Number of Troubled Companies Rise in Latest Default Risk Study

A monthly study tracking the probability of defaults among companies rose to its highest level in several months in June. The dubious list was dominated by companies based in Greece and the United States.

An index tracking the percentage of companies with a default probability exceeding 1% rose a half-percentage point from May to 6.51%, according to research firm Kamakura Corporation. That total is more than two percentage points higher than one year ago.

The riskiest company listed, amid concerns of a Greece exit from the eurozone and increasing trouble in renegotiating debt with European and International Monetary Fund leaders, is Greek financial institution Piraeus Bank SA. With a KDP (Kamakura Default Probability) score of 52%, it is one of four Greece-based banks among the 10 riskiest companies at present, at least according to these metrics. Dubiously, it is also one of just two companies with a KDP exceeding 50%—Japan’s Sharp Corp. measured at 50.1% after being below 5% just three months ago.

Four U.S. based companies—Resolute Energy Corp., Hercules Offshore Inc., Warren Resources Inc., Quicksilver Inc.—placed in the top 10 riskiest. Resolute Energy was deemed riskiest in fourth place overall, with a KDP of 36.4%. This continues a trend of problems within natural resource-based and energy-related companies since the U.S. shale boom inspired an oil price freefall and a glut of producers operating in the industry.

- Brian Shappell, CBA, CICP, NACM managing editor

Congress Abandons Export-Import Bank … For Now

Right up to the last minute, it seemed that the vote for re-authorization of the Export-Import (Ex-Im) Bank of the United States would have the support needed by federal lawmakers. In the end, Congress elected to head out of town for the Independence Day recess without passing legislation that would preserve the institution, meaning its doors are essentially shut unless it comes up again later in the month as part of another legislative effort.

The Ex-Im system is simple enough. A nation or company overseas wishes to purchase something from a U.S. company but lacks the money to do so. The foreign borrower gets a loan from the Ex-Im Bank at very competitive rates to enable the purchases of these U.S.-made goods. The money is a loan, not a grant or gift. Historically, these have been routinely paid back in full and on time, as foreign buyers want to be able to access the program in the future. They generally play by the rules.

The opposition to the Ex-Im Bank comes from Republican conservatives who have equated the program with “corporate welfare.” This is a decidedly strange attack given the way the Ex-Im Bank works—it has been taxpayer-neutral or generated a surplus in the vast majority of its years of existence. There are literally thousands of direct subsidies and specific trade preferences issued to various business sectors in the U.S that would closer fit the definition of corporate welfare.

Much has been made of the fact the biggest users of the Ex-Im Bank are companies like Boeing, Caterpillar and General Electric; but they are among 1,700 smaller operations that have taken part in and routinely benefitted from the system. Those three are also competing against companies receiving massive subsides from foreign governments, and the trio relies upon Ex-Im to help level the playing field somewhat.

The opposition is hard to understand and that has led many to theorize what underlying factors might really be behind the objections (re: pressure from big banks that see Ex-Im as a competitor, lawmakers with unrelated disputes with companies like Boeing and Caterpillar, etc.).

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

Another Go at Pro-Supplier, Pro-Subcontractor Federal Legislation Due This Summer

Even as the Senate stripped out surety protections that were tacked onto a bigger legislative effort—one passed by the House with those measures still in—just days ago, the fight against the inadequacy of current federal surety laws isn’t going away so easily.

Jim Wise, NACM’s lobbyist with the firm PACE LLP, warned weeks ago that the Senate, like in past years, could pose an obstacle for those pushing for surety reform. Since the latest defeat, Wise said new legislation with such protections has been slated for consideration in the Senate’s Homeland Security Committee in late July. Among other issues, Senate lawmakers expressed frustration with attempts to tuck in unrelated provisions within a massive defense spending measure, as was the case earlier this month.

The American Subcontractors Association, which has been rallying consistency for improvements to federal surety mandates, said that legislation, S. 1526 (Construction Consensus Procurement Improvement Act of 2015), would include the following:

  • Prohibit the use of reverse auctions for awarding contracts for federal construction and design services to help maintain the integrity of the bidding process for construction.
  • Curb use of fraudulent individual surety bonds on federal construction by using an existing standard in the Miller Act to ensure performance and payment bonds issued by a non-corporate surety are backed by assets that are real, adequate and readily available.
  • Expand opportunities for small firms in the federal construction market by increasing the guarantee of Small Business Association

The Senate passed the National Defense Authorization Act for Fiscal Year 2016 last week, but not before stripping out legislation included to improve individual surety protections. The legislation was designed to establish clearer standards for assets pledged by an individual surety on federal construction projects included statutory language designed to require an individual surety to solely pledge assets currently allowed by law directly to the government and place those assets in the care and custody of a federal entity. It also sought to increase the amount of surety bond guarantees from the Small Business Administration from 70% to 90%.

- Brian Shappell, CBA, CICP, NACM managing editor

CMI Sneak Peak: Positive Trend May Prove Elusive in June Statistics

Although data won’t be finalized and released by NACM until Tuesday, the June 2015 Credit Managers’ Index (CMI) seems to have something for everybody: the optimists, the pessimist and the neutrals. That’s not necessarily a good thing for fans of consistency. 

It appears the June CMI reading will not build upon the last two month’s increases, though the combined index also is nowhere near the level of contraction. “It’s more of the see-saw, and this is really starting to get tiresome,” said NACM Economist Chris Kuehl, Ph.D. “Every month there comes a new set of data releases. Every month the clear statement proves to be elusive once again. There always seems to be something for both optimists and pessimists to latch on to.”

The silver lining is that the CMI readings have remained well above the 50 line that divides expansion from contraction for more than three years. In addition, there will likely be positive news within the Index of Favorable Factors, notably in new applications and amount of credit extended, than bad. Even categories that seem to be on a mild downward trend, like sales, should remain comfortably in the upper 50s.

The unfavorable factors, however, could be the black cloud for June, as preliminary statistics foreshadow a decline from May’s level (50.9) that was already too close to contraction for comfort.

Manufacturing data also appear to lack anything resembling continuity of late, according to Kuehl. “On the one hand, there is some hope for better numbers in the future, as the favorable look better than they have in a long while; but the present is not so positive, as the unfavorables are getting worse,” he said. “[The latter] signals many companies are not in the shape they would like to be and are falling behind in their obligations.”

- NACM staff

Last Minute Deal Gives Trade Deal Life After Long Fight

There have rarely been such intense lobbying efforts on the part of the Obama White House as there were to garner Congressional approval of trade promotion authority. In the end, they enabled a deal in the Senate that will snatch victory for President Barack Obama’s prized trade platform from what seemed like certain defeat.

The Senate has passed legislation that will grant Obama “fast-track” authority, meaning the president can negotiate trade deals and present them before Congress for amendment-free voting. Obama needs this authority to bring the 12-nation Trans-Pacific Partnership (TPP) to conclusion despite intense opposition coming mostly from within his own party.

It was clear that few Congressional Democrats were very comfortable with Obama and Republicans in lock-step on an issue. Even Democrats in states that depend on trade and would benefit from better access to emerging Asian nations could not bring themselves to back authority that will likely lead to the TPP’s completion. After all, there also continues to be intense opposition from the unions and the progressive wing of the party.

In the end, 60 senators voted in favor of re-establishing the authority, the same number of lawmakers who days earlier blocked a move brought by a far-right Republican that would have closed down debate on the legislation. With the pact heading to the president’s desk by the end of the week, Obama will now be part of a global meeting on the trade pact next month and the long-delayed TPP will likely become a reality.

Foreign policy has not been viewed as Obama’s strong suit as a president, and he has few global allies of note. Even as Obama has been a supporter of trade in the past, nobody expected this kind of determination. Still, the president’s team of economic advisers is largely in favor of free trade and believes that the U.S. economy needs global engagement to thrive, emphasizing exports and the kind of jobs such activity generates.

- Chris Kuehl, Ph.D., NACM Economist and Armada Corporate Intelligence

Credit Insurer: Oil-Dependent Economies, Including Canada, among Countries Placed on Negative Watch

Global credit insurer Coface, in its quarterly country risk Panorama, has lowered the growth forecast of emerging countries to 4% for 2015, compared to 4.2% in March 2015. The outlook for developed economies has improved to a 2% growth forecast for 2015 and 2016, up from 1.5%.

Hydrocarbon-exporting countries are suffering from the consequences of their dependency on the oil sector:
  • Canada's A1 country assessment has been placed under negative watch, due to the impact of the decline in oil prices on investment, the risks weighing on the property sector and the negative growth during Q1 2015.
  • Algeria's A4 assessment has also been placed on negative watch. The decline in oil prices has had a negative impact on public accounts and the country's current account. If prices do not pick up, activity in the country will remain sluggish. 
  • Gabon's B assessment has been placed on negative watch. The country's high dependence on oil should result in a slowdown of economic activity to 4% in 2015 (compared to an average of 5.4% in recent years).

Also, China’s assessment has been downgraded to A4. The country's level of private debt has increased to 207% of GDP in 2014, compared to 130% in 2008, according to the IMF. This level is considered worrying and is far higher than the levels noted in other emerging countries. As such, the solvency of companies in fragile sectors could be affected. The cement, chemicals and steel segments associated with infrastructure spending are weakened by their overcapacity.Tanzania is suffering from the rapid decline in its exchange rate against the US dollar. The shilling's depreciation is causing concern and companies could suffer considerably. The country's growth is slowing while public deficit is deepening. Coface has placed its B assessment on negative watch. Finally, the economy in Madagascar is suffering from continued political instability. Its C assessment has also been placed under negative watch.

The Czech Republic, Portugal and Vietnam were all placed under positive watch in January 2015. They are continuing on the right track, with their economies driven by consumer spending.

- Source: Coface

Coal Industry Struggling, Still Not Likely Going Away Soon

Another surge in discussion about climate change and increasingly frequent news regarding some coal companies’ financial struggles perhaps begs the question: are the days of coal numbered?

There have been some decries that the role of coal as an energy source would be all but eliminated within 15 years, to be replaced by alternative sources like wind and solar and tidal and geothermal ... That is, if the pledges made by the various governments are kept. The latest round of talks on the subject of climate change have given rise to the same set of pious pronouncements as have been offered in the past. In the future, there will be all kinds of tough decisions made about the provision of energy, and the world will change.

The part that is interesting is that all of these changes will take place well after the current crop of politicians are long gone. That means the next generation is supposed to make good on promises they didn’t make and had no impact on. It is highly unlikely these promises will be kept and highly likely that coal will be around a lot longer than 15 years.

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

House Passes Trade Promotion Authority (Again), Kicks Newest ‘Clean’ Bill Back to Senate

The House finally passed legislation Wednesday to grant President Barack Obama trade promotion authority he needs to complete a multilateral free trade agreement in Asia. Still, there is no clearer indication that the latest attempt will prove successful in the Senate.

The House voted 218 to 208 to give the grant trade promotion authority to the president in a so-called “clean” bill, which means much of the worker protection and re-training program money the Senate insisted upon in its own legislation earlier this month is not included. The Senate must now decide is the House’s updated attempt is good enough.

“We urge the Senate to quickly consider the stand-alone TPA bill so it can move to the president’s desk … the world is watching the U.S. Congress and our nation’s commitment to free and open trade,” said National Retail Federation Senior Vice President for Government Relations David French.

In perhaps the biggest legislative defeat to President Obama to date, the U.S. House of Representatives rebuffed efforts on June 12 to grant trade promotion authority because there was not enough support of far left-championed worker protections included in a Senate version. As such, the Trans-Pacific Partnership (TPP) that includes several emerging, desirable (but growingly impatient) Southeast Asian nations continues to hang in the balance.

The White House, moderate lawmakers and the greater business community have been rallying for the trade promotion authority to enable the Obama Administration to finalize the TPP deal because it would open markets like Malaysia, Singapore, Brunei and Vietnam. Supporters characterize public opposition from lawmakers—led for months by current buzz politician/media darling Sen. Elizabeth Warren (D-MA), among others—as misguided and largely based on inaccurate analysis and/or the behest of aggressive unions.

“Opponents of fast-track have been flying under the protectionist banner,” said Frances Smith, an adjunct fellow at CEI. “Protectionism may seem comfortable, but it destroys the future of the competitive economy of the U.S. and isolates us from the opportunities that free trade provides.”

An inability to break the impasse on giving the same trade promotion authority held by every president since the 1930s other than President Obama would render the advancement of the TPP all but fantasy.

- Brian Shappell, CBA, CICP, NACM managing editor
For more analysis and background on the TPA and TPP, read NACM’s latest edition of eNews, which will be available late Thursday afternoon at, and previous posts here, NACM's Credit Real-Time blog.

Fed Holds Line on Policies, Hints at Coming Rate Hike on Improving Conditions

The following statement was released by the Federal Reserve Wednesday afternoon:

“Information received since the Federal Open Market Committee met in April suggests that economic activity has been expanding moderately after having changed little during the first quarter. The pace of job gains picked up while the unemployment rate remained steady. On balance, a range of labor market indicators suggests that underutilization of labor resources diminished somewhat. Growth in household spending has been moderate and the housing sector has shown some improvement; however, business fixed investment and net exports stayed soft. Inflation continued to run below the committee's longer-run objective, partly reflecting earlier declines in energy prices and decreasing prices of non-energy imports; energy prices appear to have stabilized. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations have remained stable.

The committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace … the committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced. Inflation is anticipated to remain near its recent low level in the near term, but the Committee expects inflation to rise gradually toward 2% over the medium term as the labor market improves further and the transitory effects of earlier declines in energy and import prices dissipate. The committee continues to monitor inflation developments closely.

To support continued progress toward maximum employment and price stability, the committee today reaffirmed its view that the current 0 to 1/4 % target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2% inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2% objective over the medium term.

The committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2%. The committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the committee views as normal in the longer run.”

- Federal Open Market Committee
Editor’s Note: The Fed also unveiled revised, more positive predictions for economic growth going forward, including a potential 25% rise GDP from 2015 to 2016.

Trade Promotion Authority Failure in House Again Stymies Obama’s Target Platform

In perhaps the biggest legislative defeat to President Barack Obama to date, the U.S. House of Representatives rebuffed efforts to grant trade promotion authority to the president Friday. So, again, a free trade agreement (FTA) that includes several emerging, desirable Southeast Asian nations has been left hanging in the balance.

The House was not able to pass legislation previously backed in the Senate supporting the authority, which streamlines the negotiation process when trying to forge a multilateral deal. Proposed legislation to approve funding for domestic worker and retraining programs failed 302-126. And, although the House did have enough votes to pass a standalone bill to grant Obama the trade promotion authority, the Senate’s legislation mandated that the worker aid needed to pass in the House as well. The White House’s only remaining hope for the trade promotion authority is for it to essentially go back through the Senate, almost from scratch, and pass a measure without the aid program. This approach failed in early May.

Opponents object to the secrecy with which the 12-nation Trans-Pacific Partnership FTA negotiations are being conducted and seek amendments to include an extraordinarily high level of guarantees for U.S. workers at the behest of unions. The White House, moderate lawmakers and the greater business community (including numerous small business advocate groups) have been rallying for the trade promotion authority to enable the Obama Administration to finalize the TPP deal because it would open markets like Malaysia, Singapore and Vietnam. They characterize public opposition from lawmakers—led for months by liberal Democrats like Rep. Nancy Pelosi (D-CA) and current buzz politician/media darling Sen. Elizabeth Warren (D-MA)—misguided and largely based on inaccurate analysis and/or little factual evidence.

An inability of President Barack Obama—should the effort stall completely, as appears more likely than ever —to at some point garner the same trade promotion authority held by every other president since the 1930’s would render the potential of the United States remaining part of the TPP all but fantasy. These Southeastern Asian markets are increasingly drawing manufacturing and call-center jobs formerly popular in China and India, a shift that has given rise to consumerism among demographics in these markets. With even the smallest U.S. businesses exporting much more than ever before, a trend that took flight following the recession and weak rebound, the TPP is seen as a way to better reach these emerging markets for domestic companies of all sizes, as well as a way to dilute Chinese economic influence and dominance in the region. The TPP also involves Canada, Japan, Australia, Chile and Peru.

- Brian Shappell, CBA, CICP, NACM managing editor