eNews May 24, 2018

Domestic Banks Struggle with Competitive Commercial Lending Terms

Lax commercial lending terms are spreading across U.S. banks to the delight of borrowers, many of whom say they experienced easier terms in both commercial and industrial (C&I) loans and commercial real estate (CRE) loans in the first quarter of 2018. So why are these financial institutions easing their lending standards? According to the Federal Reserve Board’s April 2018 Senior Loan Officer Opinion Survey on Bank Lending Practices, fierce competition is driving banks to change their policies to better appeal to customers.

The survey, released May 4, collected responses from 94 banks, the majority operating domestically, while others were U.S. branches and agencies of foreign banks. In addition to answering questions about lending terms, respondents also discussed the demand for CRE loans, which included construction and land development loans, nonfarm nonresidential loans and multifamily loans.

Flexible loan standards varied from company to company. For example, the survey concluded large- and middle-market firms—those with annual sales of at least $50 million—were more likely to see eased terms on C&I loans from domestic banks compared to smaller firms. Among 46 large banks, 15.2% reported their credit standards for C&I loan approval had “eased somewhat” during the first three months of 2018. This was compared to the 8% of other banks that reported somewhat eased terms. Only one out of the 71 total banks reported somewhat tightened conditions.

Smaller firms—less than $50 million in annual sales—also saw somewhat eased terms (4.5% of 67 respondents). The vast majority (94%) said terms “remained basically unchanged.”

“Most domestic banks that reported experiencing reduced C&I loan demand indicated that customers shifting their borrowing to other sources of credit and increases in customers’ internally generated funds were important reasons for weaker demand,” the study noted.

Findings were fairly level in regards to CRE lending, where loans were mostly unchanged for construction and land development. However, eased standards were seen on nonfarm residential loans, with tightened standards on multifamily loans.

“More than half of banks citing weaker CRE loan demand thought that a shift in borrowing from their bank to another bank or nonbank was either ‘somewhat important’ or ‘very important,’” the National Association of Home Builders (NAHB) stated in its analysis.

NACM Economist Chris Kuehl, Ph.D., said the rate of commercial lending is up substantially, currently 3.3% higher than May 2017. Unfortunately, as more players get involved, intensity rises. Such parties, including hedge funds, equity funds and real estate investment trusts (REITS), can offer “looser requirements” than banks and, therefore, pose risks, he said.

“To some extent, these nonbank lenders are not really competing with the banks as they often go after the debt-laden companies that banks tend to avoid,” Kuehl said. “But, they are also going after some of those bigger commercial customers that banks have long counted upon. The banks are far more regulated and scrutinized than these other entities.”

Banks are worrying about not only other institutions poaching their best borrowers, he added, but also rising inflation as well as the potential trade war between the U.S. and other countries.

—Andrew Michaels, editorial associate

Click here for a complete breakdown of the manufacturing and service sector data and graphics. CMI archives may also be viewed here.

Credit Congress

Credit Congress—The Time to Register is NOW

Hotel Deadline is fast approaching!

There's still time to take in the urban energy and desert vistas of Phoenix as NACM hosts its 122nd Credit Congress & Expo, June 10-13, 2018. More importantly, Credit Congress offers more than 60 compelling and relevant educational sessions, ranging from the fundamentals to more sophisticated and challenging subjects. Our breakout sessions present topics in the following areas:

  • Business and technical skills
  • Credit management: Core concepts to best practices, industry trends and practitioner experiences
  • Credit and technology
  • Financial analysis
  • International tracts: Global challenges, etiquette protocol and country-specific approaches
  • Leadership and management
  • Legal environment of business credit and more!

Tailor a conference agenda based on your experience, interests and goals that affords the greatest return to you and your organization. It's an unparalleled educational and networking opportunity for any credit and finance professional!

New York Law Helps to Avoid Pass-Through Businesses

Article 15-A of the Executive Law in New York is coming up on its 30th anniversary. Signed into law July 19, 1988, it created what is now known as the Division of Minority and Women’s Business Development (DMWBD) to help level the playing field for construction projects in the state.

The law was put in place to avoid the funneling of contracts through nonlegitimate minority businesses as was the case several years ago with HD Supply Waterworks, American Indian Builders & Suppliers and others. Waterworks ultimately agreed to pay the U.S. nearly $5 million for its participation in the pass-through scheme.

The law in New York is “meant to protect suppliers and legitimate contractors on the job,” said Chris Ring with NACM’s Secured Transaction Services (STS).

Simply put, minority or women-owned business enterprises (MWBEs) are those controlled by 51% of such persons who must also be U.S. citizens or permanent resident aliens, according to Article 15-A. This law was primarily established to:

  • Encourage and assist state agencies to award a fair share of contracts to MWBEs.
  • Review applications by businesses seeking certification and maintain a directory of certified MWBEs.
  • Promote the business development of MWBEs through education and outreach to state agencies as well as MWBEs.

An MWBE must also meet certain qualifications for certification in New York, which include net worth and employment restrictions. Businesses also need to meet specific requirements from the DMWBD for classification as either a supplier or broker.

A supplier, as defined by the DMWBD, is a business that must “(1) purchase and keep these materials in stock, (2) have a method to sell the materials to the public, and (3) not just supply materials for a single contract.” Suppliers also need to make sure more than 40% of the materials come from their inventory, and they must hold the purchasing and selling power of those supplies.

Brokers work in a similar fashion; however, they are not as invested as suppliers. Brokers are third-party intermediaries between the user of the material and the manufacturer or supplier of that product. Brokers are usually small with few employees and do not hold the product in a warehouse.

Suppliers need to provide documentation on top of being certified. There are eight items needed, which include: a detailed inventory, warehouse lease agreement and explanation of delivery. Without all eight documents, the business is classified as a broker and not a supplier.

Kevin Burke, CCE, director of credit and finance with Syracuse, New York-based Erie Materials, believes the law could be more harmful to suppliers than beneficial. Suppliers could be tiered-out of their lien rights with the addition of other players in the construction project’s ladder, pushing suppliers down a rung. However, getting timely and accurate job information up front can be a huge benefit since not all suppliers can have “boots on the ground” to be able to police every job that is provided to MWBEs, said Burke. Having all the information up front, such as where the product is going and what it is being used for, can be what saves a supplier money in the end.

—Michael Miller, managing editor


Online Courses

Fall Online Courses 

A more convenient alternative to the traditional classroom, our online independent study courses offer you the flexibility to choose the most opportune times to study and take exams, be it morning or evening, weekday or weekend. However, they still offer a full network of support. Our facilitators are accessible through email to answer questions, provide guidance and help students prepare for the online exams.

Our priority is to provide students with the best education we possibly can. For this reason, our classes are intensive, college-level courses. Due to the independent nature of our courses presented online, students should be highly self-motivated with the ability to learn from a nontraditional presentation medium. 

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Investors Tread Lightly in Japan Amid Lending Scandals

Japan’s corporate business climate is navigating the treacherous waters of recurring lending scandals. In the past few years, corporate lenders have come forward to admit to approving falsified loans and/or data in an effort to increase company sales. The many scandals puzzle economists, who are wondering how this will impact business in and outside a country that has the world’s third-largest economy behind the U.S. and China.

News of the most recent scandal in Japan broke May 15, when Bloomberg reported regional lender Suruga Bank Ltd. allegedly knew its staff falsified loan documents from a property investor. According to Bloomberg, “pressure to increase profits” was likely behind the laid-back loan screening. Two similar occurrences were also reported at Mitsubishi Materials Corp. and Kobe Steel Ltd. in 2017 and another at Toshiba in 2015.

EY, a company specializing in assurance, tax, transaction and advisory services, reviewed unethical conduct in Japan and other nearby countries in its Asia-Pacific Fraud Survey 2017. Nearly 1,700 employees responded to the survey, which concluded that bribery or corruption has almost doubled in the Asia-Pacific since 2013, currently at 63%. Slower growth—the reason behind the Japanese scandals noted by Bloomberg—was the second-highest challenge to businesses in the Asia-Pacific. Economic uncertainty ranked highest at 64%, with increased sector regulation and political instability at 59% and 50%, respectively.

“Since the 1980s, many Japanese companies have struggled to deliver growth [and] had debt and a corporate culture that emphasized subservience,” Bucephalus Research Partnership Founder Robert Medd told Bloomberg. “In effect, [that’s] the perfect storm for corporate malfeasance.”

Hesitation to conduct business in Japan wouldn’t be out of the ordinary, but the latest lending scandals don’t appear to have significantly deterred respondents in FCIB’s May 2018 International Credit and Collections survey. Instead, the U.S. administration’s steel and aluminum tariffs could contribute to future business decisions. Seeking Alpha stated Japan was not exempt from the tariffs and hints retaliatory tariffs against the U.S. are possibly in play.

The tariffs weren’t specifically cited in the FCIB survey; however, the number of respondents who extended credit in Japan decreased by 6% since October, while the number of those who did not extend credit doubled to 12%. The sales to existing customers saw a modest bump to 93% but a 2% drop in sales to new customers.

As the country’s third survey since August 2016, respondents reiterated that credit managers must “know your customer” before engaging in any business transactions in Japan. Understanding a company’s financial health can help mitigate the risks of becoming involved in a corrupt company.

“Make sure you get a credit application and validate it, the entity and financial records,” a respondent said. Another respondent recommended asking the customer for three U.S. trade references as well as developing an understanding of the country’s business practices and social norms. The majority of respondents agreed that Japanese companies hold themselves to high standards when it comes to making payments, so it is generally a safe market with minimum risk in regard to receiving payment.

“Ensure you are dealing with a well-established company and that you have all paperwork in place, e.g., a contract,” a third respondent said.

-Andrew Michaels, editorial associate


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Managed by construction credit professionals, NACM’s Secured Transaction Services (STS) answers your most technical questions, takes pride in handling your projects and triple checks all work for accuracy. After all, we know how important each job is to your company.

We have you covered with:

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Trade War with China ‘on Hold’ but Not Over

The U.S. and China agreed to put their trade war “on hold” after a series of tariff threats from both countries. U.S. Treasury Secretary Steven Mnuchin said on May 20 both powers look to work on a wider trade agreement in the meantime, beginning first with a framework that will address future trade imbalances.

This announcement comes after two days of vehement discussions between U.S. and Chinese delegates. The U.S. demanded China purchase $200 billion worth of goods and services to compensate for the trade deficit, which led to further negotiations and the eventual pause on the war to untangle foundation issues. China also rejected restrictions on sorghum exports and other restrictions on agricultural goods in addition to the steel tariffs.

For now, any immediate anxieties about international trade with China can be put on hold. But this pause in negotiations still leaves the quality of the market trade with China ambiguous across several outlets from steel to agriculture.

According to a report from Fitch Ratings, traders in agriculture and protein companies are in some of the most manageable fields regarding international trade with China. These companies typically have the most flexibility in terms of diverse asset bases, risk management practices and/or general pliability related to evolving trade policies.

About 15% of the U.S.’ $135 billion of agriculture products stems from soybeans, with China as the largest consumer of soy in the world, according to the USDA. A 25% tariff threat on soy exported to China announced during the trade war put downward pressure on domestic soy prices—but with the trade war halted, this risk began to diminish.

The future for the war still presents its risks, with the eventual outcome still unclear. NACM Economist Chris Kuehl, Ph.D., speculated the U.S. president is playing “chicken” with China, beginning with outrageous deals and anticipating a backdown as well as a possible agreement on something less drastic.

“Trump has staked out an extreme position to see what the other side will do and what they are willing to negotiate,” Kuehl said. “In every case, the original demands have been dropped and some kind of new deal was cut—even if it meant completely abandoning the original position.”

Kuehl also theorized the trade war began as a means to appease Trump’s core supporters. Many of his followers are anti-trade, anti-foreigners, anti-immigrant, etc., and restrictions on international trade follows the pattern of his xenophobic brand.

Mnuchin and Trump’s top economic adviser, Larry Kudlow, said Commerce Secretary Wilbur Ross plans to go to China to continue negotiations. In an interview with ABC’s This Week, Kudlow said Ross will explore areas in energy, liquefied natural gas, agriculture and manufacturing—places Kudlow predicts will see “greatly significant increases.”

-Christie Citranglo, editorial associate


FCIB at Credit Congress 2018

Educational Sessions for Global Credit Professionals—There's Still Time

June 10-13, 2018, Phoenix, AZ

Held in conjunction with NACM's Credit Congress, this is a must-attend event for anyone doing or planning to do business abroad. General, intermediate and advanced sessions are offered to benefit the experienced international trade credit professional as well as those just entering the global market and wishing to learn new skills.

International highlights:

Dig into Predictive Markers. Learn how analysts use readily available market data to predict corporate and sector failures. Find out how to use this info to manage counterparty risks for your company.

Get a Grasp on Technology. Hear firsthand from credit professionals how technology providers solved specific credit-related challenges.

Decipher International Financial Statements. Learn how to tackle financial statements from other countries to glean the most value.

Get Heard. Discover how to navigate cross-cultural communication challenges. Gather tips and techniques for communicating with customers and team members from other countries.

Establish a Network. Grow connections to other professionals who face similar issues and challenges. Build a strong network that strengthens every credit professional.

WCR Levels Off Despite DSO Increase

Working capital requirement (WCR) has stabilized over the last five years, according to a new report from credit insurer Euler Hermes, coming in at 69 days in 2017. The equation for WCR is days sales outstanding (DSO) plus days inventory outstanding (DIO) minus days payable outstanding (DPO). This financial metric “gives the amount of financial resources needed by a company to ensure its production cycle and its repayments of both debts and upcoming operational expenses,” according to the report.

The research is part two of a payment behavior study, which first reviewed DSO across 40 countries and 20 sectors. Euler Hermes reported a two-day increase in DSO last year. The leveling off of WCR is due in part to “a relaxation in delays of payment to suppliers and from a sounder inventory management,” noted the report. DPO increased one day, while DIO declined one day. An increase in WCR comes from a higher DSO, higher DIO or a lower DPO.

In Asian emerging markets, North America and Western Europe, two out of three countries saw an increase in WCR. Japan was up eight days, while Germany (+7), the U.S. (+5) and France (+3) also increased. Italy, Belgium, China and Singapore were the exceptions in those regions, resulting in a WCR decline from a drop in inventories in 2017. Across Eastern Europe, Latin America and Africa/Middle East, inventories dropped 10 days on average, resulting in a lower WCR.

Overall, more than half of all sectors saw a rise in WCR last year, especially those more vulnerable to inflation like construction, electronics, metals and technology. These sectors registered an increase in DSO as well as WCR last year, translating to high risks of nonpayment from customers and higher financing requirements for operating cycles.

Pharmaceuticals was an outlier, with a decline in DSO as well as WCR from 2016 to 2017. Technology showed the most change in WCR from year to year at an additional 11 days, yet aeronautics has the highest WCR at 129 days.

The United States is in the lower half, with an average sector WCR of 66 days. Like many countries, its aeronautics WCR was its highest sector, while telecom was at 17 days. The U.S. construction WCR (80 days) was slightly less than the sector average of 88 days.

Italy, Belgium and the Netherlands had the best WCR of the countries surveyed, while China, Greece, Taiwan and Saudi Arabia were in the cellar.

-Michael Miller, managing editor


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