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eNews April 13, 2017

 

Proposed Border Tax to Have Positives, Negatives on Agriculture Industry

The possibility of a new border tax could have a major effect on the agriculture industry. How big of a difference it will make is yet to be seen. The proposed border adjustment tax (BAT) would add a 20% tax on products imported into the U.S. Under the proposed tax plan, “there would be no income tax on revenues from export sales of goods and services produced or manufactured in the United States,” according to the American Farm Bureau Federation (Farm Bureau).

Kevin Stinner, CCE, CCRA, credit manager with Crop Production Services Inc., is taking a wait-and-see approach when it comes to the BAT. He said we will not know the effect of the tax until it is implemented. He believes the tax could be good for produce and domestic fertilizer providers. A large percentage of fertilizers such as phosphates are brought into the U.S. from places like Russia.

The tax could be a cause-and-effect issue. “[The tax] would not be a benefit for domestic grain producers,” Stinner said. Depending on what happens with imported fertilizers, there could be increased expenses for corn, beans and wheat, among other products, which could in turn make U.S. grains less desirable and cause the cost of grains to decrease, he added. This would be a negative for Midwest farmers.

The BAT could have a large effect on agriculture heading south of the border. Mexico is the third-largest goods trading partner with the U.S., according to 2015 data from the U.S. government. Mexico is the second-largest supplier of agricultural imports and the third-largest agricultural export market for the U.S.

“Many of the provisions of the tax reform blueprint will be beneficial to farmers, including reduced income tax rates,” said Patricia Wolff, Farm Bureau congressional relations senior director. She was among a panel of witnesses during this month’s House Agriculture Committee hearing on the impacts of the tax on the agriculture industry. “Debt service is an ongoing and significant cost of doing business for farmers and ranchers who must rely on borrowed money to buy production inputs, vehicles and equipment,” she added.

“Every U.S. state would be harmed by a blanket tax on import goods,” said Koch brothers-backed Freedom Partners and Americans for Prosperity, who are running a new television campaign against the BAT. “These cost increases would fall directly on importers—and subsequently consumers.”

Republican lawmakers will go back to the drawing board to discuss a change to the tax. House Ways and Means Committee Chairman Rep. Kevin Brady will work on the amendments, according to the Associated Press, and public, bipartisan hearings will be underway in the weeks ahead, Reuters said. Overall, the border adjustment tax is still a very big question mark, said Stinner.

 

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Credit Insurance Market on the Rise in U.K., U.S.

The trade credit insurance market in the United Kingdom has grown significantly as more and more businesses seek to protect themselves against insolvency or protracted debt. Close to 12,000 policies are in force and a record amount of U.K. trade is now covered by trade credit insurers.

According to the Association of British Insurers (ABI), total claims paid to businesses due to nonpayment in 2016 was £210 million, which equals more than £4 million per week. This is the highest amount since 2009 and represents an increase of 40% compared to 2015. The number of claims reached its highest level since 2009 last year. About 20% of policies in 2016 covered businesses that exported goods or services overseas. Trade credit insurers now cover a record £314 billion of U.K. trade.

Insolvencies in the U.K. are up by almost 13% from 2015, due to economic volatility in many export markets and struggling growth in the sectors of manufacturing, construction and services, according to the ABI, which compiled data from nine trade credit insurers, including AIG, Atradius, Coface and Euler Hermes.

“Businesses, in particular SMEs [small- to medium-size companies], are unable to bear the brunt of nonpayment, which can have a detrimental impact on their financial health and can also have a negative knock-on effect rippling down the supply chain,” said Trevor Williams, chair of the ABI Trade Credit Committee. “In a climate of economic uncertainty, businesses are increasingly using trade credit insurance to protect themselves against the risk of nonpayment.”

In the United States, commercial insurance rates rose for the first time in 20 months, reaching a composite rate of 1% in the first quarter of 2017, according to electronic insurance exchange MarketScout, as reported by Businessinsurance.com. Every industry moved toward higher rates, with transportation seeing the largest increase at 5%. Small accounts, defined by MarketScout as up to $25,000, were assessed a rate increase of 1% in 2017’s first quarter, while medium accounts ($25,001 to $250,000) were flat. Large accounts ($250,001 to $1 million) and jumbo accounts ($1 million and more) saw rate increases of 1% and 2%, respectively.

 

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Private Construction Project Bonds: Understanding Differing Terms Key to Securing Payment

Obtaining a copy of a bond to a construction project is crucial for any supplier, subcontractor or other involved party for a variety of reasons, the most important of which is to properly secure payment rights on the job.

In the case of private construction projects, having a copy of the bond in hand is even more crucial. There are no legal requirements for the bond terms, and private owners and general contractors (GCs) are free to negotiate the terms they find most favorable and agreeable, according to construction and real estate attorney James Fullerton of Fullerton & Knowles. These terms can include shortened noticing time frames, a requirement to send a notice to the owner and bonding company, and a shorter deadline for filing suit. Courts consider private bonds as contracts.

But suppliers and others may not even know a private project is bonded in the first place as owners and GCs aren’t required to advertise the fact, Fullerton said. Asking a project owner or architect for a copy of the bond in lieu of filing a mechanic’s lien is one strategy subcontractors and other parties can employ.

Once obtained, carefully review the terms of noticing deadlines associated with private bonds as they can vary by job, said Connie Baker, CBA, director of operations for NACM’s Secured Transaction Services (STS). In some cases, terms on private bonds can obliquely refer to state noticing requirements that must be fully understood in order to maintain rights to bond claims. For instance, a private bond in California could defer to state rules for private projects, which require sending a notice to the owner, direct contractor and lender, if any, within 20 days of first furnishing. “Don’t assume that having a private bond means you don’t have to follow the state’s requirement for noticing,” she said.

Be sure to read all of the bond rules—important details can be buried in these bonds, and they can include attached riders, Baker said.

Public projects may not actually be bonded, if the project is small or is a maintenance project, rather than new construction, Fullerton said. A contracting officer may neglect to ensure the bond is in place or that the surety is financially worthy. Trade creditors can only be safe by obtaining a copy of the bond and checking the bonding company ratings. You will have no ability to go against the government for these problems.

GCs on public projects may require payment bonds from their subcontractors as well, though these bonds are not required by statute and are considered to be a private bond, not a Miller Act bond, Fullerton said. Suppliers in this situation could make a claim on a GC’s bond and any related subcontractor’s bond.

 

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Westinghouse Bankruptcy Causes Issues at U.S. Power Plants

As Westinghouse Electric Co. struggles to continue projects in the Southeastern U.S. after filing for Chapter 11 bankruptcy protection late last month, the case serves as a reminder to credit professionals involved in a bankruptcy case to know the law and where they stand if they want to get paid.

Construction suppliers in particular should not rely on being part of a contractor or subcontractor’s lien; they should file their own lien as well to be secured, said Connie Baker of NACM’s Secured Transaction Services (STS). She also advised creditors to be aware of bankruptcy laws.

According to the U.S. Bankruptcy Code, once an entity files for Chapter 11 bankruptcy an automatic stay is put in place, which protects debtors against creditors trying to collect. The law also protects against liens being enforced against property of the estate. There are, of course, ways around the automatic stay, which include a petition.

The project’s location also comes into play. A state with inchoate liens does not violate the automatic stay when the property owner files for bankruptcy, Baker said. This type of lien “may arise as soon as a contractor begins work or supplies materials to the project. In a state without an inchoate lien, a sale of the property or a bankruptcy may cut off lien rights,” according to STS.

The Westinghouse bankruptcy is a large case with as many as 35,000 creditors, according to Lynnette Warman, Esq., of Dallas-based Culhane Meadows PLLC. She said creditors will be “ranked in order of priority” when it is time for payment. Westinghouse has about $17 million to settle liens, but there is a hearing scheduled later this month to determine whether Westinghouse will have its spending cap increased.

Fluor Enterprises, a subsidiary of Texas-based Fluor Corp., has filed a nearly $60 million mechanic’s lien against South Carolina Electric and Gas. Fluor Corp. told the Business Times it will continue working at two power plant projects and expects to be paid for the jobs. The company is Westinghouse Electric’s largest creditor at nearly $200 million in unsecured claims. Westinghouse Electric is the lead contractor for the South Carolina nuclear power plant.

“Our commitment is still to try to finish these plants,” said Kevin Marsh, chief executive of energy-based holding company SCANA Corporation. “That would be my preferred option. The least-preferred option, I think, realistically, is abandonment.” Westinghouse’s parent, Toshiba, said it would take a loss of more than $9 billion after buying the Pennsylvania-based company in 2006.

 

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New Normal or Calm Before a Spike: The State of Global Interest Rates

A significant shift in the global interest rate environment is on the horizon, with U.S. real interest rates rising to levels more aligned to the growth potential of the U.S. economy, Fitch Ratings says in a new report. The ratings agency’s outlook, however, disagrees with the “new normal” seen by others of a low-growth, low-interest rate environment that will maintain itself for a while.

“With the Fed having now achieved its inflation and employment objectives, becoming more focused on the risk of labor market tightening and starting to discuss the unwinding of its balance sheet, we expect interest rate normalization will take place by 2020 and that the Fed Funds rate will reach 3.5% to 4%,” said Brian Coulton, chief economist at Fitch. This estimate is above that projected by the Federal Reserve and higher than financial market expectations of a rate not above 2%.

“The Fed will hike interest rates a couple more times this year, but will stop at the end of the year and shift its focus to getting rid of the debt it now holds,” said NACM Economist Chris Kuehl, Ph.D.

Lower long-term interest rates are due to a declining growth trend in mature economies that has been going on for decades, said Yves Mersch of the executive board of the European Central Bank in a recent speech. He added that the slowdown in growth has produced a self-fulfilling prophecy: companies that expect demand to fall are less inclined to make big investments.

A savings glut in emerging markets and falling prices for capital goods are factors in the new equilibrium of interest rates not rising much above zero. But according to Fitch, the financial connections between the U.S. and emerging markets are weaker than those with other advanced countries, and no correction in U.S. real rates has been seen from the decline in emerging market account surpluses and foreign exchange reserve accumulation. The relative price of capital goods has been stable since the mid-2000s and rising risk premiums can be explained by “distortions” from central bank quantitative easing policies.

The rising rate environment would be accompanied by economic growth stabilizing above 2%, with the improvement in macro conditions moderating the effects of rising rates on commercial credit asset quality, Fitch said in a separate report.

It’s still not clear when, or if, change will take place, however. “The question is whether the post-crisis landscape represents a temporary departure from the pace of growth we’ve come to expect since World War II, or whether it’s the start of a new normal,” the International Monetary Fund said on its website.

 

mechanics lien, bond services, mechanics's liens

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