October 16, 2014

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News Briefs

  1. FCIB Global: Tough Headwinds Ahead Even for Strong Economies
  2. Report: Corporate Credit Quality Weakened in September
  3. The Rise of Global Cyber Crime
  4. FCIB Global: Personal Touch Increasingly Critical in Latin Collections

 

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FCIB Global: Tough Headwinds Ahead Even for Strong Economies

Economists Dan North, of Euler Hermes, and Carolyne Spackman, of American International Group (AIG), noted during the Keynote session of FCIB’s 25th Annual Global Credit Conference this week that the United States has more to celebrate from a growth perspective than most nations around the globe. However, they believe it may become increasingly difficult to expect a surge in the growth rate as others, including some key destinations for products and services coming out of the US, face mounting problems.

Spackman said the European Union is showing strong potential for a triple-dip recession. "The EU is still mired in deflation and debt…it’s a dismal picture," she said. The Russia-Ukraine situation is only exacerbating problems as Russia, which had become an increasingly important export destination for growing consumption-based activity, showed weakening even before the sanctions arrived. With gas and oil prices dropping to levels not seen in years, it will only weigh more heavily on that economy and the many that bet on its growth. It may, however, be premature to assume oil prices will remain low for an extended period, as rising geopolitical tensions in multiple regions could again promote concern over supply levels and security of key fields.

Regardless, the recurrence of economic problems in the EU—especially a weakening in France and Italy—could have a domino effect, Spackman and North noted. China's economy, though unlikely to see a hard landing, may continue to grow at slightly muted rates because of a lack of buying from the EU. This, in turn, could impact even hot Latin American economies because of the importance of selling natural resource commodities to Chinese producers, said Spackman. All of this could conspire to throw a wrench into US Federal Reserve policy as well.

"Will the US think twice about raising interest rates? It remains to be seen if they will actually raise rates in June," said a skeptical North. He wasn't the only FCIB Global speaker or attendee to speculate on the potential of the Fed delaying any hike for the federal funds rate in 2015. North also showed concern about a number of areas that could act as a drag on US growth over the next decade: a near 100% debt-to-GDP ratio, potential for less consumption in trade markets for several years, a lack of any entitlement reform plan and an aging workforce.

-- Brian Shappell, CBA, CICP, NACM staff writer

For more coverage from the FCIB Global Conference, see Story 4 and check out FCIB_Global on Twitter throughout the week or the NACM blog.

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Report: Corporate Credit Quality Weakened in September

Analysis of September statistics on corporate credit quality illustrates the second consecutive month of deterioration after default risk, according to metrics tracked by Kamakura Corporation, registered an impressive record low.

Kamakura's index of troubled companies finished September at level of 4.6%, 0.3% lower than August and 0.71% off July’s record. Data show increases in categories that tracked companies' likelihood of default between 1% and 5%, 5% to 10% and 10% to 20%. Only the category that included companies with a default probability exceeding 20% was unchanged. Concern seems to be focused on a handful of struggling industries.

"Although the troubled company index remains at historically low levels; retailing, mining and natural resource companies continue to be weak and vulnerable," said Kamakura President and COO Martin Zorn. "The term structure of default probabilities shows a deteriorating outlook. At five years, the percentage of troubled companies increased to 11.56%, and at 10 years, the percentage is 17.30%."

Kawakura characterized Radio Shack as the worst-rated company in the world from a credit risk standpoint, moving up the dubious list because the previously identified riskiest company, NII Holdings, went into Chapter 11 on September 15. Other interesting findings from Kawakura's study of corporate credit quality in September include:

  • Four of the 10 riskiest companies are based in the United States.
  • Russia and Brazil are the only other countries with two of its businesses placing in September’s 10 riskiest companies.
  • Canada and Greece each saw one of its companies on the riskiest list.
  • September's overall corporate credit quality index placed in the 98th percentile historically, according to data tracked by Kamakura since January 1990.
  • The average monthly index value since 1990 is 11.56%

- Brian Shappell, CBA, CICP, NACM staff writer

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The Rise of Global Cyber Crime

The news has been full of cyber-attack incidents, with K-Mart as the latest compromised company. This has been an escalating threat that costs companies an average of $12 million each time they are hit, double that of a few years ago ($6 million). The extent of the issue is starting to attract some real attention from the consumer and the authorities. Strategies used to defend against these attacks may have to change drastically.

Those targeting major retailers and banks are by no means low-level hackers—they are sophisticated criminal enterprises. There is abundant evidence that some of these networks are under the direct control of foreign governments and terrorist organizations. The attacks are not random and they are not all that opportunistic. Those who are attacking pick their targets and seek ways to get inside, usually through some kind of malware that compromises the security and opens a door to the exploitation of the system.

The response thus far has been to improve security one business at a time. The implication is that something is wrong with the security of the company that was hit and it is their responsibility to protect themselves. If security is inadequate and there is no real response from the government, there is deep concern that consumers will opt out of the system altogether and start finding alternatives to credit cards or other systems that can become vulnerable.

The bigger issue is how the United States and other developed nations will address hacking that is state-sponsored or done on behalf of terror groups. There have been hack attacks traced back to China, Russia, Iran, North Korea and others. It is not possible to assert that these were government sanctioned, but the evidence comes very close.

There have also been attacks that originated with affiliates of Al Qaeda and the Islamic State as well as many smaller organizations. The US and Europe have started to explore measures rooted in attack as opposed to defense, but these approaches can be risky as they could affect a variety of governments and institutions. The cyber war has been a strategic fear for some time and it is now apparent that the first wave of that attack may be aimed squarely at the financial sector.

- Armada Corporate Intelligence

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FCIB Global: Personal Touch Increasingly Critical in Latin Collections

Talking about the weather in a customer's area, how their kids are doing and what they’re having for dinner might inspire debtors in urban parts of the United States, especially the Northeast, to be impatient or even to seek an end to the conversation. However, in Latin America, failing to do so with some regularity will almost certainly downgrade the position of one’s company when it comes to whom debtors will pay in a timely fashion when liquidity is a problem, said a breakout panel of credit experts at FCIB’s 25th Annual Global Credit Conference this week.

Moderator Alessia Zalambani, CBA, ICCE, corporate credit manager at Domino Foods Inc., was first to note the importance of building and maintaining a business and personal relationship with customers in many Latin-based countries. "If they have the choice between buying from you or paying you or someone else, the relationship is so important," she said.   

This could become particularly important in the coming year, as Latin America's recent hot performance could be counteracted at least somewhat by a number of problem situations: non-diverse product and service options beyond the natural resources sector at a time when Chinese demand is slowing dramatically (virtually every Latin nation except Brazil and Mexico), growing anti-US sentiment (Bolivia, Argentina), national elections between candidates with vastly different views on the business community (Brazil), woefully inadequate foreign exchange holdings (Venezuela) and increasing pushback for debtor-favorable terms (Mexico).

Baltimore Aircoil Company Inc.'s Global Credit and Collections Director Sean Papperman, CCE, CCRA, CICP, noted that once delinquency has crept into a payment situation, it may be too late to build the kind of relationship needed. "The sooner you set up the relationship, the better, and you have to refresh it—you can't afford not to," Papperman said. "Call them, remind them who you are."

Even with stressing the importance of relationships with Latin customers, due respect remains paramount. Just because some based there may want to know about you personally and want you to know about them, does not mean they're any less business-savvy, noted panelist Lorena Garagozzo, vice president of receivables management for the US at hibu Inc. "Don't talk down to them," she said. "You have a business to run; they have a business to run. I think looking at it like that and having an intelligent conversation builds respect. If they’re having trouble paying everyone, they’ll pay the business partner that has been respectful and upfront about their business needs."

This should not shock companies and credit managers with mostly domestic experience that are now entering into Latin markets or looking to do so. Business in some parts of the United States isn't markedly different. "If you’re doing business in the South, you do have to slow down the conversation a little. You have to talk about things like their family or they might think you are being rude," Garagozzo said. In essence, know your customer (and their culture) and react accordingly. Sometimes that means taking a little more time on phone calls or visits.

- Brian Shappell, CBA, CICP, NACM staff writer

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