Home Prices Post Solid Annual Growth in November 2016, Point to Price Recovery

Jan. 31, 2017

Home prices grew 5.6% on an annual basis in November 2016, with prices for homes in Seattle, Portland and Denver showing the highest yearly gains, according the latest reading of the S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index.

In Seattle and Portland, prices rose by more than 10% from a year prior to November 2016, S&P Global said.

On a monthly, seasonally adjusted basis, the National Index increased 0.8% in November 2016, with both the 10-City Composite and the 20-City Composite posting 0.2% increases. On the other hand, prices dropped in Chicago (-0.8%), Detroit (-0.1%) and San Francisco (-0.1%) in November 2016 from the prior month.

“With the S&P CoreLogic Case-Shiller National Home Price Index rising at about 5.5% annual rate over the last two-and-a-half years and having reached a new all-time high recently, one can argue that housing has recovered from the boom/bust cycle that began a dozen years ago,” said David M. Blitzer, managing director and chairman of the Index Committee at S&P Dow Jones Indices. Low interest rates, falling unemployment and consistent personal income gains have helped the recovery, he said.

“The new administration in Washington is seeking faster economic growth, increased investment in infrastructure and changes in tax policy, which could affect housing and home prices,” Blitzer said. “Mortgage rates have increased since the election and stronger economic growth could push them higher. Further gains in personal income and employment may increase the demand for housing and add to price pressures when home prices are already rising about twice as fast as inflation.”

– Nicholas Stern, editorial associate

Credit Managers' Index Could Start 2017 with Large Split between Those Improving and Those in Trouble


Business is rebounding, but some problems are not likely to go away soon, according to preliminary data in the latest NACM Credit Managers’ Index (CMI), which will be released Tuesday morning at nacm.org. The numbers in December’s CMI results showed a nice bounce, so the question is whether the trend will continue or shrink back to the less-than-stellar performance found in previous months.

Expect the January CMI to show little change from the previous month’s numbers, but preliminary data indicates a possible split between favorable and unfavorable factors. “It is safe to assert that about half the companies out there are starting to see some real improvement in their prospects, while others are in real trouble and can’t find a way to dig out of all this,” said NACM Economist Chris Kuehl, Ph.D.

Momentum that built through 2016 increased after the U.S. presidential elections amid promises of more business-friendly policies. “It is not yet clear whether these will come to fruition, but there remains some feeling of optimism,” Kuehl said.

Preliminary data shows a developing excitement about the coming year among manufacturers, who may be moving toward increasing investment in capital goods. The improvement in the nation’s capacity utilization numbers are expected to be reflected in the data. In the service sector, the last retail season was thought to be a moment of truth to prove if retailers were to survive. Questions remain on the number of companies struggling to pay their debts, and whether the strains that have been affecting retail and construction, the two most represented industries in the survey, will be reflected in the report.

– Adam Fusco, editorial associate

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

One Belt, One Road Initiative May Carry Financial Risks

China’s One Belt, One Road (OBOR) initiative, an effort to streamline the transport of goods from Asia to Europe, is one of the largest infrastructure projects of the century and harkens back to the trade routes established millennia ago. But while the program is expected to boost economies in the region, there are risks that it might not address the most pressing infrastructure needs and could fall short in delivering expected returns, according to a new report from Fitch Ratings.

China has invested over $51 billion and more than 100 countries have signed on to participate in the project, also known as the Silk Road Economic Belt and the 21st-Century Maritime Silk Road. According to a report from the World Economic Forum, the project could provide an economic boost to more than 60 countries that represent 70% of the global population, more than half of global GDP and 24% of global trade.

Chinese funding will be used for construction of a network stretching across Asia, eastern Europe, east Africa, and less-developed sections of China. Opportunities will be created in the targeted economies, and projects associated with OBOR might help to address some infrastructure deficiencies in the region. But China’s shift from investment-led growth has created areas of excess capacity across its industrial sector, and OBOR is partly a strategy to export this extra capacity, according to Fitch Ratings. The ratings agency has doubts that Chinese banks can manage risks better than international commercial banks and multilateral lenders. Fitch also stated that genuine infrastructure needs and commercial logic might be secondary to political motivations.

Execution of the project also carries risk. Chinese engineering and construction companies have extensive technical experience, but most will be working in unfamiliar and unpredictable business environments.

Some of the loans associated with the project are large enough to have an impact on the borrowing country’s public finance profile, Fitch said. Fitch-rated sovereigns identified with OBOR projects are usually of speculative grade, but generally range from the “B” to “BBB” categories.

– Adam Fusco, editorial associate

For a view on the technological aspects of the One Belt/One Road initiative, visit NACM’s eNews.

Global Materials Prices, Inflation and Uncertainty to Rise this Year

Even as global growth is expected to make slight gains this year, the factors that have bolstered developed economies in recent years, such as relaxed monetary policy, low inflation and oil prices, may become more problematic this year.

According to a new report from credit insurer Coface, raw material prices are increasing as the IMF global raw materials index is set to grow by 11% this year after a 10% drop in 2016. Still, despite a recent OPEC agreement that led oil prices higher in December 2016, Coface expects the rebalancing of this market to go slowly as sovereign compliance with OPEC production targets is still in question—as is the risk associated with releasing U.S. shale oil on the market if prices rise further.

Regardless, a background environment of macroeconomic uncertainty and volatility could be further exacerbated by “…peaks of volatility in raw material prices,” though the trend is by no means automatic, Coface said. “Price uncertainties appear to be more closely linked to the issue of predictability than that of volatility,” the credit insurer said. “The relationship between trade and economic activity has weakened (reduced elasticity). This new ‘normality’ (the reasons for which lie in structural factors, such as the slower growth in the world value chain) will lead to continuing disappointing performances in international trade in the coming years, even if there is an upsurge in activity.”

A stronger dollar at least during the first half of the year and increasing uncertainty in developed economies are likely to dampen investment flows into emerging markets, Coface said.

Inflation—down to low levels in 2016—is expected to rise this year, “if only as a basic mechanical reaction to raw material prices having reached their low point in 2016,” analysts said. Still, sudden jumps in inflation are not as likely, given relatively weak internal demand in Europe. “Growing political uncertainties in the U.S. are also likely to limit the rise in inflation, due to their negative impact on short- and medium-term inflation expectations,” Coface said.

– Nicholas Stern, editorial associate

EXIM Reports 2016 Authorizations; Details Strategic Plan

The Export-Import Bank of the United States (EXIM or the Bank), which facilitates the export of U.S. goods and services at no cost to taxpayers, reported that it authorized $5 billion of financing to support $8 billion of U.S. exports in fiscal year 2016. Other highlights of the agency’s 2016 Annual Report include support for small businesses and minority- and woman-owned businesses, initiatives in Sub-Saharan Africa and details of its Strategic Plan.

EXIM’s charter was renewed on Dec. 4, 2015. After a lapse in authority spanning five months, the Bank reopened for business about two months into fiscal year 2016. The board of directors lacked a quorum for the year, which left the Bank unable to approve transactions above $10 million. In support of U.S. small business exports in FY 2016, the Bank authorized more than $2.6 billion. Small business authorizations, more than half of which involved amounts under $500,000, accounted for about 91% of the Bank’s authorizations for the year. Additionally, the Bank approved a record number of authorizations—770, totaling $544 million—in support of minority- and woman-owned businesses.

The Bank’s authorizations for Sub-Saharan Africa dropped due to its lapse of full authority. It authorized $95 million supporting exports to the region for FY 2016, compared to $2.1 billion in FY 2014. Nevertheless, EXIM continued to strengthen its relationships with African banking and other business partners. It signed a $100 million memorandum of understanding with United Bank for Africa at the World Economic Forum in Kigali, Rwanda, and a similar memorandum with PTA Bank at the U.S.-African Business Forum in New York City. The Bank’s board of directors and staff engaged directly in business development outreach in Angola, Cameroon, Ethiopia, South Africa and elsewhere.

EXIM’s Strategic Plan, updated in 2013 and ranging through 2017, consists of goals that include expanded awareness of EXIM Bank services, improving the ease of doing business for customers and ensuring effective enterprise risk management consistent with the Bank’s charter requirements. In FY 2016, the Bank indentified operating priorities in support of these goals, which include strengthening small business “export DNA” in all programs and products and equipping U.S. exporters to win in a rapidly changing international landscape. EXIM products facilitate support for U.S. exports through four major programs: loan guarantees, direct loans, export credit insurance and working capital guarantees.

– Adam Fusco, editorial associate

Supreme Court Contemplates Stale Debts during Bankruptcy

Members of the Supreme Court appeared divided in oral arguments last week while hearing a case to determine if a credit collection agency can pursue bankruptcy claims that would otherwise be time-barred.

The case, Midland Funding, LLC v. Johnson, presented the quandary of whether filing a proof of claim for an unextinguished, time-barred debt in a bankruptcy proceeding violates the Fair Debt Collection Practices Act (FDCPA), according to court documents. The case arose when a debt buyer filed a proof of claim in the bankruptcy case of one of its debtors hoping to collect on the claim if no one objected to the proof of claim.

During oral argument, Justice Sonia Sotomayor challenged the legitimacy of Midland’s business model and questioned whether filing such time-barred claims wasn’t adding unnecessary administrative burdens on bankruptcy courts. In the opinion of Wanda Borges, commercial law and creditors’ rights attorney and member of Borges & Associates LLC, Justice Sotomayor did little to hide her displeasure with the entire concept of allowing a state claim to be filed in a bankruptcy case.

“This model is beautiful,” Sotomayor said. “You file a claim you know is old. If you get paid, wonderful. If somebody objects, you withdraw it. There's no sanction that's possible.” 
Supreme Court Chief Justice John Roberts, Justice Samuel Alito and Justice Stephen Breyer had questions as to why time-barred claims aren’t simply objected to by trustees and expressed concern at turning a bankruptcy matter into a federal question that could only be decided by U.S. district courts.

Trade creditors should take note of how the Supreme Court decides this case because some courts are looking at personal guarantors and/or sole proprietors as individuals who may be subject to protection under the FDCPA. Borges’s advice when it comes to bankruptcy matters: if it’s a stale claim in which the statute of limitations has run, don’t bother filing a claim, as it may be considered to be an attempt to collect a time-barred debt.

Although the FDCPA is applicable to third-party debt collectors, the filing of a stale claim may be considered a violation of the automatic stay, she said. If a collection agency files the claim on behalf of the creditor and the court determines it is an attempt to collect a debt and therefore a violation of the FDCPA, it can wind up costing thousands in fines and attorneys’ fees. Only Justice Breyer raised the issue of an automatic stay violation. Most of the discussion centered on whether or not the filing of a time-barred proof of claim was sanctionable under bankruptcy and federal rules. However, a discussion of the “safe harbor” provision allowing a withdrawal of a violative claim to avoid the imposition of sanctions showed that most creditors would escape sanctions as a result.

In the Midland case, because the date of the last transaction was more than six years before the petitioner’s filing, the debt was time-barred under the relevant Alabama state law. The Eleventh Circuit reversed a lower district court’s ruling, saying the debt collectors violate the FDCPA when they file such claims. The Eleventh Circuit also said that despite agreeing with the district court that the Bankruptcy Code allows creditors to file proofs of claim on time-barred debts, applying the FDCPA to such conduct does not give rise to an irreconcilable conflict with the Code. That ruling contradicts rulings in the fourth, seventh and eighth circuits, which hold that filing an accurate proof of claim for a time-barred debt in a bankruptcy proceeding does not violate the FDCPA.

– Nicholas Stern, editorial associate and Wanda Borges, Esq., Borges & Associates, LLC


China Adds to Global Trade Importance with European, AsiaPac Outreach

China has been on a major charm offensive of late within business and trade spheres that has only intensified as U.S. officials have made the country a target.

One of the more interesting developments in international business trends is the shift in emphasis for Europe in light of the last year. The focus for the bulk of the European Union members has long been the United States, United Kingdom and, to some degree, Russia. These are all relationships that are strained, to say the least.

“Brexit” will cut the U.K. off from the business of Europe to a degree yet unknown. The Trump administration’s stated stances on policy, including tough talk on imports, foreshadow lessened interest in the EU. And Russia, perceived for years as hostile, has grown more aggressive. China will seek to replace some of the influence the U.S. and U.K. hold within European trade.

China already appears to be emerging as a clear winner in the battle for allies around Asian and Pacific states. In some respects, the Trans-Pacific Partnership trade pact was a last-ditch attempt to keep Asian states from falling into the Chinese orbit completely. The deal failed to garner support in the U.S., which sends what Asian and Pacific states see as a pretty clear message. In the last few months, the U.S. has watched the Philippines, Malaysia and, more recently, Cambodia and Indonesia tilt strongly towards deepened ties with China. 

– Chris Kuehl, Ph.D., NACM economist

Banks Look to Stronger Controls for Anti-Money Laundering as Correspondent Banking Relationships Drop

A recent report by the Dubai Financial Services Authority (DFSA) highlights that while many banks operating in the Dubai International Financial Centre (DIFC) have strong internal controls regarding general credit risk, some companies have a lack of awareness regarding trade-based money laundering risks.

The observation could be apt for trade creditors experiencing the increased cost of doing business throughout the world associated with a recent fall in global correspondent banking relationships (CBRs). Data compiled by Henry Balani of technology provider Accuity show CBRs have declined globally to 223,247 in 2016 from 360,785 in 2013. North America and Western Europe experienced the largest drop, 46% and 39%, respectively, he said.

Banks worldwide are reducing their CBRs with a focus on perceived higher-risk countries, including the UAE, according to financial messaging service Swift. As a result, more banks have lost access to international financial networks and products.

“There is an increased focus globally on trade-based money laundering risks from international groups such as the Financial Action Task Force and financial service regulators,” said Ian Johnston, chief executive of the DFSA. “Given the importance of trade to this region, regulators need to effectively oversee and supervise trade finance without hindering actual trade. We urge firms to benefit from all international guidance issued in that regard.”

Regarding anti-money laundering risk assessment, banks tend to lack specific assessment methods for trade-based money laundering and tend to focus more on credit risk and monitoring potential sanction breaches, the report notes.

Also, “…controls around identifying and dealing with the risk of dual-use goods need improvement,” the report adds.

– Nicholas Stern, editorial associate

Latin American Sovereign Outlook Negative Due to Weak Growth, Rising Debt

A weak global economic environment, depressed commodity prices, rising debt levels, and the prospect of higher global interest rates all contribute to negative credit drivers for sovereign creditors in Latin America, Moody’s Investors Service said in a recent report.

Weakness in Brazil and Argentina, two of the region’s largest economies, will hamper economic growth in the region, likely to average only .9% from 2016 to 2018. A recent average of 3% was achieved during the period between 2010 and 2015. Brazil, Ecuador, Trinidad and Tobago, and Venezuela are expected to experience the weakest growth and struggle with credit challenges over the next two years.

“Given some improvement in commodity prices and the rating actions already taken, we expect negative credit trends to be contained in 2017, relative to last year,” said Moody’s Vice President and Senior Analyst Samar Maziad. “Nonetheless, we expect the creditworthiness of a number of sovereigns to deteriorate further.”

Eight of the 29 Latin American countries that Moody’s rates ended 2016 with a negative outlook, while three had a positive. In 2015, only six had a negative outlook.

Debt levels are expected to rise in Argentina and Brazil, and large fiscal deficits and high debt ratios will likely constrain policy choices for the region’s countries. Higher global interest rates and volatile capital flows will limit the ability of authorities to ease monetary policy in 2017, inhibiting growth and contributing to higher interest costs on domestic debt. In Mexico, recent tax reforms have helped to cushion the sovereign’s credit profile to shocks, though uncertainties remain regarding potential changes in United States trade policies, Moody’s said.

– Adam Fusco, editorial associate

German Sectors on Track for Solid Growth, Stable Credit Quality in 2017

German nonfinancial companies are set to enjoy a year of stable credit quality, with ongoing economic growth and high levels of geographic diversification backing up Moody’s Investors Service’s predictions for 2017.

"German companies' stable credit quality in 2017 is supported by steady GDP growth of around 1.5% on the back of continued strong household consumption and net exports, as well as their geographic diversity, with only one-quarter of revenues earned from domestic customers," said Scott Phillips, a Moody's vice president/senior analyst.

Significant refinance requirements and regular issuance from large, repeat issuers point to new highs in bond issuance volumes this year, Phillips said.

The German automotive sector is likely to see decreased sales growth and price pressure taking away from profitability in 2017, though Moody’s analysts said strong credit metrics for firms like VW and BMW will keep their credit ratings in good shape.

The nation’s chemical sector should see profitability grow in 2017 by about 2% to 3% in earnings before interest, tax, depreciation and amortization (EBITDA), while mergers and acquisition event risk is increasing for some of the largest issuers, Moody’s said.

Also, a supportive regulatory and political environment should produce stable credit conditions for German-domiciled regulated energy networks, analysts said.

– Nicholas Stern, editorial associate

Import, Export Prices Advance in December

Import prices continued an upward trend in December, rising .4% after a .2% decline in November, according to indices from the Bureau of Labor Statistics. Export prices rose .3% in December, matching a rise in September; these were the largest increases for the export index since a .8% rise in June.

Prices for overall imports advanced 1.8% between December 2015 and December 2016, representing the largest year-long increase since the index rose 3.5% in March 2012. The 2016 increase was the first calendar-year advance since import prices rose 8.5% in 2011.

Prices for import fuel rose 7.3% in December, which was the largest monthly increase since the 10.5% advance in June. Natural gas prices also rose, showing an increase of 2.2%. The price index for import fuel advanced 25% in 2016, following a 41% drop in 2015. The 2016 increase was the largest calendar-year advance since a 62% jump in 2009.

Lower prices for foods, feeds and beverages, as well as each of the finished goods areas, led a decline in the price index for nonfuel imports in December, the third consecutive month for decreases, falling .2%. Prices for nonfuel industrial supplies and materials rose, however. Nonfuel import prices were down .1% in 2016 after a 3.4% drop the previous year.

For all exports, higher nonagricultural prices offset declining agricultural prices. Prices for overall exports rose 1.1% for the year ended in December, marking the first 12-month increase since the index advanced .4% in August 2014.

Higher prices for nonagricultural industrial supplies and materials offset lower finished goods prices, driving the nonagricultural export price increase of .4% in December, after edging down .1% in November. Declines in vegetable and fruit prices led a decrease in agricultural export prices of .3% in December, the bureau said.

– Adam Fusco, editorial associate

Slow Trade Payments in Singapore in 2016 Slumped to Lowest Level in Five Years

Companies in Singapore paid more slowly in 2016 than they did in the prior five years, with prompt payments (at least 90% of invoices paid on time) accounting for less than half the total of payment transactions.

Slow payments occurred in more than two in five transactions in Singapore last year and across the construction, manufacturing, retail, services and wholesale sectors, according to the Singapore Commercial Credit Bureau (SCCB).

According to AsiaOne, prompt payments to companies in Singapore fell 7.23% to 45.87% in 2016 from the prior year. During the fourth quarter of 2016, slow payments rose 7.85% to 43.28% from the year prior.

Typically, payment performance in Singapore improves at year-end due to sales during the holiday season, but some analysts believe companies are more actively enforcing payment terms to improve cash flows.

The food and beverage sector had the highest percentage of slow payers, while the wholesale sector saw the biggest jump in slow payments—8.35%—compared to the prior year, due primarily to a prolonged weakness in trading for oil and petroleum products, the SCCB said.

Bad debts in the heavy construction subsector slowed payment performance in the overall construction sector, with some 47.97%, or 7.6% more, firms reporting they were slow in paying in the final quarter of 2016 than during the same period in 2015, AsiaOne said.

The retail sector came in second in payment delays, hampered by slow growth among retailers in recent months. In manufacturing, payment slowing increased by some 7.63% to 45.4% in the fourth quarter of 2016 compared to the same period in 2015 due to a slowdown in the transport engineering and biomedical engineering subsectors.

– Nicholas Stern, editorial associate

Optimism among Small Business Owners Highest in over a Decade

Expectations for better business conditions among small business owners are at their highest since 2004, according to the National Federation of Independent Businesses’ (NFIB) December Index of Small Business Optimism, which rose 7.4 points to 105.8. Seven of the 10 index components posted a gain. The number of owners who expect better business conditions experienced a “stratospheric” 38-point jump.

“We haven’t seen numbers like this in a long time,” said NFIB President and CEO Juanita Duggan. “Small business is ready for a breakout, and that can only mean very good things for the U.S. economy.”

“Business owners who expect better business conditions accounted for 48% of the overall increase,” said NFIB Chief Economist Bill Dunkelberg. “The December results confirm the sharp increase that we reported immediately after the [U.S. presidential] election.”

The December survey reflected the optimism of the postelection November survey, which jumped seven points to 102.4 after the results of the U.S. presidential election were announced.

Expectations for real sales gains and the outlook for business conditions contributed 73% of the gain in the index. The percent of owners viewing the current period as a good time to expand is now triple the average level in the recovery, NFIB said. Capital spending showed gains, both in reported outlays and plans for spending. Job-creation plans are at their highest levels since 2007.

“Business owners are feeling better about taking risks and making investments,” Duggan said. “Optimism is the main ingredient for economic expansion. We’ll be watching this trend carefully over the next few months.”

– Adam Fusco, editorial associate

Mixed Results in Canada’s Attempts to Move into Manufactured Exports

After oil and other commodity prices reached a peak in mid-2014, Canada has attempted to transition some of its economic energy toward non-energy exports, such as manufactured goods. The positive results of that effort are just starting to trickle in and remain mixed overall, according to an analysis by Wells Fargo.

Recent data analyzed by the bank show these efforts have been somewhat stymied, as represented by a poor October GDP figure and the biggest one-month drop in manufacturing in that month in about three years.

December data point to some firming prices in the Canadian manufacturing sector, though not as much as economists had anticipated, said Tim Quinlan, senior economist with Wells Fargo. The industrial product price index grew 0.3% in November, despite a consensus expectation for a 0.7% increase, while raw material prices fell during the month by 2%—also a larger decline that expected.

Not everything is bad in the near term, however. In December 2016, Canada reported its first trade surplus since 2014 as export volumes increased 3.5% for the month and import volumes declined by 0.3%. “This is quite a turnaround from the record deficit of more than CA$4 billion just two months prior,” Quinlan said. Nonenergy exports jumped 4.7%.

Meanwhile, Canadian jobs grew by 53,700 in December 2016, mostly driven by full-time job growth that was the largest reported since 2012, Wells analysts said.

Wells’ prediction for Canadian GDP growth is 1.9% for both this year and the following. “These latest figures are a welcome improvement and highlight how exports could go from a headwind, as it has been for the past couple of years, to a tailwind in the years to come,” Quinlan said. “That said, we remain cautious on the macro outlook as high consumer debt levels and overheated housing prices, at least in some markets, weigh on the broader outlook.”

– Nicholas Stern, editorial associate

Look for More Mergers, Centralization of Collections Agencies in Tight 2017 Market

Several trends seen among collections professionals in 2016 are likely to carry on this year, including creditors centralizing into shared services centers, slow economic growth and smaller commercial collection agencies disappearing or merging, according to a recent report by International Association of Commercial Collection Agency (IACC) experts.

“We have seen some large creditor companies consolidate internal resources, obtaining growth through acquisition in order to increase market share and profitability,” said Bryan Rafferty, vice president of Commercial Collection Agency of NY.

As the number of collection agencies decrease, opportunities open up for third-party growth because of less competition, Rafferty said.

“For companies that can operate effectively under the current regulatory/compliance-driven environment, there will be a lot of opportunity to gain market share through acquisition, business development, and competitive scorecard wins,” said Richard Kramer, senior vice president of Enterprise Sales, Altus Global Trade Solutions. Kramer also contributed to the IACC report. “Clients are looking to reduce the number of agencies they use in order to make compliance oversight and vendor management easier, exemplified by the Department of Education award and the trend in financial services awards.”

Another ongoing trend revolves around creditors issuing RFPs to identify the best collection agencies to work with, Kramer said. Look for these agencies to develop stronger web and marketing presences so creditors can research them more easily.

– Nicholas Stern, editorial associate

Moody’s Liquidity-Stress Index Points to Benign 2017

Moody’s Liquidity-Stress Index (LSI) fell for a ninth straight month as it declined to 5.9% in December from 6% the month prior, according to the rating agency’s recent SGL Monitor Flash. This bodes well for a benign default environment in 2017, Moody’s said, though it represents a contrarian view on the insolvency outlook when compared with reports from other sources. A fall in the index occurs when corporate liquidity appears to improve and rises when it appears to weaken.

“The LSI enters 2017 on a much calmer tone than it began 2016, with the energy sector strains that drove liquidity weakness and pushed up defaults now moderating,” said Moody’s Senior Vice President John Puchalla. “Meanwhile, a steady stream of new speculative-grade issuance continues to provide lower-rated companies with liquidity support, while generally positive economic sentiment should help them maintain healthy cash flows.”

Moody’s cited company-specific and transaction-related issues as the reason that downgrades exceeded upgrades in its speculative-grade liquidity (SGL) ratings and predicted that SGL rating volatility will lessen this year as the energy sector stabilizes.

Combined speculative-grade loan and bond issuance increased about 20% in 2016 as investors continued to hunt for yield in an environment of low interest rates. The chance of higher interest rates in 2017 could create challenges for companies with weak operating performance and low ratings, but such challenges won’t be of the same magnitude as energy companies faced in 2016, Moody’s said.

– Adam Fusco, editorial associate

Moody’s Sees Stable Near-Term Outlook in India’s Nonfinancial Business Sector

Ongoing growth among India’s nonfinancial corporates will bode well for their credit outlook over the next year to year and a half, says Moody’s Investors Service and its Indian affiliate, ICRA Limited. The nation’s sector has been rated Baa3 positive by Moody’s.

"Strong GDP growth, capacity additions and stabilizing commodity prices will support EBITDA growth of 6% to 12% over the next 12 to 18 months," said Laura Acres, a managing director in Moody's Corporate Finance Group.

The ratings agency also points out that the pace of borrowing in India’s corporate sector will slow over the same timeframe as the capital expenditure cycle for Indian businesses has peaked. Large cash balances and better access to the capital markets also means refinancing needs will remain manageable this year.

"As for specific sectors, our outlook for the power, hotel and sugar industries is stable, while that for the real estate and cement sectors is negative," says Subrata Ray, senior group president and head of research for ICRA.

Meanwhile, Moody’s has a stable outlook for Indian energy exploration and production companies that reflects their higher production volumes, lower subsidy burdens and recovering oil prices.
India’s telecom sector also has a stable outlook from the ratings agency because, even though there is intensifying competition that will pressure margins, the situation will be offset by growing data consumption, analysts said.

Falling automobile prices stemming from a consolidation of taxes into the less-complex goods and services tax in April and improved consumer sentiment have translated to a stable outlook in the auto sector, Moody’s said.

India’s cement industry is one sector with a negative outlook. Cement demand growth, already suffering from single-digit growth over the last several years, is set for more hard times with demonetization through the real estate sector, analysts said.

“In the short-term, ICRA says that the cement industry will likely experience stretched receivables, given their need to provide liquidity to offset the impact of demonetization,” Moody’s said. “ICRA points out that cement prices have fallen across regions following demonetization; this situation, combined with increased input prices—such as petcoke and rising freight costs—will adversely affect profitability.”

– Nicholas Stern, editorial associate