eNews December 27, 2018
In the News
December 27, 2018
This year was an overwhelmingly positive one for the construction industry. As common among any sector over a 12-month period, material prices fluctuated; however, those same prices declined in the final months, as job growth and investment flourished. With the new year upon us, economists are looking to 2019 in hopes of a promising continuation and so far, the economic outlook appears bright.
Earlier this month, Associated Builders and Contractors (ABC) released its 2019 outlook in Construction Executive magazine, featuring the predictions of ABC Chief Economist Anirban Basu, who said although “job growth, high backlog and healthy infrastructure investment all spell good news,” the economy may encounter recurring hiccups in 2019, which first reared their head in 2018. In his December report, Basu described the U.S. economic performance as “brilliant of late,” despite the labor shortage and tariff talks being the nation’s most significant hurdles.
According to data from the U.S. Bureau of Labor Statistics, which is released on a monthly basis, construction employment hasn’t faltered much since March—a loss of 15,000 jobs on net, 8,200 from nonresidential construction. Yet, in the following seven months, employment gained a steady hand through October 2018, when 330,000 net new construction jobs were added (13,500 in nonresidential construction) compared to the same time last year. On Dec. 7, ABC announced nonresidential construction employment lessened to 5,000 net new jobs in November, bringing the annual net new construction job total to 282,000.
“[The November] employment report helps shift what has become an increasingly negative narrative regarding the U.S. economy’s 2019 economic prospects,” Basu said in the report. “And though [the] headline number of 155,000 was a bit disappointing, it is consistent with the notion that the U.S. economy continues to expand, albeit at a plodding pace. That said, there is evidence of lingering strength in both industrial and service segments.”
Currently at 3.9%, the sector’s unemployment rate beams positivity. ABC reports approximately 500,000 open construction jobs in the U.S., nearly tripling the number of jobs recorded in 2008. Eight years ago, the unemployment rate reached an alarming 27.1%, Basu said in his report, a time when there were more workers than there were jobs. The situation is now reversed, and employers are left raising compensation costs to draw interest.
The Department of Labor supported ABC’s analysis with a projected job growth of 12% between 2016 and 2026.
Material Prices, Spending & Interest Rates
At the beginning of the year, construction material prices rose significantly, in part by growing demand as well as tariffs on goods such as steel and softwood lumber. Prices improved during the final months of 2018, particularly in November when nonresidential construction input prices dropped 1.7% month-over-month (MoM), declining in 11 subcategories, ABC said on Dec. 11. Crude petroleum, unprocessed energy materials and softwood lumber declined MoM, and prices increased the most in natural gas, iron and steel and plumbing fixtures and fittings.
“Softwood lumber prices, which increased sharply earlier this year, are now down nearly 11% compared to last year and fell 3% in November,” Basu said in a separate report. “With the global economy expected to continue to weaken and the dollar expected to remain strong, contractors should expect only moderate increases in materials prices during the early months of 2019, though further declines in input prices are certainly possible.”
The U.S. Census Bureau anticipates a boost in overall nonresidential construction spending by nearly $27 billion for a total of a projected $782.4 billion. Spending is expected to increase in 2019 in 14 of the 16 areas, most notably in conservation and development, water supply, public safety and manufacturing. Credit insurer Euler Hermes predicts U.S. construction will grow by 3% year-over-year (YOY) in 2018, and 2.1% YOY in 2019. The residential market is showing warning signs, the Euler Hermes report states, while demand and operating margins are below the pre-crisis level.
September’s MoM readings raise concerns with some materials, added Basu. Prices rose for crude petroleum (more than 47%), steel mill products and asphalt (18%), tar roofing and siding products (9%) between September 2017 and 2018. Basu said in his 2019 outlook report that interest rates are a contributing factor to price gains.
—Andrew Michaels, editorial associate
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The cost of the holidays hits more than just consumers’ wallets buying gifts for loved ones. Those big screen TVs, toys, new cars and other gifts come from somewhere. They are manufactured, shipped and sold all over the world, resulting in $110 billion in unpaid invoices to thousands of suppliers, according to Greensill, a nonbank provider of working capital finance.
In its latest report partnered with the Centre for Economics and Business Research, Financing the Festive Supply Chain, Greensill states the $110 billion is an 18% ($16 billion) increase from last year. “The 18% increase in accounts receivable outstanding in this year's holiday supply chain indicates that more suppliers are being paid later than ever before, which is a major concern for businesses everywhere,” according to a release about the report.
“We analyse the Christmas holiday supply chain in this way as it gives us a really good look under the hood of the global economy, revealing the finely tuned engine that every business on earth relies upon to run efficiently,” said Lex Greensill, founder and CEO of Greensill, in the report on how they monitor outstanding accounts receivable (AR) to gauge the global economy.
Clothing, toys and electronic suppliers are facing $65 billion in outstanding AR. Clothing saw the largest year-to-year jump in unpaid invoices at 19%, while electronics has the highest number of invoices at nearly $40 billion, an almost 17% uptick from 2017.
The supply chain for electronics is highly complex, with dozens of components in each device. However, as Greensill states, larger companies and corporations, such as Apple, Samsung and Foxconn, are “among the largest players in the global festive supply chain.”
One of the biggest factors behind outstanding AR is the combination of strong revenue growth and the rise in the AR ratio compared to annual revenue, increasing the time between product delivery and the payment for the goods, according to Greensill. Among the most impacted industry is phones, with many manufacturers needing to pay for them within 90 days; however, consumers have upwards of two years to pay off the phone—a gap that is putting pressure on balance sheets.
The annual supply chain value in clothing is $300 billion, roughly 15 times greater than during the holiday season. Raw material suppliers are often hit the hardest. “The original supplier often has to make payments well in advance of getting paid,” said Greensill Vice Chairman Roland Hartley-Urquhart in the report. “For example, they often have to ship material to the buyer’s mills at their own expense. We can use information held by buyers to see when materials are delivered on a consignment basis.”
Greensill expects outstanding AR in the toy industry to reach $2.4 billion—impacted by the collapse of Toys R Us. There is a growing rift between the manufacturing and delivering of products and the payments being made within the sector, resulting in supplier balance sheet tensions and an increase in the ratio of AR to annual revenue.
—Michael Miller, managing editor
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A new payments deal signed Dec. 12 will change the way Peru uses electronic payments, upgrading the system to be available 24 hours a day, seven days a week and 365 days a year. International payment systems provider Vocalink, a Mastercard company, signed a contract with Peru’s automated clearing house, Cámara de Compensación Electrónica (CCE), to fully modernize Peru’s infrastructure for electronic payments, according to a joint press release.
Peru’s payment infrastructure will see steps into the future of business-to-business (B2B) payments, allowing transactions to take place at any time from any location, upgrading the already existing modes of virtual payments. Vocalink’s Immediate Payments Solution (IPS) will process credit transfers in real time, and it will allow users to send and receive payments from mobile phones using just a phone number: IPS does not require the user to share any bank details.
“Once complete, I believe that the platform will not only be one of the most comprehensive real-time payment systems in Latin America, but it will be in line with the best in the world,” Adrián F. Revilla Vergara, Chairman of the Board of CCE, said in a statement. “Our aim is to provide a solution from which innovative new services can be launched to power Peru’s economy.”
According to FCIB’s Credit Collections Survey on Peru from July 2018, the most popular avenue for B2B payments—by a majority of 91%—is wire transfers, which is down by 6% from December 2017 and 5% from April 2017. The second-most popular mode was credit cards at 18%, which has been gaining steam over the past year with an uptick of 8% since April 2017. EFT payments by sellers and buyers comes in third, amounting to 9% of transactions each, which has mostly been unchanged since April 2017.
FCIB’s survey also noted cash against documents was still showing up in 9% of transactions in July 2018, tying with EFT payments and climbing two percentage points since December 2017. From the FCIB data alone, Peruvian businesses seem eager to work with more e-payment options such as wire transfers, but there is still dependence on cash and credit card payments.
With the new system allowing payments to be made from mobile devices, it may also encourage payments to still be made despite any onslaughts of natural disasters. According to a recent report by Euler Hermes, natural disasters—specifically the Coastal El Niño—cost Peru “USD9bn,” leaving thousands homeless and a slowdown in copper production.
While this new technology will not fix the natural disasters affecting Peruvians, it can help a company begin running again after storms. Without the dependence on bank wires, cards or cash, by just using a mobile device, companies may have a chance to recover more quickly with greater, immediate cash flow and debt recovery.
Respondents to the FCIB survey also noted expensive bank wire transfer fees, with one respondent in December 2017 saying, “Excessive bank wire fees, with $150 deducted from the remittance seems to be the new norm.” There was no mention in the announcement of fees associated with the new system.
—Christie Citranglo, editorial associate
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U.S. Chapter 15 Proceeding
A U.S. Chapter 15 case, unlike Chapter 11, is ancillary to a primary proceeding in a foreign jurisdiction. The Chapter 15 case is recognized by the Bankruptcy Court, rather than independently commenced. In seeking assistance from U.S. courts, Chapter 15 requires that the foreign proceeding be brought by a foreign representative. The Bankruptcy Court must first recognize the foreign proceeding.
For a U.S. Chapter 11 restructuring to commence, a debtor must meet the eligibility requirements of § 109(a) of the Bankruptcy Code. In In re Barnet, the Second Circuit affirmed that the eligibility requirements for debtors under § 109(a) of the Bankruptcy Code apply equally in Chapter 15 restructurings. A debtor must show that it has either (i) domicile, (ii) a place of business, or (iii) property in the U.S. as a condition of eligibility. Notably, immediately following the decision in In re Barnett, the Delaware Bankruptcy Court, in In re Bemarmara Consulting, took a different view, holding that the requirements of § 109(a) did not apply to debtors seeking recognition under Chapter 15.
Avanti had neither domicile nor a place of business in the U.S. The Bankruptcy Court did, however, deem a $100,000 retainer deposited for Avanti’s counsel in a U.S. bank sufficient to meet the Bankruptcy Code’s eligibility requirements. Having met the procedural requirements of Chapter 15, as determined by the Second Circuit, Avanti asked the Bankruptcy Court to recognize and enforce the Scheme.
Upon achieving recognition of foreign main proceedings, § 1521(a) of the Bankruptcy Code authorizes the court to grant any appropriate relief, effectuating the objective of Chapter 15. Relief in this instance may be narrowly limited by the public policy exception. For example, whether the third-party releases so greatly offend principles of U.S. public policy.
Avanti Gets Its Releases Approved
While acknowledging the inconsistent approval of third-party releases by U.S. bankruptcy courts, Judge Glenn ultimately decided he could, nonetheless, grant recognition and enforcement of a foreign order authorizing such third-party releases. Importantly, it was not necessary for the guarantors to commence a case (either in the U.K. or in the U.S.) to obtain the benefit of the third-party releases; the Guarantor Releases provided in the Scheme were sufficient.
Avanti’s facts were unique, distinguishing it from other cases where third-party releases were denied, including in the Chapter 15 context. Although principles of comity were integral to Judge Glenn’s decision, the specific facts of the Avanti favored third-party releases.
First, no objections were filed in the Bankruptcy Court against the Scheme and it had near-unanimous support from voting-impaired creditors.
Second, the U.K. procedure proceeded in accordance with U.S. due process concepts, strengthening the argument for recognition.
Lastly, unlike Chapter 11, the U.K. Companies Act 2006 authorizing schemes does not provide a mechanism for “cramming down” dissenting classes of creditors. All that is required is that 75% of the voting shares of the creditor class vote in favor of the scheme. This threshold was overwhelmingly surpassed in Avanti. Further, third-party releases are not categorically prohibited and, therefore, are not contrary to public policy in the U.S. Under § 1521 of the Bankruptcy Code, the Bankruptcy Court has discretion to provide any appropriate relief, where necessary to effectuate the purpose of Chapter 15.
The Bankruptcy Court determined that the Scheme was capable of recognition in the U.S. so long as it did not prejudice the rights of U.S. citizens or violate U.S. domestic public policy. Additionally, he deemed the Guarantor Releases as being necessary to give practical effect to the Scheme. He expressed concern that failure to enforce the Guarantor Releases would otherwise have significantly prejudiced creditors to the detriment of the reorganization.
Judge Glenn took care to distinguish the case on its facts before recognizing the Scheme, thereby, enforcing the Guarantor Releases in the U.S. Further, not all companies will be able to avail themselves of the Scheme process in the U.K. (or other analogous jurisdictions). It is unlikely that this decision harbingers a sea change in complex corporate restructuring, but the outcome in Avanti’s case does present companies with an additional avenue to address their restructuring requirements, should the circumstances allow.
Reprinted with permission. Part I of this article was released in last week’s eNews on Thursday, Dec. 20.
David Griffiths 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 is an associate at Weil’s New York office. Weil Summer Associate Mary Seraj contributed to this article.
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