The Connection
October/November 2018
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The Risky Business of Extending Credit to Ch. 11 Debtors

Once a thriving toy retailer, Toys R Us is no more. Debt struggles repeatedly struck the popular chain store in 2016 and led the company to hire a law firm for corporate restructuring the following year. In September 2017, the century-old New Jersey-based company filed for Chapter 11 bankruptcy, only to decide to liquidate in March 2018.
Despite the impending downfall, suppliers stayed supportive of Toys R Us by extending hundreds of millions of dollars in trade credit and lengthening invoice payment periods, hoping the retailer would turn around—an objective Toys R Us vocally expressed to its suppliers. Instead, Toys R Us left suppliers high and dry after announcing plans to liquidate its assets, close hundreds of stores across the U.S, and effectively leave suppliers unpaid. It’s not unusual for suppliers to lend a hand to a Ch. 11 debtor, or in this case, lend credit, but when murmurs of bankruptcy arise, broken promises of payment can strain or even sever a business-to-business relationship.
Just because a debtor is in Ch. 11 doesn’t necessarily mean credit managers should avoid their business. Due diligence must be a priority, said Bruce Nathan, Esq., partner with Lowenstein Sandler LLP of New York. What happened with Toys R Us doesn’t happen in every Ch. 11 case. Sometimes, Nathan said, debtors file for Ch. 11 reorganization and restructuring, continue paying administrative costs and then exit fairly unscathed. Then, there’s the liquidation process seen with Toys R Us.
“If the case liquidates and if there isn’t enough to pay the secured lender [at all] or in full and have funds for all of the administrative expenses in Ch. 11, like unpaid post-petition rent, professional fees and all other post-petition payables, then everybody takes a haircut on their post-petition credit extension,” Nathan said. “Anybody who is considering extending credit has to do a lot of homework and be able to figure out what happens when the music stops. What are the chances of their post-petition credit extension getting paid in full? There’s a risk of delayed payment. There’s a risk that it will not be paid in full.”
In the case of Toys R Us, vendors were told that the existence of Ch. 11 financing provided assurance of post-petition trade claims. The company expected to come out on top in 2018 or 2019 after the holiday shopping season; however, Toys R Us never had the chance due to an underperforming budget.
According to a Retail Dive article in August, a settlement agreement was reached between the retailer and vendors in July that “provides a baseline recovery of $180 million on some $800 million owed to vendors, with the potential for more.” To their dismay, vendors can’t sue the retailer or pursue claims in full to fully recover, but they can file a proof of claim.
Critical vendors were “burned” by Toys R Us because they agreed to have their pre-petition claim paid over time and continued to extend post-petition credit, Nathan said. Then, payments stopped when the company failed.
“If I were a critical vendor, I wouldn’t extend credit in excess of whatever payment I got on my critical vendor claim because, otherwise, you’d be extending yourself more than you got paid,” Nathan said. “I’m not saying you shouldn’t do business with a Ch. 11 debtor; I’m saying there’s a risk that if you do business on credit, you don’t get paid in full or there’s likely a delay in payment. The answer may be that you do business on cash-in-advance terms.” Bloomberg reported in June that nearly 40% of the company’s vendors shipped product without cash in advance, cash on delivery or payments outstanding.
Nathan said paying attention to the company’s wellbeing is the best way to deal with a Ch. 11 debtor.
—Andrew Michaels, NACM editorial associate
Here We Grow Again!
 As you know, NACM Southwest has expanded its area of coverage, and we are pleased to introduce our Louisville, Kentucky employee, Faye Goodman:
Greetings from Louisville, Kentucky - home of the world famous Kentucky Derby. My name is Faye Goodman, and I have been with NACM South Central and now NACM Southwest for 40 years, working primarily in the collection department. I am very happy to be a part of the NACM Southwest collection team. I bring with me a pool of clients and many years of experience both in house and working with attorneys. Please call or email me ( ) if you have any questions or I can help you with your collection needs! I look forward to working with you all.
Best regards,
Congratulations to RSI Building Products for being named Top Business of the Year! Owner GERALD “SKIP” SAYRES takes building seriously, and because of that, his company is taking home one of the J. Pat Beaird Small Business of the Year awards for 2018. Sayres says that the award means “knowing that a lot of the things you try to do throughout the years finally worked and they’re able to make a difference not only seen by our employees but our customers and the community”.

On a somber note, we are saddened to report that ROBERT EARL SHAW, CFO/Secretary Treasurer for Allen Millwork, Inc., passed away in September. He was a dear friend to all of the NACM staff in Shreveport. Allen Millwork was a member of NACM Southwest for many years and was sold to Cassity Jones a few years ago.
Conquering Cyber-Readiness in Credit

When someone breaks into a house, the homeowner is likely to take preventative measures to improve security, whether it’s installing heavy-duty locks, alarms or cameras. The same can be said for financial institutions (FIs) when cybercriminals breach a company’s network and steal or leak confidential information. The latest and greatest cybersecurity programs aren’t necessarily a company’s most valuable asset, but rather, it’s their knowledge and understanding that will better protect them in the long run.
Last year, data analytics company FICO Decisions collaborated with independent research company Ovum to survey security and IT employees across five industries in the U.S. and other countries, including financial services, health care, power and utilities, retail and eCommerce and telecommunications. A startling revelation came from the financial services, retail and eCommerce industries, where 80% of respondents in the U.S.—63% around the world—believe cyberthreats and data breaches will rise over the next year. Few U.S. respondents in financial services (20%) and retail and eCommerce (15%) said levels will stay the same, the remaining 5% of retail and eCommerce respondents anticipate a decline.
What surprised analysts was how the number of cyberattacks actually declined in the prior year in the U.S. In 2016, 61% of respondents said there was an increase in cyberattacks, yet only 33% said the same in 2017. However, this good news doesn’t account for companies’ current level of preparedness—only 31% of companies say they understand the risks at hand.
“While U.S. organizations are realistic about overall levels of risk and expect it to increase, they are not so realistic about their own cyber-readiness,” the study states. “With attacks expected to increase in volume, breach risk is more important than ever before. Organizations must take the opportunity to objectively understand their likelihood of suffering a breach so they can take the necessary steps to transfer or mitigate risk.”
Too few U.S. companies (28%) never update their risk assessment procedures, with 3% conducting no assessments whatsoever. The survey indicates that companies are “overly optimistic” regarding cyber-readiness.
In addition to employee training, some companies are engaging another preventative practice known as penetration testing, which involves third-party testers attempting to expose cyber vulnerabilities in companies through test hacks. During a 10-month period that ended in June, cybersecurity software firm Rapid7 conducted simulated cyberattacks on nearly 270 corporations for its Under the Hoodie 2018 report. The tests concluded that the finance sector, for example, was more defensive against external threats, like websites and phishing, as opposed to internal threats, like connections and WiFi. About 61% of the tests resulted in no threat detection on behalf of the company.
“These results imply that if the penetration tester is not detected within a day, it’s unlikely the malicious activity will be detected at all,” Rapid7 analysts said in the report.
At Wagner Equipment Co. in Albuquerque, NM, Customer Account Representative Roberta Ortiz-Montoya said the company’s IT department stays on top of any potential cyberthreats.
“We here in the credit department get emails from the IT department when there is a scam of some
sort,” said Ortiz-Montoya, a member of the Albuquerque CFDD Chapter. “[We’re told] not to open any
emails [when] we don’t know where they are coming from.”
CFDD Louisville Chapter Member and Western Regional Credit Manager Lynn Kendrick, CBA, of Whayne
Supply & Walker Machinery, said not only do they refrain from opening sketchy emails, but they are also
in the process of implementing a three-digit verification code on credit cards.
Managing employee credentials, such as implementing administrative credentials to complete specific
actions, and encouraging a “see something, say something” policy can help mitigate cyberthreats,
Rapid7 noted. Time-driven account locks and two-factor authentications aren’t as bulletproof on their
own, but these strategies can be effective when utilized with other precautions.
—Andrew Michaels, editorial associate
The More You Know

A Day of Education in New Orleans
Bonds and Liens in the State of Louisiana
Presented by Seth J. Smiley, Smiley Law Firm
Financial Statements from a Credit View
Presented by Toni Drake, CCE, TRM Financial Services, Inc
October 18, 2018
Canal Conference Room, New Orleans

Financial Statements from a Credit View
Presented by Toni Drake, CCE, TRM Financial Services, Inc
October 19, 2018
Comfort Suites-Westchase
Houston, TX

Texas Mechanic's Lien and Bond Claims
Presented by Chris Ring, NACM's Secured Transaction Services
October 26, 2018
Las Colinas Country Club

Dealing with Bond and Lien Claims
Presented by Jason Walker, Andrews Myers, P.C.
November 7, 2018
1885 Saint James Place Ste 1500, Houston

CAP II Basic Financial Accounting
8/4/18 - 9/29/18
CAP III Financial Statement Analysis 1
10/13/18 - 12/1/18

  • Applications due for CBA, CBF and CCE June 10, 2018
  • Applications due for CBA, CBF and CCE July 23, 2018
  • 6/1/18 Nationwide Exam test date
  • 6/10/18 Certification Exam - Phoenix, AZ - Credit Congress
  • 7/23/18 Certification Exam - Nationwide
  • 9/14/18 Applications due for CBA, CBF and CCE
  • 11/5/18 Nationwide Certification Exam test date
  • 1/18/19 Applications due for the CBA, CBF and CCE March 4th exam test date
  • 3/4/19 Nationwide Certification Exam test date
  • 3/22/19 Applications due for the CBA, CBF and CCE May 19 exam at Credit Congress
  • 5/19/19 Certification Exam date
  • 5/31/19 Applications due for the CBA, CBF and CCE for July 22 nationwide exam test date
  • 7/22/19 Certification Exam
  • 9/13/19 Applications due for the CBA, CBF and CCE for Nov 4 nationwide exam test date
  • 11/4/19 Certification Exam
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