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eNews September 8, 2016

Latest Western Port Catastrophe Caused by Insolvency, Not Labor Strife

More than a week after one of the world’s largest shipping companies declared bankruptcy in its home nation of South Korea, a U.S. bankruptcy judge granted the company temporary Chapter 15 bankruptcy protection under the U.S. Bankruptcy Code in an effort to break the logjam of cargo at the ports of Los Angeles and Long Beach. Significant delays to both inbound and outbound goods delivery have increased the risk of downwind problems for creditors, such as borrowers’ cash flow and, thus, their ability to pay within set terms.

Hanjin Shipping, one of the top 10 shippers in the world and responsible for 7.8% of all transpacific trade volume involving the U.S. market, officially filed for receivership on Aug. 30. It has since asked for protection in several other key port nations. Many cargo containers sit fully loaded, while some vessels have not been allowed to dock, as port workers’ representatives want assurances about being paid. It has been reported that Samsung alone has more than $38 million in goods sitting idle on Hanjin ships at present, according to Bloomberg. The bigger test in the Hanjin fallout could come for small creditors that are directly affected and for those operating with razor-thin margins, according to Martin Zorn, president and CEO of Hawaii-based bankruptcy research firm Kamakura Co.

“There could be ripple effects for those that don’t have a lot of working capital and can’t absorb goods on hand or hits to their receivables processes,” Zorn told NACM.

The timing is already problematic given the well-documented struggles of the respective shipping and retail industries—and with shipping of holiday-related consumer goods imminent, some are characterizing the situation as potentially catastrophic. The quandary is also delaying or outright halting outbound goods of U.S. companies heading to international destinations from the west coast.

“We are dealing with an unprecedented global crisis,” wrote Rep. Janice Hahn (D-CA), a member of the PORTS (Ports Opportunity, Renewal, Trade, and Security) Congressional Caucus, in a letter asking for help from the U.S. Department of Commerce. “The impact on importers and exporters is having a ripple effect throughout the global supply chain.”

In a warning that should resonate with credit professionals, sales staff and upper management alike, Retail Industry Leaders Association President Sandy Kennedy warned “the prospect of harm is significant and apparent.” Ports already face the typical congestion, backups and lack of chassis availability that will only worsen, and significantly, by the day, she added.

This doesn’t even take into account the difficulty U.S. exporters will have trying to work out future shipping arrangements in the absence of a major carrier or that, notably in the Los Angeles and Long Beach ports, labor strife has been an ongoing and hypersensitive issue that has lead to ill-timed work stoppages several times in recent years.

 

Credit Congress

Call For Proposals

The National Association of Credit Management will hold its 121st Credit Congress & Exposition in Grapevine/Dallas from June 11-14, 2017. Please click here to fill out the form to submit abstracts, proposed sessions and communications pertaining to participation in the program. Submissions must be made using this form.

Please submit ideas by September 30, 2016. Any proposals that are incomplete or are received after this date will not be considered.

Ready-Mix Concrete Suppliers Weary of New CA Law Mandating Payroll Certification

A new law in California meant to ensure that workers who deliver ready-mixed concrete to public jobs in the state receive prevailing wages is adding an extra level of administrative burden to ready-mix concrete suppliers that already provide such wages.

Known as AB 219, the law, which took effect July 1, is part of California’s labor code. It expands the state’s definition of “public works” by requiring the payment of prevailing wages for public works projects to include the hauling and delivery of ready-mixed concrete. The legislation also requires that the hauler or deliverer enter into a written subcontract agreement with the party that engaged it (a public agency). The subcontractor must submit a certified copy of the payroll records, accompanied by a written time record certified by each driver for the performance of job duties, to the public agency and to the general contractor within five working days after the employee has been paid, the law states.

The issue for ready-mixed concrete suppliers is that their drivers often deliver the concrete to multiple job sites each day, which greatly complicates payroll certification and essentially necessitates an extra staff position and/or software solution to handle the administrative burden, said past-NACM National Chairman Kathleen Tomlin, CCE, regional credit manager with Central Concrete Supply Co. Inc. of San Jose, CA. If certified payrolls aren’t timely or correctly submitted, the public agency can withhold pay for the job.

Tomlin and others are also concerned this type of legislation could spread to other types of material suppliers in California and throughout the country.

The California law is particularly disconcerting for businesses with unionized workers like Central Concrete Supply Co. whose workers already earn above the prevailing wage, she said. The company is considering purchasing a software solution to automate the payroll process for these types of public jobs.

“If we are paying over that wage, why couldn’t we get an exemption,” Tomlin asked. While there’s no such exemption in the law currently, several trade associations, including the California Construction and Industrial Materials Association, are attempting to address the issue with California legislators going forward, she said. For instance, one suggestion would be to provide a minimum threshold dollar amount under which the law would not apply to specific jobs.

 

Credit Congress

The Only Certainty in Global Markets is Uncertainty

FCIB’s partnership with The PRS Group brings NACM & FCIB members the “best in class” monthly Political Risk Newsletter (PRL), your window to current and looming political risk in 100 countries. Every PRL provides concise, easy-to-digest briefs on up to 10 countries, with additional recaps updating prior month’s reports.

Each month’s Political and Economic Forecasts Table covers 100 countries, with 18-month and 5-year forecasts for KPIs such as turmoil, financial transfer, and export market risk. Also look for forecasts of real GDP growth, inflation and current accounts. In each issue, you’ll find rating changes, providing an excellent method of tracking ratings and risk, for the countries you’re exporting to.

FCIB and NACM members receive a 10% discount!

Click here now to learn more about this practical and valuable forecasting tool for any credit professional doing business globally.

Steel Overcapacity Weakens Market

The global steel sector remains in a state of overcapacity fueled by China’s expansion, which began in 2000, according to a study by the Center on Globalization, Governance & Competitiveness at Duke University.

“China’s ‘state capitalism’ model, still heavily influenced and controlled by Beijing, is at the core of the current overcapacity problem in the steel sector,” according to the study, Overcapacity in Steel: China’s Role in a Global Problem. “The result is a global steel sector at unviable profit levels and an influx of cheap steel in the global trading system adversely affecting companies, workers and the global trading regime.”

United Steelworkers International President Leo Gerard said in a statement, “By producing too much steel, then shipping and selling its overcapacity overseas below market prices, it bankrupts companies following free market rules and costs tens of thousands of workers their jobs.” Gerard credits China’s overproduction with the loss of at least 19,000 steel sector-related jobs.

Overcapacity in the market is a concern, said Frank Fallucca, CCE, a credit manager with ArcelorMittal USA in Chicago. When assessing a buyer’s risk, “it’s one of the many variables we take into consideration. Rapid deterioration in market price makes it difficult for customers that carry large inventory. If not properly managed, it could have a significant unfavorable impact on financial performance. In addition, from a supplier point of view, it squeezes margins and the recovery period to justify risky opportunities get extended further.”

While overcapacity is a problem and concern, buyers in the U.S. today are more apt to align inventory with what they need so margins are not as variable as they once were, said Glenn Pushis, senior vice president of long products for Steel Dynamics.

The study notes since overcapacity in the Chinese steel sector became apparent in 2007, China has added the equivalent of seven times the total U.S. steel production in 2015. Global demand only requires 1,500 metric tons; yet, more than 2,300 metric tons are available, it notes.

Meanwhile, domestic steelmaking trading partners continue to seek commitments from China to reduce its excess capacity and to eliminate further industry subsidies. China, however, has not honored its commitments to do so, the report says. In response, numerous trade cases have been filed against China. Even if the cases prevail, the damage has already occurred, the report points out. “The companies that file the cases end up with diminished power, as they must file and pay for the lengthy litigation, suffer the effects of reduced profits and idle production lines. … To address overcapacity, China must reform to reduce the systemic nature of state-led development in the country and become more aligned with market economy principles as generally practiced.”

- Diana Mota, associate editor

 

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UAE Passes Comprehensive Bankruptcy Law

The United Arab Emirates approved a federal bankruptcy law this week, which aims to create a comprehensive legal framework for insolvencies, including a regulatory body. The law is said to draw on best practices from jurisdictions such as France, Germany, the Netherlands and Japan. It attempts to address the rights of creditors and debtors by prioritizing secured creditor rights and enabling the restructure of companies without unanimous creditor approval. The new law currently awaits the president’s signature and could become effective by first-quarter 2017.

“The sooner, the better,” Massimo Falcioni of Coface Emirates Services Limited told NACM. “A clear legal framework to help distressed companies in the UAE to avoid bankruptcy and liquidation was really needed, and this initiative from the Ministry of Finance of the UAE could not be more appropriate and timely. … The UAE business environment will strengthen and attract more investors and companies in the market."

The Minister of State for Financial Affairs, Obaid bin Humaid Al Tayer, reportedly said the law “is based on modern legislative and economic principles, while taking into consideration the global developments and changes taking place in the economic and business sectors.”

Previous laws were “more suited to the resolution of insolvency of smaller, local companies, rather than international companies with complicated international funding structures. Such provisions offer few options to companies threatened with insolvency beyond liquidation, and are therefore hardly ever used,” according to a Abu Dhabi-based media outlet, The National.

The law would apply to companies whether or not they were established under commercial company laws, companies partly or fully owned by the federal or local government, or companies and institutions in free zones not governed by existing bankruptcy provisions. It, however, would not apply “to companies registered in the DIFC and the Abu Dhabi Global Market, as both financial free zones have their own internal legislation covering insolvency and bankruptcy,” The National reported. The law also covers senior employees and directors of insolvent companies, but not private individuals.

The law includes four broad pathways for insolvent companies to avoid bankruptcy:

  • Financial reorganization
  • A pre-emptive settlement
  • Financial restructuring
  • The raising of new funds

 

NACM Regional Credit 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