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

Corporate Liquidity Improves in May as Energy Slowly Recovers

Corporate liquidity was flowing in relative abundance in May, as indicated by Moody’s Liquidity-Stress Index (LSI), which fell to its lowest level since April 2015. The speculative-grade liquidity ratings of five companies were either upgraded or withdrawn, and resulted in the LSI decreasing to 4.2% from 4.9% in April and a long-term average of 6.8%.

"Energy company earnings, though still weak, continue to recover from the slump in oil prices, as do energy-related industries such as fracking sand suppliers," said Moody’s Senior Vice President John Puchalla. "More broadly, rising corporate earnings, a proliferation of covenant-lite loans, modest maturities and accommodative credit markets all support improving and benign liquidity for speculative-grade borrowers."

The retail sector is seeing a concentration of problems, particularly among department stores and specialty and apparel outlets, Moody’s said. The ratings agency anticipates that the U.S. speculative-grade default rate will drop to 3% in April 2018 from the current rate of 4.5%.

Meanwhile, the default forecast for the U.S. speculative-grade retail sector is 6.7%, the second highest among the spec-grade industry groups.

– Nicholas Stern, senior editor

May PMIs Indicate Moderating Business Conditions in U.S. Manufacturing

The U.S. manufacturing Purchasing Managers’ Index from IHS Markit slipped to an eight-month low in May, revealing a loss of momentum from the peak seen at the beginning of 2017. There was moderate improvement in business conditions, alongside subdued increases in output and employment. May data also indicated more cautious inventory policies.

“Manufacturing growth momentum continued to ebb in May, down to its weakest since just before the presidential election,” said Chris Williamson, chief business economist at IHS Markit. “Manufacturing output, order books and employment all grew at only modest rates as sluggish sales prompted firms to scale back hiring. Exports sales remained especially lackluster, hampered in part by the relatively strong dollar.”

At a reading of 52.7, the seasonally adjusted index was down just a fraction from April. Data indicated that manufacturing output increased for the 12th month running, Markit said. New order levels increased, but the rate of expansion was the least since September 2016. The survey also showed a decline in the backlogs of work for the first time since May of last year. Manufacturing firms said that sustained hiring helped alleviate pressures on capacity. Input price inflation eased sharply from the two-and-a-half-year peak seen in April, Markit said.

The May manufacturing Report on Business from the Institute for Supply Management (ISM) showed economic activity in the sector expanding, with the overall economy growing for the 96th consecutive month.

“Comments from the panel generally reflect stable to growing business conditions, with new orders, employment and inventories of raw materials all growing in May compared to April,” said Timothy R. Fiore, chair of the ISM manufacturing business survey committee. “The slowing of pricing pressure, especially in basic commodities, should have a positive impact on margins and buying policies as this moderation moves up the value chain.”

The top manufacturing industries reporting growth in May include nonmetallic mineral products, furniture and related products, plastics and rubber products, machinery and primary metals.

– Adam Fusco, associate editor

Moody’s Expects Global Growth Improvement as Protectionist Risks Fade for Now

While some of the largest risks to advanced economies have waned and emerging markets continue to expand, Moody’s Investors Service sees an improved outlook for global growth this year.
G20 economies should grow at a 3.1% annual rate in 2017 and 2018, compared with 2.6% growth in 2016, Moody’s analysts said. Meanwhile, the potential threat posed from protectionist policies in the U.S. appears to have eased at present.

"Overall, global growth is looking increasingly sustainable with economic data surprising to the upside in a number of emerging market countries," said Madhavi Bokil, a vice president and senior analyst at Moody's. "The current momentum should continue, barring any negative surprises."

In China, Moody’s expects growth to continue to slow this year—at a rate of about 6.6%—thanks to reduced property-related investment connected to central bank liquidity tightening, including limits on home mortgage lending. "We continue to believe that the near-term risk of disorderly deceleration of growth in China is limited," said Elena Duggar, an associate managing director at Moody's.
"Government policy will target limiting the growth of leverage, rather than bring about a rapid deleveraging that could be potentially destabilizing."

Prospects for India are bright—growth of 7.2% this year and 7.7% in 2018—as the government recovers from the impact of last year’s demonetization efforts and continues to push through reforms that will help “…reduce inefficiencies and improve trend growth in the long run,” Moody’s analysts said.

Global growth is still hampered, however, by “…changing demographics, muted investment, low productivity growth and stagnant wages,” the ratings firm said.

– Nicholas Stern, senior editor

May Credit Managers’ Index Could Note Cooling of Business Optimism

Business exuberance has faded a bit in May, reigniting concerns surrounding commercial credit factors, such as a slip in dollar collections from March, according to preliminary data in the latest NACM Credit Manager’s Index (CMI), which will be released Wednesday morning at nacm.org. May’s CMI results showed a drop, leaving unclear how long business and consumer patience will hold out for rapid improvements in the business environment resulting from potential tax reform, infrastructure build and deregulation. “The wild enthusiasm that was noted at the start of the year has faded as reality sets in,” said NACM Economist Chris Kuehl, Ph.D.

Expect the May CMI to show more movement in the unfavorable factors categories, as some companies’ struggles with slow payers and dollar collections in the manufacturing sector in particular are anticipated to be reflected in the data.

“The big growth opportunities have not materialized as yet, but there remains some hope they will,” Kuehl said. “The other measures of the economy have been showing some of this angst as well, as the Purchasing Managers’ Index has been down from previous heights and the latest durable goods numbers were a little off their recent peak.”

– Nicholas Stern, senior editor

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

Expect Bank Deregulation to Take Place in Small Pieces of Legislation

As lawmakers begin to make moves on promised bank deregulation, Fitch Ratings is of the opinion that this will more likely take the form of many small bills targeting specific segments of the financial sector instead of an overarching piece of legislation.

“Broad and deep deregulation is generally viewed by Fitch as likely to have a negative impact from a bank credit risk perspective; however, the ultimate form of regulatory change and its application by individual banks will determine the ratings implication,” wrote Fitch analysts in a new report.

For instance, if the Volcker Rule is repealed, it’s still unlikely that banks will return to full-scale proprietary trading, yet it may lead to negative ratings implications that depend on banks’ response, Fitch analysts said. If the Orderly Liquidation Authority (OLA)—the Title II provision of the Dodd-Frank legislation that gives the Federal Deposit Insurance Corporation (FDIC) powers to carry out quick liquidations of large, complex financial companies—is taken away, it could open up the banking sector to “…significant systemic risk in the event of a crisis, though resolution planning could be a mitigating factor to large bank failures,” Fitch said.

Meanwhile, replacing the Consumer Financial Protection Bureau (CFPB) is not expected to directly affect most banks’ and nonfinancial institutions’ credit profiles, “…though they could reduce the regulatory burden and associated costs,” analysts said.

– Nicholas Stern, senior editor

Moody’s Downgrades China’s Rating

With the expectation that economy-wide debt will continue to rise and potential growth will slow, credit ratings agency Moody’s Investors Service downgraded China’s long-term local currency and foreign currency issuer ratings to A1 from Aa3. The country’s outlook has been changed from negative to stable. This marks China’s first downgrade from Moody’s since 1989.

Though Moody’s expects that reforms will likely improve the economy and financial system given time, the financial strength of the country will deteriorate in coming years. Reforms are not likely to prevent a rise in economy-wide debt nor help with increasing government liabilities. Risks are balanced, however, at the A1 rating level, and as reforms take hold, the deterioration in China’s credit profile will be contained, Moody’s said.

Explaining the decision, Moody’s said that China’s GDP will remain very large and growth will stay high, but potential growth will likely decrease in coming years. Given the importance Chinese authorities place on growth, the economy may become increasingly reliant on policy stimulus. GDP growth has declined in recent years from a high of 10.6% in 2010 to 6.7% in 2016, a slowdown from structural adjustment that Moody’s expects to continue. Further, the ratings agency forecasts that economy-wide debt of the government, households and nonfinancial corporates will continue to rise.

China’s Ministry of Finance criticized Moody’s decision, saying that it was based on "inappropriate methodology" and has somewhat exaggerated the difficulties the Chinese economy is facing, China Daily reported.

The downgrade comes on the heels of a bilateral trade agreement between the U.S. and China that was revealed on May 12, part of which allowed foreign-owned financial groups to offer credit ratings services by July 16, the Financial Times reported.  Investors believe that the introduction of credit rating services will help attract foreign investment into China’s onshore bond market. Fitch Ratings said that it was encouraged by the news and looked forward to more details, and Moody’s and Standard and Poor’s made similar statements, the Financial Times said.

Moody’s also downgraded the ratings of 26 Chinese nonfinancial corporate and infrastructure government-related issuers and rated subsidiaries, as well as a number of banks.

– Adam Fusco, associate editor

Eastern European Companies Prefer Noncredit Sales

Overdue business-to-business (B2B) invoices in Eastern Europe are on the decline, while sales on credit terms rose slightly. Despite this, nearly 60% of companies prefer not to use credit on B2B sales. Payment default risk is also expected to worsen in the region, according to a survey from Atradius.

Overdue B2B invoices increased roughly 5% in 2016, but a more than 1% drop this year brought it to 41.5%. Nearly nine out of 10 responses reported late payments from domestic B2B customers. Foreign customers’ late payments decreased slightly but still impacted about eight in 10 responses. The Czech Republic was most likely to experience late payments while Hungary was the least likely. Turkey was the most affected and saw days sales outstanding (DSO) numbers at an average of 73 days. The regional average DSO was 61 days.

As far as sales on credit terms, the average percent of B2B sales to domestic customers is higher than that of foreign customers. This has been seen before in previous surveys. Poland had the lowest average percent of credit sales at just below 30%. Hungary had the most sales on credit terms with about two out of every three transactions. Roughly 40% of Eastern European companies sold on credit terms, which was just ahead of Western Europe.

Payment terms also increased from 2016 to 2017 in Eastern Europe. Of the countries surveyed, respondents averaged 35 days this year compared to 31 last year. Turkey had the largest increase to 47 days, and it had the longest invoice-to-cash turnaround at 42 days.

Liquidity and insufficient funds were the issues most often cited for payment delays. Complexity of payment procedures was also a reason for B2B payment concerns. “According to responses across the countries surveyed, 45% of the average total value of domestic B2B invoices remained unpaid after the due date,” said Atradius analysts.

“Against this backdrop, a strong focus on the management of trade credit risk is essential to maintaining the financial viability of a business,” said Andreas Tesch, Atradius chief market officer, in a news release. The Atradius Payment Practices Barometer survey included more than 1,000 companies from the Czech Republic, Hungary, Poland, Slovakia and Turkey.

– Michael Miller, editorial associate

Eurozone Growth Maintains Six-Year High

Economic growth in the eurozone, already at a six-year high, held steady in May, while job creation rose to one of its strongest recorded levels, according to the latest IHS Markit Flash Eurozone Purchasing Managers’ Index (PMI). Business optimism about the coming year is at one of the highest levels in the five-year history of the survey’s future output question.

“The consensus forecast of 0.4% second quarter growth could well prove overly pessimistic if the PMI holds its elevated level in June,” said IHS Markit Chief Business Economist Chris Williamson. “Capacity is being strained by the strength of demand, with backlogs of work showing one of the largest increases in the past six years.”

With output growth accelerating to the fastest in over six years, manufacturing has led the upturn, with service sector business activity also remaining strong. A boost for manufacturing came from exports rising at the steepest rate since April 2011. To expand operating capacity, hiring has been heavy, at a pace rarely before seen, IHS Markit said. Manufacturing added jobs at the steepest rate in the survey’s 20-year history. The overall rise in employment was the second-largest in nearly 10 years.

Strong price pressures have dogged the upturn, with average selling prices for goods and services rising at the second-fastest rate since July 2011.

“Although selling prices have continued to march higher, there are signs of input cost pressures beginning to ease,” Williamson said. “This suggests underlying inflationary forces could moderate as we move into the second half of the year, playing into the ECB’s [European Central Bank] hands. Although the pace of economic growth signaled by the PMI is historically consistent with the ECB taking a hawkish stance, the dip in cost pressures will add weight to arguments that there’s no rush to taper policy.”

– Adam Fusco, associate editor

Foreign Currency Shortages Continue to Hit Oil Exporters in Sub-Saharan Africa

Even though oil prices have stabilized recently, oil exporters in Sub-Saharan Africa will continue to have a difficult time managing foreign currency shortages racked up in recent years.

"Falling oil and commodity prices over the past two years have led to foreign currency shortages in numerous Sub-Saharan African countries, with oil exporters hit particularly hard," said Lucie Villa, a Moody's vice president, senior analyst and co-author of a recent report. "The stabilization in oil and commodity prices over recent months will help to ease the pressure, but any recovery will depend on continued higher prices and could take some time."

In Angola and Nigeria during the past six months or so, governments have tried to shore up the fall in foreign exchange reserves by rationing dollars, devaluing currencies and borrowing in foreign currencies, Moody’s said. “But this has been to the detriment of the non-oil economy, price stability and government balance sheets,” analysts with the ratings agency said.

The Republic of Congo and Gabon peg local currency to the euro and foreign exchange reserves have collapsed, with reserves expected to fall more this year, Moody’s said.

Nonfinancial companies operating in oil exporting countries like Nigeria and Angola have seen the most impact from local currency weakness, and analysts expect these problems to continue this year but ease in 2018. "Dollar shortages make it difficult to pay suppliers of imported goods and equipment, meet dollar debt payments or to repatriate funds outside of the respective countries," said Dion Bate, a Moody's vice president. "The associated local currency weakness increases the cost of servicing unhedged foreign currency debt obligations, reduces repatriated profits in foreign currency and lowers operating margins, as companies are not able to pass on high import costs to the consumer."

Banks in Angola, Nigeria and the Democratic Republic of the Congo have been the most affected by foreign currency shortages because of their economies’ reliance on dollars, as they’ve seen foreign currency deposits deplete with limited access to new foreign funding. "The resultant currency devaluations have also eroded banks' loan quality, profitability and capital," said Constantinos Kypreos, a Moody's senior vice president.

Higher oil prices and associated revenues are relieving pressures in Nigeria and Angola central banks, which are injecting more dollars into the economy, Moody’s said. Regardless, banks in Sub-Saharan Africa typically keep high capital buffers and enjoy robust profitability.

– Nicholas Stern, senior editor

Conference Board Index Continues Solid Showing

There may be growing doubts as to the staying power of the current economic recovery in some circles, but the data that has come from the Conference Board of late has been very solid. For the fourth straight month, there was an improvement in this data. Now the index is sitting at 126.9, 0.3% higher than it was the month before.

The index is one of the more comprehensive looks at the U.S. economy as it is essentially an index of indices with 10 components added together to paint a whole picture. There is an examination of factors such as initial claims for jobless benefits to track whether companies are hiring or firing, factory orders to get a feel for the demand that is presenting itself from the consumer, the performance of the S&P 500 to gauge what is happening in the markets and so on.

The other seven indicators include the average number of hours worked in manufacturing, manufacturer’s new orders in consumer goods and materials, the ISM index reading of new orders, nondefense capital goods orders, building permits for new private housing units, the Leading Credit Index, the interest rate spread between 10-year Treasury bonds and federal funds rate and the measure of consumer expectations for business conditions. There were reported improvements as far as the lagging indicators and the coincident index as well.

The assertion at the start of the year was that the economic growth we have seen was being driven by expectations. That has been true to some degree as there have been plenty of surveys and polls suggesting that the enthusiasm demonstrated by the business community and the consumer was rooted in the belief that a new regime would sweep through and accomplish everything from tax reform to deregulation to revamping health care and reworking trade. It soon became apparent that none of these moves would be simple or swift. That was expected to drag on people’s confidence. It may have to a degree, but there have been other factors that have helped people stay upbeat.

The economy relies on the consumer for some 80% of its growth. For several reasons, the consumer is in a good mood and has started to extend that mood to action. For a few months at the start of the year, the surveys were not really matching up well with reality. Consumers said they were confident, but retail sales lagged. Now those retail numbers are up. Revisions to the old data show that there was more activity in the retail sector than had been noted before. There is even evidence that older Millennials are starting to emulate their elders as they begin their families and buy homes and all the other things that having children demand.

-Chris Kuehl, Ph.D., NACM Economist

Risk Grows Among Chinese Investment Companies

Chinese investment companies (ICs) have come to the fore internationally, with rapid expansion over the last five years due to loose monetary policy and government support for overseas expansion of local companies. But that rapid growth may not have been matched with corresponding risk management, according to a recent report from Fitch Ratings.

Overseas expansion has become important in the strategies of ICs, which have acquired an advantage in making foreign acquisitions, with targeted businesses tempted by access to the Chinese market and other opportunities afforded by IC portfolios. From 30% to 40% of the total assets of ICs are bound up in overseas investments, Fitch estimates. Foreign acquisitions have even become necessary for portfolio diversification, but such expansion is also in accord with the government’s “going out” policy that encourages companies to invest and operate abroad.

The government has recently sought to curb capital outflows and check foreign direct investment, but ICs keep foreign currency offshore and have expanded access to offshore capital markets, which can help in foreign acquisitions without increasing capital outflows, the ratings agency said.

Concern lies in the fact that the ICs’ strategies and risk controls have not been tested by market volatility or an economic downturn. These companies also have less-sophisticated tools for reporting risk compared to more developed countries. The fact that ICs have been able to meet performance targets is attributed by Fitch to favorable market conditions. A reliance on divestment proceeds and bank loans to meet cash outflows creates the risk that ICs could be pushed into a “fire sale” environment if there is stress in liquidity, Fitch said.

Chinese IC assets enjoyed a compound annual growth rate of 67% in five years to the end of 2016, reaching a value of $1.5 trillion. Fitch expects assets to rise by more than 25% each year over the next five years.

– Adam Fusco, associate editor

U.K. Insolvencies Expected to Drop this Year, but Underlying Conditions Still Cloudy

Insolvencies in the U.K. are expected to decline by 7% this year, but a new report from credit insurer Atradius suggests the drop is not due to any underlying economic resilience but a statistical adjustment from the high rate of insolvencies in personal service companies (PSCs) in 2016.

In 2016, the U.K. Insolvency Service noted a 15% year-over-year increase in compulsory liquidations and creditors’ voluntary liquidations in England, while cases in Wales grew to 14,810, Atradius analysts said. The bulk of this increase was due to changes to claimable expenses rules that led to the liquidation of almost 1,800 PSCs in the fourth quarter of 2016. Without these PSC liquidations, the insolvency rate dropped to 1% year-over-year.

This year, the overall insolvency rate is thus expected to drop by 7% as these types of liquidations become less prevalent, Atradius said. However, business insolvencies in industries like retail are expected to increase due to the uncertainty surrounding Brexit. Retail sales, year-over-year, are expected to decrease to 1.2% growth in 2017, compared to 2.6% in 2016. Overall GDP growth is also expected to fall to 1.6% this year, compared to 2.0% in 2016.

Meanwhile, an April small- and medium-size enterprise (SME) Risk Index from Zurich found 52% of Britain’s SMEs are owed an estimated $57.8 billion in late payments. The index, which culled the results of over 1,000 SME owners, found 21% are owed more than $32,000 and almost 10% are owed more than $129,000.

Nearly two-thirds of those who recorded late payments typically saw delays of more than a month on payments already 30 days overdue, while 45% saw payment delays of up to three months, Zurich said. Twenty-four percent of survey respondents said late payments had caused their businesses to overdraft in the past, while 39% said late payments have had a significant impact on cash flow.

– Nicholas Stern, senior editor

Sovereign Credit Risk on the Decline

Though the politics of individual countries may continue to be in flux, sovereign credit risk appears to be on the decline, at least as measured during the week ending May 12.

The European Sovereign Expected Default Frequency (EDF), which measures the expected probability of default over a five-year time period by Moody’s Investors Service, dropped by an average of 2.44% on the heels of the European Commission’s (EC) report that economic growth in the eurozone is expected to expand 1.7% in 2017, a fractional increase from the forecast in February. According to Moody’s, the EC said that the perceived risk to the outlook has lessened due to the defeat of populist parties in France and the Netherlands.

“At the start of the year, the most pronounced threat to the future of the European Union was coming from countries that were once considered stalwarts,” said NACM Economist Chris Kuehl, Ph.D. “The British decision to withdraw was not all that unexpected given the frosty relationship the U.K. has long maintained with the rest of Europe, but the prospect of both the Netherlands and France pulling out had many declaring that the EU was a ‘dead man walking.’ As it turned out, both Geert Wilders and Marine Le Pen fell short and the EU was saved. At least that has been the general assessment from a relieved establishment in western Europe.”

Greece showed the largest improvement in the eurozone, with its Sovereign EDF declining from 3.08% to 2.82%, indicating that investors have some faith in the country’s ability to secure bailout money.

The Asia Pacific region’s Sovereign EDF declined by 0.51%, with South Korea’s decreasing from 0.18% to 0.17% as Moon Jae-in’s swearing in as president may ease political tensions with promises of relieving economic worries, improved relations with North Korea, and more balanced diplomacy with the U.S. and China, Moody’s said.

Latin America recorded the largest weekly drop in default probabilities, with Venezuela, Brazil and Chile marking notable improvements. In the Middle East and Africa region, Saudi Arabia, Nigeria and Turkey contributed to an average rise of 1.19% for the area’s Sovereign EDF.

– Adam Fusco, associate editor

House Builder Confidence Soars in May

Builder confidence in the market for newly-built single-family homes continued to grow in May to the second-highest level since the Great Recession, as tracked by the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI).

The HMI reached a score of 70, up two points from the April HMI reading, NAHB said. “The HMI measure of future sales conditions reached its highest level since June 2005, a sign of growing consumer confidence in the new home market,” said NAHB Chief Economist Robert Dietz. “Especially as existing home inventory remains tight, we can expect increased demand for new construction moving forward.”

The HMI tracks builder perceptions of current single-family home sales and sales expectations for the next six months as “good,” “fair” or “poor”; readings over 50 indicate more builders see conditions as good than poor.

Within the components of the HMI, sales expectations over the next six months rose four points to 79, NAHB said. The index gauging current sales expectations climbed two points to 76. The buyer traffic index, on the other hand, fell a point to 51.

Three of the four regions tracked over three-month moving averages in the HMI saw gains. The Midwest remained unchanged.

“This report shows that builders’ optimism in the housing market is solidifying, even as they deal with higher building material costs and shortages of lots and labor,” said NAHB Chairman Granger MacDonald, a home builder and developer from Kerrville, TX.

– Nicholas Stern, senior editor

Retail Sales Inch Up in April after Upward Revision from March

Retail sales inched up modestly but below estimates in April, boosted in part by a strong showing in non-store retailers, while retail sales figures were revised upward for March, according to an analysis of data from the U.S. Department of Commerce by Wells Fargo.

For non-store retailers, sales grew by 1.4% in April, while sales at electronics and appliance stores increased by 1.3%. “Electronics and appliance store sales has been one of the weakest sectors of retail in the past year but has been very strong lately, increasing another 2.2% in February,” Wells analysts said. Motor vehicle sales also reversed weak postings in the first quarter by increasing 0.7% in April.

Housing retail sales were mixed in April, with building materials and garden equipment and supplies dealer sales increasing 1.2% on the back of a 1.7% drop in March. On the other hand, furniture and home furniture store sales dropped 0.5% in April following a 1.5% increase the prior month.

Clothing and clothing accessories store sales dropped 0.5% in April following a bump in March. Also, general merchandise store sales carried on a decline from the prior month. Department store sales were down, year-over-year, by 3.7% in April, though they eked out a 0.2% rise on the month.

Meanwhile, retailers appeared to be stocking up on inventory in March—by 0.2% overall—in anticipation of some growth during the second quarter, Wells said in a separate report. “One of the few advantages brick-and-mortar retailers have over online competitors is having product when the consumer needs it ‘now!’” wrote Tim Quinlan, senior economist, and Sarah House, economist, both with Wells Fargo. “That may be a factor in why retailers are stocking up more than wholesalers and manufacturers.”

– Nicholas Stern, senior editor

Import, Export Prices Continue to Rise

Higher fuel prices and nonfuel prices each contributed to an increase in the price index for U.S. imports in April, according to the U.S. Bureau of Labor Statistics (BLS). Export prices also rose and have not recorded a monthly decline since last August. The last time import prices declined was last November.

U.S. import prices rose 4.1% for the year ended in April, continuing a trend of 12-month increases over 4%, the largest over-the-year advances for the index since February 2012. Petroleum prices saw a rise of 1.6% and natural gas 4% in April. Over the past year, the price index for import fuel has advanced nearly 43% in contrast to about a 32% decline for the previous 12-month period ending April 2016. Between April 2016 and April 2017, petroleum prices rose nearly 44% and natural gas 49%. Rising prices for nonfuel industrial supplies and materials; automotive vehicles; foods, feeds and beverages; and consumer goods offset lower capital goods prices for the year, BLS said.

Higher prices for both agricultural and nonagricultural exports contributed to the overall increase in export prices. Over the past 12 months, U.S. export prices rose 3% following a decline of 5.1% for the year ending April 2016. Among agricultural exports, a nearly 38% jump in vegetable prices this April more than offset falling prices in soybeans, corn and wheat, reflecting the largest monthly advance since the index began in December 1996. The price index for nonagricultural exports increased almost 3% over the past 12 months. In April, higher prices for capital goods and automotive vehicles offset price drops for industrial supplies and materials.

Improved global demand has continued to benefit exporters, with a stable dollar allowing further export price increases, according to a recent Wells Fargo report. An increase in export prices in March reflected the strongest year-over-year rate since 2012, Wells Fargo said.

– Adam Fusco, associate editor

Riskier Infrastructure-Like Transactions Likely to Increase

There will be an increased investment movement in riskier infrastructure-like transactions similar to 2007–08, said a new Fitch Ratings release. Credit professionals need to be on the lookout for such deals in nontraditional infrastructure investments. “Life insurers, fund managers and pension funds are increasing their allocations to infrastructure transactions as they seek out stable returns from real assets,” the report said.

“Non-core infrastructure” transactions are “likely to be fundamentally riskier than traditional infrastructure deals … because the underlying asset may be less essential to the public, may not have the same high barriers to entry and may experience more variable costs,” said Fitch.

Some of these “hybrid infrastructure” transactions include airport services and landing slots. “So far, investors have focused on buying and refinancing existing assets,” the ratings agency said, but “these investors are more aligned with debt investors in looking at the long-term stability of a business and thus keeping leverage within manageable levels.”

Private hospitals and care home businesses 10 years ago were structured in similar ways as the new infrastructure-like transactions. Other assets such as telecom towers were also once considered outsiders, but according to Fitch, some market participants now consider them as “core infrastructure” assets. This could change the current course of infrastructure hybrids and eventually land them in the same “core infrastructure” category.

– Michael Miller, editorial associate

Small Business Optimism Dips Slightly, with Dampened Expectations for an Improving Economy

Small businesses remained relatively optimistic overall about the economy in April, though they expressed some unease in their expectations for improvement in the economy following an unsuccessful attempt to repeal and replace the Affordable Care Act.

The National Federation of Independent Business’ (NFIB) Small Business Optimism Index dipped 0.2% in April to 104.5, dragged down in part by an eight-point fall in improvement expectations. Still, most of the factors tracked in the NFIB index remained on solid footing, including sales trends and increasing employment, according to an analysis of the data by Wells Fargo.

Owners continue to report difficulty in filling skilled or qualified labor, and the percentage of owners who rank the situation as their most important problem is nearing a cycle high not seen since November 2000, Wells Fargo analysts said.

Meanwhile, according to the latest Job Openings and Labor Turnover (JOLTS) survey that was released today, job openings rose a bit in March with 5.7 million openings. Job openings rose by 126,000 positions, while mining and logging lost 8,000 slots following recent gains.

Involuntary separations remain low as employers seem to be trying to hold on to workers in a tight labor market, Wells Fargo said. The so-called quit rate stayed the same at 2.1% in March, where it’s been hovering for the past year. “Although this marks an improvement from earlier in the cycle, wages have disappointingly failed to accelerate thus far in 2017. With a 17-year high share of small businesses reporting jobs are hard to fill, an acceleration in quits would bode well for a pickup in wage growth later this year,” analysts said.

– Nicholas Stern, senior editor

Problems in U.K. Retail to Impact Real Estate-Related Credit Risk

Following the break of the United Kingdom with the European Union, retailers in Britain have been affected by changes in consumer confidence and the increase of sourcing costs due to the depreciation of the pound. The U.K. nonfood retail industry faces profitability challenges, which will impact the use of real estate in the industry, with a subsequent effect on the credit risk of loans secured by it, according to a new report from Moody’s. The secondary retail property sector is set to be particularly exposed to risks, though logistics and prime retail commercial properties are likely in a position to mitigate them.

“Reduced store productivity and profitability for U.K. nonfood retailers can lead to reduced rents and increasing vacancies in properties securing commercial real estate loans and commercial mortgage-backed securities,” said Stephen Hughes, assistant vice president and analyst at Moody’s. “The degree to which these retail challenges will affect real estate landlords and debt differs, however, between prime logistics, prime retail and secondary retail assets.”

The logistics sector has the benefit of higher occupational demand. “Well-located, high-quality logistics properties will continue to attract strong tenant demand, due to steady growth in online retailing,” said Oliver Schmitt, vice president and senior credit officer at Moody’s. London’s premier shopping streets also benefit from high tenant demand, reducing credit risk affecting loans secured by these assets.

With the continued shift from consumers toward online retailing and other factors, rising cost pressure will continue to weigh on secondary retailers, who already suffer from declining sales productivity.

“The effect of rising costs on store profitability is more pronounced in secondary than in prime retail spots in the U.K., where steady or increasing sales productivity is a buffer against cost increases,” Schmitt said.

Retailers also endure higher expenses from rising employee costs and increased property taxes, particularly in London, Moody’s said.

– Adam Fusco, associate editor

Labor Productivity Affects Global Growth

Labor productivity is a cause of concern for the global growth outlook, according to a new report from Moody’s Investors Service. The ratings agency expects global growth to increase to 3.1% this year and 3.5% next year. Global growth was at 2.7% in 2016. This could change if productivity growth does not keep pace.

“Should productivity growth remain at its 2016 pace of 1.2% or even at its average pace of 1.7% over 2011–2015, global growth in 2018 could be as low as 2.5% or 3% respectively, compared to Moody’s current expectation of 3.5%,” the agency said.

There are several reasons behind the slowing rebound rate after the financial crisis, including weak investments due to the availability of credit, business pessimism and economic uncertainty. “Long-term trends such as population aging and the slowing growth in human capital and education are also behind the decline in productivity growth,” Moody’s said.

Meanwhile, the U.S. Bureau of Labor Statistics released the country’s productivity data this week. Labor productivity in the U.S. decreased at a 0.6% annual rate in the first quarter of 2017. Economists polled by Reuters expected no change in productivity. Productivity increased 1.1% between the first quarter of 2016 and that of 2017. “Weak productivity could make it difficult to boost annual economic growth to 4% as President Donald Trump has promised,” said Reuters.

“It should be noted that productivity numbers are always volatile and were likely affected by the seasonal issues that dragged overall GDP growth down for the quarter,” said NACM Economist Chris Kuehl, Ph.D. “The problem is that productivity has been unimpressive for years now and has consistently been under the levels seen in 2011.”

– Michael Miller, editorial associate

Canada Increases Exports to Non-U.S. Countries

Canada is looking to other places besides the United States when it comes to shipping goods abroad. Coal exports to China and South Korea were among the reasons for the new record of goods sent to countries other than the U.S., according to Statistics Canada.

The new record is roughly $9.2 billion, and “exports to countries other than the United States rose 15.3%” in March, the agency said in a news release. Total exports rose 3.8% in March to a record of $34.2 billion. Imports from non-U.S. countries also increased slightly to $12.2 billion. Overall imports increased 1.7%.

The U.S. is still by far the No. 1 trade partner for Canada, yet total exports only increased a tenth of a percent from February to March. Meanwhile, U.S. imports increased 2% in March and by only 4.2% on a year-over-year basis. Other importers such as China, Mexico, the U.K. and Japan had double-digit increases from March 2016 to March 2017.

Forestry products and building and packaging materials exports jumped 5% in March, but that could change following the United States’ recent announcement of adding a tariff to softwood lumber imports into the U.S. Also on Thursday, the U.S. Bureau of Economic Analysis announced a $20 million increase in March lumber imports.

Canada’s trade deficit hit roughly $100 million, while economists polled by Reuters expected a shortfall of about $580 million. Royal Bank of Canada was less favorable, with an expected deficit of nearly $730 million.

– Michael Miller, editorial associate

Global Growth Forging Slowly Ahead, but Variety of Risks Could Upend Stability

A year’s worth of slow but steady growth in the world’s industry sectors as tracked by Moody’s Investors Service has led the ratings agency to view overall outlooks for the sectors in a positive, if “modest and fragile,” light.

Global industry sector outlooks reflect expectations for fundamental business conditions over the coming year to year and a half; at the end of the second quarter 2017, nine sectors’ outlooks were positive, six were negative and 39 were stable.

"The current distribution pattern of industry sector outlooks reflects a low-growth global economy that isn't particularly resilient to shocks," said Moody's Senior Vice President Bill Wolfe. "While we expect median cash flow to accelerate slightly over the next year, the global economy also faces growing uncertainty from potential geopolitical event risks."

Moody’s now sees global median EBITDA growth at 4.0%, after three years of growth from 3.0% to 3.5%, Wolfe said. Advanced and developing economies are progressing and commodity prices are stabilizing. However, “…unusual monetary conditions continue, with interest rates rising in the U.S. and quantitative easing and negative interest rates persisting in Europe and other advanced economies.”

Trade is increasing slowly as well, though weak global demand, protectionism and political risks in the U.S. and Europe could hamper greater growth, Moody’s said. Other potential risks to global growth include evolving technologies that could disrupt established industries, shifting U.S. trade policy, a quick rise in U.S. interest rates or suddenly strengthening dollar, a quick downturn in China and economic fragmentation in Europe.

– Nicholas Stern, senior editor

Puerto Rico Faces Lawsuits, Title III Restructuring from Debt Crisis

Bondholders filed to sue the Commonwealth of Puerto Rico on Tuesday after a year-long moratorium on lawsuits expired at midnight on Monday. This could lead to the initiation of a bankruptcy-like procedure for the Caribbean island to restructure its $70 billion debt.

According to the Associated Press, those who bought $16 billion worth of bonds backed by Puerto Rico’s sales tax said in the lawsuit that a plan by the government to cut its debt was unconstitutional. The suit comes as the administration of Gov. Ricardo Rosselo failed to negotiate a deal with bondholders after the May 1 deadline. Puerto Rico Chief of Staff William Villafane said his government prefers to reach an agreement with bondholders, but if negotiations fail, a bankruptcy-like process could be an option, the Associated Press said.

The debt-cutting process, known as Title III, is an in-court procedure that the country may be forced into. Beyond its debt, Puerto Rico has a 45% poverty rate and near-insolvent public health and pension systems, according to Reuters.

The lawsuit, filed in federal court in San Juan, accuses the government of impairing contractual rights of so-called COFINA bondholders, the debt for which is backed by sales tax revenues, and violating the due process clause of the U.S. Constitution. The expiration of the litigation freeze is expected to open the floodgates of others seeking to sue the Puerto Rican government in an attempt to block Rosselo’s plan to impose drastic repayment cuts, Reuters said.

The island is operating under a federal oversight board that has the ability to seek creditor losses through Title III, according to Bloomberg. The restructuring would be the largest in the $3.8 trillion municipal bond market. With the moratorium lifted, Puerto Rico may face adverse rulings on cases already filed. The island offered holders of general-obligation bonds as much as 77 cents on the dollar and proposed as much as 58 cents on the dollar for its sales tax debt as of a week ago, but the offer was rejected, Bloomberg said.

– Adam Fusco, associate editor

Defaults Down, Liquidity Flowing for U.S. Spec-Grade Companies

Defaults for U.S. speculative-grade, non-financial companies were down in the first quarter, with default rates hitting their historic average of 4.7%. And with consistent economic growth, recent refinancing activity and improvement in commodities, analysts with Moody’s Investors Service project the default rate will drop to 3.0% in a year.

"The number of U.S. speculative-grade defaults slipped to a two-year low in the first quarter of 2017," said Moody's Senior Vice President John Puchalla. "Recent refunding activity is helping to mitigate the effect of higher interest rates, alongside continued easing of strains in the commodities sector, even as oil and gas defaults remain elevated relative to other sectors."

Ten U.S. non-financial defaults were reported in the first quarter, down from 15 during the prior quarter, which represents the smallest number since the beginning of 2015, Moody’s Puchalla said. Four of the firms that defaulted in the first quarter were in the oil and gas sector, which is well below the 17 companies in the sector that defaulted in second quarter of 2016. Exploration and production companies made up three of the recent defaults. Moody’s predicts that liquidity and ratings trends point to more defaults among oilfield service companies later this year.

Moody’s Liquidity Stress Index (LSI) decreased to 5.3% in March from a six-year high of 10.3% a year prior. Economic growth is providing good cash flow, and a blooming energy recovery and “covenant-lite” loan structures are helping to ease liquidity and default risks for spec-grade companies in the U.S. Still, the energy LSI remains high at 12.9%.

"A large number of low-rated companies are managing to get by with weak balance sheets because their liquidity is keeping them afloat," Puchalla said. "While we expect economic growth to quicken in the next year, a risky speculative-grade borrower rating distribution will sow the seeds for more defaults if economic growth is unexpectedly weak, geopolitical issues disrupt trade flows or accessing the capital markets becomes more difficult."

– Nicholas Stern, senior editor

Road Open for Transportation Growth

Though changes in trade and fiscal policies are on the horizon, healthy growth is expected in the U.S. transportation sector, according to Fitch Ratings’ U.S. Transportation Trends special report.

Leading the way for overall growth in airport passenger traffic are international hub airports, with passenger enplanements rising 3.5% in 2016. “Growth in passenger enplanements, however, is and will continue to soften as carriers scale back on service additions,” said Seth Lehman, senior director at Fitch. The ratings agency predicts growth from 2.5% to 3 % in 2017.

Growth in ports is expected to match GDP. Upward movement in the second half of 2016 was led by ports on the West Coast, with 1.8% growth year-over-year, while East Coast ports grew 3.4% in the same time period, though only posted a 0.4% rise last year compared to 2015. “Shifting trade agreements or renegotiated tariffs may affect import/export volumes, though the full effects of these changes will likely extend beyond 2017,” said Director Emma Griffith.

Moderate economic and population growth in the Southeast and Southwest should contribute to high traffic performance for toll roads in those regions. “Toll road revenues are positioned to grow faster than traffic as many authorities implement policies of inflationary toll increases,” said Director Tanya Langman.

Fitch has established a new metric called “Peak Recovery,” outlined in the report, which supplements the ratings agency’s peak-to-trough metric and demonstrates how the 2016 performance for each credit compares to its prerecession peak volume.

– Adam Fusco, associate editor

European Steel Outlook Improves

The steel industry in Europe is rebounding, and producers are expected to have increased profits during the next 12 months, said Moody’s Investors Service. The ratings agency also changed the European steel sector outlook from negative to stable. The change in rating is due to the “expectations for the fundamental business conditions in the industry over the next 12 to 18 months,” Moody’s analysts said.

Steel prices and industrial output in the European Union is expected to improve in the next year, but there could be a slight decline in prices in the “second half of this year because of a retreat in the cost of raw materials and seasonality,” said Hubert Allemani, a senior analyst and vice president with Moody’s. "Steel prices have remained at three-year highs since the strong rebound in the first quarter of 2016, alleviating concerns about how long the recovery would last."

Steel making is expected to be supported by demand from car manufacturers and the construction industry, which is Europe’s largest steel-using sector. Imported steel will still have an effect on European steel makers. “[China has] far too much capacity and will be trying to unload as much as they can on the U.S. and Europe,” said NACM Economist Chris Kuehl, Ph.D. The expected demand growth will be less than 2%, according to Moody’s.

Better prices between steel makers and their clients from a year ago are expected to help results for the first half of this year. “Together with improved consumer confidence, manufacturing in the eurozone has gained momentum and the strengthening of industrial activity should support demand for steel,” Moody’s said.

– Michael Miller, editorial associate

New Jersey Construction Subcontractors: Look Before You Lien!

The U.S. Court of Appeals for the Third Circuit’s recent decision in Linear Electric Company Inc. vs. Cooper Electric Supply Co. and Samson Electrical Supply Co. Inc. significantly increases risk for New Jersey construction subcontractors seeking to collect on claims for materials sold or services provided to construction contractors that file bankruptcy prior to paying for those materials or services.

Generally, under New Jersey’s construction lien law, when a supplier sells materials on credit to a contractor who then incorporates those materials into property located in New Jersey that is owned by a third party, the supplier can file a lien which “attaches” to the owner’s property for the amount the contractor owes the supplier for those materials. The supplier can then directly recover from the property owner on its claim for unpaid supplies—but only in an amount equal to the account receivable owed to the contractor by the owner. In other words, the supplier can collect the debt the owner owes to the contractor to satisfy its own account with the contractor. Given this statutory framework, suppliers selling materials on credit outside the bankruptcy context have a significant added source of recovery, knowing their accounts are secured by construction liens on the property of the owner (who does not want its property subject to liens).

Under bankruptcy law, when a contractor files bankruptcy, there arises an automatic stay which protects the contractor/debtor from any actions by creditors to collect a debt, including the creation or enforcement of liens “against” property of the debtor. Prior to the Third Circuit’s decision in Linear Electric, it was not clear whether the filing of a construction lien under New Jersey’s construction lien law after a contractor filed for bankruptcy constituted a violation of the automatic stay. Since the construction lien “attaches” to the property of the owner—not the property of the contractor—there is a reasonable argument that the filing of the lien would not violate the automatic stay, because such property is not property of the contractor’s estate.

In Linear Electric, however, the Third Circuit, affirming decisions of the Bankruptcy Court and the United States District Court, held just the opposite. The Third Circuit held that the act of perfecting a construction lien after a contractor’s bankruptcy filing violated the automatic stay. The court emphasized that although the liens “attached” to the real property of a non-debtor owner, the recovery by the supplier on account of the construction lien is, as a practical matter, from the accounts receivable owed to the contractor by the owner. The court concluded, therefore, that the lien was “against” property of the contractor (the accounts receivable) and the act of filing the lien violated the automatic stay and was void. In short, the court determined that although a construction lien under New Jersey law attaches to the property of the owner, it is also “against” property of the contractor within the meaning of the Bankruptcy Code. 

The Third Circuit’s decision restricts the ability of suppliers who provide goods or services to projects in New Jersey to secure their accounts with construction liens after their contractor has filed bankruptcy.  On the flip side, it provides contractors who file bankruptcy with the ability to collect accounts receivable owed by the project owner (to the extent the owner does not otherwise have valid defenses) and improves the prospects that the contractor can reorganize its financial affairs. While suppliers could formerly seek solace in the exact argument advanced by the suppliers in Linear Electric, the Third Circuit’s decision confirms that the concept of property of the bankruptcy estate is, indeed, a far-reaching one, providing the utmost protection to the debtor’s estate. In light of this decision, suppliers to construction contractors in New Jersey should consider taking the following steps to reduce their risk:
 
(i) Reduce accounts receivable turnover ratio by adopting more conservative policies on credit extension;

(ii) closely monitor the creditworthiness of contractors to avoid unexpected bankruptcy issues and, particularly, so that a construction lien can be obtained and perfected prior to bankruptcy; and

(iii) if choosing to deal with a contractor whose financial situation is questionable, request adequate assurance of payment for the services or materials provided.

– Paul Kizel, Esq., is a partner and Nicole Fulfree, Esq., is an associate at Lowenstein Sandler LLP’s Bankruptcy, Financial Reorganization & Creditors’ Rights Department. Lowenstein Sandler represents the Official Committee of Unsecured Creditors in the Linear Electric Co. Inc. Chapter 11 case.

Global Outlooks See Strong Indications of Growth

With 20 key economic variables covering 20 major countries, the latest 20/20 Vision chart pack from Fitch Ratings reveals a major trend in the resilience of the recovery in the eurozone. The report plots high-frequency macroeconomic data and includes readings on PMI balances, credit growth and labor market performance.

“The eurozone saw one of the most impressive improvements in PMI balances amongst the advanced countries in the second half of 2016 and recent readings have corroborated this trend,” said Brian Coulton, chief economist at Fitch. “The steady rise in credit growth to the private sector is also suggesting that ECB QE [European Central Bank quantitative easing] may have started to gain some traction on the economy, while a pickup in exports partly reflects the stabilization in emerging markets.”

A key component of the persistent expansion in the area, as indicated in the ratings agency’s March Global Economic Outlook and subsequent data releases, has been improving labor market conditions. Consumer confidence has been helped by ongoing job growth. Nominal wage inflation has enjoyed a small uptick, though still below the ECB’s inflation target, Fitch said.

Data from China has been better than expected, with an increase in industrial production not seen since late 2014. Data is mixed from the United States and United Kingdom, with soft nonfarm payrolls in the U.S. and weakening retail sales growth in the U.K., Fitch said.

Trade is leading the growth seen globally, according to Wells Fargo. The bank’s recent Global Review said that the global economy is on the right path. Though China is not contributing what it once did at the start of this century, its first quarter GDP indicates an economy growing slightly more than market expectation. Strong performance by Chinese trade in March and improvement in international reserves are encouraging signs of global growth, according to Wells Fargo.

Low but positive growth is expected this year in troubled Brazil. The country’s monthly economic activity index in February was the strongest in nearly three years. Data from the U.K. indicates that the economy decelerated in the first quarter of this year, but real GDP growth has held up better than expected since last June’s Brexit referendum, Wells Fargo said.

– Adam Fusco, associate editor

Recovery in Central and Eastern Europe Fueling Local Telecom Earnings Rise

A regional recovery underway in Central and Eastern Europe is boosting household spending and consumer confidence that will allow telecom providers to outpace their Western European counterparts in credit quality and revenue and earnings growth into 2018.

"Strong regional economic recovery is fueling household demand for telecoms services, such as smartphones and mobile data, driving revenue and earnings growth, improving credit quality and attracting M&A interest,” said Alejandro Núñez, vice president and senior analyst at Moody's Investors Service. “The pace of these improvements will eventually slow, but will continue for at least the next 18 months."

The ratings firm anticipates several telecoms in the region will see an average of 3.5% revenue growth this year and next, based on the sector’s being a less-mature market than in Western Europe as regards service penetration, pricing and usage. “CEE telecom markets have had more scope to expand their networks and increase the penetration of new services such as 4G mobile and Internet Protocol television (IPTV) services,” Moody’s analysts said. Prices in Central and Eastern Europe also lag behind those in Western Europe—from 44% in mobile voice revenue per minute to 14% in mobile data.

This growth potential is fueling M&A interest among foreign buyers, particularly in Poland, Moody’s said. “This trend will continue most likely in the form of in-market cable-to-mobile deals or foreign firms acquiring or merging with CEE operators.”

Earnings volatility for the sector is also likely to decrease as many telecom companies in the region have lowered foreign exchange risk over the past year by refinancing euro and U.S. dollar bonds with local-currency-denominated bank loans, analysts said.

– Nicholas Stern, senior editor

Clearing, Settlement Services Highly Vulnerable as Cyberattacks Threaten Financial Institutions

Cyberattacks against financial institutions have become an increasingly important risk factor, and institutions that provide trade execution, clearing and settlement services are more vulnerable to attacks aiming for system disruption because of their interconnectivity with the financial system.

“Cyber risk is a growing threat that can adversely affect credit ratings as attacks can compromise customer data and disrupt websites, with detrimental financial or operational consequences for individual issuers and financial systems,” said Fitch Ratings analysts in a recent report. “Related reputational damage may weaken business and access to funding and capital markets.”

In the U.S., the chair of the Securities and Exchange Commission has said cyber-security poses the biggest risk to the financial system. Under the European Union’s General Data Protection Regulation, which takes effect in May next year, banks can face fines of up to 4% of their global turnover for security breaches; any organization that uses data from EU citizens has to comply with the rule. Fitch sees that some organizations, like The International Organization of Securities Commission’s Committee on Payments and Market Infrastructures, are seeking more coordination at the international level to combat the issue. The European Central Bank reports that the average lag until a breach is detected was 146 days in 2016, a drop from 205 days in 2014.

“As information is shared across firms, cyber risk detection and response plans could improve, but coordination does not ensure that risks can be fully contained,” Fitch notes.

The use of cyberinsurance to mitigate some of the damage from cyberattacks is on the rise, reaching about $1 billion in premiums in 2015 and expected to continue growing, though protection against reputational damage is more difficult to protect against, Fitch says.

– Nicholas Stern, senior editor

SWIFT Addresses Allegations of Service Bureau Hacking

SWIFT, the financial messaging service, has said in a press release that there is no indication that its network or core services have been compromised amid allegations that two services bureaus may have been targeted to gain unauthorized access to bank customers’ data.

As reported by Reuters, a hacking group calling itself the Shadow Brokers recently released allegations that service bureaus in the Middle East and Latin America may have been compromised by third parties. The allegations date back several years. Service bureaus are third-party providers that operate a connection to SWIFT for firms that wish to outsource their day-to-day operation of the SWIFT connection. In its release, SWIFT said that it is in close contact with the service bureaus in question to ensure that they are implementing appropriate preventive measures.

SWIFT recommends that customers pay close attention to their own security and keep in mind security issues when choosing a service bureau or other third-party provider. The effects of any vulnerabilities can be mitigated by immediately installing security updates and patches. SWIFT is working through its Customer Security Programme to provide tools and guidance about security to its customers and will keep customers updated through its Security Notification Service.

SWIFT said that there has been no impact on its infrastructure or data and that there is no evidence to suggest that unauthorized access has occurred to its network or messaging services.

Service bureaus must register under SWIFT’s Shared Infrastructure Programme (SIP), which outlines the legal, financial and operational requirements with which services bureaus must comply. The SIP should not be considered a substitute for customers to perform their own security checks and due diligence, the messaging service noted.

– Adam Fusco, associate editor

Small Fabricators and Manufacturers Optimistic about Future in New Survey

Many small- to medium-size job shops surveyed for the latest Fabricators and Manufacturers Association’s Forming and Fabricating Job Shop Consumption Report have an optimistic outlook lately and believe some significant impediments to business progress may be removed and that some of the stimulating efforts will bear fruit.

A whopping 61.9% of those surveyed see improving conditions for the coming quarter and another 34.3% expect things to be about as they are now. Only 3.7% expect things to get worse. This is the most confident the sector has been in a while.

Still, the survey found capacity utilization is on the low side, just short of 70%, which indicates slack in the system, though when looking at the anticipated capacity, there is a general sense that companies will be adding to it. That may mean more slack in the short term, but should mean less in the way of shortages and bottlenecks later. But generally, the survey respondents are staying connected to their capital equipment strategies as 57.4% indicate that nothing has altered their plans and they intend to buy what they had intended to buy. About 18% have delayed their original plans by a quarter or two and 24.6% have set their plans on the back burner indefinitely. There is tremendous variability between sectors, however. Those feeding into the agricultural community are seeing very low demand while medical manufacturing thrives. Automotive and aerospace are not as vibrant as they have been.

In the manufacturing community, the level of real confidence is reflected in data such as new orders. The survey this month shows that 44.7% of the respondents are reporting more in the way of new orders and another 41% are reporting that this activity has been stable. Only a little over 14% of the responses indicated a decline in new orders. That suggests that there is more expansion in the manufacturing sector overall and that it is expected to expand further into the year.

Hiring has also seen progress and stability, but there are some factors to take into consideration that affect these numbers and have for some time. The survey reports that over 27% expect to do additional hiring while just over 68% are staying right where they are as far as hiring is concerned. That means that only 4.5% of the respondents plan to reduce their workforce. This is as low a level as has been seen in the last few years. The wrinkle in all this is that most of the manufacturers are struggling to find qualified people to hire. The pipeline as far as talent is empty. Companies really have no alternative but to poach one another’s employees, which generally means that labor costs will rise steadily as companies try to lure the people they want and need.

Beyond hiring, the next biggest expense is raw material costs. Here, the key factors are generally the price of steel and aluminum. The survey reports that the vast majority of respondents see prices for both metals coming up. In general, the commodities suppliers have been trying to adjust to reduced demand over the last few years—they have limited output as a means to hike prices. The tactic has worked pretty well and the hope is that more production can be spurred when and if there is a boost in overall demand.

The cost of transportation and logistics has also been a factor when it comes to overall expenses, but there hasn’t been all that much movement. The percentage of respondents that report more logistics costs is 29.3% and most have indicated that these costs have been stable—over 70%. Not one respondent reported that these costs are going down. Rail costs have been more stable than trucking costs and there has been some reduction in the costs of ocean cargo due to the overcapacity issue facing maritime shipping. There is also a great deal of regionalism in logistics, in part due to the fluctuating costs of fuel and overall operating expenses. Just as with manufacturing, there has been a shortage of manpower in transportation. It is estimated trucking companies are short some 80,000 drivers this year alone.

– Chris Kuehl, Ph.D., NACM economist

Leveraged U.S. Corporates May Face Challenges from Rising Rates

Rising interest rates may translate into downside risk for some U.S. corporate sectors. The credit profiles of U.S. corporates are generally insulated from rising rates, but lower-rated issuers are more vulnerable, according to a new report from Fitch Ratings.

The ratings agency does not see significant interest rate risk across speculative-grade credit profiles, even in a severe stress scenario, but a rising rate environment may limit the margin of error available to corporates that are undergoing material acquisition or in the midst of adjusting their business models. This is particularly true for those that are highly leveraged. Poor execution of cost-saving programs and key initiatives, for example, may hamper a cash flow profile that is already weak if coupled with rising rates. Negative rating actions may result.

The retail sector, with high floating-rate debt exposure, is vulnerable to interest rate risk if the benefits of a growing economy are offset by secular challenges, Fitch said. Diversified manufacturing, which likewise has high floating-rate exposure, could see improved demand, though external factors such as an increase in trade restrictions could weigh on costs and hamper growth. Sectors with low floating-rate exposure like telecom face their own challenges from a competitive environment.

The stable outlook for U.S. corporates for this year supports the view that rates rise in response to increasing inflation during an economic recovery, Fitch said. Since companies have been proactively managing maturity profiles, modest rate increases, without an increase in spreads, would not impact interest rate expense in the near term. Investment-grade corporates are less vulnerable to rising rates. Fitch estimates that its portfolio of speculative-grade corporates has an average of 52% of floating-rate debt compared to 15% for investment grade.

– Adam Fusco, associate editor

China’s GDP Climbs in First Quarter with Strong Housing, Construction Sectors

Chinese GDP for the first quarter beat economists’ consensus forecast, buoyed by the nation’s secondary industry comprised of mining, manufacturing, construction and utilities production.
GDP in China grew 6.9% in the first quarter of the year, continuing a slight upward trend over the last three quarters, according to an analysis by Wells Fargo’s Jay Bryson, global economist, and E. Harry Pershing, economic analyst.

The country’s secondary industry climbed 6.4% year-over-year, following 6.1% the prior quarter, and accounts for about 40% of the value added in the Chinese economy, the analysts said. The nation’s primary industry, including the agriculture, forestry and fishing sectors, slowed to 3.0% in the first quarter from 3.3% the prior quarter. Growth in China’s service sector also decreased slightly to 7.7% from 7.8% the prior quarter.

“Strength in the secondary sector can partially be attributed to a rebound in overall investment spending, which increased 9.2% in March—its highest year-over-year rate of growth since May of last year,” the analysts said. Meanwhile, investment in the Chinese housing sector has similarly grown—by 8.9% in February. “The turnaround in housing investment has seemed to provide a boost to the construction sector, which is contained in the secondary industry. Although we do not expect housing investment growth rates to return to the 30% rates we witnessed during 2010–2011, continued government support for lending should buoy investment in the sector and for the foreseeable future.”

Also, China’s foreign exchange reserve woes, which saw reserves decline from nearly $4 trillion in mid-2014 to about $3 trillion today, have eased somewhat after modest increases in February and March, Wells said.

– Nicholas Stern, senior editor

Asian High-Yield Bond Issuance More than Doubles in Q1 2017

Asian high-yield bond issuance is at its highest level in four years. This has paved the way for “stronger liquidity profiles and manageable levels of refinancing risk,” according to Moody’s Investors Service. The first quarter of 2017 was more than double the last quarter of 2016, said the ratings agency.

There were 26 deals totaling $10 billion during the first quarter of this year, which is the highest level of issuance since the first quarter of 2013, when it was at more than $12 billion, said Annalisa DiChiara, a Moody's vice president and senior credit officer, in a news release. This was “driven by investor tolerance for lower credit quality and active refinancing by issuers," she added.

Refinancing risk will stay at a manageable level, “and the market is well positioned to absorb upcoming maturities which total [$127 billion] in rated and unrated bonds from now through to 2021," DiChiara said. The fourth quarter 2016 issuance was at $4.5 billion, and “50% of the [$10 billion] issued in Q1 2017 was rated at B3—a record amount of issuance at this level,” said the release.

The Asian nonfinancial high-yield corporate default rate will also stay low, according to Moody’s, at around 3% this year, while “most Asian high-yield corporates currently show good or adequate liquidity.”As of the last day of March, Moody’s covered 123 Asian companies in its high-yield portfolio with nearly $67 billion of rated debt outstanding.

The March Asian Liquidity Stress Index was at its lowest since September 2015, but the long-term average of the index shows “the ongoing weakness in liquidity for many issuers in Asia,” said Moody’s.

– Michael Miller, editorial associate

U.S. AAA Rating Affirmed by Fitch

With its financing flexibility and its prominence as having the most liquid capital markets in the world, the United States has earned an affirmation of its AAA rating and stable outlook from Fitch Ratings.

According to Fitch, the U.S. economy is one of the most productive and dynamic and is supported by strong institutions and a favorable business climate. The U.S. is the issuer of the world’s preeminent reserve currency, which accounts for nearly two-thirds of global reserves.

Uncertainty remains, however, over the short-term fiscal and borrowing outlook, but Fitch expects tax cuts to lead to a loosening in fiscal policy. The U.S. government debt burden is a relative credit weakness in comparison to other AAA-rated sovereigns, Fitch said. A tax reform proposal may lead to an increase in deficits over a 10-year time span, though the plan would aim at boosting investment and growth. Tax cuts are not likely to lead to a lasting boost in growth, however, Fitch believes.

The ratings agency has revised its real GDP growth forecast for the U.S. to 2.3% for next year and 2.6% for 2018. Trade protectionism and checks on immigration would be negative for growth in the medium term. Fitch expects the Federal Reserve to continue to raise interest rates, with two more 25 basis point increases in 2017 and four in 2018, with no major effects on credit growth.

Fitch does not anticipate any developments that would lead to a downgrade in the stable outlook for the United States. Developments that may lead to negative rating action, however, include 1) a significant increase in government deficits and the debt-to-GDP ratio, and 2) a deterioration in the credibility of economy policy or a shock that affects the U.S. dollar’s role as the foremost global currency.

– Adam Fusco, associate editor