eNews July 11, 2019
In the News
July 11, 2019
For the past 10 years, insolvencies in the U.S., Canada and Mexico have decreased, reducing the risk of payment delays in North America. Now six months into 2019, credit insurer Atradius anticipates delayed payments are making a comeback, creating more problems with cash flow and days sales outstanding (DSO).
According to the annual Atradius Payment Practices Barometer survey, at least one-third of suppliers in all three countries—33% in the U.S., 34% in Canada and 40% in Mexico—expect more customers to delay payment beyond 90 days. Late payments in the construction sector was the common denominator between the U.S., Canada and Mexico. The U.S. also predicts delayed payment in the metal and ICT/electronic industries, while Mexico plans to keep an eye on the machine and consumer durable sectors.
The rise in payment delays is “a clear reversal” compared to 2018, said David Huey, Atradius Regional Director for the U.S., Canada and Mexico, in the press release.
“It is chiefly due to the regularly changing government trade policies and slowdown of the global economy,” Huey said. “In addition to casting a dark cloud over the insolvency outlook, they are putting a heavy strain on global trade. This exposes North American businesses more to the risk of payment defaults from B2B customers.”
In April 2019, FCIB conducted its International Credit and Collections survey in the U.S., Canada and Mexico, which included credit managers’ experiences regarding current payment terms, delays and causes of delays. As of April, Canada and Mexico saw increases in payment delays compared to their prior surveys in June 2018 and October 2018, respectively. While 14% of respondents in Canada said payment delays climbed, 32% said the same in Mexico.
The majority of respondents in the U.S. and Canada granted credit terms of 0 to 30 days, followed by 31 to 60 days. In Mexico, most respondents granted credit on 31- to 60-day terms; however, none of the three countries offered credit terms of more than 91 days.
“[Late payments begin with] billing disputes followed by cashflow/seasonal [issues] followed by customer payment policies,” one respondent said in the U.S. survey. In Canada, 21% of respondents also attributed late payments to customer payment policies, but Mexico struggled when their customers’ customers don’t pay on time.
Despite rising concerns over late payments, Atradius found credit managers are taking the necessary precautions to manage cashflow. At 38% of respondents, Mexico took the most initiative with plans to check customers’ creditworthiness more frequently, followed by 35% in the U.S. and 30% in Canada.
FCIB members also offered their advice when conducting business in North America.
“Make sure your company is secured or requires prepayment,” one respondent said in the Mexico survey.
“Credit is tightening somewhat in the U.S., so companies are relying more on trade credit and asking for extended payment terms more often,” a respondent said in the U.S. survey. “Negotiate credit terms up front and make sure they are adhered to.”
—Andrew Michaels, editorial associate
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The latest Tennessee legislative session recently came to a close, revising the statutes for Tennessee lien laws and deferring a bill in the Senate. Notably, Gov. Bill Lee repealed Tenn. Code Ann. § 66-21-108, which would grant real property owners the right to recover up to $100,000 from a supplier in the case of an invalid lien. The Senate also deferred a bill that would augment subcontractor lien and payment rights, allowing them to extend their lien rights from 90 days to 12 months.
Lee signed Public Chapter 142, repealing Section 108 on April 5; the law originally went into effect July 2018, signed by former Gov. Bill Haslam. Section 108 granted real property owners who successfully challenged the validity of a lien the right to recover damages from the supplier. The term “validity of a lien” came with a loose interpretation under Section 108, ranging from slander of a title to any erroneous information on a job information sheet.
If real property owners decided to take advantage of Section 108, they could recover attorney’s fees, “reasonable costs” incurred by the owner and liquidated damages—up to $100,000. The exact amount would have been determined by the fair market value of the property: 10% of the value can be recovered, up to $100,000. For example, if a supplier liened against a property worth more than $1 million, then they would be responsible for $100,000 worth of damages.
“There were no statutes like this before this law was passed,” said David Huff, a Tennessee attorney at Smythe Huff and Hayden, PC, when Section 108 initially passed. “... You feel like you wouldn’t want to push anything even in the gray area. It’s either black or white.”
After the law took effect, it faced “substantial pushback” from those in the construction industry, according to a release by Bass, Berry and Sims PLC. The Tennessee legislature then responded to the concerns, the release said. Lee, who took office in January, may have put the law into further consideration.
Meanwhile, the Senate deferred a bill that would increase the time for subcontractors and suppliers to record and enforce mechanic’s and materialmen’s liens from 90 days to 12 months. The same timeframe would apply to notices of nonpayment on the owner and prime contractor. Additionally, the bill would lessen the amount of time owners have to release retainage to prime contractors from 90 to 30 days after project completion. Another significant aspect of the deferred bill involved prohibiting the use of pay-if-paid provisions in contracts between prime contractors and subcontractors.
The bill has been deferred for now, but the Senate will take it up again in the 2020 session. The bill is not completely shut down and still has a chance of passing next year.
—Christie Citranglo, editorial associate
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The U.S. and China have been locked in a trade battle dating back to the first half of 2018, and these tensions have hindered both economies. According to the latest Country and Sector Risk Barometer for the second quarter of 2019 released earlier this month, Coface states the back-and-forth clash between the U.S. and China is doing damage to the global economy as well.
World trade is down for the first half of 2019 but is expected to make a slight recovery during the second half, resulting in an overall drop of 0.7% for the entire year. Global economic growth is also predicted to slow down from 3.1% in 2018 to 2.7% in 2019.
The U.S. economy will step back in growth dramatically in 2020 (1.3%), according to Coface, while China saw exports to the U.S. decline by 10% during the first quarter of 2019. “The resumption of the trade talks will provide an opportunity, but something will still have to give before any sort of long-term deal is struck,” said Chris Kuehl, Ph.D., NACM economist, following the G20 summit in Japan late last month. “The assumption is that trade confrontation will last for an extended period of time.”
The trade war between the U.S. and China has also weighed heavily on business confidence, culminating in a decline particularly in manufacturing. The automotive sector was hit the hardest due to political risks and consumption behavior, among other reasons, Coface states, which downgraded the sector’s risk in 13 countries, much of it within Europe. This includes the U.K., which has just over half of its automotive exports heading to the European Union. Brexit is a dark cloud hanging over both sides and, depending on the Brexit outcome, could push the sector one way or the other.
Emerging economies will also struggle on a global scale due to the U.S.-China trade impasse, with less opportunities to grow rapidly. The trade war is joined by a slowdown in the German economy and others throughout Central and Eastern Europe that will impact emerging economies. Coface downgraded four German sectors, including metals and pharmaceuticals.
Meanwhile, corporate insolvencies are forecasted to decline in North America and the eurozone this year; Western Europe is expected to have an increase in 2019 of 2%.
Automotive sector risk has a bleak outlook in the Barometer across the board, but it saw significant downgrades in Europe. India and Japan each had its automotive sector downgraded to high risk as did the Czech and Polish sectors. Information and communication technologies (ICT), pharmaceuticals and energy are also among the sectors downgraded by Coface.
The U.S. only saw two downgrades this time around—energy and transport, both going from low risk to medium risk.
—Michael Miller, managing editor
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In October 2017, M&G Resins USA, LLC, along with its affiliated debtors (M&G), filed bankruptcy in Delaware seeking relief from costs associated with the unfinished Corpus Christi chemical plant that was expected to be the world’s largest producer of chemicals to make common plastic compounds. M&G claimed that bankruptcy was necessary due to design and technical problems with the plant, underestimated labor costs and a dispute with its North Carolina-based general contractor, Integrity Mechanical Specialists.
Upon the bankruptcy filing, a group of 23 construction lien holders formed a group to protect the interest of the construction lien holders, and similarly situated creditors, in the bankruptcy case. Andrews Myers represented 14 members of the ad hoc construction lien holder group (the “CLG”), initiated formation of the group and retained legal professionals within Delaware to represent the group. The CLG retained Jeff Waxman and Eric Monzo with the Delaware office Morris James LLP as local bankruptcy counsel. Shortly thereafter, the CLG retained Providence, Inc., to serve as its financial advisor.
The CLG immediately began protecting the interest of its members and other construction lien holders in the M&G bankruptcy case. For example, the CGL (i) defeated a premature bar date that could have forfeited certain mechanic’s lien holders’ rights; (2) preserved the construction lien holders’ rights through opposition to certain sales procedures and financing motions; (3) attended the auction of the Corpus Christi plant where it negotiated settlements for payment of the lien claims with prospective purchasers; (4) negotiated a settlement to the terms of M&G’s plan of liquidation that would satisfy the CLG and allow M&G to consensually confirm a plan; and (5) negotiated the terms of the procedures that governed escrowed funds to satisfy substantially all the construction liens.
As a result of all these efforts, the CLG filed a Motion for Allowance and Payment of Administrative Expense for Substantial Contribution whereby it requested the bankruptcy court to enter an order allowing it an administrative expense claim in the amount of $1,591,036 for the fees incurred by Morris James, LLP and Province, Inc.
After a contested hearing on the matter, United States Bankruptcy Judge Brendan Shannon found that Morris James and Province “demonstrably and materially” facilitated the highly contested and complex process of reorganization for M&G. “The [lienholders group] stresses that the prospects for a sale would have been dim at best if scores or hundreds of mechanic’s lien claims remained to be litigated,” Judge Shannon wrote, “and its direct engagement with the debtors as well as with potential buyers facilitated a consensual resolution by offering counterparties a single point of contact for dialogue.”
The bankruptcy court found that the CLG’s efforts and cooperation averted a logjam of litigation that would have discouraged potential purchasers from buying the plant and that the CLG successfully negotiated a $265 million lien reserve that included a $32 million cushion, ultimately allowing for the sale of the Corpus Christi plant free and clear of the mechanic’s liens.
Jeff Waxman, counsel for the CLG, stated that “the Construction Lienholder Group is pleased with the bankruptcy court's decision. The standard for a finding of a substantial contribution under the Bankruptcy Code is a high one that requires that the party seeking an administrative expense has undertaken actions that benefited the entire estate, and not merely for its own pecuniary interests.”
Reprinted with permission.
Josh Judd, Esq., is Board Certified in Business Bankruptcy Law by the Texas Board of Legal Specialization and is a shareholder with Andrews Myers, P.C. Josh’s areas of expertise include bankruptcy and reorganization and creditors’ rights. He directly handles all aspects of Chapter 11 reorganizations and regularly advises clients on loss mitigation, structured settlements and streamlining work-outs within pre-approved terms and conditions.
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