November 20, 2014
This month's bankruptcy filings from Denmark-based giant OW Bunker in its home country and its subsidiaries in the United States, where a number of unsecured creditors are owed significant money, served as a chilling reminder that predicting fraud before catastrophic financial damage is done can be nearly impossible. The case illustrated the point of a recent FCIB panel of attorneys and representatives from the credit insurance business that credit insurance is not only for customers who look to be in trouble or are operating out of a country with a poor businesses and payments reputation, but also can be applied to debtors that appear sound.
OW Bunker officials admitted a decrease in the number of credit facilities and the low likelihood of regaining them in the near future after senior-level employees from at least one subsidiary committed significant acts of fraud. Chairman Niels Henrik Jensen said that selling the company was not a realistic option. Two US-based creditors are owed in excess of $12 million (USD) each. Positioned as the world's largest shipping fuel supplier and a company that enjoyed a wildly successfully initial public offering (IPO) earlier this year, the OW Bunker bankruptcy and trade credit insurance cases are the most intriguing in some time, said Thomas Raspanti, a senior VP with Willis Financial Solutions, at FCIB's "Demystifying Credit Insurance: A Guide to Understanding and Negotiating Your Credit Insurance Policy" event last week.
Fellow panelist Joseph McNamara, CCE, CICP, VP of credit and political risk at Equinox Global, said the OW Bunker case is another example of the misconceptions about credit insurance as it relates to companies that look good on paper and have performed well.
"They went public nine months ago and, when they went through the IP process, they had major firms looking at all of their assets," McNamara said of a company once valued at more than $1 billion. "It was a catastrophic risk [because of unknown fraud] and nobody saw it coming. People with trade insurance, coverage for catastrophic loss were covered."
Raspanti noted that credit insurance can be helpful, but is not a cure-all designed to replace usual credit due diligence on the part of trade creditors. It is best used as a "supplement" to a business, when appropriate, he added.
In addition, the panel noted the importance of actually knowing what coverage your company has back-and-forth. A lack of clarity can cause problems collecting because, as with any type of insurance, the coverage language is often strictly enforced.
"Make sure you are clear about your insurance policy...If you don't have your act together and you don't understand your policy, you're going to have problems," said James Stewart, Esq., a partner with the law firm Lowenstein Sandler LLP, which hosted the FCIB event. "Don't stick the policy in a drawer and only break it out when you're going to make a claim."
- Brian Shappell, CBA, CICP, NACM staff writer
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Payment habits for US businesses worsened in the third quarter, but the performance differed markedly between various industries, according to a report unveiled this week by global trade credit insurer Euler Hermes.
Euler Hermes' latest "Economic Insight" showed a 2% increase in the average dollar amount of past due payments to US businesses through the first three quarters of 2014, as compared to the same period one year prior. Although Euler noted its Severity Index, which tracks long-run averages of payment behavior, remained in positive territory overall, the latest data suggested a drag on the horizon for overall economic growth in 2014â€™s final quarter.
"While the dollar amount of past due payments has improved by 60% since 2008, the current figures suggest that we can expect to see slower GDP growth for the balance of the year," said Dan North, chief economist at Euler Hermes North America. "We have found a strong correlation between payment behavior and GDP, including an increase in past due payments in 2007, as the recession approached, and a decrease before the recovery began in 2009."
The best performing industries according to Euler's Receivables at Risk (RAR) metric of late have been the automotive and energy industries, though the latter is often subject to greater unpredictability than most other segments. Both are expected to post positive fourth quarter results. Retail, to a lesser extent, also looked strong heading into the fourth quarter, though that is almost a given considering the expected annual holiday shopping boost.
Those with the worst RAR rating changes between this year's second and third quarters were the commodities and electronics industries. Euler analysts characterized the commodities payment behavior change (a 71% decrease in performance) as particularly worrisome because of the unexpected and low frequency of delinquencies coupled with the high value of the losses. The industry encountered problems such as over-capacity and weakening global demand, which are unlikely to improve drastically before 2015. Reasons behind the slowdown in electronics payment behavior proved difficult to identify, Euler admitted. The agriculture and chemical industries also skewed weaker in predictions for the fourth quarter, but not nearly to the disappointing levels of those previously mentioned.
- Brian Shappell, CBA, CICP, NACM staff writer
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For the last 10 to 20 years, the economy of Japan has been stymied and the nation has had to watch the rise of China overtake them as the worldâ€™s second largest economy. This is a nation that seemed poised to dominate the world in the 1970s and 1980s and served as a model to be emulated. Then things started to slowly fall apart and, by the 1990s, the country was the very essence of stagnation, deflation and political ineptitude. Unemployment has risen and there are serious issues regarding the future labor force, as Japan is now one of the oldest countries in the world.
The Japanese economy has now contracted for two consecutive quarters and that is the classic definition of a recession. For many observers, this slide seemed inevitable the moment the decision was made to push the national sales tax from 5% to 8%. The logic was based on a notion of redistribution. Taxes would be raised from those who had more money than others and that money would go to the government so that it could put it where it would help the economy most. The massive stimulus effort that was dubbed "Abenomics," coined after optimistic Japanese Prime Minister Shinzo Abe, was a gamble, but nobody expected to see a recession emerge from this. The lesson from Japan seems to be that a nation has to decide what its policy direction is going to be. It is either going to stimulate until there is a recovery or there will have to be a real commitment to austerityâ€”doing both at the same time is not going to work.
The Abe government is desperately trying to hang on to some level of political legitimacy, which has prompted a call for snap elections in less than a month. The sense is that he will win, but not by much. That could ultimately weaken him more than it helps.
The world is still watching Japan and Abe. If there is no reaction to all these efforts, the sense is that nothing much is going to shake the rest of the world's economies out of their decline. That is miserable news for the Europeans and, to some extent, the United States.
- Armada Corporate Intelligence
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The issue of cybersecurity among businesses continued to emerge as a buzz topic at business conferences in the second half of 2014, attracting a particularly high level of focus at Novemberâ€™s Association for Financial Professionals (AFP) Annual Conference and FICO World 2014.
AFP used its conference to poll attending financial executives on the topic. It found that 62% of those polled knew of an attempted or successful cyber attack against their respective companies within the last year. About one-third of those polls ranked cybersecurity as their highest business concern. The study showed that corporate treasurers, financiers and bankers particularly feared a detrimental effect on business conditions if reports of data breaches at financial institutions persist or if said continued incidents stymie the confidence of customers, whether retail or B2B, in the security of electronic payment technology.
"Cyber risk is arguably one of the biggest risks that businesses face," said AFP President/CEO Jim Kaitz. "Companies fear direct risks from breaches of their corporate technology and they fear fallout from the economic impact of high profile breaches within our financial system."
AFP noted the results of the surveyâ€”including 21% reporting "no updates to cyber-related crisis response were made in 2014" and another 12% with "no plans to do so at their companies in the foreseeable future"â€”paint a picture of a business community still "woefully unprepared" for cyber attacks.
Lack of preparation was also analyzed at FICO World, where it was noted that less than half of US merchants are expected to be enabled with improved, chip-based credit card technology by October 2015, when new standards shifting fraud liability from credit card companies to merchants and B2B manufacturers/service providers become effective. In addition, a study cited by keynote speaker Theresa Payton, an author and former White House Chief Information Officer, showed only 28% of companies strongly insist or require vendors, partners and those in its supply chain to match their levels of risk control.
Payton and FICO CEO Will Landing agreed that companies need to do a far better job of engaging various levels of internal staff, investing in the most efficient technology and soliciting the involvement of customers to help identify and stop fraud. Payton warned, â€śThe question isn't, 'what are you doing to avoid being hacked,' it's 'when you do get hacked, what are you going to do about it?'"
- Brian Shappell, CBA, CICP, NACM staff writer
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The Export-Import Bank of the United States announced this month that it authorized approximately $200 million to finance US renewable energy exports in FY 2014, bringing its total support to nearly $2 billion since 2009. Backed by a congressional mandate to support environmentally beneficial US exports, Ex-Im is committed to empowering American companies to sell their renewable energy goods and services in overseas markets, which results in more jobs for US workers.
"American businesses have the innovation, technologies and skilled workers needed to seize the unprecedented opportunities emerging in the global renewable energy sector," said Ex-Im Chairman and President Fred P. Hochberg. "Our goal at Ex-Im is to fill the gap when private lenders can't offer support, so that US companies can compete on a level playing field in this growing market."
Last year alone, the bank's nearly $200 million in financing authorizations enabled US companies to ship approximately $550 million worth of renewable energy exports to the global marketplace in support of wind, solar, hydropower and geothermal projects. Private sector lenders generally are unable to offer longer financing terms on renewable energy projects, making the bank's support especially important in a sector where capital needs and fuel costs are spread across the lives of projects unlike that of traditional energy projects.
- Source: Ex-Im Bank
Ex-Im Bank is an independent federal agency designed to fill gaps in private export financing at no cost to US taxpayers. Ex-Im, which generated $675 million for the US Treasury's General Fund in FY 2014, signed a cross-marketing partnership with FCIB in March. The memorandum of understanding outlines mutual interest in providing information the will help US business owners finance and expand export sales without leaving their credit departments and receivables at great risk.
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