eNews March 18

 

In the News

March 18, 2021

 

Bipartisan Legislation to Extend CARES Act Bankruptcy Relief Provisions Moves to Senate

 

Diana Mota, editor in chief

Legislation passed the House 399-14 that would extend temporary bankruptcy provisions through March 2022.

U.S. Senate Democratic Whip Dick Durbin (D-IL), chair of the Senate Judiciary Committee, and U.S. Senator Chuck Grassley (R-IA), ranking member of the Committee introduced the bill on Feb. 25.

The bipartisan COVID-19 Bankruptcy Relief Extension Act would temporarily extend COVID-19 bankruptcy relief provisions enacted as part of the March 2020 CARES Act and December 2020 omnibus appropriations bill.

The bill would extend for an additional year CARES Act bankruptcy provisions that are set to expire on March 27, 2021. These provisions do the following:

  • Allow more small businesses to file for streamlined Chapter 11 bankruptcy proceedings under Grassley’s Small Business Reorganization Act of 2019 by increasing the maximum debt limit for those procedures from $2.7m to $7.5m.
  • Amend the definition of income for Chapters 7 and 13 (which govern individual bankruptcy filings) to exclude federal COVID-related relief payments from being treated as “income” for purposes of filing bankruptcy.
  • Clarify that the calculation of disposable income for purposes of confirming a Chapter 13 plan does not include COVID-related relief payments.
  • Permit individuals and families in Chapter 13 to seek payment plan modifications for plans confirmed before the date of enactment of this extender bill if they are experiencing a material financial hardship due to the coronavirus pandemic.

In addition, the bill would extend until March 27, 2022, several additional COVID bankruptcy relief provisions that were included in the December omnibus/COVID relief package and that are set to expire in December 2021. These provisions do the following:

  • Provide that federal COVID relief payments to individuals are exempt from being treated as property of the estate in bankruptcy proceedings.
  • Ensure that families in Chapter 13 bankruptcy plans who have made all plan payments but have missed three or fewer mortgage payments because of the pandemic are not denied a discharge for their other debts (though the mortgage payments would continue to be owed).
  • Ensure that families that are or were in bankruptcy proceedings are not ineligible from CARES Act mortgage forbearance and eviction moratorium provisions.
  • Set forth a process for creditors to file a proof of claim for payments deferred during forbearance periods granted under the CARES Act, and to permit modification of a Chapter 13 plan to account for such proofs of claim.
  • Prevent the termination of utility services in bankruptcy by ensuring that individuals and families will not be required to furnish a security deposit to maintain utility services during bankruptcy.
  • Exempt customs brokers who collect and pay duties to Customs and Border Patrol on behalf of importers from the claw back provisions of the bankruptcy code when an importer files bankruptcy.

The bill now goes to the Senate.

“The bill passed the house with a 399-14 vote, demonstrating wide support for these additional flexibilities that most predominantly impact small businesses,” said Ross Arnett, of Pace LLP, NACM’s Washington lobbyist. “The bill still needs to pass the Senate, where a single objection could significantly delay passage, but with both Chairman Durbin and Ranking Member Grassley of the Senate Judiciary Committee supporting the Senate version of the bill, PACE does not expect significant issues with the bill eventually clearing the Senate and going to President Biden's desk, likely within the next few weeks.”

The most significant provision included in the extension raises the maximum debt limit for those eligible for Chapter 11 bankruptcy under the Small Business Reorganization Act, proceeding from $2.7 million to $7.5 million, Arnett pointed out. “We expect this increased limit to sunset at the end of the March 27, 2022, period, as this legislation was considered by most to be a clarifying bill to make all bankruptcy-related COVID-19 measures expire at the same time.”

 

Housing Headed for Bubble?

 

Chris Kuehl, Ph.D., NACM economist

Those of you who remember the housing crisis that precipitated the Great Recession may have been looking somewhat askance at the situation facing the residential housing market. It has been booming throughout what has been an extremely difficult year and that begs the question: Is this another bubble ready to burst?

Will there suddenly be a collapse in demand, or a crisis related to mortgages that have been issued? That is certainly a possibility, but there are major differences between the situation from 2006-08 and the situation now.

The three factors are mitigating against a repeat of that previous debacle, and they are rooted from the lessons learned during the last meltdown. Mortgage standards have been much tighter. That has reduced the number of people who have been thrust into foreclosure. This recession differs from the last one because it hit the poorer service sector workers. Most of these people have been renters. We face an eviction crisis as opposed to a foreclosure crisis.

The second factor is that down payments have been higher; that locked more people into their homes, making it harder to walk away. Third, consistently high prices have been supported by everything from demand to shortages of available housing. There has not been an issue with overpriced homes suddenly losing value and shoving people underwater on their mortgages, not to the extent of the last recession.

The housing market has been a consistent strong point for the economy over the last year for a variety of reasons. The growth has been impressive despite factors that usually mitigate against this kind of growth. The price of homes has been going up month by month, according to the Case-Shiller index and other assessments.

This has not just been in hot markets, but throughout the country. The unemployment rate has been high as the recession emerged, and usually this puts a damper on demand. The millennial is still somewhat reluctant to abandon the apartment or loft lifestyle, and still the market surged because the mortgage rates on offer have been very low.

For the high-end home buyer, the motivator has been the success of the stock market. The dip in the new home starts number is likely related to some changes in that mortgage rate situation. Some increases already exist, and more are expected as long-term bond yields continue to climb. Any hint of increased Fed rates will send the mortgage rates even higher, and the housing boom will start to slow quickly.

 

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Buyer-Supplier Friction: Payment Process Pain Points

 

Andrew Michaels, editorial associate

The journey of an invoice during the order-to-cash process (O2C) is neither short nor simple. It requires consistent and clear communication between buyers and suppliers. Pain points are bound to develop and create friction throughout the process, said management consultant, Chris Doxey, CAPP, CCSA, CICA, CPC.

Although dozens of contact points can interfere with the buyer-supplier relationship, none are as problematic as the payment process, Doxey said. Areas of strain range from invoice information to prompt and accurate payments. The use of electronic invoicing, or e-invoicing, is a possible solution, but both parties must agree to its use, she added.

“The big correction, or process enhancement, is to totally automate the invoicing process so the invoices are sent to the buyers electronically and the payments are sent to the suppliers electronically,” Doxey said. “There’s no real consistent payment-invoicing process between buyers and suppliers. We’re getting a lot closer, and the good news is a lot of companies are looking into automating their accounts payable and accounts receivable process.”

Companies that refuse to pay electronically really need to “step up” because the invoice process is the leading cause of buyer-supplier friction, Doxey said, In particular, the time and cost it takes to pay via mail versus electronically is an issue.

From the buyer’s perspective, manual invoices create a variety of concerns, including the possibility of getting lost in the mailing process or incorrect information, which delays the payment process, Doxey said. In addition, the cost of a manual AP process can range from a couple of dollars to more than $20.

As a supplier, getting a check could mean a trip to the bank to make the deposit. Suppliers should investigate automation for payment receipt and application of cash or check receipt to the correct invoice, Doxey said.

To minimize the number of calls and alleviate errors, Doxey recommends suppliers communicate to buyers that they will conduct a periodic account review. For example, Doxey suggests saying some such as “I’m going to have a review of your account on this date of every month and make sure you don’t have any questions or problems on the invoices.” Building that type of partnership works well to make sure payments are paid in a timely manner, she added.

“What’s going to happen is you’re going to have good data.” Doxey said. “On the supplier side, you’re reporting base sales outstanding, and that’s going to be an accurate metric. On the buyer side, the common metric is days payable outstanding. It’s all about correct transactions and correct data. That’s going to give you an accurate financial close as well as some of the reporting data.”

Eliminating this pain point in the buyer-supplier relationship will create a seamless payment invoicing process with correct and updated data, she concluded.

The payment process is only one of many pain points Chris Doxey will review during her webinar, How to Reduce Supplier and Buyer Friction, so be sure to tune in on Wednesday, March 31, from 11AM to 12PM.

 

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Optimistic Outlook by Euler Hermes NA Chief Economist

 

Bryan Mason, editorial associate

It took 10 years to create 23 million jobs and five weeks during the initial COVID-19 lockdown to wipe them out, said Dan North, chief economist of Euler Hermes North America.

About 58% of those jobs have been recovered since then, added North, during the Euler Hermes webinar, One Year of COVID-19: What’s Next for the Economy?

“We’re still missing a lot of jobs and the question is, how are we going to get these jobs back,” North asked. “The real problem is there’s a lot of permanent jobs lost.” He projects the job market will recover around 2023—barring any more virus spikes.

Along with the massive surge in unemployment came a crushing blow to personal consumption, which makes up 70% of economy activity. North stated that in total, about $16.2 trillion has been lost to the economy due to COVID.

With businesses down about 25%, small business owners hold the highest risk of filing for bankruptcy, North said. Many small businesses have survived due to PPP loans; a program that helps small business owners keep workers on payrolls and cover mortgage interest, rent, utilities and more.

Once PPP loans run out, bankruptcy may be inevitable, he said. In addition, North noted a sharp rise in zombie firms. These companies earn just enough money to operate and pay debts; they have no excess revenue to invest and stimulate growth, North said.

Three stimulus bills have been passed since the beginning of the pandemic. The most recent bill is set to supply $1.9 trillion to those who qualify. In general, stimulus bills are viewed as one way to ignite the economy. North shared another view.

“The stimulus will give us about a 4% rise in GDP,” North said. “But it will make the economy much slower in the future. We have around $20 trillion in debt. The debt for the GDP ratio will go up around 134%. Thirty years from now it will be 202%. The problem is we have too much easy money with 0% interest rates. We’re going the wrong way.”

Not all of North’s outlook was dreary. “December was the best for retail sales and the housing market is 17% higher than before COVID,” he said.

North also pointed out the positive Treasury yield curve. Treasury yield is the return on investment in U.S. government debt obligations; when it’s positive, that’s a sign of recovery.

“Corporate profits will come soaring back, which will open up jobs,” North said. “Shipments and expenditures are both up and manufacturers have many jobs available.”

North projects a 5.1% rise in GDP this year, which he characterized as “really strong.” Yet, he cautioned that bankruptcies could delay business as normal.

Concerns about COVID and potential inflation could also remain. However, North points to data and other trends that give reason for optimism.

“New daily cases in the U.S. have been down 76% since the January peak, and deaths have been down 54%,” North said. “Hospitalizations are down 64%, and the rate of positive tests is down in most countries.”

Furthermore, The Weather Channel reports that warmer than average temperatures are approaching in April and May throughout the country. These warmer temperatures may lead to more difficult transmission of the virus.

Within that same time frame, North said, “We expect to see a temporary spike in inflation … but we have ecommerce, trade with China and more to help keep inflation down for the most part.

“There’s light at the end of the tunnel,” he said. “I’m optimistic about this outlook.”

 

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FOMC Keeps Policy Unchanged, but Rate Hikes Inching Closer

 

Jay Bryson, Wells Fargo Securities LLC chief economist, Special Commentary

Summary

As widely expected, the Federal Open Market Committee (FOMC) refrained from making any major policy changes at its meeting yesterday. But, the Committee upgraded its assessment of the current state of the economy. Specifically, the FOMC now looks for stronger GDP growth, higher inflation and lower unemployment in 2021 than it did three months ago. Although most FOMC participants continue to believe that it will be appropriate to keep rates on hold through 2023, a few committee members look for rate hikes next year and in 2023. The Committee made no changes to the interest rate that the Federal Reserve pays to commercial banks on the reserves that they hold at the central bank.

FOMC Upgrades Its Assessment of the Economy

As widely expected, the Federal Open Market Committee (FOMC) refrained from making any major policy changes at its meeting today. Specifically, the Committee decided to maintain its target range for the fed funds rate between 0.00% and 0.25% and to keep the Fed's monthly purchase rate for Treasury securities and mortgage-backed securities unchanged at $80 billion and $40 billion, respectively. The Federal Reserve will continue to purchase securities at “at least” these rates “until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.” The 11 voting members of the Committee voted unanimously to maintain the Fed's current policy settings.

That said, the Committee upgraded its assessment of the current state of the economy. The FOMC said in its January 27 statement that “the pace of the recovery in economic activity and unemployment has moderated in recent months.” Today's statement said that “following a moderation in the pace of the recovery, indicators of economic activity and employment have turned up recently.” But, the Committee did note that “sectors most adversely affected by the pandemic remain weak.”

The Committee's more optimistic outlook for the economy was reflected in its quarterly Summary of Economic Projections (SEP), which summarizes the FOMC's forecasts. The median GDP forecast among the 18 committee members for 2021 rose to 6.5% in the current SEP from 4.2% in the last SEP (December) (Figure 1). The forecast for 2022 edged up to 3.3% from 3.2% previously. The upward revision to GDP growth led to a downward revision in the unemployment rate. Specifically, the median projection now shows the unemployment rate ending 2021 at 4.5%. This forecast had been 5.0% in December. Inflation, as measured by the year-over-year change in the PCE deflator, is forecast to end the current year at 2.4%, up from the 1.8% rate that was forecast in December.

Real GDP Growth Forecast

Source: Federal Reserve Board and Wells Fargo Securities

Are Rate Hikes Coming?

The updated economic outlook led a few committee members to bring forward their expected timing of rate hikes, which was reflected in the so-called “dot plot.” In December, only one of the 17 committee members thought that a rate hike would be appropriate. The dot plot released today now shows that four of the 18 members believe that a rate hike would be appropriate next year (Figure 2). Seven members think that rates will be higher in 2023, up from five FOMC members in December. We stress that the majority of FOMC members still believe that it would be appropriate to keep rates on hold through 2023. Indeed, we continue to forecast that the FOMC will keep rates on hold through at least the end of 2022, when our forecast period currently ends. But, the dot plot could drift higher in coming quarters if incoming data lead committee members to upgrade their forecasts for 2022.

March 2021 FOMC Dot Plot

Source: Federal Reserve Board and Wells Fargo Securities

No Technical Changes to IOER at This Meeting

The FOMC also decided to maintain the so-called Interest on Excess Reserves rate (IOER), which is the interest rate that the Federal Reserve pays to commercial banks on the reserves that they hold at the nation's central bank, at 0.10%. As we wrote in a recent report, short-term interest rates have been drifting down toward 0.00% recently due to all the liquidity that is sloshing around the financial system. Therefore, we thought the committee may have nudged up the rate to 0.15% at this meeting, which would have incentivized commercial banks to leave more of their excess liquidity parked at the Fed. Although the FOMC decided to maintain IOER at 0.10% at this meeting, we expect the committee would to tweak the rate higher at a future meeting if short-term interest rates continue to linger at 0.00%. We should note, however, that any upward adjustment to IOER should be viewed solely as a technical tweak that is intended to give the Fed better control over short-term interest rate. An upward adjustment to IOER, should it occur, should not be interpreted as a signal of imminent monetary tightening.

Required Disclosures

This report is produced by the Economics Group of Wells Fargo Securities, LLC, a U.S. broker-dealer registered with the U.S. Securities and Exchange Commission, the Financial Industry Regulatory Authority, and the Securities Investor Protection Corp. Wells Fargo Securities, LLC, distributes this report directly and through affiliates including, but not limited to, Wells Fargo & Company, Wells Fargo Bank N.A., Wells Fargo Clearing Services, LLC, Wells Fargo Securities International Limited, Wells Fargo Securities Europe S.A., Wells Fargo Securities Canada, Ltd., Wells Fargo Securities Asia Limited and Wells Fargo Securities (Japan) Co. Limited. Wells Fargo Securities, LLC is registered with the Commodity Futures Trading Commission as a futures commission merchant and is a member in good standing of the National Futures Association. Wells Fargo Bank, N.A. is registered with the Commodity Futures Trading Commission as a swap dealer and is a member in good standing of the National Futures Association. Wells Fargo Securities, LLC and Wells Fargo Bank, N.A. are generally engaged in the trading of futures and derivative products, any of which may be discussed within this report.

The information in this report has been obtained or derived from sources believed by Wells Fargo Securities, LLC to be reliable, but Wells Fargo Securities, LLC does not guarantee its accuracy or completeness, nor does Wells Fargo Securities, LLC assume any liability for any loss that may result from the reliance by any person upon any such information or upon any opinions set forth herein. Such information and opinions are subject to change without notice, are for general information only and are not intended as an offer or solicitation with respect to the purchase or sale of any security or other financial product or as personalized investment advice. Wells Fargo Securities, LLC is a separate legal entity and distinct from affiliated banks and is a wholly owned subsidiary of Wells Fargo & Company. © 2021 Wells Fargo Securities, LLC

Important Information for Non-U.S. Recipients

For recipients in the United Kingdom, this report is distributed by Wells Fargo Securities International Limited ("WFSIL"). WFSIL is a U.K. incorporated investment firm authorized and regulated by the Financial Conduct Authority. For the purposes of Section 21 of the UK Financial Services and Markets Act 2000 (“the Act”), the content of this report has been approved by WFSIL, an authorized person under the Act. WFSIL does not deal with retail clients as defined in the Directive 2014/65/EU (“MiFID2”). The FCA rules made under the Financial Services and Markets Act 2000 for the protection of retail clients will therefore not apply, nor will the Financial Services Compensation Scheme be available. For recipients in the EEA, this report is distributed by WFSIL or Wells Fargo Securities Europe S.A. (“WFSE”). WFSE is a French incorporated investment firm authorized and regulated by the Autorité de contrôle prudentiel et de résolution and the Autorité des marchés financiers. WFSE does not deal with retail clients as defined in the Directive 2014/65/EU (“MiFID2”). This report is not intended for, and should not be relied upon by, retail clients.

Reprinted with permission from Wells Fargo Securities LLC.

 

 

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