After five straight months of gains, the Credit Managers’ Index (CMI) -- unveiled today at www.nacm.org -- showed an unsettling decline. Granted, the slide is far from drastic, and the CMI sits at a level exceeding that of nine of the previous 11 months.
The decline in the CMI is consistent with other data released in recent weeks. The numbers are not suggesting an imminent crisis, and nothing that approaches the return to recession being seen in Europe. However, it indicates that the robust growth that started the year has faded somewhat, provoking concerns the economy will start to retreat for the third time in as many years.
Said NACM Economist Chris Kuehl, PhD: “Spring 2012 did feature tensions in Iran sufficient to force the price of oil up for a while, and the financial crisis in Europe has had almost as much impact on the global economy as the  disaster in Japan.”
Among the biggest drags on the CMI were declining sales impact on the index of favorable factors and dollar amount of customer deductions category within the unfavorable factors side.
Kuehl characterizes the present CMI as one in a "fragile situation" that is close to contraction, but he noted there are also several reasons to remain upbeat.
Brian Shappell, CBA, NACM staff writer
(NOTE: The April CMI is now available. Visit www.nacm.org to view the full breakdown. Additional coverage is also coming to this week's eNews, available Thursday afternoon).
The Commerce Department (DOC) reported this morning that U.S. economic growth had slowed in the first quarter of 2012. Gross domestic product (GDP) increased at an annual rate of 2.2%, compared to 3.0% in the fourth quarter of 2011.
While the slower growth is bound to raise concerns about the strength of the U.S. economic recovery, much of the negative aspects of the GDP report were offset by an increase in consumer spending. Personal consumption expenditures (PCE) increased by 2.9% in the first quarter, compared with an increase of 2.1% in the fourth of last year.
With business spending, the picture was just a mixed. Real exports of goods and services increased by 5.4% in the first quarter of 2012, compared with a 2.7% increase in the prior quarter, but overall business spending fell. Nonresidential investment decreased by 2.1% in the most recent report, in contrast to a much more robust 5.2% increase at the end of last year.
Further contributing to the deceleration was a continued decline in federal spending, albeit often at a lower clip. Overall, federal spending decreased by 5.6% in the first quarter, compared to a decrease of 6.9% in the fourth of 2011. National defense decreased by 8.1%, as opposed to last year's 12.1% freefall. Nondefense spending had experienced a 4.5% increase at the end of last year, but decreased by 0.6%, in the first three months of 2012.
The DOC's Bureau of Economic Analysis, responsible for issuing the quarterly readings, stressed that this 2.2% reading was an advance estimate, based on source data that are incomplete or subject to further revision by other agencies. A second, more accurate reading for the first quarter of 2012 will be released at the end of May.
Jacob Barron, CICP, NACM staff writer
The world’s largest hedge funds are betting that the prices for industrial commodities will start to rise, and quickly, by the end of the year. This includes iron ore, copper, aluminum and most of the rarer elements. The only thing they see tanking will be gold, as they have concluded that this is a metal that has been far overpriced as people flee other investment options.
The rationale is that there will be a significant level of global economic recovery to stimulate demand for commodities that many operations have elected to slow production of. The low prices of copper shoved some of the bigger producers into limiting capacity. The same process has been at work with aluminum. Steel demand is still far below what it was a few years ago, but it has been in recovery as there has been more life in the automotive sector as well as in mining equipment and agricultural equipment.
Analysis: In this scenario, the manufacturer faces a dilemma. If they do not lock down supply now, they face the threat of higher prices. If too many elect to buy now, the supply issues will occur that much sooner, and the prices will escalate. If the producers respond to these high prices, they will up their output and the commodities hit the market before there is real demand. Then, there is then the possibility of a glut that pushes the prices back down—just as the real demand starts up, and those who waited get the best deal.
Chris Kuehl, PhD, NACM Economist
"Information received since the Federal Open Market Committee met in March suggests that the economy has been expanding moderately. Labor market conditions have improved in recent months; the unemployment rate has declined but remains elevated. Household spending and business fixed investment have continued to advance. Despite some signs of improvement, the housing sector remains depressed. Inflation has picked up somewhat, mainly reflecting higher prices of crude oil and gasoline. However, longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects economic growth to remain moderate over coming quarters and then to pick up gradually. Consequently, the Committee anticipates that the unemployment rate will decline gradually toward levels that it judges to be consistent with its dual mandate. Strains in global financial markets continue to pose significant downside risks to the economic outlook. The increase in oil and gasoline prices earlier this year is expected to affect inflation only temporarily, and the Committee anticipates that subsequently inflation will run at or below the rate that it judges most consistent with its dual mandate.
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0% to 0.25% and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.
The Committee also decided to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate to promote a stronger economic recovery in a context of price stability."
Source: The Federal Reserve
New statistics unveiled by the United States’ and Chinese governments show significant declines in various manufacturing categories for the last month. But, while some in mainstream media cover the happenings with a tone of panic, economists tell NACM that such deep concern is not warranted even if the numbers look poor on the surface.
China’s Purchase Manager’s Index tracked at 49.1 for the most recent period, representing the sixth straight decline in activity out of the manufacturing powerhouse. This came at the same time the U.S. Commerce Department reported a 4.2% decrease in durable (long-term) goods orders in March, the largest slide in about three years.
Despite that, Conference Board Economist Ken Goldstein isn't all that worried about manufacturing seeing a deep downturn in mid- or late-2012 in China. He doesn’t see the manufacturing statistics as foretelling any kind of economic hard-landing there, as feared by some market-watchers.
“Industrial production globally had been slowing but appears to be turning around judging from signals from PMI’s across the globe,” Goldstein told NACM. “China is the exception, not the rule. That sets up the dynamic where their weakness pulls others down or everyone else turns a corner, allowing China to up their exports and cushion their landing. Besides, South Korea just reported an increase in consumer confidence, suggesting the Koreans are not that worried about contagion. If that is true, why should anyone else be?”
Brian Shappell, CBA, NACM staff writer
(Note: China will be front-and-center during creditor-centric discussions on the final day of the FCIB's I.C.E. Conference in Chicago, which runs May 2-4, as well as in FCIB's latest "Doing Business in China" webinar May 9-10. For more information or to register, visit www.fcibglobal.com and click the "Events" tab).
In front of eight of the Supreme Court of the United States' nine sitting justices Monday, attorneys argued the finer points of why credit bidding should or should not be enforced as a right of secured creditors during a bankruptcy-related assets sale. Though a judgment could come as late as the end of June, the justices throughout the argument hearing appeared wary of arguments that would undermine the right on the part of secured creditors to use credit bid tactics.
The case in question is RadLAX Gateway Hotel LLC v. Amalgamated Bank. At stake is whether creditors will be able to use the value of money owed by the debtor selling assets at the auction table as opposed to straight cash, a process called credit bidding, as the U.S. Bankruptcy Court for the Seventh Circuit ruled in RadLAX. However, that view is competing with contrary decisions out of the U.S. Bankruptcy Courts for the Third and Fifth Districts, which preceded it and would limit credit bidding if widely adopted.
Appearning for the petitioner (RadLAX), David Neff argued that, in a case like RadLAX, the concern lies in the ability to attract other, non-secured bidders to even “show up” for an auction if they have the knowledge that a secured creditor can best the bid without offering up any new cash, just what is already owed to them. In addition, Neff said federal law notes that the use of the word “or” in one of the clauses guiding bankruptcy actions says the sale can go on without the right of a credit bid if the “indubitable equivalent” of their claim is realized.
Neffs’ argument drew critical reactions from several of the judges, who intimated that the argument against credit bidding runs counter to the essence of the Bankruptcy Code and the intentions of the U.S. Congress:
“You’re depriving secured creditors the opportunity to hold onto an asset if he believes the asset is being undervalued,” said Justice Alito.
“If a creditor loaned you $1 million, he got a secured interest in the property – that’s the deal,” said Justice Breyer. “There is still an advantage for the debtor to stretch out the payments over time. So, give him the property.”
“The greatest security is knowing what the courts will do,” said Justice Sotomayor. “The greatest security is knowing what the courts will do. What is the value in the business world of us upsetting the norm? Why should we upset the expectations?” She added that the presence of stalking horse bidders in a vast amount of U.S. bankruptcy cases already illustrates the existing “process is working.”
“It doesn’t take a genius to figure out that, if you allow people to bid cash or credit, you’re going to get more bids and higher bids than they are only allowed to bid cash.” Said Justice Scalia.
However, those arguing against credit bidding seemed to find a strong ally in Chief Justice Roberts, who took attorney Deanne Maynard, arguing on behalf of secured creditors’ rights, to task for “avoiding” the fact that language (specifically the word “or”) in federal law could be construed that one condition could potentially be used as a substitute for the other.
Maynard argued that the condition discussed by Neff/the case petitioners was intended by Congress as an “other” condition, one that is supposed to come in the process after an auction is completed not one that supersedes other conditions guaranteeing the credit bidding right of secured creditors.
“The whole code is set up to protect secured creditors from the undervaluation of their claim,” Maynard said. “If the secured creditor can’t raise enough cash, which is a real risk, you’re taking out of the marketplace one of the most knowledgeable parties of the property.”
Roberts responded by noting the key importance of “the specific over the general” during the Supreme Court review of the issues and statutory language.
Brian Shappell, CBA, NACM staff writer
A House panel approved legislation yesterday that would rescind the federal government’s authority to unwind failing financial institutions.
In a 31-26 vote, the House Financial Services Committee voted to repeal Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which grants regulators the authority to wind-down faltering firms in the interest of protecting the broader economy. The measure was included as part of bill designed to cut the deficit by $35 billion.
Republicans, including Financial Services Committee Chairman Spencer Bachus (R-AL), have long considered Title II a provision that institutionalizes bailouts. In addition to rolling back several other portions of the Dodd-Frank Act, the bill approved by the committee would repeal the Federal Deposit Insurance Corporation’s (FDIC’s) authority to lend to a failing firm, purchase the assets of a failing firm and guarantee the obligations of a failing firm. It would also eliminate the FDIC’s authority to borrow up to a percentage of the book value of a failed firm’s total consolidated assets in the days following its appointment as receiver.
As far as the repeal of Title II’s effect on the federal budget, Bachus cited a Congressional Budget Office (CBO) report which pegged the proposal’s savings at $22 billion over 10 years. Democrats countered, however, that as designed, Title II would eventually recoup any money borrowed from the taxpayer, typically by assessing fees on larger financial institutions.
In a letter prior to the committee’s vote, Treasury Secretary Tim Geithner urged Chairman Bachus to rethink his attempts to reduce the nation’s deficit by essentially gutting the Dodd-Frank Act, arguing that any budget savings would be erased by the costs of future crises. “Title II…prohibits the government from bailing out failing financial institutions, provides authority to break up or unwind those institutions and ensures that major financial institutions, rather than the taxpayer, bear the costs of future financial crises,” said Geithner. “By eliminating this authority, this provision would critically undermine the government’s ability to limit the damage to the economy in the event on future financial crises.”
“This provision was carefully designed to have no cost to the taxpayer over the long run,” he added. “Eliminating this provision would increase the risk that future financial crises would increase future deficits.”
Despite the committee’s approval of the bill, it has little chance of passing the Democratically-controlled Senate. Nonetheless, it could serve as a blueprint for future Republican attempts to undo the Dodd-Frank Act should the party retake the Senate or the White House, or both, in November.
Jacob Barron, CICP, NACM staff writer
Struggles among United States-based manufacturers of solar power-related products have been well documented as at least one significant company in the industry has filed for bankruptcy protection just about every month since last fall amid stiff competition and wavering domestic consumer demand. And, now, news out of Germany looks grim as the Frankfurt-based First Solar announced it would shutter a domestic plant and “idle” four production lines in Malaysia amid the acknowledging that “the European market has deteriorated to the extent that our operations there are no longer economically sustainable.”
However, India clearly is pressing on with its alternative/renewable energy generation platform as a nation, and solar energy appears to be a big part of that. Demand for solar products developed largely in the U.S., Germany, China as well as other smaller Asian nations has skyrocketed in recent months as India struggles to tries to keep up with energy resource needs imposed upon by its surging population and development. To wit, the Jawaharlal Nehru National Solar Mission aims to expand the solar capacity within the country to 20,000 megawatts by the end of this decade, which would translate into generation of 7% of all energy used within India coming via solar means.
The latest high-profile Indian solar project, dubbed the “Rajasthan Sun Technique Energy Private Limited” has brought the Indian government and developers together with Reliance Power, a U.S. subsidiary with French ownership, as well as institutional investments from Far East Asia and Holland. Despite its reauthorization beyond this year becoming a political football in the U.S. Congress, the Export-Import Bank of the U.S. approved an $80 million loan this week to facilitate the purchase of products for the project from manufacturing outfits based in eight U.S. states and the District of Columbia. It is the seventh loan venture involving Ex-Im on an India-based solar project.
Brian Shappell, CBA, NACM staff writer
The U.S.-Colombia free trade agreement (FTA) will enter into force next month, far sooner than many initially expected.
During the Summit of the Americas in Colombia this past weekend, President Barack Obama announced that the FTA will take effect on May 15, allowing over 80% of U.S. exports of consumer and industrial products to enter Colombia duty free. These include agricultural and construction equipment, building products, aircraft and parts, fertilizers, information technology equipment, medical scientific equipment and wood. Additionally, more than half of U.S. exports of agricultural commodities to Colombia will become duty-free, including wheat, barley, soybeans, high-quality beef, bacon and almost all fruit and vegetable products.
The ahead-of-schedule effective date comes as a result of quick work on the part of both nations to review each other’s laws and regulations related to the agreement’s implementation.
“This agreement will provide American businesses, farmers and ranchers with significantly improved access to the third largest economy in South America,” said U.S. Trade Ambassador Ron Kirk. “That means support for well-paying jobs at home.”
The agreement will also provide significant new access to Colombia’s $180 billion services market, supporting increased opportunities for U.S. service providers.
“This landmark agreement opens the door to new business opportunities, economic growth and job creation in the U.S. and Colombia,” said Thomas Donohue, president and CEO of the U.S. Chamber of Commerce. According to the Chamber, U.S. exports to Colombia have risen four-fold over the past decade, topping $14 billion last year. “Today our two countries can celebrate as we take our partnership to a new level.”
Congress approved FTAs with Panama, Colombia and South Korea last October. Panama’s remains the only FTA that has yet to earn an effective date. South Korea’s was implemented on March 15.
For more information on international trade, visit FCIB’s website at www.fcibglobal.com.
Jacob Barron, NACM staff writer
Though the trade surplus again grew this month, news late this week of a slowdown in the pace of Chinese growth sent some ripples through the markets in Asia and the rest of the world. Still, there is very little consensus on what this really means. And, is 8.3% growth really a bad thing?
The fact is that China’s leaders set a target for growth that is 7.5% to bring down inflation levels and, thus far, the economy continues to grow faster than that. However, the slowdown in Chinese growth has not been entirely due to these internal decisions, which is part of the concern.
The sense is that China does not consider the lower demand shown in February trade statistics as foreshadowing a crisis, but they are not ignoring the implications either. China soon will be getting a new set of leaders, and there will be pressure on this new team to show that they have the issues in China well in hand. The population is still expanding in China, and there is still a need to find over 1.3 million jobs a month to accommodate the new arrivals into the workforce. At the same time China is well aware that the aging population is going to put a strain on the working population over the next few years. The country can’t afford to stagnate when it comes to expansion, and that will put a damper on the inflation effort sooner or later.
NOTE: For more information on FCIB’s two-day “Doing Business in China” webinar (May 9-10), or to register, click here: http://tinyurl.com/7fpc95h. To take part in FCIB’s International Credit and Collection Survey on the topic of the BRIC (Brazil, Russia, India, China) Nations, click here: http://tinyurl.com/847jwqq.
Chris Kuehl, PhD, NACM economist
The rising costs of energy undoubtedly continues to put a burden on businesses around the globe. Still, exporting remains an area of optimism for several of the strongest international economies, as seems to be illustrated by statistics unveiled this week.
In Germany, a trade official said Wednesday that demand in fast-emerging Asian markets was becoming more important to business there than ever, as economic problems mount in European Union nations historically known for buying German products. As such, developing nations in the Far East warrant more attention. Nodding to the reality of the European Union’s deep financial problems, especially among its southern members, BGA President Anton Boerner declared that the EU was “losing importance” as far as export destinations go.
In China, market-watchers were surprised by this week’s news of a near $5.4 billion (USD) trade surplus on surging exports in March. Chinese officials pinned the increase to renewed appetite from U.S.-based buyers at a rate that is higher than expected at this point. China, amid growing concern over lower domestic demand, drew concern of market-watchers by reporting a $31.5 billion trade deficit just one month ago.
Meanwhile, in the United States, exports hit a record high amid demand from the Chinese and the more stable economies within the euro zone. The Obama Administration has been pushing for and easing businesses’ transition into accelerated exporting activity as the domestic economic recovery trudges slowly along. Despite the exporting record this month, it’s not all rosy for U.S. businesses in the trade game – costs of exporting and importing have increased substantial of late, especially in March (see more on this in the current edition of eNews, available late Thursday afternoon).
Brian Shappell, CBA, NACM staff writer
Total commercial bankruptcy filings for the first three months of 2012 hit 15,833, a 19% drop from the 19,638 filings during the same period in 2011.
According to data provided to the American Bankruptcy Institute (ABI) by Epiq Systems, Inc., the fall in commercial filings mirrored the overall decline in bankruptcies across the board. Total and noncommercial filings both decreased by 12% in the first quarter compared to the same period in 2011.
For trade creditors, the decline in bankruptcy filings has also been accompanied by a drop in collection issues, according to Lynnette Warman, Esq., a partner with Hunton & Williams, LLP. “The trade creditors I speak with confirm that they are experiencing fewer bankruptcy filings, and that for many, there are fewer collection issues,” she noted. “In fact, the number and amount of trade debts outsourced to collection agencies have also dropped over the past year.”
Much of the decline can be traced back to tightened credit conditions, both secured and unsecured, that gripped the trade during the recession. “As this occurred, some businesses failed fairly quickly after their bank lines were cut or unsecured credit reduced, ” said Warman. “Some of these closures were done through bankruptcy; other businesses just quietly closed their doors and their owners simply stopped doing business.”
While banks and sellers tightened credit across the board, the buyers simultaneously experienced a significant drop in their own income. “Many companies experienced a serious reduction in sales, which obviously led to fewer purchases on their part, thus less outstanding unsecured debt,” said Warman. “Businesses that have survived the past few years have had to cut expenses to survive, and should have less debt, both secured and unsecured, on their books.”
Warman will participate in four sessions at this year’s NACM Credit Congress in June, co-hosting the CCE Exam Review, serving as a panelist in the Legal Issues Executive Exchange session, and presenting two separate educational sessions. To find out more about this year’s program, or to register, click here.
Jacob Barron, CICP, NACM staff writer
Since joining forces in the early 2000s, Preston Brust and Chris Lucas, a duo better known as the LoCash Cowboys, have climbed their way up to country music's upper crust. Coming from humble beginnings in a Nashville saloon, Brust and Lucas have ridden their talent, energy and hard work to success after success, from appearances at shows and festivals all over the world, to the top of the charts with the LoCash-crafted #1 hit single, "You Gonna Fly," which was recorded by Keith Urban.
In anticipation of their third appeance at NACM's upcoming Credit Congress in Dallas, NACM Staff Writter Jacob Barron, CICP spoke with Lucas to discuss the band's roots and its bright future.
NACM: You were out of the country recently.
Yeah we were in Germany, Switzerland and Belgium. We did some Switzerland festival dates and then we did a Stars and Stripes tour for the military.
NACM: How was that? Was it the first time you guys were out of the country?
We’ve been to Mexico, but going to Germany, it was our first time for the troops and the military. It was awesome just being part of something big and to have helped the families over there when their husbands or wives are overseas in Afghanistan.
NACM: So were you playing mostly for the crowds at the U.S. bases?
Both. The foreign crowd, they love their country music over there. It’s unbelievable. We sold out of merch [merchandise] in the first day. I mean, I brought enough for 14 days and we sold out in one day. It’s crazy over there. They love American music. And with the Stars and Stripes tour, you get to go out and check the helicopters out and the jets and they walk you around and show you what our military’s really doing over there, and that was pretty interesting.
NACM: Speaking of, is there any difference for you guys playing European audiences instead of American audiences?
There is a difference and, I don’t want to offend anybody by it, but it’s like the European audience, they’re not as critical, because they don’t have the choices like America does. They just love music in general. You go over there, and I mean, they know what’s good and what’s not, but they’re not segregated by "well, this is just pop," or "this is just country." When you listen to a radio station over there they play everything. It’s really cool because they’re music lovers whether they’re country fans or not.
NACM: You guys have been playing together for a while now. Is there any city or venue that you most look forward to playing?
My favorite is definitely Baltimore, obviously, because my family’s there and it’s usually packed, but I’ll be honest with you, and I’m not just saying this, the Glass Cactus down there in Texas? It’s one of the best venues we’ve played. It’s really cool, like a Vegas-style club with a huge stage. The whole hotel is gorgeous, and the club is right next to the hotel.
NACM: So is the new album [called "This Is How We Do It"] done for the most part?
We’re releasing it in July, don’t have an exact date on it yet, but yeah, for the most part it is done. I think we’re just tightening it up on one or two more songs. Our new single "C-O-U-N-T-R-Y," comes out April 28th and May 1st.
NACM: Is there a difference between the first album and this one? I know the first one was self-released.
It’s like the grown-up version of LoCash. We had to do that first album to kind of get out what we were trying to express and what we were when we were younger, and I think through the years and on the road and writing with some huge artists and our producer Jeffrey Steele, you know, we wrote some great songs along the way and were like "we gotta come up with a big label project and we gotta come to the game, ready to win," and I belive we did that.
NACM: I wanted to ask, how did you and Preston come together as a group?
We actually both started working at the Wildhorse Saloon in Nashville, which is the sister to the Glass Cactus, and we just started hosting shows, teaching dance lessons, and we realized our banter back and forth on the microphone was cool. It was like Sinatra and Dean Martin all over again, and people were coming to see us rather than the bands. So then we finally looked at each other and said “man, do you sing?” I said “yeah, do you sing?” and he said “yeah,” so finally we started working on our harmonies backstage, going over some R&B songs, some country songs, some gospel songs, and we said "let’s do this right" and we went on the road.
NACM: How was that process? It seems like you guys had it pretty rough.
There was nothing easy about it <laughs>. We used to rock on tuna fish and macaroni and cheese, I mean, that was literally it. We would all take a van, anything we could drive like Preston’s old Grand Cherokee with no air conditioning, and we took it all out for four or five years since 2002, just kicking butt on every show and state there is. We did the old grassroots thing, the way they used to do it in the Motown days and the way they used to do it in the rock-n-roll days. Now we have some really serious fans who believe in us from 2002.
NACM: Did the success of "You Gonna Fly" really open things up for the group?
That’s probably the biggest thing so far, going number one. I seriously just got off the phone with Keith Urban like 45 minutes ago and I’m still smiling from ear to ear. You get a call like that and he’s thanking you for writing a song...it’s pretty amazing. And now we’re starting to see respect from radio stations, respect from bands that maybe weren't sure about us. You know, it’s all perception versus reality for a fan, and now they’re seeing us, saying "hey, these guys are partying with Keith, these guys, they had a Top 30 hit with their single," so the shows really ramp up. We just played Indianapolis, and there was 20 people the first day we were there two or three years ago, and it was sold out this weekend.
NACM: What's the songwriting process like for you guys?
It’s collaborative. One of us will come up with a title, we’ll start there and then we’ll go to the hook and find something that we both believe in, and next thing you know it turns out great.
NACM: Is there anything I missed?
Yeah, you should tell everyone that I need my credit reviewed and fixed <laughs>. My credit sucks man, I need some help with it.
NACM: <laughs>I'm sure I know plenty of people who would be willing to do that.
For more information about NACM's upcoming Credit Congress, or to register, click here!
Many have argued that the Chapter 11 process, at least as it works for unsecured creditors, is broken. Among those advocating for changes to the Bankruptcy Code to better provide for trade creditors are not merely the scorned trade creditors themselves, but also a burgeoning class of legal professionals.
"Increasingly, Chapter 11 is a tool for a failing company to shed its assets and distribute its unencumbered cash proceeds, if any, to creditors," said Brett Weisenberg of Cooley LLP. "The exit strategies clearly provided for Chapter 11 debtors—confirmation of a liquidation plan or conversion of the case to Chapter 7, with their attendant delay, expense and risk—no longer adequately address the goals of the various constituencies within a liquidating Chapter 11."
Weisenberg is the author of an article titled "Expediting Chapter 11 Debtor's Distribution to Creditors," which will appear in this month's edition of the ABI Journal, published by the American Bankruptcy Institute (ABI). In it, he outlines a two-part proposal for changes to the Bankruptcy Code that would enhance Chapter 11 process effectiveness, specifically by providing for a "structured" dismissal of the Chapter 11 case in certain instances and a combined disclosure statement and plan hearing. "While many bankruptcy courts have authorized these alternative exit strategies as being permitted by the Code, the time is ripe to make crystal clear that these procedures are in fact authorized by the Code," said Weisenberg.
Such a structured dismissal would prevent debtors from languishing in bankruptcy when there's little reason to believe it will be successful. Weisenberg noted in his article that the criteria to use such a structured dismissal "should include (1) the debtor holding less cash to be distributed than some maximum amount, and (2) establishing, by a preponderance of the evidence, that (a) proceeding in the requested fashion is in the best interests of all creditors and (b) confirming that a Chapter 11 plan of liquidation would be overly burdensome or impractical under the specific facts of the case."
In theory, this would provide creditors with a better chance at greater recovery, since, rather than a lengthy, expensive and ultimately futile Chapter 11 process, the case would be dismissed, and authority granted to the debtor estate fiduciaries to make a distribution to creditors. Furthermore, the speed of the process would be increased by the combination of the disclosure statement and plan hearing, which Weisenberg noted was similar to the procedure used by small business debtors under Section 1125(f) of the Code.
Until these changes are made, however, Weisenberg said that creditors and bankruptcy professionals "will be forced to expend funds on an overly complicated and cumbersome plan-confirmation process, or be compelled to fight over whether utilizing these alternative exit strategies is permitted under the Code."
Learn more about NACM's positions on the Bankruptcy Code and other statutes in the 2012 NACM Issue Brief.
Jacob Barron, CICP, NACM staff writer
One would expect the managers of what’s often a company’s largest asset, its accounts receivable, to be pretty high on the invite list to upper management meetings. Sometimes this is the case, and sometimes it isn’t.
NACM’s monthly survey for March found that credit’s inclusion in top tier meetings was split pretty evenly, with about 51% responding that “yes,” they were included in meetings with upper management at their companies, and about 47% responding that “no,” they were not. The remaining 2% noted that the question was not applicable, often due to their company’s size or structure.
Some participants noted that their companies used meetings to let employees know how valued they are. “Our company does a nice job of making all employees feel part of the team. They understand that if an employee feels they are part of the process, they take ownership,” said one respondent. “Both corporate and divisional senior and executive management are very good about bringing credit into the conversation when there is a change or issue,” said another.
Others, however, considered their exclusion from such meetings a depressing sign of the company’s priorities. “We are included when it's convenient for upper management to have us there,” said one participant. “Otherwise, no we are not and a lot of times we are not even informed of any changes that may pertain to us in a timely fashion.”
“Management attention is mostly concentrated on operational areas involving production, revenue and sales. Credit functions are not a primary focus,” said another.
As some noted, this can create a rift between departments that are deemed worthy of inclusion at upper management meetings and those departments that are not. “Upper management…views the department as a necessity and keeps us in the background,” said one respondent. “Upper management does not portray or embody an attitude of cooperation and benefit between sales and the credit department. This continues to feed the sales versus credit atmosphere dividing the two departments.”
NACM’s April survey deals with accounting ratios and is now live. Participate today by clicking here, and be entered into a drawing to win a free teleconference registration.
Jacob Barron, CICP, NACM staff writer
The U.S. Bankruptcy Court located in Delaware recently got over being the venue for some high-profile bankruptcy cases. And though bankruptcy filing levels appear to be on a significant downswing, the court in the first state of the union will hear a pair of cases likely to gain their own widespread attention in the mainstream media.
“Pink slime” became a new phrase in the lexicon of America’s consciousness followed by fast-spreading stories, which gained intense notoriety through social media sharing, of the use of chemical-laden meat additive used widely by restaurants, especially fast food outfits. The public backlash caused a drastic reduction in orders and, thus, those in the meat additive industry are struggling.
As such, the first industry Chapter 11 bankruptcy filing—not expected to be the last—comes from AFA Foods, which cited media coverage and its impact on sales to explain an inability to pay debts owed to secured and unsecured creditors. Even the case’s judge, Mary Walrath, has expressed skepticism in its reorganization prospects. It has been reported that a quick company sale might be the most optimistic option.
From processed meat to another troubled industry, solar products development, yet another in a spate of filings came this week. Solar Trust of America LLC, began having liquidity problems stemming largely from issues at parent company Solar Millennium AG. The parent company, based in Germany, was trying to sell Solar Trust but could not finish the deal before filing its own bankruptcy in Europe.
The case is significant because Solar Trust owns development rights to the world’s largest solar power project, the Blyth Solar Power Project, in California. Just one year ago, it garnered a conditional loan from the U.S. Department of Energy exceeding $2 billion, almost ensuring the Republican Party will dredge up the issue as the presidential election approaches. The Obama Administration is still recovering from the hit it took when Solyndra, a company with deep ties to President Barack Obama being investigated for fraud, filed bankruptcy months ago. More than a half-dozen other solar-related companies have filed for some form of bankruptcy protection since late last summer, most of which tied to oversaturation in the U.S. market and an inability to compete on price with Asian manufacturers of solar products.
Brian Shappell, CBA, NACM staff writer
Despite statistics illustrating a surprise trade surplus in recent weeks (as noted in NACM eNews), the mood of the Japanese manufacturer improved only a little in the last few weeks as the Bank of Japan managed to blast the yen back to some measure of respectability. However, by all accounts, the reprieve will be short-lived, and the yen will start to ramp up again.
The dollar is not showing any signs of rebounding despite the fact the largely positive economic data of late. The euro is in the tank, and there it shall stay. The yen is still the chosen refuge of some global currency traders, and that will become manifest in the weeks ahead. The exporters know they are living on borrowed time.
The Japanese export dependence still is a drag on the economy, but it is very hard to break that pattern. Japan simply lacks the aggressive consumer on which the United States can depend. The domestic economy will not jumpstart the Japanese, and it rarely has. The major hope in Japan still rests on the recovery of the U.S. consumer and their appetite for the goods that Japanese companies still manufacture better than the Chinese.
Chris Kuehl, PhD, NACM economist