Global Regulators on Mission to Downgrade the Ratings Agencies

The "Big Three" credit ratings agencies - Moody's Investment Services, Standard & Poor's and Fitch Ratings - have certainly been active stamping their upgrades and, more likely of late, downgrades on everything from global companies to individual nations. Now, a global panel of regulators and economic officials, many incensed by downgrades of struggling European nations and ratings inaccuracies in the run-up to the global downturn, has struck at the very foundation of the ratings agencies in an organized effort to undermine much of their influence on financial markets.

As predicted in a two-part story in NACM's Business Credit Magazine earlier this year (the July/August and September/October editions), the ratings agencies have fallen into the crosshairs of governments around the world and face almost certain changes, potentially sizable ones, to their business models. The strongest, most united hit against the credit ratings agencies (CRAs) came in an Oct. 27 manifesto from the Financial Stability Board (FSB), an offshoot of the G-20. FSB's "Principles for Reducing Reliance on CRA Ratings" calls for the rapid implementation of a series of standards designed to "reduce stability-threatening herding and cliff effects that currently arise from CRA rating thresholds:"

"The principles aim to catalyse a significant change in the existing practices, to end mechanistic reliance by market participants and establish strong internal credit risk assessment practices instead. The ‘hard wiring' of CRA ratings in standards and regulations contributes significantly to market reliance on ratings. This, in turn, is a cause of the ‘cliff effects' of the sort experienced during the recent crisis, through which CRA rating downgrades can amplify procyclicality and cause systemic disruptions. It can be also one cause of herding in market behaviour, if regulations effectively require or incentivize large numbers of market participants to act in similar fashion. But, more widely, official sector uses of ratings that encourage reliance on CRA ratings have reduced banks', institutional investors' and other market participants' own capacity for credit risk assessment in an undesirable way."

FSB suggested authorities and "standard setters" remove/replace references to CRA ratings in existing laws and regulations, when possible, in favor of alternative provisions as soon as prudently possible.

The effort is bold, definitive and grandiose, though not altogether unexpected. Economic officials in many nations have lashed out at the independent ratings agencies any time they have issued downgrades to nations' credit ratings in recent months. It has a generated a seemingly ongoing war of words in Europe, as the ratings agencies have been particularly hard on the high-debt "PIIGS" (Portugal, Italy, Ireland, Greece, Spain) in 2010. It is worth noting that five of the spots at the proverbial G-20 table are held by European nations of the European Union itself, all of which have publicly criticized the CRAs, and that does not include a pair of nations essentially considered part of the "Eurasian" block (Russia and Turkey).

Brian Shappell, NACM staff writer

Hot Rebound Expected for Commercial Real Estate in Southern Port Cities?

Port cities in or near the Gulf of Mexico have certainly had a rough couple of years thanks to massive fallout from Hurricane Katrina, the BP oil spill and the deep recession. The commercial real estate industry, both regionally and nationally, also hasn't been in a good position since the middle portion of last decade following its well-documented and severe industry correction. However, panelists at the Urban Land Institute (ULI) 2010 Fall Meeting in Washington, DC believe opportunity may be on the way for real estate for said port cities.

Southern ports and dependent industries have become accustomed to negative game-changers affecting them. However, the upcoming completion of the $5 billion Panama Canal expansion project could move the needle significantly in the other direction. ULI Senior Resident Fellow Steve Blank and Author/Consultant Jonathan Miller, who wrote ULI's 2011 edition of "Emerging Trends in Real Estate," said the expansion should help stabilize and grow commercial real estate, especially in New Orleans and Houston, by leaps and bounds. The expansion should cause a surge in shipping trade through the United States, though the usual suspects likely won't be in on the newfound opportunities, they predicted.

"They're not going to the West Coast ports because those ports have all they can handle," Miller said at the conference. "This is actually a very good thing."

It's possible that Savannah, GA could be added to that list as well since, as Miller and Blank noted, nearby Atlanta stands as the "international gateway to the U.S. South." Fortunately for the smaller, costal city, it doesn't have a fraction of the overbuilding problem to contend with as does Atlanta.

Hans Belcsák, president of S.J. Rundt & Associates Inc., and a Brookings Institution report each outlined the impact of the canal expansion, featured in the November/December issue of NACM's Business Credit Magazine, saying it represented a huge opportunity for those ports and U.S. businesses, in general. While neither discounts the impact on West Coast Ports as much as the ULI panelists, each intimates the southern ports stand to gain the most in large part because of increasing opportunities in Brazil. Aided by a growing middle class and hosting of globally high profile events over the next decade (FIFA's World Cup, the Olympic Games), Brazil is expected to surge past its present ranking of tenth among nations receiving exports from U.S. companies, said Brookings. The expansion of the canal allows for far quicker and cheaper shipping between the emerging economic power and a large portion of the United States. And it's not the only major market that will become more accessible as a result of the expansion...far from it.

NACM members can see much more on the Panama Canal expansion and its impact on U.S. Businesses on page 6 of the November/December edition of Business Credit Magazine. Click here to sign in and view an online copy of the magazine).

Brian Shappell, NACM staff writer

GAO Report Recommends Updates to FDCPA

A recent report from the U.S. Government Accountability Office (GAO) urged Congress to update the nation's ruling collection law to account for changes in both the industry and the technology available to third-party debt collectors.

Of greatest concern to the GAO were the problems caused by the dearth of information collectors often have about their targeted accounts. "State and federal enforcement actions, anecdotal evidence, and the volume of consumer complaints to federal agencies-about such things as excessive telephone calls or the addition of unauthorized fees-suggest that problems exist with some processes and practices involved in the collection of credit card debt, although the prevalence of such problems is not known," said the report. "One issue is that collection agencies and debt buyers often may not have adequate information about their accounts-sometimes leading the collector to try to collect from the wrong consumer or for the wrong amount-or may not have access to billing statements or other documentation needed to verify the debt." The report goes on to note that as the prevalence of debt-buying increases, accounts for collection can often be sold and resold, making verification even more difficult as the debt moves further and further away from the original parties.

The FDCPA, enacted in 1977, also lacks provisions that pertain to several technologies now ubiquitous in America's business world. E-mail, voice mail and mobile telephones were all non-existent at the time, and some of the Act's precepts reflect this: the GAO report notes that, in some instances, a debt collector may technically be in violation of the FDCPA if someone other than the debtor overhears a voice mail message revealing the debt collection effort. Other technologies that may have FDCPA ramifications for collectors are caller ID machines and predictive dialers, which can violate the Act's provisions prohibiting harassment by an overabundance of calls.

The GAO's recommendation was for congress to update the legislation to account for both the absence of information and the new technologies now relied on by debt collectors. Additionally, and perhaps more practically, the GAO suggested giving the Federal Trade Commission (FTC) rulemaking powers. When the legislation was first passed, it withheld this authority from the agency, which has limited its ability to address concerns such as the ones listed in the GAO report.

A full copy can be found by clicking here.

Jacob Barron, NACM staff writer. Follow us on Twitter at http://twitter.com/NACM_National.

SBA, Commerce, Treasury Among Agencies Accused of Blocking Independent Watchdogs

Two high-ranking Republican Senators recently criticized 13 federal agencies for hamstringing their own respective inspectors general (IGs), who serve as the agencies' independent watchdogs.
Following the results of an April survey of 69 federal inspectors general, which asked whether they had encountered any interference from the agencies they were charged with monitoring, Senators Chuck Grassley (R-IA) and Tom Coburn (R-OK) recently issued letters to the 13 agencies whose IGs suggested that they had received a lack of complete cooperation, whether in the form of blocked access to information or bureaucratic barriers that impeded effective investigations. Among those agencies receiving letters were business and financial divisions like the Small Business Administration (SBA), the Department of the Treasury and the Department of Commerce.

"Inspectors General can't conduct effective oversight of tax dollars and programs when the very agencies subject to the oversight impose delays, red tape, and roadblocks," said Grassley. "To let this continue in the executive branch is letting the fox decide who gets in the henhouse."
The letters asked each agency head to explain some of the more serious allegations leveled by the IGs in their responses to the original survey. Among them were allegations that the SBA's IG encountered significant delays on 13 projects, even having to request the same information over 16 times per project and experiencing delays in excess of 11 months. The Senators' letter to the Treasury also outlined an instance where an IG was denied unrestricted access to information from the Office of the Comptroller of the Currency (OCC) for use in investigations of possible fraud by failed financial institutions, while the letter to the Commerce Department accused the agency of broadly "filtering" the IG's access to information.

"Good government starts with good oversight. When officials block investigations they do nothing more than protect the people and processes that waste billions of taxpayer dollars every year," said Coburn. "Inspectors General are the unsung heroes of Washington. Every day they fight battles to save taxpayers money. Officials who would deny them the documents and information they need to prevent waste, fraud and abuse, are doing the American people a great disservice and cannot be called public servants."

The other agencies receiving letters were the Department of Homeland Security, the Department of Transportation, the Department of Education, the Environmental Protection Agency, the General Services Administration, the Internal Revenue Service, the Library of Congress, the National Labor Relations Board, the Social Security Administration and the Department of State.

Jacob Barron, NACM staff writer

(UPDATED) Fed's Beige Book: Concern or No, Economic Growth Continues

The talk of the last couple of months in economic spheres revolved around growing concern that the United States will decline into a double-dip recession in the near future. However, the Federal Reserve's latest study indicates such a scenario has not reared its head in recent weeks and that growth continued, "albeit at a modest pace."

The Fed's Beige Book report, tracking economic conditions in each of the nation's 12 banking districts, found continued, though in some areas sluggish, growth in the economy from September through early/mid-October. Leading the way for the U.S. economy continues to be the manufacturing sector. Seven of the 12 districts reported aggregate gains in production and/or new orders "across a wide range of industries." Three others remained at or near August levels, while only two districts (Richmond and Philadelphia) found easing in the sector. Still, new job openings in the sector remained few and far between as companies try to do, as the cliché goes, more with less. Inventories also are considered "generally light" for most firms to keep costs down during what has been a slow rebound.

The agricultural sector also performed over the last six weeks or so. The seasonal harvest "was generally ahead of its normal pace, and above-average yields were expected in most reporting districts," according to Beige Book. One could expect even more optimism from the sector because of an increase need for U.S. exports in struggling ag nations such as Canada and Russia, the latter of which sustained massive damage from uncooperative weather and farmland wildfires in recent months.

Commercial real estate problems continue to be noted, especially escalating vacancies and subsequent reduced rental rates. Still, there have been pockets of optimism on the commercial real estate side with bumps in leasing around the Richmond, Chicago and Dallas districts. Fed contacts in the latter two also reported a rising trend of investor demand for distressed commercial properties, perhaps foreshadowing long-awaited stabilization.

Bank-to-business lending also remained somewhat stymied as demand for loans continues to be low. Postponements of capital spending continued at most businesses because economic and political uncertainties.

District 1 -- Boston
Building on success during the first two quarters, continued positive sales growth was a leading story throughout New England. The semi-conductor industry was rolling in part because of strong overseas demand and a bump in the U.S. automotive industry. Some in the industry did carry a slightly less optimistic view of potential in 2011. Commercial real estate was mixed in the district: Boston vacancy rates are trending up for office space and down for apartments; Portland leasing volumes were stable; and Providence appeared more upbeat than most on increased stability and prospects.

District 2 -- New York
Commercial real estate rental rates held “mostly steady” in most parts of the region, save fo r a small decline in Manhattan proper. This was somewhat surprising given the Fed’s report of widespread, though small, increases in vacancy rates. Meanwhile, credit standards tightened for business loans, which could be of little consequence at present since loan demand, especially from small and mid-sized businesses, remained rather low.

District 3 -- Philadelphia
Philadelphia was one of only two districts that reported a decrease in manufacturing shipments and/or new orders. The industry was optimistic that conditions will strengthen within the next six months. Only one in five businesses expected market deterioration through early 2011. Fed contacts noted business loan demand was “incredibly weak,” and those with credit lines are using them less than normal. In the meantime, credit quality continued to improve among borrowers based in Greater Philadelphia. Those in commercial real estate can’t say the same as the industry remained in a largely stagnant period.

District 4 -- Cleveland
Several contact in the region noted double-digit increases of production on higher order demand. It appeared much of the bump in demand comes from abroad rather than in the U.S., including in the areas of auto and heavy equipment. Commercial real estate was little changed from the last period or even September 2009. New hiring in most industries remained flat or dropped, though a seasonal uptick in holiday season workers naturally was expected.

District 5 -- Richmond
Richmond is the other district to report a notable decrease in manufacturing activity. With industries dependent on consumer spending and optimism, such as the textile and residential real estate product industries (windows, doors, etc.), there clearly was less need to produce. Lending activity, even to some smaller businesses, appeared to be shifting from community banks to larger-sized, better capitalized counterparts. Commercial real estate activity stayed “weak,” in part because contractors are having problems garnering credit from local lenders.

District 6 -- Atlanta
The pace of new commercial construction and renovation, size of backlogs, demand for rental properties, price points and outlook for real estate all dropped again in the region. Both loan demand and district banking conditions were weak, as well. Modest manufacturing increases are planned in the short-term, in part because of international shipments.

District 7 -- Chicago
After a slump during the summer, manufacturing activity rebound by September. It actually was the best month of the year for several metals manufacturers. Mining and medical equipment businesses flourished, as well. Vacancy rates started to stabilize in most of the district on slight improvement in demand for some industrial and retail spaces. Business loan demand remained steady and credit conditions gradually improve. Still, credit availability for small business has become a source of concern. Agriculture did well during the early part of the period with strong harvest-time yields. However, activity slowed more recently, especially in part of Iowa and Wisconsin, because of heavy rains.

District 8 -- St. Louis
Few portions of the region reported any improvement in commercial property sales, vacancy rates or potential for new construction. Bank loans to businesses decreased again in September/early October, though at a miniscule rate. Planned plant openings and expansions far outweighed the scattering of manufacturing business struggles. Expanding industries in the area include those producing motor vehicle products, plastics, transformers, frozen food and detergent. Largely because of the ongoing housing downturn, production was down in the appliance and furniture manufacturing areas. Agriculture advanced well ahead of the usual pace on near perfect harvesting weather. However, subsequent drought conditions loom.

District 9 -- Minneapolis
Already slow commercial real estate demand receded further in September. Fed research indicated about 20% off all office space and 8% of all retail space was vacant at summer’s end. Manufacturing was up on gains at producers of jet engines and parts, fishing tackle, dental products, metals and beds. Wet weather put the brakes on the agricultural sector somewhat though district crops “were relatively large and in good condition.”

District 10 -- Kansas City
Manufacturing experienced a mild rebound on higher demand for factory-made products. Commercial real estate remained on the downturn, and expectations for the near future aren’t optimistic. Just about every category of commercial real estate struggled. Loan demand remained somewhat steady, with a bump in applications from businesses. Agriculture, especially corn and soybean crops, performed well through the most recent six-week Fed tracking period.

District 11 -- Dallas
High-tech and petrochemical product manufacturers reported strong growth domestically and increased interest abroad, especially in China. Production of cement, lumber and fabricated metals remained somewhat flat on economic and geopolitical concerns. Little to no speculative construction occurred, though contractors remained busy with hospital and education-related work, Fed contacts said. Loan demand and activity grew, thought the most significant acceleration was for the purpose of auto purchases by consumers. Tropical Storm Hermine was actually seen as a positive, looking forward, because it improved soil moisture for much of Texas.

District 12 -- San Francisco
Technology and semiconductor manufacturers saw another period of growth, though the pace appeared to slow slightly. While overall manufacturing remained up, there are notable problems for metal and wood production. Commercial real estate vacancies remained very high though there are signs in a decrease in total space availability. Business credit applications in the district summed up the conditions in that sector for most of the districts: “Demand continued to be restrained by businesses’ cautious approach to capital spending and desire to deleverage.”

Brian Shappell, NACM staff writer

Ex-Im Breaks Financing Records in FY 2010

First it was the Small Business Administration (SBA), now it's the U.S. Export-Import Bank (Ex-Im).

Ex-Im recently announced that it had its second consecutive record-breaking year in fiscal year 2010. From October 2009 to the end of September 2010, Ex-Im authorized a record $24.5 billion in export financing, supporting $34.4 billion worth of exports and 227,000 American jobs at over 3,300 U.S. companies.

"I am proud of the results we have achieved during our second consecutive record-setting year," said Bank Chairman and President Fred Hochberg. "Two of our major priorities are to engage more small businesses and increase our renewable-energy portfolio. And we broke records on both fronts-approving a record $5 billion in financing for small companies and tripling our renewable energy export financing to over $300 million."

Among Ex-Im's other accomplishments were the approval of 3,532 transactions over the year, more than 1,000 of which were for companies using Ex-Im financing for the first time. The bank also noted its launch of two new products during FY 2010, including a supply chain financing program geared exclusively toward small businesses.

While he applauded the bank's success, Hochberg was quick to prod his agency away from resting on its laurels. "While the Bank's 2010 performance is impressive, there remains enormous untapped potential for more American companies to sell more goods and services to more customers in more countries," he said. "And through improved customer service and increased outreach efforts, Ex-Im is committed to helping U.S. companies achieve this goal."

The Ex-Im report was released the same day as the Department of Commerce's export figures, which showed that U.S. exports of goods and services increased by 17.9% during the first eight months of 2010, totaling $1,198 billion for the January-August period. August 2010 exports topped out at $153.9 billion, which was the largest monthly figure since August 2008. The largest increases in U.S. goods purchases occurred in Taiwan (50%), Indonesia (46.6%), Korea (46.4%) and Turkey (45.4%). Perennial exporting punching bag China saw a still-notable 35.6% increase in U.S. goods purchases.

Jacob Barron, NACM staff writer

Commercial Real Estate Outlook: Recovery Coming, ‘Era of Less’ Here to Stay for a While

The commercial real estate industry is heading toward what should be a tepid recovery, like the general economy. Also similar to the new economic reality, the industry most likely will settle into a period that distances itself from the super-sizing and excess that defined the mid-2000's boom years, one PricewaterhouseCoopers (PWC) analyst/consultant Jonathan Miller calls the "Era of Less."

Miller and Urban Land Institute (ULI) Resident Fellow Steve Blank, presiding over a panel at the 2010 ULI Fall Meeting in Washington, DC last week, admitted there were many problems still plaguing the commercial real estate business, noticeably high vacancy rates caused by a stunningly small appetite for new commercial space. Though optimism is rising for future prospects, for now, demand is "still in the tank," said Blank.

"In this era of less, we don't need anything new," he noted.

However, the duo was happy to report that ULI's annual report on the industry, the 2011 edition of "Emerging Trends in Real Estate," finds ratings improving in the apartment, industrial, hotel and retail segments of commercial real estate. Moreover, they expect the worst of the downturn in the industry has passed, and the value of new construction could return to a range between $75 billion and $100 billion by 2012. However, the new and renovated spaces will have to adhere to the new trend of tenants wanting more flexible and smaller spaces to accommodate for factors such as smaller staffs and energy efficiency. Moreover, the days of significant operations being conducted in far-off suburbs seem farther from returning than the rebound for city-located spaces.

"Companies are doing more to centralize their operations," said Miller. "That's not going to serve the suburban side. [Cities and close suburban] central business districts are way better off than the suburban office right now, and the divide is growing."

The study listed the following as the best markets for opportunity over the short- and medium- term in commercial real estate construction and, even more so, renovation/redesign:

  1. Washington, DC - Because of the vast array of jobs related to the federal government, "Washington doesn't do layoffs."
  2. New York, NY - Commercial real estate has improved there more than any other market in the last year, and the federal Troubled Asset Relief Program "helped undergird the financial market."
  3. San Francisco - A progressive city that is considered a "Gateway to the World" location because of its international travel proficiency and its industries are a key driver that places California, itself, on a level equal to the eighth largest economy in the world.
  4. Boston - Simply put, "It's the academic center of the world."
  5. Seattle - It's another "Gateway to the World" city with a diverse industry base and a large number of skilled and educated young people in the workforce.

Other cities with solid prospects, according to the ULI/PricewaterhouseCoopers report are Houston, Los Angeles, San Diego, Denver and Dallas.

Brian Shappell, NACM Staff Writer

SBA Growth Capital Program Breaks Annual Financing Record

A growth capital program run by the Small Business Administration (SBA) broke a record in fiscal year 2010, providing more financing to small businesses than in any prior year in the program's 50-year history.

The SBA's Small Business Investment Company (SBIC) debenture program provided a total of $1.59 billion in financing in FY2010, marking a 23% increase over the average $1.29 billion in financing offered in the four previous years. The increase was largely credited to changes made under the American Recovery and Reinvestment Act (ARRA), which was passed in February 2009.

"At a time when access to capital was tight, including from the traditional sources for growth capital, SBA helped fill some of that gap with a record amount of financing through our SBIC program," said SBA Administrator Karen Mills. "Across the country, there are small business owners and entrepreneurs who are well-positioned to take that next step, grow their business and create good-paying jobs."

SBICs are privately-owned and managed investment firms that are licensed and regulated by the SBA. The ARRA eased the rules governing SBIC licenses and decreased license processing times, leading to a boon in the program, which in turn led to more financing. Figures from FY2010 showed that 21 new SBIC licenses were issued, marking a 130% increase over the average 10 licenses per year. Additionally, license processing times fell by 60% from an average of 14.6 months in 2009 to just 5.8 months in 2010.

"Our efforts to strengthen our program efficiency and increase funding available through the SBIC program has provided another critical tool to help these small businesses get the capital they need and drive economic growth," Mills added.
The SBIC program was created in 1958. To learn more, go to www.sba.gov/INV.

Jacob Barron, NACM staff writer

BoA Expanding Small Business Lending Initiative

(Business Wire/Bank of America) As part of its ongoing commitment to small businesses, Bank of America today announced that it would hire over 1,000 small business bankers by early 2012. Bank of America will expand its small business presence by hiring small business bankers in select banking centers in Dallas, Los Angeles, Baltimore and Washington, D.C., beginning in the fourth quarter of 2010. Hiring will continue in select locations across the country throughout 2011.

"Small businesses play a critical role in driving innovation and growth in our economy, and the steps we're taking at Bank of America will help create more certainty, more confidence and more opportunity for small businesses in all of our markets," said President and Chief Executive Officer Brian Moynihan during his keynote remarks at the Chief Executive Club of Boston luncheon this afternoon. "Our small business bankers will live and work in the communities they serve, making them uniquely qualified to work with these businesses and provide the best combination of financial services to help them grow."

Bank of America small business bankers will provide more personalized attention to small business owners by spending time with them at their place of business and learning more about what their companies do. Customers will have convenient access to local small business expertise and a dedicated resource who understands their business. Small business bankers will consult with small business owners and assess their companies' deposit, credit and cash management needs.

"As one of the nation's largest financial services providers, Bank of America is actively engaged in fostering the growth of small business," said Joe Price, Consumer and Small Business Banking executive for Bank of America. "With the creation of this role, we are responding directly to what our customers have asked for - local small business experts who provide small businesses with the financial solutions necessary to sustain and grow their business."

In the first half of 2010, Bank of America has provided $45.4 billion in credit to small and medium-sized companies and is expected to meet or exceed its pledge to increase lending to those businesses by $5 billion in 2010. In addition, Bank of America is the nation's largest investor into Community Development Financial Institutions (CDFIs), with more than $1 billion in loans and investments to 120 CDFIs in 37 states.

Bank of America also is increasing its spending with small, medium-sized and diverse businesses through a commitment to purchase $10 billion in products and services from those suppliers over the next five years. Other efforts to help small businesses include recent improvements to the bank's 2 million small business credit card accounts, such as no rate increases on existing balances, and enhancements to the Advisor AllianceTM retirement plan platform, which serves more than 900,000 people from more than 40,000 businesses.

What Will it Take for the US to Become a Real Export Player?

(Business Intelligence Brief) The statement from President Barack Obama regarding the need to increase U.S. exporting had a hint of desperation from the moment it was made. Nobody doubts that the United States needs to improve, and there was generic support for the concept from Congress and the general public. But when it comes to specifics, there have been struggles.

Obama's initial call was to increase exports by 5% in the next few years, but there was nothing to support that goal in subsequent speeches. Congressional actions actually made things worse. Most Americans oppose free trade and have become convinced that the solution to the U.S. economic crisis will be isolating the economy behind massive walls of protectionism. It's perceived that the only nations benefitting from trade include those like China, ones holding advantages such a low wage structure, flimsy laws on safety and the environment as well as a government willing to manipulate currencies, erect trade barriers and otherwise stack the deck in favor of the local company.

Those who assume this position have not looked very closely at a nation that is far more like the United States than any of these high growth nations. The Germany have become the export masters of Europe while maintaining maintained its place in the world despite the various disadvantages the United States claims: high wages, a generous system of benefits, high taxes and strict environmental and safety laws. In most respects, the Germans have even more inhibitions when it comes to competing on the global stage.

Analysis: The German economy and the U.S. economy have become more similar amid the global recession. The biggest change has been in the behavior of the consumer. U.S. companies really never had the same need to seek out foreign business as the domestic consumer was eager to purchase what was on offer. Prior to the recession, the US consumer accounted for 70% of the action in the economy but that number is now slipping and may be down to 65% or 60% by the end of the decade. In Germany, the domestic consumer only accounts for about 57% of consumption and is notoriously cautious when it comes to buying. This has forced German companies to seek markets elsewhere and they have expanded into developed and developing nations alike. The German economy is only about one-quarter the size of the US economy, but it exports more in the way of manufactured goods and in more categories. The demand for high value German machine tools and technology is well known, but the Germans export consumer goods as well. It is not generally appreciated in the US that Germany produces inexpensive goods that sell well in markets like China, India, Brazil and elsewhere.

If the US is going to reach the lofty goals set by the White House, it could do worse than copying what the Germans have done. The analysts are somewhat divided as to what makes the Germans effective at exports, but there are some patterns that win plaudits from most observers:
  1. Strong support from the top...Chancellor Angela Merkel leads as many as two dozen trade missions annually.
  2. Commitment to trade promotion within the bureaucracy...The US Department of Commerce does a yeoman's job but their budgets are paltry compared to what is spent in Germany, Japan or most other nations.
  3. Backing up its strongest export sectors...The Germans work diligently to support the pillars of its export economy with policies that focus on opening up the world market to the niche manufacturing companies that often dominate their unique sectors.
  4. Positive attitude toward trade...The Germans unite behind the notion of export and import while some polls show that 70% of Americans believe trade has been bad for the domestic economy.

Chris Kuehl, of Armada Corporate Intelligence, is NACM's economic advisor

‘Savings Claus’ Ruling Could Impact Credit Costs, Bears Monitoring

A panel of bankruptcy judges at the recent "Views from the Bench" conference at Georgetown University Law Center say a 2009 case involving a high-end ski lodge has set off a "firestorm" of discussion in the credit world. But, while one frequent NACM contributor notes the appeals process is worthy of watching for developments, he doesn't believe there will be more than a tangential impact.

The panel, including U.S. Bankruptcy Court Judges Hon. Allan Gropper and Hon. Stuart Bernstein, both of Southern District of New York, noted the issue of "savings clauses" has some up in arms that the cost of borrowing could skyrocket following a Florida court's decision. The case in question is Yellowstone Mountain Club LLC and Official Committee of Unsecured Creditors of TOUSA v. Citicorp North America (known as the TOUSA case). The fraudulent transfer and lender liability claims-related case revolved about an ill-conceived joint venture into the high-end housing market near a ski destination right before the real estate crash. It was ruled that a typical savings clause ruled that a because a party (Conveying Subsidiaries) involved in a joint venture with primary owner (Yellowstone Mountain Club) was insolvent before a massive refinancing transaction and received no value from it - Hence, accompanying liabilities were not enforceable.

On top of that, the judge in the case found that the savings clauses weren't enforceable in general because, as noted in materials prepared for the panel for event host the American Bankruptcy Institute, "with multiple savings clauses for multiple obligors, ‘it is utterly impossible to determine the obligations that result from the operation of any particular savings clause...as a matter of contract law, ‘an inherently' indefinite contract term is unenforceable.

While the judges fretted of a likely increase in borrowing costs, Bruce Nathan Esq., of Lowenstien Sandler PC, tells NACM he believes it is much more of a bank issue than a trades issue and that its impact should not be too direct or significant for most small businesses. He characterizes the matter an argument over an onerous provision based on banks trying to make themselves fraudulent conveyance proof.

"There's always reason for concern if credit is more expensive, but I don't think it will have that much of a bearing on trade credit. Trades don't generally have those clauses in our guarantees," said Nathan. He added that, tangentially, marginal customers with bank lines based on guarantees from affiliate entities would be most likely to run the risk of a bank charge increase in the fallout of the decision. "It only affects us to the extent we take from a guaranteed entity. That's always a risk, but that's a risk we all already know about it."

Brian Shappell, NACM staff writer

Rebounding Ford Earns a Ratings Bump

Moody's Investors Service took note of Ford's ongoing success in rebounding from its well-documented down days. The ratings agency gave the automotive manufacturer a stable outlook and upped its Corporate Family Rating (CFR) of Ford Motor Company to Ba2 from B1.

Also raised were Ford's probability of default to Ba2 from B1; senior secured credit facility to Baa3 from Ba1; senior unsecured to Ba3 from B2 and preferred stock to B1 from B3. Furthermore, Moody's also raised the CFR and senior unsecured ratings of Ford Motor Credit Company LLC, FCE Bank Plc, and Ford Credit Canada Limited to Ba2 from Ba3.

In its announcement Friday, Moody's lauded Ford's success at repositioning its operations and believe the company's cash flow will only continue to improve through at least 2011 thanks to improved industry and internal fundamentals:

"The sustainability of Ford's improving performance is supported by the extensive restructuring that has taken place in the US auto sector. Key elements of this restructuring have been the massive head-count reductions that lowered fixed costs and eliminated excess capacity, and the implementation of a new UAW contract that discontinued the JOBs bank program and freed OEMs of retiree health care obligations. This has resulted in a much healthier and commercially viable business environment for domestic OEMs. An additional factor contributing to the sustainability of Ford's performance is the highly competitive position of its existing vehicle portfolio, and the robustness of its new product pipeline. During the first half of 2010, Ford's earning and cash flow generation significantly exceeded our expectations, largely due to the competitiveness of its product portfolio. In addition, Ford has been at the forefront of embracing the more disciplined business practices made possible by the restructuring of the US auto sector."

Brian Shappell, NACM staff writer

IMF Meeting Will Focus on Protectionist Threats

(Business Intelligence Brief) The meeting of the International Monetary Fund is not always a seminal event in the global economic calendar but this year it has become the focal point for a range of concerns. In the last few months, the slow economic recovery has thrust almost every one of the developed nations into a crisis - some more seriously than others. The slow pace of recovery has meant that governments in Europe, Japan and the United States are far weaker than they expected to be, leaving political leaders are in panic mode. This has meant that they are all considering actions that are likely to have a deleterious impact on the global economy in the not distant future. The IMF meeting will try to get these nations to reconsider their policies but that could be an uphill battle in many respects.

The key issue for the moment is currency value. The Japanese have been leading the charge of late but they are not the only nation that has been trying to salvage their export sector with currency adjustments. The decision to try to reduce the value of the yen was taken as the dollar and euro sank dramatically against it. Suddenly the export economy in Japan was threatened and the companies that depend on overseas markets saw their respective stock prices collapse. The rapid decline in the market provoked the Japanese leadership to act despite the fact that such a move would be condemned by other nations. The timing of the Japanese decision could hardly be worse as the US was in the process of trying to ratchet up the pressure on the Chinese for their currency policy at the same time. It was awkward to be assailing the Chinese foe engaging in currency manipulation as the Japanese engaged in a version that was far more direct.

As the IMF meets, the US currency is falling like a stone and shows no sign of recovery as long as the Fed is still pursuing a policy of stimulation through low interest rates and an expansion of their securities purchasing. The Europeans are a little more cautious and may start to cut back on their stimulation, but they will be careful to avoid creating a situation in which the euro gains too much and too fast. That leaves almost every nation in the same boat and there are several who have warned that they are about to take steps to reduce the value of their currencies. The list includes South Africa, Australia, Korea and Brazil. Many more have sent signals that they will consider moves soon as well. This is the kind of response that was once referred to as "beggar thy neighbor" and has been blamed for accelerating and deepening the depression in the 1930s.

Analysis: The IMF is trying to get nations to engage in both short- and long term-strategies. In the short term, the name of the game is restraint - trying to convince nations that they should resist the temptation to protect their currency situation. These pleas are expected to fall on deaf ears. The long-term discussion may be a little less contentious, but few expect nations to make these adjustments rapidly, if at all. The IMF position and that of the US and European delegations is that the world economy is fundamentally out of balance, and that has to be addressed if these currency related crises are to become less common. In simplest terms, the export centered nations like China, Japan and other Asian states have to become more oriented to their domestic markets so that they sell less to other states. Meanwhile the states that do so much of the importing need to do far less. The trade deficit run by the United States is the case in point - too many imports and too few exports. Getting the system in balance is partly related to currency values abut there also has to be some conscious decisions regarding economic priorities. The Chinese spend very little on their own population and that has to change. The United States makes it far too easy to buy from overseas and fails to protect its own interests more often than not.

Chris Kuehl, of Armada Corporate Intelligence, is NACM's economic advisor

Fitch Latest to Downgrade Ireland's Credit Rating on Banking, Debt Woes

(Fitch Press Release) Fitch Ratings has downgraded the Republic of Ireland's (Ireland) Long-term foreign and local currency Issuer Default Ratings (IDRs) to 'A+' from 'AA-' respectively. The Outlooks on the Long-term IDRs are Negative. Fitch has simultaneously downgraded Ireland's Short-term foreign currency IDR to 'F1' from 'F1+'.

The Euro Area Country Ceiling of 'AAA' remains unchanged. The notes issued by the National Asset Management Agency (NAMA) have also been downgraded to 'A+' from 'AA-' and to 'F1' from 'F1+', in line with the sovereign ratings.

"The downgrade of Ireland reflects the exceptional and greater-than-expected fiscal cost associated with the government's recapitalisation of the Irish banks, especially Anglo Irish Bank," said Chris Pryce, Director in Fitch's Sovereign Group. "The Negative Outlook reflects the uncertainty regarding the timing and strength of economic recovery and medium-term fiscal consolidation effort."

Typically a Negative Outlook implies a slightly greater than 50% probability of a further downgrade over a 12-24 month horizon. The triggers for a revision of the Outlook to Stable would be evidence of sustained economic recovery and fiscal consolidation. The ratings could be downgraded further if the economy stagnates and broad-based political support for and implementation of budgetary consolidation weakens.

Fitch believes that the latest government estimate - announced on 30 September - of the fiscal cost of recapitalising Irish banks and the transfer of assets to NAMA are plausible, particularly if account is taken of the additional EUR5bn estimated for the stressed case. Moreover, the large cash buffer of more than EUR20bn, around EUR14bn of uncommitted funds of the National Pension Reserve Fund (NPRF) as well as ongoing bank funding support from the ECB means that Ireland still retains considerable financial flexibility. Despite the weak performance of the economy, the underlying budgetary position remains in line with the targets set out in the 2010 Budget and Fitch expects a further strengthening of the fiscal consolidation effort to be set out by the Minister of Finance in November.

On the basis of its central case, the government's total direct bank bailout costs will rise to EUR45bn from the EUR23bn assumed at the time of Fitch's last rating action on 4 November 2009. Of this EUR45bn, EUR29.3bn will be on account of Anglo Irish Bank ('BBB-'/RWN), already 100%-owned by the state. The remainder will be spread over the other four Irish banks. In some cases government assistance has been given indirectly by the state-owned NPRF in which case the transactions will show up as a rise in net debt, rather than the more commonly used gross debt measure.

General government gross debt (excluding debt issued by NAMA to fund asset transfers from the banks) will rise to 99% of GDP at end-2010 from the 78% previously predicted by the government. This increase is explained by the issuance of promissory notes to re-capitalise Anglo Irish Bank and Irish Nationwide Building Society in 2010 and by a downward revision to the estimated level of nominal GDP for 2010. While the promissory notes have an immediate full impact on the stock of gross debt, their funding cost is spread over a 10-15 year period. Net government debt that takes into account the government's cash buffer and the assets of the NPRF is forecast to be around 76% of GDP by year-end (90% excluding NPRF assets). Moreover, though the cost of bank recapitalisation is much greater than anticipated, the estimated cost of transferring assets to NAMA has consequently fallen to EUR31bn from EUR54bn. NAMA debt is not formally counted as part of government debt (though it is guaranteed by the state). However, it does represent a significant contingent liability. Fitch believes it is reasonable to assume that NAMA will over the long-term break-even given the average 58% discount that has been applied to transferred assets compared with an original forecast of around 30%.

The broad general government deficit for 2010 will be equivalent to an unprecedented 32% of GDP. However, in large part this reflects a ruling by the European statistical agency, Eurostat, that the issue of promissory notes by the government to the banks should be treated as 'above the line' budgetary expenditure. Fitch believes stripping out these one-off transactions provides a more appropriate measure of the underlying fiscal position which is now forecast to be a deficit of 11.9% of GDP, close to the initial government forecast for 2010.

A key element of strengthening confidence in the sustainability of public finances over the medium-term will be the announcement in early November of a 'four year profile' (2011 to 2014) for the budget including details of the adjustment necessary in terms of tax revenue as well as public expenditure. Broad-based political support would help strengthen the credibility of the medium-term fiscal consolidation effort.

The timing and strength of economic recovery is also critical to firmly placing public finances on a sustainable path. A rebalancing of the economy is underway. Ireland is regaining its international competitiveness lost during the 'boom' years and the current account of the balance of payments is expected to move to balance during 2011. Moreover, the drag on growth from the collapse of the construction boom has mostly run its course. Nevertheless, the ongoing distress in the housing and commercial real estate markets, household sector de-leveraging and the uncertainty over the global economic outlook, especially important given Ireland's open and internationally orientated economy, weigh on growth prospects and fiscal outlook.



Credit Congress ’11 Host City Coming Back Strong Post-Flood

Floods ravaged Nashville less than six months ago, sparing few low-lying areas in its wake. This included the famed Grand Ole Opry and the Gaylord Opryland Resort & Convention Center, host site of NACM's annual Credit Congress event for 2011. Both are helping to highlight how strongly and quickly the Music City is rebounding from the adversity.

The Grand Ole Opry reopened its doors last week after a massive renovation project was necessitated by tragic floods that stormed through the area -- floods that even left the famed stage area under multiple feet of water. The reopening, complete with a concerts with some of country music's biggest names, is seen as a victory for the effort to repair the badly damaged city.

Meanwhile, contacts at the Gaylord report its renovations, at a cost of about $180 million, are coming along well, too. The hotel operator remains on target to reopen on Nov. 15, complete with new or improved features such as the "Cascades Lobby," on-site airline kiosks, restaurants, bars, digital signage, all new carpeting and redesigned meeting space. In essence, those staying at the Gaylord over the next six months to one year, including NACM members come Credit Congress in May, will be doing so at a virtually brand new facility.

"Our meeting space is ready to go, and construction of the new restaurants, bars, Cascades lobby and Magnolia guest rooms is right on schedule," said Kemp Gallineau, Gaylord's senior vice president/chief sales officer. "There's a vibrant new spirit and energy at Gaylord...something greater than ever before. We look forward to sharing it."

Brian Shappell, NACM staff writer

Sectors Buck Continuity, Improve Anyway in Latest CMI

"If you are a big fan of volatility, you will like this month's Credit Managers' Index (CMI)," said Chris Kuehl, Ph.D., the National Association of Credit Management's (NACM) economic advisor. "The positive trends that we saw in last month's manufacturing data were replaced by some negative trends, while the service sector that looked so stressed in August seemed to come back to life in September. If just the CMI numbers were considered, one could conclude there really wasn't much going on and that everything was pretty stable. After all, the combined CMI reading went from 53.3 to 53.8. The real story is that this truly dramatic activity reversed the pattern of the previous month."

This pattern reflected the general confusion in the greater economy. Employment data managed to improve week over week at the same time that durable goods orders declined. Then, within the goods category itself, the gains in machinery manufacturing were offset by big drops in the aerospace sector. Some of this volatility can be attributed to the height of election season and Congress being in high gear-at least as far as rhetoric is concerned-and these various moves and countermoves influence business decision making from one week to another; meaning industries are delaying usual decisions as they try to determine if any of these changes will affect them.

Economists are starting to describe this recovery as a "growth recession," a term that could only be hatched by the dismal sciences Kuehl said. It refers to the fact that the recession essentially ended from a technical point of view in the summer of 2009. That was the conclusion of the National Bureau of Economic Research (NBER) with its examination of a host of factors alongside the traditional measures of GDP growth or decline. In fact, the NBER assessment of the economy held that the recession really began in 2007. What makes these assessments by the semi-official arbiter of all things recessionary interesting is they correspond with observations one could make by looking at the CMI data of the past few years.

By looking at the year-over-year numbers (see the Manufacturing and Service Index Levels graph below), it is apparent there was solid growth taking place by September 2009 and this growth carried forward through the rest of the year. Go back a few more months and look at the CMI numbers from the summer, and it is apparent that a turnaround was underway by May and June 2009-exactly the moment NBER determined the recession was coming to an end.

More interesting yet is the CMI data from 2007 when the rest of the country was still enjoying the boom. There were already some signs of trouble within the data: more disputes were appearing, there was more dollar exposure and there were more signals that sales were eroding. There was even a harbinger of things to come, as far as credit was concerned, as there was a reduction in both credit applications and applications granted. The numbers in 2007 were still solid and there was still growth but troubles were on the horizon.

What we are seeing now is that the economy was in better shape at the beginning of 2010 than it is now. In January, sales numbers were in the 60s and stayed there through May before declining through the summer. The future looks better, but only marginally. The slow activity underway during the last few months should better reflect the pace of progress to be expected in the months ahead. "The weakness in credit extension is going to continue to be a major factor and that will continue to affect sales as well. The negative issues have not become markedly worse, but they continue to be bigger concerns than they were earlier in the year, especially for the manufacturing segment," said Kuehl.

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