eNews March 5

In the News

March 5, 2020

 

Despite Decline, CMI Outlook Remains Positive

—Michael Miller, managing editor

China has been the focal point of the economic world, and rightfully so—trade wars and tariffs with the U.S. and now the outbreak of COVID-19, but credit professionals aren’t reporting much change in the latest Credit Managers’ Index (CMI) from NACM. February’s CMI declined two-tenths of a point to 56.2. Three of the four combined favorable factors improved in February, yet several unfavorables dragged the overall reading down. “The bottom line is there has been very little change despite the factors that might have affected the business community,” NACM Economist Chris Kuehl, Ph.D. said. “This is not to say that next month will not show reaction to all the global angst over the spread of the virus, but it is not showing up yet. The growth noted [in January] faltered a bit, but the data still remains strong, so it may be too early to draw many conclusions.”

Sales, new credit applications and amount of credit extended improved in February, but it was the sharp decline in dollar collections that raises concerns. “This seems to signal that more companies are starting to guard their cash flow,” Kuehl said. Rejections of credit applications (up 1.8 points) and accounts placed for collection (no change) were the only combined unfavorable factors to not decrease. Disputes fell over two points as did filings for bankruptcies. However, all six factors remained in expansion territory (score above 50) for the third straight month.

The manufacturing sector has seen its ups and downs in recent months. “Manufacturing most definitely has been facing some serious headwinds, but there are still sectors that remain relatively healthy,” Kuehl said. “The slump has been pronounced in sectors connected to the aerospace industry as well as the agricultural sector, but automotive has been holding more or less steady. The worry now is that interruptions in the Chinese supply chain will have a negative impact.” Manufacturing favorables remained at 62, but the unfavorables dipped more than a point to bring the sector’s overall index to 55.9, which is still the second-highest reading (January 2020) in the last year.

The service sector paralleled manufacturing—the favorables remained the same month-to-month at 62.3. Sales improved slightly, while new credit applications jumped more than a point. The unfavorables actually improved in February, increasing a tenth of a point. Rejections of credit applications saw a large bump, but dollar amount beyond terms deteriorated. Overall, the service sector improved a tenth of a point. “Services will likely see a spring rebound in the next month or two,” Kuehl said, “but there will be many keeping a close watch on the COVID-19 virus to see what effect it has on consumer behavior. … The service sector is always slow this time of year and, thus far, manufacturing is holding steady enough with all eyes on the impact of the virus outbreak.”


Credit Congress

A lot can be accomplished in just a few days at Credit Congress!

Credit Congress offers almost 70 compelling and timely educational sessions, ranging from the fundamentals to more advanced subjects. Read our session descriptions online and tailor a conference agenda based on your experience, interests and goals that affords the greatest return to you and your company. For education AND networking, it doesn't get any bigger and better than NACM's Credit Congress & Expo!

Please visit creditcongress.nacm.org for more information and to register.

Please visit creditcongress.nacm.org for more information and to register.

 

India MSMEs Want Action Against Late Payments

—Andrew Michaels, editorial associate

When payments are late, the first question credit managers often ask themselves is, “Why?” Clarity not only answers their question, but also acts as a stepping stone on the path toward a solution. What’s increasingly problematic is the late payments from big business or government to small suppliers that rely on timely payments. Countries around the world continue to seek clarity, most recently in India where Micro, Small and Medium Enterprises (MSME) are raising awareness.

According to Outlook India, government departments and large corporates are getting away with late payments to small suppliers. More than 34,000 startups, MSMEs and entrepreneurs compiled a budget recommendation on the community social media platform, LocalCircles, for Finance Minister Niramala Sitharaman. First on the agenda was to speed up payment processing from the government to startups and MSMEs.

“Many large corporates take several months to pay vendor invoices,” the recommendation states. “For startups and MSMEs, this creates a big cash flow issue since they have limited funds to play with.”

The recommendation acknowledges the government’s notification in 2019 that required all companies to disclose any pending MSME payments over 45 days in their half-yearly filing. Knowledge News Network India reported violations include a penalty of up to 25,000 lakh ($351,800 USD) or even prison time for “every officer of the company who is in default” for as long as six months.

However, those who created the document also asked this to apply to the government and public sector undertakings in addition to having those parties pay MSME invoices within 45 days of receiving the invoice.

The 2019 recommendation from MSMEs directly correlates with FCIB’s International Credit and Collections survey last July. Between the December 2018 and July 2019 surveys, fewer respondents said they offered 0- to 30-day or 31- to 60-day terms. More than a quarter of respondents said payment delays increased in less than a year, most of which was due to customers’ unwillingness to pay. Cash flow issues and customers’ inability to pay were among the top reasons behind payment delays.

Although located in Birmingham, Alabama, McWane Global Controller Morris Ford, CICP, said the business is experiencing payment issues with contractors in India. McWane Global specializes in traditional water and sewer products and conducts plenty of business in the Middle East, with back-office and new valve and hydrant operations in the city of Coimbatore in India. Ford said they mainly ship to contractors whose cities are in danger of running out of water, some of which are also located in the U.S. While McWane Global started business in India about two years ago, Ford said they’ve had payment issues for more than a year.

“The contractors are telling us the government is collecting the new tax, which they’re supposed to distribute back to the states,” he said, referring to startups and MSMEs that have yet to receive their income tax refund for FY 2018-19—another issue cited in the budget recommendation on LocalCircles. “They’re not giving the money to the states, so the states can’t pay for all these projects.”

Unfortunately, Morris explained, McWane Global operations depend on the continued work with these large contractors. Therefore, he said, “we need them more than they need us.”

“Now, it has gotten to the point where we’re crossing that line,” Morris added. “We’ve been telling the contractors, ‘If you want this new order, you have to pay for the current order or we’re not shipping it. You haven’t paid for the last one.’ It’s the notion that, ‘We’re not going to get further indebted to you.’ All of them are government jobs, so we know eventually we’re going to get paid, but it’s frustrating.”

When asked about potential solutions to the problem, Morris said the company tried using credit insurance, but those in India were too unfamiliar with it. At the moment, it appears to be a waiting game.


Online Courses

Master Business Law at Your Convenience, at Your Own Pace

Understanding the basics of business and contract law is a must for all busy credit pros. Business Law, NACM’s new Credit Learning Center course, is designed to arm you with knowledge about the basics of law, with an emphasis on contract law. In 18, one-hour sessions, you’ll learn about contracts, the Ts & Cs of credit applications and emerging issues such as internet law, privacy and cybercrime.
   
Coming this month—$599 including course textbooks.

This course satisfies one of the two required CBF courses. Visit the Credit Learning Center (CLC) 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 to learn more.

This course satisfies one of the two required CBF courses. Visit the Credit Learning Center (CLC) 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 to learn more.

 

Bringing Ethics Back into the Office

—Christie Citranglo, editorial associate

Each day, credit managers make decisions—from extending credit to calling a delinquent customer—and these decisions can have major impacts on their companies and their departments. With all of these decisions, creditors must weigh several options before reaching a conclusion. While careful thought must go into many of these choices, creditors need to consider another variable when deciding: ethics.

NACM’s 124th Credit Congress and Expo in Las Vegas, Nevada, June 14-17, will tackle the delicate balance of individual ethics in the workplace. The session “Ethics and the Credit Professional” led by James Hopkins, Esq., will take an interactive approach to thinking critically about ethics and how creditors can balance individual morals in the context of the workplace.

“I’m more focused on the individual and the conflicts they face,” Hopkins said. “Sometimes the individual will have a conflict where the personal ethics and the corporate ethics may differ. … You’re never going to go through any time to be analytical, it’s going to be more of a gut check.”

Hopkins’ session will be interactive and primarily discussion-based, encouraging creditors to learn from one another and grow as a team. Since many decisions must be made quickly but still require thoughtful analysis, Hopkins will break down how to keep ethics in mind when weighing the options. While ethics may not be at the forefront of all decisions, making the choice to keep morals in mind will make for a more analytical, sharp credit manager.

Nothing in the session will directly tell creditors what is or isn’t ethical; the session will instead challenge creditors to think about their own personal ethics and apply them in a business context. Hopkins will give creditors scenarios to ponder together, giving them the opportunity to see these situations in the realm of morality and not within the pressures of the office.

Creditors often grapple with the best choice for the company, but personal ethics can often be ignored. Hopkins aims to bring ethics back into the equation, creating more thoughtful and caring employees.

“What I try to do is get people to keep ethics in the back of their mind,” Hopkins said. “So, when they’re sitting in a meeting and somebody says ‘Why don’t we give this person a bribe?’ They can say, ‘Well, that’s not ethical, let’s look at it this way instead.’”

Hopkins is a retired lawyer with a business background and served on the Board of Directors of NACM’s Business Credit Services - Western Washington, Alaska & Hawaii from 2003 - 2013.


Webinar

FCIB is offering a series of webinars that will help credit professionals understand and use export letters of credit more effectively. Veteran international banker Chip Thomas will share practical techniques and insight.

This webinar covers:

  • How many banks should be involved in a transaction?
  • Are all banks the same?
  • Does it matter what bank you use?
  • What are the banks most concerned about?
  • What are the responsibilities of banks in a Letter of Credit?
  • Why do banks charge Letter of Credit fees?
  • Are bank fees excessive?
  • Can you negotiate fees with banks?
  • Will banks help you with your Letters of Credit?
  • Banks aren’t your enemy—understand why
  • Learn to talk to a bank to get what you want
  • Understand how to set up the banks for efficient payment

 

 

ITC Safe from Delivery Delays Due to Coronavirus

—John J. Marciano III, Esq., Sam Kamyans, Esq. and Sam Guthrie, Esq.

Solar developers need not worry that delivery delays caused by the coronavirus outbreak will disrupt investment tax credit (ITC) safe harboring. However, developers should take care to appropriately address any delays.

To qualify for a 30% solar ITC, taxpayers must show they began construction of the solar energy project before 2020. Many solar developers rely on an Internal Revenue Service (IRS) safe harbor that treats construction as beginning when 5% of project costs are paid (for cash method taxpayers) or incurred (for accrual method taxpayers). Most developers are accrual method taxpayers. The simplest way to show they incurred a cost for solar energy property in 2019 was to take delivery or title to the solar equipment in 2019. However, developers who did not take delivery or title in 2019 may still have incurred a cost (and thus begun construction) in 2019, so long as they paid for the property in 2019 and, at the time of payment, reasonably expected to take delivery or title within 3½ months (or 105 days) of payment.

The outbreak of coronavirus has disrupted supply chains and slowed shipments worldwide, potentially delaying shipments of solar equipment beyond this 105-day window. Specifically, the spread of coronavirus and resulting quarantines have temporarily slowed or stopped raw material production, manufacturing and shipping throughout China. Consequently, Chinese manufacturers and shippers and other companies that rely on Chinese manufacturing or shipping, may delay delivery of solar energy property purchased in 2019. In general, however, these delivery delays should not affect whether construction of the property began in 2019 under IRS guidance because a delay related to the coronavirus should not impact whether a taxpayer, at the time of payment in 2019, reasonably expected timely delivery.

For taxpayers using the accrual method of accounting, a liability (such as a cost for solar equipment) is incurred when (i) all the events have occurred that establish the fact of the liability, (ii) the amount of the liability can be determined with reasonable accuracy and (iii) “economic performance” has occurred with respect to the liability. When property is provided to a taxpayer, as under a purchase agreement for solar equipment, “economic performance” occurs as the property is provided. For this purpose, property is “provided” to the taxpayer when the property is delivered or accepted, or when title to the property passes. However, a taxpayer may treat property as provided when the taxpayer pays the provider, so long as the taxpayer can reasonably expect the person to provide the property within 3½ months (or 105 calendar days) after the date of payment.

For example, if an accrual method solar developer ordered and paid for photovoltaic modules under a binding written contract with a Chinese manufacturer on December 31, 2019, the developer generally could treat the modules as provided on that date so long as the developer reasonably expected the manufacturer to deliver the modules by April 14, 2020. Thus, unless the coronavirus outbreak caused the developer’s otherwise reasonable expectation of delivery by April 14, 2020, to be unreasonable, a delivery delay due to coronavirus should not affect the date the developer incurred the cost for the modules (i.e., December 31, 2019). Accordingly, the developer could treat construction of the modules as beginning on December 31, 2019.

Barring clairvoyance, it would have been impossible to predict the new coronavirus’ effect on manufacturers’ ability to provide solar property under 2019 contracts. China first alerted the World Health Organization of several flu-like cases in Wuhan on Dec. 31, 2019, but the virus was not identified as a new strain of coronavirus until Jan. 7, 2020. On Jan. 11, 2020, China reported just 41 people infected with COVID-19 and China did not suspend travel from Wuhan until Jan. 23, 2020. Given the timeline of the coronavirus outbreak, virtually all of which has occurred in 2020, no purchaser of solar energy property under a 2019 contract could have predicted that COVID-19 illnesses and quarantines would delay provision of property manufactured in China or from Chinese components. Therefore, as long as a taxpayer otherwise reasonably expected the manufacturer or shipper to provide solar energy property within 105 calendar days of payment, delivery delays due to the coronavirus outbreak should not jeopardize the property’s qualification for a 30% ITC.

While these rules may comfort nervous taxpayers facing delivery delays, taxpayers who have received notices of delays should ask the manufacturer or shipper for as much information as possible regarding the delay. As a practical matter, if property is provided after 105 days from payment, potential tax equity investors and auditors will want assurance that the buyer reasonably expected delivery within 105 days of payment. To that end, taxpayers should request as much information as possible regarding the delay. A written record of the reason for the delay would help, along with any information about specific quarantines or illnesses that delayed manufacturing or shipping. For example, if the property has been constructed, but shipping is delayed because a port is quarantined, the taxpayer should be able to trace the planned shipment of the property and prove that the port was quarantined on the relevant dates.

Alternatively, developers who anticipate delivery delays should consider taking title and risk of loss to the solar equipment within the 105-day window. In that case, the developer should adequately document the transfer of title and risk of loss. To err on the side of caution, developers may wish to do both: Take title and risk of loss to the equipment and compile a record of evidence about the delivery delay.

John J. Marciano III, Esq., co-heads the global project finance practice at Akin Gump and is a market leader in renewable power project finance. He has a particular emphasis on joint ventures with private equity and infrastructure funds. He is also the author of a best-selling tax credit reference guide.

Sam Kamyans, Esq., is a partner at Akin Gump. He advises on federal income tax planning as well as structuring and negotiating key tax deal points in joint ventures, mergers and acquisitions and private equity, principally in the renewable energy infrastructure industries. He has significant experience advising on the U.S. federal income taxation of partnerships.

Sam Guthrie, Esq., is a counsel at Akin Gump. He handles a wide range of sophisticated tax transactions, focusing primarily on the tax aspects of renewable energy transactions.

 

mechanics lien, bond services, mechanics's liens

NACM Secured Transaction Services (STS) presents two timely, money-saving live webinars:

Georgia Materialman’s Liens: How to Deal with Lien Waivers
March 11, 2020
Speaker: Emory Potter, Esq.
This webinar will focus on lien waivers in the state of Georgia, deal with conditional versus final lien waivers, affidavits of nonpayment and the effects of same. Click here to learn more and register.

Lien Waivers: Understanding the Rights Being Waived in Exchange for the Promise of Payment
April 29, 2020
Speaker: Kori Bazanos, Esq.
This webinar will begin with a brief explanation of how liens are created, perfected and enforced in Illinois, pursuant to the Illinois Mechanics Lien Act. Aside from mechanic’s lien rights, we will briefly cover the other remedies available to material suppliers, subcontractors and contractors. Next, we will delve into lien waivers, conditional and unconditional waivers, and partial and final waivers. We will conclude with problems which may arise when lien waivers are given, yet payment is not received. Click here to learn more and register.

Georgia Materialman’s Liens: How to Deal with Lien Waivers
March 11, 2020
Speaker: Emory Potter, Esq.
This webinar will focus on lien waivers in the state of Georgia, deal with conditional versus final lien waivers, affidavits of nonpayment and the effects of same. Click here to learn more and register.

Lien Waivers: Understanding the Rights Being Waived in Exchange for the Promise of Payment
April 29, 2020
Speaker: Kori Bazanos, Esq.
This webinar will begin with a brief explanation of how liens are created, perfected and enforced in Illinois, pursuant to the Illinois Mechanics Lien Act. Aside from mechanic’s lien rights, we will briefly cover the other remedies available to material suppliers, subcontractors and contractors. Next, we will delve into lien waivers, conditional and unconditional waivers, and partial and final waivers. We will conclude with problems which may arise when lien waivers are given, yet payment is not received. Click here to learn more and register.