credit today perspectives #3 · richard macias, esq maynard cooper & gale credit today...
TRANSCRIPT
PanelistTaylorRickettsSeniorAnalystsF&DReports
PanelistRichardMacias,Esq
MaynardCooper&Gale
CreditTodayPerspectives#3:EmpoweringCredittoMovefromNowtoNext
PanelistPeteKnox,HeadofCredit
&ARAdministrationNestle
Moderator
DavidSchmidt,Editor
CreditToday
April30,2020
Whatisgoingoninthemacroeconomyandhowhavecreditexecutives
respondedsofar?
RETAIL WEBINAR SERIES
• Widespread business closures started Mid-March & continued through April
• Output turned sharply negative in 2nd half of March
• GDP fell 4.8% in Q1driven by 7.6% decrease in consumption
• Expect to drop 40% (annualized) in Q2
• less steep declines in Q3/Q4; down ~6% for year
Macro Brief
RealGDP:PercentChangeFromPrecedingPeriod
Grossdomesticproduct(GDP) 2.9 2.3 -4.8 -26.1
Personalconsumptionexpenditures 3.0 2.6 -7.6 -38.2
Goods 4.1 3.7 -1.3 -16.3
Durablegoods 6.3 4.8 -16.1 -78.8
Nondurablegoods(e.g.Grocery) 3.0 3.2 6.9 18
Services 2.5 2.1 -10.2 -47.1
Grossprivatedomesticinvestment 5.1 1.8 -5.6 -27.8
Fixedinvestment 4.6 1.3 -2.6 -14.3
Nonresidential 6.4 2.1 -8.6 -40.7*Estimated
Last3WeeksofQ1
2020Q12018 2019
Seasonallyadjustedatannualrates
RETAIL WEBINAR SERIES
• Retail sales fell off a cliff in certain categories.
• Discretionary hit hardest • Unemployment:
• 33.5 million newly jobless • Jobless was around 4.4% in
March…expected to be 15% - 20% in April
• Unemployment to average near 14% for balance of 2020, 10% overall in 2021 (CBO)
Macro Brief
RETAIL WEBINAR SERIES
• Banks – Treasury & Fed actions boosted reserves and ability to lend;
• Cares Act – up to $2.3T committed; Direct lending, SBA Paycheck Protection Program (PPP), Main Street Lending Program, lending to states and municipalities
• Fed – Keep rates low (Fed Funds near 0%), support credit markets (security purchases, commercial paper, etc.)
• Treasury to borrow $3T this quarter, Fed balance sheet likely increase to more than 10T by Year-End
• Landlords – rent deferrals and abatement • Trade Creditors – Focus on customer contact,
payment / payment plans, term extension requests, Bad Debt reserve adjustments, C-Suite support / pressure
Credit Response So Far
6
Assessingsimilarityusuallyfocuseson:
Buyersofthesameproduct
Inthesamequantity
Whocompeteinthesamemarket
Whocompeteatthesamemarketlevel
Representingthesamelevelofcreditrisk
Robinson-PatmanActReview
Price Discrimination: A seller may not discriminate in
prices, terms of sale or credit terms
offered to “similarly” positioned buyers
Whatcanbeexpectedastheeconomystartstore-openintermsofconsumers,retailers,
supplychainsandbusinessfinance?
RETAIL WEBINAR SERIES
• Shopper coming back slowly (China, etc.); Respondents Trifurcated
• But it will come back; expect robust GDP
What to Expect as Economy Reopens
• Key question – How fast does commerce return? • Governments need to work on the messaging • Businesses need to ensure safety of shoppers
& workers
RETAIL WEBINAR SERIES
• Social distancing measures will linger; most self imposed
• Online shift will persist (up 25%) • Work from home will continue • Hospitality will remain depressed
• Businesses will look to preserve cash • Investment will be cut • Minimal inventory
• Yet, commerce will resume and: • Businesses will need goods (and credit) • Supply chain bottlenecks expected
• Bankruptcies increase as auctions / liquidations resume;
• Total U.S. filings decreased 46% in April – decreased auctions, stimulus measures
What to Expect as Economy Reopens
RETAIL WEBINAR SERIES
BankruptcyTrendsGraphic:2006-2018
11
Yourbiggestheadachesmayarisefromcontractlawissues
Existinglong-termcontracts
“FavoredNation”contractterms
Accountingissueswith
applicationofpaymentsand
credits
Refusaltodealorwrongful
terminationofanexistingdealerwherethere’s
beenalong-termrelationship
Discriminatoryallocationofproduction
CustomerReviewIssues
Whatshouldcreditexecutivesbetrackingaswellaslookingtodoaswemove
towardseconomicrecovery?
13
CommonPitfalls• Functional"availability"--discounts(advertisingallowances,volumediscounts)mustbe"practically"availabletoallcompetingcustomers.
• “Brokerage”schemestouse“commissions”asarebatethatreducespricesareprohibited.
• Promotionalallowancesareincludedaspartofpricing.
• PotentialliabilityforaBuyerthat“knowinglyinduces”discriminatoryprices.
Treating Likes as Likes• Managing risk using objective credit
assessment criteria is not going to violate Robinson-Patman.
• Based on objective evaluation of credit worthiness
• Not intended to give a customer an advantage or create a disadvantage
• UNILATERAL
Robinson-PatmanConsiderations
14
• Asellermaybeabletoshowbusinessreasonsforvariations,likeseasonalpricingordifferencesinmanufacturingcosts
CostJustification
• Suchaswithperishablegoodsorgoodswithlimitedshelflife
ChangingConditionof
Goods
Robinson-PatmanDefensesMeetingtheCompetition
• Needtoverifyanddocumentcompetitor'slowerprice,butdon'tcontactcompetitor
• Meetbutdon'tbeatthelowerprice
• Limitedtothedurationofcompetitiveprice
• Canbeusedtokeepexistingbusinessortogetnewbusin
RETAIL WEBINAR SERIES
• Credit Profile: • Financially informed • Forward looking vs. historical • Liquidity / Access to sources of
cash • Payment timeliness and expectations • Ensure Senior Management
understand the risks • Going forward: more risky than
historical • Expect a fair amount of Darwinism:
Many will fail as competitors invest in price to drive traffic
• It’s a balancing act: We all need customers
What Should Credit Executives Focus On CASH BURN ANALYSIS
16
• Developobjectivecriteriafora“CoVid”creditpolicy.• Documentinyourfilethecreditreasonsforthechangeinterms.
• Riskbasedpricingisnotthesameasloweringpricetomeetcompetition--probablyneedtojustifyasina“meetingcompetitionsituation”
• Buyerpushbackonpricingortermschanges.• Managementbuy-in
CreditWorthinessshouldbe
weighedwith“similarity”inthebalance
CreditPolicyConsiderations
Questionsweareunabletoanswerduringthewebinarwillbeansweredoff-lineanddistributedtoallattendees,aswillcopiesofthisslidedeck.
Weappreciateyourattendingthisevent.CreditTodayplanstocontinuethesediscussionswithotherleadingcreditindustryexperts.ThenextwebinaristentativelysetforMay26th…announcementsforthcoming.
FormoreinformationaboutCreditTodaypleasegotocredittoday.net.YouwillfindseveralarticlesaboutdealingwithCovid-19inourpubliclistingsaswellaslinkstoourearlierwebinarsinApril.
Questions?Ifyouwishtocontactanybodyonourpanel,youmaydosoviaemail:
• TaylorRicketts– [email protected]
• RichardC.Macias– [email protected]
• PeteKnox– [email protected]
• DaveSchmidt– [email protected]