NACM’s October CMI Scores One for the Ghosts and Goblins

Creditors may find a few rocks mixed in with their candy corn and caramel apples this Halloween, as NACM’s Credit Managers’ Index declined for the month of October. The retreat should not come as a surprise, however, after the index reached its highest level in over two years last month. Good news reigned among the favorable factors, though the difference in performance with the unfavorable factors remains stark.

“The storms altered a lot of economic patterns,” said NACM Economist Chris Kuehl, Ph.D. “That has been seen in everything from volatile job numbers, changes in the rate of housing starts and even internal migration patterns for skilled workers. There are already signs of shifts as reconstruction gets thoroughly underway.”

The combined score for the index came in at 55.5, down one point from September. Among the favorable factors, sales declined but still maintained the second-best reading of the year. An indication of a greater demand for credit and a desire to grow and expand was to be found in the improved numbers for new credit applications.

Last month, almost all the unfavorable factors were in expansion territory; all but two fell into the contraction zone in October, though the overall reading leveled off at 50. Dollar amount beyond terms fell into contraction with a decline of three points. “The volatility that has characterized the CMI for the last several months has been largely attributed to the vagaries of the slow pay,” explained Kuehl. Filings for bankruptcies and rejections of credit applications also declined, but stayed in expansion territory. Accounts placed for collection slipped out of expansion into contraction; the reading for disputes did as well, with a fall of over four points.

“What doesn’t show up that well with this data is the stark difference between the readings for the favorable categories and the unfavorable,” concluded Kuehl. “The favorable numbers are consistently in the 60s and the unfavorable keep sinking into the 40s and the contraction zone.”

– Adam Fusco, associate editor

Risk Professionals Think Executives, Boards Less Concerned with Cyber Risk

Executives and boards of directors appear to risk-management professionals to be less concerned about cybersecurity risk this year compared to last, according to a survey of risk professionals by the Zurich Insurance Group Ltd. and Advisen Ltd.

The survey found 62% of risk professionals believe their boards of directors view cyber risk as a significant threat to their organizations, compared to 83% the prior year. Also, 60% of the 315 risk professionals polled said executive management views cyber risk as a significant threat compared to 85% in 2016.

“This could indicate board members have become more comfortable in their understanding of cyber exposures,” the Security and Cyber Risk Management survey report said. “Or, it could mean risk professionals are not up-to-date on the evolving nature of cyber risk and the possible magnitude of the losses.”

Just 53% of respondents knew of changes or upgrades made following well-known attacks in early 2017. “This could indicate that risk professionals are either less educated about the exposures, have concluded these exposures are less significant to their business, or are confident (or overconfident) in their cybersecurity controls,” said the survey report. “Or the reason could be that risk professionals are not fully aware that the nature of the cyber risk has been evolving beyond data security and toward interconnected risks, including business interruption due to malware and ransomware attacks.”

– Nicholas Stern, managing editor

New Developments Helping Trade Finance, Small Businesses

Two major world financial centers have joined together to promote financial technology (fintech) growth and innovation. The Monetary Authority of Singapore (MAS) and the Hong Kong Monetary Authority (HKMA) signed a cooperation agreement on fintech this week in Hong Kong.

The first initiative is a project based on distributed ledger technology (DLT) to help facilitate trade finance cross-border infrastructure. Additional details are expected to be announced in November, said separate releases from the monetary authorities.

Additionally, the agreement will include other fintech projects, referrals of innovative businesses, information sharing and the exchange of expertise. “Collaboration between the HKMA and MAS will create significant synergy for the development of fintech and more efficient fund flows between the two markets,” said HKMA Chief Executive Norman Chan.

HKMA partnered with banks HSBC and Standard Chartered to test DLT late last year. Using DLT or blockchain can help move trade finance along with faster and safer methods. “Letters of credit are one of the most widely used ways of reducing risk between importers and exporters, helping guarantee more than $2 trillion worth of transactions, but the process creates a long paper trail and is time-consuming,” said a Reuters article. This is where DLT and blockchain can step in to facilitate a transition toward a better trade finance experience.

Meanwhile, Intuit, the company behind TurboTax and QuickBooks, is building a better payment experience for small businesses. “QuickBooks now offers one-touch electronic invoicing, a seamless Gmail integration for the one billion who have Gmail accounts and a next-generation mobile card payments reader,” said a company release.

Roughly two-thirds of small businesses have invoices that go unpaid for more than two months. The reason behind this is the medium of the invoice—“outdated, manual methods.” Customers will now be able to create invoices electronically and “click a simple link to pay electronically, enabling the invoices to be paid two times faster.” The speed of payments is very important to small firms that are trying to stay in business. “Money is like oxygen for small businesses, but every day they struggle to get paid on time,” said Intuit Vice President of Payments Jimena Almendares in the release.

– Michael Miller, editorial associate

U.S. Composite PMI Shows Private Sector Growth at Nine-Month High

The fastest rise in manufacturing production and an increase in service sector output accompanied the IHS Markit U.S. Composite Purchasing Managers’ (PMI) Output Index for October. The latest reading, at 55.7, signaled the fastest upturn in private sector output since January, IHS Markit said.

“The U.S. economy seems to have made a strong start to the final quarter of 2017,” said Tim Moore, associate director at IHS Markit. “Resilient service sector growth and an encouraging rebound in manufacturing production combined to generate one of the sharpest rises in private sector output for two-and-a-half years during October.”

The growth of new business volumes moderated from a two-year peak in August. An increase in private sector employment was supported by the steepest rise in manufacturing payroll numbers since June 2015. The October data indicated the greatest pressure on manufacturing supply chains since 2014, due to disruption caused among suppliers after hurricanes Harvey and Irma.

“The main near-term concern for manufacturers is that national supply chain pressures remain the most widespread since those recorded after the heavy snowfall in early 2014,” Moore said. “In particular, survey respondents pointed to depleted inventories among suppliers, ongoing transport delays and sharply rising raw material prices during October.”

There were also positive numbers in export sales, with manufacturers recording the most marked increase in new work from abroad for 14 months, IHS Markit said. Average lead times among vendors, however, saw their greatest lengthening since the heavy snowfall in February 2014.

– Adam Fusco, associate editor

Credit Conditions throughout the World Are on the Upswing

Credit conditions for the various industry sectors that Moody’s Investors Service tracks are at their best condition since the Great Recession. A majority of industry sector outlooks covering the next 12 to 18 months are either stable or positive.

"Our assessment of solid credit conditions is bolstered by the median EBITDA growth forecast of Moody's global ISOs, which, as of September 30, had decisively increased to 4.3% after two quarters at 4.0%, and nearly three years at about 3.5%," said Bill Wolfe, a Moody's senior vice president. "Accordingly, the aggregate and these signals, along with those from other proprietary indicators, our macroeconomic assessment, and market parameters, prompted us to change our North American ISO to positive from stable."

Outside of North America, credit conditions are expanding as well in the Euro area, China and most emerging economies, as economic fundamentals appear in better shape than they have been at any time since the end of the last decade, Moody’s said. A large amount of room to grow in Europe and some emerging markets means the current rate of growth looks sustainable.

“Moderating monetary stimulus likewise indicates that credit conditions today are solid, and Moody's analysts anticipate global monetary policy to remain relatively accommodating, gradually normalizing as economic conditions improve. If managed or received poorly, however, reduced stimulus could threaten economic growth and credit conditions. The challenge, then, will be to change course without disrupting the financial markets, or transmitting any disruption to the real economy.”

– Nicholas Stern, managing editor

New Business Volume Rises for September

New business volume in September increased 12% month-to-month from August, according to the Equipment Leasing and Finance Association’s (ELFA) Monthly Leasing and Finance Index, which covers economic activity from 25 companies who represent a portion of the $1 trillion equipment finance sector. Overall new business volume clocked in at $8.7 billion, a 7% decrease year-over-year from that in September 2016. Cumulative new business volume was up by 4% compared to 2016, year to date.

Credit approvals decreased more than a point for the month, totaling 74%. Head count for equipment finance companies rose 16.5% year-over-year, mostly due to acquisition activity at one surveyed company. The separate Equipment Leasing & Finance Foundation’s Monthly Confidence Index for October is 63.7, unchanged from September, ELFA said.

Receivables over 30 days were 1.4%, a decrease from the 1.5% in August. Charge offs in September were 0.4%, down from 0.44% the previous month.

“Third quarter new business volume was steady, if not exceptional, despite the string of devastating weather events that plagued parts of the U.S. during the month of September,” said ELFA president and CEO Ralph Petta. “Positive cumulative year-to-date volume is indicative of healthy capex, which shows that business owners continue to choose financing as a means to acquire the equipment they need to run their operations. In addition, credit quality remains at historic lows. These metrics bode well for a solid end-of-year performance.”    

“Overall, September 2017 was a satisfactory month for commercial originations,” said William J. Clark, executive vice president of Univest Capital Inc. “Our municipal originations were above average for the month. We continue to see aggressive pricing in the market and loosening of credit standards, especially as it relates to ‘corp only’ approvals. It is becoming increasingly challenging; however, we are maintaining a superior net interest margin compared to our select peer group. It is part of a strategic plan to increase our average ticket and we are experiencing some success with that, especially in the municipal and golf/turf vertical markets. Additionally, we are seeing larger financing opportunities referred by our parent bank and affiliates.”

– Adam Fusco, associate editor

P3 Projects in China Rise at Steep Pace

Public-private partnerships (P3s) in China that are used to build up infrastructure, among other projects, have been increasing in number and investment value as more projects are set to be implemented this year, according to a new report by Moody’s Investors Service.

"Support from the central government has resulted in positive regulatory developments in China's Public-Private Partnership (PPP) framework, thereby enhancing the financing options available to PPP developers and investors," said Osbert Tang, a Moody's vice president and senior analyst. "And, regulations that increase transparency and improve investor protections are positive for the ongoing development of the PPP sector."

More long-term financing and improved regulatory transparency for Chinese P3 projects are likely to lure more private investors, Moody’s said.

P3 projects in China’s national database grew by 21.5% or $436.8 billion for the first six months of 2017, as 20% of the projects were in the implementation phase—the penultimate stage of such projects—at the end of June, compared to 17% at the same time of year in 2016, Moody’s said.
The total number of P3 projects in China at the end of June was 13,554, up 20% from the end of 2016. The total investment value of these projects was $2.47 trillion at the end of June, up 21.5% from the end of 2016.

– Nicholas Stern, managing editor

Survey Shows Small- and Mid-Size Firms Had Reduced Revenue Expectations

As expectations by small- and mid-size firms declined a bit in the third quarter from the second quarter, so has those companies’ demand for capital, according to a new Private Capital Access Index survey by the Pepperdine Graziadio School of Business and Management.

The survey, conducted in partnership with Dun & Bradstreet, was of 1,176 people in companies with less than $5 million and between $5 million and $100 million in annual revenue.

Firms surveyed with revenue below $5 million saw their annual revenue expectations drop to 9.3% in the third quarter from 10.6% in the prior quarter, while those with between $5 million and $100 million saw a similar decline in expectations.

Meanwhile, the survey found 22% of all firms expected slower trade account payments than they did in the prior quarter, while between 65% and 67% said payment periods would stay the same. Thirty percent of respondents said slowing payments have reduced their ability to grow, with the impact being more widely felt among smaller firms. Eight percent said they’ve had to reduce staff due to slower payments.

Six percent of survey respondents also said they had relied on a trade credit provider for credit in the last quarter, while more respondents (18%) said they borrowed from a large bank or community bank (13%).

– Nicholas Stern, managing editor