How the ‘Brexit’ Impacts U.S. Companies

Right up to Thursday's vote in the United Kingdom regarding whether or not to leave the European Union, there was a confidence that cooler heads would prevail and the U.K. would remain in the EU. The vote was close, as expected, but the British are no longer part of the European Union. In addition, Prime Minister David Cameron announced plans to resign, the pound has crashed to lows not seen in over 40 years and, barring some sort of unlikely reversal, the country is in for massive economic and political turmoil.

For business of various sizes based in the United States, there are various layers of impact:

  1. The British pound quickly moved to freefall mode, worsening the worries of companies already hampered by weakening currencies in the EU and emerging economies against a very strong dollar. The dollar is perhaps headed to new highs. This will kill the recent recovery in exports, which is not good news for U.S. manufacturers and goods suppliers. The gross domestic product of the country remains dependent on exports for between 15% and 25% of the total and that could be cut by a third as the dollar gains. The U.S. is not the only state to see its currency surge, as the Japanese yen has also moved up, which is more disastrous for a country that that is even more export-dependent.
  2. The Federal Reserve backed away from an interest rate hike in June because it feared turmoil in Europe and those fears turned out to be well-founded. With newfound volatility levels and the soaring dollar, hiking rates has become that much harder. Some economists now suggest that it will be late in 2017 or even 2018 before Fed rates increase again. Frankly, this is a panic reaction and predictions that far out are not very helpful. Still, it is clear the Fed will have to wait for months to gauge the ultimate fallout.
  3. The U.S. has lost its most important European ally, which means greatly reduced influence over Europe. The French have generally been outright hostile to the U.S. and its goals, and the Germans are very often opposed if not combative. The U.K. championed U.S. policies in everything from economics to the military, and they will no longer have a seat at the table. In addition, the U.S. needs a healthier Europe for both economic and political reasons—this is all but guaranteed not to happen any time soon in the wake of the “Brexit” vote.
- Chris Kuehl, Ph.D., NACM economist and founder of Armada Corporate Intelligence 
FCIB members have access to much more analysis, including the impact on other power and emerging economies, through daily news briefs written by Kuehl. For more information on these and other FCIB member benefits, visit www.fcibglobal.com.
 

Credit Congress: More Businesses Interested in Electronic Payments

The business-to-business (B2B) payment landscape is still rife with inefficiencies and not enough straight-through processing (completely electronic B2B payments), according to a speaker at NACM's 120th Credit Congress in Las Vegas last week. Meanwhile, businesses often don’t receive enough remittance information and handle too many paper checks.

These payment issues are among those addressed by Claudia Swendseid, senior vice president of the Federal Reserve Bank of Minneapolis, in her presentation A Faster, Safer, or More Efficient Payment System: What Do Credit Managers Want? Citing the Fed's work with its national Remittance Coalition, of which NACM is an active member, a majority (52%) of businesses surveyed  in late 2015 said they tried to increase the use of the Automated Clearing House (ACH) system for payments. Just 3% said they’ve tried to increase payment from checks. The use of checks often depends on the size of the firm; large firms handle about 50% of their payments in checks, mid-sized about 75% and small companies about 90%, Swendseid told Credit Congress delegates.

B2B use is higher than other payment areas, perhaps unsurprisingly. However, check usage in the B2B environment has remained mostly stagnant from 2006 to 2012. That may partly be due to ACH’s higher accuracy rate, convenience and better fraud protection, not to mention that it’s usually the least costly payment option, she speculated. Meanwhile, 45% of businesses are trying to increase the use of credit cards for their convenience and easier use for working capital management.

While businesses work to sort out how they will be paid going forward, Swendseid pointed to some of the Remittance Coalition’s products—available for free—that can aid them in their use of electronic B2B payments. These resources include a small business payments toolkit and a B2B Directory, which is like a public phone book containing payment identities of payees that accept various types of electronic payments.

“We’re trying to help businesses complete transactions beyond a check,” she said.

- Nicholas Stern, editorial associate

Tech Sector Payment Trends, Insolvencies to Remain Stable This Year

Ascertaining the level of transparency in the products and life cycles of U.S. firms in the information and communications technology (ICT) industry, including knowledge about buyback arrangements for old or obsolete products, is key to choosing successful partners.

“Product life cycles still remain short and therefore a company’s long-term sustainability is driven by innovation and its ability to develop new products and bring them quickly to the market,” according to a recent report on the ICT sector by credit insurer Atradius.

The U.S. ICT market is anticipated to reach $287 billion this year, driven by increased revenues from wearables, 3D printing, virtual reality and drones, as well as a 4% increase in smart phone revenues that could reach $183 billion, the firm said. Still, some areas of the sector (e.g., tablets) may decline, with predictions of a 12% slide this year to $18 billion.

Payment trends within the industry should remain stable this year, similar to those in 2015, with common payment terms between 30 and 90 days, and some accounts taking up to 120 days, Atradius said. Payment delays in this field typically occur due to product pricing disputes, instead of liquidity issues. “Manufacturers often offer price protection or discounts on products in order to move inventory ahead of the rapid innovation of technology experienced in the market,” the firm said. “This can lead to disputes and ultimately an increase in non-payments until the issues can be resolved.”

Also, some exporters of ICT products to Brazil and Latin America have said the economic downturn and currency volatility are impacting cash flow for businesses in the region and accounts there should be closely monitored, Atradius noted.

Meanwhile, ICT insolvencies should also remain stable this year, or even increase by up to 2% in tandem with the overall business trend for American firms, particularly as the industry contains many competitors, startups and quick production cycles.

- Nicholas Stern, editorial associate

Credit Congress: Credit-Banking Partnerships Can Help in Foreign Markets

Credit managers do not often enough take advantage of potential partnerships with their banking partners, speakers during NACM’s 120th Annual Credit Congress & Expo suggested this week.

Closer relationships with banks while selling on terms to and collecting from businesses in foreign markets can often reduce problems in various areas including nonpayment and compliance.

“We can’t replace your compliance team, for example, but we can take some pressure off of you with our resources,” said Nelson deCastro, of Wells Fargo Bank, N.A., during an FCIB-designed session about banking partnerships. “Go for it.”

A key consideration when selecting a bank to partner with is to find one that has strong connections and resources in the countries in which you are dealing, especially ones facing volatile times. Oftentimes, a bigger domestic bank will need to itself partner with a bank closer to the destination of creditor’s products or services.

“We’re not good at underwriting in Brazil—a local bank is going to be better at that,” deCastro said. “Choose a bank in the U.S. that has the ability not to underwrite the companies in Brazil, but essentially underwrite the bank that is in Brazil.”

- Brian Shappell, CBA, CICP, managing editor

Keep Hackers at Bay

Fraudsters are nothing if not creative, and the latest trends in some of the scams they perpetrate on businesses involve targeting victims, noted Claudia Swendseid, senior vice president of the Federal Reserve of Minneapolis, who spoke Monday at NACM's 120th annual Credit Congress & Expo in Las Vegas.

Swendseid cited invoice, executive and extortion/ransomware schemes as a few examples. Invoice schemes can involve a fraudster sending a credit manager a fake invoice, typically in the name of a large supplier. These often contain no spelling mistakes or other obvious indicators that something is wrong.

Another type of fraud businesses are experiencing is where a credit professional is sent an email that appears to be from an executive within the firm with urgent instructions to pay the invoice, Swendseid said. The extortion schemes often involve a criminal locking down key information from your firm and demanding payment for it; if not, the fraudsters claim they'll destroy the information. Still in other schemes, criminals send enticing emails such as a LinkedIn request from a "fellow" worker.

For starters, employees should hover with the computer mouse over any email address to make certain it's coming from the correct location, she said. More generally, the credit team should sit down with its IT department and ask if it encrypts important financial information, Swendseid said. If not, it should; it's an excellent way to secure data, and more secure than any firewall your company may have implemented.

Also, make sure your company has a policy to regularly purge data it doesn't need, she said. That way, you can reduce your exposure to data theft, while also potentially saving money on data storage.

- Nicholas Stern, editorial associate

Annual Credit Congress Open for Business in Las Vegas

NACM kicked off its 120th Annual Credit Congress & Expo with a bang Monday with credit managers from around the world led into the week of elite-level credit education and networking by a keynote address from author Jeff Havens.

Havens used his trademark sarcastic, yet good-natured, wit to explain the importance of mixing a vision for your business or department with strong human connections with staff. That includes giving praise when due, and much more often than criticism, as well as promoting an open-door policy that allows for subordinates to express differing opinions. He said some contradiction can be a sign of a good connection and noted that professionals in the room likely have been contradicted by a spouse very recently, but rarely by an employee.

“The rules that govern our personal relationships may also govern our business relationships,” he said.

During the same opening General Session, NACM unveiled the 2016 Honors & Award winners, which included the following:

  • O.D. Glaus Credit Executive of Distinction: Judy Wagner, CCE, Roche Diagnostics Corp.
  • Graduate School of Credit and Financial Management Student Leadership Award: David Groom, CCE, Allied Building Products Corp.
  • CCE Designation of Excellence: Shane Norman, CCE, Wheeler Machinery Co.
  • CBA Designation of Excellence: Susan Thomas, CBA, Eli Lilly and Co.

“Each of these individuals has driven our profession forward,” said Immediate-Past NACM Chairman Rocky Thomas, CCE. “Whether through teaching, speaking, writing, mentoring or helping us meet the needs of our emerging leaders, these individuals have left their mark on our profession and organization.”

- Brian Shappell, CBA, CICP, managing editor and Nicholas Stern, editorial associate
For much more coverage from NACM's 120th Annual Credit Congress & Expo in Las Vegas, return to our Credit Real-Time blog throughout the week, visit our re-launched Twitter page under the moniker "NACM_National" and check out future editions of eNews and Business Credit. 

Select European National Payment Trends in Construction, ICT Sectors

Public buyers are exhibiting poor payment behavior in the otherwise flourishing German construction industry, while overdue payments in Poland are dragging back the nation’s otherwise rebounding construction sector.

In a series of recent reports, trade credit insurer Atradius gauged payment behavior in a smattering of nations and industry sectors. In Germany, for instance, the German Builders Association anticipates turnover growth to reach 3% in 2016 or some 103 billion euros. Those estimates coincide with a few positive payment trends in the German construction sector. Cases of payment defaults decreased again in 2015 with increasing demand and stable profit margins, and Atradius analysts expect the trend to continue this year. Still, average payments in the sector are about 45-50 days, with public buyers exhibiting the slowest payment that is straining suppliers’ liquidity.

In the Polish construction sector, average payment is at 75 days, Atradius said. This timeframe has been prevalent in the sector for the past two years. “General contractors often transfer costs to subcontractors by delaying payments,” Atradius added, while overdue payments of up to 30 days remain the norm. The nation’s National Debt Register said in March it recorded $352 million in construction companies’ debts, which represented an increase of some $83.5 million since September 2015. Atradius thus expects insolvencies in the industry to remain high this year.

In England, data centers and cloud computing, along with mobile apps and wearable technology development, are contributing to a strong sector, Atradius said. The information and communications technology (ICT) sector’s value-added growth is expected to reach 3.4% this year and 4.4% in 2017, for instance. Payments on average for the English sector are around 60 days, while the number of nonpayment cases hasn’t grown in the past year, and Atradius expects this trend to carry on into the near future. Further, insolvencies are few and far between and should stay low this year.

In Russia, the ICT sector is being hampered by the overall poor performance in the domestic economy. This year, Russian ICT sector growth should decrease by 2.1%, but rebound to positive territory (0.7%) in 2017, Atradius predicted. Payments in the Russian sector vary wildly, from 30 to 120 days, depending on the level of supply chain and market leverage of the business. Meanwhile, nonpayment notifications and insolvencies increased in 2015 and are expected to continue this year. Small and midsized electronics/ICT wholesalers and retailers have been hit the hardest in terms of late payments and insolvencies.

- Nicholas Stern, editorial associate

Overdue Commercial and Industrial Loan Balances Register Sharp Increase

The FDIC’s first-quarter Quarterly Banking Profile report shows an uptick in delinquent commercial and industry (C&I) loans. (The report provides a comprehensive summary of the financial results for all FDIC-insured institutions.)

Noncurrent loans of 90 days or more past due in the C&I sector rose $3.3 billion (2.4%) during the first three months of the year, according to FDIC data. This is the first quarterly increase in total past-due loan balances in 24 quarters and the largest since first-quarter 1987, “driven by a $9.3 billion (65.1%) increase in noncurrent C&I loans,” the agency said. Loans to the energy sector—especially oil and gas—accounted for a large part of the increase.

C&I loans grew by $71.2 billion (3.9%), “with the acquisition of a commercial finance business from outside the industry contributing to the strong growth in reported C&I loan balances,” the FDIC noted. And the average noncurrent rate for C&I loans rose from 0.78% to 1.24%. “This is the highest noncurrent rate for C&I loans since year-end 2011,” it said.

On balance, the Federal Reserve’s April Senior Loan Officer Opinion Survey shows that a moderate number of banks tightened lending standards for C&I loans to large- and middle-market firms and a modest number, to small firms over the three months prior to the survey.

- Diana Mota, associate editor

Moody’s List of Poorer Performers Drops as Defaults Rise

The number of companies on Moody’s Investors Service B3 Negative and Lower Corporate Ratings List declined from May 1 to June 1 as it went from 283 to 290.

The reasons for the drop do not point to improvements in operations, however. Instead, defaults, particularly from the oil and gas sector, fueled the decline, according to Moody’s analysts. The firm removes companies from the list if they are upgraded to B3 stable or higher, or if they default or withdraw. For the first time in three years, defaults among the lower-rated issuers outweighed the credit-positive rating actions by Moody’s.

"While a decline in the size of this lower-rated population would usually be considered good news, defaults accounted for the decrease, which could signal broader issues ahead," analyst Julia Chursin said. In May, for instance, there were eight bankruptcies among companies rated B3 negative or lower; 75% of these companies are in oil and gas. Further, businesses in the sector accounted for some two-thirds of the eight distressed exchanges and one missed interest payment in May.

“May's distressed exchanges continue an unprecedented trend among energy companies to shore up their weak balance sheets via this form of out-of-court debt restructuring,” Moody's said. In total, the oil and gas sector represented 28.6% of the firms on the list from among the 24 sectors tracked by Moody’s.

A variety of sectors, however, were added to Moody’s list in April and May through rating downgrade and a revision of their outlooks to negative. Of the nine additions, three were from the consumer and business service sector, two from manufacturing and one each from consumer products, retail, automotive and metals and mining, the ratings agency said.

- Nicholas Stern, editorial associate

Modest Growth is Apparently Not Very Popular

The latest edition of the Beige Book reports modest or moderate growth in all 12 districts. This is really pretty good news. It would seem to contradict the gloomy outlook, but it doesn’t.

Consumers are weary of all this slow growth and seem to want a real breakout. This is understandable, but modest growth certainly beats sinking back into some kind of recession.

Several interesting points were made in the latest edition of the Beige Book, a somewhat unique offering from the Federal Reserve that is as much anecdotal as it is well-formed assessment. It reflects staff opinions as well as those who are a part of the various Fed advisory boards for the districts and serves as more of a temperature check than anything definitive on the current state of the economy.

Most companies in the 12 regions expect consistent or improving growth in the coming months. That bodes well for additional hiring as well as capital investment. Most of the oil-related industries remain in the doldrums, but there is some expectation that conditions will shift in the not very distant future.

The value of the dollar has slipped a little. That has been mildly encouraging to the export community. The bigger issue regarding exports, however, has been the financial condition of the countries where the U.S. sells. It really would not matter if the dollar was far weaker than it is right now given the slow growth in Europe, China, Brazil and several other markets the U.S. depends on.

One issue that emerged in the course of the Beige Book analysis was the Brexit. The FOMC has been worried about the impact of the U.K. leaving the EU and has been trying to determine what it would mean for the U.S.

The Beige Book look at agriculture anticipates harvests will be solid this year, but that also means that commodity prices will be low. The manufacturing community shows some sectors as thriving and others, stressed. Manufacture of cars and trucks continues to be the production star, but aerospace and appliances also showed gains, as well as business machines and industrial products. Good news is also coming from the banking sector as demand for loans has been up, and those that are doing the demanding are in better financial shape than in the past. The financial sector in general looks to be in good shape, which is why the Fed has been downplaying a 2008-09 downturn repeat.

- Chris Kuehl, Ph.D., NACM economist and co-founder of Armada Corporate Intelligence