Expectations Fall for German, Eurozone Economies

A significant decrease in expectations has been registered for the German economy that also reflects on the eurozone as a whole. The Indicator of Economic Sentiment from the Centre for European Economic Research (ZEW) dropped a considerable amount in August, 7.5 points, to a level of 10. This is significantly below the long-term average of 23.8 points. The indicator for the current economic situation in Germany increased slightly, however, and now stands at 86.7 points.

“The significant decrease of the ZEW economic sentiment indicator reflects the high degree of nervousness over the future path of growth in Germany,” said Professor Achim Wambach, president of ZEW. “Both weaker-than-expected German exports as well as the widening scandal in the German automobile sector, in particular, have helped contribute to this situation. Overall, the economic outlook still remains relatively stable at a fairly high level.”

Expectations for eurozone growth are slightly lower than those for Germany. The indicator for financial market experts’ expectations for such growth dropped by 6.3 points in August. However, the indicator for the current economic situation in the eurozone has increased since November of 2016 and now stands at its highest level since January 2008. It rose 9.7 points higher in August, ZEW said.

Another index that has contributed to the view that the German and eurozone economies are slowing down is the Markit Manufacturing Purchasing Managers’ Index for July, Wells Fargo Securities said in a recent report. After hitting highs in June, indexes for both Germany and the eurozone dipped marginally in July. A further decline may solidify the view of a slowing-down economy in the region, Wells Fargo said.

– Adam Fusco, associate editor

Greece Upgraded, with Outlook Positive

In light of ongoing compliance with the conditions of the European Stability Mechanism (ESM) program, reduced political risk and sustained growth of GDP, Fitch Ratings has upgraded Greece’s rating to B- from CCC. The rating carries an outlook of positive.

The economy of Greece is undergoing a gradual recovery. Indicators signal growing economic activity, though ESM program delays weighed on confidence and private-sector payments in the first quarter. With rising consumer and business confidence, the European Commission economic sentiment indicators reached a two-year high in July. Fitch expects real GDP growth of 1.6% and 2.1% in 2017 and 2018, respectively. Domestic demand should be boosted by a decline in unemployment, continued clearance of government arrears and increasing investments.

The successful completion of the second review of the ESM program has reduced the risk of a fall in confidence or an increase of government arrears with the private sector. Fitch expects that the third review of the adjustment program will result in no increase of instability and that the Eurogroup will grant significant debt relief to the country next year.

In Fitch’s view, an important development is the Eurogroup’s plan to connect debt relief measures to actual growth outcomes after the program period. This should increase confidence that government debt is on a sustainable path. European partners appear to be changing focus from strict fiscal targets to the restoration of medium-term GDP growth, Fitch said.

– Adam Fusco, associate editor

First Insolvency Case under New Indian Bankruptcy Code Goes Forward

Aug. 18, 2017

India’s National Company Law Tribunal (NCLT) has approved the country’s first insolvency resolution order under the new Insolvency and Bankruptcy Code, 2016.

The plan for Synergies-Dooray Automotive Ltd., a company that manufactures alloy wheels, submitted its application to the NCLT January 23, according to a report in Money Control. The firm’s resolution plan was submitted within the code’s 180-day deadline.

The bankruptcy law passed Indian Parliament in May 2016 and went into effect in December, replacing the nest of rules and regulations formerly in place to tackle bad loans and nonperforming assets in the Indian economy. The total claim against Dooray from financial creditors, including three asset reconstruction companies, is roughly $15.2 million, according to a report in Livemint.com.

“There were three resolution plans out of which one was selected,” said Mamta Binani, the insolvency resolution professional for Synergies-Dooray and past president of Institute of Company Secretaries of India (ICSI), in the Livemint article. “The other two plans had good money in them, but the companies infusing capital were from a trading background. We went with the plan which had some manufacturing background to keep the company as a going concern. Putting in money is not the end of it. The selected plan also takes care of dues of operational creditors and the government, which is generally not the case when the liquidation value is zero. We are increasingly seeing that committee of creditors are conscious of the dues of operational creditors, as these are mostly small and medium enterprises, and if their dues do not get paid, then the companies can go under and overall hurt the economy.”

– Nicholas Stern, managing editor

Growth Accelerates in Eurozone

Growth is accelerating in the eurozone, reflecting the region’s broad cyclical recovery, though the pace of growth may slow next year, according to a new report from Fitch Ratings.

Factors that have supported growth include a reduction in political risk following the French elections, a rise in business confidence and improvement in export demand. Unemployment this June reached an eight-year low, which boosted consumer confidence. Policy support for the economy also has gained ground, with credit standards for loans to businesses easing this year.

Fitch raised its 2017 GDP growth forecast for the region to 2.0% from 1.7% in June. Growth is expected to slow to 1.8% in 2018. As the benefits in the drop in energy prices wear off, consumption demand is expected to decrease as well. In addition, negotiations surrounding Brexit and questions over U.S. trade policy create uncertainties over international trade.

Fitch expects growth potential in the medium term will be constrained for major economies by 2019 due to demographic and productivity trends, as well as a narrowing of output gaps. Near term, however, growth in the region should remain above the potential rates seen in recent quarters. Growth potential in advanced economies is expected to fall in the range of 1.25% to 1.75% over the next five years, Fitch said.

– Adam Fusco, associate editor

NAFTA Talks Begin in Washington

Reworking the North American Free Trade Agreement (NAFTA) has been a focus point of the Trump administration since last summer. Talks between the U.S., Canada and Mexico started in Washington today to discuss the nearly 25-year-old pact.

American officials want to continue with their protectionist views by removing dispute-resolution panels within NAFTA, said the Wall Street Journal. The panels are designed to sustain or overturn tariffs during conflicts. Both Canada and Mexico are in support of keeping the panels. These panels fall under Chapter 19 of NAFTA. If it is done away with, tariff disputes would then enter national courts or go before the World Trade Organization.

Rules of origin, especially in the automotive industry, is another topic set to be discussed, according to the Washington Post. Roughly two-thirds “of the total value of the components in a car have to come from within North America in order for that automotive to move across North American borders tax free,” said the Post.

Meanwhile, positive negotiations will not improve Mexico’s growth, according to Moody’s Investors Service. "NAFTA has not remedied Mexico's low growth, low productivity and low wages," said Madhavi Bokil, a Moody’s VP and senior analyst, in a release. “Successful NAFTA talks alone will not fix structural impediments to Mexico's growth,” he added.

Updating the rules of origin and the overall trade pact could both benefit Mexico and its economic reform efforts, said a press release from Fitch Ratings. “Changes to the treaty do not put Mexico's industrial sector at a disadvantage in the U.S. market,” said Fitch. “Trump’s protectionist turn could help Mexico further diversify its export destinations and reduce its overdependence on the U.S. for its foreign trade,” said a report from credit insurer Atradius.

U.S. and Mexican officials are looking to close the door on negotiations, with a new deal by early next year due to elections. The general election in Mexico is in July, while the U.S. has an election in November. All three sides are expected to meet in Mexico next month.

– Michael Miller, editorial associate

Chinese Internet Companies with Finance Operations May Suffer Weak Credit Quality

Chinese internet companies that conduct finance operations may be weakening their credit quality. Finance operations offer loans to consumers and merchants, distribute wealth management products and allow consumers to make purchases on a company’s platform. But if they are consolidated into the company’s financials, they are usually funded by debt, do not produce meaningful profits and lack a track record of borrowers making timely repayment of loans, according to a new report from Moody’s Investors Service.

“Loans to consumers and merchants and distribution of wealth management products—two of the primary services that finance operations provide—can also lead to contingent liabilities and potential capital calls for internet companies,” said Lina Choi, a Moody’s vice president and senior credit officer. “These risks will persist even after the finance operations are deconsolidated, although further removed from the core business. The loans and wealth management services will still be offered with the internet companies’ brand names, and the strategic relationship between the core and finance operations remains.”

Of the five rated Chinese internet companies, four have finance operations: e-commerce platform Alibaba, search engine Baidu, and online retailers JD.com and Vipshop Holdings Limited.

Risks are mitigated, however, due to strong liquidity and the synergies between each company’s core business and the finance operation. Alibaba, JD.com and Vipshop can generate higher transaction volumes and cash flow through the loans  that they provide to those who conduct business on their platforms. Data gathered on consumers and merchants assist in determining to whom loans are offered and how much.

Alibaba’s risk exposure is lower than the other three companies because its finance operation is an associate company rather than consolidated in its financials. Baidu has a large cash buffer against capital calls, and both Baidu and Alibaba have larger cash buffers than JD.com and Vipshop, Moody’s said.

– Adam Fusco, associate editor

Solar Power Projects Require Lower Debt-Service Ratio than Wind Projects

Solar power projects typically require a lower debt-service cover ratio to achieve investment-grade status compared to wind projects, according a recently released report from Fitch Ratings. Electricity production from solar projects analyzed across the U.S., Europe, the Middle East and Africa have tended to exceed initial independent estimates, while wind projects have more often underperformed against initial estimates.

Fitch analysts looked at data collected since 2010 for wind and 2011 for solar projects in terms of initial P50 forecasts, or the annual production level the project is expected to exceed 50% of the time. They found that 70% of annual observations across solar projects met or exceeded the original P50 levels, while approximately 75% of wind project observations were below the P50 level and 43% were significantly below.

“Wind project underperformance is due to three factors,” Fitch said. “The greater technical challenge in forecasting led to some initial overestimation of power production. Higher natural resource volatility has affected some projects, including unusually low wind in the Western U.S. last year. And some wind projects have also been hit by problems with equipment.”

Solar projects, meanwhile, have benefitted from better-than-anticipated solar irradiance and plant availability. “The track record of solar projects is shorter, but they clearly have lower operational risk, better generation performance and lower volatility than wind projects,” Fitch analysts said. “They are also more resilient to downside scenarios, as shown by stronger financial metrics under one-in-100-year generation assumptions.”

Fully contracted, fully amortizing solar photovoltaic projects achieve an investment-grade rating from Fitch after achieving a 1.2x debt-service coverage ratio threshold, while the ratio for wind power projects is 1.3x.

– Nicholas Stern, managing editor

Reforming NAFTA May Not Be Enough to Fix Mexico’s Growth

Though renegotiation of the North American Free Trade Agreement (NAFTA) is scheduled to begin next week, it may not solve the factors hampering Mexico’s growth. Wage and productivity gaps with the United States have widened since the agreement’s inception, according to a new report from Moody’s Investors Service.

“NAFTA has not remedied Mexico’s low growth, low productivity and low wages,” said Madhavi Bokil, vice president and senior analyst at Moody’s.

NAFTA has continued to boost Mexico’s export competitiveness through a shift toward more complex production and integration with the U.S. economy, but the liberalization of its economy with its growth model focused on exports and access to the U.S. market has not resulted in the anticipated growth rates. The income gap with the U.S. will widen over time if productivity does not improve, Moody’s said. The country’s low productivity and wage growth is connected to uneven regional growth opportunities and a high degree of informality in its economy. Reduction in regional disparity is one objective of the structural reforms agenda.

Changes to the agreement may be more reserved than radical, however. “The talks on what the future of NAFTA will look like have started and the position of the Mexican government has emerged,” said Chris Kuehl, Ph.D., economist to NACM. “In the beginning, it appeared that Mexico would be in a defensive position, but times have changed and the advantage seems to lie with Mexico to some degree. The government of Enrique Peńa Nieto has refused to bend on some of the high-profile issues pushed by Trump, while those U.S. interests that have benefited from NAFTA have become more focused and organized. The modifications are likely to be far less drastic than was originally assumed.”

– Adam Fusco, associate editor


Chinese Bankruptcies Continue Rising in 2017

Bankruptcies in China will continue to increase the remainder of the year, yet the total number does not compare to those of other large economies. China saw more than 5,600 insolvency cases in 2016 after 3,600 in 2015, said a report from Fitch Ratings.

There were 4,700 cases filed in the first half of 2017 alone. Cases are being resolved at a higher rate as well with just over 3,600 last year, which is up roughly 40% from 2015. This year, there have been more than 1,900 resolved cases.

The reason for the rise in bankruptcies is partially due to China becoming more accepting. China’s authorities “have made efforts to improve the insolvency framework,” said Fitch. Zombie enterprises, which are entities that rely on government support and state bank assistance to stay afloat, “are responsible for the most significant corporate inefficiencies and account for the bulk of overcapacity.”

To put China’s bankruptcies in perspective, France had more than 55,000 last year, while the U.S. had less than 25,000. As an alternative to outright bankruptcy, “authorities may continue to favor mergers of weak companies with stronger ones,” added the report.

Fitch believes “bankruptcies are likely to continue rising quickly over the next few years in light of rising policy attention and the tightening of credit conditions since late 2016.” Firms will also face slower growth due to the deceleration in credit growth, which can be seen in Fitch’s gross domestic product growth forecast for 2018.

– Michael Miller, editorial associate

Tech Sector Most Efficient at Turning EBITDA into Cash Flow

The technology sector of the U.S. economy grew its corporate cash position again in 2016, amassing nearly half of the total accumulated for nonfinancial companies, and is likely to add more to the pile this year.

The top five most cash-rich companies in the U.S.—Microsoft Corp., Google Inc., Cisco Systems Inc. and Oracle Corp.—kept $594 billion in cash in 2016, or 32% of the total U.S. nonfinancial corporate cash, according to a recent report by Moody’s Investors Service. "The concentration of cash among the most cash-rich U.S. companies continued to grow last year, as did the proportion held by the technology sector, which accounted for close to half of the total," said Richard Lane, Moody's senior vice president. "Despite strong returns of capital to shareholders, we expect, absent tax reform, the technology sector's cash concentration to grind even higher over the next year because of its strong cash flow generation."

The health care/pharmaceuticals, consumer products, energy, automotive and manufacturing sectors all trailed tech in terms of cash holdings, analysts said.

Aggregate cash relative to debt climbed 37% in 2016, up from 34% in 2015 and higher than the 35% average over the past decade, Moody’s said. Cash flow from nonfinancial corporate operations dropped nearly 6% in 2016 to $1.45 trillion. Also, spending on plants and equipment decreased 18% last year, with reduced energy sector spending leading the pack.

“Reflecting the decline in cash flow from operations that was more than offset by reduced capital expenditures, U.S. nonfinancial corporates generated a record $720 billion in discretionary cash flow in 2016, up 11% from 2015,” Moody’s said. “The technology sector has, on average, turned 72% of EBITDA into discretionary cash flow in the past 10 years, making it the most efficient sector in this regard.”

– Nicholas Stern, managing editor

Small Businesses Continue Optimism Streak

Optimism continues apace among small business owners, continuing a streak that started shortly after the U.S. presidential election. The Index of Small Business Optimism from the National Federation of Independent Business (NFIB) rose 1.6 points to 105.2 in July, with seven of the 10 components in the index posting a gain, two declining and one unchanged. Stronger consumer demand was apparently the key, which was a major contributor to growth in the second quarter of 2017, according to the NFIB.

“There’s nothing like more customers to make owners happy, and optimism held up, as did important measures of spending and hiring plans,” the NFIB said.

A seasonally adjusted net 19% of small business owners plan to create new jobs, an increase of four points, with higher levels not seen since December 1999. A full 60% reported hiring or trying to hire, though more than half said that they were finding few or no qualified applicants for their open positions. Finding qualified workers was a particular problem in construction and manufacturing.

"The number of owners trying to fill positions and create new jobs is very high," said Bill Dunkelberg, NFIB chief economist. "That's good news for workers, because they can command higher wages and better benefits. The bad news is that small business employers are finding it very hard to hire and keep their workers."

An unchanged 57% reported capital outlays, with spending on new equipment, vehicles, and improved or expanded facilities. Five percent acquired new buildings or land for expansion.

Among small business owners, 3% said that all their borrowing needs were not satisfied, which is a decrease of 1 point and a low reading, historically. About 31% reported that all credit needs were met and just over half said that they were not interested in a loan. Only 2% said that financing was their top business problem.

– Adam Fusco, associate editor

China’s Regulation of Its Shadow Banking Sector is Showing Some Results

Chinese authorities’ moves to dampen credit growth and liquidity conditions, as well as their efforts to regulate the nation’s shadow banking industry, appear to be having a modest effect in moderating the growth of wealth management.

"However, the authorities are also engaged in a delicate balance to ensure that tighter credit and liquidity conditions do not trigger financial instability," said Michael Taylor, a Moody's Investors Service managing director and chief credit officer for Asia Pacific, in a new report on the topic. "Tighter market liquidity is being partially offset by higher lending to the banking system by the People's Bank of China, while regulators are offering grace periods for the implementation of new policy guidelines.”

Borrowers are increasingly turning to formal bank lending, as well as lending by the relatively more highly regulated parts of the shadow banking sector, like trust companies, as regulation has tightened around shadow banking in general, analysts said. "The rotation of credit supply to these sources improves transparency and could increase the system's resilience in the face of unexpected shocks," said George Xu, a Moody's associate analyst. "However, it remains unclear whether credit from these sources will be sufficient to replace credit supplied by the shadow banking components that are now subject to closer regulatory scrutiny."

Refinancing risk is thus growing for borrowing businesses in China that have grown reliant on the shadow banking industry, including property developers, local government financing vehicles and state-owned enterprises in overcapacity industries, Moody’s said. The gap between overall credit growth in the Chinese shadow banking sector and the growth rate of nominal GDP has shortened in recent months. Also, the growth in credit assets like wealth management products has apparently slowed, thanks to regulation. “Moody's points out that the challenges associated with regulatory tightening are illustrated by a strong rebound in new negotiable certificates of deposit issuance and the increase in the banks' net claims on nonbank financial institutions, both indicators of continuing system interconnectedness,” the ratings agency said.

– Nicholas Stern, senior editor

U.S. Virgin Islands the Next Puerto Rico?

Another U.S. territory is facing financial distress. The U.S. Virgin Islands has joined Puerto Rico in an effort to stay afloat.

The islands owe more than $2 billion to bondholders and creditors, according to Reuters. “For years the U.S. Virgin Islands funded essential public services with help from Wall Street. Investors lined up to purchase its triple-tax-exempt bonds, a form of debt free from municipal, state and federal taxes.”

Firms have downgraded the territory’s credit rating to junk, which has affected the bond market in the region. “With the U.S. Virgin Islands shut out of the credit markets after a failed January bond issue, officials are scrambling to stabilize its finances after years of taking on debt to plug yawning budget holes.”

To help settle the bond debt, “The governor has sent down a five-year plan, and this is just one small portion of his plan to ensure that the territory is self-sufficient,” said Tamarah Parson-Smalls, Bureau of Internal Revenue chief counsel, in a Marketplace.org article. Gov. Kenneth E. Mapp approved sections of a bill to increase taxes on alcoholic beverages and impose an Environmental/Infrastructure Impact Fee on timeshare owners. According to the article, “some vacationers in the U.S. Virgin Islands will face a new $25-a-day fee for using a timeshare. The fees are expected to bring in $19 million per year.

The Virgin Islands also face more than $3 billion in unfunded pension and health care. Debt loads for the Virgin Islands and Puerto Rico have surpassed 50% of their gross domestic products, said Reuters. The government and two public hospitals owe the territory’s water and power authority (WAPA) nearly $30 million. WAPA in turn owes two former fuel vendors $44 million, added Reuters.

In March, Gov. Mapp requested an 8% budget reduction for cost saving measures. There is a projected $100 million budget shortfall this year. “[I am] confident that, together, we can achieve the fiscal balance that has for too long eluded us,” he said according to his website.

-Michael Miller, editorial associate

Moody’s, Kamakura Indexes Reveal Improving Default Rates

A downward trend continues in the trailing 12-month default rate among U.S. speculative-grade companies, despite a rise of U.S. nonfinancial defaults in the second quarter of 2017, according to a recent report from Moody’s Investors Service. The commodities sector accounts for the highest number of defaults, though problems in the sector are easing.

“We see a combination of cash flow that is bolstered by economic growth, good intrinsic company liquidity and fewer commodity sector strains fueling a drop in the U.S. speculative-grade corporate default rate to 2.8% a year from now,” said Moody’s Senior Vice President John Puchalla.

Companies in the retail sector continue to struggle with the change in consumer spending habits. Defaults are rising in that sector.

“The decline in brick-and-mortar store traffic, in conjunction with the shift in consumer spending to digital channels, is contributing to retail earnings weakness and increased credit strains this year,” Puchalla said. “Even so, retail defaults are not making up for the decline in commodity defaults, as the retail and apparel default rate—at 4.4% in the second quarter—remains well below the default rate for commodity sectors.”

A continued reduction in the default rate can be expected over the next year, the ratings agency said, as its Liquidity Stress Index dropped nearly two percentage points in the second quarter. Reduced risk of default and a boost to speculative-grade liquidity can be found in earnings growth and favorable conditions for refinancing and raising investment funds, Moody’s said. However, the default atmosphere is still vulnerable if the economy deteriorated or if geopolitical issues disrupted trade.

Meanwhile, the Kamakura troubled company index ended July with a decrease of nearly half a percentage point from the previous month. The decrease indicates improving credit quality. Among the 10-riskiest rated firms in July, seven were from the United States, two from Great Britain and one from Singapore, Kamakura said.

– Adam Fusco, associate editor

U.S. Oil and Gas Volumes on Close Watch

U.S. midstream oil and gas volumes could take a hit in the second half of the year due to oil’s per barrel price range, according to Fitch Ratings. The credit insurer’s outlook on the midstream space is still stable, yet “higher cost of equity capital could raise leverage for some issuers, and credit metrics are stressed for some,” said Fitch. “Volume pressure in second-half 2017 and 2018 could erode metrics further.”

On the positive side, liquidity and capital market access have supported the midstream stable outlook, Fitch added. The release from Fitch said the Permian, SCOOP/STACK and Marcellus/Utica production basins have remained steady, but others in the U.S. will see lower production volumes.

Fitch believes the Permian basin has great potential for growth, having seen a 10% production jump in the 12 months ending April 30. It also saw increases in crude and natural gas. Meanwhile, “Oklahoma as a whole has not been strong,” said Fitch. The SCOOP and STACK basins has been the bright spot. Natural gas production was down 12% at Eagle Ford in south Texas on a year-over-year basis.

Midstream companies will also have regulatory risks, especially ones with new pipeline construction. “While not necessarily an immediate credit concern, regulatory delays and uncertainty could negatively affect project returns and capital spending budgets,” said Fitch. “The outlook for oil and gas production later in the year should remain a major focus area.”

– Michael Miller, editorial associate

Stability in Asia-Pacific Corporates to Continue through 2017

A stable rating trend among nonfinancial corporates in the Asia-Pacific region in the second quarter of 2017 is likely to continue through the rest of the year, according to a new report from Moody’s Investors Service.

“The stable rating trend for 2H 2017 will be supported by broadly based global growth, stronger export demand and the recovery of commodity prices,” said Clara Lau, a group credit officer at Moody’s.

The share of negative ratings among nonfinancial corporates in Asia, which excludes Japan, Australia and New Zealand, fell 10% from the end of March to the end of June. Ratings with stable outlooks reached a 74% share by the end of June, the highest since the end of the first quarter of 2015. Negative ratings actions outpaced positive actions from Moody’s in the second quarter of 2017.

In Moody’s Japanese portfolio, negative implications among nonfinancial corporates dropped to 24% from 29% at the end of the second quarter from the previous quarter. In the agency’s Australian portfolio, the share of negative ratings stayed at 12%, which reached a high of 23% a year ago.

The metals and mining industry in the Asia-Pacific region has bottomed out, resulting in easing of pressure on those companies, Moody’s said. Negative implications in that portfolio dropped to 27% at the end of the second quarter from 60% at the end of the first. Pressure continues in the retail sector, however, with more than 30% of retail companies holding negative implications. With national sales slowing and a tightening in regulatory measures, 23% of developers’ ratings in the property sector show negative implications.

– Adam Fusco, associate editor

India’s Bond Market Sees Changes

A change in the Indian bond market is here, according to Fitch Ratings. The regulation change from the Securities and Exchange Board of India will “reduce options for companies to diversify their funding sources,” said the credit rating agency.

It was announced earlier this month by the Securities and Exchange Board of India that rupee-denominated corporate bonds will only be allowed through auction when foreign holdings hit 95% of the cap. Foreign investors can invest up to $51 billion in corporate bonds issued by Indian entities, said Fitch, and foreign ownership is already over 95%. The offshore “masala bonds” will “cease entirely until foreign ownership falls to 92% of the cap.”

Interested parties can still use the Track III External Commercial Borrowing (ECB) route, but there is a higher withholding tax on interest. Foreign companies will also face a minimum maturity rate of five years on amounts greater than $50 million and additional administrative requirements.

Corporates “will need to have a minimum ownership interest in the onshore borrower or a common overseas parent” as well, Fitch said. This does not include entities such as banks and other financial institutions. Fitch believes the ECB Track III will not be the first place company’s turn, but it could become part of an option to meet their financial needs.

Masala bonds were first issued last year, “and the market still lacks the depth that would make them more attractive to foreign investors,” added Fitch. The Reserve Bank of India (RBI) also tightened masala bond issuance earlier this month, banning related entities from purchasing them, among other changes. “The RBI's regulations were more targeted, and aimed at ensuring that only relatively strong corporates tap the offshore market,” said Fitch.

– Michael Miller, editorial associate

CMI Continues to Signal an Up-and-Down Year

The roller-coaster ride among economic data may be reflected again in the Credit Managers’ Index (CMI) from the National Association of Credit Management, according to preliminary numbers. Contradiction is the word of the day as shifts in the economy continue from upbeat to downbeat.

“It looks like companies are catching up with their creditors one month and falling back the next,” said NACM Economist Chris Kuehl, Ph.D. “This is another month where they are losing ground.”

July data indicates a down month for the CMI. The numbers in the index’s unfavorable categories have been in the contraction zone for the better part of two years, showing the distress in the economy. Preliminary figures indicate, however, that new credit is in demand. Sales likely have slipped, consistent with the trend this year.

A majority of companies are apparently managing to stave off bankruptcy in the face of economic confusion. On the other hand, the score for rejections of credit applications experienced a significant decline, signaling worsening conditions.

Companies are still determined to expand their operations one way or another, as numbers in the manufacturing sector indicate an increase in new credit applications. Businesses in the service sector may have less stomach for expansion this holiday season. With credit applications likely down, retailers may be planning for a year of light inventory.

– Adam Fusco, associate editor

For a full breakdown of the manufacturing and service sector data and graphics, be sure to view the complete July 2017 report this coming Monday here. CMI archives may also be viewed on NACM’s website here.

U.K. GDP Improves Slightly in Q2

The United Kingdom’s gross domestic product (GDP) improved slightly in the second quarter of 2017, but it’s nothing to write home about. The preliminary GDP estimate rose 0.3% in the three months ending with June, which is ahead of the 0.2% uptick seen at the start of the year.

“GDP growth for the U.K. has been anemic,” said NACM Economist Chris Kuehl, Ph.D. “There is little chance this will change much this year. Now that most understand the damage that has been caused by Brexit, the sense is that Q3 will be slow as well.”

“The economy has experienced a notable slowdown in the first half of this year,” said Office for National Statistics (ONS) Head of National Accounts Darren Morgan in a release. Despite the lack of substantial growth, “[economic] activity remains 9% above its predownturn peak,” according to the ONS.

Construction and manufacturing were the weak links during the second quarter, but retail and film production and distribution showed improvement.

“These meager growth rates indicate that the economy has lost momentum in 2017 and will consequently fail to achieve the 1.8% expansion seen in 2016,” said IHS Markit Chief Business Economist Chris Williamson.

The Bank of England expected a growth of 0.4% in the second quarter. IMS Markit is forecasting a growth of 1.4% this year, while the International Monetary Fund recently downgraded its expectation to 1.7%. Last year, the Bank of England predicted a GDP growth of 0.8% in 2017. In order to reach that prediction, “GDP would need to contract by an average of 0.7% in each of the remaining two quarters in order to hit the annual GDP growth predicted by independent forecasts and the BoE,” said the ONS.

– Michael Miller, editorial associate

Chinese Retail Firms Face Pressure

The Chinese retail sector is facing weak but improving credit conditions, while most other non-financial corporates in a variety of sectors are experiencing stable conditions, according to a new Moody’s Investors Service report.

"A challenging operating environment and merger and acquisition activity have pressured the credit profiles of Chinese retail companies, but revenue and margins are stabilizing thanks to improved product and service offerings and upgraded shopping environments," said Lina Choi, a Moody's vice president and senior credit officer.

Chinese internet and technology companies are expected to see slow, stable revenue growth this year boosted by consumer demand and increased monetization, analysts said. Meanwhile, the automakers and auto services companies will also experience slow and steady growth, thanks to reduced vehicle purchase tax incentives.

Utilities companies are expected to stay stable this year thanks to the current regulatory framework.

Domestic and overseas infrastructure investment, in addition to a large order backlog for existing property projects, should increase the revenue growth of Chinese construction and engineering firms this year, Moody’s said. “The credit profiles of rated developers should improve in 2017, despite slowing sales growth from tighter government controls,” Moody’s analysts said. “The major developers will continue to increase their market share, supported by their strong branding and execution abilities, solid financial profiles and continued access to funding.”

– Nicholas Stern, senior editor

Growth Strengthens in European Emerging Market Overview

Strengthening growth, diverging fiscal policy trends and political risk are themes in a recent report from Fitch Ratings that provides an overview of sovereign credit trends in European emerging markets.

The European Commission is forecasting a deterioration in the structural balance for most countries in the region, Fitch said. Output gaps remain negative, though wage rates are being pressured by strengthening growth. Commodity prices have contributed to an increase in inflation in the first quarter of 2017. Growth in central and eastern Europe is supported by distribution of European Union funds and by increasing strength of trade from western European countries. Easy monetary conditions and lowering unemployment, along with an increase in tourism, have helped domestic demand.

Political risks appear to be contained, Fitch said, in the face of recent changes to ruling factions in Bulgaria and Croatia, a new Romanian government and elections in the Czech Republic. A recovery in Russia continues, with domestic demand responding to confidence in the economic policy.

Turkey has recovered from a coup attempt, with growth reaching 5% year-over-year in the first quarter of 2017, supported by a stimulus effort by the government. “Billions have been poured into the economy to stabilize the political and economic situation and it has worked—at least for now,” said NACM Economist Chris Kuehl, Ph.D. “The issue now is whether the country has the ability to keep this up. The majority of analysts assert that it will not be able to. The country has been financing this surge of spending with debt (and expensive debt at that) given that investors are still not convinced the government is that stable. The only hope is that consumers and the business community have enough impact to boost government revenues. Most assert that there is just too much debt to handle and that it only stands to get worse.”

Fitch has taken three ratings actions in the region this year. Bulgaria was changed from Stable to Positive and Croatia was moved from Negative to Stable. Turkey was downgraded due to political developments affecting economic performance and the slowing economy weighing on banks, among other reasons.

– Adam Fusco, associate editor

IMF: U.S., U.K. Economy Growth Downgraded


The global economy will remain unchanged the rest of this year and into 2018, according to the July World Economic Outlook Update from the International Monetary Fund (IMF). Despite the stability across the globe, the U.S. and U.K. will grow weaker than previously expected.

“The recovery in global growth that we projected in April is on a firmer footing; there is now no question mark over the world economy’s gain in momentum,” said IMF Chief Economist Maurice Obstfeld in an IMF blog. The July update further cemented the projected global growth at 3.5% this year and 3.6% next year. China, Japan and the eurozone saw revised upward growth.

The IMF revised the U.S. growth forecasts to 2.1% in 2017 and 2018. The reason for this is due to “the weak growth outturn in the first quarter of the year; the major factor behind the growth revision, especially for 2018, is the assumption that fiscal policy will be less expansionary than previously assumed,” said the update. Even with the downgrade, “U.S. growth should remain above its longer-run potential growth rate,” added Obstfeld. The impact of Brexit on the U.K. is still unknown.

In China, “higher growth is coming at the cost of continuing rapid credit expansion and the resulting financial stability risks,” Obstfeld said. Also among emerging and developing economies, India is forecasted to grow in 2017 and 2018. Canada saw the biggest growth prediction in 2017 compared to the April projection. Meanwhile, Sub-Saharan Africa is expected to have some of the largest growth in 2017 and 2018 compared to last year.

“Despite the current improved outlook, longer-term growth forecasts remain subdued compared with historical levels, and tepid longer-term growth also carries risks,” said Obstfeld.

– Michael Miller, editorial associate

Retail High-Yield Default Rate Rises While Overall Rate Declines

Despite a drop in the overall high-yield default rate since the end of June, the U.S. retail trailing 12-month (TTM) high-yield default rate rose, following apparel retailer J.Crew’s $566 million distressed debt exchange (DDE). Large retailers such as Claire’s Stores, Sears and Nine West Holdings have a high likelihood of default before the end of the year, according to a new report from Fitch Ratings.

The retail sector rate, which rose to 2.9% in mid-July from 1.8% at the end of June, may reach 9% if those three retailers file for bankruptcy, the ratings agency said. The forecast for the sector at year end, even if Sears and Claire’s do not file, is 5%. The overall high-yield default rate fell to 1.9% in mid-July from 2.2% at the end of June, as $4.7 billion rolled out of the TTM default universe.

“Even with energy prices languishing in the mid $40s, a likely iHeart bankruptcy and retail remaining the sector of concern, the broader default environment remains benign,” said Eric Rosenthal, senior director of leverage finance at Fitch.

DDEs are the leading cause of default on an issuer basis. A total of 146 DDEs have occurred since 2008, with about 40% of those experiencing a subsequent default within an average of 13 months.

The energy default rate reached its lowest point since August 2015. Fitch expects the 2017 sector rate to finish at 2.5% and believes the sector has passed the peak of the default cycle for high-yield energy bonds.

– Adam Fusco, associate editor

Stable and Positive Outlooks Predominate Global Industry Sectors

The global economy is gaining traction as stable and positive outlooks dominate Moody’s Investors Service’s distribution of industry sector outlooks and stable growth appears more likely. Moody’s 54 industry sector outlooks reflect the rating agency’s expectations for fundamental business conditions over the coming 12 to 18 months. Currently, 12 of those outlooks are positive, four are negative and the rest are stable.

"Business conditions currently indicate continuing, if hesitant, global economic growth," said Moody's Senior Vice President Bill Wolfe. "Even so, despite an uneven recovery and even with many commodities-based sectors only recently emerging from a prolonged supply-side adjustment, overall business conditions are strong enough to support reduced monetary stimulus—suggesting that conditions for nonfinancial companies may be near a difficult-to-improve-upon peak."

Consumer-based industries, including consumer durables, global consumer products, North American building materials and U.S. homebuilding, have bolstered growth since the Great Recession and particularly over the past three to five years, Moody’s reported. Still, flagging monetary stimulus puts strengths in this sector at risk.

In March, global integrated oil moved to a positive outlook from stable, while global oilfield services and drilling and North America and EMEA refining and marketing moved out of negative territory to stable. During the second quarter, the Latin American telecommunications’ outlook improved to stable from negative, as did the global shipping sector.

Risks increased in the global automotive sector, as the outlook switched to negative from stable in October 2016, while in the same month the European automotive parts suppliers sectors fell to stable from positive, Moody’s said.

In a separate report, Moody’s noted that, so far this year, only 14 global nonfinancial companies have fallen into speculative investment-grade territory; in 2016, 63 companies lost their investment-grade status, prompted in part by flagging commodity-linked industries and negative sovereign rating actions.

– Nicholas Stern, senior editor

Almost Half of GCC Businesses Not Ready for New Value-Added Tax

Nearly half of businesses polled in the Gulf Cooperation Council (GCC) nations—the United Arab Emirates, Bahrain, Saudi Arabia, Oman, Qatar and Kuwait—are unprepared for the implementation of value-added tax (VAT) on Jan. 1, 2018, according to a new survey by the Association of Chartered Certified Accountants (ACCA) and Thomson Reuters.

Of the more than 330 people from a variety of industries in the region who participated in the survey, 11% said they understand the impact VAT implementation will have on their businesses and have used this knowledge to draft a policy, consider compliance models and identify IT system gaps, the survey noted.

Further complicating the matter, aside from Saudi Arabia, each GCC member state has yet to issue its own VAT law and executive regulation that can potentially lead to different tax treatment between each country, said Pierre Arman, market development lead for tax and accounting at Thomson Reuters. “Every function will be impacted by VAT (it’s not just a finance issue) and therefore it is essential for organizations in the region to begin analyzing how VAT will impact their operations through careful planning with their chosen tax adviser,” he said. “Time is limited and a considerable amount of the VAT impact assessment analysis can be done without knowing the details of the final law, as most of the VAT treatment can be extrapolated from other jurisdictions around the world.”

The ACCA and Thomson Reuters included a few pointers for businesses to ensure they’re ready for the VAT:

-    Allocate a budget for VAT.
-    Seek out a tax advisor.
-    Identify potential IT system gaps for VAT implementation. Specifically, when reviewing your existing billing system, identify what VAT compliance data is available and what’s not available for VAT calculation and reporting.
-    Evaluate the VAT reporting model you’d like to apply and prepare for the appropriate operational decisions and their consequences.

– Nicholas Stern, senior editor

U.S. Transportation Sector on Healthy Path for Remainder of the Year

Despite uncertainly surrounding the U.S. administration’s policies concerning upcoming spending on infrastructure, the outlook for the U.S. transportation sector is expected to be healthy for the remainder of the year.

According to Fitch Ratings’ midyear outlook on the sector, large transportation companies will still need to borrow debt to serve ongoing infrastructure renewal needs and provide congestion relief. Low fuel prices, however, should keep travel costs affordable.

A cautious growth trajectory is seen for public-private partnerships (P3s), as state and local governments explore P3 financial models. However, “there remains a scarcity of funding and a lack of understanding around the P3 structure, meaning most infrastructure needs will continue to be financed via more traditional means,” said Senior Director Scott Zuchorski.

Growth in passenger traffic at U.S. airports is expected to level off in the near term. “Large-hub airports are still the strongest performers in the aggregate, though smaller regional airports are now showing stronger performance as well,” said Senior Director Seth Lehman. Volume growth for U.S. ports should reflect that of GDP for the rest of 2017. However, “shipping company mergers, changing alliance structures and fluctuating freight rates will shift volumes, which could alter contractual protections for select ports,” said Director Emma Griffith.

Moderate growth is expected for toll roads for the remainder of the year. Stronger revenue growth is expected from inflationary toll increases. “Toll roads still face political risk, including federal funding uncertainty and state tolling opposition,” said Director Tanya Langman.

– Adam Fusco, associate editor

Business Volume Increased in the Equipment Finance Sector in 2016

The equipment finance sector saw business volume increase 2.5% in 2016, according to the recently released 2017 Survey of Equipment Finance Activity (SEFA). That marks the seventh consecutive year businesses increased spending on capital equipment. For small-ticket equipment transactions, new business volume grew 10.7% in 2016, according to a companion survey.

“The equipment finance industry continues a slow-growth trajectory, mirroring a fundamentally sound—if unspectacular—U.S. economy during the past several years,” said
Equipment Leasing and Finance Association (ELFA) President and CEO Ralph Petta. “Despite a slowly rising interest rate environment, leasing and finance companies are profitable entities, with generally healthy portfolios and sustainable levels of returns.”

The growth rate reported in the 2016 SEFA was down from 2015’s rate of 12.4%. In 2016, independents saw a 12% jump in new business volume and banks reported a 5% increase, while captives noted a 5.9% decrease. The middle ticket segment saw the largest increase in 2016.

According to the survey, the top five most-financed equipment types were transportation, IT and related technology services, agriculture, construction and office machines. The top five end-user industries representing the greatest portion of new business volume were services, industrial and manufacturing, agriculture, transportation and wholesale/retail.

Delinquencies increased in 2016, with 1.8% of receivables over 31 days past due compared to the prior year’s rate of 1.5%. Net full-year losses or charge-offs increased and remained at 0.29% of average receivables. Credit approvals increased a bit also, while the percentage of those approved applications being booked and funded fell overall.

– Nicholas Stern, senior editor

Fitch: Latin America’s Outlook is Negative

Latin America does not have a positive outlook after the first half of 2017. There were more negative than positive sovereign rating actions made by Fitch Ratings for the region in the first six months of the year, the agency said earlier this week.

Brazil, Chile, Ecuador and Mexico have negative outlooks, while Costa Rica and Suriname were downgraded one notch and two notches, respectively. El Salvador defaulted on local debt. No Latin American sovereigns are on a positive outlook in Fitch’s 2017 Mid-Year Sovereign Review and Outlook. The only positive move was Colombia, going from negative to stable due to a tax reform and “sharp falls in the current account deficit and inflation.”

“Sovereign credit pressures in the region generally stem from the challenging macroeconomic backdrop, the difficulty of fiscal consolidation, and sometimes volatile or polarized politics,” said Fitch. “All of these factors will see important developments in the second half of 2017 and 2018 as countries present their 2018 budgets and several elections take place.”

Some countries are doing their best to improve public debt. “Chile and Mexico are seeing benefits from earlier tax reforms, and Colombia and Uruguay have enacted tax increases in the past year,” added Fitch.

For a sovereign rating to change, the reasons may have to come from the citizens of the country. Fitch cites nine elections in the next year and a half as a key factor to a country’s rating. “Political deadlock was a major factor in our negative rating actions on Costa Rica and El Salvador, which have elections scheduled in [the first quarter of 2018],” said Fitch.

– Michael Miller, editorial associate

Weak Demand Cause for C&I Lending Slowdown


Weak demand may be the cause of a slowdown in growth for commercial and industrial (C&I) lending, rather than tighter credit, according to a report from Wells Fargo Securities. The pace of commercial and industrial lending at domestically chartered banks has slowed over the past year and is consistent with previous periods of economic weakness in 1990, 2001 and 2008. But the net percentage of banks that are tightening standards for such lending is easing, so other factors are at play.

A drop in the need to increase spending on business equipment is one reason. Firms are able to produce at the current pace of economic output. “The expected pace of final sales in the economy has come to reflect the steadiness of 2% economic growth over the last five years,” Wells Fargo said. Business equipment spending fell by 0.5% in 2016 after gaining 2.1% the year before.

Also, profit margins have declined. There is less incentive to add to capacity as a result. Finally, firms are able to exercise tighter control over inventories. “There is little need to borrow funds since both the real quantity of inventories has been low and little incentive exists to borrow in anticipation of higher inflation prices for inventories goods,” Wells Fargo said. “Inventories were a drag of 0.4% on growth in 2016 and are expected to add just 0.1% this year.”

– Adam Fusco, associate editor

Global Trade has Helped Asia-Pacific Banks, But Watch for Ongoing Risks

Improved global trade and a strengthening Chinese economy have helped relax cyclical pressures on Asia-Pacific financial systems, but high private-sector debt is still a risk to the system’s stability and bank performance for much of the region.

Rising demand in China, recovering commodity prices and relatively stable currency and asset prices have helped support bank performance in the Asia-Pacific region, according to a new report from Fitch Ratings. The ratings agency’s outlook is negative for 10 of the region’s 17 rated banking systems, but that’s down from 13 at the beginning of the year. “Nevertheless, the build-up in private-sector debt and the rise in property prices over the last decade of ultra-loose global monetary policy have created financial risks that could still be tested by US rate hikes,” Fitch analysts said.

Corporate debt has risen sharply in Hong Kong and China, and a sharp downturn in the economy poses a key risk for the banking sector in China. Meanwhile, rating changes for banks in China and India could occur from asset-quality issues, Fitch said. Risks are highest in state banks in India, while in China, risks are concentrated at second- and third-tier banks, which have less capital and larger exposure to shadow banking and higher reliance on wholesale funding.

– Nicholas Stern, senior editor

Optimism Continues Among Small-Business Owners, but Sustainability is Questionable

A surge in optimism among small-business owners that started with the U.S. presidential election continues, but has been falling since a peak in January. Economic growth in the first half of the year has been the same as in the past three or four years, with little progress. For the remainder of the year, euphoria will be hard to find, according to the National Federation of Independent Business (NFIB) Index of Small Business Optimism.

The index fell in June by 0.9 points to 103.6. It peaked in January at 105.9. Four of the 10 index components registered a gain, five declined and one remained unchanged.

Four percent of small-business owners reported that all of their borrowing needs were not satisfied, an historically low number, the NFIB said. Twenty-seven percent reported all credit needs met and 54% said that they did not want a loan.

The net percent of owners who reported higher nominal sales in the past three months compared to the prior three months, seasonally adjusted, was -4%. The net percent of owners expecting higher real sales volumes lost five points, to 17%. This shows low prospects for growth in the second half of the year, the NFIB said, since owners are less likely to hire employees or order new inventory with weak sales prospects.

Among owners, 57% reported capital outlays. Of those, 40% spent on new equipment, 21% acquired new vehicles, and 13% improved or expanded facilities. Capital spending has declined from earlier in the year, but the percent of owners planning outlays in the next three to six months rose three points to 30%, the strongest reading since September 2007, the NFIB said.

“A continuation of the high levels of optimism in the small business sector will depend heavily on Congressional progress on the major issues for small-business owners: health care, tax reform and regulatory relief,” the report said. “More substantial progress is needed on these major issues if owner optimism is to be sustained and produce accelerated hiring and spending.”

– Adam Fusco, associate editor

Global Cash Hoarding Increases

The world’s cash pile has doubled since the financial crisis roughly 10 years ago, according to a new Euler Hermes report. It is now 10% of the global gross domestic product (GDP).

Nonfinancial corporations had $7 trillion in cash on their balance sheets at the end of last year, according to Euler Hermes' Summer 2017 Economic Outlook, High Stakes Game Payment Behavior, Cash Piles and Major Insolvencies.

 “Global economic growth supports cash generation,” said the report. “Yet it is coupled with various uncertainties and risks which prompt saving behavior. Thus, companies will continue to be pushed to hoard.” The global cash pile increased nearly 3% in 2016 compared to the previous year based on more than 30,000 companies.

Asia-Pacific companies hold the most cash, while technology companies have surpassed oil and gas and automotive companies. Companies in the U.S. hold 30% of the global cash pile, and the U.S. has 71% of the tech industry’s cash pile. This is largely due to firms such as Alphabet (Google), Apple and Microsoft.

“Cash accumulation proved to be more dynamic in regions with the strongest economic growth,” according to Euler Hermes. “This explains why the total world cash shares of the Asia Pacific and North America regions have kept growing.” Asia-Pacific countries hold roughly 44% of the global cash accumulation. China has seen one of the largest cash pile increases since 2010, which represents more than 9% of the world’s cash.

Technology represents 18% of the global cash pile, followed by oil and gas, which is about half as prominent as the tech industry. The transportation, telecom, household equipment and machinery, and equipment sectors saw decreasing cash piles in 2016.

– Michael Miller, editorial associate

Illinois Sets Budget, Still Facing Unpaid Bills

Illinois is back on track, but the state is still facing an uphill climb. The state legislature overrode the governor’s veto on the $36 billion budget, making this the first time since fiscal 2015 the state has a spending plan in place. Illinois is $15 billion behind on bills but took the step this week toward resolving that issue.

Illinois isn’t the only state dealing with this problem. Connecticut, Pennsylvania, Oregon, Rhode Island, Wisconsin and Massachusetts are without budgets, but the latter is getting set to remedy that soon. All the states except for Illinois face no immediate credit rating implications, according to a new release from Fitch Ratings.

In Illinois’ case, the new budget includes a permanent income tax increase and recurring expenditure reductions, as well as “a plan to issue bonds to pay down a portion of the state’s significant accounts-payable backlog,” added Fitch. The budget impasse also caused the state Department of Transportation to suspend construction projects, but they have since resumed following the lawmakers’ override. Roughly 900 projects valued at more than $3 billion were in jeopardy.

“His tax-and-spend plan is not balanced, does not cut enough spending or pay down enough debt, and does not help grow jobs or restore confidence in government,” said Illinois Gov. Bruce Rauner on Facebook referring to state House Speaker Mike Madigan. The new budget is estimated to generate about $5 billion in revenue. “It proves how desperately we need real property tax relief and term limits. Now more than ever, the people of Illinois must fight for change that will help us create a brighter future,” the governor added.

Even with the new budget, Moody’s Investors Service said earlier this week, Illinois could face a credit rating downgrade. Moody’s has Illinois one step above a junk rating.

-Michael Miller, editorial associate

Economic Partnership Agreement Reached between the EU and Japan

An agreement in principle on the main elements of an economic partnership agreement was reached today between the European Union and Japan. The agreement will remove the majority of duties paid by EU companies, which total 1 billion euros annually, and open the Japanese market to key EU agricultural exports, according to the European Commission in a press release.

“Through this agreement, the EU and Japan uphold their shared values and commit to the highest standards in areas such as labor, safety, environmental or consumer protection,” said President of the European Commission Jean-Claude Juncker. “Together, we are sending a strong message to the world that we stand for open and fair trade.”

“This agreement has an enormous economic importance, but it is also a way to bring us closer,” said Commissioner for Trade Cecilia Malmström. “We are demonstrating that the EU and Japan, democratic and open global partners, believe in free trade…. With Japan being the fourth-largest economy of the world with a big appetite for European products, this is a deal that has a vast potential for Europe. We expect a major boost of exports in many sectors of the EU economy.”

The value of exports from the EU could increase by as much as 20 billion euros, benefitting sectors such as agriculture and food products, leather, clothing and shoes, and pharmaceuticals.

“The EU-Japan Economic Partnership Agreement is the most significant and far-reaching agreement ever concluded in agriculture,” said Phil Hogan, commissioner in charge of agriculture and rural development for the European Commission. “Today, we are setting a new benchmark in trade in agriculture.”

In regards to agricultural exports, the agreement does away with duties on wine and many cheeses, and will allow the EU to increase its beef exports to Japan substantially, according to the release. The agreement also opens up markets in financial services, e-commerce, telecommunications and transport. It guarantees to EU companies access to the large procurement markets of Japan and protects sensitive economic sectors of the EU, such as the automotive sector, with transition periods before markets are opened.

“After some years of debate and some real acrimony, the Europeans and Japanese have reached a deal that will both delight and dismay business in both countries,” said NACM Economic Chris Kuehl, Ph.D. “There are lots of provisions and sections, but the most important elements include the fact that Japan will get greater access to the European market for its cars. In return, European farmers will gain access to the Japanese agricultural market. Both of these are politically sensitive areas. The leaders have taken some risk by changing the rules at this stage.”

Negotiators on both sides will continue work on remaining technical issues, with a final text expected by the end of the year. It will then be submitted for the approval of the EU member states and the European Parliament.

– Adam Fusco, associate editor

Qatar’s Outlook Shifted to Negative Following Diplomatic Dispute

Moody’s Investors Service has changed its outlook for Qatar to negative from stable based on the economic and financial risks associated with the ongoing dispute between the nation and its Gulf Cooperation Council neighbors like Bahrain, Saudi Arabia and the United Arab Emirates.

“In Moody's view, the likelihood of a prolonged period of uncertainty extending into 2018 has increased and a quick resolution of the dispute is unlikely over the next few months, which carries the risk that Qatar's sovereign credit fundamentals could be negatively affected,” the ratings agency said.

Moody’s also affirmed Qatar’s rating at Aa3, reflecting the agency’s positive view of Qatar’s credit strengths, including a sizeable net asset position of the government and remarkably high levels of wealth that will continue to support the sovereign’s credit profile. The government has approximately $35 billion in net international reserves at the Qatari Central Bank and more than $300 billion of assets managed by the Qatar Investment Authority.

Amidst the dispute, the coalition has severed diplomatic relations, closed borders and expelled Qatari nationals from their countries, Moody’s reported. The coalition has also issued 13 demands of Qatar that it must meet in order to see relief. A quick resolution to the crisis has yet to arise, and the state of affairs is likely to impact economic activity. So far, there have been reports of disruptions to some nonhydrocarbon exports and a forced shutdown of helium production. Tourism is also likely to be hit by the termination of direct flights to the nation.

“Moody's thinks that a prolonged period of uncertainty will negatively affect business and foreign investor sentiment and could also weigh on the government's long-term diversification plans to position the country as a hub for air traffic, tourism, medical services, education and sports through a higher-risk perception among foreign investors.”

– Nicholas Stern, senior editor

Growth Slows in U.S. Manufacturing

The U.S. manufacturing sector experienced a subdued month in May, with growth slowing in output, new orders and employment. Optimism, however, is at its strongest level since February.

According to IHS Markit, the U.S. Manufacturing Purchasing Managers’ Index (PMI) reached a score of 52 for June, down from 52.7 in May, indicating the least-marked improvement in business conditions since September 2016. The main factors weighing on the index were slower output rates and new business growth.

“Manufacturers reported a disappointing end to the second quarter, with few signs of growth picking up any time soon,” said Chris Williamson, chief business economist at IHS Markit. “The PMI has been sliding lower since the peak seen in January and the June reading points to a stagnation—at best—in the official manufacturing output data.”

Manufacturing production has increased since last June, but the rate of expansion was modest and reached a nine-month low in the past month, Markit said. Softer new business growth was a check on production schedules. New order books improved in June, but the increase was the weakest since September of last year. Cost pressures were the weakest in 15 months, resulting in the slowest pace of factory gate (the actual cost of manufacturing goods before any markup is added to give profit) price inflation since late 2016. The sector has seen four years of sustained employment growth, though the pace of job creation was at its lowest since March, according to Markit.

“Forward-looking indicators—notably a further slowdown in inflows of new business to a nine-month low and a sharp drop in the new orders-to-inventory ratio—suggest that the risks are weighted to the downside for coming months,” Williamson said.

– Adam Fusco, associate editor

Chinese Companies Face Funding Risks from Puttable Bonds

The Chinese corporate sector could find itself under funding pressures due to the prevalence of put options in Chinese bonds. Systemic stress is not expected, but companies may face challenges if market liquidity tightens.

According to a new report by Fitch Ratings, about a fifth of onshore nonfinancial corporate bonds in China contain a put option, which grants investors the opportunity to demand early repayment of the principal. (In comparison, only about 4% of corporate bonds are puttable globally.) Puttable bonds, or put bonds, allow the holder to force the issuer to repurchase the security at specified dates before maturity, according to Investopedia. In China, corporate bonds with put options are valued at $420 billion, compared to $233 billion outstanding in the rest of the world.

Issuers can plan for refinancing, since the number of exercisable puts will peak in 2018 and 2019, Fitch said. This is the reason that systemic stress is unlikely. The put bonds will increase the cost of debt servicing sooner than some companies may have planned, however, and shift forward funding needs. Those companies that rely heavily on puttable bonds are likely to face pressure if liquidity conditions tighten significantly.

According to Fitch, liquidity and refinancing risks from puttable bonds are dampened by coupon-adjustment options. The ratings agency expects issuers to raise coupon payments when possible to dissuade investors from exercising puts, which would then allow issuers to avoid re-issuance costs. This would, however, increase the debt-servicing cost.

– Adam Fusco, associate editor

Takata Recall Obligations Could Hit Automakers Despite Bankruptcy Filing

Now that TK Holdings, the U.S. business of Takata, along with 11 Mexican and U.S. subsidiaries, filed for Ch. 11 bankruptcy on June 25th due to billions worth of liabilities from recalls and lawsuits related to its air bags, industry observers see problems ahead not only for the firm’s suppliers, but automakers could be on the hook as well.

The auto supplier has said it will recall and replace millions of defective air bag inflators that were used in the vehicles of 19 auto manufacturers across the globe; filing for bankruptcy protection doesn’t relieve the firm of its recall responsibilities, according to a report from Bloomberg. As a result, if Takata comes up short in terms of these responsibilities, car makers may have to pay the remainder.

A potential buyer of the firm—Key Safety Systems of Michigan, which is owned by China’s Ningbo Joyson Electronic Corp and is seeking to acquire Takata’s viable operations—wouldn’t necessarily have to assume unwanted liabilities like recall obligations, said Robert Rasmussen, a University of Southern California law professor specializing in corporate reorganizations, as quoted by Bloomberg. Estimates for the future cost of the recall could be as high as $5 billion, with approximately $2 billion tied to Takata, while Takata asset sales are likely to generate about $1.5 to $2 billion; automakers may have to cover this shortfall.

– Nicholas Stern, senior editor

CMI Could Begin Summer with Firm Rebound

The numbers in NACM’s June Credit Managers’ Index (CMI), which will be released Friday at nacm.org, are likely to reflect a strong monthly rebound in business conditions. The index has been on a roller-coaster ride over prior months, mirroring the volatility in many kinds of economic data streams.

“The fact is that there are contradictory waves coursing through the economy as the wild enthusiasm that greeted the start of the year has come face to face with reality,” said NACM Economist Chris Kuehl, Ph.D.

Following a decrease in May, expect the June CMI to bounce back and achieve highs not seen in months, as preliminary data indicates healthy readings in both favorable and unfavorable categories, driven in part by the same two categories that have fluctuated in prior months—dollar collections and accounts beyond terms.

The movement of preliminary manufacturing data appears to be riding in tandem with the overall index, which may be benefitting from a bump in new sales. But cautionary notes could remain for manufacturers, as may be reflected in some of the unfavorable categories. “There is still a lot of financial damage to work through and many companies have been forcing collection activity,” explained Kuehl.

Volatility could also be the name of the game in the service sector for June. “This is an odd time of year for services in general as this is the height of both the construction season as well as the travel season, but retail is generally down as there are no big spending holidays to spark a rush to the stores,” said Kuehl. “This year the construction sector has been very active and vacation season has been better than it was last year.”

– Nicholas Stern, senior editor

For a complete breakdown of the manufacturing and service sector data and graphics, view the June 2017 report on Friday morning by clicking here. CMI archives may also be viewed on NACM’s website.

India’s Renewable Energy Market Set to Grow, but Faces a Few Headwinds

The renewable energy market has a bright future in India, which is moving to meet its commitments under the Paris agreement on climate change. “However, renewable energy projects face challenges related to the weak credit quality of offtakers, an evolving regulatory framework, as well as financing and execution risks,” said Abhishek Tyagi, a Moody's vice president and senior analyst in a new report.

The country is attempting to achieve 40% of cumulative installed capacity through non-fossil fuel sources by 2030 from a current level of 30%. Also, India plans to increase its renewable energy capacity to 175GW by 2022 from the current capacity of 57GW, Moody’s said. All of this will take place in the public and private sector.

"However, the key offtakers for most renewable projects are state-owned distribution companies, and these firms typically demonstrate weak financial profiles," said Tyagi. "This situation poses a key challenge for developers such as Neerg Energy Ltd (Ba3 stable). And, while there is no history of defaults under power purchase agreements, payment delays are quite common."

Policy related to renewable energy is also a potential headwind to the sector. As an example, there has not been significant adherence to Renewable Purchase Obligations which would have led to lower demand for renewable energy, Moody’s analysts said. Still, the Feed-in-Tariff and competitive bidding guidelines for wind and solar projects have done well to improve revenue visibility through the course of purchase power agreements. Execution challenges including land acquisition, establishing resource quality, grid connectivity and availability may also be an issue as renewable energy capacity increases.

“On the financing of renewable energy projects, Moody's explains that India will need to invest close to $150 billion to meet its 2022 renewable energy targets,” analysts said. “Because domestic banks are constrained in their lending to renewable projects, foreign capital will play an important role. However, foreign currency financing is constrained by the limited hedging products available to fully cover the INR currency risk of purchase power agreements.”

– Nicholas Stern, senior editor

Tightening of Short-term Business Loans in China Worries Some Analysts

The rate of short-term, non-financial corporate bank loans to companies in China has fallen in recent months to less than 1% from a high of 4.8% growth in January 2016. The tightening—a result of Chinese policymakers’ shift to reduce debt in sectors with excess capacity like iron and coal production—is helping improve China’s overall creditworthiness, notes a recent report in Reuters about data from Moody’s Investors Service and the People’s Bank of China. However, financing activity, particularly for small- and mid-sized-businesses in China, is increasingly turning to nontraditional lenders that are demanding greater yield for riskier assets.

Bond yields for high-rated issuers have increased about 75% from a low in October 2016, while the additional yield that investors demand on lower-rated borrowers more than doubled from the end of last year to about 36 basis points last week, Reuters said. Also, syndicated offshore loan volumes to Chinese companies have dropped in the first four months of this year to less than a third of what they were during the same timeframe the prior year.

The issuance of perpetual bonds that don’t have a maturity date are also on the rise in China, worrying some analysts that this allows firms to conceal their actual debt positions as perpetual bonds can be considered equity instead of debt, Reuters said.

– Nicholas Stern, senior editor


Auto Parts Suppliers Earnings for Electric Cars Could Be Limited by Competition from Semi-Conductor Firms

Auto parts suppliers of powertrain parts for electric vehicles may be excited about the rising popularity of the product and potential for earnings in the sector, but analysts with Moody’s Investors Service see competition from semi-conductor companies selling components limiting such growth.

"GKN Holdings plc, Valeo S.A., ZF Friedrichshafen AG and Continental AG could enjoy a revenue boost from the growing adoption of alternative fuel vehicles (AFVs) with hybrid or all-electric powertrains," said Scott Phillips, a Moody's vice president and senior analyst. "This shift is fairly positive for their revenues. However, semi-conductor companies are also looking to capture the value of key components so the uplift in auto suppliers' earnings is likely to be much smaller than expected."

Some car producers may wish to manufacture the electrification equipment on their own, but Moody’s expects suppliers to begin taking advantage of growth opportunities in this sector. “Industry observers expect AFVs to account for 15%-20% of total vehicle production by 2025, supported by tougher carbon regulations, the decreasing popularity of diesel vehicles and growing consumer acceptance. Additionally, government financial incentives will boost this fledgling market,” analysts said.

Until batteries become more inexpensive, hybrids will continue to dominate the market. Value is concentrated in key AFV components like 48 volt DC/DC converters, chargers, inverters and electric motors—all of these play to the strengths of semi-conductor companies like Infineon, STMicroelectronics and NXP Semiconductors, Moody’s said. “If mass production and competition were to commoditize the manufacture of power electronics components, this could erode the profitability of the European auto parts sector. However, Moody's believes it is more likely that auto suppliers will earn low single-digit EBITA margins on electrical components, which would leave them all net beneficiaries of electrification.”

– Nicholas Stern, senior editor

E&P Sector Set to Benefit from Federal Environmental Regulatory Rollbacks

The proposed shelving and delays in implementation of federal environmental regulations should provide a boost to the cost structure of some parts of the U.S. exploration and production (E&P) industry. Still, Fitch Ratings analysts, in a new report, think the short-term benefits derived from regulatory easing will likely be eclipsed by efficiency measures and hydrocarbon pricing as economic drivers for the industry.

Regulations targeted for delay or diminishment include methane emissions control reporting requirements, loosening of flaring rules and requirements to retrofit wells to limit methane emissions, Fitch notes.

The ratings agency anticipates E&P capex and rig counts to grow substantially this year. “Rising capex and output should continue to be largely driven by efficiency gains, including the ability of operators to further increase lateral drilling lengths along with an increase of proppant loadings and conducting acreage swaps or acreage acquisitions to further core up and optimize techniques for developing multiple stacked pay zones from a single location simultaneously,” analysts said.

The U.S. Energy Information Administration just updated its U.S. crude production projections to 10 million barrels per day in 2018, a high water mark for the industry not seen since 1970. Yet the ratings agency sees environmental restrictions as an ongoing factor that could add risks to the E&P sector. “Fitch believes the U.S. withdrawal from the Paris Agreement may create offsetting risks for the industry, which are difficult to quantify, including the risk that opposition becomes more entrenched at the state and local levels even as it eases at the federal level,” analysts said. “The response from mayors and governors around the country to the Paris Agreement exit underscore there is substantial political support for emissions regulation on both the state and local level.”

– Nicholas Stern, senior editor

China Sees Rise of Fintech E-payment Tech Firms

The rise of electronic payments providers in China is facilitating more online consumption and “omni-channel retailing” and may serve as a source of competition to traditional retailers and banking operations going forward.

"The rise in the usage of e-payments is positive for internet companies and most service and consumer-related companies, although it could also be negative for some companies in traditional retail channels," said Lillian Li, a Moody's Investors Service vice president and senior analyst in a new report. "And while it will not have a near-term significant impact on the profitability of Chinese banks, it will increase competition and drive the banks to transform their business models in the payment business."

The country’s foray into fintech is also viewed as credit positive by Moody’s, as it helps China obtain its goal of rebalancing the economy away from investment and toward consumption. Such third-party fintech firms have grown in China at an annual rate of more than 100% since 2015. China’s relatively brief history of bankcard use has also facilitated the quicker adoption of fintech.

“As indicated, internet companies as well as service companies along the supply chain are benefitting from fast growth in third-party e-payments, and small businesses in the service sector could also benefit from easier access to credit from third-party platforms at reasonable costs,” Moody’s analysts noted.

– Nicholas Stern, senior editor

Stronger Demand from Emerging Economies, Macro Policies in Advanced Improve Global Growth Forecast

Global economic growth is expected to pick up pace this year. The rate will be next to the highest since 2010, according to a recent Global Economic Outlook report from Fitch Ratings. Growth worldwide is anticipated to reach 2.9% this year and 3.1% in 2018.

"Faster growth this year reflects a synchronized improvement across both advanced and emerging market economies,” said Brian Coulton, Fitch's chief economist. “Macro policies and tightening labor markets are supporting demand growth in advanced countries, while the turnaround in China's housing market since 2015 and the recovery in commodity prices from early 2016 has fuelled a rebound in emerging market demand."

The forecast for the eurozone showed the most improvement as stronger incoming data, improving external demand and enhanced optimism that the European Central Bank’s quantitative easing is gaining traction resulted in 0.3pps to the 2017 eurozone forecast to 2%, analysts said.

Ongoing growth, however, is also dependent on monetary and fiscal policies, which are considered key factors in the short-term improvement of the global growth predictions. China’s recent tightening of credit conditions may impact growth later this year, while the U.S. Fed is expected to raise rates several times through 2019.

"With the Fed now signaling that QE will start to be unwound later this year, these monetary policy adjustments could spark some volatility in global financial markets attuned to persistent monetary accommodation," said Coulton.

A recent uptick in demand from large emerging economies like Brazil and Russia is also positive news that is expected to continue in the near term, Fitch analysts said. "The two key downside risks identified last quarter—eurozone fragmentation risk and aggressive U.S.-led protectionism—have not gone away, but have certainly diminished somewhat in recent months," Coulton said.

– Nicholas Stern, senior editor

Fed Raises Rate for Second Time This Year

The Federal Reserve’s Open Market Committee decided yesterday to raise the federal funds rate to a target range of 1% to 1.25%, the second increase for this year. In a press release, the Fed said that its monetary policy remains accommodative in support of strengthening labor market conditions and a sustained return to 2% inflation.

“Consistent with its statutory mandate, the committee seeks to foster maximum employment and price stability,” according to the release. “The committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, and labor market conditions will strengthen somewhat further. Inflation on a 12-month basis is expected to remain somewhat below 2% in the near term but to stabilize around the committee’s 2% objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the committee is monitoring inflation developments closely.”

Economic activity has risen moderately since the beginning of this year. Job gains have been solid and the unemployment rate has declined. Household spending has increased in recent months and business investment has expanded, the Fed said. Inflation has declined recently and is running slightly below 2%.

The committee asserted that it will assess realized and expected conditions in future decisions concerning the interest rate, with the continuing objective of maximum employment and 2% inflation. Information taken into account will include labor market conditions, indicators of inflation pressures and inflation expectations, and financial and international developments. The Committee anticipates that economic conditions will warrant gradual increases in the federal funds rate, though it is likely to remain “below levels that are expected to prevail in the longer run,” according to the release.

– Adam Fusco, associate editor

High-Flying Optimism Continues for Small Business

For six straight months, optimism among small business owners has been at an historically high level. A record level was reached last November that continued through May, according to the National Federation of Independent Business (NFIB) Index of Small Business Optimism.

“The remarkable surge in optimism that began last year right after the election shows no signs of slowing down,” said NFIB president and CEO Juanita Duggan. “Small business owners are highly encouraged by the president’s regulatory reform agenda, and they remain optimistic there will be tax reform and health care reform. This is a policy-driven phenomenon.”

Five components in the index showed a gain, four declined and one remained unchanged. Employment appears to be a large factor. Hiring activity in May was near the highest levels in the 43-year history of the index, the NFIB said. A majority of owners, 59%, reported hiring or trying to hire in May. Among those who tried to hire, 86% said that they found few or no qualified workers. In fact, finding qualified workers was the second-largest concern among small business owners.

“The tight labor market has been a persistent problem for small business owners for the past several months, and the problem appears to be getting worse,” said NFIB Chief Economist Bill Dunkelberg. “It’s forcing small business owners to increase compensation, which we’re seeing in this data, to attract new workers and keep the ones they have. But it also means a lot of small business owners are short-handed. They can’t keep up with customer demand because the labor pool isn’t producing enough qualified workers. It’s a significant structural problem in the economy that policymakers will have to watch.”

Just 28% of respondents have plans for capital outlays, a slight rise from April but below historical levels for periods of growth, the NFIB said.

“Typically, in a strong economy, we see a lot more spending on capital,” Dunkelberg said. “We’re seeing increased hiring activity and some other positive signs, but the capital-outlays component is the missing ingredient for robust economic growth.”

– Adam Fusco, associate editor

Annual Credit Congress Open for Business in Grapevine, Texas

The 121st Credit Congress & Expo is officially open. The NACM board of directors and credit professionals from around the world were in attendance Monday for the general session at the Gaylord Texan Resort & Convention Center outside of Dallas.

Attendees were introduced into the world of unmarketing by keynote speaker Scott Stratten. He took them through a tour of the nontraditional approach to marketing and the perceptions surrounding millenials and business/customer relations. Stratten’s presentation included the philosophies behind marketing, selling and branding, using recent examples of “bad press” throughout his show. He described the generation gap as an allowed bias, but showed there is very little actual difference.

Branding in real time can affect a business, but it is important to remember to work with clients and customers, Stratten said. Communication that matters relates back to the medium the customer wants. Companies have been in the news due to this “bad press,” yet they can turn this into a positive interaction with customers with the quality and speed of an apology.

The general session also included NACM’s 2017 honors and awards winners, as follows:

•    Emerging Leader Award: Kevin Stinner, CCE, CCRA, Crop Production Services Inc.
•    CBA Designation of Excellence: Rianne McIntosh, CBA, Summit ESP LLC
•    CBF Designation of Excellence: Julie Anderson, CBF, CCRA, Stoneway Electric Supply Co.
•    CCRA Designation of Excellence: Theresa Lawler, CBF, CCRA, The Chamberlain Group
•    CCE Designation of Excellence: Melissa Kobus, CCE, Walters Wholesale Electric Co.
•    O.D. Credit Executive of Distinction Award: Larry O’Brien, CCE, ICCE, PotashCorp
•    GSCFM Student Leadership Award: Charles Edwards, CCE, Ferguson Enterprises Inc.

Among the other speakers at the morning's session was NACM Economist Chris Kuehl, Ph.D. He shared his thoughts on the Credit Managers' Index, which he joked makes him famous. Many indices are accurate and fast, but not both, Kuehl said. The CMI is both and "it is all because of you," he said, referring to the crowd of credit professionals. "Please participate. It is a valuable tool."

NACM Chairman Jay Snyder, CCE, ICCE, returned to the stage to welcome and thank the board, Stratten and everyone for attending the expo. Breakout sessions will be held through Wednesday, including valuable information on credit applications, bankruptcy, construction credit and cash flow.

To read more about our newest award winners, make sure to pick up the July/August issue of Business Credit magazine. It features a more in-depth profile of O.D. Glaus Award-winner Larry O'Brien.

– Michael Miller, editorial associate

Mexican Businesses to Face Issues If NAFTA Changes


Mexican business will be exposed to risk if a change to the North American Free Trade Agreement (NAFTA) comes to fruition. The alcoholic beverage, automotive, manufacturing, property and real estate, and retail industries could be the most affected by a change in U.S. policies, said Fitch Ratings.

“A heightened degree of uncertainty regarding the impending renegotiation of the treaty remains and the prospect of disruption to the status quo over the short- to medium-term is evident,” according to a release from Fitch. Mexico could see a moderate deterioration in trade terms, said Fitch, but an impact to credit could be avoided.

“Operations abroad generate hard currency revenues and provide flexibility for a material portion of the portfolio and thus can mitigate the credit impact of potential trade disruption, though exporters are more exposed.” More than 40% of Mexican corporates operate abroad.

Initial issues would hit manufacturers while the second wave could slow the Mexican economy and have an effect on the exchange rate, among other things. “We believe these factors are likely to lead to a softer operating performance across the corporate sector until economic conditions start to pick up and a higher visibility of a potential outcome from trade negotiations is reached,” said Fitch, referring to a lower economic growth and higher inflation.

Fitch rates more than 80 companies in Mexico, and 85% of them have a stable outlook, while only one in 10 has a negative outlook. The other 5% have a positive outlook.

– Michael Miller, editorial associate

Moody’s Maintains Stable Outlook for Indian Corporates

A gradual recovery in India’s corporate sector is expected by Moody’s Investors Service and its Indian affiliate, ICRA Limited, and goes hand in hand with the country’s sustained economic growth. Nonfinancial corporates have a stable outlook from Moody’s for the next 12 to 18 months.

“Almost 23% of all nonfinancial corporates that Moody’s rates in India carry positive outlooks and 53% carry stable outlooks,” said Kaustubh Chaubal, vice president and senior analyst in Moody’s Corporate Finance Group.

In a recent release, Moody’s said that negative rating actions have bottomed out, though recent downgrades exceed upgrades. A total of 23% of the rated portfolio has a negative bias, down from 34% in June 2016. EBITDA growth of from 6% to 12% for corporates over the next 12 to 18 months will be supported by capacity additions and stabilizing commodity prices, as well as GDP growth forecasts of 7.5% for fiscal year 2017 and 7.7% for fiscal year 2018.

With better access to capital markets and large cash balances, most corporates are able to handle their refinancing needs this year, Moody’s said. Also, the capital expenditure cycle for Indian corporates has peaked, with projects nearing completion and declining investments putting the brakes on borrowing.

Expansion in earnings is expected for the metals and mining sector due to stabilizing commodity prices, as well as completion of capital expenditure and the resulting increase in production capacity. Stressed assets in the sector could lead to debt-financed acquisitions, which will weigh on ratings, Moody’s cautioned.

The stable outlook for the power sector reflects improvement in domestic coal production, which moderates the fuel supply risk. The ratings agency’s outlook for the auto industry is stable, due to improving customer sentiment, new product launches and dropping prices. The telecommunications industry maintains a negative outlook, as earnings may come under pressure from an increase in competition.

– Adam Fusco, associate editor

More Finance Professionals Using New Commercial Credit Card Tools

The vast majority of corporate finance professionals surveyed recently by Capital One’s Commercial Card Group plan to implement new commercial card tools or services this year.

More than 90% of survey respondents said they planned on doing so, marking a 36% higher adoption rate than reported in a similar survey conducted by Capital One the year prior. Sixty-three percent of respondents said their top consideration when selecting a commercial card provider is finding one that provides for their firms’ needs, combined with an all-in-one intuitive interface that permits management of all payments in a single space. The next most important consideration—15% of respondents—is a program that supports vendor enrollment and card acceptance.

“We are seeing a big jump in demand for commercial card tools among corporate finance professionals in just one year, which demonstrates the demand for more customized and specialized offerings that support our clients’ varied business needs,” said Rick Elliott, head of the Commercial Card Group at Capital One Bank in a press release. “We are working in close partnership with our clients to better understand the daily challenges they face and provide creative solutions for these problems,” he said.

Another finding of the survey is that use of the latest digital tools is increasing. Of those surveyed, 88% said they have access to a commercial card mobile app that allows them to manage and submit travel expenses remotely, which is a 54% increase from 2016. More respondents said they use a single card for procurement and travel and expenses.

For those with companies without a commercial card app, half said the primary barrier to the commercial card app is figuring out their companies’ bring-your-own-device policy, while 50% said their companies’ didn’t want to use a mobile app yet.

– Nicholas Stern, senior editor

Moody’s Downgrades Illinois’ Bond Ratings Due to Unpaid Bills, Unfunded Pension Liabilities

Moody’s Investors Service has downgraded the state of Illinois’ general obligation bonds to Baa3 from Baa2 in the midst of a drawn-out political impasse that’s halted progress on the state’s growing pension deficit and ballooning unpaid bills.

As a result of the downgrade, Moody’s lowered the ratings of several state debt types—outstanding debt for all affected securities totals about $31.5 billion—linked to general obligation bonds, including Build Illinois Bonds backed by sales tax revenues, the Metropolitan Pier & Exposition Authority’s McCormick Place project bonds and the state’s Civic Center program bonds. The credit rating agency’s outlook for the state and these associated credits remains negative.

Currently, about 40% or $15 billion of Illinois’ operating budget consists of unpaid bills, Moody’s said. After a year of failed negotiations to address the issue, Moody’s said the state deserves the downgrade, “regardless of whether a fiscal compromise is reached in an extended session,” analysts said.

According to a Moody’s analysis, Illinois’s unfunded pension liability grew 25% to $251 billion in the year that ended June 30, 2016. The state’s credit strengths are incorporated into the new rating and include its sovereign powers over revenue and spending, a strong economic base with long-term potential to provide for its liabilities and statutory protections from bondholders. However, “During the past decade, the state's governance framework has allowed practices that greatly offset these strengths. After eight downgrades in as many years, Illinois' rating is an outlier among states, most of which are rated at least eight notches higher,” Moody’s analysts said.

– Nicholas Stern, senior editor

Service Sector PMI Shows Steady Growth for New Business

Business activity growth in the U.S. services sector has extended to a 15-month period after accelerating slightly in May and reaching a three-month high, according to the IHS Markit Services Purchasing Managers’ Index (PMI). New business grew at the fastest rate since January. Input price inflation decreased somewhat while prices charged by U.S. service providers increased.

“Although service sector business activity picked up in May, the PMI surveys for manufacturing and services collectively indicate only a modest pace of economic growth so far in the second quarter,” said Chris Williamson, chief business economist at IHS Markit. “The key message from the PMI is that the economy is enjoying steady, albeit unspectacular, growth, and that the pace of expansion has been slowly lifting higher in recent months.”

The rate of growth in new business rose to a four-month high due to stronger demand from new and existing clients. The job creation trend continued in May from its start in March 2010, with payroll expansion accelerating to a three-month high. New projects and higher overall business activity were listed as the reasons for the rise in staffing. Output prices rose for the 15th consecutive month, with the rate of increase the second fastest in the current sequence, Markit said.

“In another sign of the economy’s underlying steady expansion, average prices charged for goods and services is running at the second highest in almost two years, indicating that rising demand is helping restore some pricing power,” Williamson said.

Meanwhile, the Institute for Supply Management headline nonmanufacturing index dropped more than expected in May to a reading of 56.9, though it still indicates a solid pace of expansion, according to Wells Fargo Securities. New orders slipped 5.5 points from a high in April. Export orders increased or remained flat in April, while 5% of survey respondents reported declines in May. Employment reached its highest level since July 2015.

– Adam Fusco, associate editor