1. RECESSION ON THE HORIZON? WHAT IT MEANS TO THE CREDIT AND FINANCE TEAM
Christa Hart
Senior Managing Director
Corporate Finance
FTI Consulting
Scott Blakeley, Esq.
Orange County | Los Angeles | New York
Steven C. Isberg, Ph.D.
Senior Research Fellow
Credit Research Foundation

2. Senior Research Fellow Credit Research Foundation
Steven C. Isberg, Ph.D.
Senior Research Fellow
Credit Research Foundation

3. The Macro-Economy: Major Long Term Trends
Consolidation and concentration
Process reengineering
Manufacturing
Back office business processes
Interest rates now increasing
Rising nationalism leading to trade wars?
What are the consequences?

4. Long term real economic growth has been slowing: the new normal seems to be low growth…

5. The yield curve is in a flattening cycle: prior flattening has preceded recessions

6. Wage and salary earnings have been slowing and barely keeping up with inflation

7. Low growth in wage and salary earnings is related to declining labor productivity…

8. Manufacturing is no longer as labor intensive as it once was…

9. The motor vehicle industry is a good example of the impact of technology and outsourcing

10. One benefit is in the form of lower durable goods price and profits: competition and consolidation have followed…

11. The benefits of economic growth have not been evenly distributed across classes...

12. Even so, higher taxes have taken a huge bite out of income, leaving less to spend…

13. Inflation rates for medical care, food and housing are higher than average…

14. Housing, health care and food price inflation since 2004…

15. Nominal and real consumer expenditures on apparel are down (using the clothing CPI)

16. Real expenditures on transportation are down, in spite of nominal increases

17. Real expenditures for housing are down…

18. Real expenditures on health care increase with income class…

19. Real expenditures on food are down…

20. Indebtedness is at Unsustainable Levels: Consumer: $4 MMMM; Federal $21.5MMMM

21. Slow Growth to Recession Likely…
Low interest rates, consolidation, high turn to capital have driven stock market
Manufacturing and business process reengineering have slowed labor productivity and dampened real wage growth
Shifting income distribution and increasing oppressive tax burdens have cut into middle class consumer budgets
Combined with heavy government and individual indebtedness, will place a drag on consumer spending and economic growth

22. Christa Hart Senior Managing Director Corporate Finance FTI Consulting

23. Impact of Amazon
FTI estimates that Amazon North America has a 40% share of total online retail sales compared to 31% in By 2027, we expect U.S. online sales will approach $1.2 trillion and that Amazon’s share (1P+3P) will be 54% or $626 billion representing a 14.5% CAGR.
FTI estimates that Amazon’s total Gross Merchandise Volume (1P + 3P) in North America was $180 billion in FY2017, with 3P sales accounting for nearly 60% of the total. In fact, Amazon’s 3P sales are growing at a considerably faster rate than its 1P sales— perhaps twice as fast.
Source: SEC filings and FTI analysis. Seller services include revenue derived by Amazon from stocking, fulfillment and shipping fees and commissions of merchandise owned by third party sellers.

24. Consumer Prices for Goods Aren’t Moving Much
Core consumer inflation is approaching the Fed’s targeted inflation level, mostly due to accelerating prices for consumer services. However, for several major categories of consumer goods, inflation remains tame—either negligible or negative.
Source: Bureau of Labor Statistics.

25. Consumer Confidence
Consumer confidence is near its highest levels in almost 20 years, which is important given its historically strong correlation with discretionary spending. However, history also tells us that consumer confidence has previously peaked near current levels prior to the onset of recession.
Source: University of Michigan’s Survey of Consumers.

26. Forecast of Holiday and Online Sales
Online sales (excluding auto, gas, food) has grown mid-teens since the end of the recession. Brick & Mortar discretionary sales (GAFO) are now growing at ~3.0% — a nice improvement. Total retail sales growth accelerated to 5.5% and we expect 2018 holiday sales to grow 5.8%.
Source: U.S. Bureau of Census Reporting. Brick & Mortar discretionary spending (GAFO category includes General Merchandise, Apparel & Accessories, Furniture & Home, Consumer Electronics, Sporting Goods, and Miscellaneous). E-Commerce is reported separately.

27. Not Out of the Woods Yet, 22 Likely At Risk
In reviewing the performance of 100 U.S. public retailers with sales over $100M, we find that 22 are underperforming. There’s likely a similar penetration in those owned by private equity.
Source: S&P’s Capital IQ. Based on unweighted averages.

28. Scott Blakeley, Esq.

29. Revisiting A/R Portfolio and Credit Policies in Light of Recession Risk
Examine traditional signs of customer defaults and adjust policy accordingly
Is credit policy too liberal?
Too loose must be formulated within the context of company goals and profit margins
Credit, sales and management issues
Adjusting policy to signs of customer defaults
Using past insolvencies for predictive data points - data points are then run against current profile to further refine portfolio risk

30. Information Sources to Evaluate Customer Credit Risk

31. Restrictions on Suppliers Speech Antitrust Considerations
Prohibited SP Member Statements Where Customer Placing POs or Supplier Holding POs
Agreement not to sell to customer
Agreement not to extend terms
Agreement not to provide extended terms/workout
Agreement to advise suppliers who are not SP members to refuse to sell

32. The Dynamics of Insiders, Lenders and Personal Guaranties
Small- and Mid-sized Customer: lender conditions financing on principal guarantees
Principal’s focus is on maximizing the company’s assets to ensure lender is paid in full and guaranty released
May include principals ordering more inventory on terms from key suppliers
The Debtor’s lender is undersecured

33. Protocol for Risk Flags
Validating the credit risk flags
Consider aggregating multiple data sources to confirm original source before taking action
Responding to credit risk flags
Holding orders and meeting with customers
Attempt an in person meeting
Converting credit sales to cash
Demand written assurance of payment
Refuse delivery and demand cash under Article 2 of UCC
Stopping goods in transit
Reclaiming goods
Written demand for the return of the goods
Customer divorce and filing suit
If customer remains silent and account is not profitable
Credit team should consider collectability of and judgment against customer or guarantors before filing suit

34. Credit Enhancement Decision Tree

35. Delinquent Account Decision Tree
Credit Hold
Report to Industry Group
Late Penalty Payment
Termination of Contract
UCC Protections
Setoff/ Recoupment
Customer Divorce

36. Chapter 11 Checklist for the Supplier
Dealing with Your Prepetition Claim
Considering Post-petition Credit Sales
Critical vendor
Chapter 11 plan
Dodging the Preference
Preference waiver
Trade credit
Creditors’ committees

37. Our Listener’s and our Speaker’s
Thank You…
CRF would like to Thank
Our Listener’s and our Speaker’s
Questions?