could turn a profit, said commercial law and creditors’ rights attorney Wanda Borges, Esq., member of Borges & Associates LLC. Those plans were scuttled after the case became highly litigious, in part over the rights of the consignment vendors to the national retailer.
In March, The Sports Authority and some of its affiliates filed adversary complaints against about 160 trade vendors in the U.S. Bankruptcy Court for the District of Delaware in an effort to invalidate vendors’ purported consignment rights.

The Sports Authority and others argued that all but a few of the consignment vendors failed to follow Article 9 of the Uniform Commercial Code (UCC) when they took on the consignment business with the firm, thus failing to perfect their rights as consignment vendors, which relegated them to the status of unsecured creditors, Borges said. The vendors, on the other hand, have argued that they didn’t need to file a UCC financing statement or notify anyone about their consignment rights.

Meanwhile, an interim order from the court last week allows the consigned goods to be sold, but the proceeds have to be placed in a segregated account until it is determined how the proceeds will be divided, Borges said. The Sports Authority’s lenders have since appealed this interim order, and on May 2, the lenders and consignment vendors filed a letter with the court saying they are willing to enter mediation in the case over what should be done with the consigned goods.

A number of vendors terminated consignment agreements days to hours before the filing, seeking for their goods to be returned and proceeds of any sale of these goods to be earmarked for them (not Sports Authority lenders), said attorneys Thomas Fawkes, Esq. and Brian Jackiw, Esq. both of Goldstein & McClintock LLP.

For these vendors, the case presents triple the harm in that their products back have not been returned, they face losing money and the consigned products may now be sold outside the terms of the original consignment agreement (re: cheaper). The latter can damage the value of a brand in that products are being sold publicly at less than what is considered market value, said Fawkes and Jackiw.

All three attorneys agree that creditors who sold to The Sports Authority on consignment must pay close attention to and follow the law, including the Uniform Commercial Code, to perfect their consignment rights.

For more on how to perfect these consignment rights, read previous NACM blogs on the topic here and here, an extended eNews piece here and Borges’ article on consignment agreements in Business Credit Magazine on perfecting consignment rights here.

- Nicholas Stern, NACM editorial associate

Manufacturing PMI Drops, Shows Slight Expansion

Manufacturing indexes that follow new orders, production and inventories tracked by the Institute for Supply Management (ISM) all slid in April, contributing to the ISM’s overall decline last month to 50.8 from 51.8 in March. Readings above 50 show expansion, while those below show contraction.

Economic activity in the manufacturing sector did expand overall in April for the second consecutive month, with 15 of 18 industries tracked reporting an increase in new orders and production, while the economy grew for the 83rd consecutive month, ISM said.

Still, the new orders index dropped 2.5 percentage points to 55.8; the production index fell 1.1 percentage points to 54.2; and the inventories of raw materials index dropped 1.5 percentage points to 45.5, ISM found. Manufacturing sectors that reported growth in April include wood products, printing, paper products, plastics and rubber products, primary metals, fabricated metal products, chemical products, machinery, computer and electronic products, nonmetallic mineral products and food, beverage and tobacco products. The four industries that contracted in April were petroleum and coal, transportation equipment, miscellaneous manufacturing, and furniture and related products.

Also, the employment index increased 1.1 percentage points to 49.2%, while the prices index registered 59%, a growth of 7.5 percentage points.

- Nicholas Stern, NACM editorial associate

Construction Spending Up on Private Projects

A 1.1% rise to $842.3 billion in private construction spending this March helped total construction spending grow by an anemic 0.3% over February’s figure to a seasonally adjusted annual rate of $1.14 trillion.

Still, total construction spending in March was 8% higher than it was a year prior, while overall construction spending during the first three months of the year was 9.1% higher than the same period in 2015, the latest data from the U.S. Department of Commerce show.

In the private sector, residential construction spending led the way, posting a 1.6% increase to $435.5 billion, as nonresidential spending rose 0.7% to $406.8 billion, Commerce said.

Spending on public construction projects dipped 1.9% in March to $295.2 billion as spending on office, public safety, amusement and recreation, transportation, power, sewage and waste disposal, and water supply all dropped. Construction spending on commercial, health care, educational and conservation, and development projects increased slightly.

- Nicholas Stern, NACM editorial associate

U.S. Trade Deal Improvements with Europe Unlikely Before New Administration

While it is believed that the chances of the Trans-Pacific Partnership passing through an increasingly partisan Congress or earning ratification in all of the other nations involved are remote, the potential free trade agreement update between the United States and European Union is even further from completion.

Obama Administration and EU leadership are deeply divided along many lines (e.g., agriculture, manufacturing, services, etc.) as they try to come to an agreement on the Transatlantic Trade and Investment Partnership (TTIP). France is deeply opposed, and Germany is only slightly more comfortable with what is on the table. Meanwhile, the U.S. position on trade has been weakening with every month of the current campaign. These are nations that really need one another’s markets, but the trading patterns are sensitive because they essentially trade similar goods with one another.

The prospects of an agreement are dim and even if the pact was ironed out with trade officials between the two sides was ironed out quickly, infighting within the U.S. House and Senate almost guarantee nothing will be completed with Europe in the remaining nine months of the Obama term.

The stated goal of the TTIP was to lower already low trade barriers between two of the world’s largest trading partners to enable the easier flow of trillions of dollars worth of commerce.

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

April Credit Managers’ Index Looks to Maintain Momentum

NACM’s Credit Managers’ Index (CMI) for April, which will be released on NACM’s website Friday, is expected to continue with positive news and to challenge for the best level of the calendar year.

The most recent CMI peak came in July and, following a late-summer/early-fall decline in form, the index began a largely positive growth trend again in November, even as a few key categories (e.g., sales) lost steam.

“The thinking was that a real corner had been turned and the remainder of the year would be equally strong,” said NACM Economist Chris Kuehl, Ph.D of July’s performance. “Then, momentum was lost in August. The difference between last summer and now is that there has been a consistent build in the data, which would suggest more sustainability.”

Take particular note Friday of the unfavorable factors categories, of which most have been threatening to enter expansion territory after a lengthy lull.

“This [April’s CMI] would be the first time that all the unfavorable readings have all been above 50 in close to two years, and that would be a significant development,” said Kuehl. “To some degree, these numbers would suggest that companies that were on the ropes have finally reached the end. They are no longer driving the data down.”

- NACM staff

Click here Friday morning (ET) to view NACM’s full April CMI report. Click here to view the CMI archive.

U.S. Executives Looking Abroad for Growth

Doubtful about prospects in the United States over the next year, executives at mid- and large-sized businesses surveyed for Wells Fargo’s 2016 International Business Indicator expect international business activity to pick up in the next 12 months.

The 2016 International Business Indicator moved up Monday to 65 from 63 this time last year, according to the Wells Fargo report. Some 64% of 262 executives surveyed predict their company’s global business to either “increase a little” or “increase a lot” by this time next year, while 54% said it will become more important to their company’s financial success.

The importance of international business to companies’ financial success may reflect, at least in part, diminished expectations about growth prospects in the United States,” said Jay Bryson, global economist with Wells Fargo. Indeed, the percentage of survey respondents who said they expected U.S. business conditions to be “much better” or “somewhat better” over the next year dropped from 64% in 2015 to 48%.
About 60% of respondents said volatility in commodity prices is affecting companies’ international business, with 61% saying low energy prices are benefitting them. Meanwhile, 66% said low interest rates in the U.S. have been beneficial, while 43% expect higher rates would affect overseas business.

A majority of respondents believe foreign political developments (59%) and foreign economic conditions (51%) may have negative effects on their companies’ global plans this year, Wells Fargo said. Also, slightly more than half noted “currency fluctuations or exchange rates” could negatively impact their businesses, up from 39% in 2015. “The significant attention to exchange rates could reflect the sharp appreciation in the value of the U.S. dollar that has occurred over the past year,” Wells Fargo analysts said. 

China Slips, Emerging Markets Remain In Spotlight
The survey also reported that 33% of respondents ranked Western Europe as the “most important international market today,” giving it the No. 1 slot and dropping China to second place with 23%. Last year, China was No. 1 on this list. “China’s slippage may reflect the slowdown that has been occurring in that country in recent years,” Bryson said. “Real GDP in China grew at its slowest annual growth rate in 25 years in 2015.”

Still, business executives rank developing economies as “hot spots” over the next two to three years, with nearly 70% of survey respondents agreeing that emerging markets represent the greatest revenue growth opportunity. Countries like China, Mexico and India, with their expanding middle classes, were particularly attractive to survey respondents.

“Although developing economies are not likely to return to the supercharged growth rates that characterized the middle years of the last decade, these countries will probably continue to outpace their advanced economy counterparts in coming years in terms of economic growth,” Wells Fargo economists said.

- Nicholas Stern, NACM editorial associate

New Chinese Corporate Default Trend Underscores Increasing Risk

Recent defaults by Chinese state-owned enterprises (SOEs) are on the rise as Chinese authorities exert less control than a decade ago over the nation’s financial system. This could bring default rates in line with those reported in developed economies, increasing credit risks of China-based companies.

China’s financial system is stressed from slowing growth rates, weakening bank asset quality and significant leverage growth over the past decade, explains Andrew Colquhoun, senior director of sovereigns at FitchRatings, in an April 21 report. Things may be worse for corporate sectors that have experienced “severe over-capacity and weakened credit profiles, but have also benefited from implicit government support in the past,” Colquhoun said. “If investors rapidly change their perceptions of government support in these sectors, it could lead to a disorderly deleveraging.”

In February, electrical transformer manufacturer Baoding Tianwei became the first onshore SOE to default on a corporate bond on principal, while in April, two more SOEs missed bond payments and another SOE had trading of its notes suspended. Several private-sector firms have also defaulted on their corporate bonds. These defaults in turn likely contributed to a rash of bond issue cancellations in March and April.

While the overall default rate is small compared with that in developed markets, a rise in default rates or an unanticipated credit crunch managed without a transparent and consistent process could leave lenders “uncertain as to which SOEs will be allowed to default and over the process for resolving creditors’ claims,” Fitch analysts noted. “In this scenario, even government-controlled banks could become risk averse and be unwilling or unable to lend—a feature evident in other government-controlled banking systems in emerging markets.”

- Nicholas Stern, NACM editorial associate

World’s Top Alt Energy Producer Files Chapter 11

Missouri-based SunEdison, the world’s largest corporate renewable energy producer, put rumors of its financial demise to rest Thursday when it officially filed for Chapter 11 bankruptcy protection. The case underscores some of the dangers of overly rapid expansion as well as hedge fund-driven business models in more volatile industries.

SunEdison filed in U.S. Bankruptcy Code for the Southern District of New York, which is widely considered one of the two most debtor-friendly jurisdictions for such proceedings in the country. As noted in the April 14 edition of NACM’s eNews, late 2015 whispers of financial problems evolved into an increasingly loud buzz last month when SunEdison delayed filing its year-end financial numbers (Form10-K) and 4Q2015 earnings information releases.

Aggressive expansion into new global markets, as well as new product lines, pushed SunEdison to the largest market share in the renewable industry. That expansion also invited risk-based problems at levels experienced by few of its competitors. Coming out of the last wave of alternative energy bankruptcies that ramped up early this decade, largely because of domestic producer oversaturation and allegations of Chinese product dumping at artificially low prices, the company’s rapid and bold expansion peaked in 2014 and 2015 and included ventures into several now-struggling “emerging economies.” In recent months, SunEdison’s plans for one corporate takeover fell apart at the last minute because of investor allegations of misrepresentation of its financial health. In addition, its stock price fell by about 98% in less than a year.

- Brian Shappell, CBA, CICP, NACM managing editor

Credit Quality of Chinese Industries a Mixed Bag in Short-Term

Amid an ongoing slowing in growth rates, the credit quality of Chinese companies [non-property] may play out in a tale of sector divergence over the next year to a year-and-a-half, with the oil and gas, steel and broader commodities areas struggling and consumer-based areas such as food and beverage, auto and construction racking up gains.

Structural changes in Chinese consumption preferences and distribution will support growth for companies in the Internet and technology sectors, albeit at the expense of traditional retail formats like department stores, said Moody’s Investors Service in its report today on key credit trends for these and other sectors in China.

For food and beverage companies, low raw material prices should support steady profit margins and “provide a buffer against weak revenues and pressure on profitability,” Moody’s analysts said. Automakers benefitting from China’s vehicle-purchase tax cut should experience sales gains in 2016. Slowing construction in the property and metallurgical sectors could be offset by moderate demand from Chinese and overseas infrastructure builds.

Meanwhile, the Chinese steel sector’s profitability will drop from falling production volumes and lower capacity use, as lower input material prices are “no longer sufficient to offset” muted market pricing, Moody’s predicted. Consequently, steelmakers' debt leverage and liquidity risk continue to rise, in turn raising corporate default rates in the sector,” says Lina Choi, a Moody's vice president and senior credit officer.

The bulk chemicals industry will see worsening oversupply, weak demand and lowered prices and profits, Moody’s predicted. Some specialty chemicals producers may, however, benefit from low oil prices.

“In the metals and mining sector, the sharp drop in revenue and earnings has raised leverage for many entities, which Moody's expects will lead them to balance cash preservation with the pursuit of growth opportunities,” the ratings firm said.

- Nicholas Stern, NACM editorial associate

German Exports Expected to Grow in 2017, Despite Global Turmoil

Trade credit insurance firm Euler Hermes anticipates global corporate bankruptcies will rise this year by 2% for the first time in seven years, and exporting giant Germany is no exception with cases expected to increase by a percentage point in 2017.

Still, Euler Hermes analysts expect German exports to grow by some $104 billion by 2017. "Exporters are pressing hard on the gas pedal,” said Ron van het Hof, CEO of Euler Hermes Germany, Austria and Switzerland. “Over the next two years they will even post stronger export growth than China ($96 billion) and gain pole position through this overtaking maneuver.”

Overall, German exporters have stable profit margins, and though world-wide economic turmoil could dampen profit expectations in the near term, payment behavior of German companies remains strong, according to Euler Hermes. For instance, DSO at listed German companies is 56 days compared to the global average of 67 days.

"It is interesting that payment delays fell last year, but non-payments were up 3%," said Ludovic Subran, chief economist at Euler Hermes."This, combined with high competitive pressure and below-average margins, confirms the trend reversal we predicted, with insolvencies stagnating once again in Germany in 2016 followed by a slight rise in 2017."

Germany’s largest trading partner, the United States, is expected to see a 3% rise in insolvencies, while its other two-largest trading partners, the U.K. and China, could see a rise in insolvencies of 1% and 20%, respectively.

The picture in emerging markets is also less than sanguine. Bankruptcies in Brazil could rise as high as 22%, while Colombia and Chile could see insolvencies grow by 13% and 11% over the next two years, respectively, Euler Hermes said. Asian “supplier countries,” like Hong Kong and Singapore will see 15% more bankruptcy filings, and Australia, South Africa, Turkey, Russia, Greece and Switzerland are also on track for more bankruptcies.

- Nicholas Stern, NACM editorial associate