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eNews January 25, 2018

Retail Risks Still Warrant Trade Creditors Remain Alert to Payment Warning Signs

The risks to commercial creditors posed by the retail sector have been known for months, and according to recent predictions, are likely to stick around this year as traditional players compete with online upstarts for market share.

Last week, S&P Global downgraded Sears Holdings further into junk status—to CCC- from CCC—after the company reported it was in talks to restructure potentially more than $1 billion of corporate debt, according to news reports. At the beginning of the year, Sears was one of the 10-riskiest, publicly rated companies, according to the Kamakura Troubled Company Index. Even higher on the Kamakura list was Bon-Ton Stores, Inc.—another beleaguered retailer with flagging sales and millions in debt piling up.

Bon-Ton’s suppliers have been pressing for tighter terms for months, as they had for Toys R Us before it filed for Ch. 11, as well as for Gymboree, Charming Charlie and others. Some vendors stopped shipping to companies like Sears and Bon-Ton prior to the holiday season.

In certain situations, retail firms have been filing for Ch. 11 protections while still being profitable, such as the 2017 filings of rue21, Payless ShoeSource and True Religion, USA Today reported. Melissa Jacoby, a University of North Carolina bankruptcy law professor quoted in the USA Today piece, said some companies with few real financial problems have filed for bankruptcy to use its protections as a “bludgeon” for creditors and have had their cases thrown out. Still, it’s more typical to see companies waiting too long to file.

Many of these companies end up filing either because they can’t service their debt, they’re overleveraged or the real estate they utilize is too expensive and they need to right-size their balance sheet, said Jeffrey Cohen, Esq., partner with Lowenstein Sandler LLP in New York.

Bankruptcy filings in the sector used to catch landlords or vendors off guard, but more recently, they’re seeing the writing on the wall six months out, said Cohen. That’s due in part to companies being more transparent with their suppliers, and in some situations, offering better access to financials.

Cohen recommended companies join trade associations, like NACM, or trade groups to hear what other vendors are experiencing to better protect themselves. He also advised creditors to watch for sudden changes in leadership—a potential indicator of a company’s disruption or deterioration.

He’s also seen more firms seek to protect themselves using consignment agreements, but he recommends making sure you’ve timely followed the necessary UCC filing procedures to perfect the consignment agreement. If a secured creditor objects, trade creditors can then attempt to secure other payment protection mechanisms like a letter of credit or cash-in-advance.

This year, Cohen said, it would be surprising to see the same volume of retail bankruptcy filings as in 2017. “Some companies are making every effort to resolve issues out of court.” But some firms, he warns, will still end up in court in an attempt to shed trade debt or real estate issues.

– Nicholas Stern, managing editor

Credit Congress

Credit Congress: Session Highlight

27036. Collection Strategies after a Natural Disaster.
Speaker: Matthew Jameson, Esq., Jameson and Dunagan, PC

This presentation addresses how to resume collection attempts in an area impacted by a natural disaster. The severe storms and flooding in Texas, Florida and Puerto Rico and the forest fires in California are just a few examples of areas in which this is relevant. We will discuss what to expect and what to do in the immediate aftermath of the disaster, drawing on my own experience in Texas after Hurricane Harvey. This session gives insight into some of the issues my client’s were facing, such as court closures, mail disruptions and displaced people. We will talk about the importance of avoiding public relations problems through social media. We will also talk about the steps to take once suppliers/trade creditors have decided it is appropriate to resume their collection attempts. Regardless of where you live, your company could be affected by a natural disaster. We will discuss some best practices credit departments can use to put them in the best possible position of dealing with a natural disaster.

Credit Congress offers more than 60 compelling and relevant educational sessions from which to choose, ranging from the fundamentals to more sophisticated and challenging subjects. Tailor a conference agenda based on your experience, interests and goals that affords the greatest return to you and your organization.

Register by Feb. 16 and save with the Early Bird rate. Click here to learn more and register.

Professional Service Providers Have Lien Rights Too

How do you know if you have the right to protect your payment on a construction project? It depends on where you fit within the construction chain, which is headed by the project owner. Below the owner can be a general contractor, subcontractor, sub-subcontractor, material supplier and others that form contractual relationships. But what if you are part of a different group—architects, engineers, surveyors, etc.—do you have mechanic’s lien rights as well? As is the case with many lien situations, the answer is that it varies by state. Arizona, California, Louisiana and West Virginia are among the states that allow someone who furnishes professional or design services to have lien rights.

In Arizona, people providing professional services are on the same playing field as those who supply labor or materials. They must file the preliminary notice to the owner, general contractor, construction lender, if any, and the person they are contracted with to have a valid claim of lien, according to Arizona statutes. On private projects, this must be done within 20 days of first furnishing. Anyone providing professional services must be registered to have lien rights.

Design professionals in California also need to be licensed. They must give a preliminary notice within 20 days to the owner, direct contractor and construction lender, if any. Those with a direct relationship with the owner only need to send the construction lender, if any, the preliminary notice, according to California’s Civil Code. The law also requires additional items for design professionals, including a demand for payment to the landowner at least 10 days before recording the lien. Design professionals are only entitled to lien if the improvement has not started.

In Louisiana, such individuals are defined as prime consultants—registered or certified surveyors or engineers and licensed architects—or professional subconsultants, who are employed by the prime consultant. Consultants must give the owner a written notice within 30 working days from the start of employment. While in West Virginia, architects, surveyors, engineers and landscape architects are on equal footing with contractors, subcontractors and materialmen.

New York considers drawings done by architects, engineers and surveyors as an improvement. Architects and engineers can also receive drawings from other parties, which occurred in a recent scenario involving rebar detailing, which is a technical service. These shop drawings are supplied to architects and engineers for approval and are required. The rebar drawings provide guidance so concrete and construction companies can install the rebar correctly at the job site. Unfortunately, it is unclear if someone providing such drawings can file a lien in New York since the work must be done by a licensed design professional, according to Kevin Laurilliard, Esq., with Albany-based McNamee Lochner PC.

“One case law summarily dismissed a mechanic’s lien because the drawings were not done by a licensed professional, while another case refused to summarily dismiss a mechanic’s lien because the lien was not ‘defective on its face’ and the extent of licensed professional’s involvement was an issue of fact to be determined at a later stage of the lawsuit,” noted Laurilliard. However, if you are ever on the fence about filing a lien, “I recommend that the mechanic’s lien be filed because there is no penalty for filing the mechanic’s lien; and the lien might get the attention of all of the participants on the construction project and therefore get [the] client paid,” he said.

– Michael Miller, associate editor

NACM's Graduate School of Credit & Financial Management

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NAFTA Industry Outlooks Are Inconsistent

Industry outlook performances are a mixed bag in North America, according to a report from Atradius. The credit insurer recently released country reports for North American Free Trade Agreement (NAFTA) partners the United States, Canada and Mexico as well as Panama and Costa Rica. Atradius reviewed 15 industries, including agriculture, construction, food, metals and textiles. Each performance forecast was given a rating of excellent, good, fair, poor or bleak.

The U.S. did not receive an excellent credit risk situation for any industry, but automotive/transport, electronics/ICT and chemicals/pharma were among those that did earn a good outlook this month. Metals, paper, steel and textiles were poor. Real gross domestic product (GDP) year-over-year growth is predicted to increase by 0.3% to 2.5% in 2018. Inflation and real government consumption are also expected to increase this year, while the unemployment rate is forecasted to dip under 4%.

Canada carries an excellent credit risk outlook in agriculture and financial services, but a bleak forecast in textiles. Mexico does not have any excellent or bleak forecasts. Panama’s credit risk forecast is roughly split between good and fair. Costa Rican agriculture, food and services industries have an excellent outlook this year. Its paper industry was not rated. Canada’s GDP is expected to drop more than a percent, and Mexico’s will be unchanged.

Insolvencies in the U.S. will continue to decrease, yet there will still be some risks. “NAFTA renegotiations, for example, could have severe implications for the U.S. business outlook through lower investment in the case of heightened uncertainty or business impediments,” said the Atradius report. Canadian insolvencies are predicted to remain at 2017 levels.

NAFTA plays a large part in each country’s economy. According to Atradius, Canada and Mexico are the No. 1 and 2 export markets for the U.S., while Mexico and Canada are two and three, respectively, behind China in import sources. The U.S. is the top import source and export market for Canada by far over China. Mexico’s main import source and export market is also the U.S. The same can be said for Costa Rica, but China is Panama’s largest import source.

The sixth round of NAFTA talks between officials from the three countries resumed this week in Montreal. Officials have also traveled the continent promoting the trade pact. Canadian Minister of International Trade Francois-Philippe Champagne spoke in Montreal earlier this week. Minister of Environment and Climate Change Catherine McKenna visited Mexico City, Houston and Miami. “We are working hard with our U.S. and Mexican counterparts to find solutions to modernize NAFTA because our economies are stronger together,” said Champagne in a release.

Since NAFTA began in 1994, the total value of trade between the U.S., Canada and Mexico has increased to more than $1 trillion, according to the Canadian government.

– Michael Miller, associate editor

Honors and Awards

Nominate a Special Credit Professional

Do you know anyone working in the field of credit management whose professional life displays unquestioned integrity, outstanding and meritorious service in the field, and ongoing dedication to the highest standards of the profession? The National Association of Credit Management Honors and Awards have become an important mechanism by which we recognize our colleagues for their outstanding efforts and unwavering commitment.

Nomination period ends Feb. 16.

Click here to learn more and nominate your choice.

IMF’s World Economic Outlook Better than Expected

The current state of the global economy is uplifting. The International Monetary Fund’s (IMF) recently updated World Economic Outlook (WEO) survey shows faster global output than its fall predictions and a favorable forecast for global growth over the next two years. However, a financial market correction could still steer the economic outlook elsewhere beyond 2019.

Since mid-2016, an upswing in growth graced some 120 economies, accounting for three quarters of the world’s GDP, the IMF reported in its WEO update on Jan. 22. Third-quarter growth in 2017 was higher than originally projected in Germany, Japan, Korea and the United States, while emerging markets and developing economies (EMDEs) greeted Brazil, China and South Africa. The WEO revision now forecasts nearly 4% global economic growth in 2018 and 2019—0.2 percentage points higher than both the October 2016 forecast and IMF’s current estimate of last year’s global growth.

Financial conditions are currently riding on “easy settings,” the report clarifies, and tightening these settings—possibly brought on by rising inflation and interest rates—could bring slower growth. For example, the U.S. economic outlook appears bright, notably thanks to the reduction in corporate tax rates and temporary allowance for full expensing of investment. But, policy is always developing.

“If the financial conditions remain easy into the medium term, with a protracted period of very low interest rates and low expected volatility in asset prices, vulnerabilities could accumulate as yield-seeking investors increase exposure to lower-rated corporate and sovereign borrowers …,” the report noted.

Although such occurrences are plausible, W.W. Grainger Inc. Credit Administration Senior Manager Ed Bell, Ph.D., CBA, ICCE, says he isn’t committed to the idea of an economic slowdown in the U.S. beyond 2019. In fact, he said he predicts the opposite.

“I think [economic growth] is going to pick up,” said Bell, an NACM member. “We’ve been in a very long period of negative, no or slow growth, which is something we’re coming out of now. This year, there are some economists predicting higher than 3% GDP. If that’s true, it’s going to signal the fastest growth we’ve had in years.”

The recent tax incentive, for instance, will see companies “pour money into growth for the first time” in a long while, Bell said. The country’s economic outlook could turn depending upon changed agreements, i.e., the NAFTA discussions, or tariffs on U.S. products, as well as political shifts following the next presidential election.

Despite these possibilities, Bell said he doesn’t see the current trend dissipating.

“If it does, then credit managers will be under pressure again, like we were through the recession, to extend more trade credit,” he added. “If credit tightens, meaning it’s harder for companies to go out and borrow money from financial institutions, then they have to go back to relying on trade credit. … I do believe we will see inflation creeping back into the picture, [but] I think the Fed will be really quick to react and raise interest rates, which again, will tighten credit.”

– Andrew Michaels, editorial associate

FCIB at Credit Congress 2018

Register Now for Sessions at Credit Congress Designed for International Trade Executives

June 10-13, 2018, Phoenix, AZ

Held in conjunction with NACM's Credit Congress, this is the premier educational and networking event for international credit and trade finance professionals worldwide. Learn about the latest credit trends and technology, review market intelligence and share practical experiences and solutions with your peers. Get country-specific forecasts, hear the latest tips on international credit risk management and gather resources on trade finance.

This is a must-attend event for anyone doing business globally, or planning to.

Click here and register today!

Employee Training Can Weaken Fraud, Cyber, Security Risks

Any company, let alone a credit professional, knows that fraud, cyber and security risks can’t be taken lightly. Sheer utterance of such issues can send a company into a frenzy to review its inner workings; meanwhile, making sure everyone is aware of any outside threats.

In a three-month-long survey in 2017, commissioned by Kroll and conducted by Forrester Consulting, 540 senior executives across the globe reported their experiences, if any, with fraud, cyber and security risks over 12 months and took a deeper look into preventative measures during a time when these risks keep rising.

According to Kroll’s Global Fraud & Risk Report, incidences of fraud, cyber and security issues reached all-time highs in 2017. While 82% of executives reported their companies falling victim to fraud in 2016, the latest Kroll report indicated an increase of 2% in 2017. Cyber and security incidents in 2017 also increased to 86% and 70%, respectively, from 85% and 68% in 2016.

The majority of survey participants reported experiencing fraud that led to information and/or data theft, loss or attack, Kroll reported. Other cases included theft of physical assets or stock, management conflict of interest, internal financial fraud and corruption and bribery. So, who’s behind these acts? Ex-employees were reported among the top-three culprits, which also included companies’ very own junior employees, competitors and random perpetrators.

Information security relies heavily upon employees. Companies are beginning or continuing to implement security-related training, policies and protocols, and the age-old notion of “show, don’t tell” is key. Yes, companies must explain threats and how to prevent them, but hands-on training brings knowledge full circle.

“Management must follow the same rules,” Kroll reported. “Nothing undermines a security protocol more than senior managers who fail to wear a badge, or who use their own equipment and/or have special access rights.”

Mike Foster, CEO of Foster Institute IT security agency, said the increase in incidences is likely attributed to growing amounts of valuable information within a company, which then garners interest from more attackers.

By sending out, for example, hoax emails to employees, Foster said companies can train them to be wary of potential threats. Clicking an email’s link can open up the company’s most valued information to those who have no business seeing it.

“That’s how the attackers gain access to a computer,” Foster said. “The attackers can’t just come in through the firewall and sign into the computer. If you get the user inside to click a link on an email message, the network is a lot more likely to let the attacker come through.”

Technology can hinder a company’s safety from these attacks, but Foster said that in addition to training, other protection is available, such as application whitelisting—using software that allows employees to only run company-approved programs. However, if companies limit the number of programs they install overall, Foster said there’s less reason for attackers to want to break through.

“Testing and training is a great thing,” he said. “It’s becoming popular. We’ll see more and more, I hope.”

– Andrew Michaels, editorial associate

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