Business Debt Collection

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
 

In Japan, the largest manufacturing bankruptcy in the nation’s history was declared this week as Elpida Memory Inc. found its liabilities in the neighborhood of $5 billion far too great to overcome without restructuring. The computer memory chip manufacturer, once a big part of a booming exporting industry dominated by Japan, has had trouble keeping up with foreign counterparts. The bulk of that competition, driven by lower costs, comes from outfits in South Korea, primarily Samsung.

Also not helping the Elpida and its contemporaries is that its chips are used for computers and laptops, not necessarily the growingly popular smart phones/devices like the iPhone/iPad and similar products. Additionally, the overvalued yen, which has become a bit of a magnate as investors leave the unstable euro, has made it harder for Japanese-based exporters to compete and threatens Japan’s long-held trade strength. As such, Japan, never known as a country where corporate bankruptcies were very likely, could be seeing its fortunes change … and not for the better (see more on this topic in a feature in the latest, March issue of Business Credit Magazine).

In Greece, the ratings agencies have struck again. This time Standard & Poor’s have downgraded Greece into the sovereign credit rating category of “SD” or selective default. Given its troubles, any action of the kind – once thought to be a virtual bomb in the markets – strikes as less than shocking. Said S&P:
“Greece's retroactive insertion of Collective Action Clauses materially changes the original terms of the affected debt and constitutes the launch of what we consider to be a distressed debt restructuring…we believe that the retroactive insertion of CACs will diminish bondholders' bargaining power in an upcoming debt exchange.”

In Ireland, a potential snag in the latest European Union effort to force the tightening of member states’ proverbial belts is emerging. Prime Minister Enda Kenny announced this week that, as per Irish constitutional mandate, a public vote must be held to ratify the proposed EU treaty that calls for tougher debt limits, limits that almost certainly will force more, unpopular austerity in the debt-rattled  nation. For his part, Kenny said he plans to sign the treaty as a show of support he believes, at least in part, is necessary for an ongoing economic recovery for the EU. It is worth noting the neighboring United Kingdom was one of only two members voting against the treaty, but it’s also not on the euro as its primary currency.

(Note: Check out this week’s eNews, out Thursday, for more breaking and news for credit and financial professionals. www.nacm.org).  

Brian Shappell, NACM staff writer
 

At FCIB New York International Roundtable Wednesday statistics and anecdotal evidence seemed to question America’s ability to compete with other nations as key indicators clearly appear to be trending in the wrong direction.
Speaking on short-term growth prospects, Federal Reserve Bank of New York Vice President Matthew Higgins survey featuring a collective of top economists predicts upcoming gross domestic product growth for the United States at 2.2% as it continues to struggle with high unemployment and debt. It's well below other emergeing economies.

Long-term, the United States is not faring as well as many would have expected in the world rankings of key areas, especially those related to infrastructure and education. “The U.S. already is falling out of the ranks of leading nations in areas key to growth,” he said.

Another area where the United States is lagging, as illustrated in a subsequent FCIB Roundtable session, is within accounting standards. As the United States, more specifically the Security & Exchange Commission, goes back and forth regarding the International Financial Reporting Standards (IFRS), domestic businesses could find themselves in a tough spot no matter which side on which federal regulators fall, speaker Charles Blank suggested. Blank, senior manager at Grant Thorton LLP, noted that a number of nations have already moved toward the standard, developed by the International Accounting Standards Board to try to assure more uniformity and transparency among businesses throughout the globe.

And, in paraphrasing a comment from now former SEC Commissioner Kathleen Casey, the U.S. could very well affect its global competitiveness if it continues to “kick the can down the road.”

For more on the topic, view the lead story in this week's NACM eNews, available on the NACM website (www.nacm.org). More coverage of the FCIB Roundtable will be feature on the NACM blog as well as in subsequent editions of NACM eNews and Business Credit Magazine.

Brian Shappell, NACM staff writer

The overall economic narrative in the country for the last month has been a question as to whether the latest run of bad economic news is a temporary phenomenon or is the harbinger of much worse to come. As many analysts have asserted that this is all attributable to the earthquake and “Arab Spring” as those who assert a double-dip recession is setting up for as early as the third quarter. Most of the economic community is somewhere in between, but much of the interpretation lies within the latest run of data, and the National Association of Credit Management Credit Managers’ Index (CMI) for June suggests the temporary impact position has some validity.

The dramatic collapse reflected in the May CMI eased up a little in June. The index numbers bounced around, but these variations were obscured somewhat by the fact that the index as a whole was flat. Considering this month, it is very apparent that the devil is in the details. The overall index number was exactly the same as it was in May—54.2—but there were significant changes in the combined sub-indices for favorable and unfavorable factors.

“The most distressing news comes from the number of credit applications received and the amount of credit extended,” said Chris Kuehl, PhD, managing director of Armada Corporate Intelligence and NACM economic advisor. Many businesses seemed more cautious in the last month or so. Part of this is still related to the issues in Japan and the fear of higher commodity prices, but there is also some growing unease regarding political games. “Few really believe that the United States would put $100 billion at risk in its securities market by not raising the debt limit, but there is intense fear that Congress will take the game too far and provoke a reaction in the markets before it reaches an agreement,” Kuehl said. “It appears this trepidation is affecting the willingness of businesses to expand and seek additional credit. The good news is that sales have risen during this period; in the past, expanded sales usually beget more credit requests and more credit extended.”

The bad news in favorable factors has been balanced out by good news in some of the unfavorable factors. Many signs of distress weakened a little. There were fewer disputes and fewer dollars beyond terms. While there were also fewer bankruptcies, there were still concerns about the number of credit applications rejected and the number of accounts placed for collection. “The overall impression is that there is some separation taking place between those companies that have weathered the last few years and those that had been counting on an economic breakthrough to help salvage their financial position. This is a development we’ve referenced before and the pattern is still evident,” said Kuehl.

As the recession gives way to a slow recovery there is a series of expected moves from the different players in a given industry sector. The market leaders start to anticipate the end of the downturn, and they are ready to ramp up and make an attempt to grab market share from rivals. The best-prepared companies make the first moves forcing competitors to try to keep pace. Some do, but others begin to falter as the business they expected to cover their investment fails to materialize. Right below the market leader category is the market challenger and they are looking for the weak link among the market leaders. They push with their own expansion schemes in an attempt to supplant them. If they calculate correctly they make the jump; if they do not they fall back and start to struggle with cash flow. Right behind the leaders and the challengers are the market followers and they are waiting to see how the bigger battles play out before they choose which approach to emulate.

“Right now the economic recovery is waiting for the market followers to make their move. This is the biggest category of business—and the most cautious,” said Kuehl. The CMI data suggest that this sector is starting to have more active sales activity, which generally provokes more credit demand. The majority of credit requests have been coming from either the most important customers with the best credit or from those struggling on the bottom tier. “When the middle levels start to get earnestly engaged is when there is potential for more general overall economic growth.”

The online CMI report for June 2011 contains the full commentary, complete with tables and graphs. CMI archives may also be viewed online.

This month's news is not so positive as recent world events are rippling through the U.S. economy. For the past several months there had been a consistent feeling of optimism—despite some struggling in the manufacturing sector based on solid sales—and the seeming willingness to increase trade credit. That optimism took a hit this month. There were sharp declines in sales, new credit applications, dollar collections and the amount of credit extended—all the positive factors. The overall index dropped from 64.1 to 62.2. "This is not exactly catastrophic as the index remains in the 60s," said Chris Kuehl, PhD, managing director of Armada Corporate Intelligence and economic advisor for the National Association of Credit Management, "but the pace has dramatically slowed and that is hardly what had been anticipated or hoped for."

There were continued signs of distress in the unfavorable factors, but the decline slowed and that is somewhat better news. The overall sense of the March data is that the U.S. economy is struggling to keep pace with the events in the world that have drastically altered everything from commodity price expectations to sourcing decisions and credit allocation. "It is important to note that the ripple effects of the events in the Middle East and Japan have only started to manifest and will be factors for months to come," said Kuehl. "The Japanese catastrophe has affected supply chains all over the U.S. and Europe and that has added considerable expense to manufacturers being forced to find new suppliers or wait for weeks to get what they need from the affected region." The price per barrel of oil has jumped by almost $15 since December and that is now filtering into all sectors of the economy.

The most dramatic change in the CMI data is in the category of dollar collections. The combined index slipped back to levels not seen since November of last year, falling -0.7 from 56.4 to 55.7. Kuehl noted that the real damage here is not that the index numbers are drastically reduced—they are still holding fast in the 60s and upper 50s. The real problem is that expectations had been high and it was anticipated that these numbers would be well into the mid-60 level by now. There had been some expectation that gains would be placing these index numbers into the 70s by mid-summer, but that is no longer the most likely scenario. The gains seem to have stalled for the moment, and it is not likely they will start up again as long as the global situation remains fundamentally unpredictable.

When one looks at the unfavorable factors there is still cause to worry and there will be more concerns as prices start to escalate. The rise in oil prices has been sharp, but this is not the only sector seeing increases. The radical price hikes of all industrial metals and food inflation are as bad as they have been since the debacle in 2008 and are now moving through the economy: high oil prices have prompted higher airfares and freight rates. As businesses face these hikes, they are forced to spend more than anticipated and that puts a strain on their ability to keep pace with the other debts they owe. Many of the companies reporting on their creditors suggest that a key reason for the slowdown in payment has been the spike in operating costs.

If there is any good news in the data for this month it is that the index of unfavorable factors has not changed much as compared to the favorable factors. The negative news is the same as last month, suggesting that some concerns about credit collapse have been reduced. There were fewer bankruptcies in this period and that is good news. The other factors worsened a little, but not dramatically. "The anecdotal evidence suggests that most creditors are reacting to some short-term shocks but expect to be back to normal in the months to come—providing that the situation in the Middle East does not worsen appreciably," said Kuehl.

(Note: A link to the full report, complete with tables and graphs, along with CMI archives, is available at the eNews version of this story. It can be found at this website, nacm.org

This month's Credit Managers' Index (CMI) from the National Association of Credit Management (NACM) reveals a tale of two economies and two strategies. There is continued good news in the index with sales and credit availability, but there is some very bad news as far as the toll this economy has had on business thus far. An impressive growth in sales pushed the number well into the 60s with a reading of 66.3-the highest since the recession started in 2008. Credit applications experienced the same growth, rising to 60.3 after having slipped to 58.6 in January. This number is also the highest since 2008, suggesting that companies still expect growth and are taking steps to get ready. The good news continued with dollars collected, which improved from 60.9 to 63.4. And, finally, there was good progress in the level of credit extended-an increase from 64.8 to 66.5.

The sum total of all this positive trending is an improvement from 62 to 64.1 in the favorable factor index. "What then is the problem?" asked Chris Kuehl, PhD, managing director of Armada Corporate Intelligence and NACM economic advisor. "Why is overall growth in the CMI non-existent? The 56.4 reading this month is the same as last month despite the good numbers."

This is the vexing part of a transition economy, said Kuehl. This is the time that companies move aggressively to capture market share due to the sense that the consumer is starting to engage-an assumption reinforced by overall economic numbers. The retail sector finished 2010 stronger than expected and the last set of data from the Purchasing Managers Index (PMI) show substantial gains in both the manufacturing and service sectors. Consumer confidence is up as well. These are the signs everyone has been waiting for, but they are not the signs of a fully recovered economy.

This situation creates the same pattern every time. The strongest competitor in a given market, the market leader, starts responding to anticipated demand with more capital investment, some hiring and additional marketing. That provokes the market challengers in that sector to respond in kind to maintain their edge. Right behind them are the market followers that also have to react to the moves of those in the dominant position. It is a chain reaction driven by the need to hang on to market share-a race that some companies are better positioned to enter. They are the ones that can wait for the recovery. Those that are not sitting on enough cash have no choice but to make investments and hope that the timing is right.

One of two things will happen to these companies. If the timing is right, the investment will pay off. The anticipated demand will manifest itself, and the cash flow will be there to handle the investment and credit requests. If the timing is off or if the company is forced to respond to the competition sooner than preferred, the debt soon becomes brutal and business failures ramp up. This is the signal sent by this month's index. The two negative factors showing the biggest increase were bankruptcies (falling from 59.1 to 56) and accounts placed for collection (moving from 52.5 to 49.9). Other indicators deteriorated as well. In the end, the declines in the unfavorable factors dragged down the combined index and left the CMI flat for the month.

This part of the transition out of a recession can be the most brutal. Companies barely hanging on could survive if there is little additional pressure. Now with the competition starting to heat up, these struggling companies are left with poor options. They either just accept the loss of their market or they gamble on their ability to hang on. If they guess wrong, they get into trouble soon. It is now a matter of how patient creditors can be and the point where credit managers must really show their skill at reading businesses. If they restrict an account to reduce exposure, they strain the relationship and may lose that customer should it rebound. If they give too much and the company goes under anyway, they have lost a lot of money and could put their own company in some peril.

"The assertion is that 2011 is the transition year 2010 was supposed to be," said Chris Kuehl, PhD, managing director for Armada Corporate Intelligence and economic advisor for the National Association of Credit Management (NACM). "The ‘green shoots' that started to appear about this time last year wilted and died by the end of spring, but 2011 is starting to show some signs of greater economic stability," he said. "This trend has been noted in several indexes and indicators and the Credit Managers' Index (CMI) is no exception." There was an overall improvement in the numbers-from 55.8 to 56.4-the highest point reached in the combined index since April 2010 when the index hit 56.5. What makes this latest number more encouraging is the expectation that the index will continue to see improvement over the next several months, noted Kuehl. Back in April that high point was followed by steady decline that took the index all the way back to 53 in August before a slow rebound got underway.

The most encouraging indicator this month is amount of credit extended. The jump from 61.7 to 64.8 is very significant as this is the signal that many have been waiting to see. While sales and new credit applications slowed a little in January, the numbers remain robust due to the overall increase in activity in these indicators over the past several months. Sales dropped from 65.9 to 63.5, which is still very respectable given that the holiday season had ended. New credit applications fell from 60.1 to 58.6, but that is also somewhat attributable to the arrival of a generally slow time of year as compared to the last quarter.

The fact that credit extended sharply increased despite the slowdown in sales and credit applications indicates more credit availability than in previous months-quite a bit more. This indicator has not seen such high readings since early 2008, and those were barely at 62, much less at 64.8. Banks are reporting a loosening of credit in the United States and since lenders are more active, more commercial credit is appearing as well. Companies are far more willing to offer credit and, as they start to consider expansion in the coming year, it will also create more opportunity to engage their clients.

This was not the only piece of good news in the CMI. There was improvement across the board in the negative factors. Rejection of credit applications was subdued and there was improvement in accounts placed for collection. Even disputes and bankruptcy data showed improvement. The positive development in these negative indicators over the last few months has been identified as an important trend in previous years.

"As companies start to see increased sales and begin to anticipate growth opportunities in coming months, it is important that they get positioned to take on more debt, if needed, for that expansion," said Kuehl. "If they are planning to access more credit, they generally have to catch up on their current debt first." In the midst of the downturn, companies tried to conserve cash flow at all costs, during which they are more prone to stretching out credit obligations. The result is reflected in the deterioration of unfavorable factors. As companies recover and catch up on their credit, they are in a position to request more and in a position to be granted that access. "This is what seems to be happening now," said Kuehl. "Companies are setting themselves up for more growth in the months to come. The data from the CMI is reflected in the latest economic numbers from the Purchasing Managers Index (PMI) as well as surveys from groups like the National Association of Business Economists and the Conference Board."

The index now stands at a level that normally signals more rapid expansion in the near future.

Click here to view the full report, complete with tables and graphs, along with CMI archives.

Source: National Association of Credit Management