Chinese Companies Face Funding Risks from Puttable Bonds

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

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

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

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

– Adam Fusco, associate editor

Takata Recall Obligations Could Hit Automakers Despite Bankruptcy Filing

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

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

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

– Nicholas Stern, senior editor

CMI Could Begin Summer with Firm Rebound

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

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

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

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

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

– Nicholas Stern, senior editor

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

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

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

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

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

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

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

– Nicholas Stern, senior editor

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

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

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

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

– Nicholas Stern, senior editor


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

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

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

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

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

– Nicholas Stern, senior editor

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

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

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

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

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

– Nicholas Stern, senior editor

China Sees Rise of Fintech E-payment Tech Firms

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

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

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

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

– Nicholas Stern, senior editor

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

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

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

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

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

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

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

– Nicholas Stern, senior editor

Fed Raises Rate for Second Time This Year

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

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

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

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

– Adam Fusco, associate editor

High-Flying Optimism Continues for Small Business

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

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

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

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

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

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

– Adam Fusco, associate editor

Annual Credit Congress Open for Business in Grapevine, Texas

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

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

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

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

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

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

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

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

– Michael Miller, editorial associate

Mexican Businesses to Face Issues If NAFTA Changes


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

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

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

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

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

– Michael Miller, editorial associate

Moody’s Maintains Stable Outlook for Indian Corporates

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

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

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

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

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

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

– Adam Fusco, associate editor

More Finance Professionals Using New Commercial Credit Card Tools

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

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

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

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

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

– Nicholas Stern, senior editor

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

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

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

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

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

– Nicholas Stern, senior editor

Service Sector PMI Shows Steady Growth for New Business

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

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

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

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

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

– Adam Fusco, associate editor

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