eNews September 27, 2018

September CMI Improves, Forecast Remains Unstable

The Credit Managers’ Index (CMI) for September saw modest, positive growth in both the manufacturing and service sectors, but not without caveats. Combined, the sectors rose 0.6 points, leading upward from August’s score of 55.8 to September’s 56.4—the highest reading since May. With tariffs on $60 billion worth of Chinese goods implemented in late September, manufacturing and service companies likely bought in anticipation, forecasting a downturn for sales and extending credit for the rest of 2018.

Both the favorable and unfavorable factors went up this month. The favorables hit a high point of 65.2, a reading that hasn’t been seen since May, extending the positive trends from the summer months. Sales was up in manufacturing and service; however, this may be a result of the trade wars. Companies are participating in precautionary buying, as new credit applications fell and the combined index for dollar collections remained roughly the same as last month.

“This continues to be the prime concern for the CMI data,” NACM Economist Chris Kuehl, Ph.D., said. “Why are there still so many struggling operations given the overall growth of the economy and the good news that has been registered in the favorable categories?”

The causes for concern emerge when looking at the unfavorables. The unfavorables increased a half-point since August, coming in at 50.6—still dangerously close to contraction territory. The rejection of credit applications category fell just under half a point from last month, which Kuehl attributes to a lower amount of new credit applications. He said this indicates more companies with unpredictable financial futures are seeking credit, yet pose too much of a risk.

The manufacturing sector saw less growth than the service sector; manufacturing saw a half-point growth, while service jumped nearly a point. The retail companies that make up the service sector saw a surge as stores prepare for the holiday shopping season, contributing to its spike; seasonally, the growth is appropriate. Companies in the manufacturing sector may not be expanding as much—evident through the unfavorables—although three of the six categories showed some improvement.

“There has been growth in terms of industrial production and the overall GDP as well. This is all somewhat unexpected given the turmoil and controversy over tariffs and trade wars, but timing is everything,” Kuehl said. “That motivation will fade through the remainder of the year.”

—Christie Citranglo, editorial associate

Call for Proposals—Deadline is Friday

The National Association of Credit Management will hold its 123rd Credit Congress & Exposition in Aurora, Colorado, from May 19-22, 2019. Please visit creditcongress.nacm.org to fill out the form to submit abstracts, proposed sessions and communications pertaining to participating in the program. Submissions must be made using this form.

Please submit ideas by Sept. 28, 2018. Any proposals that are incomplete or are received after this date will not be considered.

30-Day Warning: Major Changes to Pennsylvania’s Contractor and Subcontractor Payment Act, Part II

In last week’s Part I, Kenny Cushing, Esq., of Cozen O’Connor, discussed withholding and invoice errors pertaining to significant amendments to Pennsylvania’s Contractor and Subcontractor Payment Act (CASPA).

Suspension. The current statute outlines three areas of potential exposure for an upstream entity that fails to make proper payments: (1) interest; (2) penalty interest; and (3) attorneys’ fees.¹ The amended act also adds a very significant fourth area of potential exposure by creating a framework for downstream entities to stop work if they are not timely paid. Like the current statute, the amended act permits the parties to agree to contractual payment terms and timing for payment. The amended act now explicitly permits downstream entities to suspend performance if they are not being paid according to the contract, notwithstanding agreed contract terms to the contrary.² This provides downstream entities with a new leverage point to force upstream entities to negotiate payments to avoid a work stoppage.

Although there are nuances to consider with the interpretation and application of the amended act, the bottom line is that a downstream entity may now suspend performance as soon as 70 days following the end of the billing period for which payment of undisputed amounts or untimely disputed amounts has not been received. ³ To do so, the downstream entity must: (1) provide written notice of nonpayment at least 30 days after the end of the billing period; and (2) provide written notice of intent to suspend performance at least 30 days after written notice of the nonpayment and at least 10 days before it suspends performance.⁴ There are slight differences between the procedures for a contractor and subcontractor to suspend work, but the concept is the same.

Once a downstream entity suspends performance, it may continue the suspension until payment is received. It should be noted that the statute is unclear whether the payment amount required to restart the work includes the applicable statutory interest of 1% per month.

Upstream entities should be prepared to properly and timely—within 14 days of receipt of an invoice—document withholdings of properly disputed payments to avoid the possibility of work suspensions. Downstream entities may consider providing form notices at 30 days and 60 days after nonpayment to maximize leverage and also should create the necessary documentation to support payment claims if needed.

Retainage. The amended act permits contractors and subcontractors to facilitate the release of retainage upon substantial completion by posting a maintenance bond with an approved surety for 120% of the amount of retainage being held.⁵ Whether a downstream entity decides to exercise this right depends on that entity’s particular circumstances and the particular project at issue, as there may be a number of variables and business considerations, such as the need for cash flow versus the potential to recover statutory interest.

Both upstream and downstream entities should contractually define “substantial completion,” since it is the event that triggers the right to post the maintenance bond under the amended act.

Waiver. Unless specifically authorized by CASPA, no CASPA provision can be waived.⁶ The most notable impact is the amended act will prohibit construction agreements that require downstream entities to continue performing when payments are improperly withheld, an important new feature for upstream entities seeking timely completion of their projects.

Upstream entities should re-evaluate their typical contract provisions related to payment dates, withholding, retainage and the downstream entity’s obligation to continue work during payment disputes, as many of these provisions may be unenforceable under the amended act. On the other hand, downstream entities no longer need to negotiate such provisions that will be unenforceable under the amended act.

Reprinted with permission.

Kenny A. Cushing, of Cozen O’Connor, focuses his practice on construction law. He counsels and represents project owners, developers, contractors and design professionals in all phases of public and private construction projects, agency appeals and the dispute resolution process. This article can be found in its entirety here.

¹ See id. §§ 505(d), 507(d), 512.
² See id. §§ 505(e), 507(e) (as amended).
³ “Billing period” is defined as “[a] payment cycle agreed to by the parties or, in the absence of an agreement, the calendar month within which work is performed.” Id. § 502.
⁴ See 73 P.S. §§ 505(e)(2), 507(e)(2) (as amended).
⁵ See id. § 509(a.1) (as amended).
⁶ See id. § 503(c) (as amended).

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.

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.

Labor Shortage Leaves Construction Sector in a Bind

Properly trained workers are hard to find and the construction industry is no exception. The growing global population not only requires more housing but also more commercial space—construction that can’t be accomplished without skilled professionals. In a time of substantial labor shortages across the service sector, construction experts are tapping into their creative outlets to find new ways to complete the workload without the workers.

Last month, the Associated General Contractors of America (AGC) and Autodesk released a joint survey of 2,500 construction professionals; 80% said they were “having a tough time filling hourly craft positions.” In a press release, AGC Chief Economist Ken Simonson described the construction labor shortage as “significant and widespread” throughout the U.S., where more than half of respondents reportedly increased salaries, incentives and bonuses to attract potential employees. Construction has increased wages about 3.7% as of early September, said NACM Economist Chris Kuehl, Ph.D.

“The glib response has always been that job shortages would go away if these people were paid more,” Kuehl said. “The problem is that paying unskilled and unqualified people doesn’t do much to advance the prospects for the hiring company.”

The most difficult jobs to fill include pipe layers, sheet metal workers, carpenters, concrete workers and pipefitters/welders, according to the survey. Such a strong demand for workers makes current and future projects even more strenuous. Regarding future projects, the survey noted, dwindling labor numbers could cause project delays, increasing both the timeframe and construction costs.

“Construction firms are changing the way they recruit, train, schedule, charge and staff as they struggle to cope with labor shortages that make it increasingly difficult for them to keep pace with demand,” the survey states. “In one sense, the changes workforce shortages are prompting could prove positive as workers earn more and firms become more efficient with their operations. Yet, it is also clear that workforce shortages pose a real and substantial risk to the broader economy.”

Although training seems like the simplest solution, Kuehl said, educating future construction workers is more complicated than just teaching younger generations about the industry through newly developed programs. Training must be geared toward older students as well as younger students because the former often see “little that is geared to them.” Although it is difficult to know what a business needs in advance, training programs might also consider selective training to avoid educating more students than there are jobs.

In the meantime, construction companies are turning to technology to help pick up the slack in labor. Sarah Hodges, senior director of the construction business line at Autodesk, told Construction Dive technology greatly improves communication and overall connectivity in addition to revitalizing data collection tactics. Autodesk encourages using automation for certain jobs to ease the shortage strain on today’s workers.

“The industry is at a tipping point,” Hodges said in the article. “We want to be a change agent in terms of how we look at solving problems and making sure we’re communicating the excitement and opportunities around the industry.”

—Andrew Michaels, editorial associate

CLC 2.0 is Here

The Credit Learning Center has been upgraded with improved capabilities and security, including:

• Ability to watch your modules on tablets and smart phones
• Download and print course material without having to view it first
• Better organization and access to courses ordered, viewed and completed
• Automatic reminders of purchases

As always, choose the modules and courses you need to improve job performance and complete them at your convenience, any time, anywhere!

Learn more at clc2.nacm.org or contact the NACM Education Department at This email address is being protected from spambots. You need JavaScript enabled to view it. or 410-740-5560.

Bank Loses $7.6 Million Lien Due to Ineffective Financing Statement

The UCC-1 financing statement is an innocent-looking form, with just a few boxes to complete and check as part of a secured financing transaction, but it is a critical document that lenders must correctly complete and file. In another reminder of the significance of the financing statement, a bankruptcy court has ruled that a lender’s financing statement designed to perfect a $7.6 million lien against all assets of a business was insufficient, rendering the underlying lien avoidable by the Chapter 7 trustee and making the assets available to unsecured creditors. First Midwest Bank v. Jeana K. Reinbold, Chapter 7 Trustee (In re 180 Equipment, LLC), No. 17-81749, Adv. No. 18-8003 (Bankr. C.D. Ill., Aug. 20, 2018).

In this case, the borrower executed a security agreement granting a security interest in 26 categories of collateral, including accounts, chattel paper, equipment, general intangibles, goods, instruments and inventory. The bank filed its financing statement promptly, describing the collateral as “All Collateral described in First Amended and Restated Security Agreement dated Mar. 9, 2015 between Debtor and Secured Party.” The bank did not file the underlying security agreement with the financing statement, nor did the bank file the underlying security agreement separately. After the debtor filed its Chapter 7 bankruptcy case, the bank sought a declaratory judgment that its lien was valid; the trustee counterclaimed to assert that the lien was avoidable because the financing statement was insufficient.

The bank argued that its financing statement was adequate under Section 9-108(b) of the UCC, which allows a description of collateral in the financing statement by methods such as specific listing, category, quantity, or “any other method, if the identity of the collateral is objectively determinable.” The bank contended that the last of these methods applied to the financing statement’s reference to the security agreement and even though the security agreement was not filed, the financing statement met the requirements and put other lenders on sufficient notice of the bank’s lien. The court disagreed, finding the statement did not describe the collateral; rather “it attempts to incorporate by reference the description of collateral set forth in a separate document, not attached to the financing statement.” Therefore, the trustee prevailed and the bank’s lien was avoided.

The obvious lesson is that lenders should not take any shortcuts with financing statements, such as seeking to incorporate other documents under the financing statement without filing them with the financing statement. Such omissions are low-hanging fruit for bankruptcy trustees and unsecured creditor committees.

However, recent news for lenders in this area is not all bad. Another bankruptcy court upheld a financing statement describing collateral as “all accounts receivable, inventory, equipment and all business assets located at 1803 W. Main Street.” The tangible assets actually were located at a different address. The court nevertheless found that the address limitation could be read to apply only to “all business assets,” and in any event, the description was ambiguous such that a reasonably prudent searcher would be put on inquiry notice. In re 8760 Service Group, No. 17-20454-drd-11, 2018 WL 2138282 (Bankr. W.D. Mo. 2018). Another court found that a financing statement listing “equipment,” among other things, was not seriously misleading even though it incorrectly included in the collateral description that “this filing filed as ag lien.” Because the debtor’s name was stated correctly, the incorrect additional “ag lien” language created an ambiguity with the “equipment” description, but would not mislead a searcher as to the actual collateral covered. Winfield Solutions, LLC v. Success Grain, Inc., No. 3:17CV00329 JLH, 2018 WL 1595871 (E.D. Ark. Apr. 2, 2018).

The adequacy of financing statements to perfect liens continues to generate substantial litigation. Much of this could be avoided by lenders being careful in the preparation and filing of their perfection documents. The additional time taken at the initial stage to get the financing statement correct can save immense loss at the end stage. If you have questions about or need help with the preparation and filing of these documents, consulting an attorney is recommended.

By John J. Hall, Esq. and Larry E. Parres, Esq. Reprinted with permission from Lewis Rice, LLC.

John J. Hall concentrates his practice primarily in the areas of business reorganizations, bankruptcy, loan restructuring, commercial finance transactions and creditors' rights. His practice includes representation of national, regional and state banks as well as secured and unsecured creditors in bankruptcy courts and other federal and state courts.

Larry E. Parres practices in the Corporate Department and represents national, regional and local financial institutions. He represents some of the largest banking associations in the United States in cases filed in Missouri, Illinois, Delaware and New York.

Essential Tools for Doing Business Abroad

FCIB Worldwide Credit Reports

FCIB Credit Reports go beyond the numbers, providing in-depth, personal and operational information about your customers and prospects that is vetted, validated and verified. FCIB adds value by using multiple providers—in fact, the best provider, on-the-ground in a region. FCIB checks to see the subject is who they say they are. The more you know, the better your credit decision will be.

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.

FCIB and NACM members receive a 10% discount on PRS Country Reports and the Political Risk Newsletter.

To learn more, visit www.fcibglobal.com.

Carillion Circle Continues Rolling

The collapse of U.K. construction giant Carillion has reared its ugly head again. According to a recent article with The Guardian, taxpayers will be on the hook for more than 150 million pounds ($198 million), which includes 65 million pounds in redundancy payments.

The Unite union received new information, showing 50 million pounds has already been paid for worker redundancy with 15 million more still to come. This is on top of the 90 million pounds, cited by The Guardian, for lawyers, accountants and other costs.

“Taxpayers should not, and will not, bail out a private sector company for private sector losses or allow rewards for failure,” said David Lidington, chancellor of the Duchy of Lancaster and minister for the Cabinet Office, in a written statement shortly after the firm’s collapse in January.

Announced earlier this week, the U.K. government has taken over a 335-million-pound Liverpool hospital project once overseen by Carillion. A separate Aberdeen bypass will be completed by a joint venture of construction firms Balfour Beatty and Galliford Try.

The downfall of Carillion reaches far and wide, affecting British citizens, large businesses, small businesses and others in between. Most notably impacted are the suppliers of Carillion, which were left with hundreds of millions of pounds in unpaid bills. This led David Brown, chief product officer for financial technology firm Previse, to pen a letter this month through openaccessgovernment.org.

Similar to the order-to-cash cycle, Brown’s writing underlines a circle of life for supplier payments, or a cause-and-effect scenario. He called the Carillion fallout the “canary in the coal mine,” urging members of Parliament to act to avoid similar issues in the future. “In October, a bill with the backing of over 200 MPs will be debated which would put construction companies’ retentions into a safety deposit scheme,” he noted.

Brown summed up slow payments in the industry as “bad for buyers, fatal for suppliers,” foreshadowing the circle of life of both parties and the payments. He added that slow payments are caused by longer payment terms and also cause smaller businesses to go bankrupt. To avoid going under, and while they wait for payment from customers, businesses try to cover cash flow by turning to expensive credit.

Business productivity is also hindered due to the possibility of the invoice runaround, and businesses are forced to increase prices, which is passed along to the buyers. According to Brown’s letter, two-thirds of organizations report they receive duplicate invoices resulting in 15 employees, on average, having to deal with one invoice.

Public buyers have turned to supply chain finance (SCF), which allows suppliers to be paid on behalf of the buyer by the SCF provider. This can speed up the process of payments with little impact to a buyer’s cash flow. However, upfront technology and compliance costs are large for suppliers, said Brown, making this approach impractical for smaller businesses. This can also lead to buyers extending payment terms, worsening the late payment issue.

“Poor payment culture is a problem without borders, damaging small businesses in the U.K. and across Europe,” said Mike Cherry, national chairman with the Federation of Small Businesses, in a release about an FSB report on the European Union’s Late Payment Directive. “It is an issue that has persisted for far too long and the time has now come to ramp up efforts to shift the cultural dial on poor payment practices in the EU.”

—Michael Miller, managing editor

Let Us Do the Work

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