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eNews March 30, 2017

 

Dampening Enthusiasm Stalls Latest CMI, but Overall Strength Remains High

Numbers in NACM’s March Credit Managers’ Index (CMI) continue to reflect significant strength, but some of the shine has worn off from February’s readings as the combined score dipped and a bit of deflated economic expectations came to the fore.

“The index survey for March was taken prior to the ACA defeat in Congress and suggests there had been some reduction in enthusiasm even prior to the legislative setback to the Trump agenda,” said NACM Economist Chris Kuehl, Ph.D. “This is typical of a boom fed by expectations—patience wears thin as fast as it develops. The fact is, good numbers still dominate—they are just not quite as good as they had been.”

The combined CMI score dropped slightly to 54.3 in March from 55.4 the prior month, despite a small gain in the unfavorable category. High readings in the favorable categories in February faded a bit, though most of the subcategories are still above 60. The combined favorable categories for March are still the third-highest reading in the last year.

Sales and new credit applications scores fell but remain high compared to a year ago, while dollar collections took the biggest hit. “This is worrisome, as it suggests that a good number of companies are suddenly struggling to pay their debts,” Kuehl said. “It is expected this will start to show up in the unfavorable numbers sooner than later.”

The encouraging news in March came from the unfavorable categories, with improvements seen in rejections of credit applications, accounts placed for collection, dollar amount of customer deductions and filings for bankruptcies. Overall, improvements in the unfavorable categories, however, were very slight.

“The numbers are essentially flat, but that is better news than has been the case in earlier months when the sections continued to show stress,” said Kuehl. “Right now, there are two categories that are in expansion territory and four that are still in contraction, but it is encouraging to note that two of these categories are very close to the 50 level with readings of 49.8. The hope is that they trend a little higher in the months to come.”

 

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U.S. Supreme Court Declines to Hear Swipe Fee Settlement

The U.S. Supreme Court will not hear a nearly $6 billion settlement between retailers and Visa and MasterCard, leaving a lower court’s decision in place to throw out the settlement. The settlement was once valued as the largest U.S. antitrust deal ever at $7.25 billion, but it dipped to $5.7 billion when 8,000 retailers dropped out of the case.

Last year, the U.S. Court of Appeals for the Second District ruled the settlement was unfair to retailers that would not receive money in the lawsuit, which started in 2005. Merchants claimed the credit card companies fixed interchange fees, also known as swipe fees. Visa and MasterCard charge retailers more than $30 billion, or 2%, in swipe fees per year, according to the National Retail Federation.

The settlement was not a good idea and would have done nothing to keep swipe fees under control in the future, said NRF Senior Vice President and General Counsel Mallory Duncan. The trade association announced it welcomed the high court’s refusal to reinstate the settlement.

The lawsuit is pending in the U.S. District Court in New York after the decision not to take up the settlement in Washington. Retailers can still go to trial or pursue a different settlement. “A new resolution is at least a year away, and between the necessary notice periods and potential appeals, any finality is likely two years away at best,” according to Bruce Nathan, Esq. and Andrew Behlmann, Esq. of Lowenstein Sandler LLP of New York.

“A positive takeaway for merchants accepting credit cards is that it appears likely that the core features of the existing settlement ... are likely to form the basis of any new settlement,” said Nathan and Behlmann. They include “a cash payment for retailers who accepted Visa and MasterCard in the past and were allegedly harmed by their swipe fee practices, and an injunction against surcharge restrictions going forward.”

Large retailers such as Amazon and Starbucks opposed the settlement as did credit card companies American Express and Discover. JP Morgan Chase and Bank of America would have funded about a third of the settlement, according to Reuters.

Chief Justice John Roberts and Justice Samuel Alito did not take part in the decision on whether to hear the appeal.

 

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Conviction of Chicago Minority-Owned Subcontractor Illustrates Risks of Using DBEs

A recent case of a Chicago woman who was sentenced to federal prison for acting as the head of an illegal front company to allow another larger firm to gain a profitable city airport contract serves as a strong reminder of the need to be aware of and follow the disadvantaged business enterprise (DBE) rules regarding minority- and women-owned businesses.

In light of this and previous cases, material suppliers and other vendors should examine closely any third party with whom they’re conducting business to ensure that it’s serving a “Commercially Useful Function (CUF)” and is a legitimate DBE before accepting an order from such a firm, said Chris Ring of NACM’s Secured Transaction Services (STS). “Ignorance of the rules will not help you here,” he said. “If there’s a bad-faith actor and you know about it, it can lead to negative consequences including fines and penalties.” Ring will join Jim Fullerton, Esq., of Fullerton & Knowles, PC, in a discussion on how to educate sales members about the risks associated with accepting orders from DBEs at NACM’s 121st annual Credit Congress & Expo in June.

According to a report in The Chicago Tribune, Elizabeth Perino’s company posed as a legitimate woman-owned business to allow a larger company to meet its requirements for hiring disadvantaged businesses in order to win a multimillion-dollar runway repair contract at O’Hare International Airport. Perino submitted fake documents supposedly showing that her firm rented construction equipment to the larger firm, which already owned the asphalt sweeper equipment in question, and entered into a handwritten “gentleman’s agreement” with the company’s owner to obfuscate this fact.

Kevin Burke, CCE, director of credit and finance at Erie Materials Inc. in Syracuse, NY, said his company, in conjunction with their attorney, developed a checklist for salespeople to follow before they accept orders from DBEs. Burke was among a panel of specialists who spoke at a Nov. 21 NACM webinar on the topic of risks in accepting orders from minority contractors. While each firm should consider their own requirements, Erie’s checklist includes verifying that a customer is diversity-certified and making sure the company deals directly with the disadvantaged business and not, say, the GC. “All to show their commercially useful function,” he said.

Ring also suggested checking with the U.S. Department of Transportation’s Federal Highway Administration (FHA) to learn more about federal requirements. The agency, for instance, identifies four key factors that should be analyzed when determining whether a firm is performing a commercially useful function. These include: whether the entity is performing the amount of work that’s consistent with industry practices; and when the firm furnishes materials—determining the quantity and quality for the material, being directly responsible for negotiating the price, and ordering the material and paying for it. Additionally, larger public entities such as HUD, DOD, DOE, etc. offer some guidance on their websites for dealing with DBE contractors.

 

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The Graduate School of Credit and Financial Management® (GSCFM®) has moved to American University in Washington, D.C.

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China’s M&A Activity Hits Record Levels

Chinese mergers and acquisitions (M&A) activity reached record levels in 2016, and though it may come off its peak this year, new records are expected in 2018 and beyond.

China has become the second-largest global investor behind the United States, with completed M&A transactions in 2016 totaling $140 billion. Over the next decade, China’s global outward foreign direct investment could average $140 billion to $275 billion annually, according to a recent report from law firm White & Case.

“Our analysis shows that barring an economic crisis in China, the record set for Chinese outbound M&A in 2016 is not a one-off event,” analysts at White & Case said. “If China sustains economic growth and stays on track with external financial liberalization, the average annual value of Chinese outbound M&A will more than double from 2015 to 2025 compared with the period from 2010 to 2015.”

Energy and natural resources were the main focus of China’s M&A activity in the early 2000s, but after 2013, the mix became more diverse. Top industries of outbound M&A now include high tech, financial institutions, industrials and real estate. Geographically, early targets were resource-rich economies in the Middle East, Central Asia, Africa and Latin America. Investment then shifted to politically stable, resource-rich countries such as Canada, Australia and the United States. Almost half of total Chinese outbound M&A were in those three countries from 2008 to 2013, White & Case said.

In the near term, the indebtedness of Chinese corporations and overleveraging in the country’s financial system creates risks. Chinese firms will face scrutiny abroad from concerns over national security and asymmetries in the marketplace.

Chinese companies have been cautioned by their own government about their investments. "Overseas mergers and acquisitions can sometimes resemble a rose with thorns; you must be careful and you must do your due diligence," said Pan Gongsheng, head of the State Administration of Foreign Exchange and vice governor of the central bank, according to Shanghai Securities News as reported by Reuters.

According to the report M&A 2016 Review and 2017 Outlook from PricewaterhouseCoopers (PwC), China’s M&A activity in 2017 will closely follow 2016, with a small decline due to new regulations having a slowing effect, but will continue to grow to new records for 2018. The record levels in 2016 were in terms of both deal values and volume of transactions. Drivers for this activity will remain in place over the medium to long term, the report said.

 

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Impact of Political Risk on Business Activity Measured in New Index

Credit insurer Coface has introduced a new political risk model that covers 159 countries from 2007 to 2016, following its previous political risk indexes for Western Europe (2016) and emerging countries (2013). The new tool will help gauge how political risks impact business activity.

For each country, Coface takes into consideration two groups of data: security risk, which includes conflict and terrorism, and the risk arising from political and social fragility. The political risk index has trended upwards since 2007. It peaked in 2010, reflecting the global economic crisis and the increased social pressures in developed countries. The increase in risk from 2014 onward is due to the rise in terrorism and growing number of conflicts, Coface said.

Political risk is the highest in the Middle East, North Africa and Sub-Saharan Africa. Since 2013, risk has grown mainly in Sub-Saharan Africa and the Commonwealth of Independent States (CIS). In the CIS, political risk is well above the global average due to a deterioration of the situation in Russia and Ukraine. Latin America’s score has been affected negatively both from heightened political risk in Mexico, with intensification of the war against gangs, and the deteriorating situation in Venezuela, following the drop in oil prices. Meanwhile, Asia has seen an improvement in its political risk score since 2010, despite high scores in India and China.

For advanced countries, conditions have improved since the financial crisis of 2009, but the rise of populism and security concerns led to a decline in the risk score for some European countries, Coface said. The credit insurer’s analysis concludes that the pressure of populism has reached the highest levels in the United Kingdom and France, followed by Austria and the Netherlands.

Similar hotspots weigh heavily in the latest Political Risk Letter from the PRS Group. Russia’s new minister of economic development, Maxim Oreshkin, has signaled that with oil prices above the lows hit in 2016, there will be less pressure for government moves on privatization, but the fiscal strategy will include partial sales of state assets. Government crackdowns on potential rivals and critics in anticipation of next year’s presidential election are a factor in the current climate.

The U.S. presidential election sent Mexico's peso to new lows. Though inflationary impact was somewhat offset by low oil prices, a lifting of price controls on fuel resulted in the biggest increase in the consumer price index in four years in January, while the consumer confidence index fell in its largest year-on-year drop. Weak GDP growth is expected in Mexico, with pronounced downside risks, the PRS Group said.

 

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