CMI Preview: Index Drops, Some Categories Near Contraction Area


The Credit Managers’ Index (CMI) for July – available now at www.nacm.org and Thursday in eNews – will reflect the grim reality of the economy of summer 2012. It became obvious some months ago that another spring swoon was underway and, like the last few years, the summer was an extension of the deterioration, according to various CMI statistics.  



“The problems that beset the economy earlier in the year have not abated and, now, there are some new ones to worry about [the farm sector, the Euro crisis],” said NACM Economist Chris Kuehl, who prepares the CMI each month.  “There are some signs of nascent recovery, but thus far these have not been enough to reverse the course of the last few months.”



And it’s the unfavorable factors that are telling more of a downbeat story, which has Kuehl more worried than the slide in the favorable indicators.



“The index of unfavorable indicators has now dipped below the magic 50 line that separates expansion from contraction; This is the first time the unfavorable index has been in contraction since the end of 2010, Kuehl said. “This is a precipitous fall, and it is unlikely that a reversal will be swift…the slump is setting in more aggressively.”



Among the biggest areas of concern is the dollar amount beyond terms decline. To wit, problems in that area could be foreshadowing that customers are experiencing newfound cash-flow issues most thought were over at the official end of the recession. Meanwhile, generally weak consumer confidence and a lack of importing interest from struggling European-based trade partners are compounding the negatives.



-Brian Shappell, CBA, NACM staff writer



(Note: for full CMI statistics for July and additional analysis, please visit to www.nacm.org).

Unsecureds to Take Big Haircut in Newly Proposed Solar Bankruptcy Plan


As expected, unsecured creditors will get pennies on the dollar at best if the initial proposal for Solydra’s freshly filed reorganization plan is adopted (eventually) in anything resembling its present form by a U.S. Bankruptcy Court judge.



Solyndra, which announced it was seeking Chapter 11 protection in September amid a declining solar market during recession, high overhead, foreign competition and accusations of fraud; has filed its reorganization plan in a way many companies do when insolvency strikes: in the Third Circuit/Delaware Court. It has long been perceived that said court, based in Wilmington, is the most bankruptcy-friendly in the nation. In the plan, the controversial Solyndra would end up paying out a maximum of 6% of what it owes to unsecured creditors, and that is if proceedings go smoothly. Remember: lengthy court battles which have been prevalent in high-profile cases of late could only draw more funds from the overall pot, and reduce that estimate.



Solyndra, a solar energy company with deep ties to the Obama Administration fundraisers, still is being investigated for fraud. The California company had at one point received more than one-half-billion-dollars in government loan guarantees and was noted by Obama political enemies for its palatial offices.



It’s one of more than a half-dozen filings in the last year by overleveraged alternative energy companies, which was predicted in NACM’s Business Credit Magazine in spring 2011. Producers have alleged that Asian competitors have been offered subsidies by their governments and can no longer compete because they are undercutting them so drastically on pricing and costs. Others note a major factor is oversaturation in the U.S. solar energy/products manufacturing industry, which saw rapid and perhaps unsustainable interest during the waning days of the last economic boom.



-Brian Shappell, CBA, NACM staff writer

More Opposition to Interchange Settlement, but Resistance Might Be Futile


Opposition to the proposed settlement in the credit card interchange case continues to grow, as another major plaintiff in the case rejected the agreement this week.

The National Association of Convenience Stores (NACS) has led the opposition, joined by Walmart, Target, SIGMA, an association representing independent motor fuel marketers and chain retailers, and now the National Grocers Association (NGA), which is among the most prominent of the class action plaintiffs in the original case.

NGA cited the settlement's lack of a mechanism to allow merchants to have a say in how interchange fees are set as their primary reason for joining the opposition.

"NGA joined the lawsuit on behalf of its independent retail grocer members over seven years ago to bring about real reform of the anticompetitive credit card swipe fee system. This proposed settlement agreement fails in this regard by allowing Visa and MasterCard to continue their dominant anticompetitive practices," said NGA President and CEO Peter Larkin. "Meanwhile, merchants and consumers will continue to pay exorbitant swipe fees with no hope of reform. NGA's members are also concerned about Visa and MasterCard's ability to use their dominance to prevent emerging and innovative lower cost payment options."

Interchange, or "swipe," fees are currently set unilaterally by card processors like Visa and MasterCard. While the proposed settlement provides for a $6 billion payment to retailers and allows merchants to pass on their future processing costs to their customers, it does not provide for transparency in the way that the fees themselves are set, meaning Visa and MasterCard could continue to charge fees at whatever rates they see fit without many options for recourse from merchants or buyers.

"The proposed settlement represents a small fraction of the $350 billion in swipe fees the card companies have charged merchants, and ultimately consumers, for the last seven years. This agreement only ensures that the card companies will continue to fix hidden swipe fees and be able to increase them at will for years to come," said Larkin.

Despite the intensity of the opposition, resistance to the settlement could prove futile. The opposition by trade groups means only that the groups themselves reject the settlement, not that their members do. Merchants will individually have the ability to formally opt out of the settlement should it be approved and if merchants representing 25% of Visa and MasterCard's credit card sales do choose to opt out of the agreement, the card processors will be able to cancel it. Still, even with retailers like Target and Walmart and trade groups like NACS and NGA, the opposition is likely to fall well short of that 25% threshold, meaning the settlement would be approved, Visa and MasterCard wouldn't have to make any further concessions, and individual merchants would be allowed to opt out of the agreement at their own risk.

Stay tuned to NACM's blog and eNews for more updates.

- Jacob Barron, CICP, NACM staff writer

Hot or Not…Who is Moving in What Direction in Latest Business Risk Statistics


The following is a rundown of some recent statistics from numerous sources outlining factors such increasing or decreasing international credit risk, business environments, requests for credit reports and destinations for U.S. products and services.

Major export markets with the largest annualized increases in U.S. goods purchases (Source: Commerce Department): Panama (37.5%), Turkey (31.5%), Argentina (30.1%), Chile (29.1%), Hong Kong (29.0%), Honduras (27.8%), Peru (26.3%), Russia (26.2%), Brazil (23.5%) and Ecuador (22.7%).

Nations hosting the most businesses where FCIB members and customers have used/requested freshly investigated FCIB international credit reports (Source: NACM): China, India, Mexico (surging in June), Hong Kong, South Korea.

Countries that either saw a quarterly upgrade or removal from a negative watch list (source: Coface):
Slovakia, Indonesia, Nicaragua and the Ivory Coast.

New additions to quarterly positive watch list for business climate prospects (Coface): Indonesia: United States and the Ivory Coast.

Countries that have either been downgraded, removed from a positive watch list or placed under a negative one during the summer quarter (Coface): Czech Republic, India (though still at a healthy A3 rating overall), Spain, Italy, Cyprus and Guatemala.

List of downgraded or negative watch listed countries for the quarter for respective business climates  (Coface): India, Argentina and Syria.

-Brian Shappell, CBA, NACM staff writer

Germany Gets More Bad News; Netherlands, Too


Moody’s Investment Services has taken heat over not acting quickly enough of ratings changes from a host of commentators, including Z-Score creator/Credit Congress speaker Ed Altman, PhD, as recently as this Spring (Eg: Spain maintaining a Aaa rating through early June). However, the ratings agency took the lead in putting two of the strongest nations in a struggling European Union on its version of a watch list.  

Usually, it’s actual downgrades to sovereign credit ratings that make news where the so-called “Big Three” ratings agencies are concerned, but Tuesday brought headlines to Moody’s simply for its decision to move both economic titan Germany as well as the Netherlands from a stable outlook to a negative one. Granted, neither of the duo nor Luxembourg, which received the same reclassification this week by Moody’s, are being faulted themselves for the growing concerns. Moody’s biggest concerns centered on “the rising uncertainty regarding the outcome of the euro area debt crisis given the current policy framework and the increased susceptibility to event-risk stemming from the increased likelihood of Greece's exit from the euro area, including the broader impact that such an event would have on euro area members, particularly Spain and Italy.”



“Even if such an event is avoided, there is an increasing likelihood that greater collective support for other euro area sovereigns, most notably Spain and Italy, will be required,” Moody’s noted in its statement. “Given the greater ability to absorb the costs associated with this support, this burden will likely fall most heavily on more highly rated member states if the euro area is to be preserved in its current form.”
Despite the warning, all three remain at the “Aaa” level with Moody’s.




-Brian Shappell, CBA, NACM staff writer

Plot Thickens in Interchange Fee Settlement Fight


The National Association of Convenience Stores (NACS) was the first to reject a proposed settlement in a case against Visa and Mastercard over credit card interchange fees. As time wears on, however, it looks like they won't be the last.

Most recently, the association has been joined by retail giant Target in their opposition to the proposed settlement, for ostensibly the same reasons cited by NACS in their original complaint. "Target believes the proposed interchange fee settlement is bad for both retailers and consumers," said the company in a statement. "The proposed settlement would perpetuate a broken system, restrict retailers from any future legal action and offer no long-term relief for retailers or consumers. In addition, Target has no interest in surcharging guests who use credit and debit cards in order to allow Visa and Mastercard to continue charging unfair fees. We will continue to explore our options while working toward a solution that represents true reform."

NACS has held that the settlement, which has the support of the defendants as well as the court-appointed class counsel for the plaintiffs, fails to address the lack of transparency in the process by which Visa and Mastercard set these fees. "Not only does the proposed settlement fail to introduce competition and transparency into a clearly broken market, it actually provides Visa and Mastercard with the tools to continue to shield swipe fees from market forces," said NACS Chairman Tom Robinson upon announcing NACS' rejection of the settlement earlier this month.

As a result of their opposition, and the fact that they currently stand alone among the 19 class action plaintiffs in rejecting the proposed settlement, the lawyers representing the plaintiffs have petitioned the court to have NACS dropped as their client, arguing that they can't reconcile the interests of their other clients with NACS' "divergent objectives." NACS has until tomorrow to respond to the motion.

Responding to the news that Target also opposed the settlement, NACS said that they expected many other class action plaintiffs to follow Target's lead in the coming weeks. "It's a bad deal and the growing backlash against the terms of the proposed settlement that we are hearing from retailers confirms that this is far from a done deal," said NACS Senior Vice President of Government Relations Lyle Beckwith.

NACS also cautioned retailers to tread carefully in the coming weeks, as Beckwith suggested that they may receive unsolicited sales calls offering them a piece of the more than $6 billion in settlement funds in exchange for their support of the proposed agreement. "It wouldn't surprise me at all if retailers start getting calls," he noted. "We strongly recommend that retailers keep their options open before signing any agreements with third parties to obtain settlement funds."

Stay tuned to NACM's blog and eNews for further updates.

- Jacob Barron, CICP, NACM staff writer

Not All Class Action Plaintiffs Wild about Proposed Visa, Mastercard Settlement


Not all merchant groups are wild about the proposed settlement in the class action case against Visa, Mastercard and a group of large U.S. financial institutions.

The National Association of Convenience Stores (NACS), one of several plaintiffs that originally filed the suit in the Eastern District of New York, unanimously rejected the proposal, citing a litany of inadequacies that the agreement fails to address. Chief among them is the fact that the settlement doesn't include any means to alter the process by which interchange fees are established.

"Not only does the proposed settlement fail to introduce competition and transparency into a clearly broken market, it actually provides Visa and Mastercard with the tools to continue to shield swipe fees from market forces," said NACS Chairman Tom Robinson, president of Santa Clara, California-based Robinson Oil Corp. "This proposed settlement allows the card companies to continue to dictate the prices banks charge and the rules that constrain the market including for emerging payment methods, particularly mobile payments. Consumers and merchants ultimately will pay more as a result of this agreement—without any relief in sight."

NACS argued that without any mechanism that would force Visa and Mastercard to constrain their interchange rates according to market conditions, the agreement would allow the two credit card giants to continue raising rates as they saw fit, the net result of which will be to make merchants pay for their own settlement.

"Even the monetary agreement in this proposal is a mirage," said Robinson, referring to the more than $6 billion that the defendants will have to pay to retailers as part of the settlement. Despite the fact that the payment will be the largest antitrust settlement in U.S. history, NACS noted that this amounts to less than two months' worth of interchange fees based on the estimated $50 billion in swipe fees collected by the credit card companies on an annual basis. "Merchants won't get these funds for years and will have paid more than that through increased swipe fees long before they see those funds," Robinson added.

It's unclear what NACS' opposition means for the still-pending court approval of the settlement, which has so far been agreed to by all defendants, as well as by the court-appointed class counsel for the class action plaintiffs.  "NACS does not accept this proposed settlement and we reserve the right to fight it if other class representatives do accept it," said NACS President and Chief Executive Officer Henry Armour. "There is plenty of time for merchants to make thoughtful decisions related to this proposed settlement. We hope and expect that, as they have the time to review it, many other merchants including class representatives will decide to reject this proposal."

Stay tuned to NACM's blog and eNews for more updates and analysis on the settlement.

- Jacob Barron, CICP, NACM staff writer

German Retail Bankruptcy Grabs Headlines; But Reason for Alarm?


Germany long was held up as the model for business efficiency in Europe. Even as problems among southern European Union members first began to bubble over, the business community looked to the Germans as the likely salve to the problem, not just in bailout money but in production, efficient management and consumption by its natives. But, on top of stumbles by others in the retail sector there of late, this week came the headline-grabbing insolvency filing of mail-order retailer Neckermann.

Neckermann reportedly was working on garnering concessions from creditors, but they fell through. Some 2,000 jobs could be lost as part of the retailer’s collapse, and it led many to jump to the conclusion that the EU debt crisis is the primary culprit for the ills of this company and others who have found it tough to stay afloat.

Ben Deboeck, country and sector risk coordinator for Belgian-based Ducroire Delcredere, told us this week that it’s worth noting Neckermann was in trouble for a long while, and that it was potentially unfair to pin its failings entirely on the larger debt crisis. That said, such instances of insolvency could be part of an increasing trend pending on how the EU responds to troubles with members such as Greece, Spain and Italy.

“Given the current sluggish economic environment, it should of course be of little surprise that weaker companies, even in stronger countries such as Germany and the like, are heavily exposed to the current downturn,” said Deboeck, who keynoted FCIB’s Annual International Credit and Risk Management Summit in Hamburg. “I guess the Peugeot/Citroën problems are probably a better example of the direct fallout of the crisis, though, and may be more worrying in regards to things to come for European industries if the downturn becomes really protracted.”

-Brian Shappell, CBA, NACM Staff Writer

Gloomy Bernanke Punts on Further Easing


Markets and businesses anticipated that Federal Reserve Chairman Ben Bernanke would illuminate near-term plans for stimulus at his appearance before Congress this week to present the Semiannual Monetary Policy report. However, the chairman largely avoided endorsing or denouncing further stimulus actions instead focusing on decelerating economic activity and the usual side-stepping of partisan-laced, election-year questioning on Capitol Hill.

Bernanke brought the bad news early, as he told members of the Senate Banking Committee of an economy that, while continuing to grow, has seen the pace of advancement shrink and signs that recent employment gains were on a precarious limb, so to speak—particularly in manufacturing.

And though he reiterated the target for the federal funds rate would remain at the historically low level (between 0% and ¼%) for the foreseeable future and that the Federal Open Market Committee was “prepared” to take further actions if needed, Bernanke gave no indication which way the Fed was leaning on the latter matter.

-Brian Shappell, CBA, NACM staff writer

Settlement Will Allow Merchants to Pass Credit Card Interchange Fees on to Buyers


Merchants that accept credit cards for payment may soon be able to pass on interchange fees to their customers in the form of a surcharge.

Visa, Mastercard and a group of large U.S. financial institutions reached a memorandum of understanding (MOU) last Friday, resolving claims from a 2005 class action lawsuit brought by a group of U.S. retailers over the fees charged on merchants to accept credit cards. In addition to providing for a $6 billion payment to retailers, the MOU also provides for policy changes that will allow sellers to charge customers more for paying via credit card.

Though it has yet to be approved by the U.S. District Court for the Eastern District of New York where the case was filed, the MOU has been agreed to by all defendants and the court-appointed class counsel for the merchants, meaning court approval is likely to be a formality at this point.

Interchange fees have long been a thorn in the side of any merchant accepting payment via credit cards, whether they sell to consumers or other businesses. In essence, the fee is a percentage of the total value of a transaction that, at least until the settlement is expected to enter into force early next year, had to be paid solely by the merchant. The fees fall especially hard on smaller companies, who lack the technical expertise necessary to navigate through the notoriously complicated process by which these rates are established.

Under the terms of the settlement, however, these companies will be able to recover their interchange fees from their customers, with some notable limitations. For example, merchants using a surcharge to offset their cost of acceptance can only charge a fee equal to what they pay to accept credit cards. They must also disclose the surcharge to the buyer at the point of entry, point of sale and on the receipt.

Additionally, the settlement does not apply to debit cards, and does not apply in the 10 states where surcharging remains illegal: California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma and Texas.

Stay tuned to NACM's blog and this week's eNews for further updates.

- Jacob Barron, CICP, NACM staff writer

2012 California Municipal Bankruptcies to hit Three, More Probable


As predicted, the Stockton, CA Chapter 9 filing was not alone, as now two more communities have decided to take the path of municipal bankruptcy in the state.  

Lawmakers in San Bernadino, CA voted Tuesday to pursue a municipal bankruptcy filing, like Stockton did before it late last month. It also comes on the heels of Mammoth Lakes’ Chapter 9 filing in California just before the Independence Day holiday. San Bernadino, too, seems to be tied to a lot of contracts with current and retired public workers that are zapping its budget. California had implemented a state law requiring a 90-day mediation period designed to bring municipalities and their creditors to the negotiating table before struggling cities can file. While it has likely slowed the pace of filings, votes and discussions to pursue the bankruptcy option have continued.

“There will be a series of filings in the next six months to a year, there’s no doubt about it,” Lowenstein Sandler PC’s Bruce Nathan, Esq. told eNews in an interview last week. Nathan is among experts who have been predicting a surge in Chapter 9 filings since even before Harrisburg, PA; Jefferson County, AL; and Central Falls, RI grabbed headlines for attempts to file nearly a year ago.

San Bernadino had made mention of employee cuts in a fiscal plan released on its website, complete with amateurish corrections/changes marks throughout the PDF, and cited there were “no easy choices” on the horizon while foreshadowing impending decisions: “The financial situation in 2012 is a systemic problem held over for years…Clearly, reductions to the expenditures side of the budget are not going to product the level of savings that will be needed to balance the budget.”

- Brian Shappell, CBA, NACM staff writer

(Note: More on this story including Chapter 9 talk out of two Pennsylvania communities in this week's eNews, available Thursday afternoon).

 

Latest U.S. WTO Case against China Challenges Duties on American Cars


Judging by the sheer quantity of World Trade Organization (WTO) cases brought against the country by the U.S., China appears to be in no hurry to fix its image as a trade rule scofflaw.

The latest in a series of WTO cases, brought by the Obama Administration last Thursday, seeks dispute settlement consultations with China due to the country's imposition of antidumping and countervailing duties on more than $3 billion in exports of American-made automobiles.

"As we have made clear, the Obama Administration will continue to fight to ensure that China does not misuse its trade laws and violate its international trade commitments to block exports of American-made products," said U.S. Trade Representative Ron Kirk. "American auto workers and manufacturers deserve a level playing field and we are taking every step necessary to stand up for them. This is the third time that the Obama Administration has challenged China's misuse of trade remedies."

For its part, the Obama Administration has continued to hold China accountable to its commitments as a WTO member. In two prior cases, the U.S. challenged duties that China imposed to restrict imports of certain steel products and chicken products from the U.S. Several other actions have been brought against China's export restraints on several industrial raw materials, China's restrictions on electronic payment services and subsidies to China's wind power equipment sector.

"In each of these matters, the key principle at stake is that China must play by the rules to which it agreed when it joined the WTO," said Kirk's office in a statement. "Those commitments include maintaining open markets on a non-discriminatory basis, and following internationally-agreed procedures in a transparent way."

The consultations requested last week represent the first step in a WTO dispute. If, after 60 days, the matter remains unresolved, then complainants may request the establishment of a WTO dispute settlement panel.



To learn more about how to grow your company through exports, visit FCIB's website here.

-Jacob Barron, CICP, NACM staff writer

U.S. Judge Turns Heads by Ignoring Mexican Court's Bankruptcy Decision


A Chapter 15 (the cross-border provision allowing U.S. courts to recognize or ignore foreign insolvency proceedings that include domestic trade creditors) case out of the U.S. Bankruptcy Court in Dallas saw Judge Harlin Hale deny enforcement of a restructuring plan from the Mexican-based company Vitro SAB. Vitro, a glassmaker, previously saw its reorganization plan approved in a Leon (Mexico) court that included waiving the guarantee claims of U.S.-based bondholders while Mexican creditors received 40 cents on the dollar and the debtor retained company control. Although, it is typical for a judge to affirm such plans out of respect even when U.S. creditors take a bit of a hit, Hale believed the decision “manifestly contrives” U.S. bankruptcy policy and the interests of American bondholders and trade creditors.

The case, which could have implications on U.S.-Mexican trade and business-law, presently is awaiting an appeal in the U.S. Bankruptcy Court’s Fifth Circuit.

-Brian Shappell, CBA, NACM staff writer

(Note: More on this story available now in our weekly eNews compilation. Visit www.nacm.org to view).
 

Mechanic's Lien Law Changes in Effect for First Week in CA


A number of states have made small yet important changes to their mechanic’s lien statutes in the early weeks of the summer of 2012. However, the biggest construction-based buzz centers on the slew of changes in California, with the majority of them taking effect July 1.

In California, like in DC in early June, changes went into effect that loosened lien requirements allowing them to now be filed prior to the completion of a project, noted Greg Powelson, director of NACM’s Mechanic’s Lien and Bond Service (MLBS). While no specific alteration was earth shattering, the combination is important and ones “we all need to digest,” as Powelson characterized them.

“The reality is it’s a bunch of small changes, but credit managers who are not up to speed on the changes could lose their rights. In California, they think their change was a big deal because the entire statute was re-codified on July 1,” he said.

A list of changes in California, as well as new wrinkles in Washington, DC; Indiana and Iowa are available in this week's eNews and, in even more detail, by visiting MLBS' web site at http://www.nacm.org/construction-liens-mlbs.html.


-Brian Shappell, CBA, NACM staff writer

Consumers Still Trending More Pessimistic


The two prime measures of consumer confidence are trending in the same direction, and that is not a good thing for the economy as a whole. First, it was the Conference Board data and now the Reuters/University of Michigan survey. The readings for the latter this month fell to 73.2 from a May reading of 79.3. Most analysts had expected a deterioration of confidence but not one that steep. In most months the collapse in the price of gasoline would have had an impact, but this time its influence was subdued and, instead, the consumer was far more worried about other things.

The factors that have been at the top of the consumer’s list to worry about include the unemployment situation as well as the uncertainty factor. These have been harped on, so it comes as no shock that they would rank as key issues. The part that has become increasingly interesting is that there are some subtle nuances as far as what people are worried about. The unemployment situation has started to shift a little, as fewer people are worried about their own job security. Now they are concerned about what steps the country will have to take to address the issue, and there is fear that this will cost them.

Analysis: The uncertainty argument is vexing as it always has been. It is not that the world has ever been certain. What makes the uncertainty today so much harder to take than in the past? Two rationales have developed on that topic. The first is that it seems that too much is out of the control of the United States. Europe usually is not a top-of-mind issue for American consumers, but the recent negative news has been relentless and confusing. It is clear that things are not good in Europe, but it is not so clear why that matters directly to the US consumer. That makes for unease. The second factor is that there is remarkably little faith in Congress when it comes to rescuing the economy, as most people seem preoccupied with the impending fiscal cliff and what that means to them.

-Chris Kuehl, NACM economist