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eNews April 6, 2017

 

Potential Legislation in Florida Could Hit Construction Lien Law

A state lawmaker in Florida who has told the construction industry he believes homeowners should have no responsibility for payment to subs and suppliers and wants to eliminate their lien rights on most residential construction may introduce legislation detrimental to the industry this week in Florida’s House Commerce Committee.

That legislation, supported by Florida House Speaker Richard Corcoran, could be attached as an amendment to a building code-related bill called “An Act Relating to Construction” or HB 1021, as early as April 5, according to Deborah Lawson, a lobbyist with Lawson Governmental Affairs who is supporting Florida’s NACM Improved Construction Practices Committee (ICPC). The ICPC is a joint committee comprised of members from the NACM South Atlantic and NACM Tampa Affiliates.

Specific details about the legislation are not yet known, but a credible source has told the ICPC that the amendment would impact Florida lien law as it currently exists, and potentially harm the ability of material suppliers and small residential contractors to secure their rights to payment, said Lori Marino, CBA, regional credit manager for Titan Florida LLC and chairwoman of the ICPC. “If you take away lien rights, I think the way credit is evaluated will change.”

Wade Mullins, credit manager at Quality Precast Co. in Brandon, FL, and a member of the ICPC, said the system of checks and balances built into Florida’s current lien law works. “Our speaker is misguided by thinking we have a problem that doesn’t exist,” he said.

A credit manager for a large supplier in the Florida market has said that if such a provision were passed into law, suppliers would be forced to sell directly to a project owner, which in turn could weigh on private residential owners as they would have to apply for the credit and buy directly from the supplier.

Lawson said that the amendment filing deadline was April 5, though a late filed amendment can also be brought out at any time with a two-thirds vote of the committee, so it remains unknown whether the amendment will be available. “Although there are things in this bill Construction Coalition members want, none of them want it bad enough to support a bill with a bad lien law amendment. We remain united in opposition at this time,” she said.

Meanwhile, NACM members and other interested parties should contact their state representatives in Florida and let them know the impact this amendment could have on small construction business in the state, Marino said. The ICPC will continue to track this potential change to Florida lien law and update members.

 

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American Express Antitrust Litigation Continues to Languish

After a long and arduous legal battle, the American Express Anti-Steering Rules Antitrust Litigation is at the doorstep of the U.S. Supreme Court. Unexpectedly, rather than file its petition for a writ of certiorari (request to be heard), the United States sought and obtained an extension until May 5 to file that petition.

In 2010, the United States and the attorneys general of 17 states brought an antitrust enforcement action against American Express, which has a rule that prevents its merchants from steering customers toward less expensive credit cards, such as Visa, MasterCard or Discover. The United States challenged these “anti-steering rules,” or nondiscrimination provisions (NDPs), as anti-competitive restraints in violation of Section 1 of the Sherman Antitrust Act.

In February 2015, U.S. District Court Judge Garaufis issued a decision finding that Amex’s anti-steering rules were violative of Section 1 of the Sherman Antitrust Act. He found that the NDPs deny merchants the opportunity to influence their customers’ payment decisions to shift to less expensive cards, impair the “competitive process in the network services market, rendering low-price business models untenable, stunting innovation, and resulting in higher prices for merchants and their consumers.” Further, “deprived of any meaningful ability to regulate their own consumption of network services in response to differences in network pricing, merchants are left with an all-or-nothing acceptance decision: either agree to be a passive consumer of American Express’ network services, or refuse to accept Amex cards altogether.” Garaufis continued: “Elimination of American Express’ anti-steering rules would restore merchants’ responsiveness to changes in network pricing and, in turn, unlock an important avenue of competition among the credit card network.” 

American Express appealed that decision, and in 2016 the U.S. Second Circuit Court of Appeals reversed the judgment and mandated that the U.S. District Court enter judgment in favor of Amex. The circuit court found that “Amex’s NDPs … are agreements between Amex and its merchants, not agreements between competing payment-card networks,” and that “so long as Amex’s market share is derived from cardholder satisfaction, there is no reason to intervene and disturb the present functioning of the payment-card industry.” The United States immediately asked the court for a rehearing by the initial three-judge panel or for a rehearing by the entire court (“en banc”), arguing that the panel was mistaken on several points of law and conflicted with precedential decisions of the Second Circuit and the U.S. Supreme Court. On Jan. 5, 2017, that petition was denied. 

The case is now at a standstill until the Supreme Court petition is filed. There may be many reasons why an extension was sought, including the possibility that a settlement can be reached. Pundits have suggested that the real cause for the delay is to allow the Department of Justice to acquire staffing and new leadership under the Trump administration. Stay tuned for more updates on the case.

 

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Chinese Corporates Face Financial Stress from Overdue Payments

The percentage of Chinese companies surveyed by credit insurer Coface with accounts that had overdue times of more than 150 days may be a source of alarm in that country.

According to credit insurer Coface’s corporate credit risk management survey in China, to which more than 1,000 companies responded, 68% of the responding companies experienced overdue payments in 2016. The previous five years averaged 80%. But there was an increase in the number of companies that reported average overdue times of 90 days or more, and a dramatic increase in respondents with overdue times of more than 150 days. More respondents indicated that ultralong overdue amounts accounted for over 2% of their total annual turnover.

Coface reported that in the company’s experience, about 80% of ultralong overdue amounts are not paid back at all. A company’s liquidity can become a problem when over 2% of its total annual turnover is tied up in ultralong overdue payments.

Deterioration in ultralong overdue issues was seen in the sectors of chemical, industrial machinery and electronics, IT telecoms, metals, pharmaceuticals and retail. Nonpayment of these ultralong overdue amounts has been inflicting significant financial stress, compounded by tighter monetary and credit conditions. Industrial overcapacity, decreased demand and an uptick in business competition has pressured profit margins.

Construction remains China’s most at-risk sector in 2016, with almost 46% of companies reporting 2% or more of their turnover in ultralong overdues. Highly indebted construction corporates in China face a challenging year in 2017.

Some improvement was seen in metals, a high-risk sector in recent years, helped by restructuring and a rebound in metal prices. Structural growth drivers support the pharmaceutical sector, and the long-term outlook is positive, but a deterioration in overdue issues was seen in 2016 compared to 2015, due to a changing regulatory framework. Risk of nonpayment remained steady in the household electric and electronic appliances sector, while improvements were seen in automotive, paper/wood and textile/clothing.

Average credit terms increased in 2016, to 68 days, compared to 56 in 2015 and a five-year average of 57. Fewer respondent companies granted average credit terms of 60 days or below in 2016, compared to 2015. The number of respondents that offered average credit periods of 120 days or more increased noticeably.

Less than half of those surveyed used credit management tools to mitigate their nonpayment risks, Coface said. Almost three-quarters favor amicable negotiations as their most effective tool.

 

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Consumer Durables Show Signs of Strength in 2017

Online competition, upcoming elections and inflation are just some of the factors weighing on the consumer durables sector globally.

Strong private consumption spurred on by an improved housing market, job growth and higher wages is expected to keep the 2017 outlook for consumer durables positive in the U.S., according to credit insurer Atradius’ Market Monitor reports on the sector. Tax cuts could have an additional effect on spending, though interest rate hikes and any trade restrictions imposed by the new administration could hamper consumer spending.

Consumer preferences for online alternatives to brick-and-mortar stores and growing online competition contributed to a significant number of store closings and bankruptcies in 2016. Bankruptcy filings by U.S. retailers with at least $250 million in liabilities nearly doubled last year; the excess available retail space and stronger competition could lead to major retail filings and department store closures, the credit insurer said. Payments take 90 days on average, and delays in payments are expected to increase this year.

Consumer confidence is high in the U.S., however, according to surveys from the Conference Board and the University of Michigan. “The reason for this enthusiasm is that consumers have seen better job numbers and more indications of growth,” said NACM Economist Chris Kuehl, Ph.D. “The positive take by consumers right now is based on their confidence in the job market and their belief in the ability of the economy to grow.”

In the United Kingdom, payments in the sector take 60 days on average, while a small increase in payment delays is probable in the near future. Insolvencies are set to increase slightly to coincide with rising economic uncertainty. This year is expected to be a challenging one for consumer durables, as the weaker British pound puts upward pressure on prices. Higher inflation will hurt consumer spending and weigh on GDP growth.

In Germany, smaller businesses struggle to deal with fast-growing market leaders and online sellers. Payment terms in consumer durables range from 30 to 60 days but can reach 120 depending on individual retailers and their market power. Payment behavior is good and stable, Atradius said, and the sector’s insolvency level is low.

Retail sales of consumer durables has rebounded this year in India, after dipping from robust growth last year when the government withdrew two denominations of bank notes from circulation. Payment terms are from 60 to 90 days on average. Delays and insolvencies are expected to level off in 2017.

In France, consumer confidence might be affected by upcoming presidential and parliamentary elections. Payments in the industry take about 45 days on average. Retail insolvencies decreased in 2016, but are expected to level off in 2017, Atradius said.

 

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Brexit: The Portmanteau That Shocked the World

By now, the entire world knows what the new portmanteau, or combination of words, “Brexit” means. It references the United Kingdom’s exit from the European Union (EU), as voted on last summer. The U.K. did not officially start the process of withdrawing from the EU until late March, when Prime Minister Theresa May invoked Article 50. That is the formal process used to leave the bloc.

“Once the move is made, there will be no turning back for the U.K. or for the EU—the process is inevitable,” said NACM Economist Chris Kuehl, Ph.D. “What follows now are a long series of meetings and deadlines to work out the details of the divorce. The first major meeting will be at the end of April when all the remaining members of the EU have to agree on their formal response.” The two sides now have two years to figure out a withdrawal agreement.

“We expect the ratification of the EU exit agreement to be held between Fall 2018 and March 2019,” stated a Euler Hermes report, The Taming of the Brexit. “Divorce talks will mainly focus on the U.K.’s outstanding commitments, the end of the U.K. inclusion in several EU institutions, and the rights of EU citizens living in the U.K. and vice versa.” The credit insurance company expects the U.K.’s economy to stay strong, but consumer spending will be affected due to higher inflation and a slowdown in wages. Fitch Ratings also expects the GDP to slow and consumer price inflation to increase.

Foreign “investors and exporters doing business in the U.K. will be negatively affected through the currency depreciation, slowing domestic demand and the rise in insolvencies,” added Euler Hermes. Companies in the U.K. will experience lower profitability and lower domestic demand from rising input cost inflation and higher nonpayment risk, among other things. More than 20,000 insolvency cases are expected this year, which is still a quarter less than the average from 2003 to 2007, according to Euler Hermes data.

“It’s hardly surprising that more companies are reviewing credit insurance,” said Mike Clark, chair of British Insurance Brokers’ Association’s (BIBA) Trade Credit Focus Group. Companies that failed to plan ahead and guard against swings in sterling have seen “eroded short-term cash flow and longer-term profit … [but for] manufacturers who export, a weakened pound has presented an opportunity to grow sales,” added Clark.

“U.S. businesses shouldn’t panic,” said Michael Burke, Esq. of Arnall Golden Gregory. “The most important current Brexit fact is that we don’t know what it will look like at the end of the process.” Burke gives a number of items to consider for U.S. businesses. They include:

  • Keep an eye on currency fluctuations.
  • Consider Ireland, one of two English-speaking nations once the U.K. leaves, for an EU headquarters.
  • Watch for laws to become more complicated.
  • Trade agreements, or lack thereof, could make the movement of products more expensive.

“The British also seek a new trade agreement that preserves the business that takes place between the U.K. and Europe,” said Kuehl. “The negotiations will hinge on how badly the British need this trade deal. That will depend on whether the U.S. develops as the alternative market the U.K. has hoped it would become. The challenge for the U.K. is the U.S. is deeply mired in an anti-trade and protectionist mood and is not likely to welcome an influx of cheaper British goods.”

The sentiment, according to Burke, is that “much of Brexit’s impact is unknown. … There is no ‘guide’ to managing the departure since no EU member has ever left the pact.”

 

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