January 6, 2022

	I. CMI Ends 2021 Slightly Above Year Average
	II. Poll Shows Length of Time Past Due, Amount Due Rank High in Collection Efforts

	III. LIBOR Is Officially Out, but What Does That Mean?
	IV. Understanding the Unique Nature of Public Construction Projects

After a series of ups and downs, NACM’s Credit Managers’ Index (CMI) combined score ended the year 0.8 points lower than it started. With a 1.5-point month-on-month gain, the December 2021 index reached 58.9. For 2021, the index reached its highest in April (60.6) and its lowest in November (57.4). The average for the year was 58.6.

“2021 ended much stronger than originally predicted,” said NACM Economist Chris Kuehl, Ph.D. “The end of the year was expected to be something of a disappointment. Every time economic signals suggested a strong rebound, there was a setback; and when circumstances seemed too overwhelming, there was a surge of consumer activity that pushed growth again.”

The combined index of favorable factors gained 2.7 points, reaching 69.1—its highest reading since January 2021. Dollar collections improved the most with a 4-point gain (64.4). The amount of credit extended category grew 2.7 points (72.3); sales, 1.5 points (71.8); and new credit applications, 2.2 points (67.6).

The index of unfavorable factors improved slightly with a 0.8-point gain to 52.1 as three of the categories declined and three saw improvement. Disputes fell deeper into the contraction zone with a 0.9-point drop to 48.1. Rejections of credit applications fell 1.4 points (51.3); and filings for bankruptcies, 0.1 points (55.9). Dollar amount of customer deductions improved 0.9 points (49.4), but it still remains in contraction territory. Dollar amount beyond terms jumped 5.9 points (55.0), and accounts placed for collection increased 0.3 points (52.4).

“Although data from the unfavorables was not impressive, the trend is in the right direction,” Kuehl noted. “The bottom line is that the unfavorables index is still showing distress in some circles even as the overall data has been improving.”

For a complete breakdown of the manufacturing and service sector data and graphics, view the December 2021 report. CMI archives also may be viewed on NACM’s website.

Nearly 94% of credit professionals prioritize collection efforts based on the length of time their customer’s invoice is past due, according to a recent NACM eNews poll. Amount of past due ranked second with 85%.

Other factors included:

• Customer risk grade (29.17%)
• Unreconciled or unapplied payments (22.92%)
• Customer type (16.67%)
• Level of disputes (10.42%)

Christopher Roshong, credit manager for Graves Lumber Company (Akron, OH), chose nearly all of them. Based on poll options, Roshong’s team places the highest importance on amount past due followed by length of time past due, customer risk grade, level of disputes, customer type and unreconciled or unapplied payments.

Throughout the past two years, the importance of knowing your customer has never been more important. “The biggest thing is to know your customer,” Roshong said. “This helps you understand more about your customers’ financial situations and any implications that may prevent them from paying on time.”

Roshong advises regular communication with customers to “keep a pulse” on their current situations. Therefore, creditors should determine who they should contact first based on all of the indicators shown above, and any other information they may acquire such as the customer’s:

• Line of credit
• Financial reserves
• Ongoing disputes
• Limited staffing and more

“When I am aware of a specific customer that regularly struggles to meet payment deadlines, I will contact them first via phone at the beginning of every month,” Roshong said. “Another way to monitor your customer would be to stay in contact with the sales team to see if they have any additional information about the customer that may be helpful.”

Roshong attempts to resolve issues with customers internally before moving to outside sources. “Ask your customer ‘how can we remedy this situation?’” Roshong said. “By attempting to resolve the matter with them first, you will gain more insight into their situation which can further develop your relationship with that customer and potentially lead to a more favorable resolution.”

On rare occasions, Roshong’s team uses a third-party collection agency when customers become noncommunicative and all internal collection tactics have failed to elicit payment. His team also may employ a legal counsel in these instances. 

As of Jan. 1, U.S. banks can no longer issue loans or other financial contracts using the London Interbank Offered Rate (LIBOR), a widely used benchmark for determining short-term interest rates since the 1980s. “These changes might seem very minor from the outside, but they have big ripple effects,” Venetia Woo, consulting firm Accenture’s global lead LIBOR advisor, told the Wall Street Journal. 

“The rate is being scrapped a decade after banks were caught trying to rig it in what will be the biggest shake-up to markets since the introduction of the euro in 1999,” according to Reuters. According to management consultancy firm, Oliver Wyman, more than $240 trillion in products reference LIBOR and banks have spent about $10B preparing for the transition.

"It's one of the biggest transitions in financial markets in decades," Dixit Joshi, group treasurer of Deutsche Bank, told the Financial Times. “This is a milestone for the regulators since the great financial crisis about lessons learned.” 

While LIBOR was controversial and outdated, it remained appealing to some businesses because it was familiar. A multitude of companies quickly took out new loans yearend 2021 to beat the deadline. For example, Columbus McKinnon (Getzville, NY) recently took out a $75 million loan using LIBOR despite knowing the deadline was close, according to the Wall Street Journal article. “[Columbus McKinnon] didn’t want to amend the language in its existing credit agreement, which would have required approval from its creditors,” the news report reads.

Going forward, financial agreements will need to use a different benchmark. Creditors and debtors that have lending or borrowing agreements using LIBOR must have those agreements amended to reflect a new index by June 2023, which will be more complicated with legacy contracts.

“Central banks have been working to develop benchmarks that are a truer reflection of the cost of capital and based on actual transactions,” a Bloomberg article reads. But not all interest rate benchmarks are created equal, and creating ones that are reliable is proving more challenging. “Unlike LIBOR, the new rates fail to capture the credit risk that banks assume when they lend to each other,” the article notes. 

The Secured Overnight Financing Rate, or SOFR, is currently in the lead to replace LIBOR. But other benchmarks such as the Ameribor rate and Bloomberg’s BSBY rate are gaining favor among banks. The next few months will determine if one (or several) of those rates become more dominant. 

“Until we get four or five months under our belts in the new regime … I'm going to hold my powder a little dry on whether this is a done deal or not,” Richard Jones, a partner at the law firm Dechert, told American Banker. 

Public construction is unique in that receivables are secured by payment bonds posted by the general contractor. Public construction projects are either owned by the federal government or state governments, and with the passage of the $1.2 trillion infrastructure bill that means more of these types of projects will become a reality.

Suppliers and subcontractors must understand and utilize statutes to protect their rights, said Chris Ring, of NACM Secured Transaction Services. “You are not allowed to file liens on publicly owned pieces of property, so the payment bond posted by the general contractor replaces a mechanic’s lien as a form of collateral.”

Federal and state construction projects fall under the Miller Act and Little Miller Act, respectively. “The statutes require payment bonds be posted for downstream material suppliers to claim against in the event of nonpayment,” Ring said.

When working on a government project, subcontractors and suppliers should know who the general contractor is, what bonding company it has hired and the steps to claim against the payment. Furthermore, not all government-owned projects are funded by the government entity, so the process of claiming against the payment will differ under these circumstances.

In addition, there are public private partnerships [PPP], cooperative arrangements between two or more public and private sectors. “Basically, the government entity is the property owner, while private investment money is used to fund the project,” Ring said. “Prior to PPP legislation, subcontractors had no way to secure their receivables because liens could not be filed, and there was no payment bond to claim against. PPP laws require general contractors to post a payment bond to protect subcontractors and material suppliers in the event of nonpayment. Credit professionals must be aware of what the rules of engagement are for PPPs and securing their receivables.”

Due to the unique nature of each of these types of statutes, Ring urges credit professionals to fully understand them in order to take advantage of their rights. Attorney Katy Baird, of Andrews Myers PC (Houston, TX), and credit managers DeAnna Leahy, CCE, of Sunroc Corporation (Orem, UT), and Sam Smith, of Crescent Electric Supply Company (East Dubuque, IL), will cover both statutes as well as public private partnerships in more detail on June 7 during NACM’s 126^th Credit Congress & Expo in Louisville, KY.