In the News
February 15, 2018
Construction Sector to See Gains in 2018, Risks Remain with Smaller, Indebted Firms
Expansion in the overall U.S. construction sector is likely to continue this year, bolstered by strong economic growth as profit margins are expected to remain stable and price increases are offset by higher costs.
Construction starts are anticipated to grow by 5% in 2018 led by double-digit growth in commercial construction, according to a newly released analysis of the sector by credit insurer Atradius. Construction spending is expected to increase 7%, thanks in large part to bumps in private residential spending.
However, Atradius analysts are less sanguine about the prospects for greater public investment in the nation’s infrastructure. “Despite repeated announcements by the U.S. administration that it will invest in infrastructure improvements, a public construction spending increase remains uncertain, as political gridlock and shifting priorities have so far stifled promises to boost infrastructure spending,” the credit insurer stated in the report. Industry groups have issued statements that generally support the U.S. administration’s infrastructure plans, though some, such as the Construction Employers of America, expressed their desire for more federal funding in such a plan.
Other potential headwinds to the sector this year include a combination of rising prices and higher interest rates that could impact the housing market, especially for first-time buyers, who have grown in number since 2011, Atradius said.
Construction businesses’ overall leverage and reliance on bank finance are high—companies with consistent profitability, healthy balance sheets and prompt payment trends can typically obtain lines of credit, as promising construction projects remain attractive to lenders in the growing market, the firm said. “However, the volatile nature of the construction sector continues to bottleneck financing options for companies with liquidity issues.”
Payments in the industry take 38 days on average to complete, with 60-day and 90-day terms common, Atradius said. In 2017, late payment notifications increased only slightly compared to 2016 and payment experience in the sector has been generally decent. The credit insurer doesn’t expect to see an increase in insolvencies in 2018. In fact, the risk appetite of Atradius across all construction sectors, including residential, commercial, public and materials, has grown. “However, caution is advised with small construction businesses, which still show higher bankruptcy rates than their peers in other industries.”
The firm suggests credit managers obtain and review financial statements of customers on an annual basis, with supplemental “soft credit information” to be reviewed more often. Trust gained through experience with customers builds comfort levels, and a reduction or withdrawal of trade insurance cover will be considered by Atradius if the buyer shows “significantly worsening results, including losses, heavy debt levels, problems with working capital, cash flow, liquidity and deteriorating payment trends.”
– Nicholas Stern, managing editor
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How New Accounting Standards Change Financial Statement Analysis
New global accounting standards may give trade creditors a clearer image of a company’s standing when it comes to credit investment, while also enhancing provision requirements for expected credit losses.
Under International Financial Reporting Standards (IFRS) 15, regarding revenue from contracts with customers, and U.S. GAAP Topic 606, Fitch Ratings reported on Feb. 9 that companies in different jurisdictions must report revenue “more consistently and transparently,” including account and disclosure information. Having this information readily available enables creditors to stay up-to-date with customers and their business. On the other hand, the report stated that the now-accessible information could show customers’ current and/or potential weaknesses, leading to concerns from investors.
IFRS 9 (financial instruments), which became effective on Jan. 1, 2018, also changes the game for creditors by requiring corporates with financing operations to make provisions for expected credit losses, according to a credit risk manager who is an NACM member.
“The framework is more reliable, so the statements should be more meaningful for trade analysts,” the member stated. “Of course, how IFRS 9 is or will be implemented [in companies] depends on auditors and the guides provided to them. We will see more future-driven statements.”
At this point in time, companies are in a “period of transition” and figuring out how to deal with IFRS 9, which the creditor said will be “a learning curve.” Near-term impacts are unlikely since concrete results are at least a year away.
The member’s thoughts concurred with Fitch, which reported that the new accounting standards could affect ratings over time, “particularly if they lead to significant change in a company’s business model.” Fitch added that all hope isn’t lost for some sectors; however, because if the outlook is bright for anticipated revenue, companies’ cost of capital may decrease thanks to rising shareholder interest.
Overall, the creditor said IFRS 9 is expected to have positive effects on trade analysts, who will now be able to see risks in real time as well as the future.
“From our point of view, this is an additional empowerment for credit risk management,” the creditor said. “We are required to provide input to our accounting colleagues. We are the ones who have the expertise to provide information on risks of default. Therefore, my experience is that this will strengthen the role of credit management.”
In the creditor’s company, processes are already in place for IFRS 9, showing positive impacts on the role of credit management and analysts. The creditor said it should be easy to monitor everything and then review the results and “lessons learned” at a later date—most likely in the next year.
– Andrew Michaels, editorial associate
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Make Judgments Easier by Following Requirements
Material supplier payment rights can be complex even with statutes that spell out the steps that must be taken to ensure security. One appellate court is not taking these rights lightly and affirmed a lower court’s decision to side with the supplier and not the surety and subcontractor. This was in part due to court interpretations, but also because the supplier followed the requirements to stay protected. Meanwhile, the subcontractor also claimed it was owed money from the general contractor (GC).
Bear Industries (Bear) was supplying limestone and sand materials to Amtek of Louisiana (Amtek) from May 2012 to July 2013 for a Walmart project in New Roads, Louisiana. Hudson Construction Company of Tennessee (Hudson) was the GC, and Hanover Insurance Company (Hanover) was Hudson’s surety that furnished the project’s bond. At one point, Hudson stopped making payments to Amtek, and Bear filed suit against Amtek and Hanover under the Private Works Act for materials valued at nearly $260,000.
Amtek disputes had to be arbitrated due to its subcontract with Hudson. After the arbitration and motions to confirm it throughout 2016, a trial court heard Bear’s nonpayment claims. In roughly two months’ time, the court ruled in favor of Bear; it found Bear was owed attorney fees as well. Hudson and Hanover claimed Bear did not comply with the Private Works Act and had an invalid lien.
The act was established to give rights and protect materialmen, laborers and subcontractors who provide improvements on immovable property, according to the Louisiana Court of Appeal, First Circuit, which affirmed the October 2016 decision of the trial court in January. The appellate court also confirmed that “pay if paid” is not a defense for a surety, and that it would defeat the purpose of having the Private Works Act in the state.
“Allowing a surety to assert a ‘pay if paid’ clause to defeat payment to a subcontractor on the basis that the contractor has not received full payment from the owner, where the owner has escaped liability to the subcontractors by relying on the payment bond, would render the protections afforded to laborers and suppliers on private works projects set forth in the Private Works Act meaningless,” stated the First Circuit Court.
Arbitration amounts awarded also showed the arbitrator believed Hudson would pay off Bear’s lien, which was included in the amount awarded to Hudson.
What You Can Do to Be Protected
Asking for a copy of the bond up front can be a lifesaver. “This is sometimes the most expensive question never asked,” according to the Construction Law Survival Manual from Fullerton & Knowles, PC of Northern Virginia. There are no legal bond term requirements for a private project, so gathering the information or finding out about the bond’s existence can be difficult when owners and GCs do not advertise it to lower tier suppliers. “On private projects, provisions can be added that create extra ‘hurdles’ for any potential claimant,” the Manual notes. This can include a different timetable for noticing and other notice requirements. Having all the information and following the statutory requirements for notices and liens are two factors that can land you on the right side of a potential litigation process.
– Michael Miller, associate editor
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Artificial Intelligence—Latest Wave of Change in Corporate Accounting
Artificial intelligence (AI) is becoming more commonplace in society and the workforce, where information is collected and shared among many, including those who work in financial systems and accounting departments.
According to accounting automation software provider Blackline, AI software has already been integrated into accounts receivable (AR) and accounts payable (AP) departments across the globe. Some results are promising, but analysts say the unfamiliar terrain still warrants concern.
A 2017 Censuswide survey on behalf of Blackline gathered input from 300 CFOs, financial directors and accountants in the United States about AI’s role in corporate accounting departments and what its use means for work product and human intervention. A similar survey was conducted in Australia in late 2017.
Respondents in the U.S. survey worked for companies with annual revenues of more than $150 million, Financial Regulation News reported, almost half (46%) of whom said AI is currently part of their organization. Meanwhile, 30% of respondents said they were “investigating” AI use in the workplace.
One question raised in these studies was that of liability, specifically, if something goes wrong, who is at fault? While a few respondents (16%) believed the AI developer would be at fault, the majority (45%) said the fault lies with the finance executives. However, most AI uses only existing information, the survey reported, making liability concerns less worrisome.
NACM Graduate School of Credit and Financial Management (GSCFM) alumnus Don Giallanza, CCE, said in his experience, he often uses AI tools for “a quick reference” when determining whether to extend credit.
“It’s one of the tools in our arsenal, but it’s not something we would use as a standalone,” Giallanza said. “When you go through and do your due diligence, you’re looking for more than just one naysayer. ‘Is this consistent across the board? In the event that I have somebody who’s paying me slowly, are others seeing that? Was the invoice not received or is the issue that the customer can’t pay it or is there something more to it?’”
The use of AI has picked up over the past few years, he said, and it’s even used by some companies to extend a $25,000 or $50,000 line of credit. Giallanza said he still relies on direct contact with customers.
“Once upon a time, there was a credit application filled out and forwarded to you with everything attached,” he said. “Today, they can do that online. … It is a welcomed change because it helps us move along and turn in decisions a lot quicker.”
In the meantime, Blackline reported that the legality of AI making financial decisions that could impact a company remains up in the air. Jobs within a company won’t necessarily disappear because of AI, but rather AI will allow employees to take on more important tasks that are better suited for human intervention.
– Andrew Michaels, editorial associate
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National Trade Credit Report Welcomes New Preferred Partner
NACM’s National Trade Credit Report welcomes Intellimind as a new preferred partner. The Paris, France-based firm specializes in business-to-business credit management solutions.
As an FCIB member, it comes as no surprise that Alain Mathieu, Intellimind CEO, is familiar with the NTCR. He believes this is a great opportunity to help Intellimind customers and NTCR users—access goes live in the second half of this year. Mathieu will be at NACM’s Credit Congress & Expo this June in Phoenix, Arizona, as an exhibitor to help users understand how the NTCR and Intellimind can benefit them to make smarter credit decisions. Intellimind’s presence in the U.S. is aimed at helping users from the United Kingdom to Australia gain access to NTCR data, and it gives more exposure to the report’s global users no matter the time of day.
“From Intellimind’s Credit Voyager platform, users can request credit reports directly. … It will enable the user to have the NTCR with internal information on customers in only a matter of seconds,” said Mathieu. Intellimind will also “offer NACM members another method to easily contribute their accounts receivable data as well as access the NTCR—all from Intellimind’s interface,” noted NACM Tampa Executive Vice President Gina Calabrese Sylvester, CMP, CGA. It’s a one-stop shop that transforms risk into opportunity by allowing users to send commercial credit requests and request credit reports and financial statements, among other solutions.
Credit Voyager came about while Mathieu was still in the banking industry. He thought there should be a better way of entering numbers and figures into a spreadsheet, so he began building a prototype to help save time with reports.
Why You Should Use the NTCR
The five Cs of credit are the backbone of the industry. Character, capacity, capital, collateral and conditions each bring a different aspect to credit. The five Cs will help you, as a creditor, know your customer. To accurately know your customer, a credit investigation may be needed. This is where the NTCR comes in handy.
Benjamin Franklin wrote, “An investment in knowledge pays the best interest.” That is exactly what the NTCR is: knowledge and information. Contributing to the NTCR gives creditors numerous benefits to help make well-informed credit decisions. The report paints an accurate picture of a business’ payment trends and habits. It also features public record data, portfolio risk analysis and a predictive score based on tradelines gathered by NACM Affiliates.
Reducing fraud, protecting your company and saving time are among the many reasons to contribute your credit information to the NTCR. The NTCR can increase your leverage with customers and enhance your customers’ creditworthiness profiles as well.
“All of the preferred partners provide flexibility for the NACM members. … [Intellimind] does bring more awareness to the credit community about NACM and the products and services available to them,” said Sylvester.
Learn more about the NTCR and its other preferred partners.
– Michael Miller, associate editor
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