Chinese tax breaks to help steady global auto sales in 2016

Global automakers should see stable sales this year, particularly in China and small European countries like Spain, according to Moody’s Investors Service. Those sales, however, will likely fall in 2017 as Chinese tax breaks on passenger vehicles expire at the end of 2016.

Auto sales in China are expected to grow 6.5%, as the Chinese government cuts in half a 10% vehicle purchase tax on passenger vehicles with engines of 1.6 liters or smaller and provides supportive monetary policies, Moody’s reported Feb. 29. After those policies expire at the end of the year, unit sales in 2017 are expected to deflate to about 2.5%, it noted.

In the U.S. market, 2015 saw strong sales growth of 5.8%, but analysts at Moody’s expect that growth to drop in 2016 to 0.9% as “much of the pent-up demand has been met. U.S. growth is therefore likely to stay flat in 2017,”the firm said.

"Japanese car sales will likely pick up ahead of a planned doubling of sales tax to 10% in April 2017, which should lead to a modest 1.8% of unit sales growth in 2017 versus 0.3% in 2016," said Motoki Yanase, a Moody's vice president and senior analyst.

Auto sales growth in Western Europe is anticipated to remain fairly strong at 4.7% in 2016 and 3.1% in 2017, while much of the growth is expected in smaller countries like Spain and Italy, Moody’s said.

Meanwhile, Russia, Brazil and Argentina face economic headwinds that will challenge car sales in 2016. Russia could see unit sales declines of 15%, while Brazil and Argentina face the prospect of 10% sales declines, Moody’s projected. Economic challenges in these countries also make forecasting for 2017 very difficult.

- Nicholas Stern, NACM editorial associate

February’s CMI Repeats Combined Totals from Last Month

February’s Credit Managers’ Index (CMI) shows no change overall from last month, mirroring the economy as a whole to some extent.

“There has been similar activity in some of the other indices that are watched carefully for trend signals,” said NACM Economist Chris Kuehl, Ph.D. “The Purchasing Managers’ Index is back down in the 40s and that is worrisome; but at the same time, there has been a gain in the New Orders Index and that suggests that future readings could be stronger.”

With a slight improvement from 58.2 to 58.6 in the index of favorable factors and a less encouraging trend in the unfavorable categories (50.3 to 50.1), the total combined score was 53.5, the same as January. All four favorable sub-categories showed increases with sales leading the pack (55.8 to 56.8) and dollar collections coming in second at 58.3 up from 57.8.

In the combined unfavorable categories, four of the six factors, the same ones as last month, remain in the contraction zone (below 50). Disputes showed the only gain, from 48.6 to 49.7, while rejections of credit applications and dollar amount of customer deductions remained unchanged at 52.2 and 49.5, respectively.

“The good news is that there is a marked difference in the performance of the favorable factors as all of them are in expansion territory and one of the readings [amount of credit extended] is above 60,” explained Kuehl. “The decline of the unfavorable numbers suggests more and more companies are facing struggles to keep current on their debt. Thus far, the challenges are not unexpected, with the companies engaged in the oil sector having the hardest time of it.”

- NACM staff
Visit NACM’s website for the full report of the February CMI. CMI archives may also be viewed on the NACM website.

Brazil Receives Negative Outlook

Moody's Investors Service has downgraded Brazil's issuer and bond ratings to Ba2 and changed the outlook to negative.

Several factors lead to the decision, the firm said, including the probability that the government's debt will exceed 80% of gross domestic product (GDP) within three years and political upheaval, which will further complicate fiscal consolidation efforts and delay structural reforms.

“Risks are skewed toward an even slower consolidation and recovery, or further shocks emerging, which creates uncertainty over the magnitude of deterioration of Brazil's debt profile over the rating horizon,” Moody’s said. “That deterioration is expected to continue over the coming three years, given the scale of the shock to the Brazilian economy, the lack of progress made by the government in achieving its fiscal and economic reform objectives and the political dynamics expected to persist over that period.”

The downgrade from Baa3 rating with a stable outlook—assigned in August—captures ongoing deterioration, “while the negative outlook contemplates the risks of further deterioration to Brazil's credit profile emanating from macroeconomic shocks, deeper political dysfunction or the need to support government-related entities,” Moody’s noted.

Moody’s expects GDP growth to average a negative 0.5% over the period 2016-18. “Additionally, we expect interest rates to remain elevated in real terms, which will contribute to low debt affordability with interest payments accounting for more than 20% of government revenues,” it added.

The long-term foreign currency bond ceiling was changed to Ba1, while the short-term foreign currency bond ceiling was changed to NP. The long-term foreign currency deposit ceiling was changed to Ba3, and the short-term foreign currency deposit ceiling changed to NP. The long-term local currency bond and deposit ceilings were lowered to A3.

- Diana Mota, NACM associate editor

British EU Exit Talks Down to Final Stage

There has long been hostility towards the European Union in the United Kingdom, as most recently notable in the push by London's mayor for Great Britain to exit. The average U.K. resident has never fully embraced the notion that Britain is part of Europe, and there has been ambivalence regarding many of the demands made by the EU. The refusal to join the eurozone currency system is just one of the higher profile differences of opinion

There are many in the conservative and labor parties that want Britain to pull out of the EU altogether—the "Brexit" as opposed to the "Grexit," the often-rumored Greek withdrawal that never came to fruition. There will be an emotionally charged referendum on continued membership this June, and now the EU is making a sort of final offer to the U.K. regarding what it will be willing to do to keep the country involved.

The EU would like to see the British remain, but there are clear limits to how accommodating the rest of Europe will be. Demands have focused mostly on the rules and regulations that come from Brussels. The British chafe at many of these and resent the need to adhere to them. The EU is not ready to exempt the U.K. from the majority of these. The latest statements from the EU suggest that a final offer is going to be made and, if the U.K. decides that it wants to pull out, no further negotiations will take place.

It seems the Europeans have tired of this drama and want a definitive end. The June decision could well be final and, if the British decide to execute the Brexit, the split will be considered permanent. Both Germany and France have pushed hard for an end to the drama and expect the British to make a definitive choice. The two states acknowledge the importance of the U.K. but do not believe the EU will be weakened as would be U.K. Analysts have asserted the British have far more to lose than gain from a Brexit, but emotions run high on issues such as these. Either way, volatility in some key commercial markets will almost certain follow an exit.

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

eNews Update: State's Costly Surety Change Legislation Quashed

As noted in the latest edition of NACM’s eNews, lawmakers in Washington state were pushing hard for legislation that would double mandated surety bonds amounts and alter the timing for which preliminary notices on commercial projects could be served. However, thanks to a concerted effort by stakeholders, including members of NACM Business Credit Services (Seattle), the effort has been stymied … at least for now.

Senate Bill 6482 had been gaining what appeared to be enough support to potentially pass through the Washington legislature before the primary sponsor decided late this week to stop pushing the bill. The statutory changes sought to require surety bonds of $24,000 for general contractors (GCs) and $12,000 for subs, up from the present $12,000 and $6,000, respectively. For material suppliers on commercial projects, the preliminary notice can be served any time, but would only trap funds up to 60 days prior to the notice being served via certified mail. For material suppliers on single-family residential new construction projects, preliminary notice would only trap funds back 10 days of the notice being served. State senators behind the proposal also sought to ensure lien amounts were limited to “actual costs to the person furnishing labor, professional services materials or equipment.”

“SB 6482 sought to modify an effective existing law with language that would have been detrimental to business, especially construction suppliers, and consumers who it sought to protect,” said Jon Flora, president & CEO of NACM Business Credit Services. “For our members who regularly file liens, especially in construction trades, this bill had major negative consequences.” Flora added that letters to legislators played an important role in the bill’s ultimate failure.

Other groups opposing the bill were the Building Industry Association of Washington, National Electrical Contractors Association, Washington Aggregates & Concrete Association and Western Building Materials Association (WBMA). However, Flora does not believe this is the last that suppliers and subcontractors will hear about these proposed changes.

It is anticipated that some form of this bill may arise again in future legislative sessions,” Flora said. “This coalition of like-minded industry associations is poised to work together again as necessary. We will continue to monitor any activity through our government relations team and keep members informed."

- NACM staff

For more articles focused on construction, liens and bonds, visit NACM's Secured Transaction Services website here.

Canadian, South African Risk Tracking Higher While France Improves

A series of reports released by trade credit insurer Coface in recent weeks indicates that several key nations are showing elevated risk levels, including the one responsible for the largest portion of international business for NACM members. One that is critical to any hope of eurozone stability, however, is emerging as a pleasant early-year surprise.

Coface assigned Canada a rare downgrade to an A2 level, still the second best rating by its metrics, and left the country on its negative watch list. Canada has long been viewed as one of the most reliable nations based on the policies of its government and payment behavior of its businesses; however, its growth in dependence on the energy sector in recent years has raised red flags because commodities prices, especially oil, have fallen to historic lows.

Perhaps Coface’s next most significant classification change to date in 2015 was South Africa’s downgrade from an A4 rating to a B. The nation has been reeling from perceived ineffective leadership, corruption and disparity-based unrest somewhat consistently since its early-decade star turn as host of the World Cup and Olympics. Reduced demand for natural resource products also is not helping what was seen as the most stable economy on the continent as recently as five years ago. Coface continues to consider South Africa firmly part of its negative watch list.

Coface did note some positive movement as well, however. Perhaps no country is showing more of a turnaround than France, which appears to be moving beyond recent years’ problems. One month ago, Coface claimed its growth “should be more dynamic as evidenced by the decline in the number of insolvencies or the sharp increase in the number of start-ups.”  This week, it doubled-down on its positive view by noting the 2.1% annual decrease in insolvencies by France-based businesses through the end of 2015, with a 3.5% drop predicted for 2016. Among factors helping French businesses are the sharp drop in oil prices, the favorable (low) currency value versus the U.S. dollar, success in tax credit programs for well-performing businesses and a business failure rate not seen since pre-crisis years nearly a decade ago.

- Brian Shappell, CBA, CICP, NACM managing editor

Argentina Makes Peace with Creditors

The election of Mauricio Macri to the Argentine presidency promised a new approach to global economics, and he has wasted no time in trying to settle with angry bondholders and creditors throughout the world. For the most part, they are getting what they demanded and Argentina is getting what it needs: access to the financial markets and loans from the likes of the IMF and others.

This is a battle that has been going on since 2001, when the government of Argentina elected to default on debts it incurred to keep a shaky budget intact. The government was in chaos with leaders holding office for no more than a few months. The emergence then of President Nestor Kirchner allowed for some stability, but he pushed the default further and adamantly refused to honor the bond obligations, setting off years of acrimonious relations with the investment community. The country has been all but cut off from the world, and the demand that bondholders settle for pennies on the dollar triggered a decade of legal attacks from those that had lost millions.

Macri has angered those in the country that still resent the demands of the bond holders, but he ran on a mandate of returning the country to some semblance of normalcy. Kirchner’s widow Cristina Fernandez has been ruling in her own right since 2007, and a nation that has been teetering on the edge of financial collapse ever since simply grew tired of it.

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

Reacting to the End of the Oil Boom

Those who live by the boom shall die by the bust—or so it always seems. The surge in the oil sector turned several states into the envy of the United States during the recession. It was laughable to even mention the "r" word in this sphere when the price per barrel of oil was above $100 and only seemed to be heading north. These were the days for states like North Dakota, Texas, Louisiana and Alaska as well as, to a slightly lesser extent Oklahoma, Wyoming, West Virginia and New Mexico. The bust has been nearly as swift as the boom and now these states are all coping in their own way.

The majority of the tax revenue related to the oil boom has come from extraction taxes at the wellhead, but that is hardly the most important part of the oil economy for these states. There were lots of jobs and thus, income taxes and sales taxes being collected. There was housing and retail development and all the industrial expansion that goes along with the surge. Now much of this is gone at least for the time being.

States tend to fall into two categories depending on how many times they have been through this process. Those who know the drill have practiced frugality in some respects and set aside money to protect against events like this. They will be able to keep their budget intact for a while. Others tended to react to the windfall with excess—They will be hard pressed to avoid some version of a fiscal disaster.

- Chris Kuehl, Ph.D., NACM economist

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.