New Business Volume Rises in October

New business volume in October rose 2% year-over-year from that in October of last year, though it was down 3% month-to-month from that in September. According to the Equipment Leasing and Finance Association’s (ELFA) Monthly Leasing and Finance Index, which covers economic activity from 25 companies who represent a portion of the $1 trillion equipment finance sector, cumulative new business volume was up 4% compared to 2016, year to date.

“Equipment finance originations continue to grow, albeit slowly, as some sluggish market verticals show signs of rebounding,” said ELFA President and CEO Ralph Petta in a release. “This trend, coupled with buoyed confidence in overall economic conditions, paves the way for a very healthy end-of-year bump.”

Credit approvals clocked in at 74.6% for October, up from 74% in September. Head count for equipment finance companies was up 17.1% year-over-year, though this is attributable mostly to one company in the survey. Participants in the index include Bank of America Merrill Lynch, BB&T Bank, CIT, Hitachi Credit America, M&T Bank, Merchants Bank Equipment Finance, TD Equipment Finance, Volvo Financial Services and Wells Fargo Equipment Finance.

Receivables over 30 days were 1.4%, the same as in September and unchanged from the same time frame last year. Charge-offs were 0.41%, only a slight rise from the previous month. The separate Equipment Leasing & Finance Foundation’s Monthly Confidence Index registered 67 in November, up from 63.7 in October.

“Business confidence is very strong and building, despite the relatively flat growth of originations,” said David C. Mirsky, CEO of Pacific Rim Capital, in the release. “This is because lessors are feeling mounting strength in the overall economy, evidenced by increasing requests for quotations and new orders being placed by lessees in every market segment.”

The hurricanes that occurred earlier in the year have had an effect on the economy, as shown by recent numbers from the “index of indices.” “The Conference Board’s index of leading economic indicators rose slightly more than expected as the economy shrugged off the impact of the hurricanes,” said NACM Economist Chris Kuehl, Ph.D. “It wasn’t so much that the storm damage was ignored—more that the storm aftermath took over as far as the economy is concerned. The initial damage was not quite as severe as had been expected (at least at a national level), but the reconstruction has been swift and has boosted several areas of the economy. The expectation had been a 0.9% boost; the actual improvement was 1.2%, to a total of 130.4.”

– Adam Fusco, associate editor

Cov-Lite Loans Pose Greater Risks as Leveraged Finance Activity Nearly Reaches Post-Crisis High

Corporate creditors should take note that the covenant-lite loans that are predominating in the North American leveraged loans sector provide new risks that could jeopardize lenders’ ability to repay.

Cov-lite loans accounted for approximately 77% of the leveraged loans that Moody’s Investors Service has analyzed since the beginning of 2016; this figure is up from 25% a decade ago. Vanishing maintenance covenants and those covenants providing leveraging, lien and structural protections may not prohibit borrowers from taking certain actions that could harm their ability to pay the loans back, Moody’s said.

"Strikingly, the covenant packages are weakest in lower-rated cov-lite loans," said Derek Gluckman, a Moody's vice president and senior covenant officer. “Cov-lite's domination of the leveraged loan market is now well established. But cov-lite loans are more risky for investors, with the absence of maintenance covenants depriving them of early warnings of distress, periodic oversight and the opportunity to secure a place at the head of the line when enforcing their rights."

Libor spreads are also tightening on these cov-lite loans, the analysts warn. “The expectation of receiving some premium for taking on increased risk remains challenged by extraordinary demand in the loan market,” Moody’s analysts said. “Analysts at the rating agency have observed a compounding of default and structural risks in the lower-rated cov-lite loan space where the weakest covenant packages are found, but noted offsetting compensation is not so clearly evidenced when looking at spreads.”

Meanwhile, in a separate report, Moody’s analysts note that high-yield bond issuance increased to its highest monthly level this year, while overall leveraged finance volumes have reached a post-crisis high.

High-yield bond volumes reached $21.7 billion in October, up from $5.7 billion in September as well as the prior October’s $4.3 billion, Moody’s said. "While larger transactions contributed to the exceptionally large high-yield bond issuance, October's volumes also benefited from the high number of issuers, including first-time issuers, accessing the market. Increased activity in the cable and telecom sectors also boosted loan volumes," said Peter Firth, an associate managing director at Moody's.

Leveraged finance activity so far this year has nearly reached the post-crisis record of $240 billion in 2014.

– Nicholas Stern, managing editor

Business Confidence Hits Three-Year High

More than a third of companies forecast growth, indicating a high degree of confidence in the U.S. private sector, according to IHS Markit’s latest Business Outlook report. Favorable business conditions and new product developments are reasons for the positive sentiment. Expectations regarding future output were also buoyed by strong client demand and larger customer bases. Potential threats to growth include supply chain pressures and changes in government regulations.

“The latest data on industrial production has been as impressive as it has been in several years, and the most interesting aspect of this recovery is that it has come despite the impact of the hurricanes,” said NACM Economist Chris Kuehl, Ph.D. “The drivers for the manufacturing boost have been manifesting all year and continue to pick up speed. The export sector is as strong as it has been since the recession because the economies of Europe and Japan have been on the rebound and they are both important markets for the U.S. The weaker dollar has been a big contributor as well.”

“Optimism among private sector firms is the highest since June 2014 for both output and new orders,” said Sian Jones, economist at IHS Markit. “Moreover, confidence is reflected across both manufacturers and service providers. In line with greater confidence, business revenues are forecast to rise at the quickest pace since mid-2014. Similarly, expectations around profits are the strongest since February 2014. Expenditure on capital investment, however, is predicted to soften from the previous survey period, but remained in line with recent trends.”

Optimism is also high in regards to increasing staffing levels among goods producers for the coming year. Confidence in hiring is at its highest in three years. Service providers also foresee a pickup in job hiring plans. Workforce numbers in the U.S. are expected to grow at a faster pace than the global average.

Supplier shortages and higher raw materials prices will weigh on the cost burdens of private sector firms over the coming year, though companies expect just a mild rise in input prices compared to the global average, IHS Markit said.

– Adam Fusco, associate editor

Some U.S. States Will Lose More than Others under NAFTA Renegotiation

As President Trump’s administration takes more of a hard line on trade, it may be time for an evaluation of the effects changes in policy may have, and in detail. In a recent report, Fitch Ratings assesses the impact of changes to or withdrawal from the North American Free Trade Agreement (NAFTA) on individual states and the role they play in trade with Canada and Mexico. Though it seems the administration is willing to renegotiate the trade pact rather than withdraw from it altogether, the ratings agency looked at data in light of minor changes to NAFTA that could result in prolonged negotiations as well as major disruptions in trade that could occur from a complete withdrawal.

North Dakota is at the top of the list among states in terms of its export exposure to Canada, according to a ranking of U.S. states’ 2016 import and export trade volume with Canada and Mexico from the U.S. Census Bureau. A total of 82% of North Dakota’s exports were sent to Canada in 2016. New Mexico is No. 1 by volume of exported goods shipped to Mexico, with the Mexican domestic market the destination for 43% of that state’s exports, Fitch said.

The states with the largest export exposures to Canada, after New Mexico, are Maine, Montana, Michigan, Vermont, Ohio, Missouri, South Dakota and Indiana. Major export industries include farm products, energy (i.e., oil and natural gas), machine parts and automotive products.

Eleven U.S. states send 30% or more of their exports to Canada, including those above, and 24 others depend on Canada for at least 20% of their exports. Imports of industrial and consumer goods in these states are heavily weighted toward Canada. A withdrawal from NAFTA would greatly increase import tariffs, imposing substantial costs to U.S. importers and consumers, Fitch said.

Mexico took in 40% of Texas’ exports by product value in 2016, and the Mexican domestic market was the recipient of 38% of Arizona’s and 15% of California’s exports. Due to the complex supply chain in the automotive industry that started in 1993, when NAFTA was signed, Michigan is a big component in U.S./Mexico trade. Twenty-two percent of Michigan’s exports by value, mostly automotive and heavy machine components, were destined for Mexico in 2016. Other states with important exporting relationships with Mexico include South Dakota, Nebraska, Iowa, Kansas and Missouri.

Michigan is in a unique position if NAFTA’s terms change drastically, due to its proximity to Canada and prominent role in the automotive industry. Sixty-five percent of the state’s exports went to Canada and Mexico, resulting in 7.4% of its Gross State Product in 2016.

– Adam Fusco, associate editor

U.S. Steel Sector Has Stable Outlook

The U.S. steel and metals sector is stable overall, according to the latest Market Monitor from credit insurer Atradius. The demand for U.S. steel is expected to increase by roughly 3% in 2017 and 2018, following a nearly 5% decline in 2016.

“While the overall financial and credit conditions are generally stable, steel/metals companies still must be financially very viable in order to obtain their preferred lending terms and interest rates,” said Atradius. Since the second half of last year, steel prices have rebounded. There was a profit margin deterioration in 2015 and the first half of 2016 due to the lower cost of imported steel and a drop in demand from the oil and gas sector.

Overall, payment delays and defaults have stabilized. Payments on average take from 30 to 45 days domestically and 60 to 90 internationally. Industry insolvencies are not expected to rise much this year and next year. “However, an increase in both payment delays and business failures in Puerto Rico and the area around Houston with its large oil industry cannot be ruled out,” said the market watch report. This is due to the recent hurricanes to make landfall.

The possibility of a major infrastructure plan “would certainly help the sector,” said Atradius. This was one of three strengths for the industry, along with lower insolvencies and a businesses’ stable financial situation. International trade wars and increasing competition were among the weaknesses.

Atradius also reviewed the steel industry in other countries, including China, Germany, the U.K. and India.

– Michael Miller, editorial associate

Small-Business Optimism Rises in October

Small-business owners expect higher sales and anticipate that now is a good time to expand, according to October’s Index of Small Business Optimism from the National Federation of Independent Business (NFIB). Four of the index’s components rose while five declined slightly, and one remained unchanged. The categories of expansion and sales expectations each climbed six points; the job openings category rose by five points. Overall, the index rose to 103.8 in October, up from 103 in the previous month.

“Owners became much more positive about the economic environment last month, which suggests a longer-run view,” said NFIB Chief Economist Bill Dunkelberg. “In the nearer term, they are more optimistic about real sales growth and improved business conditions through the end of the year.”

The labor market remains tight for small-business owners, which has been a trend the past year. Among owners, 59% reported that they tried to hire in October; 88% of them reported finding no or few candidates who were qualified. Construction firms are still trying to meet demand due to the recent hurricanes, with the result that hiring activity was particularly strong in Florida and Georgia.

Just 2% of small-business owners said that financing was their top business problem. Four percent reported that all of their borrowing needs were not met, a historical low. Twenty-nine percent said that their credit needs were met, a decrease of four points, and 53% said they were not interested in a loan, an increase of two points.

“Consumer sentiment surged based on optimism about jobs and incomes, an encouraging development as consumers account for 70 percent of GDP,” Dunkelberg said. “We expect a pickup in auto spending as people in Texas and Florida continue to replace cars that were damaged in hurricanes. We expect the same increase in home improvement spending, partly because of the hurricanes, but also because of the skyrocketing price of homes.”

– Adam Fusco, associate editor

China Looks to Expand Presence of International Aircraft Lessors

Thanks to a rise in the number of Chinese consumers able to spend more on travel, Chinese aircraft lessors are expanding rapidly and bringing added competition to the global marketplace that may further pressure the yields and margins of established companies.

China’s growth in air traffic has been a key driver of strong global demand for commercial aircraft, and in a recent report by Fitch Ratings analysts expect the rapid pace of this growth to continue, with revenue per passenger kilometer likely to increase to 10% per year over the next decade or so. So far this year, 42% of Chinese aircraft deliveries have been lessor-owned, up from 33% in 2012.
China’s Belt and Road initiative and Go Global strategies are also helping drive Chinese lessors pursuing international expansion, Fitch said. This expansion is also aided by airspace bottlenecks and a lack of airport capacity for domestic routes.

“Chinese-backed aircraft lessors are competing aggressively in the global market across the spectrum of future aircraft orders, new delivery transactions and the leasing of older aircraft,” Fitch said. “Chinese entrants may price risk differently from established players, given their growth priorities and generally shorter track record in aircraft leasing. Leasing subsidiaries of leading Chinese banks [are] also benefiting from their parents' funding and capital support, which may lower their funding costs and provide an advantage over standalone global competitors.”

Increasing competition in the worldwide market could pinch profitability and weaken underwriting standards for established international lessors, thus raising the risk of market shocks putting pressure on lessors’ ratings. “Several airlines have already been forced into bankruptcy this year, including Monarch of the U.K., Air Berlin and Alitalia. This illustrates the weak credit quality of some airlines even in a benign market environment, as well as the dangers for lessors of significant airline customer concentration,” analysts said.

– Nicholas Stern, managing editor

G20 Nations Issue Fewer Trade Restrictions in Recent Period

G20 economies have introduced fewer trade-restrictive measures since May than the prior period and many more trade-friendly measures, according to a new report from the World Trade Organization (WTO).

Nations within the trading block adopted 16 new trade-restrictive measures from May to October, including new or increased tariffs, export restrictions and local content measures; this was about half of the number of measures introduced from mid-October 2016 to May 2017, the WTO said. Meanwhile, G20 economies implemented 28 measures designed to facilitate trade from May to October.

“G20 members have shown restraint in implementing trade-restrictive measures, despite continuing economic uncertainties,” said WTO Director-General Roberto Azevedo in a press release. “This is positive news and it shows again that the global trading system is working. Nevertheless, the threat of protectionism remains and so I urge G20 countries to redouble their efforts to avoid implementing new trade restrictions and to reverse those measures that are currently in place.”

– Nicholas Stern, managing editor

Emerging Market Corporate Ratings Hindered by Commodities Downturn

Even though global economic growth is set to be the strongest since 2010, the corporate ratings of emerging markets (EM) will take time to catch up. According to a recent report from Fitch Ratings, the downturn in commodities has damaged balance sheets and the Brazilian recession is also a drag on international ratings, despite a likely 10% increase in revenues this year among emerging markets as a whole.

Though Fitch expects that eventually the positive economic atmosphere will shift the direction of its rating actions, it will not likely happen until next year. So far in 2017, EM corporate downgrades have outnumbered upgrades 60 to 45. Ratings outlooks and watches have also tended toward the negative, though less so compared to last year.

Global GDP is expected to increase by 3.1% in 2017 and 3.2% in 2018 from strong growth in the U.S. and robust performance in the eurozone, Fitch said. This will support demand of EM exports. The two years of economic contraction in Brazil, however, weighs on ratings, though a return to growth in that country is anticipated.

Commodity prices, with the exception of oil, have outperformed Fitch Ratings’ expectations. This, along with a weakening U.S. dollar, should contribute to conditions that will lead to expansion for EM corporates. The largest contributors to growth will be energy companies, Chinese domestic homebuilders, utilities, building materials firms and construction firms, Fitch said. Year-end leverage will decline in all regions except China, where a reduction is not expected until 2018.

– Adam Fusco, associate editor

Moody’s: 2018 Sovereign Creditworthiness Outlook Is Stable

Sovereign creditworthiness has a stable outlook for 2018, according to Moody’s Investors Service. The “healthy growth and synchronized global economic expansion of 2017 [is] likely to continue into 2018,” said the ratings agency in a release.

Moody’s rated 137 sovereigns in its most recent 2018 outlook. Nearly three-fourths of them have a stable outlook, while 10% have a positive outlook and 22 sovereigns have a negative one. There were 35 negative outlooks a year ago.

"The macroeconomic environment for sovereigns is more favorable than it was a year ago," said Moody’s Managing Director of Global Sovereigns Alastair Wilson. "Moody's expects global GDP growth in 2018 to remain over 3% in 2018, similar to 2017. That benign economic backdrop allows governments a longer window in which to carry out economic and fiscal reforms."

Despite a favorable global outlook, Moody’s cites several challenges that prevent “a greater improvement in global credit conditions,” according to the report. Among the issues are political uncertainty and social tensions. This problem can be seen in Brazil, South Africa and Turkey, noted Moody’s. “Overall, slow progress on reforms leaves many sovereigns more vulnerable to a deterioration in their credit profiles in the event of a shock.”

Public debt levels are also a cause for concern, but Moody’s predicts almost half of the sovereigns’ debt burdens will stay within one percent of current levels. "While benign economic conditions lower the risk posed by high debt levels, few sovereigns have much, if any, fiscal space to respond to shocks," explained Wilson. Heightened geopolitical risk is the third challenge listed by Moody’s, which could “potentially undermine the stable outlook for sovereign credit.” Among the specific challenges were U.S. protectionism, a potential military conflict in Korea and tensions in Spain.

– Michael Miller, editorial associate