April 16, 2015
New studies on risk and payment practices find the Americas performing significantly better than their European predecessors and most emerging economies outside the region. However, two of the important up-and-coming markets within continue to live up to reputations of being high-risk/big-reward.
Coface, in its Country Risk 2015 handbook, said global risk levels likely will continue to be uneven throughout the year, even if there is prudent optimism thanks largely in part to the United States. Challenges for China to maintain high growth and for the European Union and emerging economies to rebound from 2014 missteps remind business and credit decision-makers of many past problems.
"Just as the financial crises are lastingly affecting the confidence of the economic players, they are also having a long-term impact on credit," Coface CEO Jean-Marc Pillu wrote. Atradius' Payment Practice Barometer tracking late 2014 activity also found the Americas performing generally better than other regions. The two firms, however, shared concerns noted in a February 2015 NACM Business Credit magazine article regarding the generalized, overall reliability of debtors Mexico and Brazil compared with other power or emerging economies.
Atradius found that, of the four biggest economies in the Americas, Mexico and Brazil performed worst in payment practices. The study notes that respondents from the region and, individually, within the U.S. see the biggest risks to business profitability as maintaining adequate cash flow and the related collection of outstanding invoices. For example, the worst days sales outstanding (DSO) levels were posted in Brazil, at an average of 59 days. Mexico followed in second place (48 days).
Insufficient availability of funds is the top reason for payment delays, with Mexico posting the worst rate (40.5%). Inefficiencies of the banking system continue to be another big area of concern therein, with Brazil posting the worst performance in that category (39.7% there blame late payments on system issues) and Mexico dubiously in second (33.8%). Atradius theorized that part of the problem with the banking systems stems from the U.S. and Canada increasingly accepting a wide variety of payment forms, including newer, electronic-based ones that their southern counterparts simply cannot handle yet.
Coface rated the risk levels for both Mexico and Brazil at A4/"quite acceptable," or about middle of the road among the seven category levels. But it listed a number of high-concern areas for both. Its subsequent report specifically focused on Mexico, The Mexican Economy Faces Headwinds, notes the financial effect of opening the oil and gas industries to private investment is disappointing many that had expected a boon, in part because of the drastically lower oil prices and the country's dependence on its oil reserves. Echoing previous NACM reports, Coface also remains concerned that the Nieto administration, which was very popular for its pro-business and anticrime stance at the beginning of its term, is losing its grip on popularity amid coverage of some corruption allegations and a return of drug cartel-related crime fears, primarily the highly publicized murder of dozens of students late last year.
- Brian Shappell, CBA, CICP, NACM managing editor
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While commercial bankruptcy filings overall were down 19% for the first quarter of 2015, the number of bankruptcies among publicly traded U.S. companies has reached its highest first-quarter level since 2010, as reported by data analysts from research firm New Generation Research Inc./Bankruptcy Company News and Reuters, among others.
The former noted that, in the first three months of this year, 26 publicly traded U.S. corporations filed for bankruptcy, more than double the pace of 2014's first quarter and just about halfway to the 54 filings from such companies in all of last year. Part of the mainstream media concern perhaps stems from the huge dollar amounts involved.
The value of assets for a half-dozen of the corporations that filed so far in 2015 exceeds $1 billion, according to New Generation. Total first quarter filings for publicly traded companies this year comprise about $34 billion in assets. Both data points represent records for this decade.
As feared by numerous economists, plunging prices of crude oil and other commodities is a significant factor in the rise, as most of the recent bankruptcy filings are in some way connected to resources, particularly oil. As reported in a NACM blog in March, crude oil prices have dropped precipitously since the summer. Factors such as these and others have made the domestic industry, as well as those that supply it with materials or services, one to watch for potential restructuring activity. Moreover, an increasing number of players in that sector are newcomers attracted by the boom conditions and, thus, lack the experience and skill to adjust quickly enough to a market that has turned volatile, said Kit Pettit, a senior associate with the Pennsylvania firm Bernstein-Burkley, PC. Pettit and others predicted problems for the oil and commodities industries as far back as July, as noted in NACM's Industries to Watch feature in eNews and the Credit Real-Time blog, highlighting the mounting problems tied to the rapid, unsustainable expansion in the industry.
If prices hold at these levels or continue to fall, solvency struggles could increasingly affect more established companies if they are overleveraged, Pettit added. Restructuring experts nationwide identified the global energy sector in a recent survey by AlixPartners as the area with the most potential for restructuring activity this year.
If the first quarter's pace continues, more than 100 public companies will file by year's end. Reuters noted that last happened in 2010 (106 filings), which followed an abysmal year (211 in 2009).
The analysis also states restructuring specialists have said there's a rise in companies trying "to renegotiate looming debt maturities or loan covenants, particularly energy companies that are hoping oil prices will rebound." Other noteworthy areas among the more than two-dozen bankruptcy filings this year include the ever-struggling retail sector, most notably in the form of the Radio Shack filing, and the oversaturated gaming sector, as seen in the Caesar's case.
- Diana Mota, NACM associate editor
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Although 16 times more is spent on consumer research than business research, â€śbusiness-to-business (B2B) companies need to understand their market just as much as consumer-facing ones,â€ť according to www.circle-research.com.
The firm questions the difference for several reasons. â€śBehind every single consumer product sit many, many B2B products,â€ť it said. Likewise, B2B outweighs B2C when it comes to size. â€śFor example, B2B-led online marketplace Alibaba is worth three times as much as the more famous B2C-led equivalent eBay (based on market capitalization). And thatâ€™s not an isolated example. Around two-fifths of the U.K.â€™s largest publicly traded companies (the FTSE 100) are B2B. B2B is an economic powerhouse; yet in the world of market research, itâ€™s the poor cousin.â€ť
Circle Research attributes the difference, in part, to the size of the intended audience. In many cases, B2B products and services target small populations. The firm demonstrates its point using the telecom market in the U.K. â€śA manufacturer of mobile network infrastructure equipment has just four major prospective customers in the U.K.â€”Vodafone, EE, O2 and Three. In contrast, each of these operators has a target market numbering many millions. This means that sample sizes in B2B research, and therefore project fieldwork costs, are much lower than in B2C.â€ť
Cultural differences between the two sectors, however, play a part as well, the firm said. B2B companies rely more on sales and engineering than research when making decisions. â€śThis means that the traditional champion of the customer voice, the marketing team, can be side-lined.â€ť
The company also finds that purchase decisions focus more â€śon functional criteria and structured decision making,â€ť which â€ścan create a false sense of security; a sense that itâ€™s obvious who the customer is and what they need.â€ť
Because relationships are more important in B2B, front-line players could feel as if they know their target market. â€śThat needs to change,â€ť Circle Research said. â€śB2B buyers are behaving differently nowadays, and this means that suppliers need to start putting the voice-of-the-customer at the heart of decision making.â€ť
B2B buyers approach potential suppliers less often to discuss and learn about options. â€śThis made the sales team critical not just for the supplier, but also the buyer,â€ť the firm said. Today, prospective buyers use technology such as the Internet to become informed as well as narrow down their list of potential suppliers, reducing their involvement in the decision-making process.
According to a Google and CEB (the Corporate Executive Board Company) study, almost three-fifths of the buying process occurs before the average buyer reaches out to prospective suppliers. â€śSuppliersâ€™ own actions are further widening the distance between buyer and seller. Frost & Sullivan [a growth strategy firm] estimates that by 2020, $6.7 trillion worth of B2B transactions will be through e-Commerce,â€ť Circle Research said.
These changes in how business is done means B2B companies need more research to keep them close to customers, it concluded.
- Diana Mota, NACM associate editor
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The U.S.-South Korean Free Trade Agreement (FTA) was designed to promote trade between the two nations through the lowering or elimination of tariffs and regulations, all in an effort to open markets to one another's companies. However, the critics are out in force in both nations of late, which does no favors for those hoping to gain more support for the multilateral pacts still being negotiated.
The dealâ€”one of three put into effect during the Obama presidency after originally being crafted during the Bush administrationâ€”faces increasing assertions that South Korea is stalling in a wide variety of industrial areas despite the deal once being thought to be a no-brainer positive for businesses. Meanwhile, the Koreans claim the U.S. is doing the same thing in an effort to slow the pace of auto exports from South Korea.
These attacks matter, as this pact is something of a model for what the U.S. wants to see in the much bigger Trans-Pacific Partnership (TPP). Most analysts assert that the attacks on the pact with Korea are really a thinly disguised attack on the bigger agreement. The focal point for U.S. critics is the growing deficit in tradeâ€”the U.S. now buys much more from Korea than the Koreans buy from the U.S.â€”a gap of $20.6 billion in 2013, as opposed to one of $16 billion the year before. The primary problem is that Korean goods are far more popular in the U.S. than American goods are in Korea for various reasons (cost to produce, currency value issues, etc.). However, the question that few manage to ask is whether the trade surplus enjoyed by the Koreans is a result of the U.S. buying more imports or due to the fact that Korea is replacing other nations that once sold to the U.S. Evidence exists that Koreaâ€™s expansion is coming at the expense of the Japanese and Chinese and not due to the fact that the U.S. is importing any more than it ever did.
The TPP involves a number of emerging Southeast Asian nations as well as the U. S., Canada, Japan, Chile and Peru, among others. The TPP is supposed to bring together the nations of the Pacific in some kind of trade partnership that will advance their respective economies. It was supposed to be the key to the U.S. "pivot to Asia" policy and, indirectly, a way to ease some of China's dominance in the region. But it has been fraught with delays, diplomatic errors, lack of transparency and allegations that the U.S. and Japan have been bullying their way through the trade talks.
- Chris Kuehl, Ph.D., NACM economist
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The U.S. economy remains firmly in expansion territory though the level of activity in some sectors and industries is being stymied somewhat by lower oil prices and/or the strong value of the dollar compared with other currencies used for trade of goods and services, according to the Federal Reserveâ€™s period roundup of economic activity.
The Fed's Beige Book, the latest of which tracks conditions through April 3, finds all 12 districts reporting some level of growth or at least "steady" conditions. The best performances, all described as growing at a moderate pace, can be found in the Richmond, Chicago, Minneapolis, Dallas and San Francisco districts. Atlanta and Kansas City appear to be spinning their wheels more than their counterparts, according to Fed data.
Fed contacts report mixed conditions concerning manufacturing, though automotive activity is rising again. The service side anecdotally appears to be performing even better, with confidence increasing heading into the spring and summer months as well as a boost particularly from providers of high-tech solutions.
Winter weather earlier in the period acted as a drag on sectors such as agriculture, construction and travel (notably business-related trips). Fed contacts also expressed ongoing concern about the most recent West Coast port disruptions, the value of the dollar negatively impacting exporting activity and the loss of jobs and capital investment by oil companies as part of the fallout of dropping oil prices.
Still, optimism, albeit of the cautious variety, is notable in the grand scheme of things. Perhaps the increased loan demand or even the recent stability of credit and banking conditions in the latest Beige Book underscores said trend.
- Brian Shappell, CBA, CICP, NACM managing editor
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