eNews January 18, 2018

New Bankruptcy Bill Would Limit Ch. 11 Venue Options to Principal Place of Business

A new bankruptcy bill introduced into the U.S. Senate would curb “forum shopping” in Ch. 11 cases by tightening the wide range of allowable bankruptcy venue options currently available. These court venue options, including a place of incorporation, principal place of business and assets, or where an affiliate has filed a case under Ch. 11, have led to an increase in companies filing outside their home states or principal place of business, concentrating cases into a few districts like Delaware and New York, the bill states.

NACM is among a group of associations that support the bill, including the Commercial Law League. NACM’s members have for years consistently raised concerns about the venue issue and asserted that where a case is filed can significantly impact its outcome, said NACM National Chairman Kenny Wine, CCE. “Selecting a venue outside of the debtor’s primary location increases the cost of participation by the debtor, adding travel and lodging expenses to the case—costs many American small businesses can ill afford, especially when a key customer has not paid them,” he said. “We believe that by requiring the debtor to file in the jurisdiction of its primary place of business or its principle assets, the bankruptcy process will be fairer for all participants.”

Senate bill S. 2282 was introduced by Senators John Cornyn (R-TX) and Elizabeth Warren (D-MA) Jan. 8. The bill would “ensure corporations file for bankruptcy in districts that allow small businesses, employees, retirees, creditors and other stakeholders to fully participate in cases that will have tremendous impacts on their lives,” the Senators said in a joint statement.

“Closing the loophole that allows corporations to ‘forum shop’ for districts sympathetic to their interests will strengthen the integrity of the bankruptcy system and build public confidence,” Sen. Cornyn said.

Sen. Warren said: “I’m glad to work with Sen. Cornyn to prevent big companies from cherry-picking courts that they think will rule in their favor and to crack down on this corporate abuse of our nation’s bankruptcy laws.”

Delaware lawmakers are not pleased with the bill and responded in their own joint statement. “Denying American businesses the ability to file for bankruptcy in the courts of their choice would not only hurt Delaware’s economy, but also hurt businesses of all sizes and the national economy as a whole,” said Delaware Governor John Carney and Delaware’s Congressional Delegation. “Experienced bankruptcy judges are critical to ensuring that companies can restructure in a way that saves jobs and preserves value.”

Corporate debtors would no longer be permitted to file simply on the basis of their state of incorporation and would stop debtors from filing for bankruptcy in another district just because an affiliate of the debtor has filed there.

The bill would also require that courts transfer or dismiss cases filed in the wrong district.

– Nicholas Stern, managing editor

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Don’t Wait to Take Action in Unpaid Balance States

Every so often, you get lucky as a construction trade creditor. There are also times when, as a material supplier, you can do everything correctly and miss out on an opportunity, such as full payment for your products or services on a project. There can be lessons learned in every scenario as is the case with a recent settlement on a Texas project.

Texas is an unpaid balance state (where lien rights are limited to unpaid funds), and owners are required to keep a 10% retainage. Texas is also a repetitive notice state and requires second- and third-month notices to owner, depending on where you fit within the project’s supply chain. If you are selling to a subcontractor, second- and third-month notices are required—e.g., selling in January, a notice to owner is due by March 15 and April 15 and each month of furnishing that remains unpaid, according to NACM’s Secured Transaction Services (STS). If you sell directly to the general contractor, a third-month notice is required.

In the recent illustrative settlement case, all notices and the lien were filed timely, but due to its status as an unpaid balance state, the owner had already paid the general contractor—ultimately getting the owner off the hook for additional payments to suppliers. First and last furnishing were done within the same month, and the project was completed the following month in 2016. A notice was filed as was the lien at the beginning of 2017. The 10% retainage was also gone since it was past 30 days after the original contract was completed. For reasons that may never be known, the owner offered the supplier pennies on the dollar of the contract value in a confidential settlement. The plaintiff took quick action of the advantageous situation and accepted the settlement.

This unusual scenario was a first for Carol Davis, legal placement assistant with STS. One of the reasons behind the situation could be due to the quick turnaround from first furnishing to last furnishing to project completion, in about a month’s timeframe. It is also important to note that this could happen again; it depends on when the materials are furnished within the timeline of the entire project. Checking completion dates of the project is also important, and “it doesn’t hurt to do notices early,” noted Davis. Do not wait until the 11th hour to file a notice or serve a lien and hope for payment, especially in unpaid balance states where the money could be gone by the time you file.

– Michael Miller, associate editor

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Business Sector Debt Notable, Despite Global Economic Recovery

Global economic recovery is a promising feat following the 2008 recession. Debt, particularly in the business sector, however, is a reoccurring speed bump that some predict could shake the economies of the U.S. and China in the future.

In a Jan. 11 FCIB webinar, Wells Fargo Securities Managing Director and Global Economist Jay H. Bryson reviewed the global economic outlook, which recognized that business debt in the U.S. began increasing from its mid-60% mark of GDP around 2012. Debt in the nation’s business sector continues to rise in 2018 after reaching an all-time high of 73.3% last year. The next two years don’t show a financial collapse in the U.S. from government debt—stabilized at 98% GPD—but Bryson said business debt could “at some point” lead to recession.

“What’s happened is the business sector has become more levered and if the Fed is going to continue to raise rates and interest goes up, sooner or later, something there may break,” he said, adding that three rate hikes are anticipated in 2018 and two in 2019. “We’re watching this closely.”

This contributed to small business lending increases in 11 out of 18 industry sectors in 2017, including construction, reported Biz2Credit.

In China, the most concerning area of debt exists in the business sector. A data comparison in percentage of GPD between China and the U.S. showed that the latter’s overall debt in the past decade has been “essentially stable,” Bryson said. This differs drastically from China, which he said is expected to see growth by no more than roughly 6% toward the end of 2019.

As more business debt becomes nonperforming in China, it puts the banking sector at risk, which then affects the economy, Bryson said. It is unlikely for the Chinese to not address the issue, he added. Instead, they could very well recapitalize the banking system, as they have twice in the past two decades, taking debt from the business sector and incorporating it into the public sector balance sheet.

In the eurozone, the global economic recovery has supported creditworthiness in recent years, according to Moody’s Investor Services. On Jan. 15, Moody’s reported that sovereign creditworthiness appears stable in the eurozone this year.

“We expect that the euro area’s economic recovery that started in late 2013 will continue in 2018 and become increasingly broad-based,” Moody’s Senior Vice President Sarah Carlson said in the report.

However, high government debt levels still exist, with an overall debt reduction of about four percentage points since 2014. The most notable declines in debt are anticipated in Germany and the Netherlands at an additional 10 percentage points, taking it below the 60% of GDP Maastricht threshold by the end of 2019.

Moody’s also predicts declines in material debt in Portugal, Cyprus and Greece, but little to no debt reduction in France, Spain or Italy.

“Banking sector risks have eased since the crisis,” the report states, “but weak growth potential and elevated debt burdens mean sovereign credit profiles are vulnerable to rapid deterioration in the event of a shock.”

– Andrew Michaels, editorial associate

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Emerging Markets Brighten Outlook for 2018

Global risks can swiftly close the door to emerging markets, but if the predictions of Atradius trade credit insurance come true, markets in nine countries are expected to flourish and benefit at least seven industry sectors in 2018.

Emerging market economies (EMEs) grew by nearly 1% from 2016 to 2017, according to Atradius’ January 2018 economic research, with an additional 0.3% growth anticipated in 2018. Domestically driven growth, stable political conditions and young populations are behind these potentially thriving markets, which Atradius says will be in Colombia, Costa Rica, the Czech Republic, India, Indonesia, Morocco, Panama, Senegal and Vietnam.

In Colombia, for example, 2018 GDP growth is predicted at nearly 3%, with year-over-year private consumption and real fixed income marked at 2.9% and 4.1%, respectively.

Twenty-six out of 70 respondents to FCIB’s International Credit and Collections December 2017 survey reported having customers in various sectors in Colombia. In the results, published on Jan. 16, the 26 respondents reported that while their customers in Colombia weren’t difficult to sell to, they did not pay well. Similar concerns were raised by 40 out of 70 respondents who reported having customers in Colombia in FCIB’s April 2016 survey.

Although 19% of respondents in the latest survey reported no payments delays, 12% reported an increase in payment delays and another 12% reported a decrease. One respondent recommended others get trade references when doing business in Colombia, saying that the country “buys a lot and the[y] pay for it, but they are high maintenance. …”

Opportunities might exist in Latin America’s pharmaceuticals sector, including expectations of Colombia’s emerging market.

“In Colombia, higher state investment in health care services has increased demand for medicines, especially generics,” Atradius reported. “Pharmaceutical sales are expected to expand steadily in line with economic growth there, underpinned by the unprecedented political and security stability.”

Aside from Colombia, Atradius reported the most promising emerging market to appear is India at a forecasted 7.4% GDP growth, followed by nearly 7% growth in Senegal and 6.5% growth in Vietnam. The retail and consumer durables sector is believed to contribute to all three countries’ emerging markets. Vietnam may also see a boost in the agriculture and food, automotive, chemicals and plastics, and machines and engineering sectors.

As Brazil emerges from a prolonged recession, Seeking Alpha reported growing investments in the country, which was supported by FCIB’s December 2017 survey that showed 92% of respondents extending credit to customers. This was a significant increase from the 79% who reported extending credit in April 2017.

– Andrew Michaels, editorial associate

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Keep an Eye Out for Signs of Money Laundering

When dealing with any issue, using common sense is often times the answer to the problem. This is true for creditors that may become involved voluntarily or involuntarily with trade-based money laundering (TBML). It is one of the simplest ways to avoid TBML, according to a recent webinar from FCIB on the topic. Other ideas presented by speaker Fred Dons, director, head CTF Flow Netherlands with Deutsche Bank, included the following: Don’t be afraid to ask questions, know your client/business and be able to explain the transaction.

Dons defined money laundering as “the process by which one conceals the existence, illegal source or illegal application of income, and then disguises that income to make it appear legitimate.” The money laundering process usually happens in three stages: placement, layering and integration. Placement occurs when criminal funds are deposited into bank accounts or invested, for example. Layering is the movement to distance the criminal proceeds from the source by routing money through multiple bank accounts.

Dons emphasized the role banks play to help mitigate TBML. Banks should review trades and conduct due diligence to determine the legitimacy of the trades being financed. He emphasized that not all transactions that deviate from the norm are TBML, but they can raise red flags and require extra care from banks and businesses. Straying away from normal business can include dealing with new customers, new markets or new products.

Some common TBML techniques described by Dons included under, over and multi-invoicing; over, under and phantom shipment; fraudulent description of goods; and transfer pricing. As is the case when moving away from the normal course of business, not all techniques automatically mean money laundering. One example Dons gave occurs in the shipment of china—10% will break, so it is over-shipped to make sure the customer has a full set.

Due diligence is key for businesses and others involved in a trade transaction. Dons mentioned if products are being shipped by ocean freight, there may be a check on the captain of the vessel, the vessel’s route, the vessel company, and so on. Another warning sign is when there is a significant mismatch between the description of the goods on the invoice and the bill of lading.

As a business trading with other businesses, it is your responsibility to know the party you are doing business with. Some major red flags to watch for include determining if the customer has a public domain email address, such as Gmail or Hotmail; if the end user of the product is a freight company; and if payment, especially cash, comes from a third party that is not involved in the transaction. Just because these situations come about does not always mean you are getting involved in a money laundering scheme, but you can never be too cautious.

– Michael Miller, associate editor


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