Credit Scoring and Improved Risk Management

“In today’s economy, we all have to deal with higher risks, greater losses and greater delinquencies,” said Vernon Gerety, Ph.D, VGAdvisors, LLC. “What I’ve been preaching is consistency in the way that you deal with every client, based on the factors that you face, such as the quality of the customer, the amount of information you have on them and how long your relationship has been.”

During the NACM-sponsored teleconference, “Credit Scoring and Improved Risk Management,” Gerety stressed that credit managers must adopt credit scoring and the philosophies behind it, and apply them company-wide. The mantra being that those with the best risk management strategy win. If there is consistency in how customers are evaluated and the language that is used to describe them, a business is then set on a course for greater success. For example, using a risk-rated system to describe customer creditworthiness – a simple A, B, C, D, F scale – is a launching pad for better portfolio management and cross-functional communication.

“What I’m suggesting is that no matter how you underwrite, your business would operate more effectively, from a strategic as well as operational perspective, if you designed a risk rating system to evaluate your customers,” said Gerety. “A nice thing about a risk rating is that it’s a tool, whether you are using credit scoring or not, that allows you to say, we consider this an ‘A’ credit and then it becomes part of the vernacular of how you talk about customers throughout your entire organization. It allows you to communicate more effectively with some non-credit type people, specifically sales and senior management.”

That allows the credit department to easily explain to senior management and sales why they chose not to extend credit to a particular customer and it validates their efforts. They can report to management that they reduced the number of “F” credits from the company’s customer portfolio and increased the number of “As,” decreasing risk and the possibility of defaults, while easily quantifying improvement.

In terms of credit scoring, there are plenty of companies that provide solutions, including NACM affiliates. But in reality, credit scoring programs are just an automated extension of a credit manager’s decision making process. It should be viewed as a partner to the credit function.

“Technology is not the solution, technology is the enabler,” explained Gerety. “What technology has provided to us is a wealth of data. And our job as credit professionals is to turn data into information. What we do with that information is we make decisions; we use our knowledge and expertise and experience. Credit scoring fits right into that, but what credit scoring does is, instead of a manual perspective it does it from an automated perspective. And there are some advantages and disadvantages to that.”

What technology also provides the credit department is consistency. Scoring utilizes past experiences to statistically predict future events. Statistical models can provide a superior risk tool by picking the most significant predictors of risk from hundreds of possibilities and determining the relevant importance of each predictive variable minus the hours of manual labor it would take a credit manager to conduct the research.

No matter what method companies use to determine the creditworthiness of new clients, Gerety said the most important aspect is keeping an eye on how customers are paying that company. A customer may have a great Dun & Bradstreet number and spotless financials, but once they are a client, credit departments need to continually inspect payment behavior. This can be a process of blending not only the internal data that has been collected, but also external data collected culled from outside sources to get a broader view of that client. If a customer is slow to pay a particular company but is paying everyone else on time, then that customer is either viewing that vendor as inferior or is using that vendor as a bank. It also means that the cash is out there, it just needs to be collected.

“You need to continually refresh your evaluation of your customers based on how you are being paid and going outside to see what changes may have occurred via other data sources,” said Gerety.

In the current recessionary and emerging post-recessionary period, credit scoring has an important role as an application to trigger early-stage collections and to prioritize collections.

Professionals interested in hearing the replay of Gerety’s presentation can contact Tracey Flaesch at (410) 740-5560 or at

Matthew Carr, NACM staff writer. Follow us on Twitter @NACM_National

How Much Are Economic Indicators Worth?

Numbers have told the story of the global recession, with monthly, quarterly and annual indicators characterizing all of the economy's ebbs and flows. Analysts, regulators and academics rely on these figures to make predictions and policy, but for financial professionals in the trenches, the real-world worth of numbers and growth percentages is notably subdued. In NACM's most recent monthly survey, respondents noted that economic indicators do have an effect on their company's policies but that it's a muted one at best.

When asked "How much do economic indicators and statistics influence your company's policies and procedures?," the largest percentage of participants (47%) answered "somewhat." The next most popular answer, garnering 28% of responses, was "not very much," followed by "very much" with 16% of responses. Six percent or participants said "not at all" and only 3% didn't know how much these indicators affected their companies.

Certain policies were more susceptible to change based on economic figures than other policies, most notably salaries. "We were just told that our company has been put on a salary freeze for 2009 and possibly for 2010 due to the economic crisis," said one respondent. Others noted that economic indicators play a role but that it's only one part of their company's considerations. "Economic indicators are used as one of the factors we consider when determining acceptable risk levels," said one participant. "They are used as a gauge to indicate how we think risk levels will be impacted by our customers' financial condition and what direction their markets are expected to take."

Some respondents noted that the breadth of some popular economic indicators makes them less useful and that more specific figures have a greater sway in their company's behavior. "The indicators that we use are not the general newsworthy reports, but those tied to maritime shipping and cost statistics for international shipping. These indicators will impact where we need to watch expenses and gear up to take care of our shippers," said one participant. "We follow government economic indicators and stats but our focus is with our industry's indicators and stats," said another. Opinions on larger, general economic indicators were varied though, with some hailing them as an invaluable resource ("No business no matter its size, scope, industry can truly succeed without following economic trends, developments, and statistics.") and others deriding them as an oversimplified and often sensational account of what's really happening ("If you let yourself be guided by the media's opinion of the economy you will be out of business in no time."). These respondents often noted that they relied on other sources for their company's strategies. "My marketplace and discussions with clients are a much better indicator," said one respondent.

NACM's September survey deals with how you communicate with your customers and will be live on NACM's website ( shortly.

Jacob Barron, NACM staff writer

Government Spends Record High on Small Business Contracts, Still Falls Short

Fiscal year 2008 was a banner year for small business procurement, as the federal government set a new record for prime contracts to smaller firms. According to the U.S. Small Business Administration's (SBA's) recently released third annual small business procurement scorecard, the sector won a total of $93.3 billion in contracts during the period, which ran from October 1, 2007 to September 30, 2008, marking an almost $10 billion jump from the prior year's figures.

Still, the record-breaking numbers have elicited muted celebration at best.

"This record $93.3 billion in contracts to small businesses is significant, however, across the federal government we are committed to ensuring that the 23% goal is met and even exceeded going forward," said SBA Administrator Karen Mills. "Especially during these tough economic times, federal contracts for small businesses can be just the opportunity they need to continue to grow and create jobs. At the same time, the federal government gets access to some of the most innovative and best products and services." Despite the broken record and the major increase in the contracting dollars reaching small businesses, the federal government as a whole still fell short of its statutory goal of 23% of all contracting dollars reserved for smaller firms. As much money as $93.3 billion is, it only amounts to 21.5% of all federal contracting dollars spent in FY2008.

Some agencies are more to blame than others. The SBA's scorecard grades on the completion of five different contracting goals for federal agencies, and for a five-out-of-five rating an agency needs to spend a certain percentage of its contracting dollars on certain specific sectors: 23% on small businesses as a whole, 5% on small disadvantaged businesses, 5% on women-owned businesses, 3% on service-disabled veteran-owned businesses and 3% on small businesses in HUBZones (historically underutilized business zones). Only one agency, the General Services Administration (GSA), met or surpassed all five goals, while large agencies like the Department of Defense (DOD), the Department of Justice (DOJ), the Social Security Administration (SSA) and the State Department met or surpassed only one of the five goals. Two agencies, the Office of Personnel Management (OPM) and the U.S. Agency for International Development (USAID), managed to meet none of the five goals.

"President Obama has made a commitment to ensuring that small businesses have greater access to federal contracting opportunities and it is a commitment shared across this Administration," said Mills. "We have already begun taking aggressive steps to connect small businesses with contracting opportunities, as well as increase our outreach to federal agency procurement officers to make sure they get the information and tools they need to help them connect with these good, innovative small companies."

In addition to being below the statutory limit, questions have been raised about whether or not the money included in the SBA's figures even went to small businesses at all, potentially flowing instead to much larger firms. "According to information from the Federal Procurement Data System - Next Generation (FPDS-NG), of the 10 largest recipients of federal small business contracts, 85.4% of the contracts went to large businesses," said the American Small Business League (ASBL) in a response to the figures. "Eight of the top 10 recipients of small business contracts were large businesses."

The ASBL has long criticized the White House, both former President George Bush Jr.'s and current president Barack Obama's, for its inaction on the issue of large companies getting small business contracts. According to the association, the top recipient of federal small business contracts in FY2008 was Textron, a Fortune 500 firm with 83,000 employees and over $25 billion in annual revenue that allegedly received $775.7 million in small business money during the period.

Other firms that the ASBL claims were included in the SBA's $93.3 billion figure were Lockheed Martin, Boeing, General Electric, Booz Allen Hamilton and Northrup Grumman.

A full copy of the SBA's scorecard can be found at the agency's website (, while the ASBL's rebuttal can be found at

Jacob Barron, NACM staff writer

FTC Taken to Court Over “Red Flags” Rule

The broad brush oversight of the Federal Trade Commission’s (FTC) “Red Flags” Rule has sparked plenty of complaint and confusion. As the deadline for mandatory compliance has repeatedly been delayed, the pushback from industries has gained momentum. There have been a growing number of protests that the agency has overstepped its authority by trying to enforce the “Red Flags” regulation on a wide spectrum of businesses. Now, a prominent association is taking the fight to court to win exemption from the FTC’s Rule.

The American Bar Association (ABA) on Thursday asked that the U.S. District Court for the District of Columbia bar the FTC from implementing the “Red Flags” Rule on law practitioners. The Rule is designed to force companies to detect, mitigate and respond to instances of attempted fraud perpetrated by identity thieves. The businesses required to comply have to have a written “Red Flags” program addressing these tenets that must be approved by the company’s senior management before the compliance deadline, which right now is November 1, 2009. The Rule divides entities into two sections, “financial institutions” and “creditors.” The ABA is miffed because lawyers have been filed under the heading of “creditors” in the “Red Flags” Rule, which, to the association, is a dramatic failure in judgment.

“Congress did not intend to cover lawyers under the Rule,” said ABA President Carolyn Lamm. “The FTC’s decision to apply the Rule to lawyers is contrary to an unbroken history of state regulation of lawyers and intrudes on traditional state responsibilities. The Rule requires extensive reporting and bureaucratic compliance that would unnecessarily increase the cost of legal services.”

The FTC uses the definition for “creditor” that is outlined in the Fair and Accurate Credit Transaction Act of 2003 (FACTA), which is the definition adopted from the Equal Credit Opportunity Act (ECOA). In those pieces of legislation, a “creditor” is “any person who regularly extends, renews, or continues credit; any person who regularly arranges for the extension, renewal, or continuation of credit; or any assignee of an original creditor who participates in the decision to extend, renew, or continue credit.” NACM members should be familiar with this definition as it is the reason business and commercial creditors fall under the governance of the “Red Flags” Rule.

Lawyers were never included in the original versions of the Rule and in subsequent releases until the April 30, 2009 deadline extension. During the previous delays in mandatory compliance, the FTC had pointed towards ongoing confusion and continuing interpretations of the scope of FACTA as the reasons for compliance delays. In April of this year, the FTC published a three-page document, “FTC Extended Enforcement Policy: Identity Theft Red Flags Rule, 16 CFR 681.1,” on its website and to the ABA’s surprise, lawyers were listed as one of the businesses that must develop policies under the “Red Flags” Rule. The reason given was:

In FACTA, Congress imported the definition of creditor from the [ECOA] for purposes of the [FCRA]. This definition covers all entities that regularly permit deferred payments for goods or services. The definition thus has a broad scope and may include entities that have not in the past considered themselves to be creditors. For example, creditors under the ECOA include professionals, such as lawyers or health care providers, who bill their clients after services are rendered. Similarly, a retailer or service provider that, on a regular basis, allows its customers to make purchases or obtain services and then bills them for payment at the end of each month would be a creditor under the ECOA.

ABA charges that the agency is completely ignoring the aforementioned ECOA definition of “creditor” and further argues that simply because lawyers provide a service in advance of billing doesn’t make them regular extenders of credit.

The ABA complains that applying the “Red Flags” Rule to lawyers is “arbitrary, capricious and contrary to the law.” It also asserts that the FTC has failed “to articulate, among other things: a rational connection between the practice of law and identity theft; an explanation of how the manner in which lawyers bill their clients can be considered an extension of credit under FACTA; or any legally supportable basis for application of the ‘Red Flags’ Rule to lawyers engaged in the practice of law.”

From ABA’s perspective, the FTC’s “Red Flag” Rules threatens the independence of the lawyer profession by subjecting it to “unauthorized” and “unjustified” federal regulation. The association is asking that the Rule be deemed unlawful and void in its application to lawyers, claiming it will impose significant burdens upon them, particularly sole practitioners and those in small firms.

Nearly 30 state and local bar associations have officially joined the ABA’s ranks in opposition and the association plans to appeal to Congress that the regulation should not apply to lawyers.

Since the Rule went into effect in January 2008, the deadline for mandatory compliance has been pushed back multiple times, with the current deadline looming of November 1, 2009. The FTC has stepped up its business education efforts to ensure all industries affected are aware of their responsibilities and the agency told NACM earlier this week that it is working on additional guidance materials that are planned to be published before October.

Matthew Carr, NACM staff writer. Follow us on Twitter@NACM_National

NACM July Survey Follow Up Shows Adjustments Affect Very Small Percentage of Invoices

NACM's July Survey, which asked "What percentage of your company's invoices need to be adjusted due to disputes, corrections or other issues?," showed that adjustments were manageable, but constant sources of frustration for credit professionals. A large majority of respondents (72%) noted that only 0-10% of their company's invoices needed to be adjusted due to disputes and other issues, but in a follow-up survey, it was revealed that the real percentage of invoices adjusted was even lower than "0-10%" suggests.

The second survey was only sent to the 72% of respondents who answered "0-10%" in the initial July survey, which amounted to around 1700 people. According to the results of the follow-up, 31% of these respondents noted that, in reality, less than 1% of their company's invoices required adjustment. Fifteen percent of participants said their company adjusts only 1-1.9% of their invoices, 11% said their company adjusts only 2-2.9% of invoices and 13% said their company adjusts only 3-3.9% of their invoices.

Participants in the follow-up survey were also asked how many invoices their company issues annually. The most popular answer was "10,001-25,000," which garnered 17% of all responses, followed by "5,001-10,000" and "25,001-50,000" which received 12% and 11% respectively. There was little deviance among different classes of invoices; whether a respondent's company issued close to a thousand invoices a year or close to a million, the better part of them noted that less than 1% of their invoices required adjustment. Still, for larger companies that invoice more than 100,000, 500,000 or even 1 million invoices a year, having to adjust even less than 1% of them could still be a sizeable problem that impedes the payment process.
Of the different invoice classes, respondents who issued between 500,001 and 1 million per year had the highest percentage of "less than 1%," with nearly half (46%) answering this way.

Jacob Barron, NACM staff writer

Projected Record Deficit Stirs Ire

As the battle over healthcare continues to heat up, the economic picture for the future of the United States has again come into focus. The Congressional Budget Office (CBO) and the White House both reported earlier this week that the U.S.’ deficit will balloon to a record $1.6 trillion this year, representing 11.2% of gross domestic product (GDP). For opponents to President Barrack Obama’s healthcare plan, the news provided a red flag against increasing federal spending.

Though NACM’s Credit Managers’ Index (CMI) showed that the U.S. economy hit bottom in March and other analyses have agreed with a similar timeframe, the CBO anticipates recovery will be “slow and tentative.” The predictions are for 1.6% annual growth as 2009 matures, with GDP growth of 2.8% from the fourth quarter of 2009 to the first quarter of 2010. The CBO predicts a slow build up to 3.8% GDP growth by 2011 and that the average annual growth seen in 2012 and 2013 will be around 4.5%.

As the economy recovers, and if all policies remain as they are today, the agency estimates the nation’s deficit would shrink, but remain above $500 billion per year, more than 3% of GDP, for the duration of 2010 until 2019. Public debt over that time frame would increase from 54% of GDP to 68% of GDP by 2019. That would be double the low seen in 2001 of 33%. But the problem looming is that healthcare costs are expected to increase rapidly if something isn’t done. Last year, outlays for Social Security, Medicare and Medicaid combined for 9% of GDP. Over the next decade, that percentage is expected to hit 12% of GDP by 2019 and total 17% of GDP by 2035. If that is allowed to happen, the CBO warns that it would pose a threat to U.S. economic stability because federal debt and the deficit would grow substantially.

For the ten year period from 2009 to 2019, CBO’s baseline combined deficit projection is roughly $7.1 trillion, $2.7 trillion more than the estimate it released in March. In contrast, the White House’s Office of Management and Budget (OMB) predicts a combined deficit of $9.1 trillion during that same ten year period. CBO’s Director Douglas Elmendorf calls a comparison of the two projections “apples-to-oranges.” The OMB assumes Obama’s proposed policies will be approved.

“President Obama inherited the major causes of the deficit -- including debt-financed tax cuts and an economic crisis from the last administration -- but he has accepted the responsibility to leave our nation on sounder fiscal footing than he found it,” said House Majority Leader Steny Hoyer (D-MD). “The Recovery Act, even while it added to the short-term deficit, staved off catastrophe and is bringing this recession to an end.”

Hoyer said that the mid-session reviews of the budget are clear signals to Congress and the White House that efforts must be made to bring the deficit under control. He added that, “because the cost of health care is the single biggest contributor to our deficit, it is imperative that we pass a health care reform bill that brings peace of mind to middle-class Americans, while reducing costs.”

Not unexpected, the other side of the aisle saw a different picture. Republicans have rallied around the White House’s $9 trillion figure and see the deficit projection as a clear sign that the nation’s fiscal health is on a slippery slope.

“The Obama administration’s announcement that the 10-year federal deficit has risen to $9 trillion is staggering,” stated Senator Lamar Alexander (R-TN). “We’re on track to double the national debt in five years and triple it in 10 years. This is a flashing red light for any health care proposal that doesn’t reduce the cost of health care for Americans and their government.”
Senator Sam Brownback (R-KS) called the amounts of money being discussed simply “shocking.” "If the Administration stays this course, the gross federal debt will more than double to $24.5 trillion, more than 107% of the projected size of the economy,” claimed Brownback. “Particularly troubling is that these deficits will come with income taxes rising to one of the highest levels on record as a percentage of GDP."
With the deficit debate developing, adding fuel and fodder to the healthcare discussion, the Department of Commerce’s Bureau of Economic Analysis (BEA) released its complete analysis of economic growth. The agency says that real GDP edged down 1% in the second quarter of 2009, a better performance than the expected 1.5% drop and a much smaller decline than the 6.4% seen in the first quarter.

And despite grumblings about the breadth of the Recovery Act, the CBO, OMB and others have all agreed that the plan averted even worse disaster.

“The economy’s better than expected performance in the second quarter suggests that it is beginning to stabilize,” said Commerce Under Secretary for Economic Affairs Rebecca Blank. “The Recovery Act and other economic initiatives have put the brakes on the worst economic downturn in generations – but we are not out of the woods yet.”
Matthew Carr, NACM staff writer. Follow us on Twitter @NACM_National

Reader’s Digest Files for Chapter 11

Reader’s Digest Association, Inc. (RDA) filed today for bankruptcy restructuring under a voluntary pre-arranged Chapter 11. RDA is best known as the publisher of Reader’s Digest, the world’s largest circulated magazine. Despite the global recession and the announcement, the company says that operationally it remains strong and that revenue declines for this year are expected be in the “low single digits.”

RDA announced that it has filed a number of motions to ensure that the filing does not adversely affect day-to-day operations for its employees, customers or suppliers. The company is seeking - and fully expects to receive - approval for a variety of first-day motions, including requests to honor its customer obligations. Suppliers and vendors who provide goods and services to the company on or after August 24, 2009, will continue to be paid in the ordinary course.

RDA will be aided considerably in the restructuring process by reaching in principle a debt-for-equity agreement last week with a vast majority of its senior secured lenders which will reduce its debt burden 75% from $2.2 billion to $550 million. Senior lenders representing 80% of the dollar value of outstanding bank debt and 70% of investing institutions agreed to the deal. The bankruptcy filing will bind the remaining lenders.

Pre-packaged Chapter 11s have emerged as a symptom of the current bankruptcy system. The recent case of Source Interlink was a prime example of the success pre-arranged plans can have, as the company filed and emerged from bankruptcy in a little over 30 days by reaching agreements with lenders. On the other side is Charter Communications, which filed for bankruptcy in April with what it thought was a pre-arranged plan, only to be met with objections from lenders and the company was filing amended plans in court at the end of July.

Mary Berner, president and CEO, RDA, has heaped gratitude upon the company’s senior secured lenders for taking the exchange of a substantial percentage of the $1.6 billion in senior secured debt for equity that transfers the ownership of the company to the senior lender group. This means that Ripplewood Holdings LLC, which purchased RDA for $2.8 billion in 2007 and has been trying to control costs ever since, will relinquish its stake in the company. All members of the Board of Directors that have served since the 2007 acquisition have resigned, with the exception of Berner. The agreement with the senior secured lenders also established $150 million in new money Debtor-in-Possession (DIP) financing, which the company believes will provide sufficient liquidity and the necessary capital to emerge from bankruptcy. There is also the establishment of substantive terms for the $550 million in debt that will stay on the company’s balance sheet. RDA’s pro form capital structure will include the $150 million exit facility; $300 million in a second priority U.S. term loan and approximately another $100 million (USD) in a current Euro Term Loan, both part of the senior secured lenders agreement; and a single class of common stock.

RDA’s international operations will not be affected by the Chapter 11 filing.

In conjunction with the bankruptcy announcement last week, RDA chose not to make a $27 million interest payment on its 9% Senior Subordinated Notes due 2017. Instead, the company is utilizing a 30-day grace period available to it as discussions are ongoing with the lender group and stakeholders in the push for a consensual de-leveraging transaction. RDA stressed that choosing not to make the payment does not constitute default, which would allow for the acceleration of the Senior Subordinated Notes or any other debt.

A person familiar with the case said that the key obstacle that remains for RDA is negotiating with the lenders of $600 million in junior subordinated debt. If the company has any hope of succeeding with a pre-packaged Chapter 11, it needs two-thirds of the dollar amount and half the number of the lending group to agree to a plan and the offer made to these lenders has been mainly a buy-in.
Berner said today, “We look forward to emerging with a restructured balance sheet and as a financially stronger organization that is positioned to pursue our growth and transformational initiatives.”

Reader’s Digest, like the majority of print media outlets, has taken a beating from declining advertising dollars and a shrinking readership base. Earlier this year, the magazine lowered the number of issues released per year from 12 to 10, and lowered its circulation guarantee with advertisers from 8 million to 5.5 million. In its 10-Q filings with the Securities and Exchange Commission (SEC) for the second quarter, RDA reported revenues were down from $575 million in the first three months of 2008 to $479 million in 2009, with operating losses of $535.9 million and net losses for the nine months ending March 31st 2009 of $652.6 million. The company also reduced the value of its trademark on the name Reader’s Digest from $621 million in 2008 to $288.7 million this year.

Matthew Carr, NACM staff writer. Follow us on Twitter @NACM_National

Strengthening the Credit and Sales Relationship

There is no shortage of laments about the relationship between the credit and sales functions. Each views the other as a necessary evil: integral to a business’ function but populated with impediments to success. Though the path is forged by miles walked in another person’s shoes, bridging that gap is essential to a company’s health. Having a lower profile, it is the burden of the credit function to make those first steps.

Davy Tyburski, founder,, cites work done by the Credit Research Foundation (CRF) that asserts that credit professionals must take a leadership role in process improvement initiatives, as well as in creating seamless processes that reduce errors, delays and rework. By working with sales to identify common mistakes and hiccups, the credit function can establish itself as a herald for the common mantra of the modern business world that companies must evolve into complete customer service-oriented organizations.

“Those words are thrown out a lot: ‘We need to be customer driven;’ ‘We need to listen to our customers,’” commented Tyburski during his NACM-sponsored teleconference “Strengthening Your Credit and Sales Relationship.” “But very few business credit and collection professionals know how to do that. And even if they know how to do it, it’s sales that can take the appropriate actions to make that dream a reality.”

The credit and collections department must face the fact that corporate executives don’t completely understand business credit. This is made apparent in the two questions Tyburski asks when he personally works with companies to improve cross-functional relationships: what the perceived value of business credit and sales is. On a scale of one to ten, company executives will rate the value of the credit department as 7.5, which is a vast underestimate of importance. The average perceived value of the sales team is 9.25.

“It doesn’t matter where you are at today,” stated Tyburski. “What matters is what are you doing from today forward to increase your perceived value within your organization?”

Sales is on the frontlines delivering revenue to a company, while business credit is on the backend delivering cash. The problem often is that the sales staff fails to realize the frustrations and difficulties that arise in collections when they make rash decision about low-quality accounts. The impact is felt directly on a company’s bottom line. Delinquent accounts bleed away profits and the longer the account remains in arrears, the less likely a company will see that money. After 60 days delinquent, more than 15% of accounts will go completely uncollected. After 90 days, the percentage rises to over 27%. At six months, over 43% of delinquent accounts will never be collected upon. So, that credit and sales relationship must be improved to cut back days sales outstanding (DSO).

Tyburski recommends that credit managers zero in on three relationship principles between the sales and credit teams: respect, appreciation and communication.

Credit departments must respect the time of sales staff. For sales people time really is money. There may be just 10 hours a day for them to try and sell. But, in many organizations that Tyburski has worked with, sales ends up serving as the middle man between credit and the accounts payable person, spending as much as 25-30% of their time on what he deemed as “administrative-type duties.” That could be researching problem invoices, sitting down at a customer’s location making copies of invoices and then getting those invoice copies to credit. In this type of situation, the credit department needs be proactive and to think of ways on how to provide sales people with more time to sell.

Another way credit can help eliminate needless mistakes and confusion, as well as wasted hours, is to create a sales guide to business credit.

“Here’s the secret about sales people: we don’t really like a lot of text. We like pictures. We like graphs. We like flow charts,” said Tyburski. “If you can make it in color, that’s even better.” He suggested making the guide 25 pages or less so that the sales people can carry it with them in their sales bag.

Guide should be full of flow charts and ideas that can expedite the application process. For example, if a credit manager is noticing that whenever credit applications are coming in from the sales team or the customer Line 7 is often not complete, this is something to point out in the guide. Common issues and occurrences are what the credit team wants to put in the guide’s pages, informing the sales people that this is something they want to be careful about because the problems cause delays in the processing of the credit application, delays in company revenue and ultimately a delay in the salesperson receiving their commission.

Credit can also sit in on sales calls, make joint customer visits and have credit members present at sales meetings to better improve the relationship and understanding between the two functions, because as Tyburski says, “You will not hear me until you know me.”

Matthew Carr, NACM staff writer. Follow us on Twitter @NACM_National

Obama Moves to Increase Small Business Access to Government Contracts

While the health care debate has effectively drowned out discussion of any and all other political issues currently facing the U.S., President Barack Obama has quietly found the time to advance his other campaign promises, most recently launching a new initiative to increase small and minority-owned business access to government contracts. "In order for t he Federal Government to better meet or exceed the goal of 23% of prime contracts for small businesses, Vice President [Joe] Biden and I have tasked Small Business Administrator Karen Mills and Commerce Secretary Gary Locke with leading a federal government-wide initiative to increase outreach," said Obama. "Over the course of the next 90 days agency officials will take an important step forward by holding or participating in more than 200 events focused on sharing information on government contracting opportunities."

In addition to the government officials' attendance at numerous procurement events, Locke and Mills were also charged with expanding their outreach to fellow contracting officials, passing along best practices and education to help agencies reach their contracting goals and promote small business procurement in remarks and discussions with business groups nationwide. "It has been a priority from day one of this administration to ensure that small and minority-owned businesses are aware of and have access to federal contracts and funding opportunities," said Locke. "Over the past 40 years, minority-owned businesses have grown from 300,000 to nearly 4 million today. Their success and the success of small American businesses are vital to our economic recovery."

Included in the contracting opportunities that the administration will begin promoting to small businesses are those that fall within the broad infrastructural investment initiatives in the American Recovery and Reinvestment Act (ARRA). The ARRA also provided an increase in funding for the Small Business Administration's (SBA's) microloan program, piling an addition $50 million for loans and $24 million for technical assistance onto the program's budget in the hope of increasing small firm access to capital. "Government contracts can play a key role in helping small businesses turn the corner in terms of expansion and job creation," Mills said. "But make no mistake, the benefits the government receives are equally as impressive-working with small businesses allows the federal government to work with some of the most innovative companies in America-with a direct line to the CEO."

The initiative drew cheers from Senate Committee on Small Business and Entrepreneurship Chair Mary Landrieu (D-LA). "The announcement today that the Obama Administration will follow through with commitments to increase federal contracting opportunities to small businesses, including minority-owned and veteran-owned businesses, is a step in the right direction. The Federal Government is the largest single purchaser of goods and services in the world. Small businesses are due at least 23% of all contracts awarded, and this Administration's effort to ensure they are not left out of the process demonstrates their commitment to small business growth throughout the country."

Small business owners looking for more information on existing contracting opportunities can visit the administration's website at Commerce and SBA officials are also available to answer questions in local offices across the country and can be found on the agencies' websites, and

Jacob Barron, NACM staff writer

Bankers Caution IASB, FASB On Speedy Accounting Standard Setting

A recent white paper released by the American Bankers Association (ABA) has raised concerns about the approach the International Accounting Standards Board (IASB) and its U.S.-based partner, the Financial Accounting Standards Board (FASB), are taking toward setting new global accounting standards related to financial instruments. The ABA paper also urges the two boards to remain diligent despite the urgency of the now waning global financial crisis. "What the accounting boards are discussing now would be the biggest accounting change we've ever seen," said Donna Fisher, ABA senior vice president of tax, accounting and financial management. "We are deeply concerned that the shortcuts being taken will result in flawed or inconsistent rules."

The ABA raised concerns with the IASB's scheduled timeline for completion, which some fear would not allow U.S. companies to get a word in when it comes to the proposal and public comment stages of standard setting. Recent proposals to expand mark-to-market, also known as "fair value" accounting, in financial statements were also of concern to the ABA, which has supported mark-to-market accounting for actively traded assets, while opposing it for most of the more traditional loans in which banks traffic. "Given the role that mark-to-market has played in exacerbating the current economic crisis, it is hard to understand the rationale for expanding it at this time," said Fisher. "Mark-to-market accounting lacks a sufficient level of reliability, which the current market has demonstrated."

Still, while the white paper took aim at some of the board's actions and proposals, it agreed with the IASB and FASB's long-term overall goal of international accounting standard convergence. "If the IASB finalizes its rule on accounting for loans and debt securities prior to the FASB finalizing its rule, FASB will have to adopt the IASB's rules or adopt a different rule which would result in divergence between U.S. generally accepted accounting principles (GAAP) and international rules," said the white paper. "The goal should be improving the current accounting rules that are in need of repair within a time frame that provides for due process and strives for international convergence."

Earlier this month, the ABA sent a document to the FASB and IASB offering its guidance on developing a new accounting model for loan and debt securities. Full copies of the white paper and the ABA's communications with the IASB and FASB can be found on the association's website at

Jacob Barron, NACM staff writer

UPDATED: Reader’s Digest Announces Bankruptcy Plan

Earlier this week, Reader’s Digest Association, Inc. (RDA) announced that it will seek bankruptcy restructuring under a voluntary pre-arranged Chapter 11. RDA is of course best known as the publisher of Reader’s Digest, the world’s largest circulated magazine. Despite the global recession and the announcement, the company says that operationally it remains strong and that revenue declines for this year are expected be in the “low single digits.”

RDA will be aided considerably in the restructuring process by reaching in principle a debt-for-equity agreement with a vast majority of its senior secured lenders which will reduce its debt burden 75% from $2.2 billion to $550 million. So far, senior lenders representing 80% of the dollar value of outstanding bank debt and 70% of investing institutions have agreed to the deal. A bankruptcy filing would bind the remaining lenders.

“This agreement in principle with our lenders follows months of intensive strategic review of our balance sheet issues to financially strengthen the company,” said Mary Berner, president and CEO, RDA. She touted, “The company has strong brands and products, a leadership position in many markets around the world and a solid plan for the future. Restructuring our debt will enable us to have the financial flexibility to move ahead with our growth and transformational initiatives.”

Pre-packaged Chapter 11s have emerged as a symptom of the current bankruptcy system. The recent case of Source Interlink was a prime example of the success pre-arranged plans can have, as the company filed and emerged from bankruptcy in a little over 30 days by reaching agreements with lenders. On the other side is Charter Communications, which filed for bankruptcy in April with what it thought was a pre-arranged plan, only to be met with objections from lenders and the company was filing amended plans in court at the end of July.

Berner heaped gratitude upon RDA’s senior secured lenders for being willing to exchange a substantial percentage of the $1.6 billion in senior secured debt for equity that transfers the ownership of the company to the senior lender group. This means that Ripplewood Holdings LLC, which purchased RDA for $2.8 billion in 2007 and has been trying to control costs ever since, will relinquish its stake in the company. All members of the Board of Directors that have served since the 2007 acquisition have resigned, with the exception of Berner, who will be compensated $125,000 per month as long as she is employed with RDA during the restructuring process and will receive a $2.2 million severance package if not offered employment upon the company’s exit from bankruptcy. The agreement with the senior secured lenders also includes a commitment from members, led by JP Morgan, to provide $150 million in new money Debtor-in-Possession (DIP) financing, which the company believes will provide sufficient liquidity and the necessary capital to emerge from bankruptcy. There is also the establishment of substantive terms for the $550 million in debt that will stay on the company’s balance sheet. RDA’s pro form capital structure will include the $150 million exit facility; $300 million in a second priority U.S. term loan and approximately another $100 million (USD) in a current Euro Term Loan, both part of the senior secured lenders agreement; and a single class of common stock.

RDA’s international operations will not be affected by the Chapter 11 process based on their continuing operations and access to DIP financing.

In conjunction with the bankruptcy announcement, RDA said that it will be electing not to make a $27 million interest payment due earlier this week on its 9% Senior Subordinated Notes due 2017. Instead, as it secures the best path to move forward, the company will utilize a 30-day grace period available to it as discussions are ongoing with the lender group and stakeholders in the push for a consensual de-leveraging transaction. RDA stresses that choosing not to make the payment does not constitute default, which would allow for the acceleration of the Senior Subordinated Notes or any other debt.

A person familiar with the case said that the key obstacle that remains for RDA is negotiating with the lenders of its junior subordinated debt. If the company has any hope of succeeding with a pre-packaged Chapter 11, it needs two-thirds of the dollar amount and half the number of the lending group to agree to a plan and the offer made to these lenders has been mainly a buy-in.
The court filing of the company’s Chapter 11 plan is expected to take place within the next 30 days, before the grace period ends.

Reader’s Digest, like the majority of print media outlets, has taken a beating from declining advertising dollars and a shrinking readership base. Earlier this year, the magazine lowered the number of issues released per year from 12 to 10, and lowered its circulation guarantee with advertisers from 8 million to 5.5 million. In its 10-Q filings with the Securities and Exchange Commission (SEC) for the second quarter, RDA reported revenues were down from $575 million in the first three months of 2008 to $479 million in 2009, with operating losses of $535.9 million and net losses for the nine months ending March 31st 2009 of $652.6 million. The company also reduced the value of its trademark on the name Reader’s Digest from $621 million in 2008 to $288.7 million this year.

RDA continues to calm vendors that business will continue as usual and that the majority of vendors and suppliers will be unaffected. “The company is not going out of business anywhere around the world,” wrote Albert Perruzza, senior vice president, RDA Global Operations, in a letter to the company’s vendors.

Matthew Carr, NACM staff writer. Follow us on Twitter @NACM_National

Despite Declines, Housing Numbers Offer Silver Lining

The housing sector plays the thorn in the lion’s paw of the U.S. economy. After two consecutive months of increases, the residential construction numbers released by the U.S. Census Bureau and the Department of Housing and Urban Development (HUD) showed that building permits for July had receded 1.8% from June to 560,000. After the rapid fall during the final six months of 2008, the most recent numbers are 39.4% lower than the 924,000 permits estimated in July of last year.

Housing starts were also down from June, easing lower 1% from 587,000 to 581,000 in July. And of course, providing a barometer for the economic devastation that has taken place over the past 12 months, those figures were more than 37% below the 933,000 starts seen in July 2008. On a positive note, single-family housing starts were up 1.7% to 490,000, the fifth straight month with an increase. But single-family home completions fell 4.1% to 491,000, continuing its teeter-tottering trend.

Even though the July figures showed declines, they are still on the top side of the bottom hit in April.

“Monthly data for housing activity are volatile, but today’s nominal decline stands as a reminder that the economy is still fragile,” stated U.S. Secretary of Commerce for Economic Affairs Rebecca Blank. “Looking at the big picture, we are confident that we’ve created the stability necessary to turn things around.”

Sticking toward the cheery side of the numbers, the Commerce Department points out that following the plunge down the backside of the bell curve that took place in the sector between April 2005 and April 2009 where total permits plummeted 78%, total permits have risen 12.4% during the last three months. Total housing starts have also increased more than 21%, after a near-fatal tumble of 78.9% from a peak in January 2006 to the lows seen in April 2009.

Though there may be buds, the roses aren’t yet fully in bloom. During the last 12 months, the construction sector as a whole has lost more than one million positions. The construction industry is trying to cope with an unemployment rate of 18.2%, almost double that of the nation’s average. And according to the Federal Reserve Board, U.S. banks are reporting total real estate loans have set a new record with a delinquency rate of 8.27%, while residential loans have hit a new high-water mark of their own with a delinquency rate of 8.84%, nearly a full percentage point higher than what was seen in the first quarter of this year. Charge-off rates have increased to new peaks as well, with banks reporting total real estate loans in the second quarter hit a charge-off rate of 2.17% and residential real estate loans hit a rate of 2.34%.

Nonetheless, the government and the markets are becoming more optimistic that recovery is well underway. Blank stressed what has become the Commerce Department’s company line over the past week of economic indicator releases, saying, “As we double Recovery Act spending in the second half of the year, and with every new project we start, we are one step closer to getting there.”

Matthew Carr, NACM staff writer. Follow us on Twitter @NACM_National

Climate Change Bill Debate Heats Up

As the National Oceanic and Atmospheric Administration (NOAA) released some provocative numbers about the planet’s temperature last week, the debate over Representatives Henry Waxman (D-CA) and Edward Markey’s (D-MA) “American Clean Energy and Security Act of 2009” (ACESA) climate change legislation continued to heat up.

According to NOAA’s Climatic Data Center, Earth’s ocean surface temperature in July was the warmest on record, 1.06 degrees above the 20th century average of 61.5 degrees, and breaking the previous high set in 1998. In the more than 120 years that the data has been collected, the combined global land and ocean surface temperature for July was the fifth warmest on record.

NOAA said the El Nino effect in the Pacific could be the culprit for some of the impact as related sea-surface temperature anomalies increased for the sixth consecutive month. Still worthy of note is that Arctic sea ice coverage decreased to the third-lowest level recorded and has continued to decrease at a rate of 6.1% per decade since 1979.

This will likely add more fodder for proponents of the Waxman-Markey bill that narrowly passed the House in June and is waiting for Congress to return in September to resume its debate in the Senate. The bill requires a 17% reduction from 2005 levels in greenhouse gas emissions by 2020, striving for an 83% reduction by 2050.

On the other side of the argument is economics. Manufacturers and energy producers are the prime targets of the Waxman-Markey bill as it looks to curb greenhouse gas emissions over the next several decades; the two industries emit the largest amounts of greenhouse gases. These industries in return are rallying that carrying the burden of additional costs placed on them by the bill will ultimately lead to massive job losses, an apt argument as the country stares a 9.4% unemployment rate in the face and is still wobbling toward economic recovery. For example, the American Petroleum Institute (API) claims that as many as 341,000 jobs would be eliminated in Texas alone if the version of the Waxman-Markey bill that passed the House is signed unchanged into law. According to the analysis done by CRA International—the consulting firm API commissioned to conduct the study— the ACES legislation would result in 2 million jobs lost across the United States and result in a 1.3% decline in gross domestic product (GDP) by 2030.

The advocacy group Republicans for Environmental Protection (REP) has lauded the Waxman-Markey bill as a step forward and continues to call for increased bipartisan support to ensure that the bill receives enough votes to clear the Senate hurdle. From REP’s perspective, “winning broader support would require Senate Democrats to make a good-faith effort to engage Republicans” while at the same time require Republicans to contribute credible ideas for crafting a universally applauded version of the bill. The REP has drawn similarities to Ronald Reagan’s battle to protect the ozone layer from emissions in 1987 to President Barack Obama’s environmental/industry stand-off today. The argument of economic impacts was prevalent then as well.

The National Association of Manufacturers (NAM) and the American Council for Capital Formation (ACCF) also released their commissioned study of the Waxman-Markey bill last week that came to similar conclusions as API’s. According to the analysis, by 2030, job losses in the U.S. as the result of the legislation would be between 1.8 million and 2.4 million. It also warned that by 2020, gasoline prices would increase between 8.4%-11.1% and that those percentages would more than double by 2030, with natural gas and electricity prices seeing considerable increases as well. According to the NAM/ACCF study, losses to GDP between 2012 and 2030 would range between $2.2 trillion and $3.1 trillion, while GDP would fall between 1.8-2.4% by 2030 as a result of the Waxman-Markey bill.

The Union of Concerned Scientists (UCS) has lashed out against the NAM study—not the first time the two entities have butt heads— calling the projected costs “grossly overestimated.”

“For example, they inexplicably restrict the amount of wind energy that can come on line each year through 2030 to a level (5,000 megawatts) that was greatly exceeded last year (8,358 megawatts) and will soon be again this year,” said Liz Perera, Washington representative, UCS.

Much like REP, she recommended, “It’s time for the country to work together to resolve this problem rather than trying to confuse the public.”

While the Senators have returned to their respective states to address local issues, as well as hear their constituents’ opinions on the issues of healthcare and the environment, evidence for both sides will continue to mount. ACES eked by the House by a mere seven votes, and though Democrats hold an overwhelming majority in the Senate as well, it does not mean the bill’s future is already written.

Matthew Carr, NACM staff writer. Follow us on Twitter@NACM_National

Bankruptcy Filings Continue to Flood Courts

The destruction caused by the nation’s economic woes is still readily apparent in the U.S. business sector. The Administrative Office of the U.S. Courts has released that business bankruptcy filings hit 55,021 in June, up 63% from the 12-month period ending June 2008. Another sour note is that total business and non-business third quarter filings were 381,073, which is the highest total of any quarter so far this year. It also represents the largest amount of filings for a quarter since December 2005, before the implementation of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA).

For the 12-month period ending June 30, 2009, total bankruptcy cases have increased 35% over last year.

According to the Judiciary’s figures, Chapter 11 bankruptcy filings have increased 91% from the 12-month period ending June 2008. Filings increased from 7,293 to 13,951. Chapter 7 filings have also seen a massive surge, increasing 47% from 615,748 for the 12-month period ending June 2008 to 907,603 for the 12-month period ending June 2009.

The news is also stark for the United States’ 25 million small businesses. According to Equifax Inc., from June 2008 to June 2009, bankruptcy filings for the small business sector has soared upwards 81%. Equifax analyzed its small business database and found that there were 5,712 small business bankruptcies in June last year and that increased to 10,339 this June.

“The data shows that the economic pain is continuing for small businesses across the country,” said Dr. Reza Barazesh, head of North American research for Equifax’s Commercial Information Solutions division. “While it may not be quite as intense in some areas as what we saw earlier this year, we’re still seeing hefty increases in the number of bankruptcies in a lot of major metro areas.”

From Equifax’s analysis, California is the hardest hit state for bankruptcies, being home to ten of the 15 metro areas that had the most commercial bankruptcy filings in June. Los Angeles, the Riverside/San Bernardino area and the Sacramento metro led the nation in small business bankruptcy filings. Equifax unearthed some surprising figures in its analysis, including the Charlotte-Gastonia-Concord metropolitan area of the Carolinas, which didn’t appear in the top 15 in small business bankruptcy filings a year ago, but had surged to the nation’s fourth most in June.

The top five metropolitan areas with the least amount of small business bankruptcy filings were Springfield, MA; Lafayette, LA; Cedar Rapids, IA; Charleston, WV; and Hagerstown-Martinsburg, MD-WV.

Because of the dramatic increase in bankruptcies over the last twenty four months, the Judiciary is facing a deluge in workload. The branch has approached Congress to approve additional judges. At the end of the second quarter, Judge Barbara Lynn, a district court judge in the Northern District of Texas and chair of the Judicial Conference Committee on the Administration of the Bankruptcy System, urged members of the House Judiciary Subcommittee on Commercial and Administrative Law to back the recommendations for additional bankruptcy court judges. The Judicial Conference has previously sought the authorization for 24 additional judgeships in 1999, 36 additional judgeships in 2003, 47 additional judgeships in 2005 and following the enactment of BAPCPA, an additional 24 permanent judgeships.

Matthew Carr, NACM staff writer. Follow us on Twitter @NACM_National

The New Trend of Economic Optimism

At this time last year, as the government ran to the rescue to Fannie Mae and Freddie Mac, as AIG and Citigroup crumbled, the country was mired in economic gloom. The downturn that began in late 2007 had blossomed into a full-blown crisis, with housing prices going down the drain and sub-prime mortgages claiming victims on a massive scale. Every piece of data released was pored over for the bad news. Those days now seem to be falling further behind in the rearview mirror.

Over the last couple days, more evidence has trickled out that brighter days are ahead for the United States, bolstering confidence in the economy. The trade deficit has widened, but the declines in exports and imports have slowed dramatically. In June, wholesale inventories continued to fall for the 10th straight month, but sales ticked upwards for the first time in a year. Consumer spending is still feeling the pressure from job losses and tightened credit conditions, but there are signs of stabilizing. The Federal Reserve Board’s Federal Open Market Committee (FOMC) released that it sees evidence “that economic activity is leveling out” and that conditions in the financial markets have continued to improve over the last several weeks.

But the U.S. isn’t out of the weeds yet.

“Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability,” stated the FOMC.

The Committee added that although the prices for energy and commodities have mostly rebounded recently, the slack in demand will likely keep inflation in check for the time being. As such, the Central Bank will keep the federal funds target rate between 0 and 0.25%.

Discouraging news did come via retail sales, which, after a nearly 1% increase in June, edged lower in July by 0.1%. Though the slip caught most off-guard, the total increase seen during the last three months has been the strongest three-month performance since December 2007.

“Despite the slight decline in retail sales we remain encouraged that the Recovery Act and other economic initiatives have stabilized conditions and help those harmed by the economic crisis,” said U.S. Commerce Secretary Gary Locke, adding that the cash-for-clunkers trade-in program has led to a spark in sales in the automotive industry. “And stimulus dollars boosted disposable income in the first half of this year, signaling a bottoming out of the recession. The road to recovery is long, but with every Recovery dollar we spend and project we start, we are one step closer to getting there.”
The move towards turnaround and perspective is also visible in the labor markets. In July, seasonally adjusted unemployment initial claims saw a slight increase of 4,000 to 558,0000, but, as the Department of Labor reported earlier this month, the unemployment rate in July leveled out at 9.4% from 9.5% in June. There were 247,000 jobs losses last month—not a number to be ignored— though the up side is that the average number of monthly job losses from May to July was 331,000, almost half the average monthly decline of 645,000 seen from November to April.

Even the beef and pork export industry—coming off a record year in 2008 to a brow beating this year because of the global downturn—is seeing the positive. The U.S. Meat Export Federation (USMEF) released that through the first half of the year, it looks like 2009 will wind up as the second-best year for U.S. pork exports. The fears of H1N1 hammered pork exports as more than a dozen countries instituted bans, but so far, pork and pork variety meat exports have topped $2 billion.

“The H1N1 influenza virus has been an important factor for U.S. pork exports,” said USMEF Chairman Jon Caspers. “We have had market access issues in two of our top six export markets [China and Russia], which makes it all the more important to maintain a strong presence in our other key markets.”

And that lock out of major markets has been considerable. Compared to the first six months of 2008, pork exports to China are down 52% in volume to 267.7 million pounds and 54% in value to $203 million, while the volume of exports to Russia have fallen 35% in volume to 134 million pounds and 37% in value to $123.9 million. The other side of the coin is that pork exports to Mexico—the No. 1 consumer of U.S. pork and pork variety meats—is up 52% in volume and 37% in value to $369.6 million.

U.S. beef exports have been on a slightly better track than pork, declining 2% in volume and 6% in value compared to the first six months of last year. But for the month, they are down 13% in volume and 16% in terms of value.

“In challenging economic conditions like these, there is no one silver bullet that will drive exports,” said USMEF President and CEO Philip Seng , adding that USMEF has employed a number of educational and marketing programs to maximize U.S. potential in foreign markets.

Matthew Carr, NACM staff writer. Follow us on Twitter @NACM_National

Trade Deficit Widens But It’s Not All Bad News

The nation continues to look for concrete evidence of rebound, and the latest trade releases have many panning for gold among the numbers.

The U.S. Census Bureau released that wholesale merchant sales totaled $313.1 billion for June 2009, down 21% from June 2008. Nonetheless, it was a modest increase of 0.4% over the May 2009 numbers, while sales of automotive and automotive parts were up 4.5%. Also showing signs of improvement were petroleum and petroleum products, which were up 7.1% from May.

Despite a sluggish domestic economy the last several quarters, the United States has been able to maintain positive growth with gaining momentum in foreign markets. After seeing the smallest trade gap this decade, the U.S. trade deficit widened 4% from $26 billion in May to $27 billion in June, and though both imports and exports increased in June by 2%, imports outpaced exports by $1.1 billion.
In June, exports of goods and services rose to $125.8 billion while imports of goods and services ticked upwards to $152.8 billion.

In total, the goods and services deficit has decreased $33.2 billion from the heights seen in June 2008. A snapback from the rebound of the dollar as the rest of the world has grappled with economic woes is that exports are down a little more than 22% year-over-year, a loss of $35.8 billion. Adding more pressure to foreign markets is the U.S. battle with recession, with imports tanking $69 billion from June 2008, representing a decline of 31%.

For the six month period from January to June, total U.S. exports year-to-date stood at $745.8 billion while total U.S. imports were at $918.8 billion. In 2008, during the same six months, U.S. exports reached $924.4 billion while imports approached $1.3 trillion. Good news for U.S. trade is that imports have declined at a more rapid pace than exports—28.8% compared to 19.3%. This has been aided by the fact that energy prices have bottomed out, and through the first half of 2009, the average price per barrel for crude has tumbled 52%—more than $50 per barrel—compared to the first six months of 2008.

Still, the numbers for the first half of 2009 are down from 2007, when exports for the first six months hit $785.7 billion and total imports year-to-date were $1.14 trillion. Regardless, there is hope that much of the bleeding has now been contained.

From the fourth quarter of 2008 to the first quarter of 2009, exports declined 11.5%. Between the first quarter and second quarter of 2009, exports eased down just 1.3%. At the same time, imports between the fourth quarter of 2008 to the first quarter of 2009 fell 18%, though they are just down 3% between the first and second quarters of this year. This shows that the downturn appears to have slowed.

“While we are seeing signs that the worst part of the recent economic downturn is behind us, we still face challenges to resuscitate domestic manufacturing and expand U.S. exports,” said U.S. Commerce Secretary Gary Locke.

As the United States and China are continuing to try and hammer out trade agreements, they have also been mired in spats over import bans, a major one which received a recent ruling from the World Trade Organization (WTO) today. In the interim, the U.S. trade deficit with its second largest trading partner continues to widen. Exports to China increased by $300 million from May to June to $5.5 billion, but U.S. Chinese imports increased $1.2 billion during the same time period to $24 billion. Year-to-date, China is the third largest market for U.S. goods, representing $30.4 billion in exports. Canada has been by far the U.S.’s principal consumer, importing more than $96 billion in U.S. goods while Mexico is a distant second at $58.6 billion.

On the domestic front, June sales of durable goods were up 0.7% from the month prior, though down nearly 23% from June 2008 totals. Sales of nondurable goods were up a smidgen at 0.1%, but a far cry from last year’s totals, down 19.4%.

Matthew Carr, NACM staff writer. Follow us on Twitter @NACM_National

Business Credit Preview: Tips on Making the Downturn Work for Your Company

"It's tough, but with what's going on in today's market, we're living in a world of downsize," said Jim Montague, CCE, director of credit operations at Lippert Components, Inc. "Every one of you is doing more with less people and your company is not going to come to you and say ‘I'm going to give you more help in your department, I think you need it.' It's going to be the other way around."

In response to this environment, companies and credit departments have reacted by implementing various technologies to take the place of other staff and while making the remaining team as efficient and productive as possible. Whether its credit scoring, deduction management or e-invoicing processes, or even new techniques for finding new sales overseas or getting the most out of their current customers, companies are adapting the credit function to suit the current economic environment and credit professionals themselves should be leading the charge to use these different solutions to add to their company's bottom line.

In the September/October 2009 issue of NACM's Business Credit magazine, scheduled for release early next month, credit professionals can find a wealth of information on both technological solutions, new techniques to enhance sales and collections, as well as the latest in business trends to keep them on the cutting edge. Check out the issue's domestic feature for a primer on various high-tech solutions that credit professionals can use to make their operations more efficient, all with less paper. Or, get up to date on the global business world with the international feature, which discusses the state of beneficial free trade agreements in the country's wobbling economy. The issue also includes articles on optimizing a credit department, following trends in financial regulation and managing deductions using other software systems.

To learn more about Business Credit magazine, or to subscribe, click here today!

New FTC Rule Targets Petroleum Market Manipulation

No one has ever said that markets aren’t subject to volatility. Lulls are followed by rallies; rallies are offset by declines. Demand and crisis give lift to price, thresholds are tested and then there is a tumble back to earth. For universal commodities like crude, volatility and price shocks are not insulated occurrences, but are felt on a macroeconomic level, resulting in booms and recessions, while triggering emotional responses. Following the oil glut of the late 1980s, the last two decades have been highlighted by a considerable increase in worldwide crude prices, which in turn has sparked consumer outrage; has left energy companies trying to answer for unparalleled profits; has provided momentum to the “green” movement; and has emerged as a major front in foreign policy.
Through it all, there has been a question as to whether the facts of a true market response are being witnessed, or is it the fiction of greed-guided manipulation.

The start of this century has been mired in an energy crisis as crude and gasoline prices have escalated, seemingly out of control. The Energy Information Administration (EIA) reported on January 4, 2002 that the average price for a barrel of crude stood at $18.68. From there, the price marched steadily upward and for the week ending July 4, 2008, the EIA reported the average price per barrel was $137.11. That’s nearly 7.5 times the price seen in six years earlier. Just a week later, on July 11, 2008, the price per barrel reached a record of $147.27 and has eased its way down since. Public outcry over those years was vocal—still echoing today—and energy companies, traders and speculators fell into the crosshairs of Congress. In 2007, the Energy Independence and Security Act (EISA) was passed, and Subtitle B of Title VIII of the law specifically addressed petroleum market manipulation.

Acting on the authorities granted it under EISA, last week, the Federal Trade Commission (FTC) issued a Final Rule concerning market manipulation by petroleum industry members. And the agency is prepared to enforce the provisions of the rule with gusto.

“This new rule will allow us to crack down on fraud and manipulation that can drive up costs at the pump,” said FTC Chairman Jon Leibowitz, stating that the agency will use its authority under the rule as aggressively as possible. “We will police the oil markets—and if we find companies that are manipulating the markets, we will go after them.”

The key word is “if.” Since the 1960s, as FTC Commissioner William Kovacic and industry groups have pointed out, the FTC has been investigating allegations of price-fixing and other anti-competitive behavior in the oil sector. During previous investigations of price fluctuations, the agency determined that market forces were principally at play. Now, the Final Rule’s broad mandate will allow the FTC to enforce penalties upon a wide range of contracting instruments and possibly become blight in transactions that don’t even affect consumers.

Under the Final Rule, the FTC will be zeroing in on any person, directly or indirectly, involved in the purchase or sale of petroleum products for knowingly perpetrating instances of false public announcements of planned pricing or output decisions, false statistical or data reporting, wash sales intended to disguise the actual liquidity of a market or the price of a particular product, or the employment of any other manipulative or deceptive device or contrivance. The Final Rule also prohibits intentional material omissions from a statement that, although true, is misleading under the circumstances and has an adverse effect on the market as a whole. As imagined, the proposed rule and its current final version have not won any friends in the oil industry, particularly as the FTC has armed itself with the ability to bring down the hammer of substantial fines.

“Unlike other unfair or deceptive acts or practices, for which the penalty per violation under the FTC Act is $11,000, the maximum penalty here is nearly 100 times greater—$1 million—and it compounds each day until a violation is rectified,” the American Petroleum Institute (API) released in a statement. “This clearly is an overreaction by the FTC when strong deterrents already are in place.”
The industry’s concern, mirrored in the dissenting vote of Commissioner Kovacic to the rule’s passage, is that ultimately the rule is going to create a timid environment where traders and industry officials are fearful they are going to be pegged with fines for inadvertent mistakes.

“Because the Final Rule’s requirements are unlikely to proscribe only genuinely harmful conduct, there is serious danger that it will impede routine contracting that is benign or pro-competitive and thereby make Americans worse off by damaging the flow of commerce in petroleum products,” wrote Kovacic.

FTC Commissioner J. Thomas Rosch agreed with the rule’s adoption, but cautioned that Kovacic’s opinion was warranted since the conduct prong of the rule for knowing deceit does not require proof of an exercise of market power having an adverse impact on the market as a whole, which is required under the Sherman Act.

“The net result is that the rule may chill oil companies from, among other things, voluntarily providing their data to independent data-reporting firms, as they do now, for fear that they may be held liable for an inadvertent omission,” noted Rosch.

The Final Rule will go into effect on November 4, 2009. Leibowitz shrugs off the allegations of the potential damage to commerce.

“Trade associations representing the oil industry have voiced concern about the new rule. They argue that it will chill business conduct in the service of stopping something that they don’t believe is happening in the first place,” stated Leibowitz. “These industry advocates have proposed specific changes that would weaken the rule—requiring a higher scienter standard under the general liability provision, requiring an explicit market distortion element for the entire rule and entirely eliminating liability for omissions.”

Leibowitz simply concluded, “I am fundamentally opposed to these proposals,” adding that he agreed with Commissioner Rosch that those suggested changes would effectively neuter the rule and would hinder the agency’s ability to curtail market manipulation.

Matthew Carr, NACM staff writer. Follow us on Twitter @NACM_National

Money Talks and a War of Words

The worldwide economic meltdown left few countries unmarred. The United States is currently becoming more confident that recovery has begun and that it can finally watch contraction recede into the background. The Dow Jones Industrial Average pierced the psychological veil of 9,000 and has seen tremendous momentum since the 6,600 point realm in March, when NACM’s Credit Managers' Index (CMI) showed that the country had finally hit bottom. For most of the globe, the past couple of years have been an unwanted lesson in resolve while waiting for rebound. Then there have been those countries like China and India—two of Asia’s economic powerhouses—that have enjoyed more subdued growth, but growth nonetheless.

With estimated reserves in the ballpark of $2 trillion, China has quickly emerged as one of the most economically powerful countries in the world and there is little doubt that China, along with India, Brazil and Russia, will compete with the United States for the title of largest single country economy in the coming decades. China has worked to close the gap with the United States, the European Union and Japan. It has become the U.S.’s second largest trading partner behind Canada, and despite the fact that it is the third largest consumer of U.S. goods exports, China enjoys a trade surplus with the United States of more than $250 billion.

The U.S. and China have realized that their economic futures are hinged upon one another and began holding economic summits under the Bush Administration, which have been continued under President Barack Obama, though receiving the slight title tweak of Strategic and Economic Dialogue (SED). At the end of July, officials from China and the U.S. sat down to speak, and again, the ponderings as to whether the yuan will ever replace the dollar as the world’s currency resurfaced. The conversation first started earlier this year as countries struggled with the blanket of global recession while China beamed with first half gross domestic product growth (GDP) of 7%. People’s Bank of China Governor Zhou Xiaochuan made a speech on international monetary reform that called for a replacement to the world’s reserve currency. Zhou called the current system “a rare and special occurrence” in the world’s history, and reiterated that the economic crisis that stymied global growth clearly demonstrated that going forward the current reserve currency—the U.S. dollar— would need to change. He offered suggestions such as the International Monetary Fund’s (IMF) Special Drawing Rights (SDRs), and ultimately stated that any change that was to take place would need to be gradual and a “win-win” for all stakeholders.

Of course, in years past, Japan’s re-emergence sparked discussions of the yen replacing the dollar, then there was the European Union’s formation and along with that came claims that the euro would dethrone the dollar as well. Each was predicted to “eventually” unseat the greenback as the world’s key currency. Currently, the yuan has an exchange rate of more than 6.8 to 1 with the dollar.
Will the U.S. be outpaced by China? There are those that certainly believe it’s not only in the realm of possibility, but is inevitable, particularly as investors remobilize in Asian markets.

“Our long-term view is not only could China’s market surpass the U.S., but that it will do so and within the next 20 to 30 years,” stated Jim Trippon, editor, China Stock Digest. "There is an old adage: when you’re No. 2, you try harder. There is no doubt that China’s economic engine is running hard, on all cylinders, unlike the U.S.’s economy.”

He added, “We have to remember that the U.S. has not always been the world’s largest economy. This position the U.S. holds is really an outgrowth of the World War II victories over Japan and Nazi Germany.”

As the two superpowers try to negotiate a bilateral investment treaty, the United States and China’s relationship continues to be peppered by a war of words. As Senate Finance Committee Chairman Max Baucus (D-MT) wrote Treasury Secretary Timothy Geithner, “The global financial system remains in crisis. And protectionist tendencies in both countries have strengthened.” There are the ongoing poultry bans between the two; the Chinese ban on U.S. beef and pork; and the accusations that the Chinese government is manipulating the value of the yuan. Geithner submitted in written testimony during his nomination hearings in January that China is purposefully devaluing the yuan to boost exports. Chinese exports have ramped out tremendously from $593 billion in 2004 and are expected to surpass a projected $1.7 trillion this year. At the end of July, the IIMF reported that it feels that China’s currency remains “substantial undervalued,” tossing out the once-used verbiage of “fundamentally misaligned.”

Matthew Carr, NACM staff writer. Follow us on Twitter @NACM_National

Readers can check out China Stock Digest at

Bill Introduced In Senate Would Strengthen Customs, Trade Enforcement

A new bill, proposed by Senators Max Baucus (D-MT) and Chuck Grassley (R-IA) would reauthorize the Department of Homeland Security's (DHS) U.S. Customs and Border Protection (CBP) and U.S. Immigration and Customs Enforcement (ICE) units and aim to enhance the two entities' customs and trade enforcement efforts.

Currently, CBP and ICE only exist as functions under DHS discretion according to the Homeland Security Act. Baucus and Grassley, chairman and ranking member of the Finance Committee, respectively, introduced the bill in order to firmly establish the two divisions within DHS and require them both to prioritize and enhance their specific missions. Additionally, the bill, named the Customs Facilitation and Trade Enforcement Reauthorization Act of 2009 would create high-level trade positions in CBP and ICE, strengthen trade enforcement by requiring CBP to develop its own risk assessment methodologies to better target cargo that violates U.S. customs and trade laws and require the DHS Secretary to identify concrete benefits for participants in the Customs-Trade Partnership Against Terrorism (C-TPAT), a program that provides business participants with reduced inspections and expedited processing at the border in exchange for taking steps to protect their supply chains from illegal smuggling or concealed cargo.

"Customs facilitation and trade enforcement are vital to America's economic security," said Baucus. "CBP and ICE have not focused sufficient resources on their trade missions and this bill would direct them to do so. It would give these agencies the resources and tools they need to better enforce our customs and trade laws so legitimate goods enter our country quickly, and harmful goods or goods that infringe intellectual property rights (IPR) stay out." A provision in the bill would also establish a new division within ICE that would coordinate federal efforts to prevent the import or export of goods that violate IPR, and explicitly states that CBP has the authority to seize unlawful devices used to circumvent these protections.

"The CBP and the ICE agencies do important work," said Grassley. "This legislation will help them to accomplish their commercial missions by strengthening the accountability and prioritization of commercial customs functions, even as they continue to protect homeland security."

Jacob Barron, NACM staff writer. Follow us on Twitter at

Unemployment Falls In July, Fewer Jobs Lost Than Expected

The U.S. Department of Labor reported today that the nation's unemployment rate took an unexpected turn in July, dropping slightly from 9.5% in June to 9.4%. The most recent report also noted that employers had scaled back layoffs, eliminating just 247,000 jobs in July, marking the fewest cuts in a year.

The number of long-term unemployed, or those jobless for 27 weeks or more, increased by 584,000 in July, meaning one in three unemployed persons now fall into this category. Additionally, the number of persons who've taken part-time work for economic reasons, also called involuntary part-time workers, remained steady at 8.8 million. This number skyrocketed in the fall and winter but has remained largely unchanged since.

The unemployment rate announcement comes just a week after the U.S. Department of Commerce reported that the nation's economy as a whole slowed at a reduced rate of 1% in the second quarter, leading analysts to believe the recession may be at an end. As NACM's Credit Managers' Index (CMI) has predicted, many believe that the economy could start growing again by the end of the third quarter.

Jacob Barron, NACM staff writer. Follow us on Twitter at

The Safari for Partners: Spurring New Investment in Sub-Saharan Africa

Africa has the potential to gleam as one of the world’s greatest jewels. It is widely recognized as the birthplace of the human race, has caches of the most sought after resources on the planet and is teeming with natural beauty and mystery, while being home to nearly 15% of the world’s population. And yet, it remains the poorest and most under-developed continent on the planet. Disease, corruption, poverty, war and genocide have made many of the countries infamous nightmares instead of pearls to marvel.

In Sub-Saharan Africa, the majority of the population survives on less than $3 per day and the poor have only been getting poorer. Looking to build on other initiatives in place, such as the African Growth and Opportunity Act (AOGA) signed in 2000, President Barack Obama is hoping to re-ignite a turnaround in Sub-Saharan Africa by utilizing agreements to encourage direct investment, like bilateral investment treaties (BITs). The purpose is to entice foreign dollars to African countries by soothing the anxieties of investors by providing legal protections and the adoption of market-oriented domestic policies.

Of the 40 BITs the United States has signed over the last three decades, five are in force with Sub-Saharan Africa countries: Cameroon, the Democratic Republic of Congo, Mozambique, the Republic of Congo and Senegal. The U.S. also signed a BIT with Rwanda—one of the fastest growing economies in Africa— in February 2008, but that is still pending Senate approval.
There are two sides to pressing forward with treaties like this now in Africa. On the positive, as a whole, Africa has remained pretty well insulated from the economic crisis that flattened the tires of the rest of the world. According to Coface’s Economic Research and Country Risk Department, Sub-Saharan Africa saw economic growth of 6.1% in 2008, though this year, the gross domestic product (GDP) growth of the region will almost certainly be down a couple of points because of the plunge in raw materials prices. The negative is that the price for copper has tumbled nearly 50%, while platinum and zinc prices have plummeted nearly 70%, and aluminum is down 60%, particularly bad news for the Sub-Saharan region since it generates 14% of the world’s total aluminum production. Also dragging on the region’s GDP is the volatility of oil prices, with the region accounting for 8% of the world’s crude production and Nigeria contributing as much as 15% of the world’s ‘bonny light’ oil production.

But as everyone knows from the countless “Cash 4 Gold” commercials, gold is once more king, and Sub-Saharan Africa accounts for 20% of the world’s gold production.
Because an offshoot of a global recession is a withdrawal of foreign direct investment (FDI), financing conditions are expected to tighten this year in Sub-Saharan Africa. When raw materials and ore prices soared, the United States flooded the region with capital, with Coface reporting that U.S. FDI increased from $18 billion in 2004 to $50 billion in 2007. The United States, in need of more diverse sources of oil, poured the majority of the money into exploration and extraction. The result of which is that over the last decade, Sub-Saharan Africa output represented 25% of the total increase in the world’s oil reserves.

The goal is continue to get more capital inflows to Sub-Saharan Africa, but with the Administration twist of the United States becoming more of a “partner” than “patron.”

“Because trade is a critical platform for Africa’s economic growth, we’re exploring ways to lower global trade barriers to ease the burdens on African farmers and producers,” said Secretary of State Hillary Clinton to leaders at the 8th Annual AGOA Forum on Wednesday, August 5. “Today, Africa accounts for 2% of global trade. If Sub-Saharan Africa were to increase that share by only 1%, it would generate additional export revenues each year greater than the total amount of annual assistance that Africa currently receives.”

Now, the United States has begun negotiations with a tiny island country off Africa’s coast in the Indian Ocean, just east of Madagascar. Mauritius may not be a household name, but Secretary of State Clinton and U.S. Trade Representative Ron Kirk see the country of 1.3 million as the perfect launching pad for a new wave of U.S. investors into Sub-Saharan Africa.
“Mauritius is one of the most economically successful and politically stable countries in Africa,” said Ambassador Kirk. “It has an impressive track record on democracy, economic growth, openness to foreign direct investment, economic diversification and the expansion of trade.”

Mauritius might be best known as the only home of the now extinct dodo, but, since the United States signed a Trade and Investment Framework Agreement (TIFA) with the country in September 2006, it has quickly become a destination for U.S. dollars. Since 2004, the United States’ direct investment position in Mauritius has increased 700% and from 2006 to year-end 2007, the U.S. position increased 83% to $2.9 billion. Diamonds, textiles and such items are the primary exports to the United States, though the country’s main cash crop is sugar cane, grown on nearly 90% of the cultivatable land on the island and accounting for 15% of export earnings. Mauritius is making a push into financial services and its banking sector has received considerable attention with close to $1 billion in foreign investment.

With just a little over 40 years of independence, the country is flourishing, many eyeing it as a gateway to South Africa, India and China. Inflation has fallen from near double-digits at the tail end of 2008 to around 6% this year. And Mauritius, points out Coface, has begun adopting a more accommodating approach to fiscal policy, with duties on a variety of items, such as construction materials and food, being discontinued, while duties on household goods and automotive parts have been cut in half. Being an island country, Mauritius relies heavily on food and energy imports. The country’s total GDP is a mere $6.3 billion, but imports this year will likely top $4.7 billion, most of that originating from India and China.

Matthew Carr, NACM staff writer. Follow us on Twitter @NACM_National