In the News
February 16, 2017
With an all-time record $2 trillion of U.S. corporate debt coming due in the next five years, credit professionals should be on guard and prepare for any contingency.
According to new reports from Moody’s Investors Service, both speculative-grade corporations with over $1 trillion and investment-grade firms with almost $1 trillion face a record amount of debt maturities. The rating agency’s refunding indices signal that the market’s capacity to absorb upcoming maturities is below average. As companies begin to address their longer-term maturities, Moody’s expects issuance in the primary market to accelerate in the second half of 2017.
Credit professionals should “continue to monitor the debt structure related to the timing of the debt that is coming due,” said George Schnupp, CCE, global director of credit at Anixter Inc., who will present the certification course Financial Statement Analysis 2 at NACM’s 121st annual Credit Congress & Expo in June. “In other words, the analyst should be aware of what debt is coming due in year one, year two and so on and make sure to include the information on all write-ups. If the majority of the debt is coming due next year or two years from now, the analyst really should be performing a deep dive to better understand the risk and whether they can pay for the use of debt.”
Schnupp pointed out that U.S. monetary policy is calling for at least three interest rate hikes this year, “which will, in effect, cost our customers more to borrow or fund their businesses through debt,” he said. “The analyst will need to pay closer attention to debt covenants, debt ratios, cash flow from operations and interest coverage.” However, the new U.S. administration has talked about lowering corporate tax rates, which would benefit corporate America, he added.
Bankruptcies are a risk in this environment. “As interest rates continue to increase, those companies that are operating on slim margins are going to be impacted and therefore we will see an increase in bankruptcy filings,” he said.
Close to 60% of speculative-grade companies with debt due in the 2017–2021 time frame are in sectors with stable outlooks from Moody’s. Among those, the telecommunications industry has the highest amount of debt maturing before 2021. Those with negative outlooks amounted to 16%, with manufacturing having the highest portion. The energy sector accounts for about $117 billion of the investment-grade debt maturing in the five-year period.
“Over the last decade corporate America had access to cheap debt and now the tide is a-changing,” Schnupp said. “Time to ensure corporate balance sheets are in good financial shape.”
Credit Congress: Session Highlight
25555. Credit and Conflict Resolution
Speaker: Jeff Jones, Twisted X, Inc. Conflict and the importance of resolving conflict are present in every facet of our society. The business environment is a constant arena for conflict and the credit function is a hotbed of continual conflict between the finance and sales functions. Learning how to see conflict as an opportunity to grow and knowing the key steps to resolution will help everyone find ways to collaborate for greater success. 1. Understanding differences in viewpoint and personality. 2. Learning to go “below the line” to seek greater understanding. 3. Viewing conflict from “the balcony” to see the bigger picture and seek collaborative results.
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The global construction sector is in the midst of a long-term stable period as credit insurer Euler Hermes sees overall growth of 3.5% this year, slightly better than last year’s 3.4%, while growth in advanced economies like the U.S. will supplant contraction in emerging economies.
Analysts expect construction growth in emerging markets to drop to 4.2% instead of the 8.8% growth witnessed over the past decade, while advanced economies should see growth of about 2.5% versus -0.9%, Euler Hermes said. “The sector remains mainly composed of smaller firms with very high leverage ratios, a weakness highlighted by longer payment terms compared to other sectors.”
The U.S. construction sector is seen by Euler Hermes as the world’s No. 1 importer and the No. 2 exporter while carrying a low-risk rating.
According to credit insurer Atradius, the U.S. construction industry had sector growth in 2016 of 5.3%, carrying on a rebound since 2012, while another 2% increase is anticipated for this year. Residential construction in particular is forecast to see robust growth through 2019, as foreclosures have declined 11%. New hotels, offices and amusement/recreation venues should drive nonresidential expansion by 5.6% in 2017. Unemployment in the sector is low—almost 5%—and barely above the national rate.
If the new U.S. administration follows through with plans to invest significantly in infrastructure, it could prove an added shot in the arm to the sector. Also, more increases in interest rates anticipated this year could result in increased buying activity in housing, Atradius said.
Viable and promising projects typically receive bank lending, and the financing climate is only improving as commercial and residential markets strengthen, the credit insurer said. Still, rising salaries and increasing health care and other expenses cut away at already-tight business margins.
Payments in the U.S. construction industry average from 30 to 60 days, while 90-day terms aren’t unheard of. “Over the last two years, payment experience in the construction sector has been rather good, and the overall number of late payment notifications we received in 2016 leveled off,” Atradius analysts said. “U.S. construction insolvencies decreased in 2016 and are expected to level off in 2017. Small businesses in the industry are generally still paying later and have higher bankruptcy rates and delinquent debt than other industries.”
Trade creditors dealing with smaller construction firms should still remain cautious, however, and Atradius recommends reviewing financial statements on an annual basis and supplemental credit information more frequently. “Reduction or withdrawal of cover is considered if the buyer shows significantly worsening results, including losses, heavy debt levels, problems with working capital, cash flow or liquidity, or deteriorating payment trends.”
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In order to become more effective and achieve excellence in their profession, credit managers need to attain the type of leadership skills and abilities that influence people inside and outside their organizations to reach greater productivity, efficiency and accountability.
“Leadership is a choice,” said veteran management consultant Rick Hernandez, who will participate in a nine-part series of leadership webinars sponsored by NACM and FCIB throughout the year, starting Feb. 23. “The question for the credit manager is: How do you want to be known and what’s your new value proposition in a demanding, global environment?”
Gaining the commitment of people at various levels of your organization, for instance, requires more than having a compelling vision and strategy for the credit department and leaning on the influence of your position to execute, said Hernandez, who has trained executives from companies that include Intel, Dole Foods and the Walt Disney Company.
It also requires—particularly for credit professionals—tapping into a degree of emotional intelligence that leads to a better understanding of the audience you’re trying to reach, such as corporate executives. This in turn is predicated on developing greater self-awareness, the key to a conscious leadership approach, he explained.
In the series’ kickoff webinar The Power of Influence and Purpose, Hernandez will lay out some concrete approaches and practices to sway peers and bosses and help credit professionals shape an organizational voice that gets results. This voice is based in part on credit managers’ ability to listen and communicate with their teams to reach an alignment between a strategic vision and roadmap and their company’s larger goals, he said. Aside from growing the business, a conscious leader also continuously thinks about developing his or her team to meet the business’ evolving demands.
Developing an influential voice also requires the ability to give precise assessments about the current state of the credit function, the agility to come up with creative solutions to problems like late payers or unfavorable credit terms, and the resiliency to sustain the successful execution of department goals. “It’s about creating greater significance in a new era through the influence of leadership,” Hernandez said.
– Nicholas Stern, editorial associate
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With the Mexican peso among the worst-performing currencies in relation to the U.S. dollar over the past year, uncertainties concerning the new U.S. administration’s policies toward Mexico continue to weigh the peso down. The currency plunged more than 15% against the dollar between Election Day and Inauguration Day, though it has recently recouped some of its losses, according to a NAFTA update in Wells Fargo Securities’ recent economic commentary.
Data show that the Consumer Price Index inflation rate in Mexico rose to 4.7% in January, the highest year-over-year rate in four years. The decline in the value of the peso directly contributes to the inflationary environment, Wells Fargo said. The Bank of Mexico raised its main policy rate by 50 basis points in response to the inflation uptick. Wells Fargo analysts believe that policy tightening, higher inflation and uncertainty about NAFTA will result in a mild recession in Mexico this year. They also expect the peso to regain its footing past the near-term as policy uncertainty fades.
Two years of red ink have plagued Canada’s trade accounts, but signs show small trade surpluses, helped by the stabilization of oil prices. Good news is also to be found in employment, with nonfarm payrolls in Canada rising by 48,000 in January, a stronger-than-expected showing. It follows 54,000 jobs created in December.
The Bank of Canada, however, is taking a cautious approach to policymaking due to slack in the labor market, Wells Fargo said. In the view of Wells Fargo analysts, the Bank of Canada will remain “on hold” through most of 2017, and if the U.S. Fed initiates modest monetary tightening, they foresee some depreciation of the Canadian dollar versus the U.S. dollar in the near term.
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The go-to, trite problem within credit departments used to be the difficulty in dealing with sales staff who didn’t appreciate the importance of risk mitigation. With a more interdepartmental, team-minded ethos prevalent in business globally these days, the emerging struggle has turned to bridging the generational gap.
The credit departments and businesses that have found ways to bridge that divide between workers from the Millennial and baby boomer generations (and in between) are the ones often showing some of the most success and smoothest operations. After all, drama rarely affects the efficiency or the bottom line in a positive way, according to author Scott Stratten, who will serve as the keynote speaker at NACM’s 121st annual Credit Congress & Expo in June.
“You have people who are younger coming in who are tech savvy and perhaps very useful,” said Stratten, author of UnMarketing. “But there is often a backlash against Millennials. Some want them to ‘pay their dues’ for 25 years before they can have their say. That’s a huge issue … because combining experience with innovative people, that would be unstoppable. If you work together, then you can be the innovator.”
Stratten and Kevin Stinner, CCE, CCRA, credit manager with Crop Production Services, suggest that there are more commonalties between these generations of workers than is typically acknowledged by those finding relationships strained. Stratten joked that Millennials are oft-criticized for not liking meetings—“but who actually likes meetings?”—and for being on their phones a lot, “but I see as many people in the 40s on their phones in public as anyone else.”
“Millennials have grown up in a world online—baby boomers were brought up in a world with the boom [years] of post-WWII reconstruction,” said Stinner, who will present the Feb. 27 NACM webinar Wisdom for Credit People in Their 20s and 30s.
These younger employees, who are the future of the industry, need to be plotting a career path in credit and setting goals—veteran employees should be trying to help them find their way, Stinner suggested. After all, everyone is working toward the same goals of growing their companies without putting them at too much risk.
“Each generation has their experiences that have shaped their lives, and each generation comes into the workforce with the idea that they are going to change the world for the better,” Stinner said.
– Brian Shappell, CBA, CBF, managing editor
You Have Questions
What do I have to do? When do I have to do it?
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