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In the News

November 16, 2017

eNews will take a break next week for the holiday and resume on November 30. For up-to-date credit news, visit NACM's blog. Have a happy and safe Thanksgiving!

RIP TPP; Long Live CPTPP


Don’t Expect Construction Information to Fall into Your Lap


Tanker Industry Suffers Glut, yet South Korean Shipping May Rebound


Optional Notices: To File, or Not to File?


The Impact of Exchange Rates in Long-Term Foreign Settlements


RIP TPP; Long Live CPTPP

What appeared to be a dead deal once the United States pulled out seems to have been resuscitated, albeit under a different name. The 11 remaining member countries of the Trans-Pacific Partnership (TPP) agreed tentatively to a trade deal Nov. 11, now dubbed the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), as reported by Global Trade Review. It almost did not happen, given the no-show of Canadian Prime Minister Justin Trudeau for the round of negotiations the day before, during meetings in Da Nang, Vietnam. A broad agreement was finally reached, however, with final details to be established in the new year. The deal then would move on to the respective governments for ratification. The countries in the trade pact include Australia, Canada, Chile, Mexico, New Zealand, Peru, Singapore and Vietnam.

“The fact is that most of the countries that were engaged in the TPP plan really wanted to see this pact go forward,” said NACM Economist Chris Kuehl, Ph.D. “Now it appears the Asians will resurrect the TPP with or without the U.S. This version of the TPP will be centered on Japan rather than the U.S.”

The pact would have covered 40% of the global economy but was thrown into confusion as to its outcome when President Donald Trump withdrew the U.S. as one of his first acts as president, news agency Bloomberg said. The discussions in Vietnam have aimed to suspend some parts of the agreement in an effort to move forward without the involvement of the U.S. Though core elements were agreed upon, Trudeau said that there was “still more important work to be done to ensure we reach the best deal for Canada and Canadian people,” Reuters reported.

“The idea behind TPP in the first place was as much about the politics of the region as it was about economics,” Kuehl said. “The U.S. wanted to use TPP to pull these nations closer to the U.S. and further from China. The pact would have provided access to services sectors in the signatory states and would have granted some access to the U.S. market for manufactured goods as well as farm goods. The agricultural sector would actually have gained more access to these countries than they got in the U.S.”

Indeed, the U.S. sectors that will be hardest hit by the withdrawal from the deal will be American farmers and small-business owners, CNBC reported. With the agreement seeking lower tariffs for goods traded among members, the U.S. will still encounter high rates when shipping to the Asia-Pacific region. Farmers and agricultural producers in the Asia-Pacific will benefit, and not those in the U.S., CNBC added.

The U.S. may or may not get a future invitation to join the new version of the TPP, Kuehl said, and other experts believe that the U.S. absence from the trade agreement may only be temporary, CNNMoney reported.

“The bottom line is that trade deals are tough and multilateral ones are the toughest,” Kuehl said.

– Adam Fusco, associate editor

 

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Don’t Expect Construction Information to Fall into Your Lap

Information and deadlines are two key ingredients in construction credit. Some may say they are the most important components when waiting for a check. Having the correct information can help you process the accurate forms, letters, notices, etc., but if it is not done in a timely manner, then having the information does you no good. The same can be said the other way—filing claims without the right facts but on time means little. There are even some instances in which a claimant has no information and misses deadlines. There is a recent example of a case heard by the Supreme Court of Canada that sheds some light on this problem.

The background of the case involves three entities: Langford Electric Ltd., Valard Construction Ltd. and Bird Construction Company. All three were working on a Suncor Energy oil sands project in Alberta, according to the website canadianunderwriter.ca. Bird was the general contractor, and Langford subcontracted drilling work to Valard in 2009. Langford was required by Bird to obtain a labor and material payment bond, which was provided by the surety the Guarantee Company of North America (The Guarantee) in 2008 for more than $500,000. Langford was named as the principal and Bird was the obligee.

“Generally labor and material payment bonds are a form of risk management directed at mitigating the financial risks associated with nonpayment,” said Bird Construction to the Supreme Court, according to Canadian Underwriter. The surety that issues the bond is required to “pay unpaid suppliers of labor and material in the event of the principal’s default, thereby keeping the construction project free from liens and minimizing delay,” continued Bird in the article.

When Valard notified Bird it had not been paid by Langford, Bird told Valard about the bond. Unfortunately, Valard never knew the bond existed, thus missed out on the filing claim window. This resulted in the surety not paying the claim since the deadline had passed. Valard initially took legal action against the surety and Bird, but filed for discontinuance against The Guarantee in 2013. “The timeline for making a claim on a bond is dependent on the wording of the bond. However, most require notice to be given of the intention to make a claim on the bond within 120 days following when payment should have been made in full, with a one-year deadline within which to sue for payment under the bond,” said Chad Kopach, Esq., partner with Blaney McMurtry in Toronto.

A ruling by an Alberta court in February 2016 said Bird was not obligated to inform Valard about the bond, which said the claimant can take action against the obligee, Bird Construction. “From my review of the case law, no court in Canada has ever determined that an obligee has an obligation to notify claimants of the existence of a bond,” said Kopach.

Valard was described as “ignorant” by two Alberta appeal court judges because it did not take the necessary steps to learn about the bond. They added that Valard “had the means” to have Bird inform them about the bond’s existence. “It is an important and prudent practice, in the construction industry, for potential claimants to make a request as to the existence of a labor and material payment bond,” said Bird. “Finding out if a bond exists is found in each province’s lien legislation,” noted Kopach. “In Alberta, it is in s.33 of the Builders’ Lien Act.”

On Nov. 7, the Supreme Court heard Valard Construction Ltd. v. Bird Construction Company, resulting in a reserved judgment with reasons to follow, according to the court’s docket.

– Michael Miller, editorial associate

 

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Tanker Industry Suffers Glut, yet South Korean Shipping May Rebound

An oversupply in the global tanker market will likely keep freight rates low and maintain pressure on shipping company credit metrics. New-vessel orders and limited scrapping of older ships have contributed to a glut in the market, according to a recent report from Fitch Ratings.

By year end, capacity is expected to have risen up to 6% from a year earlier, with a further 4% growth in 2018. This is due to orders placed in 2015 when rates were high, with a large portion of orders coming from Greece and China. But high global oil inventories and OPEC production cuts will likely cause demand growth to bottom out this year. Fitch expects a moderate increase in tanker demand next year due to rising oil consumption, higher U.S. exports and moderating oil inventories. Demand could match supply growth in 2018, halting the downslide in the market, but tanker rates are not likely to rise without further scrappage or slower capacity growth, Fitch said.

Though credit metrics will be under pressure, liquidity risks are limited because of healthy cash positions among the shipping companies. Companies with the majority of long-term contracts are likely to maintain healthy operating profits while those with only a few such contracts may only break even.

Accelerating turmoil in the tanker market has contributed to the recent slowdown for investment in new ships, according to the latest weekly tanker market report from shipbroker company Gibson. A large rebound in tanker ordering activity occurred earlier this year, “driven by the collapse in new-building prices, following the malaise in the shipbuilding industry,” Gibson said. “Shipbuilders went through several years of very limited new order intake from all sectors within the shipping market, forcing yards to compete aggressively by pushing their prices lower and lower.” In the first half of 2017, 139 tankers above 25,000 deadweight metric tons had been ordered, which was double the level for all of 2016. But ordering has slowed considerably over the past few months, with just 37 units ordered since July, according to Gibson.

The industry has entered the usual strong season for tanker earnings, however. “Demand for tonnage tends to increase in the fourth quarter, while weather-related delays and disruptions also aid the tanker market over the winter months,” Gibson said.

Meanwhile, South Korea’s shipping industry, which has suffered bankruptcies and billion-dollar losses due to cuts from customers hit by the 2008 financial crisis, may be experiencing a turnaround, according to Reuters. The crisis reached its peak when one of the world’s largest shipping companies, South Korea’s Hanjin, filed bankruptcy. But companies like Daewoo Shipbuilding & Marine Engineering (DSME) are innovating to fulfill needs for nimbler ships and offshore energy platforms.

South Korea, Japan and China account for four of every five merchant vessels built. Global orders grew almost two-thirds during the first nine months of this year compared to last year, and South Korea earned half the business in September alone, Reuters said. In that month, DSME took a container ship order from Europe worth $820 million, its largest in two years.

– Adam Fusco, associate editor

 

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Optional Notices: To File, or Not to File?

Preliminary and notice to owner requirements on construction projects for subcontractors and material suppliers vary from state to state, but there are several that follow a similar path. Not all states require the initial notice, depending on the type of project, but it is important to know what you could be missing out on if you decide not to file.

Alphabetically, Alabama is the first state; it can also be considered one of the most problematic notice states when subcontractors and suppliers are looking for payment on private jobs. The subs, suppliers and others “who shall do or perform any work” have lien rights; however, “the lien shall extend only to the amount of any unpaid balance due [to] the contractor by the owner or proprietor,” according to Alabama law. If a notice to owner is sent prior to furnishing materials, the lien becomes full price—unless the owner notifies the furnisher in writing before the materials are used that they will not be responsible for the price. Sending the preliminary notice is done to trap funds, said Chris Ring of NACM’s Secured Transaction Services (STS). Serving the notice is also a prerequisite to filing a mechanic’s lien in Alabama.

If states offer an optional notice, why file? “It is for protection,” said Ring. “The notice is a protection mechanism for the property owner—they benefit the most, but subs and material suppliers can also benefit by helping the money flow downstream. It can help owners have a free and clear title as well.” If you are going to send an optional notice, make sure it goes to all parties required by statute and to customers, even if they are not required to receive the notice.

Colorado is another state that does not require a preliminary notice to owner. If one is given, “it is the duty of the person who contracted with the principal contractor to withhold from such principal contractor … sufficient money due or that may become due to said principal contractor … to satisfy such claim and any lien,” according to the Colorado Revised Statutes.

Filing the optional notice can also help with customer financial difficulties, challenging orders and job account changes, noted Ring. He suggested to “always do them when working with a new customer since you have never dealt with them before. You can manage exceptions easier by following this practice.” When there is no statutory requirement for a notice to owner, STS suggests filing it within 45 days from last furnishing. This can also be a pressure point with the owner and others to avoid a potential lien.

Kansas, Nebraska and New Jersey are among the handful of states that do not require a notice on private commercial projects, but once again, serving a notice within 45 days from last furnishing can prompt payment. Connecticut and Vermont are among those that do not require the notice nor differentiate between commercial and residential projects.

South Carolina is unique since subs and suppliers have no specific time frame to file the notice. It must be served before the lien and “quickly, since the lien will be limited to unpaid funds at time of receipt by owner,” according to STS, which suggests serving the notice within 30 days of first furnishing to protect lien rights.

For a more in-depth look at optional notices, STS will be holding an online workshop hosted by Ring early next year.

– Michael Miller, editorial associate

 

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The Impact of Exchange Rates in Long-Term Foreign Settlements

One of the challenges I often navigate is the negotiation of long-term payment settlements for clients outside of Brazil. Although coming to an agreement with the two parties involved is one aspect, maintaining a viable arrangement amidst unpredictable economic fluctuations is another that requires careful and creative planning.

When I am arranging payment on behalf of my foreign clients, I must be aware of the exchange rate between the Brazilian real and the currency of my clients’ countries. All currencies gain and lose strength regularly, but the recent history of the Brazilian economy has made these fluctuations more pronounced and harder to predict. For example, from 2013 to 2017, the real has decreased against one U.S. dollar from 2.042 to 3.164, a 43% adjustment, and has shifted further just from January to the present.

When payment is being arranged over this time period, the variance must be planned for in the agreement between the parties.

While payment over more than a year is not always the ideal solution, it can certainly be the preferable option in Brazil. When faced with the choice of litigation or a long-term settlement, many choose the latter because processing a claim through our courts can take as long as five years, at significant upfront cost, and with no guarantee of payment. When this is the case, accepting payments over multiple years seems to be the best resolution. 

But agreeing to a regular payment amount and time frame is not sufficient when you expect to see a change in the exchange rate over the course of the payoff period. For example, if the real falls in comparison to the U.S. dollar, the debtor must use more reals to maintain the installments, and depending upon the continuing devaluation, this may force the debtor to stop the installments.

In anticipation of these fluctuations, I often need to build in flexibility to satisfy both parties. For instance, if the real weakens against the dollar by over 20% over a period of six months, the debtor will be allowed to pay an agreed-upon, predetermined smaller amount in the foreign currency with an extended time frame. Conversely, if the real gains over six months by over 20%, the payment amounts will increase along with a shorter time frame. 

I have found this approach to be an equitable and pre-emptive way to prepare my client and the debtor for the unavoidable fluctuations that may occur. It also means:  

  • Avoiding renegotiation with the debtor each time the rate significantly changes.
  • Not needing to seek repeated approvals from the client.
  • Saving time to draw up and obtain confirmation on new agreements.
  • Minimizing the risk that the debtor may default on a long-term payment plan.

In addition to minimizing the impact of exchange rate fluctuations, the agreements are created such that:

  • Payments are pegged to strong currencies, such as the U.S. dollar, euro, or British pound.
  • Interest may also be charged, especially when installments and payment terms become smaller and longer, respectively.
  • As a Confession of Indebtedness, signed by both parties, they are an enforceable document upon default.
  • Wire transfer fees are borne by the debtor.

– Octávio Aronis, Esq., Aronis Advoqados, São Paulo, Brazil

 

 

 

mechanics lien, bond services, mechanics's liens

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