In the News
May 25, 2017
Business Insolvencies Trend Downward in Most of Eurozone
Business failures are on the decline among certain major players in the eurozone, with economic growth in some buoyed by household consumption and a rise in employment. The credit risk situation across the countries of Western Europe is mixed, with generally good readings for agriculture, food and chemicals/pharmaceuticals sectors.
According to recent country reports from credit insurer Atradius, business failures in Germany have decreased annually with that nation’s consistent economic performance since 2010, though creditors’ outstanding claims have increased as larger businesses more relevant to the economy have failed. No substantial insolvency decrease is expected in 2017. Private consumption is the main driver for growth, with the economy sustained by household spending and lower unemployment. Growth in exports is expected to expand this year with an increase in global demand. The credit risk situation in Germany is good for construction and machines/engineering and excellent for chemicals/pharmaceuticals.
Productivity remains a problem in the manufacturing sector in France. Overall growth is expected to remain below the eurozone average. Decreasing unemployment should help private consumption, however. The number of business insolvencies was about 5% higher than before the start of the credit crisis in 2008. There has been a sharp increase in public debt, with public spending the highest in the eurozone despite some austerity programs, Atradius said. The country’s credit risk situation is poor for construction and agriculture and excellent for chemicals/pharmaceuticals.
In Italy, corporate insolvencies decreased in 2015 and 2016 after experiencing annual increases between 2008 and 2014, reflecting the county’s weak economic conditions. A further decline is expected this year, though poor payment behavior continues to plague liquidity conditions for Italian businesses. The credit risk situation is recorded as bleak in construction, fair in agriculture and good in automotive/transport and food.
In Spain, business failures are expected to decrease by 8% this year, reflecting the economic rebound the country has enjoyed since 2014, though they remain at a high level. The country’s economic rebound is expected to continue in 2017, with strong household consumption and increases in employment. Deleveraging of corporate debt continued in 2016, but remains above eurozone averages. The credit risk situation is Spain is poor for construction and metals and fair in agriculture.
Business insolvencies in certain industries in the U.K. are expected to increase from the enduring uncertainly about the nation’s break with the European Union, though the currently high insolvency level is predicted to decrease this year overall. The credit risk situation is poor in metals and construction, with good ratings recorded for agriculture and chemicals/pharmaceuticals.
For the rest of the region, business insolvencies are expected to decline in Denmark, Ireland and the Netherlands, level off in Belgium and increase in Austria, Sweden and Switzerland.
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Construction Prompt-Payment Statutes Popping Up in Canada
Subcontractors and suppliers in Canada tired of slow payment from their clients are helping advance prompt-payment legislation at the federal and provincial level.
At the federal level, prompt-payment legislation that would impact federal construction projects supported by the Mechanical Contractors Association of Canada recently passed the Senate, according to the Engineering News-Record. The U.S., U.K. and the European Union have passed prompt-payment legislation already, and many subs and suppliers in the Canadian construction industry consider prompt payment the issue that needs to be addressed, said Chad Kopach, Esq., partner with Blaney McMurtry LLP in Toronto. The Mechanical Contractors Association found subs on average wait 120 days for payments.
While many political parties appear to support the prompt-payment legislation on federal projects, it still has to pass through the House of Commons—an unusual circumstance in that most federal legislation is initiated in the House of Commons and moves to the Senate, Kopach said.
Perhaps more meaningful for suppliers and subs is construction reform legislation wending its way through the Ontario provincial government that includes new prompt-payment provisions, he said. This bill, which according to the Engineering News-Record could be introduced in June and signed into law next year, would involve both public and private projects in the province—a likely greater pool of construction projects than just federal construction jobs.
The Ontario bill would mandate 28-day payment from the owner to the general contractor (GC) upon receipt of a proper invoice, with a seven-day window after receiving the invoice to note any disputes, Kopach said. The GC would then have seven days to pay the sub and the sub seven days to pay suppliers, and so on. Further, the bill would introduce an adjudication provision—similar to arbitration—that would see disputes resolved with a binding decision within 42 days. Parties would, however, still be able to sue in court on payment disputes. Subs and suppliers would also be able to file and perfect liens.
Alberta Infrastructure began last year to introduce prompt-payment clauses in its contracts, while in Quebec, government officials have said they plan to apply prompt-payment rules to public construction projects this spring, the Engineering News-Record said. British Columbia is also looking at reforming its construction statutes.
“There seems to be a real push to get this out there,” Kopach said.
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ICC Calls on UN to Address Trade Finance Shortfall
The International Chamber of Commerce (ICC) is asking the United Nations (UN) to alleviate a major shortfall in short-term world trade financing.
More than a third of world trade is completed with bank-intermediated transactions, according to the ICC. This is equal to trillions of dollars per year, and the short-term financing is at a $1.6 trillion shortfall. This difference impacts small- and medium-sized enterprises (SMEs), which are 95% of all companies. Nearly 60% of trade finance applications denied by banks are SMEs, meaning small businesses and entrepreneurs are “particularly impacted by this trend,” said the ICC.
The ICC has called for the UN to address the issue at this week’s Financing for Development Forum in New York. The Chamber asked forum participants “to commit to an urgent UN-led review of the trade financing gap with a particular focus on possible means to reverse the on-going erosion of international correspondent banking networks.”
The UN recognized the trade finance shortfall at the 2015 Addis Ababa Action Agenda. A “lack of access to trade finance can […] result in missed opportunities to use trade as an engine for development,” said UN members according to the ICC’s release. The shortfall is not a recent issue. The gap has expanded since the peak of the financial crisis.
One of the main reasons for the gap is due to global financial crime regulation. ICC recognizes the need for precautions, but “the increasing complexity of global financial crime regulation—and associated regulatory and reputational risks—has resulted in banks adopting an extremely cautious approach to managing risk and as a consequence they are reducing and exiting certain types of business.”
Many large banks have cut back on banking relationships with counterparts in other countries due to issues involving criminal activity that could expose them to sanctions. Correspondent banking relationships (CBR), which are bilateral agreements built to establish services such as international payments or letters of credit, have decreased by more than a quarter in the last seven years, according to a recent study by Accuity.
The phenomenon has been attributed, at least in part, to de-risking or the notion that large financial institutions have been driven from the market, at least in some geographies like the Caribbean, as a result of a series of regulations since 2008 that mandate higher levels of transparency, higher levels of liquidity requirements for banks and ramped up enforcement of anti-money laundering activities.
Penalties for violations are regularly splashed across global headlines—in 2014, anti-money laundering fines reached about $10 billion—and have led banks and other financial institutions to abandon otherwise viable business opportunities rather than spend too heavily on compliance, the Accuity report notes.
“If we want to reverse this trend and begin to ‘re-risk’, then the ‘antidote’ will require more granular level due diligence and proper risk assessments to provide large clearers with the confidence that they can deal with low-risk businesses in high-risk jurisdictions,” Balani said.
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Effective Cybersecurity for Credit Professionals
With more than 200,000 computers infected in 150 countries within the span of a weekend, the so-called WannaCry ransomware attack put cybersecurity back in the headlines, though it seems it hardly left them. With ransomware the fastest-growing malware threat to computer systems, according to the U.S. government, it behooves credit professionals to ensure that company networks and payment systems are protected from that or any other threat.
Cyberattacks may hold particular risk for credit professionals as payment systems move from paper to more electronic forms, not only in transmission of such payments but in the storing of card and payment data, related Scott Blakely, Esq., of Blakely LLP, who will be a co-presenter on payment channel alternatives at NACM’s 121st annual Credit Congress & Expo this June. “It is one of the key issues that payment teams will face in coming years,” he said.
The reason the WannaCry attack was successful was that it was able to exploit vulnerabilities in old computer operating systems. Credit professionals leave themselves open to criminal activity if using systems that are not up-to-date. “It is not uncommon for small- to mid-size companies to have old operating systems and to be at greater risk to these types of cyberattacks,” Blakely said. He added that hackers are looking across industries, regardless of company size, for opportunities to exploit. It is not just Fortune 500 companies that are targeted.
As credit teams try to accommodate the desire to accelerate the speed of payments, there is a greater risk that this kind of information will be attacked, especially since card payment is emerging as a preferred way to pay customer invoices, Blakely said. Wire forms of payment are also vulnerable.
A best practice in terms of reducing risk in storing forms of payment is to look to third parties to hold that information in a cloud-based system, Blakely recommended. Cloud technology is updated easily and automatically and incorporates built-in constraints to block intrusive software.
Ransomware is malware that targets computer systems for the purposes of extortion. It encrypts data until a ransom is paid and is often delivered through phishing (disguised as from a trustworthy source) emails. According to the U.S. Justice Department, prevention is the best defense. Recommended measures include:
- Implement an awareness and training program, so that employees are aware of the threat of malware and how it is delivered.
- Enable strong spam filters to prevent phishing emails from reaching end users and use software to authenticate inbound email.
- Patch operating systems, software and firmware on devices.
- Manage the use of privileged accounts based on the principle of least privilege, which allows users administrative access only if absolutely needed and those with access to use it only when necessary.
Cybersecurity is at the forefront of concerns among financial institutions, Blakely said, but the technology that is used for such attacks is emerging quickly. In fact, the kinds of attacks he is seeing are advancing faster than what financial institutions can respond to. Though it may get harder and harder to prevent attacks, through best practices and sound decisions, the risks associated with such attacks can be reduced.
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Postponed Los Angeles Football Stadium Opening Illustrates Problems with Construction Delays
Football fans in Southern California will have to wait an extra year to see their NFL teams hit the field in the new stadium outside of Los Angeles. It was announced last week the venue will open in summer 2020 instead of the originally planned 2019, as developers are blaming weather for the one-year opening delay. The privately funded stadium broke ground in November, and roughly six million cubic yards of dirt have been excavated. The foundation for the stadium bowl and roof are nearly complete.
Setbacks to large construction projects like this are “danger signals,” said James Fullerton, Esq. of Fullerton & Knowles PC. Roughly 70% to 80% of the time, weather is not the real problem, he explained. Developers of the California stadium had planned for 30 rain days during the 36-month construction period, but heavy rains in the early part of the year had already doubled the allotted number.
The football teams will not be the only entities at risk of losing money due to the opening delay. Change orders for the setback can hurt general contractors and subcontractors financially. It can also cause the project budget to increase anywhere from 5% to 10%, according to Fullerton.
On a $10 million project, $1 million might not seem like a large sum of cash, but it could be the difference that puts someone out of business. “Where is the money going to come from?” asked Fullerton. Subs and GCs may not have that money on hand to shell out following a delay and increase in project cost. A three-month delay is annoying but not the end of the world, yet it could put subs out of business. That is the scenario Fullerton gave, but near LAX it is a one-year opening delay and a $2.6 billion project, meaning this could have a very large impact even with a cost increase of 5%, or $130 million.
The delay does not directly impact mechanic’s liens, but it might be necessary to file a lien or bond claim if off the job for 75 days, said Fullerton. There is no guarantee the subs or suppliers will be brought back following a delay in construction.
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