Volatile Winter Swings Continue for Credit Managers’ Index

Those hoping for a continued positive trajectory in the monthly Credit Managers’ Index (CMI) upon its official release Friday will be in for a disappointment. February’s reading puts the CMI more in line with where the index was in a disappointing December than the triumphant rebound that followed in January.

“It appears this will be another one of ‘those’ years. At least it is starting out that way,” said Chris Kuehl, PhD, economist for the National Association of Credit Management. “The burning question is, yet again: which of these months is going to turn out to be the anomaly?”

The February numbers indicate weakness in a variety of areas. Some of the particularly worrisome areas judging from the CMI statistics include sales, amount of credit extended and dollar collections.

Manufacturing looks to be predictable volatile right now, and predicting further problems or a rebound for March and beyond is a difficult prospect at present. “Manufacturing is providing to be mysterious as the readings have been volatile and unpredictable,” Kuehl said. “There has been much conjecture regarding the impact of the winter, and analysts are mixed. Some are blaming storms and the bitter cold for a general slowdown…this suggests that the economy will improve when the weather does. The counter assertion is that there are deeper issues and recovery will not be as simple as turning the calendar pages.”


The complete CMI report for February2013, available Friday at www.nacm.org, will contain additional commentary, complete with tables and graphs and individual data for the manufacturing and services sectors. CMI archives may also be viewed on NACM’s website. 

Detroit Case Eyes Summer Decision

The messy Detroit Chapter 9 municipal bankruptcy case looks like it will be resolved at a rapid pace. Judge Steven Rhodes has set a potential bankruptcy plan confirmation hearing in the case for July to the chagrin of several creditors trying to slow the proceedings down. Creditors and two of the three largest US credit ratings agencies criticized the early city reorganization plan for putting considerations of public workers and retirees before those of creditors, especially bondholders. Moody’s Investors Service predicted a particularly high potential for a “cram-down” on creditors.

Detroit stands as the largest municipal bankruptcy case in US history and is under close watch nationally because of its potential implications for many US cities struggling with escalating debt problems tied primarily to retiree benefits such as pensions and health insurance.

- Brian Shappell, CBA, CICP, NACM staff writer

Panama Canal Work Resumes after Disconcerting Stoppage

With the trade economies of many US port cities and emerging nations in the west eagerly awaiting the timely opening of an expanded Panama Canal, a worrisome standoff between the Panama Canal Authority and the Spanish company hired to build a new lock system has ended.

After nearly two months of gridlock in negotiations and a work-stoppage spanning most of February, critically important work on the Canal expansion resumed after a preliminary deal was struck between Grupo Unidos por el Canal (GUPC) and the Panama Canal Authority late last week. The Authority reportedly agreed to make payments due to GUPC in December after some funds were withheld because of massive cost-overruns on the immense project. It is estimate GUPC’s work is on pace to exceed the original cost of the project by a whopping 50%.  NACM Economist Chris Kuehl, PhD said it is widely held that much of the expense is corruption-related and goes to “the highest levels of the project.”

It was of considerable importance to stakeholders tied to the expansion and those expected to enjoy better access and less expensive shipping options as a result that the effort get back on track. “The project is expected to be a boon for activity from shippers based in the Western United States and some Latin nations,” Kuehl said. “Short of a quick resolution, this could have jeopardized the goal of having the expanded Canal open by 2015.”

- Brian Shappell, CBA, CICP, NACM staff writer

Ukraine Still Facing Most Severe Crisis Ever

The president of the country has fled to the east and is now facing an order for his arrest by the new acting president and the parliament. Most of the Yanukovich supporters in Parliament have also fled east, and that leaves the power in Kiev in the hands of an opposition that is united in only the most tenuous way.

But the fact is that Russia will never allow the formal disintegration of Ukraine, but there may be little they can do to stop the de facto divide between the pro-western and pro-Russian halves of the nation.  The euphoria of driving Yanukovich from the capitol will be short-lived as they start to face the reality of governing in the shadow of a Russia no longer distracted by the Olympics.

Analysts are already watching a massive shift of security personnel out of Sochi and towards the border with Ukraine. There is no sense that Russia will sit idly by and watch the country split, It may well offer tangible support to bring Yanukovich back to power. The fact is that Ukraine is facing long-term volatility and perhaps its most severe crisis ever—more than when it split from the USSR and even more than when the Orange Revolution took place.

- Chris Kuehl, PhD, Armada Corporate Intelligence

Industries to Watch: European Alternative Energy

Although the European alternative energy industry held on for quite a bit longer than its US-based counterpart, the industry is now are seeing a spike of insolvencies that is unlikely to stop soon. Like those in the US, the sector is contending with lower demand amid outsized supply, extremely aggressive pricing from Asian competitors and the slashing of existing government subsidies--all at the same time.

“You see it already. Everything linked to alternative energy is having difficult times these days,” said Freddy Van den Spiegel, chief economist and director of public affairs at BNP Paribas Fortis. “That sector was really growing very quickly thanks to government support and plans to increase renewable energy by 2020 as a significant part of total energy. But, given the budget situation in many [EU] states, the subsidies have been reduced, even in Germany and Belgium. Some of these new companies don’t have a business model anymore given the financials.”

At the beginning of the year, solar developer S.A.G. Solarstrom AG attempted a self-imposed insolvency restructuring, but is now going through more typical European insolvency proceedings, which yield far fewer restructuring success stories than the US Chapter 11 bankruptcy system. Also entering insolvency this year so far are Wirsol Solar Energie GmbH and wind-energy-focused Prokon Regenerative Energien GmbH. Meanwhile, Robert Bosch GmbH opted to shed its majority stake in aleo solar AG, leaving liquidation the only option for the solar module manufacturer.

While EU-based alternative energy certainly bears watching because of various red flags, it does not mean the sector is bereft of opportunities, especially down the road. Those who survive the shakeout by putting out top-quality products and without overreliance on government subsidies will be positioned well when the market boasting fewer competitors rebounds.

“The alternative energy and renewable debate will continue,” said Van den Spiegel. “Some of these companies, after mergers and acquisitions, will come up with technologies that are sustainable. I have confidence in the sector, but certainty in the next two to three years it will be tougher times.”

- Brian Shappell, CBA, CICP, NACM staff writer
Van den Spiegel will be among the featured speakers at FCIB’s Annual International Credit & Risk Management Summit in Munich. For more information on the May event or to register, click here.
- See more at: http://blog.nacm.org/#sthash.LYsWaESn.dpuf

Fed: Industrial Production, Manufacturing Well Off the Mark to Start 2014

The latest statistics from the Federal Reserve show that industrial production suffered a pretty significant setback to start the year. That said: the hope is that most of the sluggish performance can be tied to severe winter weather in many parts of the country.

The Fed noted that industrial production decreased 0.3% in January, freefalling from the 0.3% increase the previous month that inspired great optimism. Still, January’s level, at 101% of the 2007 average, was nearly 3% higher than the production level of January 2013 even if it was below the long-term average.

The drop in industry manufacturing was particularly noticeable, down 0.8% from December, after five consecutive months of gains. In fact, it was among the largest decline in manufacturing output since the end of the Great Depression. Industries with the worst pace drop-offs for the month were steel, semiconductors, motor vehicles and organic chemicals production. Agricultural and textile production decrease dubiously headlined slowing output in the nondurable manufacturing category, also down 0.8% in January.

Fed analysts and officials hinted that winter storms that hit the Midwest and Eastern seaboard particularly hard made it near impossible for output to match that of previous months.

- Brian Shappell, CBA, CICP, NACM staff writer

Expanded Panama Canal Opening Jeopardized in Ongoing Cost Dispute

Talks between the Panama Canal Authority and the Spanish company hired to build the new lock system that broke down last week with such anger that many believed the rift to be insoluble, have apparently restarted. Still, the dispute continues as neither side is taking too big of steps to the high road at this stage and avoiding acceptance of blame for massive cost overruns.

The Authority has objected strenuously to the cost overruns tied to the project, which is expected to be a boon for activity from shippers based in the Western United States and some Latin nations. To date, overruns tallied $1.6 billion over a project originally budgeted at $3.6 billion. The Spanish consortium asserted that these costs have been due to constant changes and alterations to the original plan. The consortium said that they indicated to the authority that changes would result in higher costs. Now, the Spanish claim they are being stiffed and halted work on the project. Short of a quick resolution, this could jeopardize the goal of having the expanded Canal open by 2015.

While the hostile rhetoric toned down since last week, the two sides are without much bargaining room. The Spanish companies are in no position to eat these additional costs given their financial position and that of Spain itself. The Panama Canal renovation has been far more expensive than anticipated, and that doesn’t really shock anyone. The sense is that much of the expense is related to corruption and graft that has been taking place at the highest levels of the project, and the Panama Canal authorities are not ready to wade into that mess just now.

- Chris Kuehl, PhD, Armada Corporate Intelligence

New York Retainage Law Reform Effort Coming this Year

New York State Assemblyman Edward Braunstein will serve as the primary sponsor on legislation this year designed to bar general contractors from holding money from material suppliers. When the National Association of Credit Management (NACM) asked Braunstein, he said it was a fairness issue. He believes that the proposal has a strong chance this year in the state assembly.

Representatives from supplier trade associations are making the case that they are selling complete products, which should be treated differently than services (labor) provided by subcontractors through the end of a project. They characterize it as a financial “drain” holding back suppliers from involvement in other projects.

Chris Ring, of NACM’s Secured Transactions Services, agreed that materialmen are the most vulnerable and “held hostage” because their money is often gone for the longest time. That could be upwards of four years if awaiting completion on something like a skyscraper in New York City. But he is far from confident about the prospects of the proposal sailing through the Assembly quite so easily. “I don’t see any reason why general contractors would lay down for this because they benefit so much from retainage laws,” Ring said of possible pushback.

- Brian Shappell, CBA, CICP, NACM staff writer
See the extended version of this story with more analysis from Ring, Braunstein and Dana Schnipper, of JC Ryan EBCO/H&G LLC and the Northeast Retail Lumber Association, in the News Makers section at www.nacmsts.com and this week’s edition of eNews, available Thursday.

Ukraine Central Bank Puts New Restrictions on Foreign Exchange Transactions

The National Bank of Ukraine's (NBU's) Resolution No. 49 took effect last Friday, placing a number of new restrictions on foreign exchange transactions that could greatly limit the ability of companies with customers in Ukraine to get paid.

Specifically, Resolution No. 49 enacts a temporary ban on purchases of foreign currency for the purpose of early repayment, by Ukrainian residents, of credits and loans in foreign currency under agreements with non-residents. Payments on such transactions must be made from the payer's own foreign currency funds as long as the Resolution remains in effect, which it will until the NBU decides to change course. The Resolution also bans insurance companies from buying foreign currency to cover their reserves.

Furthermore banks are obliged for fulfill orders of clients (legal entities and individual entrepreneurs) contained in the payment document in any currency only to the extent of the funds on the client's current accounts as of the beginning of the transaction day, meaning essentially that overdraft payments are unavailable. Banks are also limited, with some exceptions for education and medical transactions, to buying foreign currency not exceeding the value of 50,000 hryvnias per month, per individual, on the order of residents and non-residents for the purpose of transferring that money abroad.

In short, this means that individuals can only send 50,000 hryvnias, or about 5,700 USD, to a non-resident every month.  Banks must place funds to be used for foreign currency purchases in a separate account from which these funds may be transferred for purchasing foreign currency after a six-business-day wait, essentially placing a hold on any foreign entity trying to get paid by a Ukrainian company when payment requires foreign currency beyond what exists in the company's current account.

Ukraine remains in the throes of both political and debt crises, and the latest limits on foreign exchange transactions are intended to boost the hryvnia, but could also negatively affect trade and create a black market for foreign currency.

Learn more about this and other subjects in FCIB's members-only discussion boards.

- Jacob Barron, CICP, NACM staff writer

European Parliament Pushing Insolvency Law Consistency, Real Changes Still Far Off?

An overwhelming majority of the European Parliament voted this to support a tentative European Commission proposal calling for streamlined and consistent cross-border business insolvency laws throughout the 28-member bloc. Still, there are experts who are tempering optimism that such rules could become a reality anytime in the near future.

The Parliament, on a 580 to 69 vote (19 abstentions), backed a Commission plan for insolvency laws that are designed to shift more toward allowing and fostering business restructuring during troubled financial times over the current system, which purposefully or inadvertently pushes liquidation as the most likely outcome. The key provisions of the new insolvency laws, if passed when language is finalized are as follows: extending the rules that cover rescue proceedings, creating an EU-wide insolvency registry, reducing the opening of multiple insolvency proceedings against one company and clarifying rules when dealing with the insolvency of groups of companies.

“Europe needs modern rules on cross-border insolvency to help service our economic engine,” said European Commission Vice President and EU Justice Commissioner Viviane Reding. “The first option for viable businesses should be to stay afloat rather than liquidating.”

The theory behind the effort, on paper, appears unassailable. Such a series of laws, if functional, would greatly reduce risk in dealing with EU-based businesses. However, the realities could prove to be vastly different. To wit, many FCIB contacts believe there likely will be too many obstacles in the form of state-to-state legal differences for such a plan to go into effect within many of the EU’s member states.

“That’s always a problem here,” said Freddy van Den Spiegel, chief economist and director of public affairs at BNP Paribas Fortis . “Contract law is not harmonized. As soon as you touch contract law, you have unintended consequences. Indeed it will be difficult.” Van Den Spiegel said there are further-along efforts to make rules consistent in sectors including insurance and pensions, and those are progressing slowly and problematically because of the issues involved with navigating the diversity in laws and accepted practices throughout the EU.

- Brian Shappell, CBA, CICP, NACM Staff writer.

More on this topic will be available in next week’s edition of eNews at www.nacm.org. Van Den Spiegel will be among the speakers at May’s FCIB Annual International Credit & Risk Management Summit in Munich. For more information or to register, click here.

Creditors' Committee in Crosshairs of Detroit Bankruptcy Case

Attorneys representing the city of Detroit have asked Judge Steven Rhodes to dissolve the creditors' committee involved in the Chapter 9 bankruptcy there, arguing that it could stymie mediation efforts in the municipal bankruptcy, characterizing it as counterproductive, imprudent and unnecessary. Should Rhodes disband the committee, it could encourage attempts to disband committees in other bankruptcies of various types going forward.

However, while the NACM community has long supporter creditors committees in most situations, municipal bankruptcies are complex, especially in Detroit's case, and there could be some mitigating circumstances that make it a special situation. The motion to disband the committee is based on the fact that four of its five members are represented by counsel and actively involved in other mediation efforts, such as a retiree committee, in the case. The argument is that a creditors' committee in Detroit is akin to having a second bite of the apple, so to speak.

Granted, the city’s argument that it is financial imprudent is one that traditionally would be hard to argue, from the perspective of trade creditors. However, oddly, there seem to be no trade creditors engaged in the committee process. The judge is expected to rule on the matter during a February 19 hearing.

- Brian Shappell, CBA, CICP, NACM staff writer

For deeper expert legal and industry analysis on this topic, see the extend version of this story in this week’s NACM eNews, available now at www.nacm.org (in the “Resources” section).

European Commission Calls Member Nations Out for High Corruption

Corruption within the European Union costs its economy a staggering 120 billion euro annually, and a new report slams the efforts in many nations as “uneven,” if not half-hearted.

The European Commission’s EU Anti-Corruption Report released this week indicated that more than three-quarters of Europeans believe corruption is widespread despite stated increased efforts to stymie such practices and 56% believe matters have worsened during the past three years. The report noted that criminal laws banning corruption are largely in place, but enforcement is wildly inconsistent from nation to nation and intense investigations rarely occur within the areas with the worst reputations.

The report cited a recent Eurobarometer survey on corruption relevant to businesses, noting that 35% of those polled reported that corruption prevented them from winning a contract in the last year. The statistics indicate that corruption was most pervasive in construction, when looking at sectors, and Bulgaria, Slovakia and Cyprus, when looking at nations. Frequent complaints included contract specifications that are “tailor-made for specific companies,” conflicts of interest in bid evaluation, collusive bidding and unclear evaluation criteria. The Commission study also noted that problems with bribery were seen as most pervasive in the Czech Republic, the Netherlands and Slovenia.

“Corruption undermines confidence in democratic institutions and the rule of law, it hurts the European economy and deprives states from much-needed tax revenue,” said EU Commission for Home Affairs Cecilia Malmstrom. “Member states have done a lot in recent years to fight corruption, but today’s report shows that it is far from enough.”

Germany, Finland and Luxembourg were noted to have low-levels of corruption and bribery and member states including Ireland and Malta, while still troubled, have shown real commitment to improvement in recent months and years.

- Brian Shappell, CBA, CICP, NACM staff writer