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March 1, 2011 BCMA - It’s All About You! Welcome to the latest issue of BCMA News! This month’s topics… 1. More Municipal Customers Face Bankruptcy 3. Judging Offers on Your Bankruptcy Claims 4. Optimizing Off-Shore Credit Staffing 1. 1. More Municipal Customers Face Bankruptcy Selling to cities and towns used to be the model of low-margin, low-risk business. That’s all changing. Consider the little town of Central Falls, Rhode Island, which went into judicial receivership in May and is likely soon to file for Chapter 9 Bankruptcy. There’s apparently no alternative. The town’s $80 million in liabilities is five times its annual budget. It amounts to about $4,200 for every man, woman and child. These massive liabilities are mainly unfunded pension obligations, a predicament facing thousands of towns and cities and many states. They’ve been building for years as often lavish pension and benefit commitments were made to employees, and absurdly high returns were projected from invested pension funds. Bankruptcy, which allows for breaking these contractual commitments, appears to be the only way out. What will that mean for trade creditors? Sam Gerdano, president of the American Bankruptcy Institute, notes that unsecured creditors will suffer every bit as much as in commercial bankruptcies. Rules in preference payments and other issues are the same. The only bright spot, he says, is that it’s almost inconceivable that you could be caught unaware. “There have been very few municipal bankruptcies so far,” he says, “and there’s been great publicity about them well before hand.” That’s practically guaranteed, of course, because of the protests of the employees and retirees who will be hammered. Should States Have Chapter 9 Protection? Unlike municipalities, states are barred from seeking bankruptcy protection because of their sovereign status. But some have accumulated liabilities — usually associated with pension commitments — that put them in just as dire need as the worst-off cities. New York’s newly elected governor recently described his state as “functionally bankrupt.” Illinois and California have been famously broke for some time. Gerdano believes that chances of expanding Chapter 9 protection to the states are slim, mainly because of the havoc that would cause to bond markets and the massive opposition of public employees. There has been some talk of establishing some sort of oversight panel for distressed states, similar to the Municipal Assistance Corp., which helped New York City during its fiscal crisis of 1975. But even that may be years away. Meanwhile, trade creditors have to tread carefully with many of their state agency customers. Last year, California met obligations with IOUs, payable at an unspecified date. Bard, which sells hospitals and other health care facilities medical disposable supplies, received these for several accounts. Credit Manager Marty O’Toole says they never even considered cutting these accounts off from future deliveries. That, he says, was in large part because of their healthy margins. Margins & Risk Factor Into Decisions “We have a higher tolerance for risk than other suppliers might have,” he says. “We didn’t tell them that we weren’t going to sell them anymore until they could pay cash. We assumed that they would make good on them, and they did.” “We take a long-term approach to the relationship,” he continues. We go on selling on some basis assuming that eventually we’ll be made whole. The beauty of our business is that it tends to be recurring. We know there will be another need and another order and that they will find a way of paying eventually. For suppliers making one-time sales, the willingness to assume risk may be different.” Not sure how you rate with your staff? Why not put yourself up for a vote? Arkadi Kuhlmann, chairman and president of ING Direct USA, does that every year. He asks his employees if they want him to stay on, because “I don’t want to serve here,” he says, “unless I’ve got the commitment of people genuinely wanting me to serve.” Interesting idea. Some of Kuhlmann’s colleagues think he’s crazy to do it. But, as he sees it, keeping the people above him in the organization (the board of directors) happy is no more important than having the confidence and support of those working for him. The ballot is anonymous, of course, and it’s not a popularity contest. What he’s asking for is whether employees have faith in the organization, in their mission and in him. “It’s a big question,” he notes. And they’ve always voted for him to stay. 1. 3. Judging Offers on Your Bankruptcy Claims Let’s say you’ve got a claim on a bankrupt claim that you’ve been holding for some time. Now you get an offer from a third party to buy it. What to do? The rule of thumb, particularly if the offer is high, is to look into why the third party wants it. Credit Manager Denis Golden of Daewoo International (America) Corp, recalls how when he was with a previous employer he had two such offers. One was in the high 90s on the dollar, the other in the teens. He checked with his favorite information source: www.secondmarket.com, which publishes a free, online monthly newsletter with information on newly traded bankruptcy cases, notable Chapter 11 filings and other information on claims-trading activity. “For me it was a window into what they were doing, revealing all of the action behind the scenes,” he says. “I was able to tell top management that one claim looked like it was going to be a blowout where we were going to get next to nothing, and the other looked like we would be made basically whole. And that’s what happened.” Providing free information doesn’t pay the bills, of course, so SecondMarket is also in the business of connecting up sellers and buyers of bankruptcy claims through an electronic trading platform. Developed in 2008, when those 350 corporations mentioned above were filing, this “hybrid” centralized trading platform is designed to provide both pricing and asset transparency for seller, buyers and investors in bankruptcy claims. The platform, explains Andrew Gottesman, vice president of the Bankruptcy Claims Market, “enables sellers to choose among a variety of sales options, including several different types of auctions.” 4. Optimizing Off-Shore Credit Staffing Five years ago, when Brenda Jalowiec became credit manager of Emerson Electric’s Motor Division, now a subsidiary of Nidec Motor Corporation, she found a significant part of her department’s staff 12 time zones away in Manila. She now has seven subordinates there handling collections, cash applications and customer maintenance. What are the challenges of managing such a far-flung operation? “You have to communicate a lot,” she says. “They’re out of sight, but you have to make sure they’re not out of mind. You have to make the time for them. It begins with setting up procedures so that everyone in the department—here and in Manila—is doing things the same way and goes on to continually keeping in touch to make them feel they are part of the organization.” Once or twice each year she spends two or three weeks in Manila getting to know the staff there personally. They are, she says, a “delightful organization. They do anything that is asked of them.” All are fluent in English, but there are occasionally a few communications issues (e.g., using the wrong tense of a verb or the wrong spelling of a word). “We continue to work at how we can better use some of their skills, all the time cognizant of ‘pushback’ from customers,” she says. “Like all of us, customers don’t like to see American jobs leaving America, so we all have to sensitive to that issue too.” "I Don’t Want to Talk to Them" In a typical pushback, a customer will call and say, “I don’t know who called me. I couldn’t understand them. I don’t know who they were. But they weren’t in the U.S., and I don’t want to talk to them!” Her response: “I can understand what you’re saying, but you have to understand that we have to run our company as we feel is appropriate. And we have to contain our costs so we can sell you motors at the price you’re willing to pay.” She and team leaders listen regularly to recordings of these conversations with customers. If they feel that there is a language problem, they provide further training or, if necessary, replace that person. But, for the most part, she insists, there s no language problem. English is their second language and they are fluent. Then, too, they often find that that Manila staff is talking with shared service personnel of U.S. customers who may be in India, Costa Rica, Mexico or any of the many other countries where these operation are now being handled. “So we have customers who have heard the same complaints and gone through the same situations,” she says. To learn more about subscribing to Credit Today, check out our web site at http://www.credittoday.com/ Credit Today Benchmarking Survey- 2011 Improvement Initiatives -- Many Different Things Going On Credit Today 2011 Outlook Survey Reveals a Changing Risk Scenario Benchmarking Survey on Meetings Looks at the Worst Meeting Experiences - Learn What to Avoid! Benchmarking Extended Terms- Survey Participants Weigh In on the Process With Some Great Advice |
