eNews September 3, 2015

Credit Managers’ Index Drops Nearly Two Points in August

NACM's Credit Managers' Index (CMI) has experienced many ups and downs this summer, showing volatility in both the favorable and unfavorable categories. In August, the combined score plunged nearly two points from 56 to 54.2.

"That sick feeling that one gets on a roller coaster seems to be affecting those that have been following the gyrations of the CMI this year," said NACM Economist Chris Kuehl, Ph.D. "A good month seems to occur after a bad one and then there is a return to the negative side of the next one."

Falling from 63.5 to 59.2, the index of favorable factors served as the main drag in August. Therein, the sales category recorded the biggest shift, decreasing from 65.1 to 57.9. Remaining favorable factors categories also dropped, but in less dramatic fashion. "There was a real sense of optimism a month ago, and that now seems to have faded," Kuehl noted. "Of more concern is that all of this data was collected prior to the market meltdown, and that suggests that next month is likely to be worse."

Although the index of unfavorable factors increased slightly from 50.9 to 51, it still raises concern due to its proximity to the contraction zone (anything below 50). Half of the unfavorable factors categories slid into negative territory, and the remaining ones are closing in. The filings for bankruptcies category took a notable fall, dropping from 55.6 to 54.4. "The worst of the bankruptcy readings was June [52.5], and it had been hoped that the rebound in July would be sustained," said Kuehl. "There is doubt about that now, and this can be an awkward time of year for some sectors of the economy. There is also some concern that the market debacle at the end of August will have pushed some of these companies into the bankruptcy abyss."

The manufacturing CMI dropped from 55.7 in July to 53.9 in August. The sector has been affected by the strengthened dollar and the collapse in the energy sector. The majority of the decline took place in the favorable categories, with its combined index falling from 63.1 to 58.3 and the sales category plummeting nearly 10 points, from 66 to 56.4. The manufacturing sector's index of unfavorable factors reflected mixed readings with four of its six categories slightly increasing.

The service CMI showed similar results as the manufacturing CMI, with its combined index dropping from 56.3 in July to 54.6 in August. The index of favorable factors fell from 64 to 60.2, with all four of its categories decreasing. Sales and dollar collections took the hardest hits, at 59.5 and 58.8, respectively. The service sector's index of unfavorable factors declined from 51.2 to 50.9, moving slowly toward the contraction zone. Of the six unfavorable factors categories, only two showed marginal increases in August.



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Venue Reform Push Returning to Congress This Fall?

Bankruptcy venue reform remains an important issue to trade creditors based in the United States. Upon lawmakers' return from their current break, the door for a legislative conversation about venue should be open for the first time in years as reform's most notable opponent, Vice President Joe Biden, becomes increasingly preoccupied with a potential 2016 presidential run and watches his power base in the U.S. Congress erode as the end of the Obama Administration approaches.

NACM sources indicate that venue reform legislation is at least being considered among several who previously championed the cause. Supporters include Senate Majority Whip John Cornyn (S-TX) and Rep. Lamar Hunt (R-TX), the latter of whom introduced the most recent reform effort of heft in 2011. The timing of the most recent interest happens to follow one of Texas' formerly largest energy companies filing its Chapter 11 in Delaware, where it incorporated, rather than allowing the case to be heard in its home state of Texas.

"They have been sympathetic to venue reform in the past, but I think the Energy Future Holdings case was what really motivated the latest rumored interest," said Jim Wise, founder of lobbying firm Pace LLC and a longtime member of NACM's Government Affairs Committee.

As recently as 2012, NACM included in its legislative platform a call for Congress to change the Bankruptcy Code to ensure cases were heard where a company's primary place of business or assets were located. This push began as the U.S. Bankruptcy Court in Delaware, where many U.S. companies incorporate because of the ease of process there, earned a reputation as debtor-friendly and its ability to expeditiously navigate complicated cases. The Southern District of New York showed similar attributes in the past. As such, their shares of total domestic bankruptcy cases grew, dwarfing most others in the United States. NACM members, among others, appear to have continued interest in reforming venue mandates, according to the current NACM survey that is active through noon on Sept. 11.

Survey respondents who participated during its first week indicated at a ratio of 15 to 1 that venue law should be changed to prevent companies from "venue shopping" to a debtor-friendly court outside of their home areas. Moreover, of the 12 topics NACM members were asked to rank, venue placed fourth in the preliminary data. A 2014 Commercial Law League of America study indicated that 70% of public companies filing Chapter 11 cases did so outside of the district where their principle assets and operations were located. CLLA said forum shopping was occurring at "epidemic levels."

Arguments against venue reform—beyond general recalcitrance to change and protectionism from stakeholders like the vice president, a former U.S. Senator for Delaware and Judiciary Committee chairman—seem to be fading as well. Many courts throughout the country have demonstrated a strong ability to navigate even complicated reorganization proceedings in recent years, despite previous assertions that the Delaware and New York courts were more skilled or efficient. Judges, like those in the Winn Dixie case that was reassigned to Florida after an attempted move to New York, more frequently are rejecting filings that smack of venue shopping. Also, a significant cost disparity often exists: hiring attorneys in Delaware and New York typically costs more than in many other parts of the country. This is problematic in that the pool of resources already is deficient; otherwise, there would be no bankruptcy reorganization process taking place. "I can tell you that I have served on creditors committees where the U.S. Trustee has said, 'you can use a New York or Delaware attorney, but they can only bill at the local rates,' said Val Venable, CCE, director of credit at Ascend Performance Materials and past chairwoman of NACM-National. "I've had this happen in North Carolina, Florida and Pennsylvania."

Still, despite a reemergence of interest in at least forwarding a new discussion on bankruptcy reform, a reality of Congress is that things don't move without potential voters making noise. "When a lawmaker gets a bunch of letters from constituents because they've been hosed over, there is a flurry in activity," Wise said. "People are rarely eager to act without sufficient public pressure." As such, Wise indicated that credit professionals should consider contacting their lawmakers via letter, email and phone to let it be known that a host of bankruptcy reform issues, including venue, need to be addressed. This is especially notable for constituents in Texas with the aforementioned lawmakers and in Iowa, where Sen. Chuck Grassley (R-IA) is the current chairman of the subcommittee (Judiciary) that would be tasked with exploring reform if an appetite to begin the process exists. Grassley also helped champion several NACM-supported changes to the Bankruptcy Code that were enacted about a decade ago.

- Brian Shappell, CBA, CICP, NACM managing editor and government affairs liaison



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Potential of September Fed Rate Hike Still Unclear

As with many things in life, it's not over until it's over. And that appears to be the situation regarding whether the Federal Open Market Committee (FOMC) raises rates this month as it was once so widely assumed. On any given day, news sources offer a variety of opinions on the subject.

Economists and others watched for signs from the Federal Reserve's annual economic policy symposium in Jackson Hole, WY, last week. "At this moment, we are following developments in the Chinese economy and their actual and potential effects on other economies even more closely than usual," Fed Vice Chairman Stanley Fischer, reportedly said. For months, FOMC members have said they want to be transparent about when a rate increase would take place to mitigate disruptions to financial markets. And while many analysts were convinced it would happen this month, the unexpected market ups and downs of the past week have shaken that resolve. In a July statement, the FMOC said it would "raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2% objective over the medium term."

"The FOMC is waiting to see what the September employment report shows," said Jason Schenker, president of Prestige Economics, LLC, based in Austin, TX. "The U.S. economy is on solid footing, despite the August deceleration for manufacturing seen in the [Institute for Supply Management Manufacturing Index]. The labor market is improving and inflation is likely to rise somewhat. It is China that is exceptionally weak and in recession ... for now."

Chinese officials have blamed concerns over the interest rate hike for last week's global stock market upheaval—not the devaluing of the country's currency—and want the U.S. to delay a hike to "give fragile emerging market economies time to prepare," according to a Reuters' article. Financial instability in the emerging markets is expected to increase in the wake of the inevitable Fed rate hike, wrote Euler Hermes Chief Economist Ludovic Subran in the article "Fed Quake: Who Will Bear the BRuNTS?," which will appear in the September/October edition of Business Credit magazine. However, the impact likely will not approach levels of the collective crash experienced after Fed rate increases in the 1990s, according to Subran. "There is improved resilience in the emerging markets," he wrote. "Financial buffers have been strengthened for most. ... Policymakers, especially central bankers, have gained creditability for moving to clearer targets."

Some signals have arisen that emerging markets may get the temporary delay they want. "The U.S. dollar has weakened a bit this month prompting many to believe that, with a weaker yuan and a weaker dollar, this adds weight to the assumption that the Fed will not raise rates in September or even December," said Bob Garino, vice president of Houston-based Export Advisors. "Others, however, see the reaction to the currency move by China as 'over-baked' when put into context of how much the yuan has increased in the past decade (14% in 12 months) as well as the devaluations we've recently seen for the Japanese yen, the euro, the Canadian dollar or the Mexican peso in the past year."

Garino noted that current U.S. macroeconomic numbers (retail sales, industrial production, housing) "more than trump the mild hysteria associated with China's recent currency 'adjustment'" and that he still believes the Fed will raise rates in September, absent further evidence of deflation.

- Diana Mota, NACM associate editor


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Country Risk Roundup: Brazil, South Korea Face Economic Collapse; OPEC Moving Forward

The Brazilian economy plunged 1.9% during the second quarter after falling 0.7% during the first quarter, according to the Wells Fargo Economics Group. The country's construction sector saw the largest drop at 8.4%, while its industrial sector fell 3.7% and commerce activity declined 3.3%.

"The combination of an unraveling commodity cycle, uncertainty regarding China and the difficulties faced by the rest of the global economy alongside the investigations of fraudulent activity within state-owned Petrobras will make growth difficult in the next several years," the report states.

FCIB members doing business in Brazil reported that payment delays are mainly due to poor cash flow, foreign exchange parity, failure to have correct paperwork requirements and exchange rate resistance, according to results from FCIB's International Credit & Collection Survey on South America, which are posted on the Knowledge and Resource Center. One member advised to "use caution, set risk limits and do business only when a real relationship is established through visits."

Venezuela is seeking help amid falling worldwide oil values. Apparently, China plans to loan the South American producer $5 billion to increase the country's oil production, according to widespread media reports. The Organization of the Petroleum Exporting Countries (OPEC), of which Venezuela is one of 12 members, posted a bulletin on its website this week that the group is ready to talk to other producers to achieve better oil prices.

"Apart from the obvious loss of much-needed revenue required for member countries' socio-economic development, there are growing fears that, under the current low-price scenario, investment in future capacity additions will continue to be shelved or canceled altogether," OPEC stated.

OPEC also stressed in the statement that while it remains open to discussions, all parties involved must be on a level playing field. "OPEC will protect its own interests," its statement reads. "As developing countries, its members, whose economies rely heavily on this one precious resource, can ill afford to do otherwise."

Also this week, South Korea's exporting activity plummeted 14.7%, the largest decline in six years. NACM Economist Chris Kuehl, Ph.D. said this "disastrous drop" threatens the economy and may result in layoffs and bankruptcies. Though considered stable and emerging early this decade, South Korea's major markets aside from the United States—Japan, China and Europe—have dropped off significantly.

"It is expected that Korea will take steps to reduce the interest rate further in the hopes that it will both allow more borrowing and that it will mean a weakening of the won," noted Kuehl. "The Koreans have thus far not tried to match the currency devaluations of their neighbors, but that resolve may be flagging soon."



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Commonwealth Continues Debt Restructuring Efforts

Puerto Rico's debt restructuring working group's deadline was pushed back a week, while the Puerto Rico Electric Power Authority (PREPA) reached an agreement with key bondholders. The target date for the proposal to restructure the commonwealth's $72 billion debt burden has shifted to Sept. 8. Gov. Alejandro Garcia Padilla cited emergency preparations in the lead-up to tropical storm Erika as the reason for the delay.

PREPA announced Wednesday an agreement with a group that holds about 35% of its outstanding bonds. The plan includes the following:

  • The Ad Hoc Group will exchange all of its outstanding power revenue bonds for new securitization notes and receive 85% of existing bond claims in new securitization bonds, which must receive an investment grade rating;
  • Bondholders will have the option to receive securitization bonds that will pay cash interest or convertible capital appreciation securitization bonds;
  • All uninsured bondholders will have an opportunity to participate in the exchange; and
  • The Ad Hoc Group will negotiate with PREPA in good faith to backstop a financing that will allow PREPA to conduct a cash tender for bonds held by non-forbearing creditors.

"This agreement, when implemented and assuming participation from 75% of uninsured bondholders outside the Ad Hoc Group, is forecasted to reduce PREPA's total debt principal by approximately $670 million, save more than $700 million in principal and interest payments over the next five years and substantially reduce PREPA's interest rate expense on the exchanged bond debt," said Lisa Donahue, chief restructuring officer. "We will continue to focus on finalizing consensual agreements with the other creditors so that we can continue to implement PREPA's transformation."

Meanwhile, others continue to lobby Congress, which reconvenes Sept. 8, for some degree of bankruptcy protection for the island.



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