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Special Events Responsible for More Credit Rating Upgrades than Downgrades

Corporate credit is benefitting from one of the most unusual upturns in the business cycle since WWII. Though leverage is higher, corporate bond yield spreads have narrowed and default probabilities have declined. And special events such as merger and acquisition (M&A) activity and equity infusing have delivered a net benefit to corporate credit ratings when once they dragged ratings lower.

In a recent report, Moody’s Investors Service declared that mergers, acquisitions and divestitures now prompt more upgrades than downgrades. This may be due in part to the below-normal revenue growth of the current economic downturn dissuading companies from participating in debt-funded acquisitions, leveraged buyouts and equity buybacks, which weaken credit quality. For the first time, the effect of M&A on U.S. credit rating revisions went from negative to positive in the eighth year of a business cycle upturn, Moody’s said.

In the first nine months of this year, M&A has entered into 82 upgrades and 55 downgrades. From the third quarter of 2009 to third quarter 2013, M&A actions were linked to 314 credit rating upgrades and 263 downgrades of U.S. companies. An imbalance of this type is common for the early years of an economic recovery, the ratings agency said.

The common equity market also influences corporate credit. Ample liquidity has been demonstrated by the record highs enjoyed by several equity indexes. The 15% climb in market value of common stock helped to reduce the number of downgrades from shareholder compensation, Moody’s said. In addition, the substantial valuation of equity shares reduced the incentive for companies to engage in equity buybacks or special dividends that might inspire a credit rating downgrade.

Corporate credit quality is enhanced by infusions of common equity capital. In the third quarter of 2017, there were just three credit rating upgrades ascribed to infusions of common equity capital, down from 13 in both the first and second quarters. Regardless, for the year ended September 2017, the number of such upgrades increased substantially by 86% annually, to 41, outweighing the 36 downgrades that resulted from stock buybacks or dividends, Moody’s said.

If special events such as M&A activity, equity market performance and equity infusion turn to causing more downgrades than upgrades, a mature business cycle may be reaching its end.

Credit Managers' Index

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NC Notices and Liens Could Be Trouble for Subs, Suppliers

Some state laws are easier than others when it comes time to file or serve a lien. In others that are more complicated, it can be nearly impossible to know the rules and regulations inside and out. North Carolina is one of those tricky states that can trip up subcontractors and material suppliers if the law is not followed.

In 2013, the state went live with LiensNC, an online system designed to protect lien rights and act as a database for project information. It stands for North Carolina Online Lien Agent System. Owners can file an Appointment of Lien Agent, while potential lien claimants can file a Notice to Lien Agent with LiensNC to announce their involvement with a project. An important note to those submitting a Notice to Lien Agent is that it cannot be edited once it has been submitted. To protect your lien rights against a conveyance or mortgage of the property, file a Notice to Lien Agent no later than 15 days after first furnishing.

Submitting a Notice to Lien Agent through the online system does not make the agent an agent of the owner and does not constitute serving a Notice of Subcontract on the owner. The Notice to Lien Agent is done within LiensNC, while the Notice of Subcontract is completed through a separate, served notice. Meanwhile, all liens on real property and Notices of Contract must be filed with the clerk of superior court in the county where the project is located.

“Sometimes it can be difficult to know if the Notice of Contract has been filed and posted, so we recommend serving the Notice of Subcontract because it gives subs and suppliers special benefits,” said Connie Baker, CBA, director of operations with NACM’s Secured Transaction Services (STS). This is important because if a Notice of Contract is posted at the property adjacent to the permit within the required time period and has been filed with the clerk of superior court, a second- or third-tier subcontractor must serve the contractor a completed and signed Notice of Subcontract to retain their right to lien on real property.

The Notice of Subcontract “identifies the lower-tier subcontractor, who otherwise might remain unknown to the contractor, and the contractor then becomes obligated to notify that lower-tier subcontractor or supplier within five days after the contractor makes a payment to the first-tier sub,” according to NACM’s Lien Navigator. Should subs and suppliers remain unpaid, they have a right to lien the owner’s property and also file a lien on funds.

Unlike the 120-day deadline from last furnishing for liens on real property, liens on funds do not have a statutory time limit. First-, second- and third-tier subcontractors have the right to lien against the property as well as the funds, yet subs who are more remote than the third tier only have the right to lien upon funds. Filing sooner rather than later is imperative to capture funds before the owner pays them out to the contractor.

Determining the difference between the notices and liens and where to file them can be a hassle if subs and suppliers work with different states. Knowing North Carolina’s law like the back of your hand could be what gets you paid. Services like NACM, STS and the Lien Navigator are here to help in times of uncertainty.

Credit Congress

Credit Congress Registration Is Now Open!

Share with us the eclectic mix of urban energy and striking desert vistas. Bask in its golden rays. The charms of the southwest await you in Phoenix as NACM hosts its 122nd Credit Congress & Expo, June 10-13, 2018. Credit Congress offers more than 60 compelling and relevant educational sessions from which to choose, ranging from the fundamentals to more sophisticated and challenging subjects. Our breakout sessions present topics in the following areas:

  • Business and technical skills
  • Credit management: Core concepts to best practices, industry trends and practitioner experiences
  • Credit and technology
  • Financial analysis
  • International tracts: Global challenges, etiquette protocol and country-specific approaches
  • Leadership and management
  • Legal environment of business credit
  • and more!

Tailor a conference agenda based on your experience, interests and goals that affords the greatest return to you and your organization. It's an unparalleled educational and networking opportunity for any credit and finance professional!

Click here for more information and to register!

Export Compliance in Today’s Global Economy

Having effective compliance policies in place has become a necessity in today's business world. The United States’ export controls apply to all international business, so if at any time your company engages in trade with another country, it is important to understand the laws and regulations that govern such trade. Failure to do so may lead to fines or the loss of the privilege to trade.

In the webinar “Export Compliance: Sanctions, Embargos, Denied Parties,” hosted by FCIB and presented by Lizbeth C. Rodriguez-Johnson, Esq., of Holland & Hart LLP, special risks were outlined, focusing on prohibited parties and sanctioned destinations. It is important to follow a product that you are selling to the end user because a country that buys your product might go on to sell it to a prohibited country or for a prohibited use. You and your company should know with whom you conduct business, how you conduct business and how you can demonstrate compliance with trade law. The costs of investigating potential violations can be quite high and an "involuntary investigation" by the U.S. government may result in three times that cost, Rodriguez-Johnson explained.

U.S. export control laws cover physical commodities, products and components; software; technology and technical data; know-how and expertise; and services, including training and teaching. Some of the chief government agencies regulating trade are the U.S. Commerce Department Bureau of Industry and Security and the U.S. Treasury Department Office of Foreign Assets Control (OFAC). OFAC administers U.S. trade sanctions on select countries, such as Iran, Cuba, Russia and Venezuela. Countries subject to targeted sanction by OFAC include Iraq, Libya, Somalia, Lebanon, the Balkans and Belarus. Each sanction program is different and is modified as foreign policy evolves. OFAC also maintains a regularly updated list of foreign individuals and companies with which U.S. companies are prohibited from conducting business.

OFAC sanctions prohibit U.S. citizens, businesses and financial institutions from engaging in business or financial transactions with persons or entities on the Specially Designated Nationals or other lists, Rodriguez-Johnson said. Financial institutions are required to file reports to OFAC for blocked payments or transfers and rejected transactions. Reports must be filed within 10 business days of the transaction. A company that is subject to OFAC jurisdiction must screen customers to prevent possible transactions with a proscribed party.

At a minimum, a trade compliance program for your company should include a policy on compliance and export responsibility, as well as procedures for the screening of prohibited parties and sanctioned countries. It is important to keep records, which will help protect you from being accused of an intentional violation of regulations if you can show an effort toward compliance. There should also be a training element to your policy and a safety valve for reporting violations so that employees feel comfortable in letting their companies know of any transgressions, Rodriguez-Johnson said.

Credit Learning Center

CCE Recertification Deadline Approaching

CCEs, if you have not put thought into recertification, the time is now! The deadline to renew your valuable CCE Certification is Dec. 31, 2017. Renewal fees are reduced for members if the renewal application is received by Oct. 31.

Three education points and three participation points are required over your three-year recertification period of (2015 - 2017) to maintain the integrity of the CCE designation. For more on some of the opportunities available to you for earning points, click here.

The CCE recertification form can be found here.

California Passes First State Payment Transparency Law

California is the first state to have a payment transparency law in place for state agencies. The state now requires agencies to post to their websites information about a project that will help subcontractors and suppliers know their payment rights. Gov. Jerry Brown signed AB1223 into law earlier this month to hold state agencies and prime contractors more accountable.

“Subcontractors and suppliers on certain state projects and all local projects will now have the information needed to prove their right to be paid under the prompt payment laws, which is triggered when the general contractor has been paid,” said Daniel McLennon, chair of the legislative committee for American Subcontractors Association (ASA) of California.

The new law requires a state agency with an internet website to post payment information on its site within 10 days of making a construction contract payment. This does not apply to contracts valued below $25,000 and to certain progress payments. According to the law, data that are to be published include:

  • The project for which the payment was made.
  • The name of the construction contractor or company paid.
  • The date the payment was made or the date the state agency transmitted instructions to the controller or other payer to make the payment.
  • The payment application number or other identifying information.
  • The amount of the payment.

With that said, there are currently no consequences if the agency posts after 10 days or not at all, according to McLennon. “Complaints to government officials could be effective to leverage state and local agencies to comply. Otherwise, legal action seeking injunction would be required,” he explained. Prior to the new law, “to obtain information about payments to general contractors, subcontractors would have to demand production of information through the Freedom of Information Act, which is time consuming, slow and expensive,” McLennon added.

The Department of General Services handles most of the state construction projects except for a handful of departments including the Department of Water Resources and the Department of Transportation. “Thus, the new law does not apply to much construction by the state itself, but it does apply to all local agencies,” McLennon said.

Although California is the first state to pass such a law, there are other areas that have similar legislation. “Several cities, including the District of Columbia and San Antonio, already have payment transparency laws in place,” said ASA Chief Advocacy Officer E. Colette Nelson. Virginia and Maryland have also considered payment transparency laws. “I expect other ASA chapters to pursue legislation in their states,” she added. At the federal level, H.R.2350, Small Business Know-Before-You-Bid Construction Transparency Act of 2017, was introduced earlier this year and has been supported by NACM. This act could help small contractors, subcontractors and suppliers with change order payments, payment timelines and payment bond transparency.

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Are You Prepared for All the Challenges of International Trade?

FCIB's ICRM graduates are!

FCIB’s International Credit & Risk Management online course (ICRM) is a comprehensive, in-depth 14-week course designed to educate entry-level professionals as well as senior-level executives about the intricacies of global credit and risk management. The course offers vital, up-to-date knowledge in a collaborative, 24 hours/day-accessible learning environment. Peer-to-peer interaction will build, diversify and strengthen a reliable network of professionals while helping you gain an all-encompassing view of credit and risk management.

The ICRM Online Course starts up again in Jan. 2018 so enroll now. Then take the final exam to earn a CICP designation as a Certified International Credit Professional!

IBM Steps into Blockchain Trade Finance Ring, but Will Adoption Become Widespread?

As trade creditors doing business overseas very well know, completing international transactions can be a relatively slow and expensive process.

Letters of credit, for instance, while very secure, can also involve rampant discrepancies among relevant documents such as bills of lading or commercial invoices that lead to more expense and delay—and it’s been that way for a long time, said Ron Shepherd, director of membership and business development at FCIB. It’s a line of business that could be ripe for disruption, assuming the right tech solution comes along and is widely adopted, he said. That’s a big if, for sure, but it doesn’t mean firms in the fintech space haven’t been trying to break through and build scale with an effective solution of their own.

One of the latest comes from IBM, in partnership with blockchain startup Stellar and payment company Kickex. Developed for banks, it seeks to facilitate cross-border payments from the South Pacific’s retail industry to firms in Australia, New Zealand and the U.K., according to a recent report in TechCrunch. Already, more than a dozen banks have joined the project, with plans to expand into South America, Southeast Asia and other areas next year.

Further, IBM is seeking to use its Blockchain Platform to provide a solution that would be used to record the terms of a contract, manage trade documentation and allow small customers to put up collateral, obtain letters of credit and finalize transaction terms with immediate payment. “With the guidance of some of the world’s leading financial institutions, IBM is working to explore new ways to make payment networks more efficient and transparent so that banking can happen in real time, even in the most remote parts of the world,” Bridget van Kralingen, senior vice president of IBM Industry Platforms, said in a statement.

Shepherd likens the hype surrounding various blockchain payment solutions to that of SWIFT’s Bank Payment Obligation. It was introduced in 2013, but only received lackluster corporate uptake due in part to regulation and stalled market acceptance. Skeptics of distributed ledger technology in trade finance have also pointed to the need for widespread digitization of documents and processes in the trade space for it to become anything close to a primary solution, according to an August piece in Global Trade Review.

Still, the use of blockchain technology could be an effective part of a trade solution if “it speeds up payment and reduces the errors and the fees that exporters have to pay to get discrepant documents corrected,” Shepherd said.

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*See savewithups.com/nacm for specific services and discounts. Introductory program discounts will be applied to accounts for Weeks 1 to 4 on the UPS Savings Program. Week 1 includes the date that discounts are applied. Weeks are calculated Sunday through Saturday.