Credit Managers’ Index Decline in February Surprises

The National Association of Credit Management’s Credit Managers’ Index dropped significantly this month, an unexpected decrease considering where projections were a few months ago.

“That is a nasty drop and at no point in the last year has it been that low,” said Chris Kuehl, NACM economist and cofounder of Armada Corporate Intelligence. “The reduction in the overall score was reflected in reductions across the board—favorable and unfavorable factors and in both the manufacturing and service sectors.”

The survey measures activity in manufacturing and service sectors among business-to-business credit professionals.

Check out coverage of February’s CMI results in today’s eNews. The full report will be available on Friday, Feb. 27. CMI archives may also be viewed on NACM’s website.

-  NACM Staff

Russia Junked Again

Moody's Investors Service downgraded the government of Russia's sovereign debt rating on Feb. 20 to junk status. The drop in rating comes one month after Standard & Poor’s made a similar call, the first time Russia dipped below investment grade in more than a decade, according to news reports.

Moody’s cut the rating from Baa3 to Ba1 with a negative outlook and identified several factors that led to the drop:
  • Continuing crisis in Ukraine and the recent fall in oil prices and of the ruble exchange rate;
  • Fiscal pressures and continued erosion of Russia’s foreign exchange reserves in light of ongoing capital outflows and restricted access to international capital markets; and
  • Although still low, increasing risk that international response to the military conflict in Ukraine might trigger a decision by Russian authorities that would directly or indirectly undermine timely payments on external debt service.
“In Moody’s view, the existing and potential future international sanctions, the erosion of the country’s foreign exchange buffers and persistently lower oil prices plus high and rising inflation will take a negative toll on incomes as well as business and consumer confidence,” the credit agency said. “As a result, Russia is expected to experience a deep recession in 2015 and a continued contraction in 2016.”

The negative outlook reflects the potential for more severe political or economic shocks to emerge, related to the Ukraine conflict or a renewed decline in oil prices. Moody’s also has lowered Russia’s country ceilings for foreign currency debt to Ba1NP from Baa3/P3; its country ceilings for local currency debt and deposits to Baa3 from Baa2; and its country ceiling for foreign currency bank deposits to Ba2/NP from Ba1/NP. “A country ceiling generally indicates the highest rating level that any issuer domiciled in that country can attain for instruments of that type and currency denomination,” Moody’s said.

Although it doesn’t anticipate upgrading Russia’s rating in the near term, the credit agency said it “would consider stabilizing the outlook if the macroeconomic and financial market conditions were to stabilize, if the risks of financial market volatility were to subside, and/or if there was a serious prospect of the Ukraine crisis being resolved in such a way that the risk of ongoing or escalating military hostilities and further sanctions were to dissipate.”

Moody’s also said it would consider downgrading the country’s government bond rating if the macroeconomic and financial market conditions deteriorated substantially below the agency’s base case, or if the Russian government watered down or abandoned its fiscal and structural reform plans. Other factors that could negatively influence Russia’s rating include additional sanctions due to an escalation in the military conflict that would further undermine its economic strength as well as actions that could create more uncertainty about the government’s capacity or willingness to continue to service its debt, Moody’s said.

- Diana Mota, NACM associate editor

Port Settlement Forged, But Remains Tenuous

Following the thinly veiled government threat of invoking Taft Hartley or taking some other kind of executive action, the two sides in the West Coast port labor dispute reached a tentative deal late last week. By Saturday, the ports up and down the coast resumed something approaching normal operations.

The business impact of the labor dispute will linger for many months, as there were as many as 31 ships still off shore. It will be weeks before they are all unloaded. The estimate is that more than 100 have been held at their ports of origin. There are several long-term reactions expected as a result of this latest action. The first and most obvious is the backlog of cargo ships and the delay this has created for a large number of shippers. Produce has been rotting on idled ships and retailers have been unable to get the inventory they ordered. There are shortages showing up all over the consumer sector and many customers are furious. The insurance companies have not been thrilled either. These issues will be solved sooner or later and most of that damage will be somewhat ephemeral.

A bigger issue is the use of West Coast ports in the future. It is not that ports will be abandoned altogether, but this is the second time in roughly 10 years the ports labor disputes have temporarily shuttered operations. Shippers don’t appear to be as sanguine as they once were. Those that opted to shift their port use to other U.S. locations may not be willing to go back to the ports in California, Oregon and Seattle. This is exactly what the rival ports are counting on as they take steps to ensure this new business stays. The majority of the ports on the West Coast are hampered by congestion and regulatory burdens that other ports don’t have.

In addition, the relationship between the International Longshore and Warehouse Union and the Pacific Maritime Association hasn’t become harmonious overnight, and it’s not expected to move in that direction quickly. There are still those workers operating at a very slow pace, partial lockouts in some areas and examples of workings banding together to ignore some contractual mandates.

There may also be an effect on the other transportation sectors. If a shift away from the Western ports comes to fruition, rail and truck transportation will have to alter routes and change their areas of focus. The decision to rearrange will not be taken lightly. For now, there will be many full trucks and trains as the backlog is dealt with, but in another few months that demand could drop sharply.

- Chris Kuehl, Ph.D., NACM economist

Obama Takes to Email to Garner Trade Pact Support

President Barack Obama has been turning up the dialogue on exporting potential in recent weeks and took to email on Feb. 18 in attempts to boost support for a multilateral trade pact involving several Asian nations. Apparently intended for business audiences, Obama again laid out reasoning to pursue the Trans-Pacific Partnership and Trade Promotion Authority—which must be granted by Congress and has been to previous presidents—that would make it easier for the administration to forge various free trade agreements. His email correspondence, unedited, is as follows:

My top priority as President is making sure more hardworking Americans have a chance to get ahead. That's why we have to make sure the United States –and not countries like China—is the one writing this century's rules for the world's economy.

Trade has an important role to play in supporting good-paying, middle-class jobs in the United States. Unfortunately, past trade deals haven't always lived up to the hype. That's why I've made it clear that I won't sign any agreement that doesn't put American workers first.

But we also should recognize that 95% of our potential customers live outside our borders. Exports support more than 11 million jobs—and exporters tend to pay their workers higher wages. Failing to seize new opportunities would be devastating not just for our businesses, but for our workers too.
That's why my Administration is currently negotiating the Trans-Pacific Partnership -- so we can benefit from trade that is not just free, but also fair.

We have the chance to open up more markets to goods and services backed by three proud words: Made in America. For the sake of our businesses, and American workers, it's an opportunity we need to take.
But beyond greater access to the world's fastest-growing region, the agreement will establish enforceable commitments to protect labor, environmental, and other crucial standards that Americans hold dear.

Right now, China wants to write the rules for commerce in Asia. If it succeeds, our competitors would be free to ignore basic environmental and labor standards, giving them an unfair advantage over American workers.

We can't let that happen. We should write the rules, and level the playing field for our middle class. The first step is for Congress to pass Trade Promotion Authority.

After years of shipping jobs overseas, our manufacturing sector is creating jobs at a pace not seen since the 1990s. Rather than outsourcing, more companies are insourcing and bringing jobs back home. Today, more than half of manufacturing executives have said they're looking at bringing jobs back from China.
Let's give them one more reason to get it done, by giving me the tools I need to grow our economy, boost exports for our businesses, and give more hardworking middle-class families a chance to get ahead.

President Barack Obama

Small-Business Credit Conditions Reach New Heights

Small businesses have access to a wider availability of credit as credit conditions reached new highs, improving for the third-consecutive quarter, according to the recent Experian/Moody’s Analytics Small Business Credit Index (SBCI). The index grew 1.5 points to 116.7, quarter to quarter. Credit balances expanded by 2.2% compared with the previous year, and delinquency rates declined to a cyclical low of 8.5%, both of which improved the index as did an expansion in the number of trades. The index measures credit conditions for companies with fewer than 100 workers.

“Small businesses are finally kicking into high gear,” said Mark Zandi, Moody’s chief economist. “They are investing and hiring more and are borrowing more to finance their expansion. They are also repaying what they have already borrowed in a more timely way. Business conditions are much improved and will likely improve even more in coming quarters.”

Small businesses also improved their risk and payment behavior. For example, over the last year, they reduced the number of days they paid their bills beyond contacted terms by full a day, or more than 19%. Over the same period, a small business’s average commercial risk score—based on a scale of 1 to 100, with 100 being least risky—grew to 61.6, a 3.1% hike, and bankruptcy rates fell 10.9%.
If small businesses maintain this payment behavior, “the credit spigot will continue to widen, opening up more opportunity for small businesses to grow,” said Dan Meder, vice president for Experian’s Business Information Services.

Increased confident in small businesses’ ability to pay could translate into more available credit and sales, Meder said. Lenders and suppliers, however, should track data trends so that they make confident decisions and reduce risk, he warned.

Credit quality split along regional lines as western states fared better than states east of the Mississippi, and the Mountain West region had lower delinquency rates. Northeast and Midwest states continued to lag as the housing market recuperates.

- Diana Mota, NACM associate editor

For the full report, visit

NACM's Industries to Watch: Auto

Automotive producers and parts suppliers have been riding high of late after a short-lived, minor slowdown that followed many months of carrying the manufacturing side of global economic growth. There is still plenty of strength in auto, to be sure. However, trade creditors should be aware of emerging problems and closely watch some warning signs that could affect the cash flow of players of various sizes and roles in the industry.

A new U.S. Congressional report released this month focuses on auto as it relates to perhaps the fastest-growing area of concern in business: hacking-based fraud. The report by Sen. Ed Markey (D-MA), Tracking & Hacking: Security & Privacy Gaps Put American Drivers at Risk, notes that newer cars and trucks rely significantly more on data-driven technology and tracking (i.e., Bluetooth, Internet access, etc.) and suggests that auto producers are woefully unprepared for potential hacking attempts. Defenses in that area appear far less developed than most sectors of the business world, according to industry responses received by Markey. While it's not likely to doom any one manufacturer of parts or finished autos, the chances of a hack-based public relations incident similar to Target or Home Depot, or worse, are somewhat high.

"Drivers have come to rely on these new technologies, but unfortunately the automakers haven’t done their part to protect us from cyber-attacks or privacy invasions … Our technology systems and data security remain largely unprotected," said  Markey, a member of the Senate Commerce, Science and Transportation Committee. "We need to work with the industry and cyber-security experts to establish clear rules of the road to ensure safety and privacy."

Meanwhile, an increasing number of economists and business analysts in the press are starting to talk about a subprime auto lending "bubble" that could burst in the near future. Remember: a lending bubble in residential real estate caused by excessive risks was among the drivers, if not the primary one, of the market crash nearly a decade ago and the eventual recession. What resulted was tougher credit standards for even fair- to well-rated potential borrowers and an obvious chilling effect on sales that hit materials suppliers hard. Many in the auto industry pointed to the strong historic performance of auto loans and criticized such predictions. Granted, housing industry titans did the same when "hard landing" talk surfaced around 2006 and 2007.

In addition, auto producers based in Europe and those who forged greater market inroads there are facing freefalling sales. The conflict between Ukraine forces and Russian separatists will continue to weigh on confidence and expectations going forward. In addition, as has been often overlooked, the Russian market became an increasingly important area of expansion earlier this decade, when the economy there was humming. New statistics suggest car-buying activity was off by at least 25% in January, according to PricewaterhouseCoopers, and an annual drop of at least 35% through the end of 2015 is expected. Because of the ongoing conflict, newfound foreign exchange (currency) woes and Russian officials' recalcitrance to admonishment regarding its perceived role in the conflict, the auto market is likely to continue shrinking throughout Europe.

- Brian Shappell, CBA, CICP, NACM managing editor

New Rating Group Challenges Big Three’s Accuracy

Universal Credit Rating Group continues to move forward with its plans to offer the world an alternative credit rating method and expects to release its first ratings as early as this year.

China’s Dagong Global Credit Rating Co., Ltd; U.S.-based Egan-Jones Ratings Company; and Russia’s RusRating formed the Hong Kong-based partnership in June 2013 to provide independent and objective ratings, they said. The trio hopes to reform the current international credit rating system and to support global economic recovery.

“Credit ratings are indispensable in global economic operation, and it is obvious that the current rating system needs reforming and introducing new thinking,” said Guan Jianzhong, chairman and president of Dagong Global Credit Rating and chairman of UCRG, at the platform’s 2013 launch. “UCRG aims to construct a new international credit rating system, which reflects the laws governing the development of our credit-based economy and essential requirements of credit rating; to develop new international credit rating theory and rating criteria; to establish an independent international supervision system for credit ratings; and to communicate the right message about credit ratings to the world.”

Most of the information regarding UCRG comes from various news reports and press releases as few economic analysts have appeared to weigh in on the new organization.

UCRG’s announcement to release ratings this year follows Fitch Rating’s and Standard & Poor’s downgrading of Russia’s sovereign credit rating to BBB-, a step above junk level and on par with India and Turkey. Some analysts question whether the Big Three provide accurate readings of economic situations and believe developed economies receive a free credit rating pass, while developing economies receive more risky ratings, according to a RusRating analyst.

Two of the Big Three have come under fire for allegedly giving high ratings to risky mortgage-backed securities prior to the financial crisis. As the U.S. Justice Department’s case against S&P’s winds down, the government is beginning an investigation of Moody’s Investors Service. In June 2013, Sean Egan, president of Egan-Jones Ratings and director of the UCRG, said, "Obviously there's been a breakdown of the system, obviously there's yet to be any sort of tangible reform. That is really the impetus for seeking some alternatives for global institutional investors."

- Diana Mota, NACM associate editor

U.S. Port Dispute Worsens Over Weekend

Tensions between the International Longshore and Warehouse Union (ILWU) and port operators through the Pacific Maritime Association may be approaching their most dangerous levels since a costly 2002 work shutdown as more than two dozen ports were temporarily shuttered over the weekend. More of this could scuttle the domestic economy enough to cause a first quarter contraction, according to NACM Economist Chris Kuehl, PhD.

Pacific Martime reportedly shut down many ports along the U.S. West Coast over the weekend, alleging workers have been intentionally cutting their production in protest over the ongoing contract and working conditions disagreements. This includes the Los Angeles and Long Beach ports that account for approximately one-third of trade activity, according to some estimates. The ports did reopen Monday.

Recent federal mediation in ongoing disputes among port players on the U.S. West Coast appear to be backfiring, driving the parties further apart. Kuehl said a prolonged work stoppage could throw the U.S. economy into a recession for the first quarter. In 2002, a 10-day work stoppage cost West Coast ports upward of $1 billion per day, and that was before nearly as many U.S. businesses felt compelled to sell products outside of the country. The financial impact could be double in 2015 because businesses have sought more buyers, in B2B and retail, outside of the U.S. due to changes inspired by the Great Recession domestically and increased trade support programs promoted by the Obama Administration with the stated goal of doubling American exporting activity.

Problems in the shipping industry are numerous and include the presence of larger-sized ships, more ships arriving in ports daily, out-of-date technology compared with overseas ports, shortages of key equipment and greater demands on port workers without increases in staffing.

- Brian Shappell, CBA, CICP, NACM managing editor

Radio Shack (Finally) in Chapter 11, Awaits Court Approval

Perhaps the least surprising bankruptcy filing this decade, Radio Shack filed for Chapter 11 protection late Thursday in the U.S. Bankruptcy Court in the District of Delaware. But, despite years of financial troubles and self-inflicted wounds, the brand name curiously may not disappear entirely.

Radio Shack filed for voluntary bankruptcy as it continued to struggle with mounting debt. Instead of liquidating inventory, the company is selling off 1,750 of its 4,000 to General Wireless. The plan is to turn most of these locations into Sprint-branded stores, which is interesting since Sprint recently turned around its struggling business model at least temporarily amid heavy marketing that skewered higher costs for cell phone service offered by rivals Verizon or AT&T. However, under a so-called “store within a store,” concept, the Radio Shack brand name may be used for a number of products/offerings. That seems to be a head-scratcher among analysts, given how far Radio Shack’s reputation has fallen in recent years. Either way, the move could mean many suppliers will be able to continue doing business with the company if a U.S. Bankruptcy Court judge approves.

Radio Shack was identified as increasingly troubled in an NACM Industries to Watch article in August 2013 about the precarious state of the retail industries, especially where electronics was concerned. Radio Shack was a proverbial poster boy for the trend, and even a punch line, for a variety of reasons: oversized stores, too many locations, inadequate response to e-commerce competition, failed rebranding that was viewed as desperate and other notoriously poor management decisions. Radio Shack tried reducing its number of stores and hours of operation of late to save money but has continually racked up losses. More recently, Moody’s Investors Service predicted that an October injection of cash by investors would almost certainly not help beyond 12 months because of  continued “anemic store traffic, margin erosion and chronic revenue declines.” The ratings agency noted that “unless management is successful in stabilizing the company's margins and reverse the precipitous revenue declines, we expect the company to find itself in the same precarious position.”

- Brian Shappell, CBA, CICP, NACM managing editor

ERP Provider SAP Announces Big Overhaul, but Will It Work Better for Credit?

SAP SE unveiled a number of major changes this week designed to make its enterprise resource planning (ERP) offerings faster, more efficient and more flexible than in the past. Company officials are calling it the biggest change for the company in nearly a quarter-century. Proclamations aside, what remains to be seen is what the new SAP options actually deliver, especially to a trade credit industry that many argue has been failed by SAP's off-the-shelf products in the past.

SAP, one of the two biggest players in the ERP world, announced it is updating its existing business suite and also offering more in cloud-based software options going forward. SAP Business Suite 4, also known as SAP/4HANA, will offer cloud-based, onsite and hybrid options that "reinvent SAP for the digital age," said Bill McDermott, CEO of SAP.

The topic of massive limitations to the credit function on the part of products and services designed by SAP, Oracle and other large ERP providers is covered at length in the upcoming March edition of Business Credit magazine. A number of add-ons, or bolt-ons, are available in the market and often work well—if addressed during the earliest planning stages of an ERP implementation—to fix things companies perceive that SAP and Oracle designed without credit in mind, said Scott Tillesen, CCE, CICP, CEW, vice president of credit for the Americas at Tech Data Corporation, and Pamela Craik, CCE, area credit manager at McKesson Corporation. Both are among credit professionals reporting that their companies are enjoying increased efficiency and cost savings because of ERP conversions, while acknowledging that the successes very likely would not have occurred as easily if they had relied solely on basic ERP systems without add-ons from third parties.

- Brian Shappell, CBA, CICP, NACM managing editor
For extended version of this story, see this week's edition of NACM's eNews, available later this afternoon.

Trade Pact Rising From the Ashes?

Only a few weeks ago, it appeared the Trans Pacific Partnership (TPP) trade pact was doomed to failure and mostly because U.S. President Barack Obama was unable to rally sufficient support from his own party. It appears that after seven years, this massive free trade agreement (FTA) might now actually come to fruition.

The TPP would register as the biggest trade deal agreed to in decades and cover some 40% of global trade. The pact was supposed to be the centerpiece of Obama’s shift towards Asia and has been stalled by domestic opposition as well as, to some degree, its low popularity in Japan.

Democrats in the U.S. Senate and House have been far from convinced regarding the TPP’s potential positives. Many chose to actively oppose the president in public, asserting that trade in general is not in the interests of the unions and the middle class in the U.S. They base that assertion on that notion that jobs have left the country as companies seek cheaper locations to produce and pointed out that goods from these low-cost nations will have an advantage when they are imported into the US. The counter argument is that the U.S. also exports and needs these markets to compete. The question is: Are there as many jobs added by foreign trade as there are jobs lost? It depends on whom one asks and what measures are used.

The position that the Obama White House has taken is that gains outweigh losses, as many of the negative aspects of global production will take place with or without the TPP. Companies seeking low-cost production will not be in the U.S. under any circumstances unless the U.S. simply becomes highly protective. The real issue is how the U.S. can find a way to gain as much from globalization as it potentially loses. That may very well be within reach via the TPP and pacts like it.

- Chris Kuehl, PhD, NACM economist and cofounder of Armada Corporate Intelligence