In the News
March 9, 2017
The effects of the global financial crisis remain, with corporate and sovereign ratings still well below the levels seen before the crisis. The next couple of years could see them fall further as ratings outlooks have deteriorated, according to Fitch Ratings.
The proportion of corporate ratings in the “A” to “AAA” categories experienced a 10% drop in the last decade, due to a mix of longer-term and cyclical trends. Companies have also been more willing to run higher debt levels in a period of low borrowing costs. Sectors with potential for a ratings rise include autos and natural resources. Rising demand and a reduction of overcapacity have contributed to improvement for oil, iron ore and steel companies, while the automobile sector is on a trajectory for recovery.
Fitch’s sovereign portfolio has seen large adjustments, with the proportion of “AAA” sovereigns dropping to 10% by the end of 2016, its lowest level ever. Government debt levels are expected to persist based on growth, interest rate and primary balance projections, Fitch said. Rising trade protectionism and economic nationalism could be detrimental to growth and boost inflation. In addition, a stronger U.S. dollar poses a challenge for emerging markets.
“The majority of these countries have substantial dollar-denominated debts that have been incurred during the years of cheap credit,” said NACM Economist Chris Kuehl. “They now face the prospect of paying these debts in higher value dollars. That will be a huge drain on their foreign reserves.”
Rising headline inflation in the eurozone has likely contributed to the increase in yields on longer-dated sovereign debt since mid-2016. Eurozone inflation, which reached 2% in February, is above the European Central Bank’s target rate for the first time in four years, media sources reported.
“The problem is that most of the hike is the result of higher energy costs—not such a good thing,” Kuehl said. “The ECB is not yet concerned enough to alter its policy on rates, but that day may not be that far off. The expectation is that overall global growth will only get back to what it has been for the last decade or so—3.3% this year and maybe 3.8% in 2018. This is almost two full points off the pace that was considered normal before the recession hit.”
Improvement in growth prospects and increased support for fiscal policy, however, are moving the world economy away from “never-ending” quantitative easing by central banks, Fitch said.
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The expiration of a trade agreement governing Canadian imports of softwood lumber has been the driving force behind a recent rise of lumber prices, from framing to structural panels. Though prices have been steady since 2014, in recent weeks some have risen by more than 30%.
The lumber cost increases are part of a larger trend of increasing construction costs that will play a role this year in slowing overall activity, according to the Wells Fargo Equipment Finance’s 2017 Construction Industry Forecast. “Costs have been muted in recent years, largely due to weak global demand and the strong dollar,” the report says. “However, the overall cost of materials and components for construction, including cement, gypsum, ready-mix concrete, and steel, is expected to see some upward pressure in 2017.”
The outlook for a new agreement on softwood lumber between the U.S. and Canada and its effects on lumber prices is highly uncertain, said the National Association of Home Builders (NAHB). The initial Softwood Lumber Agreement (SLA) of 2006 removed all duties placed on Canadian softwood lumber imports since May 2002 and placed export charges or volume limits on Canadian imports unless the monthly price rose over a determined amount. It also imposed charges on Canadian regional exports if the volume to the U.S. in any given month rose above a “trigger volume” and exempted softwood lumber products exported by dozens of Canadian companies. When the SLA expired in October 2015, a 12-month “cooling off period” came into effect. In November 2016, domestic lumber producers filed a petition with the International Trade Commission (ITC) to investigate the softwood lumber issue.
In January, lumber prices increased as the market reacted to an ITC preliminary determination siding with domestic softwood lumber producers. In late February, the U.S. Department of Commerce postponed its preliminary determination of countervailing duties to late April. Recent price increases indicate that producers are bracing for charges between 20% and 30%. According to the NAHB, Canadian mills have priced lumber at a premium high enough to make up for surcharges tied to purchases in February and make up capture funds to be remitted to the U.S. tied to shipments that go back to December.
Framing lumber has risen in price by 15% since the beginning of this year. In comparison, the average weekly price change throughout 2016 was +0.2%. Mills have priced future, retroactive duties into the market, for the most part, the NAHB said, though any news is likely to shift the market.
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Construction credit is a difficult and unique field because there are many links in the chain of the order-to-payment process. As a supplier or other contractor, your direct customer may not be responsible for the payment that didn’t trickle down to your firm. For example, a general contractor (GC) upstream who’s being sued because it can’t pay workers comp could be holding up payment.
Collecting job information, such as the name of the property owner, the correct address and the name of the GC on a private or public job account remains a key tool for companies when asserting their rights to payment under mechanic’s lien or payment bond statutes.
“At the end of the day, if you’re not collecting job information and if you’re struggling with getting job information, it’s almost akin to accepting credit from a customer and not getting them to fill out a credit application,” advised Chris Ring of NACM’s Secured Transaction Services (STS). Ring was the presenter at Tuesday’s webinar, Helpful Tips for Obtaining Job Information. (STS will host a repeat of the webinar from 11:30 a.m. to noon EST, April 4.)
Consider that your company may be the primary lending source of a customer. “If you’re acting like a bank, you should think like a bank,” Ring said. A $15,000 write-off on an order with an anticipated 3% margin will mean the sales department will have to find $500,000 in new business to offset that loss. Engaging the lien or bond process allows companies to say yes to sales deals and larger lines of credit, while helping avoid pricey write-offs.
In most cases, construction suppliers and other contractors have members of their sales team collect job information, according to an STS poll. About 70% of those surveyed said sales collected the information, 18% said the credit department did and the remainder used a combination of both. Whoever is responsible, make sure he or she gets that information as soon as possible, when people are more willing to divulge it, Ring suggested.
More Job Information Collection Tips
- Include information about the project’s bank. In some states, such as California, you have to notify the bank lending to the project in order to maintain and enforce lien rights.
- Get information about the project’s architect, who typically does not have an axe to grind on any project. He or she will have a copy of payment bonds for public projects and usually know when draw payments are expected from the owner to the GC.
- Look to notifications of commencement in states like Florida, Georgia, Michigan, Pennsylvania and elsewhere that will include important job information. For large jobs, know who the GC is, as there may be several on a project.
- Make sure to collect information about customers who are leasing a property. If the lease holder is not notified on some projects, you might not have any lien rights, said Connie Baker, CBA, director of operations for STS.
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Trade creditors should actively monitor rising corporate pension deficits and how they impact a company’s performance.
More global firms, especially in Europe, will be reporting an increase in their pension deficits for fiscal 2016. In addition, low discount rates will be blamed in part for the deficit growth, a recent Moody’s Investors Service report noted. Rising interest rates could help assuage some of this burden, but analysts believe it will require several years of interest rate gains to do so. This could ultimately negatively impact asset values, thereby offsetting gains from a potential fall in pension obligations.
"In light of our outlook for interest rates, pension deficits could exert more downward pressure on ratings in cases where companies appear to be overly reliant on interest rate increases to ease large deficits," said Richard Morawetz, a Moody's Group credit officer for the Corporate Finance Group. "While pensions are rarely the main driver for rating actions, large deficits that we expect to be enduring are frequently a significant contributing factor." The ratings agency accounts for pension deficits in its debt metrics, which also include factors such as core debt funding and earnings trends.
In the forest products sector, there have been a few cases of pension liabilities that have heightened the concerns of Pia Porvari, CICP, head of credit, Global Credit Risk Management, for Helsinki, Finland-based UPM. In the paper sector, where decreasing demand is leading to many restructurings, “the companies might end up with pension liabilities that are not on a sustainable level and they seek ways to reduce or get rid of these liabilities,” she said.
While Porvari said her team doesn’t often come across cases in which a company would not be able to manage these liabilities, when credit professionals at the firm conduct buyer visits, they ask about pension liabilities to understand the position companies are in, particularly if they’ve recently gone through a merger and acquisition (M&A).
The Moody’s report found that the largest pension adjustments were concentrated among investment-grade companies, which typically have been in operation for many years and are more likely to have obligations under defined benefit plans. For example, in the U.S., the adjustment of General Motors and The Boeing Company equaled about two-thirds of total adjusted debt. In Germany, Volkswagen Aktiengesellschaft and Daimler AG have the largest adjustments relative to total debt at 59% and 72%, respectively, while in the U.K. the highest adjustments are GKN Holdings plc (51%) and BAE Systems plc (46%).
Low discount rates are a key factor in determining the extent of pension deficits, but assumptions about longevity, future earnings, inflation and M&A activity are also important, Moody’s said.
You Have Questions
What do I have to do? When do I have to do it?
We Have the Answer
NACM's Lien Navigator
Credit professionals rely on the Lien Navigator. It will guide you through the entire process. It determines when and how action needs to be taken to protect lien rights across the 50 states, Washington, DC and Canada. The real-time Navigator ensures that you’ll always have current information. Specific questions are also answered for subscribers through the Navigator Answer Line.
For more information, call Chris Ring at 410-302-0767 or visit www.nacmsts.com.