Canadian SMBs’ Lending Struggles Continue

Canadian investment in its small- to medium-sized businesses (SMBs) saw an uptick in February over the prior month, but the latest readings of small business credit data and analysis provider PayNet’s lending index indicate an ongoing struggle and undefined future.

PayNet released its February Canadian Small Business Lending Index results on April 13, showing a nearly two-point bump from January, yet the index was down 5% from February 2017. Although delinquencies among SMBs decreased for the 11th consecutive time year-over-year, the number of loans past the 30-day due date increased month-over-month in February 2018, Business Wire reported, particularly in accommodation and food, wholesale, transportation and retail.

In the same report, PayNet President William Phelan said SMBs are stepping away from borrowing in the meantime after showing strong numbers in early 2017.

“While still low by historical standards, this jump in 30-day delinquencies means Canadian private businesses are experiencing increased financial stress,” Phelan noted in the Business Wire report. “Whether this rising stress is a correction from unusually low levels of delinquency or a material shift in direction remains to be seen.”

The Canadian index reading differed from the Thomson Reuters/PayNet Small Business Lending Index for the U.S., where numbers not only increased for the fifth consecutive month, but also scored the second-highest reading in history. Growing industries included construction, public administration, transportation and warehousing; however, delinquencies were still prevalent, as past dues between 31 and 90 days increased nearly 1.5% in the past year. Like Canada, U.S. small business delinquencies were seen in transportation and retail in addition to construction.

-Andrew Michaels, editorial associate

Contractors of DOT Projects Confront Credit Complications

Contractors on large Department of Transportation (DOT) projects could face credit complications in the foreseeable future in connection to minimal state revenue growth and federal funding, Fitch Ratings reported on April 13.

State-level funding was often provided for such projects but has declined over the past few years, leaving contractors to seek other sources. One example is bridge financing, which Fitch said allows contractors to enter into low-cost contracts that they then increase by order changes or dispute resolutions. Although these excess costs might get repaid, contractors’ credit is affected because of the ramifications on their “near-term liquidity and working capital.”

“The National Association of State Budget Officers reported that 22 states made midyear budget cuts in fiscal 2017,” Fitch said, “and midyear budget reports and executive budget proposals released to date indicate some will report deficits for current and upcoming fiscal years.”

Fitch also noted how the U.S. administration’s infrastructure proposal relies heavily on state budgets; therefore, federal funding probably won’t come to pass. The majority of the plan revolves around roughly $200 billion in federal funding in the next decade, but it’s specifically geared toward transportation programs that are underway.

“States and local governments are asked to provide up to an 80% match for competitive grants and loans for $120 billion of the $200 billion in total funding,” Fitch added.

-Andrew Michaels, editorial associate

India’s Economic Growth Increases Likelihood of ABS Loan Repayment

Credit managers conducting business in India have no need to worry when it comes to asset-backed securities (ABS), as Moody’s Investors Services reports a “pick-up” in the country’s economic growth, increasing the likelihood of loan repayment.

India’s economy grew 6.2% in 2017, with expectations even higher at 7.6% this year. As borrowers rake in a steady income, Moody’s said this will enable them to repay their loans that back ABS. Such loans include auto loans as well as loans against property (LAP) to micro, small and medium enterprises (MSMEs).

“Auto ABS delinquency rates will remain stable at current levels through 2018, but delinquency rates for small- and medium-size enterprise ABS backed by [LAP] will continue to rise …” Moody’s Analyst Vincent Tordo said in a press release.

Tordo explained demand for freight transportation is increasing and noted that commercial vehicle (CV) loans back auto ABS in India. Therefore, such demand creates more revenue for CV operators, providing them with the funds to repay.

-Andrew Michaels, editorial associate

Companies Debate Small Business Hiring Growth

The cost-saving efforts of the U.S. tax reform are beginning to manifest in the small business market, as financial services and business consultant CBIZ, Inc. recorded a bump in its Small Business Employment Index (SBEI) in March.

February’s disappointing results of a slight decrease in hiring among small businesses was redeemed last month when the SBEI showed a 1.39% increase, following a survey of thousands of companies with 300 or fewer employees released on April 6. Less than one-fifth of respondents decreased in hiring but were outweighed by the nearly 30% of businesses that said they increased hiring. In a press release on April 6, CBIZ Employee Services Organization President Philip Noftsinger likened this boost to the tax cuts.

“As small business owners begin to realize the benefits of tax reform, they will likely translate to better wages and more jobs,” Noftsinger said in the release. “Almost every industry represented in our SBEI grew their staff totals in March, so if this positive trend continues, the economy could be seeing solid growth across the board going forward.”

Years past have shown similar results in March hiring numbers, which economists have attributed to better weather. However, CBIZ’s results were contradicted by the Small Business Jobs Index conducted by Paychex, Inc., which provides payroll, human resource and benefits outsourcing services for small- to medium-sized businesses (SMBs). On April 3, Paychex reported a decrease in small business employment growth of 0.12%—the lowest point since 2011, IHS Markit Chief Regional Economist James Diffley said in the report.

Despite Paychex’s recorded dip in hiring, the report said wages in March 2018 increased about 2.7% over the prior year.

-Andrew Michaels, editorial associate

American Bankruptcies Decline in 2018 1Q

Bankruptcy filings are down in the U.S., according to the American Bankruptcy Institute (ABI). Its latest release reported first quarter bankruptcies declined 4% compared to the same time last year.

According to ABI and data from Epiq Systems, there were more than 187,000 during the first quarter of 2018. There were more than 195,000 in 2017’s first quarter. Noncommercial filings also declined 4%, while commercial bankruptcies dropped 1%. Despite the overall improvement in commercial filings, Chapter 11 commercial filings increased 22% compared to the first quarter of 2017.

“Volatile market conditions in retailing have led to an increase in commercial cases, while a long-awaited course correction on Fed monetary policy could make credit more expensive for consumers with household debt,” said ABI Executive Director Samuel J. Gerdano in the release.

There were 770 commercial Chapter 11 filings in March 2018, a 64% jump compared to March 2017. Total commercial filings in March decreased 7%.

Alabama, Tennessee, Georgia, Mississippi and Illinois led the nation in per capita bankruptcy filing rates during the first quarter of the year (total filings per 1,000 population). The national average increased to a rate of 2.42. Alabama and Tennessee were each over 5.5.

-Michael Miller, managing editor

China’s Payment Delays Growing

Credit managers might want to revisit their payment terms when it comes to extending credit in China. According to a recent report from credit insurer Coface, payment terms with Chinese businesses significantly increased in 2017, leaving risk managers “more complacent” in regards to their current expectations.

On April 3, Coface released its China Corporate Payment Survey for 2018, consisting of more than 1,000 company responses that were collected during the fourth quarter of 2017. The results showed an eight-day increase in the average payment terms from the prior year, although respondents who reported payment delays dropped to 29% from 46% in 2016. Some of the data baffled economists, particularly because of the country’s economic successes over 2016—its GDP jumped about 0.2%.

“The proportion of respondents experiencing payment delays exceeding 120 days increased to 26% in 2017 from 19% in 2016, while those experiencing ultra-long (more than 180 days) payment delays exceeding 2% of their annual turnover increased…,” Coface reported.

Companies’ cash flow is then at risk, the report explained, because 80% of ultra-long payment delays don’t get paid and, therefore, impact the company’s annual turnover. These delays are more prevalent in the energy, construction and automotive sectors; however, they’re lower in paper and textiles, as well as the pharmaceutical sector.

-Andrew Michaels, editorial associate

Emerging, Advanced Economies Show Similar Results in Corporate Default Rates

Corporate defaults come as no surprise in advanced economies, but a recently released Moody’s Investors Service 20-year study found that the default numbers for emerging economies are quite similar to those in advanced economies after an in-depth review of more than 1,700 defaults in both markets around the world.

The Moody’s report, released on March 28, showed about a 1% difference in the average annual corporate default rate between advanced and emerging economies since 1998—the latter remained on the high end at 3.7%. The study was conducted through the end of last year and indicated that while both economies had similar default numbers, the results occurred for different reasons.

“Sovereign and banking crises, currency volatility and exchange controls drove many emerging market corporate defaults in the last two decades, while defaults in advanced economies were more likely to result from adverse industry trends, competition and aggressive financial policies,” Moody’s Corporate Finance Group Senior Credit Officer Richard Morawetz said in the release. Morawetz was also the author of the report.

In the early years of the report, Moody’s said, the aforementioned sovereign crises in emerging markets were seen in countries such as Brazil, Mexico, Argentina and India, which in turn, boosted default rates. Meanwhile, the most corporate defaults in advanced economies occurred in the Americas, specifically in part by the high number of rated entities in the U.S.

The highest number of defaults in advanced and emerging economies was recorded by Moody’s at 254 in 2009, but has since decreased to 242 by the end of 2017.

“Missed interest or principal payments are the primary type of default in both regions,” Moody’s said. “By contrast, bankruptcy filings are more prevalent in advanced economies.”

-Andrew Michaels, editorial associate

Oil Price Increase Raises Concerns of U.S. Supply Outlook

Rising prices coupled with growing tensions with the Middle East could threaten the U.S. oil supply, despite a substantial increase in global output.

According to Reuters, oil prices were clocked at $70 a barrel this week—an increase of 7% in March and more than 5% overall in 2018. As the May deadline nears for the U.S. to decide whether it will withdraw from the Iran nuclear accord, oil-related concerns are fueled by large exporters across the globe that many say are “controlling supply.”

PVM Oil Associates Analyst Tamas Varga said in the Reuters report that non-OPEC (Organization of the Petroleum Exporting Countries) producers boost oil demand throughout the world.

“The price strength of the last couple of weeks is down to two factors,” Varga said in the release. “The first one is a stable OPEC output level which leads to impressive compliance (with an oil supply-cutting deal). The second one is supply-side geopolitical developments in Venezuela, Libya and Iran, the most acute of which is Iran.”

Last week, however, Moody’s Investors Service reported a shift in its global oil and gas sector rating from stable to positive, citing a potential 13% to 18% growth in earnings. This was attributed to the sector’s EBITDA and the cut in production costs in 2015 and 2016, which improved operating margins.

-Andrew Michaels, editorial associate

Current U.S. Tariffs Have Limited Impact on China's Economy, but That Could Change

With the U.S. administration’s tariffs underway, the likelihood of a global trade war is becoming increasingly foreseeable to many economists and trade industry experts. However, Moody’s Investors Service reported on March 22 that the current measures will only have a limited impact on China’s economy.

Unlike 10 years ago, Moody’s reported, China is “less dependent on exports,” which haven’t shown much of a benefit to the country’s gross domestic product (GDP) growth. The U.S. tariffs on solar panels, washing machines, steel and aluminum are unlikely to make a dent in the country’s exports since there’s minimal U.S. market exposure.

“However, the negative impact on both Chinese economic growth and specific industries would be greater … if the U.S. significantly expands tariffs and other significant and broad-ranging protectionist measures,” the report stated. “Sectors with large direct exposure to the U.S. market include cork and wood products, furniture, office machines, household appliances, electrical equipment, road vehicles, telecommunications equipment, electrical machinery, apparel and footwear, animal oils and fats.”

Although China is currently manufacturing parts in these sectors, Moody’s added, additional U.S. trade policies could come down hard on domestic supply chains. According to Reuters, President Donald Trump is expected to announce tariffs on Chinese imports later today.

-Andrew Michaels, editorial associate

PPP Program to Boost Argentine Infrastructure Investment

Infrastructure investment in Argentina has dwindled in recent years, but a new public-private partnership (PPP) program might give the country a much-needed boost over the next four years.

The PPP program will feature a $26 billion investment beginning this year through 2022 for roads, energy and mining, communications, water, sanitation and housing, Moody’s Investors Service reported on March 15. Bank debt and bond issuance in the country will fund investments, which Moody’s said remain low among domestic investors. Argentina saw $88 billion in total assets under management (AUM) by the end of 2017; however, only 6% went toward infrastructure.

“The PPP efforts will help boost the country’s low investment rates and will do so in a way that limits the program’s fiscal impact,” Moody’s said. The program was developed by analyzing PPP programs elsewhere in Latin America, such as Peru.

Government certificates, called TPIs, will fund construction, with limited risk exposure for more investors, Moody’s Vice President and Senior Analyst Daniela Cuan said in the report.

In FCIB’s December 2017 Credit and Collections survey for Argentina, 94% of respondents said they did not extend credit to customers. This was a drastic increased compared to the April 2017 survey, when only about 30% reported the same thing. One respondent said that anyone who plans to conduct business in Argentina should closely monitor the country’s “ever-changing government restrictions and monetary policy.”

Issues with extending credit showed problems with payment, such as postdated checks, wire transfer delays, incorrect invoices as well as customers only paying once they’ve been paid.

-Andrew Michaels, editorial associate