British Business Confidence Hits Low Point

In comparison to the constant angst and turmoil in the rest of Europe, the U.K. would have to be described as good to tolerable. The pound sterling has been rising along with the dollar, and the Bank of England has not felt the need to get radical with stimulating of late.

This is not to suggest, however, that all is well in Britain from an economic point of view. Parts of its population have seen precious little gain, and high unemployment continues. The latest iteration of the BDO business optimism survey does not point to an inspired or confident corporate community. The index dropped to 100 for the first time since 2013, and that surprised more than a few analysts given that most of the data recently have been OK. Few thought the mood was improving, and few thought it was going to get markedly worse.

The issues that put respondents in a sour mood are about what one would expect, but it came as something of a shock to see how disturbing these seemed to be. At the top of the list was the overall health of the global economy and growing concern over the status of the Chinese economy. Few businesses in the U.K., however, do all that much with China, and it is far from a major export destination for the British. It is certainly a source of imports, and that should have people in a better mood given the status of the pound. The British interact more with the U.S., and that market has remained more or less viable. Europe is always the most important export market, and the financial issues there have been serious to say the very least.

For the most part, the worries that have affected the British business community are the same as those that have affected the rest of the world, but there is one factor that is unique to the U.K and has had much to do with the community’s nervousness. British ambivalence toward the EU is up for debate again, and many people are really worried about whether the U.K will stay in the European Union.

The “Brexit” is not something motivated by economic failure and a desire on the part of the other members to force withdrawal as the “Grexit” promised to be. This is not Greece; this is the response of a country that has never been totally convinced it should be engaged heavily into the matters of Europe. The EU is generally viewed as a European invention and one that interferes with Britain far more often than it helps. The refusal to join the eurozone was motivated by this British suspicion; and over the last few years, it has appeared this decision was a good one. Will Britain vote to leave the EU in the referendum? Most assert the vote will be close, but that the U.K. will stay engaged, but there is enough doubt that the business community is worried that such a move would be damaging to the economy

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

Percentage of ‘Troubled’ Companies Surges to Open Year

A monthly study that tracks the percentage of companies with increased default risk showed its worst deterioration in several years this January, with a singular industry sector in the United States responsible for nine of the world’s 10 riskiest firms. The data arrive with a message that risk evaluators may need to up their collective game in 2016.

Kamakura Corporation’s Troubled Company Index, which tracks companies carrying a default probability that exceeds 1%, jumped 3.23% in one month through the end of January to settle at 13.71%. At one point mid-month, the index appeared to track as high as 16.83%, easily a record for the index in the last five years, according to Kamakura statistics.

“The Troubled Company Index has been steadily signaling increased risk since hitting an intra-year low last April,” said Kamakura President/CEO Martin Zorn. “One month into the New Year, we see continued weakening of global economic conditions; 21% of global GDP is covered by a central bank. In the current environment, risk managers must use multi-factor models with robust stress analysis. Single-factor or even three-factor models could fail analysts.”

Though matters outside of the United States are weighing heavily on the overall Kamakura reading, the 10 riskiest companies in January are all based domestically, with nine of them operating in the natural resources/energy sector. The only exception is Cumulus Media Inc., which carries the largest Kamakura Default Probability (54.6%) of the 36,000 public firms tracked. The company with the largest probability in December, concert festival-focused event promoter SFX Entertainment, filed for bankruptcy protection early this week.

 - Brian Shappell, CBA, CICP, NACM managing editor

Shocking East Coast Port Walkout Shrouded in Mystery, Logistical Headaches

Expectations and concerns regarding potential labor peace disruptions at U.S. ports have been heavily focused on West Coast-based operations. To the surprise of shippers and even union leadership, the first port flashpoint of 2016 occurred last week on the opposite coast at the Port of New York and New Jersey and with almost no warning or subsequent explanation.

On Jan. 29, workers at the third-busiest domestic port walked off the job, causing thousands of backups well into the following week. The walkout lasted less than a full day, as both an arbitrator and union leadership failed to support the action. International Longshoremen's Association (ILA) leadership instructed the workers to "to accept orders and return to work immediately" and noted it had "heard your voices" in a message posted on its website. The cryptic message offered no explanation for the reasoning behind the walkout, though worker unrest at many U.S. ports has been escalating because of concerns over perceived working conditions issues, outdated technology, crumbling infrastructure and ship/load sizes. ILA leaders appeared angry at their own membership in public comments about the incident and said they were not made aware of any plans for a walkout last week.

This is the first significant port incident since last year, which saw a number of disputes between union workers and port ownership. In early 2015, operator Pacific Maritime shut down many ports along the U.S. West Coast, including the Port of Los Angeles and the adjacent Port of Long Beach, alleging workers from the International Longshore and Warehouse Union (ILWU) intentionally reduced production in protest over unresolved contracts and poor working conditions. The shutdown lasted only a few days. In 2012, a 10-day work stoppage cost West Coast ports upward of $1 billion per day. Work stoppages in present day could cost at least double that because businesses have sought more buyers, in B2B and retail, outside of the U.S. due to weakened demand during the recession and increased trade support programs promoted by the Obama Administration.

In addition, the two largest freight ship dockings in U.S. history occurred in Los Angeles. Although an achievement in that the so-called "mega-ship" was more than 20% larger than any previous domestic port docking, questions about workloads and equipment are expected to follow. Los Angeles and Long Beach operations serve an estimated one-third of all U.S. imports.

- Brian Shappell, CBA, CICP, NACM managing editor

Getting in Front of a Customer’s Bankruptcy

Commercial Chapter 11 filings registered their first year-over-year percentage increase since 2009 as the 5,309 filings during 2015 represented a 2% increase over the 5,188 commercial Chapter 11 cases filed the previous year, according to the American Bankruptcy Institute and data provided by Epiq Systems, Inc. And some financial experts predict current economic conditions could push those numbers higher. “Energy, steel, health care and retail are industries that are particularly vulnerable,” said Bruce Nathan, Esq., a partner with Lowenstein Sandler LLP.

At some point in their career, credit professionals will likely find themselves working with financially distressed customers that are at risk of insolvency. “Identifying the warning signs of a financially distressed customer months, and even years, before a bankruptcy filing and knowing what steps to take to reduce your company’s exposure could help mitigate any adverse impact to your company,” he said.

Using his more than 30 years of experience in bankruptcy, restructuring and insolvency, Nathan will present NACM’s upcoming webinar, Bankruptcy Rumblings: How to Best Position Your Company in Advance of Customer Bankruptcy, from 3-4 p.m., Feb. 10. The program will cover the early warning signs that characterize troubled companies at risk of a bankruptcy filing and the available sources of information credit executives can access to become aware of these risks.

Nathan will demonstrate via numerous examples and recent case studies how these warning signs mushroom toward the inevitable. Nathan will also review what questions credit professionals should ask and what information they should obtain from a financially distressed, privately held customer. Attendees will learn how they can use this information to protect their firm from the risk of nonpayment as well as utilize available legal tools to reduce terms and improve the likelihood of payment of claims against a struggling customer.

-- Diana Mota, associate editor

Register for the webinar on the NACM website.

Credit Managers’ Index Looking to Open 2016 with Positive Trend

NACM’s Credit Managers’ Index for January, to be released Thursday morning at www.nacm.org, is expected to show significant improvement overall, though some trouble spots still exist. Even with projected improvement, the CMI’s combined reading is more likely to rival October’s showing (53.9) than 2015’s July peak (56).

Pushing any potential positive trends for the combine index would be the performance of favorable factors categories. Although a surge in the sales category would be most appreciated, increases in new credit applications, dollar collections and amount of credit extended are more likely to carry that side of the CMI equation. Don’t expect much from combined unfavorable factors readings, which appears mired near the contraction zone (anything below 50).

NACM Economist Chris Kuehl, PhD. suggested that some of the positives in the January data may have  counterbalances in other categories. “It appears there is interest in new credit and that means that companies are considering expansion,” Kuenl noted. “The cautionary note here would be an increase in rejection of credit applications in the unfavorable indices.”

However, Kuehl noted that the ongoing willingness of creditors to extend terms is a good sign.

“This suggests that there are some good customers with good credit out there," Kuehl said.


- NACM

Four Countries Receive Higher Risk Ratings

In the last quarter of 2015, Euler Hermes upgraded risk ratings for four countries, which began showing economic growth and improvements.

Côte d’Ivoire showed improvement last quarter as it went from an orange D3 rating to an orange C3. The West African nation’s gross domestic product (GDP) growth is forecast to reach 7%, or higher, in 2016 and 2017. Cyprus also remains a risky country, but improved its red B4 rating to an orange B3. The country lifted capital controls, successfully returning to bond markets with low interest rates, and its GDP is growing.

Economic growth in Honduras is set to remain strong in the coming years, and its country risk rating increased from an orange C3 to a yellow C2. The International Monetary Fund and Honduran government enhanced fiscal and external positions; inflation is contained and the fiscal deficit significantly narrowed. The business environment, however, remains problematic. “Although it performs particularly well with regard to getting credit and trading across borders, important shortcomings remain in enforcing contracts, protecting investors and resolving insolvency,” Euler Hermes says.

Real GDP growth in Ireland is strong, and its risk rating improved significantly from a yellow BB2 to a green A1. Ireland’s fiscal deficit has fallen, and debt sustainability has improved. “The expansion in both manufacturing and service sectors should remain strong, the consumer is likely to continue to benefit from a better economic outlook and external demand for Irish products should remain dynamic thanks to the improved price competitiveness,” Euler Hermes states.

- Jennifer Lehman, marketing and communications associate

New Sanctions Target Iranian Trading Network

One day after the United States lifted decade-old sanctions against Iran, the U.S. Department of Treasury’s Office of Foreign Assets Control (OFAC) designated 11 entities and individuals involved in procurement on behalf of Iran’s ballistic missile program.

The new sanctions target a trading network, which "obfuscated the end user of sensitive goods for missile proliferation by using front companies in third countries to deceive foreign suppliers,” OFAC said. Specifically, the agency sanctioned United-Arab-Emirates-based Mabrooka Trading Co. LLC and its China- and UAE-based network as well as five Iranian individuals.

Tensions between Iran and the United States are far from over, said NACM Economist Chris Kuehl. “At the same time that sanctions are being lifted as part of the nuclear deal, the U.S. has imposed new ones on companies and entities that have been contributing to the Iranian missile program.” Iran has asserted it will “aggressively pursue its legal rights on this program,” Kuehl noted. “The tit-for-tat may be a diplomatic ploy so both leaders of the U.S. and Iran can look tough at the same time that they are making progress toward some real cooperation on the issues that matter the most to them. The U.S. stalls its nuclear program, and the Iranians get to sell more oil.”

In a U.S. Department of Treasury press release, Adam Szubin, acting under secretary for Terrorism and Financial Intelligence, states: “Iran’s ballistic missile program poses a significant threat to regional and global security, and it will continue to be subject to international sanctions. We have consistently made clear that the United States will vigorously press sanctions against Iranian activities outside of the Joint Comprehensive Plan of Action – including those related to Iran’s support for terrorism, regional destabilization, human rights abuses, and ballistic missile program.”

Iran has denounced the new sanctions as having “no legal or moral legitimacy.”

- Diana Mota, NACM associate editor

‘Brutal’ Year Anticipated in the Oil Sector

By now it would seem that everybody on the planet is aware that there has been a collapse of epic proportion in the oil world. A number of factors, however, make this story compelling, and the most important of these is the fact this was so unexpected and unpredictable. Although there is nothing new about oil gluts or the volatility of this market, the past year or so is unprecedented in its extent and severity. It seems that none of the usual rules are being followed and that creates consternation as far as what happens from here. It doesn’t seem logical at first blush, but those who take the long view are really concerned that oil prices could hit all-time highs in the not-all-that-distant future—maybe as high as $200 a barrel if the whole scenario plays out as feared.

The first issue to consider is why reaction to the current glut has been so different. In the previous situations, producers took familiar steps to get prices back up. They cut production. In the last 30 to 40 years, the reduction in output was essentially managed by the OPEC cartel—this was the main reason the cartel was formed in the first place. Major oil states agreed to act in a unified manner to manage the supply and price of oil. As OPEC lost control over the oil world, there was considerably less interest in cooperation and it became every country or producer for themselves. Even without a cartel calling the shots, it would seem logical for producers to reduce output when demand slumps, but there has been a significant change in the way that oil is developed.

The big changes in the oil world have been driven by technology over the last few years and that has changed the strategies of the producer. There is a great deal of investment in oil now, and that makes producers reluctant to halt production even as prices fall—they need the cash flow even if it is significantly reduced. The other change of note is that oil extraction is harder than it once was. Twenty or 30 years ago, an oil producer could essentially turn the spigot on and off. If one wanted to reduce output, it was a pretty simple task, and when the demand went back up, the ramp up was swift. That is no longer the case, as shutting down operations can be costly and getting things back can be even more expensive. Many producers are electing to keep on developing as it is cheaper to sell at a low price now than to try to get back to normal production levels later.

This is the essence of the long-term concern. Producers are going to face a wall sooner than later. They have already elected to halt almost all new drilling and even exploration. There is far too little profit to be made to justify any additional capacity. The next step will be to shutter current production in an attempt to dry up supply. Unfortunately, these closures will not be strategic or organized—this will be businesses and operations failing and leaving the market altogether. If this happens enough, there will soon be too few producers to handle future demand. The situation will reverse and in a hurry. The demand will not be met, and suppliers will not be able to rush back into business and the glut suddenly reverses and becomes a major shortage—hence the fear of $200 a barrel oil.

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

Global Service PMI Falls for 11th Month

Growth in the global service sector fell to an 11-month low, mainly due to weaker economies in the United States and China, according to a recent news release from JPMorgan and Markit. The JPMorgan Global Services Business Activity Index dropped to 53.1 in December, down from 53.9 in November

“Sector data launched [Jan. 6] provides useful insight into the key drivers of the slowdown, which was largely the result of a reversal of fortunes for the consumer services sector,” explained David Hensley, director of global economic coordination at JPMorgan. “In contrast, the performances of the business services and financial services sectors remained solid in comparison.”

In the U.S., the PMI survey showed its service sector losing momentum, pushing the overall rate of economic expansion down to its weakest for the year, noted Markit Economist Chris Williamson. While the economy grew by 1.9% in the fourth quarter, the weakness seen last month has raised concerns that growth is not strong. “The survey also signals robust employment growth, but likewise suggests the pace of hiring has slowed since earlier in the year as businesses have become more cautious in the face of worries such as the forthcoming elections, the strong dollar, global growth jitters, and the outlook for interest rates,” Williamson said.

In the U.S., output expanded at its slowest pace; in China, growth was only marginal. Brazil, Russia, and Hong Kong, however, saw a significant decline in output, and France fell back into contraction. The United Kingdom, eurozone and Japan saw similar rates of output expansion from the previous month.

The U.S., eurozone, U.K. and China all saw a rise in staffing levels, while Hong Kong and India were unchanged. Brazil and Russia, however, cut back sharply on staffing levels.

According to the Jan. 8 Markit Global Sector PMI, metals and mining posted the steepest drop in production in three years. On a whole, global growth in 2015 was driven by finance, food and drink, pharmaceuticals and hi-tech services.

- Jennifer Lehman, NACM marketing and communications associate

Singapore's Fragile Growth Signifies Weakened Global Trade

Despite strong real gross domestic product (GDP) growth during the fourth quarter, Singapore’s economy remains fragile with 2015 representing the weakest year for growth since 2009, according to Wells Fargo Economics Group. While GDP increased by 5.7% in the final quarter of 2015, Singapore’s real GDP only grew by 2% on a year-over-year basis.

The country’s manufacturing sector impacted overall economic growth, with output contracting for the third straight quarter. “Weakness in industrial output primarily reflects Singapore’s exposure to the slowdown in global growth and trade activity, as much of the country’s manufactured output is ultimately exported,” the Jan. 4 report states.

Construction output recovered after contracting in the third quarter, but only increased 2.2% from last year. The service sector, however, is stable and increased 3.2% from a year earlier. “The relative resilience in service sector output despite contraction in manufacturing activity is an encouraging development, and one that has been echoed in several other large economies, particularly in China and the United States,” according to Wells Fargo.

Overall consumer price index (CPI) is negative and slow growth over the past year has given way to an absence of inflationary pressures in Singapore’s economy. This gives the Monetary Authority of Singapore the ability to reduce its target pace of appreciation for the country’s currency. “Relative to the U.S. dollar, the Singapore dollar has actually depreciated roughly 7% over the same time period,” reads the report. “With the Federal Reserve expected to continue increasing the federal funds rate in the coming quarters, [we] expect the Singapore dollar to see gradual declines vis-à-vis the greenback in the year ahead.”

- Jennifer Lehman, NACM marketing and communications associate