eNews January 3, 2019

In the News

January 3, 2019


Credit Managers’ Index Ends 2018 on Sour Note

Business Failures Down, Delinquencies Reach Four-Year High

Fish Fraud Infects Each Link of Seafood Supply Chain

How Subcontractors or Materials Suppliers Can Use the Surety Bond Contract, Part I

Credit Managers’ Index Ends 2018 on Sour Note

Credit professionals reported fewer sales and new credit applications in NACM’s December 2018 Credit Managers’ Index (CMI), but the declines in the favorables should be taken with a grain of salt as they are all still well within expansion territory.

"On one level, this is disappointing. It would have been nice to see the index continue tracking upwards, but it is important to remember that any reading over 50 suggests growth, so [an overall December] reading of 54.2 is certainly respectable," said NACM Economist Chris Kuehl, Ph.D.

The reading is a decline of 1.6 points from November, moving the CMI to numbers seen in October. Sales took the biggest hit, a drop of 5.5 points. That leaves it outside the 60s for the first time since December 2017. New credit applications and amount of credit extended also stepped back at 57.5 and 61.9, respectively. Dollar collections, while it declined, still hovered near a reading of 60. Overall, favorables sank from 63.2 to 59.4 in December, also the first time since the prior December that the score was below 60. “The slide in all these factors suggests there has been a slowdown, which is consistent with some of the other data that has been seen in the Purchasing Managers’ Index, durable goods orders and capacity utilization,” Kuehl said.

The future was a little bit brighter for the combined unfavorable factors—not all saw a dip in December. Rejections of credit applications remained the same at 51.4, while accounts placed for collection and dollar amount of customer deductions improved yet stayed in contraction territory (score below 50). Disputes and dollar amount beyond terms each took a dive into contraction territory at 49.6 and 49.3, respectively. “This drop is more worrisome, as this is often the first sign of impending credit issues,” said Kuehl, referring to dollar amount beyond terms. Bankruptcy filings remained one of the more constant factors, improving to 55. The overall index of unfavorables remained above 50 for the second straight month.

Compared to 2017, Kuehl said, “There are some early warnings starting to show up as the favorables are sagging for the first time in a year. At this point, the reason could be seasonal, but if the trend extends to next month, there will be more concerns about the coming year.”

—Michael Miller, managing editor
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Business Failures Down, Delinquencies Reach Four-Year High

Trade credit delinquency rates reached the highest yearly percentage in the third quarter of 2018 across nine U.S. industries—a rate last seen four years ago. Despite a decline throughout 2017, delinquencies started increasing in the first quarter of 2018, only to continue and exceed a 3% rate in quarter three.

Dun & Bradstreet (D&B) released its Q3 2018 U.S. Industry Delinquency and Failures Report in mid-December 2018, following an analysis of the manufacturing, retail, transportation, real estate, business services, personal services, construction, automotive and financial services sectors. The delinquency rate, defined as 91 or more days past due, came to 3.06% in the year’s third quarter.

“Businesses seem to be stabilizing in the backdrop of a strong labor market and GDP growth; possibly resulting in the dip in insolvency and bankruptcy filings,” the D&B report states. The number of overall business failures maintained its ongoing decline in the third quarter at more than 15%, a substantial improvement over 2017’s third quarter findings at a roughly 3% increase.

“However, while businesses are growing—hiring workers, producing goods and providing services—they are struggling to meet their payment obligations on time,” the report notes.

The majority of delinquencies were seen in the automotive industry at roughly 5.6%, with transportation close behind at nearly 4.9%. Retail, manufacturing and construction saw the middle ground between 3% and 4%; whereas the lowest rate was in real estate (about 1.7%) and financial services (about 1.8%).

What’s more promising are small business loan approval rates for large and small banks. According to the latest findings in the Biz2Credit Small Business Lending Index, big banks’ (assets of $10 billion or more) approval rates garnered another tenth of a point for a total of 26.9% in November 2018. Meanwhile, more than half of small banks granted funding requests (50.2%).

“The economy continues to show strength, and this bodes well for small businesses in search of capital. Entrepreneurs are optimistic about the future, and banks are willing to lend,” Biz2Credit CEO Rohit Arora said in a press release. “The holiday shopping season has gotten off to a good start, and overall, companies have done well in 2018. It’s a good economic atmosphere for small business lending at the moment. I expect this to continue into the new year.”

In the D&B report, year-over-year (YOY) business failures declined nearly 17% in the surveyed industries, most notably in business services and manufacturing at about 26% and 29%, respectively. However, two industries—automotive and financial services—increased and were marked the “top industries to monitor” in the fourth quarter. Automotive business failures were slightly higher than financial services in 2017, a time when both industries still saw decreases in business failures.

Automotive is also on the watchlist for rising delinquency rates as it increased to more than 5.5% in quarter three. Transportation and retail delinquency rates are also worrisome, having increased to about 5% and 3%, respectively.

—Andrew Michaels, editorial associate

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Fish Fraud Infects Each Link of Seafood Supply Chain

Fish fraud has exploded into an epidemic across all links in the supply chain, according to a recent report by the Office of the New York State Attorney General. The report found a total of 26.92% of fish were mislabeled in New York. Many of the mislabeled fish were done so intentionally, switching out more expensive species or wild-caught fish with cheaper breeds or farmed fish. Cases were more common downstate, with New York City showing the highest rates of mislabeled fish, and Long Island and Westchester and Rockland counties not far behind.

“What it comes down to is the grocery industry is facing tighter and tighter margins, especially in what they call ‘center store grocery.’ In the last year or so, the national brands are feeling the pressure,” said Mark Speiser, CCE, Director of Credit at Archer Daniels Midland Company. “Consumers are going out and buying a lot more of the store brand that are a cheaper price.”

The report noted this constant trading off of fraudulent fish can have a negative effect on the fish market. While supermarkets are able to overcharge customers for fake fish, they were still being sold for “less than the average price for the desired species,” according to the report. This was found to undercut responsible fish merchants who sell genuine products and undermine the market as a whole.

“Center store has always been challenged by the payment margins. With the tougher margin in grocery credit with stores such as Kroger, the margin impacts the company’s cash flow,” Speiser said. “What a lot of these companies are doing is thinking about where they can bring in more cash, you can only go out and borrow so much money.”

There is a way to combat fish fraud at the supplier and retailer levels. The report offers tips for suppliers, retailers and consumers to be mindful of when dealing with seafood.

One suggestion is “Supplier Validation:” checking in with each link of the supply chain. Suppliers can provide retailers with a pledge of commitment to “clear, accurate and precise product labeling and outside auditing” in order to keep a trustworthy bond between the supplier and customer. Providing consistent labeling across products is also helpful.

“Traceability and Auditing” is another solution suppliers can offer to customers. Suppliers can begin a traceability protocol with customers, allowing them to see where the seafood originally comes from. Conducting direct or third-party audits of facilities whenever possible and thorough DNA testing of the fish will help as well.

The problems surrounding fish fraud stem from a lack of transparency in the market, from the fisherman to the suppliers to the retailers and down to the consumers.

“The wide price disparities between different fish species means that substituting a cheaper or more obscure species for a more expensive or better known one can allow the seller to sell at a higher price—or to price the fish lower than a competitor selling the authentic product,” the report said.

—Christie Citranglo, editorial associate

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How Subcontractors or Materials Suppliers Can Use the Surety Bond Contract, Part I

How Canadian subcontractors or materials suppliers can use the surety bond contract is what material suppliers want to know when general contractors, with whom they have contracted, default on payment, particularly in bankruptcy cases. It is common practice for clients to require that the general contractor provide a surety bond to cover a significant breach of this nature.

Generally speaking, the purpose of a surety bond contract to cover payment for labour and materials is to guarantee that the workers, suppliers and subcontractors used by the general contractor are paid.[1]

In order to benefit from the protection provided by the surety bond, a claimant must disclose its contract to the surety, usually within 60 days from the date on which the claimant commences work or on which the materials are delivered. When a claimant has not been paid or anticipates not being paid, it must send the surety a notice of claim within the time specified in the contract, which is generally 120 days from the date on which the services were completed or the materials were delivered.

The Decision in Panfab

On June 26, 2018, the Court of Appeal again examined the principle that requires disclosure to the surety in order to obtain payment for labour and materials, in Industries Panfab inc. v. Axa Assurances inc., 2018 QCCA 1066.

In 2010, the Local Housing Bureau (the “Bureau”) retained Groupe Geyser inc. (“Geyser”) to construct three buildings in Longueuil with a total of 180 units. As stipulated in the construction contract, Geyser obtained a surety bond from Axa Insurance (“Axa”) to guarantee payment for labour and materials.

Geyser subcontracted with Les Revêtements RMDL (“RMDL”) for the exterior cladding of the three buildings it was constructing. RMDL then signed a $330,000 contract with Industries Panfab inc. (“Panfab”) for it to supply metal sheathing boards. A few days before making its first delivery, Panfab informed Geyser, Axa and the Bureau of its contract to supply RMDL.

A few months after the first delivery, RMDL ordered additional sheathing boards that were not part of RMDL’s initial order from Panfab. Panfab made an additional disclosure to the surety and upped the total cost of its contract. Panfab made two additional disclosures, in each of which it stated the new, higher total cost of its contract.

Panfab’s total invoice for all of the materials came to $446,328.24, but it received only $321,121.84. Its claim was therefore for $125,206.40. RMDL declared bankruptcy in 2012 and, given the situation, Panfab sought to claim under the surety bond for payment for its materials.

Decision at Trial

At trial, the Court found that Axa’s surety bond contract contained a stipulation for the benefit of third parties, based on which Panfab could characterize itself as a creditor under the contract and thus benefit from the guarantee provided by the surety bond.

However, the Court concluded that there was only one contract between the parties and that the increase in the value of the contract had been disclosed more than 60 days after the first delivery of materials. In fact, it characterized the amount claimed as an overpayment and limited the amount that it ordered Geyser and Axa to pay to $54,830.66, since the effect of a judgment for the overpayment would have been to alter the terms of the surety bond contract and add to the respondents’ contractual obligations.[2]

Reprinted with permission. Part II of this article will appear in next week’s eNews.

François Bélanger is a partner in Lavery’s Litigation group. He acts as litigation counsel in the areas of commercial, real estate and construction law. Marc-André Bouchard is a member of the Litigation group. He represents clients in the Quebec courts in civil, family, estates, commercial and construction law cases. Solveig Ménard-Castonguay joined the Lavery team in the summer of 2018 as a student. She is currently completing her Bachelor of Law at Université de Montréal.

[1] MONDOUX, Hélène, François BEAUCHAMP, “Les cautionnements de contrats de construction” in Collection de droits 2017-2018, École du Barreau du Québec, vol. 7, Contrats, sûretés, publicité des droits et droit international privé, Cowansville, Éditions Yvon Blais, 2017, p. 59.

[2] Industries Panfab inc. v. Axa Assurances inc., 2018 QCCA 1066, para. 14.

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