Credit Managers’ Index Shows Positives and Negatives

July’s CMI activity mirrored the volatility seen in the overall economy. Job creation numbers crashed to levels not seen since the recession in May, only to jump back to near-record levels. Durable goods numbers are down due to a drop in exports, while the housing sector shows more strength since before the downturn. “We’re now seeing some of that same back and forth in the CMI data,” noted NACM Economist Chris Kuehl, Ph.D.

Although the combined score regained some momentum (now at 53.5, up from 52.7 last month), various subcategories reflect extremes in activity. The index of favorable factors jumped 2.4 points to return to the 60s range where it has been three times in the past year. Its strength shows up through growth in all four of its categories. This is a trend that needs to continue if there is to be any progress in the economy overall, Kuehl said.

Unfavorable factors showed more distress, moving from June’s 49.9 to 49.2; of the six subcategories, only rejections of credit applications and filings for bankruptcies were above the line that divides contraction from expansion. “The fact that credit applications are up, but approvals are down indicates weaker buyers hoping to find a supplier that will give them credit regardless,” Kuehl said. This could signal that sellers can afford to be more selective, reflecting strength, against weaker buyers.

The other four unfavorable categories are hovering near 50 with the lowest being disputes at 47.6. Volatility remains in both the favorable and unfavorable indexes. “On the one hand, there has been impressive progress in some of the sectors of the economy; but at the same time, there have been some very weak ones,” Kuehl said. “These companies are struggling with their credit obligations.”

 

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Doing Business in Countries with High Interest Rates

Interest rates for many countries have been forecasted to remain low—for a while at least. Brazil’s new central bank, however, opted this week to keep the benchmark SELIC interest rates at 14.25%.

Conducting business in countries such as Brazil or Venezuela (21.36%) can become somewhat of a double-edged sword. Because of the economic risk involved, credit professionals might prefer to request cash in advance, said Craig Schurr, instructor of FCIB’s International Credit & Risk Management (ICRM) online course and retired senior vice president and manager of FirstMerit Bank’s International Banking Division. With some countries boasting interest rates close to 30%, however, it can make it financially cost prohibitive for companies in those countries to obtain the cash to pay in advance, Schurr added.

Tools such as credit insurance or letters of credit can not only help mitigate payment risk for the seller, they enhance relationships with customers by allowing them to hold on to their money in high interest rate areas and lower their cost of financing the purchase. It builds goodwill, he said.

Using these instruments also allows companies to provide more liberal terms. Options such as these could mean meeting customers somewhere in the middle, Schurr said. Grant open account terms then establish your price by imbedding the cost of having to purchase credit insurance and the additional carrying cost using an interest rate that reflects your time value of money for not receiving cash up front. It will benefit your customer because it will more than likely be well below the country’s interest rate, he explained. Schurr emphasized that even a small token of meeting your buyer somewhere in the middle will be well received and lead to much better relationships.

- Diana Mota, associate editor

 

NACM Regional Conferences

Connect, Network, Learn and Share

Held each fall, the regional conferences are a wonderful opportunity for members to learn and grow by attending educational sessions and network with fellow credit professionals from their respective geographic regions.

Eastern Region Credit Conference
September 14-15, 2016
Rochester Airport Marriott
Rochester, NY
Hosted by: NACM Upstate New York

All South Credit Conference
September 18-20, 2016
Hyatt Place Fort Worth
Historic Stockyards
Fort Worth, TX
Hosted by: NACM Southwest

Western Region Credit Conference
October 12-14, 2016
Renaissance Seattle Hotel
Seattle, WA
Hosted by: NACM Business Credit Services

Central Region Credit Conference
November 9-10, 2016
Crowne Plaza Hotel
Independence, OH
Hosted by: NACM Great Lakes Region

Construction Round-Up: Surety Programs, Transportation Funding and P3s

Louisiana has begun a new surety bond guarantee program to provide small construction companies greater access to major construction projects. The Bonding Assistance Program, administered by Louisiana Economic Development (LED), will help small construction companies obtain bid, payment and performance bonds. Contractors that are certified clients of LED’s Small and Emerging Business Development Program will be eligible for the Bonding Assistance Program. For qualified companies, the state may guarantee the first 25% of the contract value, up to $100,000, to limit the surety company’s risk in providing a bond.

In Michigan, Gov. Rick Snyder vetoed on July 1 Senate Bill 557, which would have eliminated cost-sharing requirements for some municipalities related to state highway and interstate projects within their boundaries. In his veto letter, Snyder said the bill would have forced the Michigan Department of Transportation to reallocate funding from rural to urban areas, thus leaving rural communities with fewer “Main Street” projects. Instead, the governor wants the state to address wholesale revisions to Public Act 51, the state’s main transportation funding act, before the end of the year.

In other construction-related news, a new report from the Institute for Local Self-Reliance (ILSR) advises government agencies to take more responsibility for public-private partnership (P3) project-related broadband agreements in order to maximize the advantage to the public for which they were ultimately designed.

The report highlights a broadband P3 project in Westminster, MD, as a model program that balances the right amount of risk and reward in such a P3 partnership. For instance, the city is responsible for all network construction and owns the fiber infrastructure, while its private partner, Ting, leases access to the network (for 10 years, with the possibility for two 10-year lease extensions) and is responsible for providing services to subscribers, the ILSR report notes.

The Westminster program is seen as an inspiration for one that the city of Santa Cruz, CA, has adopted. However, other projects, such as Google Fiber, leave little leeway to public entities. Google Fiber, for example, designs, owns and runs the fiber network it installs, and also controls the number of locations and subscribers, as well as the types of services it provides. It decides who can buy the network if the firm chooses to sell.

“Communities engaging in a (P3) should retain some agency for future decision-making,” the report concludes. “Any (P3) has risks and communities should be extremely wary of any potential partner that claims there are no risks with their preferred approach.”

 

FCIB European Summit

World-class Education and Networking for International Credit and Risk Managers

November 13-15, 2016
Amsterdam, Netherlands
Steigenberger Hotel

Summit highlight: With continued turmoil in the markets, FCIB is offering two educational sessions on country risk.

Country Risk: Latin America

As troubling news from Brazil and Argentina remains a cause for concern to world markets, panelists from across industries and areas of expertise will discuss the current and future risks of trading in key Latin American countries.

Country Risk: Trading Conditions in Russia

Conducting business in “sanctions heavy” Russia requires informed sovereign risk analysis. Panelists will discuss how to mitigate risk, conduct business safely, and examine how perceptions of trade with Russia match the reality.

For more information and to register, visit fcibglobal.com/amsterdam-summit-2016.

Court Case Highlights Need to Closely Review Contracts

Suppliers, subcontractors and other parties to prime construction project contracts should carefully examine the contract’s language to determine if they are bound to resolve issues through arbitration and to make sure they’re comfortable with that process.

“You need to be aware of what you’re getting into,” said Karen Hart, Esq., partner with Bell Nunnally & Martin LLP in Dallas. That’s particularly true if one’s firm agrees to a different contract than the prime contract, which may not mention arbitration but still makes reference to or incorporates a prime contract that does. In that case, also read the prime contract to realize and understand attached obligations, Hart advised.

Filing a claim through arbitration can cost more than filing in court—arbitration filing fees can exceed $1,000 whereas typical court filing fees are a fraction of that, Hart said. Also, see if the forum or the contractual arbitration clause requires one or more arbitrators—a panel of three likely will cost more than a panel of one, particularly since arbitrators typically charge by the hour. Also noteworthy is that typically no automatic right of appeal following a decision exists in arbitration.

A recent case in the Supreme Court of Texas illustrates the importance of clearly understanding some of the limits on compelling arbitration by firms that were not signatories to an arbitration clause, noted Lionel Schooler, a Houston-based employment lawyer and partner with Jackson Walker LLP.

G. T. Leach Builders v. Sapphire V.P. involved a luxury condominium project being built by Sapphire and was damaged by Hurricane Dolly in 2008. Sapphire filed suit against several insurance brokers after it failed to obtain insurance proceeds to cover millions of dollars in losses, asserting the insurance brokers allowed a builder’s risk insurance policy to expire and be replaced by a permanent insurance policy, though construction was not complete.

Nearly three years later, the insurance brokers designated several others as responsible parties, including the project’s general contractor, G. T. Leach Builders, and two of its subs, court documents show. Sapphire amended its suit to name them as defendants, alleging negligence. G.T. Leach later moved to stay the litigation and rely on an arbitration agreement in the general contract. Subcontractors made similar motions, relying on language in their subcontracts with G. T. Leach, even though Sapphire never signed the subcontracts.

The Texas Supreme Court eventually ruled G. T. Leach didn’t waive its arbitration rights and that arbitrators, not the courts, must decide the issue of whether a contractual deadline barred G. T. Leach’s demand for arbitration. Further, the court found no agreement between the developer and the subcontractors to arbitrate, as “Sapphire did not agree in the general contract to arbitrate its claims against the other defendants and is not equitably estopped from refusing to do so.”

 

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Fed Subgroup Recommends Debit Balance Best Practices to Suppliers, Retailers

Increasingly, debit balances appear to be causing more problems for the already struggling retail industry. This is bad news for the industry and its suppliers alike, a report from an offshoot of the Federal Reserve Bank of Minneapolis suggests.

Among other points noted, suppliers and retailers should actively communicate about owed or expected debit balance payments more quickly to avoid problems for either side, suggested the Payment, Standards and Outreach Group of the Federal Reserve Bank of Minneapolis in the 2016 white paper Retail Debit Balances Best Practices and Procedures Technical Report.

An accounts payable account usually carries a credit balance that indicates the amount that a retailer owes a supplier for goods received—the debit balance means the account is in “deficit status” (supplier actually owes the retailer), according to the Fed group, which is part of the national Remittance Coalition, of which NACM-National is a member. This is happening more frequently, typically in situations where the value of deductions is more than the payment activity on the supplier’s account.

The report suggests a host of best practices including what retailers would like to see from their suppliers: a retailer web portal to monitor account status, timely reconciliations, accurate shipments and invoices, and agreements/other commitments shared internally within the organization.

“Suppliers want to maintain strong, long-standing relationships with their retailers,” said Mary Hughes, senior payments consultant for the Fed’s Standards and Outreach Group. “Debit balance handling was identified as a pain point in a focus group the Remittance Coalition conducted at an industry conference. Both sides agree that establishing best practices and procedures would go a long way to improving how retail debit balances are handled in the industry. Better communication and comprehensive documentation can reduce the time and labor expended in resolving retailer debit balance claims.”

That said, the Fed group’s endgame with this effort isn’t to push for legislation or even a rule in the Federal Register. Rather, this is about “getting the dialogue started,” which could benefit all industries involved to some extent.

“Like most open, consensus standards, adoption of the best practices in this technical report is voluntary,” Hughes told NACM. “There aren’t any ‘rules’ per se, as each supplier-retailer partnership does things its own way. As we say in the report, an organization should pick and choose which practices make sense to it.”

 

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 To view past eNews issues or to visit the NACM Archives, click here.

 

 

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