Indian Bank Credit Profiles Take Hit with Steep Losses


The credit profiles of India’s public sector banks are reporting severe losses, and without the needed strengthening of capital in a quick fashion, this could negatively impact the banks’ ability to pursue credit growth.
Indeed, few current options for private-sector capital exist in India as the “government remains the most importance source of new capital for the sector,” notes Fitch Ratings in a report today on Indian banks’ credit profiles. And when bank lending tightens, companies rely more heavily on their suppliers and tend to seek to stretch lending terms or request more favorable terms.
For many public-sector banks, core capital ratios are close to or below the Basel III financial year 2019 minimum regulatory requirement of 8%—with poor earnings outlooks, this banking sector is also “unlikely to build capital through internal capital generation …,” the ratings agency said. Public-sector banking losses more than doubled the government’s capital injection in fiscal year 2016, leading to more need for additional external capital, or some $140 billion. And with only about $500 million in additional Tier 1 capital issuance, “… the sector’s requirement for new capital needs to be addressed to meaningfully kick-start credit growth to lend support to the economy,” Fitch Ratings economists said.
Further, government banks have an average non-performing loan-to-equity ratio of around 70%, compared to about 8% for private Indian banks, according to Fitch.
Fortunately, India's new Insolvency and Bankruptcy Code could work to loan resolution timeframes if it’s implemented in a timely and effective way, Fitch Ratings said. “The government's intention is encouraging, according to recent press reports, but it will take time to see whether the new code can help resolve the current non-performing loan (NPL) stock, especially since the broader economy remains relatively uncertain. The Reserve Bank of India's recent discussion paper on limiting banking sector exposure to individual corporate borrowers, when implemented, could further reduce systemic risk by limiting concentration risk to large corporates.”
- Nicholas Stern, editorial associate

Near-Term Chinese GDP Revised Upward

Recent data highlighting an uptick in house building and infrastructure investment are among the factors that led Fitch Ratings to revise upward its GDP forecast for China this year and next.

The Chinese government has demonstrated determination to uphold near-term growth targets, while recent stimulus measures will likely support Chinese economic growth in 2016 and 2017 at an estimated 6.3% GDP growth rate, Fitch Ratings said. That rate represents an upward revision from prior expectations by the ratings agency of 0.1 and 0.3 percentage points, respectively.

“Higher monetary growth targets at the March National People's Congress and official pronouncements show a policy focus on stabilizing near-term growth at around the 6.5% target,” the firm said in a recent release. “We think this focus will remain at least until the 19th Party Congress in November 2017.” Still, that growth could slow to 5.8% by 2018, hampered by productivity and a rising debt load that may impact private investment.

Other Asia-Pacific countries also show signs of the government’s mix of stimulus and structural reform at the macroeconomic level, the ratings agency said. For instance, police-rate cuts in India and Indonesia should result in higher GDP growth, while low oil prices have managed to restrain inflation and reduce account deficits. Further, policymakers’ resolve to institute reforms that should translate into 8% growth in India in 2018-2019 and 5.7% growth for Indonesia in 2018. “Reforms, such as Indonesia's effort to improve purchasing power and the business environment, could play an important role in maintaining growth momentum should the external environment deteriorate,” Fitch Ratings economists said.

Historically low policy rates in Australia and South Korea should offset these nations’ dependence on global developments and maintain GDP growth in the 2.6% to 3% range through 2018.

In Japan, Fitch Ratings sees ongoing tepid growth of about 0.7% until 2018, as wage growth remains slow and a stronger yen threatens to reduce net exports and corporate profits. “The Bank of Japan has emphasized that it can engage in further easing, but it is not clear that its introduction of a negative-interest-rate policy is combating deflationary risks,” the firm said.

- Nicholas Stern, editorial associate

Flexibility, Diverse Customer Targets Equally Important to U.S Manufacturers

During the last decade, a number of events have underscored the importance of not limited a targeted sales and credit base too much to one area. A notable example came during the U.S. recession, which forced many manufacturers that previously sold almost exclusively to domestic customers to either pursue international markets or close down amid a drastic demand downturn. Analysis from the Census Bureau this week again underscored the importance of this.

For manufacturers, Wednesday's Census statistics illustrate that those with a domestic market orientation are faring better than those more focused on overseas markets. Notably, U.S. growth expectations for economic growth for the near term are improving from earlier estimates with analytical firms like Goldman Sachs, which predicts 3% growth in the second quarter, while the so-called emerging economies lose ground from previous gains in importance (e.g., China continues to watch growth rates slow, Brazil finds itself in the throws of political and economic meltdowns). It’s the reverse of the situation during the height of the recession, says NACM Economist Chris Kuehl, Ph.D.

“This is why the diverse customer base is so vital to long-term success,” Kuehl notes. “Selling globally is not a casual undertaking and requires focused investment in the parts of the world that offer the best chances for success. The U.S. manufacturer has to be nimble enough to get engaged when this is a good idea and smart enough to bail out when the conditions inevitably change.”

Wednesday’s release of preliminary Census data on trade for April showed the U.S. deficit grew by 3.4% in April to $57.5 billion. Total exports grew to $32.4 billion from March’s $30.8 billion, led by companies shipping industrial supplies, but imports surged by more than twice that dollar amount, settling at $176.8 billion in April. Capital goods imports increased the most, to $49.2 billion, with the foods, feeds and beverages, industrial supplies, capital goods, automobiles and consumer goods also showing growth last month.

- Nicholas Stern, editorial associate, and Brian Shappell, CBA, CICP, managing editor

How Much Damage Would a 'Brexit' Cause?

The war over whether the United Kingdom should remain part of the European Union is truly heating up, with both sides dragging out their most aggressive arguments. In many ways, this has become a “devil you know" debate.

Advocates for Britain staying in the EU point out that many of the issues the UK expressed the most concern over have been worked out to Britain's satisfaction. They assert that breaking away would be exceedingly risky and that data suggest such a break would cost upwards of 500,000 jobs and reduce 4% of GDP growth over the next three years. Supporters also suggest that price of houses would tumble by almost 19% and that dozens if not hundreds of businesses would have to close. Such references are the most panicked to date and a clear attempt to get the public in a state of high concern.

Those pushing for the exit are denying these figures accuracy. On the other hand, they have no more access to facts than those who remain committed to the EU.  They assert that once British business is free from the meddling of the Europeans, it will surge and actually create more jobs. Exit supporters also scoff at the idea that EU countries will cease trading with the UK and underscore that Europe does plenty of business with non-EU countries such as the United States, Canada, Japan, China, India and so on. Why would be doing business with the UK after the Brexit be any different?

This is the challenge of economic analysis on such a subject. Who is to know what happens in the future? It is not as if the UK is declaring war on Europe and insisting that all trade relations cease. It is not as if the Europeans are going to punish the UK out of spite to their own detriment. The reality is that business people in both regions are motivated as they have always been. If they see money in the transaction, they will engage in it. There are many companies that have developed close ties to their suppliers and customers and will not allow the changed political environment to alter that very much.

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

Manufacturing Output Drops for First Time Since Financial Crisis

U.S. manufacturing output estimates showed worrying signs for this segment of the economy today as it fell for the first time since September 2009, while new orders expanded at the slowest rate so far this year.

“The weak manufacturing PMI data cast doubt on the ability of the U.S. economy to rebound from its disappointing start to the year in the second quarter,” said Chris Williamson, chief economist at Markit Economics. Many firms monitored by Markit said uncertainty about the economy led clients to delay spending, prompting firms to cut production schedules.

The Markit Flash U.S. Manufacturing Purchasing Managers’ Index now tracks at 50.5, down from April’s 50.8 reading and barely above the neutral level of 50, Markit said. The reading was dragged down by a renewed fall in production, weakened new order growth and more cuts to input stocks. Also, reduced foreign client demand slowed overall new orders from U.S. manufacturers as new export sales fell for the second consecutive month.

Outstanding manufacturing work fell for the fourth month in a row in May, as the rate of backlog depletion remained unchanged from April, Williamson said. Stocks of inputs decreased for the sixth consecutive month, while inventories of finished items increased marginally after April’s slight reduction.
Further, “Any uplift in prices was largely due to higher commodity prices, notably oil. Core price pressures look to have been once again subdued by weak demand,” he said. “The survey is signaling that manufacturing will act as a drag on economic growth in the second quarter, leaving the economy once again dependent on the service sector, and consumers in particular, to sustain growth.”

- Nicholas Stern, editorial associate

Materials Costs Rise as Construction Index Ticks Up in 2Q

The nonresidential construction index report (NRCI) ticked up in 2016’s second quarter, driven by improvements in the overall and local economies where construction industry executives conduct the most business. Notably, the uptick in activity and associated demand for materials means most suppliers are selling their products to contractors at higher prices.

The NRCI increased to 61.3 in the second quarter, up from 55.6 the previous quarter, according to construction industry management consulting firm FMI, which conducts the quarterly report. The index, of which a reading exceeding 50 indicates expansion, shows that outlooks for commercial, education, health care, lodging, manufacturing and office projects all increased in the second quarter.

“That is a solid recovery, and almost every component of the NRCI moved in a positive direction this quarter,” FMI concluded. “The main exceptions are the costs of labor and construction materials, which are holding down the rise in the NRCI score.”

The index for the cost of construction materials fell 13 points in the second quarter to 25.2, which is an indication that are contractors are seeing higher prices, FMI said. Approximately 51% of survey respondents reported that construction materials’ costs rose from last quarter, 47.6% said they were the same, and 1.4% found price easing from the previous quarter.

However, the three-year business outlook for commercial construction projects dropped to 45.6 this quarter from the previous reading of 45.7, keeping both readings below the expansion threshold. Projects related to education, healthcare and manufacturing did improve, remaining above the contraction/expansion dividing line, FMI said.

- Nicholas Stern, editorial associate

Late B2B Payments Rising in Eastern Europe

The Eastern European economy is set to rise by 1.1% this year, led by growth in Poland, according to a new Atradius survey. However, respondents say trade credit risk in the form of late payments from foreign businesses is increasing.

Eastern European-based businesses surveyed by the trade credit insurer said 63.4% of their foreign business-to-business sales were conducted in cash, with the remainder using credit-based sales. Slovakia reported the least amount of credit sales at 26.7%, while Hungary was the most credit-friendly Eastern European nation, with 53.6% of sales conducted on credit.

In some countries, credit versus cash sales diverged dramatically based on whether the business was conducted with a domestic or foreign entity, Atradius said. In Turkey, spread was greatest--Turkish businesses conducted 48.1% of their sales on credit to local businesses compared with just 32.4% with foreign businesses.

Late payments are also a big issue in Eastern Europe, with some 85% of respondents seeing late business-to-business payments for invoices over the past year, with an average of 43% of invoices in the region remaining outstanding, Atradius said. Insufficient availability of funds was the main reason cited for late payment from both foreign and domestic accounts. Default rates for domestic invoices grew 3.8% this year over last, while those for foreign invoices climbed 6.6%—some 20% of respondents in the region expect DSO to worsen in the coming year. Poland reported the highest average DSO for domestic invoices at 71 days, with Turkey close behind at 63 days. More than 60% of the value of domestic invoices in Turkey was paid late this year, up from 55.2% last year.

Late payments from foreign customers also impacted Turkish businesses the most, with 53.1% of the total value of Turkish export sales on credit coming in late, up from 49.8% last year. One surprising result of the survey found that Poland reported the lowest domestic and foreign payment default rates in Eastern Europe, but also the highest days sales outstanding (DSO). “This most likely reflects the proportion of export invoices more than 180 days overdue (14.3% of the foreign receivables’ value). This is nearly three times higher than that recorded in the other countries surveyed in the region,” the firm said.

Importantly, late payments of business-to-business invoices caused 27.2% of Atradius survey respondents to delay payments to their own suppliers. Businesses in Czech Republic, Slovakia and Turkey were the most affected by this, with about 30% saying they had to delay their outbound payments. More than 18% of respondents had to take steps to correct cash flow, and 17.2% said they had revenue loss. Meanwhile, 12% of businesses in the region said they defaulted on payments to suppliers.

- Nicholas Stern, editorial associate

Money Laundering Scandals Highlight Central American Credit Weaknesses


A lack of effective anti-money laundering controls in several Central American banks as highlighted in the recent ‘Panama Papers’ scandal brings an added layer of risk to the region’s banks and opens them to increased risk associated with deteriorating reputations.
Unrelated incidents related to money laundering since late 2015 have exposed weaknesses in the regulation of Central American banks, which are already under pressure from slowing economic growth, according to a report released today by FitchRatings. “Rated banks in the regions said that correspondent banks have reduced funding lines this year given weaker economic prospects and, in our opinion, news about weak governance and poor transparency is likely to cause a further drying up of wholesale funding for the region.”
In April, the Panama Papers revealed information about over 11 million financial and legal records relating to offshore companies arranged by Panamanian law firm Mossack Fonseca. Although the scandal is not directly related to Panamanian banks, the sector’s credibility has still been undermined, the ratings agency said. In the same month, authorities confiscated some $20 million of preference shares at Guatemala’s Banco de los Trabajadores under suspicion that illicit earnings funded the investment. In that case, however, the regulators took swift action and the banks ratings were not affected. In another case, authorities forced Honduras-based Banco Continental into liquidation in October 2015, as its principal shareholder was prosecuted for money laundering in the U.S. In addition, Panamanian regulators turned against Balboa Bank & Trust Corp. in May after U.S. authorities said one of its largest shareholders had been accused of money laundering, causing a rating downgrade as the bank defaulted.
The overall operating environment in Central American countries keeps bank ratings low there, but poor or ineffective corporate governance further constrains that environment, according to FitchRatings. To date, Fitch assigns investment-grade ratings to seven banks in Panama and one in Costa Rica, while other Central American banks earn BB or B ratings that “incorporate weaknesses in the governance and regulatory environment compared with higher-rated countries.”
- Nicholas Stern, NACM editorial associate
FCIB members have access to the Credit and Collections Survey results of credit professionals doing business in Central America and Mexico. For more information on how to join and take advantage of this insider knowledge, go to fcibglobal.com.

Wave of Middle East Countries Downgraded on Oil Prices, Debt Issues

Triggered by factors from lower oil prices to rising debt levels, Moody’s Investment Service this month has downgraded several Middle Eastern countries’ credit ratings outlooks over the near term. Moody’s announced the following credit changes on Saturday:

Saudi Arabia —Downgraded to Aa3 from A1, but assigned a stable outlook. Low oil prices have negatively impacted the government’s finances, as well as external accounts and reserve buffers. Real gross domestic product (GDP) growth is expected to drop to 1.2% this year from 3.5% in 2015, with an average 2% growth figure over the next five years. That tracks much lower than the 5% average reported from 2011 to 2015, Moody’s notes. Still, Saudi Arabia’s plan to reduce economic and fiscal dependency on oil, for instance, even if partially implemented, “should sustain Saudi Arabia’s credit profile at its current level,” Moody’s said.

Bahrain—Downgraded to Ba2 from Ba1, as well as assigned a negative outlook. The rating agency anticipates Bahrain’s government debt burden and affordability to deteriorate significantly during the next two to three years. In 2015, the nation’s fiscal deficit was an estimated 13.1% of GDP, and Moody’s expects that deficit to rise to 16% this year. That agency predicts that will narrow “only gradually” later this decade.

Oman—Downgraded to Baa1 from A3, assigned a stable outlook. Despite fiscal consolidation efforts, the ratings agency expects that a protracted period of low oil prices will negatively impact Oman’s sovereign credit profile more than previously anticipated. The country is vulnerable to oil price shocks, with hydrocarbons accounting for an average of 67% of its total exports and oil and gas revenues composing 87% of government revenue this decade. Moody’s expects real GDP growth to decline 2% this year and by 0.8% in 2017.

Kuwait—Confirmed as Aa2, but assigned a negative outlook. Government finances have deteriorated, with a deficit of 1.1% of GDP in fiscal year 2015 to 2016, down from a surplus of nearly 30% the year before. Moody's believes Kuwait's low levels of indebtedness and its very large reserve buffers provide space to accommodate the deterioration in its fiscal balance. However, Kuwait has a weaker business environment and policymaking than many of its Aa2 peers. Over the medium term, this could erode its economic and fiscal prospects.

Qatar—Confirmed as Aa2, but assigned a negative outlook. Low oil prices are expected to be manageable for Qatar, as the IMF believes the country has a low fiscal and external breakeven point in terms of oil prices at $53 per barrel and $45 per barrel, respectively, for this year and 2017. However, Qatar’s medium-term debt trajectory is very sensitive to small cuts in growth and increases in the average deficit position that could cause a debt burden to divergence from the Aa2 median, Moody’s said.

- Nicholas Stern, NACM editorial associate

U.S. Business Inventories Grow in March, Alongside Sales

Total U.S. manufacturers’ and trade inventories grew in March—by the highest rate since June 2015—alongside total distributive trade sales and manufacturers’ shipments, helping keep the total inventories-to-sales ratio flat in the month.

The U.S. Census’ measure of business inventories is a good barometer of business confidence, says NACM Economist Chris Kuehl, Ph.D. “There was far too much inventory only a few months ago and there has been a concentrated effort to work that down ever since,” he said. “As long as companies are not adding inventory, there is going to be a general production lull in the economy as a whole.” Indeed, in March, business inventories rose 0.4% from February’s figure to $1.819 trillion, while inventories were up 1.5% over the prior year, Census said.

Retailers led the total inventories rise with a 1% increase in March, though manufacturers and wholesalers also saw slight increases. Within retail inventories, auto inventories jumped the most with a 2.3% increase, which is not unexpected given the decline in March auto sales, Wells Fargo Senior Economist Tim Quinlan noted. “While the inventory adjustment may continue, we expect less of a drag on GDP growth moving forward,” he said. “However, inventories are notoriously volatile.”

The inventory-to-sales ratio remained unchanged from February to March at 1.41.

Inventory expansion followed a March increase in sales, which were up 0.3% to an estimated $1.289 trillion, year-over-year. Still, sales fell 1.7%. Merchant wholesales performed best among industries in March, with sales growing 0.7%. Retailers, on the other hand, disappointed with a sales decline of 0.3% in March.

- Nicholas Stern, NACM editorial associate

Increasing Fuel Costs Key to Import Prices’ Rise

Led by higher fuel prices, the price index for U.S. imports and exports in April increased.

Consecutive 0.3% import index increases for U.S. imports in March and April marked the first monthly advances since June 2015. These are the largest monthly increases since May 2015, the Labor Department said in latest release. Over the past year, import prices dropped 5.7%, the smallest annual decline since December 2014. In April, prices for fuel imports grew 3.3%, following a 7.6% rise in March. Labor attributed the April increases to a 4.1% rise in petroleum prices, offsetting the 10.5% plunge in natural gas prices. Despite the recent increases, import fuel prices have dropped 36.4% over the past year. Higher prices for nonfuel industrial supplies and materials, foods, feeds and beverages and automobiles offset declining consumer and capital goods prices, Labor said.

Also of note, import prices from China dropped 0.1% in April—Chinese imports have not seen price increases since December 2014, Labor said. In contrast, import prices from Mexico, Canada and the European Union all rose in April, with Canadian import prices increasing the most at 1.4%.

“Looking ahead, we expect import price inflation to climb higher in the coming months on anticipation of further oil price stabilization and more gradual appreciation of the U.S. dollar,” said Sam Bullard, senior economist with Wells Fargo.

Export prices grew in April by 0.5%, the first monthly advance in the index in a year, according to Labor. Still, year-over-year, the export price index declined 5%. Prices for soy beans led agricultural exports, showing a 4.4% rise, with overall agricultural export prices increasing 0.5% in April. Over the past year, agricultural export prices were still down, dropping 9.7%.

Nonagricultural export prices grew by 0.5% in April on the back of a 0.3% rise in March, driven by industrial supplies and materials and capital goods increases, Labor said. Year-over-year, nonagricultural export prices were still down 4.6%.

- Nicholas Stern, NACM editorial associate

Durable Goods Fell, Non-Durable Goods Rose in March

The trade in petroleum, farm product raw materials and non-durable goods helped the overall sales of merchant wholesalers, excepting manufacturers’ sales branches and offices, inch up a scant 0.7% to $430.6 billion in March over the revised February figure, but remained down some 2%, year-over-year.
Overall durable goods sales dropped 0.2% in March to $211 billion, and were down 0.4% over March 2015 figures. Hardware sales fell 2.2% to $11.1 billion in March from February, according the latest Monthly Wholesale Trade: Sales and Inventories report from the U.S. Census Bureau. Lumber and automotive sales were also down by 1.2% and 0.7%, respectively, while furniture, professional equipment, metals and electrical equipment all saw gains in March.
March’s inventories-to-sales ratio for merchant wholesalers was 1.36, unchanged from February’s ratio and higher than March 2015’s figure of 1.32, Census said.
The inventory situation is a good barometer as far as business confidence is concerned, said NACM Economist Chris Kuehl, Ph.D. “There was far too much inventory only a few months ago and there has been a concentrated effort to work that down ever since. As long as companies are not adding inventory, there is going to be a general production lull in the economy as a whole.”
For non-durable goods, sales grew from February to March by 1.6% to $220 billion, but remained down from the prior year by 3.5%, Census noted.
Petroleum sales have shown high volatility over the past year as they were up in March by 13.5% or $34.5 billion, but still down some 23% from a year ago, according to Census. Apparel sales also plunged 5.9% to $13.2 billion and were down 6.2% from the year prior. Also down in March were sales of alcohol (1%), groceries (1.3%) and paper (0.1%), while sectors that saw sales growth in March included farm products (2.7%), chemicals (0.7%) and drugs (0.4%).
- Nicholas Stern, NACM editorial associate

Still-Raging Western Canadian Fires Having an Impact on Industry, Pricing

There seems no end in sight regarding the oil fields fires burning in Canada's Alberta province. Beyond the human toll--the wildfires have destroyed thousands of homes and forced the evacuation of more than 100,000 people--it is already affecting the per barrel price of oil. Soon, the impact on the insurance sector will be felt as well.

The government in Canada, which provides more credit-based customers to NACM members' companies than any other country outside of the United States, was heading for a deficit before all this. Now that likelihood has ballooned to perhaps unmanageable levels. This is a disaster on par with hurricanes and earthquakes and it is still getting worse.

That said, it may help some U.S.-based suppliers and services providers in and tied to strong pricing the domestic oil industry, as the fires have created the most important change in the oil world of late. Canadian output is aimed primarily at the U.S. market. This conflagration has been out of control for weeks and could be throughout the summer. The estimate is that there has been a one million barrel a day loss thus far. This is a fifth of the country’s production.

Granted, this lack of production is going to have a ripple effect in some parts of the United States.  Refineries in the middle of the country will have less access to oil and they will see the price of crude rise. That means that local gas prices in the middle of the country will start to rise sooner than later. In addition, rail companies in the region that invested so much in hauling oil along Canadian routes may face trouble staying afloat financially.

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

UK Service Sector Drops on Brexit Fears

Growth in the United Kingdom service sector slowed in April for the third time in the past five months, with the business activity and business optimism readings dropping to low points not seen in over three years, as noted in the Markit/CIPS UK Services PMI.

The seasonally adjusted Markit/CIPS UK Services Business Activity Index dropped in April to 52.3 from 53.7 in March—this index has averaged 55.2 since its inception in July 1996, Markit Economics said. “The slowdown in the service sector follows similar weakness in manufacturing and construction to make a triple-whammy of disappointing news on the health of the economy at the start of the second quarter,” said Chris Williamson, chief economist at Markit.

Some firms surveyed for the index reading cited fears surrounding Brexit (Britain leaving the European Union) have added to the economic uncertainty, in part, by way of delayed orders from customers, Markit Economics analysts said. Also, introduction in the U.K. of the national living wage was cited as an important factor that drove up input costs in April; and the inflation rate hit a 27-month high because of surging fuel prices and the effects of a weaker pound.

“The EU referendum and introduction of the national living wage are unique moments in time for the UK services sector, and indeed the wider economy. The question lingers as to how deep an impact they will both have on the sector in the long term,” said David Noble, group chief executive officer at Chartered Institute of Procurement & Supply.

Most worrying within the U.K’s service sector is the financial community, as analysts anticipated a wholesale exodus from London, said NACM Economist Chris Kuehl, Ph.D. “There is also concern about tourism--It will be harder to enter the U.K. and there will be some hard feelings for a while as well," Kuehl said. "This has affected all the usual sectors such as entertainment and hospitality as well as retail.”

Still, not all news was dismal in the latest reading, as new business volumes picked up slightly in April, and the index carried on its overall march of uninterrupted growth over the past 40 months. That marks second-longest streak registered over the survey history, Markit analysts noted.

- Nicholas Stern, NACM editorial associate

Argentine Bond Issuance Presents Opportunity Through the Headwinds

As Argentina steps from the shadows and reenters the international credit markets, spurred by a new market-friendly president, trade insurance company Euler Hermes has upgraded the nation’s risk rating. However, headwinds like inflation and subdued commodity prices still cloud the picture of its economic future.

In its latest country report on Argentina, Euler Hermes upgraded the country’s risk rating to C4 from D4 in light of the settlement with holdout creditors and the subsequent $16.5 billion bond sale on April 18, which represented the largest bond sale in emerging market history. The bond offering was four times oversubscribed for all maturities with an average interest rate of 7.1%, noted Ludovic Subran, chief economist with Euler Hermes. “The crucial point to be made is that all this reflects and affects investor confidence,” he said. “The tide has turned ever since Mauricio Macri won the presidential run-off at the end of 2015 and has begun to steer the country’s economy in a new direction.”

Still, 2016 will mark the beginning of significant adjustment period as Macri—who faces significant political opposition and does not hold an absolute majority in the Congress—attempts to implement capital controls and more credible national statistics. Argentina also faces an expected economic contraction of -1.2% this year and minimal GDP growth of 0.6% in 2017, Euler Hermes predicts. Subran said to expect inflation this year to top 40% and another devaluation of the Argentine Peso.

“The main challenge will be to find enough hard currency to meet external commitments without depleting foreign reserves too much,” he said. “Enhancing agro-competitiveness, reviving the ailing manufacturing sector and sanitizing the financial sector are among the important milestones to meet for a full recovery.”

- Nicholas Stern, NACM editorial associate

Sports Authority Bankruptcy Moves to Liquidation

The Sports Authority, Inc. has relinquished all hope of reorganizing and leaving bankruptcy and has opted to convert its Chapter 11 into a liquidation.

The Sports Authority filed for bankruptcy protection on March 2 as it became burdened with more than $1.1 billion in debt. The original plan included selling off unprofitable stores, closing them down and reorganizing the remaining stores that could turn a profit, said commercial law and creditors’ rights attorney Wanda Borges, Esq., member of Borges & Associates LLC. Those plans were scuttled after the case became highly litigious, in part over the rights of the consignment vendors to the national retailer.
In March, The Sports Authority and some of its affiliates filed adversary complaints against about 160 trade vendors in the U.S. Bankruptcy Court for the District of Delaware in an effort to invalidate vendors’ purported consignment rights.

The Sports Authority and others argued that all but a few of the consignment vendors failed to follow Article 9 of the Uniform Commercial Code (UCC) when they took on the consignment business with the firm, thus failing to perfect their rights as consignment vendors, which relegated them to the status of unsecured creditors, Borges said. The vendors, on the other hand, have argued that they didn’t need to file a UCC financing statement or notify anyone about their consignment rights.

Meanwhile, an interim order from the court last week allows the consigned goods to be sold, but the proceeds have to be placed in a segregated account until it is determined how the proceeds will be divided, Borges said. The Sports Authority’s lenders have since appealed this interim order, and on May 2, the lenders and consignment vendors filed a letter with the court saying they are willing to enter mediation in the case over what should be done with the consigned goods.

A number of vendors terminated consignment agreements days to hours before the filing, seeking for their goods to be returned and proceeds of any sale of these goods to be earmarked for them (not Sports Authority lenders), said attorneys Thomas Fawkes, Esq. and Brian Jackiw, Esq. both of Goldstein & McClintock LLP.

For these vendors, the case presents triple the harm in that their products back have not been returned, they face losing money and the consigned products may now be sold outside the terms of the original consignment agreement (re: cheaper). The latter can damage the value of a brand in that products are being sold publicly at less than what is considered market value, said Fawkes and Jackiw.

All three attorneys agree that creditors who sold to The Sports Authority on consignment must pay close attention to and follow the law, including the Uniform Commercial Code, to perfect their consignment rights.

For more on how to perfect these consignment rights, read previous NACM blogs on the topic here and here, an extended eNews piece here and Borges’ article on consignment agreements in Business Credit Magazine on perfecting consignment rights here.

- Nicholas Stern, NACM editorial associate


Manufacturing PMI Drops, Shows Slight Expansion

Manufacturing indexes that follow new orders, production and inventories tracked by the Institute for Supply Management (ISM) all slid in April, contributing to the ISM’s overall decline last month to 50.8 from 51.8 in March. Readings above 50 show expansion, while those below show contraction.

Economic activity in the manufacturing sector did expand overall in April for the second consecutive month, with 15 of 18 industries tracked reporting an increase in new orders and production, while the economy grew for the 83rd consecutive month, ISM said.

Still, the new orders index dropped 2.5 percentage points to 55.8; the production index fell 1.1 percentage points to 54.2; and the inventories of raw materials index dropped 1.5 percentage points to 45.5, ISM found. Manufacturing sectors that reported growth in April include wood products, printing, paper products, plastics and rubber products, primary metals, fabricated metal products, chemical products, machinery, computer and electronic products, nonmetallic mineral products and food, beverage and tobacco products. The four industries that contracted in April were petroleum and coal, transportation equipment, miscellaneous manufacturing, and furniture and related products.

Also, the employment index increased 1.1 percentage points to 49.2%, while the prices index registered 59%, a growth of 7.5 percentage points.

- Nicholas Stern, NACM editorial associate

Construction Spending Up on Private Projects

A 1.1% rise to $842.3 billion in private construction spending this March helped total construction spending grow by an anemic 0.3% over February’s figure to a seasonally adjusted annual rate of $1.14 trillion.

Still, total construction spending in March was 8% higher than it was a year prior, while overall construction spending during the first three months of the year was 9.1% higher than the same period in 2015, the latest data from the U.S. Department of Commerce show.

In the private sector, residential construction spending led the way, posting a 1.6% increase to $435.5 billion, as nonresidential spending rose 0.7% to $406.8 billion, Commerce said.

Spending on public construction projects dipped 1.9% in March to $295.2 billion as spending on office, public safety, amusement and recreation, transportation, power, sewage and waste disposal, and water supply all dropped. Construction spending on commercial, health care, educational and conservation, and development projects increased slightly.

- Nicholas Stern, NACM editorial associate