eNews December 20, 2018
In the News
December 20, 2018
After a unanimous vote by the Federal Open Market Committee (FOMC) on Dec. 19, the Federal Reserve (Fed) will raise benchmark interest rates by another 25 bps, making this the fifth quarter in a row interest rates have risen despite push back from the president. The Fed also announced interest rates will not go up as much in 2019, as originally predicted by economists and forecasted by the Fed in the past.
“We think this move was appropriate for what is a very healthy economy,” said Jerome Powell, chair of the Federal Reserve, during a news conference on Dec. 19. “ … Nothing will deter us from doing exactly what we think is the right thing to do.”
Many economists had anticipated the increase, according to NACM Economist Chris Kuehl, Ph.D, who said the hike was expected for months, and the uptick was priced into the markets “long before now.” Since the market and economists predicted this move from the Fed, Kuehl noted the hike will have “no immediate” impact on the health of the economy. If the Fed decided to not hike the interest rates on Dec. 19, it would have been “shocking in the extreme and would send markets into chaos,” Kuehl said.
Throughout the weeks leading up to the Fed’s decision, President Donald Trump pushed back on Powell’s expected decision to raise the rates, especially considering he and the board chose to do so for the past several quarters. Trump feared the rise in rates would hinder the already “booming” economy, and that inflation numbers were “very low.” The main fear revolved around the Fed moving too fast with interest rates.
Kuehl said federal interest rates remain “historically low,” and the quarter point will not impact prime rates or mortgage rates. This prediction also coincides with the Fed’s decision to not raise interest rates quite as high in 2019. Before the announcement, Kuehl foresaw interest rates not exceeding 3.5% in the next two years, and with the Fed’s decision to slow down interest rate hikes even further in 2019, it may help stabilize the U.S. economy.
“The aim of the central bank is to manage monetary policy, but one task is far easier than the other. Getting ahead of inflation is as simple as making money more expensive with those higher rates,” Kuehl said. “Attacking recession is like ‘pushing a string,’ as all the Fed can do is make borrowing cheaper. The Fed has been able to throttle inflation effectively but has much less success with fighting recession, unless Congress gets engaged with its own tax cuts and spending hikes.”
Moving into 2019, the regional presidents and a few other appointees will be rotated out, and the Fed may see different strategies since the dynamic will change. Next year will see six hawkish and six dovish members on the board, an even split, with two more members yet to be appointed by Congress. Hawks generally push for higher rates while doves are not as eager.
Thus far, hikes will continue to slow down next year, likely breaking the streak of rising rates each quarter in 2019. At most, Kuehl predicts the rates will reach an even 3%.
—Christie Citranglo, editorial associate
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As artificial intelligence (AI) continues to find its footing and gains popularity in the business credit workplace in the U.S., hundreds of organizations worldwide are predicting the technological advancement is here to stay, with the majority of companies having some level of implementation in their finance departments by 2020. Technology’s ability to recognize and comprehend speech as well as solve programs through algorithms not only eliminates menial tasks but also enhances the performance and quality within the organization.
The term “AI” has been around since the mid-1950s, yet the most significant strides came to light in the past five to 10 years when AI transformed from an idea into tangible tech. Today, different types of AI, including predictive analytics, mobile financial process support and analytics and robotic process automation (RPA), are among the top emerging technologies, according to Gartner. The research and advisory company’s recent global survey of more than 400 organizations indicates a growing interest in AI or machine learning within the next couple of years. Machine learning expands on AI, with its computer system’s ability to learn from prior results.
“More than a quarter of organizations surveyed expect to deploy some form … in their finance department by 2020,” Gartner Senior Director Analyst Christopher Iervolino said in Business Wire on Dec. 5. Between 2016 and 2018, Iervolino noted, a growing number of companies include AI in their discussions about “financial planning and analysis” (FP&A) at a growth rate of 15.7%.
However, there’s no sense in putting the cart before the horse, he added. Although half of survey respondents anticipate deploying predictive analytics by 2020, the technology is still evolving in regards to FP&A. The first two steps in Iervolino’s three-step process to implement AI involve assessing and expanding the company’s current processes and tools. First, what are the finance department’s current capabilities? Then, how can these capabilities be enhanced and/or expanded? Only after asking those crucial questions should a company seek new opportunities, such as AI.
China, on the other hand, is finding more success with AI implementation. During a Dec. 9 interview with Fareed Zakaria on Global Public Square (GPS), Kai-Fu Lee, venture capitalist and author of A.I. Superpowers, said China uses mostly mobile payments, pushing cash and credit cards by the wayside—a phenomenon that happened within the past three years.
“That shows you how the tech companies can come in so quickly,” Lee said in the interview. “Also, the payment isn’t just to pay the merchant; anyone can pay anyone. ... The best thing is there’s almost no charge.”
Comparatively, China is ahead of the U.S., where Lee said the latter is using “the last, most-advanced structure, which was the credit card system.” The use of credit cards never really took hold in China, but instead, China jumped toward mobile payments. The chairman and CEO of Sinovation Ventures also presented his findings to the Center for Strategic & International Studies (CSIS) in November, explaining how China’s AI implementation is speeding past the U.S.
For example, he said, in 2013, the U.S. exceeded China in internet, business, perception and automation AI implementation. By 2018, China tied with the U.S. for internet AI implementation and exceeded the U.S. in perception AI implementation. Lee said during his presentation that by 2023, China will have the most internet and perception AI implementation, be tied with the U.S. in automation AI and fall behind in business AI.
“When you really measure competitiveness in terms of applications, China has gone from way behind to catching up and, soon, to be a little bit ahead of the U.S.,” Lee said in his presentation. “All this will propel AI forward so much so that [PricewaterhouseCoopers] estimates it will be almost $16 trillion of net incremental GDP in just another 11 years.”
—Andrew Michaels, editorial associate
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A recent Chapter 15 decision by Judge Martin Glenn of the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) suggests that third-party releases susceptible to challenge or rejection in Chapter 11 proceedings may be recognized and enforced under Chapter 15. This decision provides companies with cross-border connections a path to achieve approval of non-consensual third-party guarantor releases in the U.S.
The company, Avanti Communications Group (“Avanti”), was a Ka-band satellite operator, providing wholesale satellite data communications services throughout Europe, the Middle East and Africa. Headquartered in London, Avanti was incorporated under the laws of England and Wales as a public limited company.
Prior to its restructuring, Avanti had approximately $1 billion in funded debt obligations, comprised of approximately $118 million in outstanding super-senior term loans maturing in 2020 (the “Term Loans”), $323 million in outstanding senior secured notes maturing in 2021 (the “2021 Notes”), and $557 million in outstanding senior secured notes maturing in 2023 (the “2023 Notes,” together with the 2021 Notes, the “Notes”). The issued debt was guaranteed by Avanti and each of its direct and indirect subsidiaries.
In late 2017, Avanti faced increasing financial pressures due to an overleveraged capital structure and delays in manufacturing and procurement. Avanti and an ad hoc group of holders of its Terms Loans and Notes entered into preliminary discussions for a comprehensive balance sheet restructuring.
Subsequently, Avanti entered into a restructuring support agreement (“RSA”) with creditors comprising 62% of its outstanding 2021 Notes, and 55% of its outstanding 2023 Notes. The RSA set out the terms of a debt-for-equity swap of Avanti’s 2023 Notes and the amendment of its 2021 Notes, which was to be implemented pursuant to a scheme of arrangement under the UK Companies Act 2006 (the “Scheme”). In order to effectuate the Scheme, it had to first be sanctioned by the High Court of Justice of England and Wales (the “English Court”).
The Sanctioning of the Avanti Scheme
Avanti initiated a proceeding before the English Court for approval of the Scheme. The English Court considered the application and issued a Convening Order, requiring the meeting of the impaired creditors (i.e., holders of the 2023 Notes). Because the impaired creditors were comprised exclusively of holders of the 2023 Notes, the Scheme consisted of one voting class.
The Avanti Scheme granted third-party releases, including releases of guarantors of the 2023 Notes (the “Guarantor Releases”). The proposed Guarantor Releases prohibited creditors from seeking recovery against Avanti or its subsidiary guarantors.
At the meeting, the impaired creditors, holding 98.3% of the outstanding 2023 Notes, attended and voted in favor of the Scheme. None of the impaired creditors voted against the Scheme. As a result, the English Court sanctioned the Scheme, finding jurisdictional, statutory and fairness requirements to be satisfied. To protect its reorganization efforts and ensure fair and efficient administration of the restructuring, Avanti sought to then have the Scheme recognized in the U.S. under Chapter 15 of the Bankruptcy Code.
Reprinted with permission. Part II of this article will be released in next week’s eNews on Thursday, Dec. 27.
David Griffiths, Esq., is a partner in the Business Finance & Restructuring Department of Weil’s New York office. David has significant experience representing hedge funds in all areas of domestic and international restructurings. He is experienced in crisis management, corporate governance, financings, acquisitions involving distressed situations and corporate and capital markets transactions.
Alexander Welch, Esq., is an associate at Weil’s New York office. Weil Summer Associate Mary Seraj contributed to this article.
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Digital payments are going mainstream according to Bill.com and its Rise of Modern Business Payments report released this month. The cloud-based digital payments firm surveyed more than 460 accounting professionals to determine how they pay bills for their clients, and surprise, surprise, digital bill payments are the favorite medium.
“Payments are rapidly evolving for accounting firms, as digital payments are now more often used than paper checks,” said Vinay Pai, Bill.com senior vice president of engineering, in a release. “Enterprising accounting firms have already begun to work with new digital payment methods like cryptocurrencies and virtual credit cards, which gives them valuable experience and competitive advantages as these forms move towards mainstream acceptance.”
Nearly three-fourths of respondents said they use ACH transfers to pay clients’ bills, and more than half do not use handwritten checks. Only 6% said they don’t pay bills electronically for their clients. The major reasons for digital payments include the speed of processing and the higher cost of using paper checks. Accountants use and recommend digital payments because they help clients manage their cash flow.
Digital payments are also time efficient. A 2015 Bill.com survey found 14% of respondents spent less than one hour per month per client handling bill payments. A similar response in the 2018 report shows that has more than doubled to a third of respondents.
The 2018 report also reviewed other forms of digital payments, not just ACH. More than a quarter of accounting professionals believe virtual credit cards are safer and more secure than traditional plastic; however, only 10% said they used virtual cards to pay clients’ bills. Three percent said they used cryptocurrencies.
The main factor driving digital payments for accounting professionals is client preference. Nearly three-fourths of clients request digital bill payment services. “As digital payments and the technologies that work with them continue to evolve, more and more clients want firms to provide bill payment services that allow them to make these convenient payments,” the report states.
Digital payments also have a market outside domestic transactions. More than 40% of those surveyed report their clients make payments to vendors outside the United States, and Bill.com expects that to increase in the next year. There are a number of issues that can arise when making cross-border payments including cost, speed, payment tracking and access to local currency. “Digital business payments go a long way toward alleviating these significant problems, thanks to the speed of delivery, ease of use, electronic audit trails, ability to pay in local currencies and lower rates compared to wire transmissions,” according to the report.—Michael Miller, managing editor
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Ohio N. Univ. v. Charles Constr. Servs., 2018 Ohio LEXIS 2375 (Oct. 9, 2018).
This case arose out of the construction of an inn and conference center at Ohio Northern University (“ONU”). After completion of the project, ONU discovered water damage and structural defects in the work and filed suit for breach of contract against its general contractor, Charles Construction Services, Inc. (“Charles”). Charles, in turn, sought defense and indemnity from its commercial general liability (“CGL”) insurer, Cincinnati Insurance Company (“CIC”). As required by ONU, Charles’s policy contained a “products-completed operations-hazard” (“PCOH”) clause and terms specifically related to work performed by subcontractors. Under Charles’ policy, the insurance covered “property damage” only if it was caused by an “occurrence,” defined as “[a]n accident, including continuous or repeated exposure to substantially the same general harmful conditions.” “Accident,” however, was not defined. CIC intervened in ONU’s suit, seeking a declaratory judgment that it was not required to defend or indemnify Charles.
The trial court granted CIC summary judgment, holding that CIC had no duty to indemnify or defend Charles. The trial court based its holding on Westfield Inc. Co. v. Custom Agri Sys., Inc., 979 N.E.2d 269, a 2012 decision in which the Ohio Supreme Court concluded that claims for faulty workmanship are not fortuitous, and therefore, not claims for “property damage” caused by an “occurrence” covered by a CGL policy.
Charles and ONU appealed the trial court’s decision and the Court of Appeals, while acknowledging Custom Agri as good law, concluded that the opinion did not address PCOH or subcontractor-specific CGL-policy terms. The court held that the CGL policy language was ambiguous as to coverage for property damage caused by a subcontractor’s defective work, construed the language against the insurer, and reversed the judgment of the trial court.
The Supreme Court reversed the judgment of the Court of Appeals and reinstated the judgment of the trial court. While Charles and ONU, along with several amici curiae, argued that PCOH clauses in CGL policies provide coverage for defects discovered in subcontractor work—and cited several recent opinions by courts across the country holding that the definition of “occurrence” encompasses damage to the insured’s own work arising from faulty subcontractor workmanship—the Supreme Court concluded that, “[t]o resolve this matter, [it] need only apply the holding of Custom Agri.”
According to the CGL policy’s terms and Custom Agri’s interpretation of those terms, only “an occurrence” could trigger coverage for property damage. The Court explained that, as held in Custom Agri, faulty work, however, does not meet the definition of an “occurrence” because it is not based on a fortuity. Therefore, claims for defective work are not claims for “property damage” caused by an “occurrence” under a CGL policy. Moreover, the Court concluded that because there was no “occurrence,” the PCOH and provisions relating to subcontractor work had no effect, regardless of the additional money Charles paid for the additional coverage. CIC, therefore, was not required to defend Charles against ONU’s lawsuit or indemnify Charles against any damages.
While the Supreme Court recognized that its decision was contrary to the recent trend in other jurisdictions, it explained that it was bound by the plain language of Charles’ policy and its previous interpretations of that language. The Court therefore invited the Ohio General Assembly, if it were so inclined, to enact legislation redefining “occurrence” to include property damage resulting from faulty workmanship.
Reprinted with permission.
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