eNews August 16, 2018
In the News
August 16, 2018
Chinese Corporate Debt Climbs, Creates Lending Concerns
How can a country’s economic conditions improve in the wake of growing debt? Chinese government officials are awaiting an answer to this very question as they strive for a much-needed boost during a time when corporate debt levels are packing a punch to the economy. Despite the nation’s recent attempts to reignite the economy using relaxed credit conditions, economists are baffled by China’s rising corporate debt, with defaults of $5.5 billion so far in 2018—nearly $2 billion more than last year.
According to a Reuters report on Aug. 10, 16 Chinese corporations have defaulted on 34 corporate bonds, 40% of which occurred in the past two months. This year’s corporate defaults have already exceeded those in 2017 when China saw 30 corporate defaults at $3.81 billion. The majority of defaults come from private firms, some missing more than one payment, including Wintime Energy Co. Ltd. with four missing payments and CEFC Shanghai International Group Ltd. missing three.
South China Morning Post and Fitch Ratings reported in June the Chinese government’s attempts to lower borrowing levels to address debt would, in turn, hurt business investment.
“While China has moved to ease credit conditions and encourage investment in corporate bonds to support struggling private firms amid signs of slowing economic growth, corporate issuers have not been the main beneficiaries of these policies,” Reuters stated. “Despite the relatively high number of cases this year, China’s policymakers have said that the default rate remains much lower than in many other countries, and that risks in the bond market are generally controllable.”
In the U.S., for example, corporate debt exceeded $6 trillion in June, S&P Global reported. However, the cash-to-debt ratio reached a record low in 2017 at 12%, just below the 14% a decade ago. On Aug. 13, Moody’s noted corporate credit quality in Mexico is expected to be “largely stable” through mid-2019.
FCIB’s latest International Credit and Collections survey for China, conducted in May, reflected these ongoing issues. Compared to the June 2017 survey, there were twice as many respondents this year who recommended credit managers not extend credit to customers in China. The number of respondents who said they would extend credit dropped from 85% to 70% in less than a year, while more than half approved payment terms between 31 and 60 days.
“I have hundreds of customers in China, so there are multiple reasons for dispute, [such as] cash flow, payment practices and just general slowness,” a respondent said.
“This is not the China that we were selling to one year ago,” another respondent added. “Our customer is the government of China and they have been extremely difficult to deal with.”
To avoid risks of payment default, respondents suggested creditors secure payments with letters of credit, cash in advance or cash on delivery. Many creditors also noted they do not extend credit terms and even seek credit insurance to protect their companies.
—Andrew Michaels, editorial associate
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Retention Not Withheld in California Case Where Dispute Existed
In 2010, Universal City (Universal) hired Coast Iron & Steel Co. (Coast Iron) to build a new ride at the Universal Studios Hollywood. Coast Iron subcontracted the installation of the metalwork to United Riggers & Erectors, Inc. (United Riggers). The initial subcontract between Coast Iron and United Riggers was for $722,742, but was increased by change orders to approximately $1.5 million. United Riggers completed its work to Coast Iron’s satisfaction.
In August 2012, Universal made its final retention payment to Coast Iron. However, Coast Iron refused to pay any retention to United Riggers due to disputes over change order requests from United Riggers which increased the subcontract price by approximately $350,000. United Riggers then filed suit to collect these sums, including prompt payment penalties under California Civil Code Section 8814 for failure to timely pay retention. Coast Iron ultimately paid all of the $149,602.52 in retention owed to United Riggers during the litigation. After a bench trial, the trial court entered judgment in favor of Coast Iron. The Court of Appeal reversed the trial court’s ruling on the statutory claim for failure to make timely retention payments. The California Supreme Court affirmed.
Under Section 8814, subdivision (a), if retention has been withheld throughout a project, a direct contractor must pay retention to its subcontractor within 10 days of receiving retention from the owner. However, under subdivision (c), “[i]f a good faith dispute exists between the direct contractor and a subcontractor, the direct contractor may withhold from the retention to the subcontractor an amount not in excess of 150% of the estimated value of the disputed amount.” The question before the California Supreme Court was whether this exception allows withholding retention when there is any dispute between the parties, or only when there is a dispute directly relevant to the specific retention payment that would otherwise be due. The parties agreed that the adequacy of United Riggers’ performance of the work, for which the retention was owed, was not in question. Instead, their dispute concerned whether United Riggers was owed monies over and above the subcontract price.
After considering the text, legislative history and purpose of Section 8814, the California Supreme Court concluded that the right to withhold retention from a subcontractor is limited to instances where there is a dispute over the specific payment in question. The Court noted that this interpretation comports with the statute’s remedial purpose, which is “to ensure timely payment of undisputed amounts to contractors, without impairing the ability of payors to withhold amounts as security when the obligation to pay those specific monies is in doubt.”
The Court held that a direct contractor may not withhold a retention payment that is part of an undisputed amount, simply because a dispute has arisen over whether additional amounts over and above the retention might also be owed. Allowing a direct contractor to withhold 150% of an undisputed amount would create a windfall—the direct contractor “would be able to secure for itself an interest-free loan of the additionally withheld amount … this is precisely the evil the Legislature sought to eliminate when it enacted [Section 8814].”
Luke Nicholas Eaton is an associate in the Construction Practice Group of Pepper Hamilton LLP, resident in the Los Angeles office. Luke's practice focuses on construction, business disputes and commercial collections, representing clients in both litigation and arbitration, in the United States and throughout Europe.
Connect and Learn with Credit Professionals in your Region
Regional conferences are a wonderful opportunity for members to network and share news, information and tips with fellow credit professionals from their respective geographic regions.
Central Region Credit Conference
September 13, 2018
Hosted by: NACM North Central
Western Region Credit Conference
October 10-12, 2018
Salt Lake City, UT
Hosted by: NACM Business Credit Services, Utah & Arizona
All-South Credit Conference
October 21-23, 2018
Clearwater Beach, FL
Hosted by: NACM Tampa
For more information and to register, contact the local Affiliate.
Late Payment Legislation Sees Pushback in UK Despite Benefits
Following the collapse of U.K. construction company Carillion, whispers of late payment legislation have swept across the area. Since late payments led to Carillion’s demise and the unemployment of thousands of people, legislation to regulate payments may be the next step for the U.K. Other similar companies have pushed back on this idea, claiming the market will naturally adjust to compete with the supply chain. But with the danger of late payments beginning to hit other industries, such as retail, the market may not be able to adjust quickly enough to enact change.
In a recent Construction News article, Chief Executive of Morgan Sindall John Morgan denounced the legislation, relying instead on the market adjusting naturally. Morgan pointed out how his company improved its payments record, noting that Morgan Sindall pays within 44 days, which is better than the average of the top-20 largest contractors in the U.K.
“We’re all competing for the very best supply chain, and one of the best ways to compete is to be one of the best payers,” Morgan said in the article. “So the market will make contractors pay quicker; it doesn’t need regulation.”
But with the U.K.’s retail industry and other construction companies suffering from the same late payments plague, even eight months after Carillion’s fall, the market may not be adjusting quickly enough. Retail supply chain House of Fraser was bought by Sports Direct just after announcing it needed funding by Aug. 20. According to the BBC, waiting for payments has worried several suppliers in retail. House of Fraser had been in business since 1849 before being bought out.
A lack of late payment legislation has toppled the biggest companies in the U.K., and it’s also detrimental to several small businesses. According to a recent PrintWeek story, the Federation of Small Businesses estimated that £14 billion is being withheld from smaller firms because of late payment. Late payments hurt small business the most in the U.K. as they’re usually on the bottom of the supply chain, have tighter cash flows and smaller margins compared to larger companies.
The small businesses that suffer more than others seem to be the ones relying on longer, bigger projects with large companies as opposed to several smaller jobs. It can be enticing for small companies to work with firms like Carillion, but if these big firms aren’t willing to pay on time, the allure of working with them quickly fades.
Under current EU law, firms are able to charge interest on overdue balances. The problem manifests when the EU does not enforce the extra payment to the customer once the main invoice is settled. PrintWeek said this may be because of a fear of “upsetting” a customer or the fear of more costs arising to recover the statutory charges, which are legally owed by the customer.
Several U.K. suppliers have also failed to embrace electronic payments as paper trails continue to linger across industries, resulting in late payments. According to a recent survey by WEX, working with mostly digital payments helps reduce the amount of late payments; however, even some remaining manual payments can slow down the process. While many companies have switched to digital, it may not be enough without legislation to regulate payments.
—Christie Citranglo, editorial associate
It's a Big World Out There! Are You Prepared?
Here are the essential tools you'll need for doing business abroad:
FCIB Worldwide Credit Reports
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PRS Country Reports
PRS Country Reports help you manage the risk from global market uncertainty by digging beyond the headlines to give you a comprehensive, fact-based view of the economic and political risk of doing business in a particular country. Each report provides 18-month and five-year forecasts for turmoil, investment, transfer and export risk in 100 countries, plus in-depth coverage of relevant political and country risk events, country conditions and independently back-tested methodology sourced by the IMF.
Political Risk Newsletter
The “best in class” monthly Political Risk Newsletter, written by the PRS Group and available to members through FCIB, provides concise, easy-to-digest briefs on up to 10 countries, with additional recaps updating prior month’s reports. Each month’s Political and Economic Forecasts Table covers 100 countries, with 18-month and five-year forecasts for KPIs, such as turmoil, financial transfer and export market risk. You’ll also find rating changes, providing an excellent method of tracking ratings and risk, for the countries you’re exporting to.
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North Carolina Seeing Fewer Lien Claims in 2018
Mechanic’s liens in North Carolina are on the decline. A year-over-year comparison for the first six months of the year showed a major drop in recorded lien claims, according to the Charlotte Business Journal.
The report stated 123 claims valued at a total of $8.3 million were recorded in the first half of 2018 in 14 jurisdictions across the state, which included Guilford, Mecklenburg and Wake counties. There were 313 claims at just over $30 million filed by contractors during the same time period in 2017. The average lien amount is also roughly $30,000 less this year than last. The article cites the “resurgent economy” as one of the reasons lien claims are down this year. In 2017, there were 524 mechanic’s liens totaling more than $53 million.
At the time of this printing, the largest lien this year was an almost $808,000 claim filed in March for construction work near the Interstate 485 and Interstate 160 interchange. The second largest claim was nearly $430,000 for work at a Charlotte apartment complex. Rounding out the top three was a lien for nearly $270,000.
The North Carolina Lien Agent System (LiensNC) went into effect for projects starting on or after April 1, 2013. The lien agent system allows, but does not require, potential lien claimants to give notice that they are working on a construction project, according to the system’s website. The system is a three-step process, which includes the owner registering the project by filing an Appointment of Lien Agent, potential lien claimants filing Notice(s) to Lien Agent and performing a search to view all state construction projects.
If any of the following conditions apply, an Appointment of Lien Agent is not required to be filed by the owner:
- Total cost of improvements is less than $30,000
- Improvements are to the owner's existing residence
- Improvements are for a public building project
The Notice to Lien Agent is done to notify the Lien Agent that a potential lien claimant is providing services, materials, labor, etc. to the project. “The Notice must be filed prior to conveyance or mortgage of the real property by the owner to an unaffiliated third party, or for those first providing lienable labor, services or materials to the project property within the last 15 days prior to such conveyance or mortgage, the Notice to Lien Agent must be filed within 15 days of the potential lien claimant's first furnishing to the project property,” according to LiensNC.
This process is not to be confused with filing a Notice of Subcontract, Claim of Lien or Claim of Lien Upon Funds, etc., which are not handled through the online lien agent system.
—Michael Miller, managing editor
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Texas Receives Federal Funding for Flood Control
Hurricane Harvey ravaged the Texas gulf coast in mid-August last year, making landfall as a Category 4 storm and dumping more than 27 trillion gallons of rain across the state. Harvey caused severe flooding that damaged and destroyed homes, making it one of the costliest hurricanes to hit the United States mainland, second only to Hurricane Katrina, which hit New Orleans in 2005.
The U.S. Army Corps of Engineers has recently announced that Texas will receive approximately $5 billion in funding for various flood control projects throughout the state. This funding comes from a disaster relief package passed by Congress earlier this year.
The bulk of the approved funding—nearly $4 billion—will be expended in the Sabine Pass to Galveston Bay Coastal Storm Risk Management and Ecosystem Restoration Project. The project entails the construction of nearly 27 miles of new levees and the fortification of 30 miles of existing levees along the coast.
Additional projects that benefit from this funding include safety improvements to the Barker and Addicks dams ($1.5 million) and completion of flood control projects in the Houston area ($295.2 million). The flood control projects to be completed include three major bayou widening projects with a combined price tag of $185 million.
Finally, some $10 million will go toward studies of Houston area watersheds, the reduction of Buffalo Bayou flooding, and the determination of future projects which will best protect the Texas coast from hurricane storm surge.
Allocation of these federal disaster relief funds comes on the eve of a $2.5 million bond election slated to be held in Harris County on August 25th—the one-year anniversary of Hurricane Harvey. If passed, the bond would fund various flood protection projects, including improvements to drainage and warning systems, as well as home buyouts and the construction of additional detention basins.
Lauren Scroggs is an associate attorney at the Houston office of Andrews Myers, P.C. Her practice focuses primarily on construction law. She advocates for general contractors, subcontractors, suppliers and owners in various capacities, including negotiations, alternative dispute resolution, litigation and appeals.
NACM Editorial Associate Andrew Michaels contributed to this article.
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