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eNews August 4, 2016

Transparency, Public Input Key to Successful P3 Projects

More transparency, disclosure and public input before public-private partnerships (P3s) proceed could save suppliers and others from costly delays.

“Projects that have significant advance planning and meaningful public involvement to identify key long-term public policy objectives and acceptable tradeoffs create a better risk-reward balance for taxpayers, users and investors,” said Fitch Ratings. The firm cited North Carolina’s House vote to cancel the Interstate 77 managed-lanes project as an example. The Senate disagreed with the House, while the governor recommended changes to address a local stakeholder group’s concerns about the project’s impact on users due to additional tolls, project financing and the concession company’s bankruptcy in another project.

As the project has already been awarded, “changes … could raise costs, as post-award changes would not be bid out to multiple contractors,” Fitch Ratings said. “The project could also go forward as planned and face a stronger political challenge.”

Similarly, in June, a federal judge recommended a six-month delay in the construction of Maryland’s Purple Line light rail project because of an environmental impact lawsuit brought by state residents. “The delay will raise the cost of project implementation and require private project sponsors to be compensated to ensure that the eventual decision mitigates the additional carrying cost of debt, construction cost escalations and reduced equity return,” Fitch economists said.

Costly delays such as these on construction projects will trickle down the chain to suppliers, said Connie Baker, CBA, director of operations for NACM’s Secured Transactions Services (STS).

“Construction credit professionals not only have to look at risk and how to confirm their company is secured by payment bonds on P3 projects, they may also need to spend time researching the project to keep management updated on delays late in the project that will hold up payments,” Baker said. “Time delays will add additional costs that are not always foreseen, such as the cost of carrying the money, possible interest paid on borrowed funds, lost interest earnings due to depleting invested funds, not to mention operational costs like salaries.”

Another consideration is the accounts receivable exposure to your customer, she said. “As we know, they will want to continue buying on credit for other jobs, which will increase the exposure risk.”

 

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Mitigating Correspondent Banking Risks

Foreign correspondent banking comes with a level of risk that credit professionals need to manage via due diligence, monitoring and reporting systems.

“Correspondent banking services are an essential component of the global payment system, especially for cross-border transactions,” said Ed Bell, CBA, ICCE, senior manager, credit administration for W.W. Grainger Inc. “Due to increased requirements for compliance with [anti-money laundering and combating the financing of terrorism] regulations, an increased perception of risk and some uncertainties on the potential impact of noncompliance, there has been a reduction of correspondent banks worldwide willing to take the risk. It is important that international credit professionals understand the risk and complexities of the global correspondent banking system.”

In general, “foreign financial institutions maintain accounts at U.S. banks to gain access to the U.S. financial system and to take advantage of services and products that may not be available in the foreign financial institution’s jurisdiction,” according to the Federal Financial Institutions Examination Council, a Virginia-based U.S. government interagency. (The council is comprised of five banking regulators: the Federal Reserve Board of Governors, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of the Comptroller of the Currency and the Consumer Financial Protection Bureau.) “These services may be performed more economically or efficiently by the U.S. bank or may be necessary for other reasons, such as the facilitation of international trade,” it notes on its website.

Services may include:

  • Cash management services, including deposit accounts.
  • International funds transfers.
  • Check clearing.
  • Payable through accounts.
  • Pouch activities.
  • Foreign exchange services.
  • Overnight investment accounts (sweep accounts).
  • Loans and letters of credit.
  • Lines of credit.

Some foreign financial institutions could pose a higher money laundering risk to their respective U.S. bank correspondent. “Without adequate controls, a U.S. bank may also set up a traditional correspondent account with a foreign financial institution and not be aware that the foreign financial institution is permitting other financial institutions, or customers to conduct transactions anonymously through the U.S. bank account (e.g., payable through accounts and nested accounts),” the website states.

- Diana Mota, associate editor

 

NACM Regional Conferences

Connect, Network, Learn and Share

Held each fall, the regional conferences are a wonderful opportunity for members to learn and grow by attending educational sessions and network with fellow credit professionals from their respective geographic regions.

Eastern Region Credit Conference
September 14-15, 2016
Rochester Airport Marriott
Rochester, NY
Hosted by: NACM Upstate New York

All South Credit Conference
September 18-20, 2016
Hyatt Place Fort Worth
Historic Stockyards
Fort Worth, TX
Hosted by: NACM Southwest

Western Region Credit Conference
October 12-14, 2016
Renaissance Seattle Hotel
Seattle, WA
Hosted by: NACM Business Credit Services

Central Region Credit Conference
November 9-10, 2016
Crowne Plaza Hotel
Independence, OH
Hosted by: NACM Great Lakes Region

Pending Threat of Devastating Florida Lien Law Change

Florida’s construction lien law works the way it should about 99% of the time, bringing projects to successful completion with payment to those who made them possible. It is one of the most well-thought-out and structured laws in the country that’s well balanced between the industry and consumers to preserve rights if certain steps are taken, while providing consumers with a proper payment defense. Suppliers, however, need to be aware that all of that could change.

Although a small percentage of consumers still end up with unpaid liens on their property, it is enough for incoming Florida House Speaker Richard Corcoran, who told the construction industry that homeowners should not be responsible for paying subs or suppliers. Corcoran wants to eliminate their lien rights on most residential construction.

“If such a provision were passed into law, suppliers would be forced to sell directly to a project owner, as this would be the only way to maintain lien rights,” said a credit manager for a large supplier in the Florida market. This in turn would increase the burden on private residential owners, as they’d have to apply for the credit and buy directly from the supplier.

Such a law would negatively impact small residential contractors. Ultimately, this legislation could severely limit the number of residential builders, driving the cost up for potential homeowners.

Although Florida’s NACM Improved Construction Practices Committee (ICPC) has discussed the issue with the incoming speaker, it has not received an affirmative response to the solutions or alternate suggestions proposed. The incoming speaker is one of the most powerful speakers Florida will have in a long time, which means if he chooses to pursue such a change in the laws, he might be successful.

Is there a legislative bill to fight? No. Is there language to support or oppose? No. The industry needs to prepare for the unexpected—a political play that Florida’s industry will have to respond to when it surfaces and with little time to mobilize. It’s a new game, and the stakes are high.

 

FCIB European Summit

World-class Education and Networking for International Credit and Risk Managers

November 13-15, 2016
Amsterdam, Netherlands
Steigenberger Hotel

Summit highlight: With continued turmoil in the markets, FCIB is offering two educational sessions on country risk.

Country Risk: Latin America

As troubling news from Brazil and Argentina remains a cause for concern to world markets, panelists from across industries and areas of expertise will discuss the current and future risks of trading in key Latin American countries.

Country Risk: Trading Conditions in Russia

Conducting business in “sanctions heavy” Russia requires informed sovereign risk analysis. Panelists will discuss how to mitigate risk, conduct business safely, and examine how perceptions of trade with Russia match the reality.

For more information and to register, visit fcibglobal.com/amsterdam-summit-2016.

Credit Managers Must Stress ‘Fundamentals Over Noise’ Now More Than Ever

The percentage of financially troubled firms globally dropped this month to its lowest level this year, according to metrics tracked by Hawaii-based research firm Kamakura Corp. While good news on the surface, the one-month surge in stability in some ways should be taken with a grain of salt, in favor of ground-level analysis, just as the “Brexit” news should have been in June, said Kamakura President/CEO Martin Zorn.

“If we track back to the initial reaction of the ‘Brexit’ in June, almost everyone overreacted and thought the world was going to fall apart,” Zorn told NACM. “You saw extreme volatility then. Now you see a quick and large recovery, which can also be an overreaction. There are still big risks out there to credit grantors.”

Zorn believes B2B credit managers now must remind their staff (and themselves) to stress fundamentals and analysis, not recurring mainstream media frenzies, which are often overblown, or one-month aberrations in data, positive or negative. “Take a longer term view of the direction of market and macro factors,” Zorn said. “Be company-focused, sector-focused, country-focused. Now is not the time for painting with a broad brush.”

Kamakura’s troubled company index ended July at 9.86%, a decrease of 1.1% from the prior month. The index reflects the percentage of the 38,000 public firms Kamakura tracks that have a default probability over 1%—a decrease in the index reflects improving credit quality, according to the firm’s website. Zorn said that issues on the horizon that have a greater likelihood of having a real impact include the weakness in the banking system of Europe’s third-largest economy (Italy), China being nowhere near moving past lending problems despite recent talk of a softer economic landing than once predicted and the outcome of the U.S. presidential election.

 

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Ex-Im Launches Program to Boost Exports

The Export-Import Bank of the United States (Ex-Im) has launched its Regional Export Promotion Program (REPP), a joint effort between Ex-Im and regional organizations to stimulate U.S. export sales abroad and bolster job growth at home.

The program currently has 38 members hailing from 26 states and two U.S. territories.

“Through REPP, the bank will continue to grow our network of regional, state and local partnerships we need to ensure small businesses have additional tools and access to U.S. government resources for exporters,” said Fred Hochberg, chairman and president of Ex-Im.

The program provides assistance with outreach and counseling; introduction to marketing and training materials; and access to finance experts, lenders, insurance brokers and government export resources.

Organizations eligible for membership include local, regional or state economic development organizations or World Trade Centers that assist small businesses.

“These entities have the local market knowledge and the ability to personally reach companies selling internationally,” according to Ex-Im’s website. “They know the local businesses, and can advise them on how the Bank’s products can enable them to increase their sales.”

Ex-Im’s recent annual “Competitiveness Report,” mandated by Congress, finds that its lapse in authorization and lack of a board quorum have disadvantaged U.S. exporters’ competiveness. The report also notes “more than half of all export credit support worldwide comes from just three countries (China, Japan and Korea)” and that “two Chinese [export credit agencies] were responsible for nearly 10 times more export credit than [Ex-Im].”

- Diana Mota, associate editor

 

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