Emerging, Advanced Economies Show Similar Results in Corporate Default Rates

Corporate defaults come as no surprise in advanced economies, but a recently released Moody’s Investors Service 20-year study found that the default numbers for emerging economies are quite similar to those in advanced economies after an in-depth review of more than 1,700 defaults in both markets around the world.

The Moody’s report, released on March 28, showed about a 1% difference in the average annual corporate default rate between advanced and emerging economies since 1998—the latter remained on the high end at 3.7%. The study was conducted through the end of last year and indicated that while both economies had similar default numbers, the results occurred for different reasons.

“Sovereign and banking crises, currency volatility and exchange controls drove many emerging market corporate defaults in the last two decades, while defaults in advanced economies were more likely to result from adverse industry trends, competition and aggressive financial policies,” Moody’s Corporate Finance Group Senior Credit Officer Richard Morawetz said in the release. Morawetz was also the author of the report.

In the early years of the report, Moody’s said, the aforementioned sovereign crises in emerging markets were seen in countries such as Brazil, Mexico, Argentina and India, which in turn, boosted default rates. Meanwhile, the most corporate defaults in advanced economies occurred in the Americas, specifically in part by the high number of rated entities in the U.S.

The highest number of defaults in advanced and emerging economies was recorded by Moody’s at 254 in 2009, but has since decreased to 242 by the end of 2017.

“Missed interest or principal payments are the primary type of default in both regions,” Moody’s said. “By contrast, bankruptcy filings are more prevalent in advanced economies.”

-Andrew Michaels, editorial associate

Oil Price Increase Raises Concerns of U.S. Supply Outlook

Rising prices coupled with growing tensions with the Middle East could threaten the U.S. oil supply, despite a substantial increase in global output.

According to Reuters, oil prices were clocked at $70 a barrel this week—an increase of 7% in March and more than 5% overall in 2018. As the May deadline nears for the U.S. to decide whether it will withdraw from the Iran nuclear accord, oil-related concerns are fueled by large exporters across the globe that many say are “controlling supply.”

PVM Oil Associates Analyst Tamas Varga said in the Reuters report that non-OPEC (Organization of the Petroleum Exporting Countries) producers boost oil demand throughout the world.

“The price strength of the last couple of weeks is down to two factors,” Varga said in the release. “The first one is a stable OPEC output level which leads to impressive compliance (with an oil supply-cutting deal). The second one is supply-side geopolitical developments in Venezuela, Libya and Iran, the most acute of which is Iran.”

Last week, however, Moody’s Investors Service reported a shift in its global oil and gas sector rating from stable to positive, citing a potential 13% to 18% growth in earnings. This was attributed to the sector’s EBITDA and the cut in production costs in 2015 and 2016, which improved operating margins.

-Andrew Michaels, editorial associate

Current U.S. Tariffs Have Limited Impact on China's Economy, but That Could Change

With the U.S. administration’s tariffs underway, the likelihood of a global trade war is becoming increasingly foreseeable to many economists and trade industry experts. However, Moody’s Investors Service reported on March 22 that the current measures will only have a limited impact on China’s economy.

Unlike 10 years ago, Moody’s reported, China is “less dependent on exports,” which haven’t shown much of a benefit to the country’s gross domestic product (GDP) growth. The U.S. tariffs on solar panels, washing machines, steel and aluminum are unlikely to make a dent in the country’s exports since there’s minimal U.S. market exposure.

“However, the negative impact on both Chinese economic growth and specific industries would be greater … if the U.S. significantly expands tariffs and other significant and broad-ranging protectionist measures,” the report stated. “Sectors with large direct exposure to the U.S. market include cork and wood products, furniture, office machines, household appliances, electrical equipment, road vehicles, telecommunications equipment, electrical machinery, apparel and footwear, animal oils and fats.”

Although China is currently manufacturing parts in these sectors, Moody’s added, additional U.S. trade policies could come down hard on domestic supply chains. According to Reuters, President Donald Trump is expected to announce tariffs on Chinese imports later today.

-Andrew Michaels, editorial associate

PPP Program to Boost Argentine Infrastructure Investment

Infrastructure investment in Argentina has dwindled in recent years, but a new public-private partnership (PPP) program might give the country a much-needed boost over the next four years.

The PPP program will feature a $26 billion investment beginning this year through 2022 for roads, energy and mining, communications, water, sanitation and housing, Moody’s Investors Service reported on March 15. Bank debt and bond issuance in the country will fund investments, which Moody’s said remain low among domestic investors. Argentina saw $88 billion in total assets under management (AUM) by the end of 2017; however, only 6% went toward infrastructure.

“The PPP efforts will help boost the country’s low investment rates and will do so in a way that limits the program’s fiscal impact,” Moody’s said. The program was developed by analyzing PPP programs elsewhere in Latin America, such as Peru.

Government certificates, called TPIs, will fund construction, with limited risk exposure for more investors, Moody’s Vice President and Senior Analyst Daniela Cuan said in the report.

In FCIB’s December 2017 Credit and Collections survey for Argentina, 94% of respondents said they did not extend credit to customers. This was a drastic increased compared to the April 2017 survey, when only about 30% reported the same thing. One respondent said that anyone who plans to conduct business in Argentina should closely monitor the country’s “ever-changing government restrictions and monetary policy.”

Issues with extending credit showed problems with payment, such as postdated checks, wire transfer delays, incorrect invoices as well as customers only paying once they’ve been paid.

-Andrew Michaels, editorial associate

Rewritten Financial Reform Law Would Ease U.S. Small Bank Lending

The 2010 Dodd-Frank financial reform law giving the U.S. government regulation over the financial industry is headed toward a rewrite that would ease tight restrictions on small banks and community lenders. Following the U.S. Senate’s vote to approve the revised bill on March 14, the legislation is making its way to the U.S. House of Representatives.

According to a recent Reuters report, small banks and community lenders would see benefits from the rewritten bill, unlike large U.S. banks, including raising their risk threshold from $50 billion to $250 billion that would normally lead to “stricter oversight.” The report also said that banks with less than $10 billion in assets won’t have to worry about the ban on proprietary trading.

The original bill, enacted after the 2007-2009 global financial crisis, was criticized by Republicans for its effect on banks’ lending abilities, Reuters said, but applauded by Democrats for its “critical protections for consumers and taxpayers.” If passed in the House, the bill would go back for another vote in the Senate

“There’s no guarantee that a modified bill would be able to pass the Senate. That’s a real danger,” Paul Merski, executive vice president with the Independent Community Bankers of America, said in the Reuters report. Merski supports the bill.

-Andrew Michaels, editorial associate

Reverse Factoring Accounting Errors Led to Carillion Collapse

Although reverse factoring is becoming an increasingly popular supply-chain finance option around the globe, proper accounting procedures should be in place throughout the process—an arrangement that fell short and may have caused the demise of U.K. construction giant Carillion, which collapsed in January.

According to an article in Supply Chain Management Review, reverse factoring occurs when a supplier sells discounted invoices to a bank and pays them at a later date. Meanwhile, suppliers are getting paid earlier. In the case of Carillion, Moody’s Investors Service reported on March 13 that the construction and services group lacked “explicit disclosure” in its agreement with suppliers and banks.

“Carillion’s approach to its reverse factoring arrangement had two key shortcomings: the scale of the liability to banks was not evident from the balance sheet, and a key source of cash generated by the business was not clear from the cash flow statement,” said Moody’s Vice President and Senior Credit Officer Trevor Pijper, who also authored the report, in a press release.

The reverse factoring agreement began in 2013, with the banks owed about 498 million pounds (more than $695 million), outside of the balance sheet’s disclosed 148 million pounds (more than $206 million) in bank loans and overdrafts. Moody’s reported that the larger amount was shared with “other creditors” and “excluded from borrowings.”

Carillion also didn’t disclose bridging finance from its banks as part of its cash flow, which would have contributed nearly 100% of its cash generated.

-Andrew Michaels, editorial associate

Steel, Aluminum Import Tariffs Should Have ‘Limited’ Impact on Sector

With U.S. government plans in motion to impose tariffs on steel and aluminum imports, industries in the sector are left wondering what potential risks might be coming their way in regards to future business operations. A direct impact on the nation’s steel and aluminum producers will most likely be “limited,” said Fitch Ratings; however, retaliation from other countries could restrict global growth.

President Donald Trump brought attention to these tariffs earlier this month when he shared plans to impose them on 25% of steel imports and 10% of aluminum imports. About 0.3% of U.S. GDP is from iron, steel and aluminum imports, Fitch reported. More reports have already surfaced that the European Union is planning to retaliate with tariffs of their own if the U.S. tariffs pass.

As many political and business figures react negatively to the news, international law firm Foley & Lardner LLP reported on March 5 that steel and aluminum companies were pleased with the proposed tariffs. The report cited comments from the American Iron and Steel Institute, which said the tariffs will “combat an import ‘surge’ in 2017 and large amounts of worldwide excess steel capacity.”

“If the tariffs are successful in reducing the overall level of imports,” Fitch added, “they should result in higher domestic production volumes, capacity utilization and prices, supporting profit margins from 2018 onward.”

Any risks will only grow if countries take “protectionist measures,” Fitch said.

-Andrew Michaels, editorial associate

2018: Another Good Year for U.S. Insolvencies

The global economy is set for a change of pace this year, according to a new insolvency forecast from credit insurer Atradius. 2018 will be the ninth straight year of insolvency declines at 3%. This is due in part to economic growth and low interest rates, but “downside risks are rising as the period of easy money is coming to an end, especially in the [United States].”

The U.S. economy is poised for a nearly 3% increase this year, according to Atradius, and corporate bankruptcies dropped 4% in 2017. Business confidence has been spurred by the recent tax reform and regulatory rollbacks. This will “stimulate higher corporate investment and business activity, which in turn should further lower insolvencies.”

However, there are still risks to this prediction, which include tightening trade policies. Despite the positive outlook, there are a few industries that are dealing with heightened insolvencies. Bankruptcy filings increased in the oil and gas sector, and insolvencies reached a six-year high in the retail industry. The latter is potentially due to consumers migrating to online shopping.

Of the countries surveyed by Atradius, Greece showed the best outlook at -12%, while the United Kingdom was the only country to have its insolvency outlook increase at 4%.

-Michael Miller, managing editor