A credit professional would have to be somewhat asleep at the switch to have missed the often negative news coverage in business publications and mainstream media about the struggles of Best Buy and JCPenny (JCP). The problems faced by the two companies and others like them, albeit to a lesser extent, warrant inclusion of department stores and “big box” retailers as industries to watch. As such, creditors are going to need to be mindful of warning signs coming from companies therein.

JCP’s business model, which featured a failed gamble on a campaign that ended faux discounting and coupons in favor of “real” pricing, and Best Buy’s struggle to overcome powerhouse online retailers like Amazon, and brick-and-mortar competitors like Walmart for market share are the source for their struggles. But an even bigger storm for retailers of this size and profile, as suggested by Bruce Nathan, Esq. of Lowenstein Sandler LLP, potentially looms in the not-too-distant future: rate hikes. Let’s face it, rock-bottom interest rates, and the economic malaise inspiring them, won’t last forever. “If your business model is troubled and you have a lot of debt, that’s going to be one big issue,” said Nathan. “When interest rates go up, the debt has to be refinanced. But a lot of these retail businesses are also badly overleveraged.”

And potential financial problems with such stores could have a domino effect as many of them serve as anchor stores designed to drive more foot traffic to other retailers in malls and shopping centers. Nathan noted that such a domino effect could also impact a commercial real estate sector that has already seen its share of hardships over the last half-decade. “You need to look for the warnings to be able to mitigate your risk,” said Nathan. “You want to be able to anticipate a bankruptcy well before the filing. And there’s so much more information out there now that wasn’t 20 years ago.”

- Brian Shappell, CBA, NACM staff writer
 
Catch Nathan in Bankruptcy Rumblings: Identifying and Mitigating Risk of a Financially Troubled Customer Headed toward Bankruptcy at Credit Congress on May 22. For more information on the event or to register, visit http://creditcongress.nacm.org/. 

Credit professionals looking for unique financing solutions should see where investors want to put their money. That was just one of the many insights offered during yesterday's FCIB New York International Roundtable, held at the offices of Lowenstein Sandler, LLP. During the event-ending panel, titled "Non-Traditional and Creative Methods for Receivables Management and Working Capital Finance," professionals from the brightest corners of commercial trade financing offered attendees some new ideas on how to approach managing their receivables.

Panelist John Barone of JP Morgan noted that credit professionals often fail to see the big picture in terms of how receivables are securitized and financed, cutting themselves off to a number of financing options. In essence, he made the point that creditors and their companies should look to areas where investors want to put their money, and investors are currently looking to invest in so-called high-yield markets. "When we discuss high-yield we mean any company that is rated BBB or less," said Barone. "If you were to look at a group of European high-yield names and you also look at the default rate and how those names as a portfolio have traded, the spread was astronomical."

Ultimately, the idea is that the greater the risk, the greater the reward, a fact that means greater profits for investors and thus greater access to unique financing solutions for companies looking to finance sales to this area. "Many of the credit professionals that we talk to don't look at this," said Barone. "They analyze those individual customers and they tend to not step back and think about things on a more macro basis. The market for high-yield risk in Europe is growing. Investors are looking to put their capital somewhere and they're looking for something they can also get a yield on their capital." Europe is one place where creditors can hope to increase sales while hedging their risks because investors are more interested in taking the risk of securitizing such transactions with puts and other financing options.

See more about this year's New York Roundtable in today's edition of NACM's eNews. For more information on FCIB's other educational and networking opportunities, click here.

- Jacob Barron, CICP, NACM staff writer

 

Several years in the making, the UCC Filing Service went fully live online this week, joining the Mechanic’s Lien and Bond Services under NACM's Secured Transaction Services umbrella.  The service provides the means to mitigate the risk of debtor nonpayment for businesses that sell or finance various types of personal property under UCC’s Article 9, as well as those that lend the labor, materials and other services under state law. The purpose, at its simplest level, is to help creditors become a secured party as an investor, thus putting them in the best possible position to get paid. Remember: secured creditors get paid out 100% (if money is available) before unsecured creditors get one cent, per bankruptcy law. This is increasingly important in areas such as construction as the domestic economic recovery, already sputtering, is threatened by ongoing and new threats, such as gridlock in the U.S. Congress.

Powelson noted that getting involved with UCC filings is not difficult when using a service providing the know-how. He recalled a colleague in Texas who, after years of “me badgering him to protect himself,” made a UCC filing about six month before a major customer filed a massive, $40 million bankruptcy. The colleague’s business was paid nearly 100% of what it was owed, unlike unsecured creditors who received pennies on the dollar.

“That filing cost him $82 and took about one hour to complete,” Powelson said. “With getting paid what he was owed, he joked that the program already paid for itself ‘for about the next 2,200 years.’ I think there are a ton of credit managers who just aren’t sure about the process and perceive it as very cumbersome. The process can be somewhat easy, actually. But sometimes you’ve got to get crushed or really kicked in the teeth and have your boss say, ‘we can’t do this anymore. What could we have done to protect ourselves?’ before you make the move.”

- Brian Shappell, CBA, NACM staff writer

Corporate bankruptcies experienced a freefall in April, far outpacing the decline reported on the part of individuals/consumers.

Statistics prepared by Epiq Systems Inc. in accordance with the American Bankruptcy Institute found total bankruptcy filings dropped 16% from the same period last year. However, the numbers indicated commercial filings fell 25% to 5,132 for the month on an annual basis and by 9% between March and April.

“Businesses continue to cut costs to improve their financial stability,” said ABI Executive Director Samuel J. Gerdano. “As businesses remain committed to bolstering their balance sheets, bankruptcy filing rates will continue to decrease.”

However, some bankruptcy experts like Bruce Nathan Esq., of Lowenstein Sandler PC, aren’t convinced that a downward trend in bankruptcy is a situation with which creditors should become too cozy.

“Even as the economy improves, a lot of companies are going to be dealing with debt walls on debts pushed out to 2013 and 2014 by banks,” said Nathan. “I can safely predict that the trend of a decrease in filings will not last forever. Chapter 11 will increase again soon.”

Brian Shappell, CBA, NACM staff writer

Total commercial bankruptcy filings for the first three months of 2012 hit 15,833, a 19% drop from the 19,638 filings during the same period in 2011.

According to data provided to the American Bankruptcy Institute (ABI) by Epiq Systems, Inc., the fall in commercial filings mirrored the overall decline in bankruptcies across the board. Total and noncommercial filings both decreased by 12% in the first quarter compared to the same period in 2011.

For trade creditors, the decline in bankruptcy filings has also been accompanied by a drop in collection issues, according to Lynnette Warman, Esq., a partner with Hunton & Williams, LLP. “The trade creditors I speak with confirm that they are experiencing fewer bankruptcy filings, and that for many, there are fewer collection issues,” she noted. “In fact, the number and amount of trade debts outsourced to collection agencies have also dropped over the past year.”

Much of the decline can be traced back to tightened credit conditions, both secured and unsecured, that gripped the trade during the recession. “As this occurred, some businesses failed fairly quickly after their bank lines were cut or unsecured credit reduced, ” said Warman. “Some of these closures were done through bankruptcy; other businesses just quietly closed their doors and their owners simply stopped doing business.”

While banks and sellers tightened credit across the board, the buyers simultaneously experienced a significant drop in their own income. “Many companies experienced a serious reduction in sales, which obviously led to fewer purchases on their part, thus less outstanding unsecured debt,” said Warman. “Businesses that have survived the past few years have had to cut expenses to survive, and should have less debt, both secured and unsecured, on their books.”

Warman will participate in four sessions at this year’s NACM Credit Congress in June, co-hosting the CCE Exam Review, serving as a panelist in the Legal Issues Executive Exchange session, and presenting two separate educational sessions. To find out more about this year’s program, or to register, click here.

Jacob Barron, CICP, NACM staff writer
 

The bipartisan nature of H.R. 2533, the Chapter 11 Bankruptcy Venue Reform Act, was on display this morning during a hearing on the bill in the House Judiciary Committee.  Lawmakers from both sides of the aisle asked a small group of witnesses an array of questions, and regarded the arguments against the bill, proved by lone dissenting witness Professor David Skeel of the University of Pennsylvania Law School, with a great deal of skepticism.

Held in the Committee’s Subcommittee on Commercial and Administrative Law, chaired by Rep. Howard Coble (R-NC), the hearing offered the bill’s sponsors and supporters to lay out their qualms with current bankruptcy venue statutes, which allow debtors a strikingly broad array of choices of where to bring their case.  “These rules allow a large Chapter 11 debtor to choose their venue…This leads to some strange results,” said Coble in his opening statement.  “The Los Angeles Dodgers, an entity with Los Angeles in its very name, filed in Delaware.”

Coble mentioned a complaint that would arise again and again in the hearing, noting that the leeway that Chapter 11 debtors have in where they file their bankruptcy case often comes at the expense of smaller creditors.  “Small creditors must defend preference claims filed in a remote jurisdiction,” he said.  “[They’re] sometimes left in the dust.”

Judiciary Committee Chairman Lamar Smith (R-TX), one of the bill’s original sponsors, noted in his opening statement that H.R. 2533 would not only correct provisions that disenfranchise smaller creditors, but also restore the Constitution’s original intent for the nation’s Bankruptcy laws.  “The current Chapter 11 venue rules allow many corporations to forum shop for a venue with favorable judicial precedent for the business.  For example, a nationwide retailer may prefer to file in Delaware because of the Third Circuit’s well-known rulings on the treatment of unpaid rent in bankruptcy.  At the same time, a business with many unionized employees can avoid filing in Delaware to avoid Third Circuit precedent on collective bargaining rights in bankruptcy,” said Smith.  “The Constitution instructs Congress to enact uniform bankruptcy laws.  While courts of appeal are permitted to interpret Bankruptcy Code provisions differently, Chapter 11 debtors should not be able to leave their home districts and shop for a forum whose judicial precedent on bankruptcy law they happen to prefer.”

Three of the four witnesses agreed with the Chairman, and supported the bill, namely Peter Califano, partner with Cooper, White & Cooper who testified on behalf of the Commercial Law League of America (CLLA), Hon. Frank Bailey, chief judge of the Bankruptcy Court for the District of Massachusetts, and Professor Melissa Jacoby, of the University of North Carolina School of Law. 

“The consequences of corporate bankruptcy are most profound in the communities where the debtors’ principal assets are located,” said Califano.  “If bankruptcies are filed in remote districts, the parties with the most familiarity with the debtor’s operations might be cut off in the process.”  Bailey and Jacoby agreed with Califano, with Bailey noting that “the current venue statute undermines confidence in the bankruptcy system,” and Jacoby observing that “the current laws really do risk being perceived as being procedurally unfair.”

Subcommittee Ranking Member Rep. Steve Cohen (D-TN) added that the current venue rules ultimately harm “small creditors, employees and other affected stakeholders,” and that “this bill [H.R. 2533], that’s bipartisan, offers what we think are common sense changes to bankruptcy venue statutes.”

NACM has publically voiced its support for H.R. 2533, and has long advocated for sensible changes to the Code’s rules governing where a debtor may file.  To urge your member of Congress to support the Chapter 11 Bankruptcy Venue Reform Act, look up your congressperson’s contact information here (be sure to rely on your company’s address rather than your own home address), then visit NACM’s Advocacy page to download a form letter that you can personalize to increase its effect on your representative.

If you have any questions, contact Jacob Barron, NACM staff writer and government affairs liaison, at jakeb@nacm.org.

Jacob Barron, CICP, NACM staff writer

The International Accounting Standards Board (IASB) and its U.S.-counterpart, the Financial Accounting Standards Board (FASB), recently announced a delay in their accounting standards convergence schedule.  While the original plan was to complete convergence work by June, the boards voted to delay the target for completion to the second half of 2011, although the U.S. insurance standard is targeted for even later, in the first half of 2012.

The two boards have been hard at work, erasing the boundaries between International Financial Reporting Standards (IFRS) and U.S. generally accepted accounting principles (GAAP). However, in their most recent progress report, the boards announced their decision to allot more time to complete the work of converging the two standards into one, cohesive global version.

“Today we are reporting further substantial progress on our work to improve and align international and U.S. accounting standards, while providing additional time to finalize the remaining convergence projects,” said Sir David Tweedie, chairman of the IASB.  “The convergence program continues to raise the standard of financial reporting worldwide, delivering much-needed improvements in key areas and providing a solid platform for global high quality standards.”

In their report, the IASB and FASB also announced that they had completed five other projects which would yield new standards in the next few weeks. They will also jointly issue new requirements in relation to fair value measurement, and put three remaining memorandum of understanding (MoU) projects on priority. These MoUs cover financial instruments accounting, leasing and revenue recognition, while aiding the boards’ joint mission to converge IFRS and GAAP.

“The progress report highlights the many areas where we have already improved and converged our standards, and our plans for completion of the priority projects,” said Leslie Seidman, chairman of the FASB.  “We have also clarified our plan to continue to engage stakeholders in the remaining steps of the process, and give them an opportunity to review the draft standards before they are finalized.”

The process of merging IFRS and GAAP could have ramifications on how commercial creditors read financial statements for public companies.

Jacob Barron, NACM staff writer

"Neutral, relative and necessary."

If you read those three words out loud, dramatically and in a deep voice, they could almost sound like the tagline to a new political thriller or legal drama, possibly one that takes place in Switzerland, or during an especially captivating arbitration proceeding. I don't think such a film exists, but rest assured that if it gets made in the next few years, I'll be suing whoever made it.

In any case, those three words are culled directly from a lesson in the CICP course. At the beginning and end of every module, and sometimes at the beginning or end of a lesson (modules are the big chapters, and they're divided into lessons), the instructor offers some valuable, broader, more philosophical tips and summaries, and this one caught my eye. The thing that the course says is neutral, relative and necessary is risk. Whether it's political, financial, documentary, or interest rate-, acceptance- or foreign exchange-related, risk is a neutral, relative necessity in the world of commercial credit.

Now, this may be something that all credit professionals keep in mind at all times, but it still struck me as a remarkably powerful assessment of what risk is. I've written article after article about how to mitigate risk and reduce it, treating risk like it's a bad thing; the enemy of commercial credit extension, both domestic and international.

This is hardly the case though, and while I still stand behind those articles I wrote and believe risk mitigation is something that creditors do on a daily basis, it's important to remember that risk just...is. It's not an enemy or a friend, nor is it something to be combated or cultivated, it just...is. I'd imagine that recognizing this fact, that risk is something a credit department lives with, but can't do without, is one of the first steps toward becoming a great risk manager, and looking at it this way certainly affected the way I viewed the credit function as a whole. Credit departments and credit professionals aren't meant to eliminate risk, they're meant to make it manageable, and profitable, to be comfortable with something that's, by definition, kind of uncomfortable.

The idea that risk is "neutral, relative and necessary" speaks to credit's role not just as a financial buffer, but as a revenue generator. Another line I wrote down from the course, not from the same lesson, I don't think, is that credit should be viewed as "an investment in receivables." An extension of credit isn't just giving someone something for free and then hoping they pay back, it's an investment in the company and the company's future. I've probably written as many articles on risk mitigation as I have on credit's reputation as "sales prevention," which is something the CICP course recognizes and addresses with thoughts like this. Risk as a necessary constant, and credit is an investment.

Just something that struck me I guess. Back to work now. For those of you keeping track, I'm almost caught up, and should be 100% before week's end.

Till next time,

~Jake

Coverage of FCIB's New York International Round Table is available Thursday in NACM's eNews and an extended feature will be included in the soon to be released March issue of Business Credit Magazine. As always, the Round Table featured interested insights and strong opinions on economic and credit conditions in the United States and abroad.

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Here are some interesting quotes captured during the Wednesday's event:

"Creditors lose with inflation; debtors, like the U.S. government, win with inflation," said Dan North, chief economist at Euler Hermes ACI. "Some countries now are discouraging investment from foreigners with hot U.S. dollars."

"There's eight times the amount of people among the Indians and Chinese. Protectionism will no longer be an option," said North on projections of the shrinking dominance in relation to world GDP in deference to India and China. "It's doesn't mean we're not going to be important or prosperous...but it puts us at more risk to growing creditors and losing the U.S. dollar as a global reserve currency."

"Access to credit information is getting more and more restrictive [in China], said Joachim Bartels, managing director of the Business Information Industry Association. "They find loopholes on financial information, targeted at Dow Jones, Bloomberg, etc. If we can't deliver commercial credit information, it will be damaging to our market; and it will be damaging to their market.

"Banks are starting to lend again, business is getting done," said Garlow.

"They've become credible inflation fighters," said North on Brazil.

"I don't think there really is a currency war," said Josh Green, CEO of Panjiva. "Currency is a bit of a side show when you think about trade. The future is going to be more about market access. Can we get access to the various Chinese markets, Indian markets?"

"In my world, the big question is where is the next China," said Green. "Realistically, there is no next China. People talk about Africa. But, realistically, what kinds of investments are being made. People go there for stuff, resources, not the people or their skills at anything."

"Quantitative easing (by the Fed) = printing money = inflation pressures," said North. "The Fed soon will be chasing inflation for a long time."

"We must touch third rails of society: Social society and Medicare," said North. It's an ugly job, but if we don't, never going to fix budget."

"Customers are not complying with terms," said David Garlow, VP/country risk manager, of AIG Global Trade. "Conditions are improving, banks are starting to lend again; business is getting done."